As an early crypto adopter (circa 2013) I’ve seen many hype cycles and waves of crypto projects come and go.  When I think about investing in web3/blockchain enabled projects, I view it from a very practical perspective, because there are still a plethora of crypto projects that are completely divorced from necessary and practical utility.

Let’s put on our first principles hat.  Fundamentally, web3 has three basic potential value propositions:

1. Increase efficiency by reducing cost/friction (with time being a component of cost).  By removing middlemen and manual processes through smart contracts and direct payments, distributed ledgers can reduce transactional friction and reduce the cost of accurate and automatically reconciled record keeping.  When paired with IoT, inefficiency and human error can be further reduced.

2. Increase transparency.  Public ledgers that are automatically balanced with no human intervention enable a radical level of transparency with any set of data or transactional relationships (including democratic governance).

3. Increase security and resilience.  Through decentralized nodes (including miners, validators, etc.) and decentralized data storage, we dramatically increase the points of failure and reduce viable attack vectors, thereby increasing the security and resilience of distributed blockchain-enabled systems vs traditional private/centralized systems.

So when evaluating web3 projects, I look to see if the unique selling proposition (USP) has strong ties to one or more of those things.  Then I look at if that particular USP is significantly better/different than the web2 equivalent.  In other words, we don’t need to just attach blockchain to something just because we can, although every web2 company does need a web3 strategy.  For example, if I’m building a crypto payment system that is slower, more expensive (due to transaction fees), and harder to use than centralized solutions like Paypal or Cash App AND don’t give users control of their private keys, then what’s the point?  Users might as well just use those web2 systems unless there is a clear path to making the web3 solution better.

Beyond utility, with crypto projects in general and web3 specifically, community can be a primary driver of value, sometimes even a prerequisite.  Without community it is much harder, if not impossible, to achieve scale using limited resources.  Community helps distribute the workload (developers, node operators, miners, validators, user feedback, etc.) and increase the reliability and resilience of the system.  So I look at a project’s github, social media, and discord/reddit/telegram channels to evaluate the strength of their community.   

Beyond the usp and community, I look at the developers’ ability to execute (also looking at github). How quickly do they fix errors, add features, etc.  Do they stick to their development roadmap or constantly rely on hype to build support without shipping real product(s)?

Finally, here is a good resource from the folks at Alliance outlining the common pitfalls for web3 startups. I cosign pretty much all the issues they identify.

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