Unlocking the Potential of Web3: Understanding and Managing Economic Risks

Feb 17, 2023

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Introduction

What we have been noticing

Web3.0, or simply Web3 refers to the next generation of decentralised and distributed systems, powered by blockchain technology. While the Web3 ecosystem has tremendous potential, there are also a number of economic risks associated with this emerging technology. Understanding these risks is critical to achieving economic stability in Web3. In this article, we will explore the key factors that contribute to economic stability in Web3, and how these can be managed.

Key topics this article will cover:

What is Web3 and why should you care?
Understanding Economic Risks in Web3
How to analyse and mitigate economic risks in web3?
Conclusion: Our verdict. Is it worth getting involved?

What is Web3 and why should you care?

Web3, also known as the "decentralised web," is a term used to describe the vision of a more open, transparent, and decentralised version of the internet. It refers to the next generation of the internet, which is designed to be more decentralised, democratic, and secure than the current web. Rapid expansion of the e-commerce and retail industries is expected to boost the global market for web 3.0 blockchain. The global web 3.0 blockchain market size is currently valued at USD 2.86 billion in 2023. It is estimated to reach an expected value of USD 116.51 billion in 2033 at a CAGR of 44.9% during the forecast period (2023-2033).

The growth of Web3 has been exponential, as it provides a more decentralised and inclusive platform for the digital world. With its innovative approach to governance, value creation, and stakeholder participation, Web3 has attracted a growing number of developers, businesses, and users who recognize its potential. This is because Web3 can revolutionise the way we interact and transact online. The Web3 ecosystem is continuously expanding and evolving. This creates new opportunities for developers, entrepreneurs, and users to build, own, and exchange unique digital assets in a secure and decentralised manner. As the Web3 movement gains momentum, it is poised to play an increasingly significant role in shaping the future of the internet and the global economy.

Understanding economic risks in Web3

While Web3 has the potential to provide many benefits, such as increased security, privacy, and decentralisation, it also comes with certain economic risks. Several types of economic risks associated with Web3 include:

Governance: The decentralised nature of Web3 means that it is not subject to traditional financial regulations, which can make it more susceptible to fraud, scams, and other forms of financial abuse.
Liquidity Risks: Decentralised finance (DeFi) is a rapidly growing sector of Web3. Due to the lack of liquidity in some markets, investors may be unable to liquidate their positions, which can lead to significant financial losses.
Market Risks: The value of digital assets can be highly volatile and subject to market fluctuations, which can lead to significant losses for investors.
Scalability Risk: As Web3 networks continue to grow, there may be challenges in scaling the technology to support the demand. This can result in slow transaction times, network congestion, and higher fees, which can impact the usability and adoption of the technology.
Interoperability Risk: There are many different Web3 networks and protocols, and there may be challenges in getting these networks to work together seamlessly. This could limit the potential of Web3 and create risks for businesses and investors operating in the space.

In conclusion, it's crucial to carefully weigh the potential benefits and risks of Web3 before making any investment decisions. While many of these risks also apply to traditional financial systems, the decentralised nature of Web3 can exacerbate and make them more difficult to manage.

How to analyse and mitigate economic risks in web3?

Economic risks in Web3 can be analysed through the following steps:

Understanding the Web3 ecosystem: It is very helpful to have a thorough understanding of the Web3 ecosystem, including its underlying technologies, token economy, and key applications, in order to properly assess its economic risks. For example, one must understand how and why tokens are used in decentralised applications, how smart contracts are created and enforced, and how different applications interact with each other in order to properly assess the risk of investing in a Web3 project.
Identifying the key economic actors: Knowing the key economic actors, for instance, token holders, developers, and users, as well as understanding what motivates them, what motivates them, and what they aim for is crucial for analysing Web3 risks in the context of their incentives, behaviours, and objectives. By understanding the motivations of each actor, one can better determine how those motivations might lead to potential risks. For example, if the developers of a project are incentivised to make the project successful, they may take actions that increase the risk of the project failing.
Assessing token economics: Assessing the design and configuration of token economics, including supply, inflation rate, and distribution, can help to identify potential risks and ensure that token economics are aligned with the goals and objectives of the Web3 ecosystem. For example, if a project has an inflation rate that is too high, the tokens may not be attractive to investors or have enough purchasing power to create an effective incentive system.
Evaluating Blockchain based projects: Evaluating Blockchain based projects, including smart contract code, security, and liquidity, can help to identify potential risks and ensure that decentralised platforms and applications are secure and stable. Doing so can reduce the chances of a hack or other security breach, as well as minimise the potential for liquidity issues. Additionally, it can help to ensure that the smart contract code is well-written and efficient, allowing for faster transactions and better user experience.
Analysing network effects: Analysing network effects, including the number of users, adoption rate, and the level of collaboration and interdependence, can help to identify potential risks and ensure that the Web3 ecosystem is growing and thriving. For instance, by looking at the number of users in a network, it is possible to measure the adoption rate of a protocol and to identify any potential risks associated with growth or decline.
Examining market risks: Examining market risks, including market volatility, liquidity risks, and regulatory risks, can help to identify potential risks and ensure that the Web3 ecosystem is robust and resilient. For example, understanding the liquidity of assets and the impact of regulatory changes on market movements can help to identify potential risks before they occur and take appropriate steps to mitigate them.
Reviewing parameter risks: Reviewing the parameters that govern the behaviour of the Web3 ecosystem, including smart contract parameters, network parameters, and DeFi parameters, can help to identify potential risks and ensure that parameters are carefully designed and configured to minimise risk.For example, reviewing the parameters that govern the supply and demand of a DeFi protocol can help to identify potential risks of liquidity shortages or sudden spikes in volatility.

By following these steps, we can develop a comprehensive understanding of the economic risks of Web3. We can also take steps to mitigate these risks, ensuring the stability and security of the Web3 ecosystem. This is like building a bridge, where every step taken is a strong and secure foundation for the entire structure, ensuring that the bridge is safe to cross.

Conclusion: Our verdict. Is it worth getting involved?

The answer to whether it is worth getting involved in Web3 depends on several factors, including individual goals, skills, and interests. For those who are interested in decentralised technology, the potential benefits of Web3 are significant. Web3 offers the opportunity to be a part of shaping the future of the internet and the global economy. In addition, it offers the opportunity to build and own unique digital assets in a secure and decentralised manner.

However, it is important to understand the challenges and risks associated with Web3, including technical complexity, interoperability, scalability, regulation, and security. It may not be suitable for everyone and careful consideration should be given before investing time or resources.

Watch the videos below to learn more about the different types of economic risks in Web3 and how to mitigate them. Don’t forget to like and subscribe so you don’t miss out on important updates and our newly uploaded videos.

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Lisa JY Tan | Founder and Managing Director
E: Lisa.T@EconomicsDesign.com | W: EconomicsDesign.com