Investment Thesis
Introduction
We at 3GI believe that blockchain technology is the most important invention since the internet. It is a technology that is changing the way we work, the way society functions, the way the economy moves, and the way politics is conducted. It is having and will continue to have an everlasting global impact. Blockchain first saw the light of day when the initial Bitcoin white paper was released in 2009, with the sole purpose of serving as a decentralized form of currency. At that time no-one could have predicted that the underlying technology would transform the world.
Blockchain technology is this revolutionary because it has enabled a trustless and permissionless system. Through this system, humans can transact with one another without any need to rely upon a third party with authority to enforce the terms of their contracts. Instead, blockchain technology allows a smart contract (a contract written in code) to self-execute once pre-determined requirements have been met. Effectively, this means that powerful intermediaries such as banks and law firms no longer have any leverage or justification for being in positions of power. This in turn gives rise to a new era, where the general public can conduct all sorts of transactions on the blockchain.
A brief background
The internet started with Web 1.0 in the 1980s, where we could read and digest information from the internet (read-only). In the early 2000s, the internet evolved from read to read and write. This was the emergence of Web 2.0, which enabled any user to write and contribute to the internet. We can see today that many industries were disrupted by the rise of Web 2.0, and an immense amount of wealth transfer and creation happened in the past two decades; just think of Mark Zuckerberg, Larry Page, and Jeff Bezos who rode the Web 2.0 wave since its inception. Eight out of the ten richest people in the world are a product of Web 1.0 and Web 2.0.
Web3 is the next evolution, and it is about to have a similar influence, but with a much wider distribution of wealth than with Web 2.0. Web3 takes Web 2.0 up a notch by adding one key element: ownership. With the ‘read, write, own’ proposition, we believe that the Web3 revolution will be even faster than the Web 2.0 revolution, due to the existing internet infrastructure, its availability globally, and its open-source nature.
Some applications are already changing millions of lives and disrupting industries.
As we are in the early stages of the Web3 revolution, we’ve only seen very little of what blockchain technology can bring to the table. However, this technology has already crept into some industries and the results have transformed perceptions of what it can truly change.
One way that blockchain technology is disrupting the banking industry is through the increased efficiencies that it offers by allowing peer-to-peer lending and borrowing without the need for a trusted middleman. Lending activity in traditional finance is often done by or through banks who keep the majority of the profits. A blockchain-based protocol called Aave allows users to directly lend to borrowers. Both sides benefit from the elimination of a third party, which optimizes rates for both sides. To date, billions of dollars have been borrowed on platforms like Aave, Compound, MakerDAO, and others.
On the payments front, blockchain technology is already providing users with solutions that are better, faster, and cheaper. Chai in South Korea is one example. Chai is a payments solution provider built on the Terra blockchain. It utilizes Terra’s stable coin UST and its blockchain infrastructure to offer merchants a no-brainer solution. Instead of the typical 2-3% fee taken from merchants by existing providers for processing transactions, and the five to fifteen days to settle the amounts, Chai offers merchants its solution for a 0.5% fee as well as instant settlement. Since its inception in 2019, Chai has serviced 2 million users and processed over $1.2 billion in transaction volume using the blockchain.
The ‘ownership’ element of Web3 is key to its success
The business models of Web 2.0 companies such as Google and Meta are built on gathering user data and then selling this data to advertisers. Users benefit from using Google by getting instant access to information, while Google sells the users’ data to companies that will target the users based on their searches. In the case of Web3, the user is rewarded with a share of the ownership of the platform (Web3’s version of Google). This means that the user can also benefit from the profits generated by the platform. In Web 2.0 the user is the product but in Web3 the user becomes the product and the owner, altering the dynamics of the entire relationship between the advertising companies and the users.
A real-life example of this is a freelance marketplace called Braintrust, which matches talent with jobs. Although there are thousands of existing (Web 2.0) freelance marketplaces, the key difference between the two is the fees charged. Web 2.0 companies connect the freelancer with a company and charge both a fee (usually 20-40% combined), whereas Braintrust dramatically reduces the cost to the company to 10%, and does not charge freelancers at all. This automatically attracts the best talent while distributing value more equally to the freelancers in the network. Moreover, freelancers who have completed a project via Braintrust end up receiving a token of ownership in Braintrust. This enables them to benefit from Braintrust’s future profits as well as vote on important matters and shape how they would like to see the platform evolve.
Another example is music and digital ownership. Historically, record companies and music streaming services have retained up to 80% of the revenues generated by sales and plays, with just 20% going to the artists. Web3 has changed this by giving artists the infrastructure that enables them to distribute their music directly to their fans and keep the majority of the revenues generated for themselves. If an artist chooses to use music NFTs, this approach will also benefit the artist’s fans by giving the fans ownership in the music collected as well as a share of the royalties. The artist will essentially have their own community that consists of fans who are willing to invest in them and do the work that has traditionally been the responsibility of record labels. This means that artists no longer need to have hundreds of thousands or millions of fans to make a living. Audius is one example of a platform that is taking this approach today by connecting artists directly to their fans whilst keeping the artists in control over how they would like to monetize their work.
To sum up, in Web 2.0, the corporations receive the money first and pay the creator last. In Web3, the creators can interact with their fans, receive payments, and promote content directly. No middlemen are taking 99.9% of what is due to the artists and creators. In Web3, not only do the creators get ownership of their work but so do their fans. Now, creators can transform their images, photographs, songs, and videos into NFTs, and continue to provide NFT owners with a share of any profits made from the underlying content.
The above examples are only a few of the many ways that the blockchain revolution is changing our lives. Many others are already in place and many will keep emerging as the impact and breadth of this technology evolves and reaches more people.
Where we are and where we see it going
The crypto market is still in its infancy, and we can see some of the biggest names in the finance world starting to jump at the opportunity. For example, BlackRock, the biggest asset management company in the world with approximately $9.5 trillion in assets under management has recently confirmed that it is stepping into the crypto market. Sequoia Capital, one of the top venture capital firms in the world, has been increasingly investing in crypto to a degree that 1 in 5 investments it made over the past 12 months were in crypto related projects. Andreessen Horrowitz, another leading global Venture Capital Fund (early investor in Facebook, Instagram, Skype, Airbnb, Lyft, and many others) stepped into crypto in 2018, ramped up investments with a $2.2 billion crypto fund in early 2021, and is currently raising for a new $4.5 billion fund. We at 3GI consider ourselves late enough to have 1000% conviction in the crypto world, and early enough to benefit from the huge upside that is coming our way. As the well-known saying goes, ‘The best time to invest was yesterday, the second best time is today’.
Global crypto adoption is also on the rise. On 7th September 2021, El Salvador was the first country to officially adopt Bitcoin as legal tender, making the cryptocurrency an accepted means of exchange for goods and services. More countries are anticipated to follow suit this year. Countries with high rates of inflation such as Argentina, Turkey, Brazil, and Mexico have all seen tremendous growth in the use of stable cryptocurrencies as a medium of exchange. Many states in America are racing to adopt crypto as well. By the end of 2021, the global crypto market had about 295 million people holding cryptocurrency in some form, representing approximately 3.7% of the world’s population. Less than 5 million of these investors were active users interacting with DeFi protocols and other Web3 dapps (decentralized applications). Total Value Locked in DeFi grew from under $5 billion at the start of 2021 to more than $160 billion towards the end of the year. Total crypto transaction volume grew to $15.8 trillion in 2021, up 567% from 2020. There was over $30 billion in Venture Capital funding in 2021 and this figure is set to grow much higher in 2022.
Visa, Mastercard, Amex, and Paypal have all introduced crypto features that allow their customers to invest and transact using crypto. These companies are also studying ways they can utilize blockchain technology to enhance the efficiencies of their current payment systems. For instance, in September 2021 Visa announced that it is working on building a layer 2 (network) for stablecoins and central bank digital currencies on top of the Ethereum blockchain.
Apple, Meta, Amazon, Walmart, Alphabet, Disney, Adidas, Nike, and many more blue chip companies have indicated their interest in the blockchain and are getting involved in one way or another.
Tesla, Microstrategy, Block, Lemonade, KPMG, and an increasing number of private and publicly listed companies have put Bitcoin on their balance sheets. KPMG stated that they have gone through this process so that they can guide their clients and prospective clients through the process of crypto asset treasury allocation and help them navigate the crypto asset world.
The above companies are platforms with the ability to onboard billions of people to Web3. As illustrated above, the inflow of new money into crypto has been growing and will continue to grow at exponential rates as more and more users and institutions jump on board.
The total value of all financial assets in the world including all debt, equities, real estate, commodities including gold, and alternative assets is approximately $430 trillion. The global equities market alone dominates a large piece of the pie with $125 trillion as of January 2022. To put things in perspective, the total market cap of crypto is still under $1.7 trillion.
We strongly believe that the crypto world has the potential to grow more than 10x over the coming five years, which would put it at a total market cap of $15 to $20 trillion, or just less than 5% of the current value of all financial assets. In our opinion, this is a conservative approach, since we have not included the value of any inflow of activities and transactions from the traditional world to the new world, which would reduce the gap even further.
That said, with the improvements and revolutionary applications that the crypto world is bringing, we believe that the crypto world can disrupt all financial assets and will eat up market share across the board, enabling it to potentially take over much, much more. Whether it be in relation to debt (for example, with decentralized lending platforms), commodities (for example, with Bitcoin as an alternative to gold as a store of value), equities (for example, tokens representing ownership as an alternative to shares), currency (for example, where stable coins are offering new alternatives, where utility coins are being used as an alternative to money payments to offer a service or get paid for it), and/ or even in relation to real estate (for example, metaverse real estate acting as alternatives for virtual offices, social interactions etc.), the crypto world is here to change the world as we know it.
Crypto has also set its eyes on tokenizing debt. The total value of global debt currently stands at approximately $296 trillion. This includes government, household, corporate, and bank debt. One example that illustrates this is when Societe Generale issued on-chain tokenized bonds as collateral for a crypto loan in the form of a stablecoin called DAI from MakerDAO.
Why invest with us
As with any revolution that is disrupting industries and changing the world, not all companies, teams, or stakeholders will be winners. There are currently more than 12,000 tokens and each of those is an investment opportunity to be studied. While we believe that the entire industry will grow 10x over the next five years, there will be many winners and even more losers. In our opinion, anyone who wants to ride the wave during such exciting yet turbulent times needs to either allocate a significant amount of time and effort to understand new concepts, research projects, and keep up with trends and updates, or invest with someone who is already putting in the time and effort.
To the mainstream media, crypto has negative connotations as the majority of people trade crypto based on a Youtube video or tweet prepared by an influencer whose sole purpose is to pump their bags. Most of the time the random tokens which these people are advertising have no true underlying value (for example, Meme coins such as Shiba Inu and Doge Coin). These people trade based on “hopium” and get rich quick scams which always end very badly. This method of trading is no different from gambling. In reality, if you want to actually invest with the odds being on your side, you need to make informed decisions that are backed by hours of work and research.
Anas, Rami, and Saeb are a team of Web3 enthusiasts, passionate about tech and big believers in the blockchain. Our backgrounds include a diverse set of profiles ranging from management consulting, big tech and startups, oil and gas, real estate, and venture capital investment. These give us a well-rounded, unbiased, multi-disciplinary approach to investment strategies and the way we see blockchain technology evolving. We are not into gambling or technical analysis; we are mainly data-driven fundamental investors who research and understand the potential of projects before we invest. Any investment requires 100% consensus among all three partners.
Anas: Property investor and developer, manager of oil drilling company with over $80 million in annual revenue. Founded multiple side gigs in Web2 marketplaces and D2C E-commerce. Holder of Bitcoin since 2013 and active crypto investor over the past year with over 10x return. Holds a degree in Finance from American University of Beirut.
Fun facts: Always dresses formal. Cringes whenever he hears the word “Web3” as he’s used to using the word “crypto”.
Saeb: Ex-consultant with Mckinsey, venture capitalist in MENA. Launched an early-stage fund in 2016 and has invested in over 20 companies. Startup operator since 2021. Launched a beauty e-commerce business from scratch and has gone through a failure and pivot. Holds a Bachelor’s degree in Business Administration and a Bachelor’s degree in Economics from the American University of Beirut.
Fun facts: Hates dressing formal, loves the word “Web3” as opposed to “crypto”, and finds this technology “just beautiful”.
Rami: Managed Operations at Uber in GCC, and launched Cloudkitchens in Dubai, Riyadh, and Kuwait. Currently CCO at a FoodTech startup in Eastern Europe. Holder of Crypto for the past 5 years. Holds a Bachelor’s degree in Business Administration and a Bachelor’s degree in Economics from the American University of Beirut.
Fun facts: Formal or informal, crypto or Web3, potato potato. This thing is huge, WAGMI LFG.
Our investment ethos/strategy:
We follow a diligent approach to identify investment opportunities that we believe will give our investors the best exposure to the crypto and Web3 ecosystem.
Investment Ethos
We are value investors who try to find the best investment opportunities based on fundamentals and valuation metrics that help identify attractive tokens with huge upside potential. We analyze vast amounts of information when researching the market for the best tokens to invest in.
Keeping up with the market’s latest news, trends, and developments is a core element of our research process. This alone requires spending hours and hours a day just to stay informed on how the technology is evolving, the biggest challenges it faces, solutions that are being worked on, and upcoming innovations.
We screen the markets daily looking for interesting protocols with unique offerings. We go down the rabbit hole looking at the fundamentals behind the ideas and concepts of projects that interest us. We look at the utility of projects, efficiencies introduced, problems they solve, value they add, their competitive landscape, and the potential market size amongst other things related to the project’s macro environment.
For projects that grasp our attention, we dive deeper by looking at and assessing specific attributes such as the team behind those projects and their relevant experiences, previous accomplishments, the team’s technical expertise, the leader's vision, and more. We also consider other aspects such as who the backers and investors behind a particular project are, how their other investments have fared, and the value they can add to the projects they are backing.
When evaluating a project’s competition, we look at the project’s defensibility factor which indicates its core competencies for things such as how easy it is for other protocols to fork (i.e. copy) the project and develop better features and utility, users’ switching cost, how vulnerable the project is to vampire attacks (attempts by competitors to steal the project’s users), the project’s market share, time in the market, the protocol’s liquidity, product or service efficiency, its network effects, and other factors that represent barriers to entry.
Crypto assets are valued differently from non-blockchain-based businesses. There are certain evaluation metrics that are specific to this asset class. This includes the total value locked, the use of a project’s token as money, and tokenomics, which refers to the supply and demand dynamics of a token on the blockchain. Other metrics include what the tokens represent, the utility (if any) behind those tokens (token usage), the voting power (if any) of the tokens, the supply schedule (including whether this is fixed), whether the tokens are inflationary or deflationary, the issuance and burn cadence of the tokens, and the token distribution. More traditional metrics do exist as well and we look at those too, including market cap, project maturity, protocol revenues, price to earnings and price to sales ratios, the multiple at which the token is trading at, the number and concentration of unique addresses that hold the token, trade volume which the protocol processes, number of daily active users, growth rates, adoption rates, and the size of the treasury.
We do not believe in timing the market however we do consider the best time to invest in certain assets. For some assets, we might deploy a dollar-cost average investing approach in which we routinely invest a certain amount in that particular asset. For other assets, we might take on a different approach such as getting our hands on the asset during its initial coin offering (crypto’s equivalent for an IPO) or investing in a token before it lists on a centralized exchange and becomes available to retail and mainstream investors.
We operate the fund fully on-chain which offers various benefits such as the range of tokens available to invest in and how we can interact with DeFi protocols. For instance, Coinbase has approximately 73 million users but less than 100 tokens. Binance has over 30 million users with over 500 tokens. FTX has under 10 million users with less than 500 tokens. The majority of crypto owners worldwide hold their limited range of assets on these centralized exchanges while less than 10 million people are active on-chain using self-custody software and hardware wallets. There are over 20,000 tokens in issue but as demonstrated above, only a small fraction is available for the retail investors to trade on centralized exchanges. In contrast, we invest in some crypto assets using decentralized exchanges before these assets become available to the masses when they are listed on centralized exchanges. As you can imagine, this offers massive potential as we can get our hands on crypto assets using methods that are still considered complicated to the majority of the crypto asset holders using CEXs.
Most importantly is for a token to fit in our overall investment strategy that operates on a long-term investment horizon. We strive to maintain a well-balanced, risk-managed portfolio that is allocated across the various crypto industries and risk levels. The crypto industries that we invest in include Cryptocurrencies, Blockchains (Layer 1), Blockchain Scaling Solutions (Layer 2), Blockchain Infrastructure (like Bridges, Storage, Compute & Oracles), Defi (decentralized finance) Apps, GameFi (Gaming meets finance) Apps, DAOs (decentralized autonomous organizations), Social Tokens, NFT (non-fungible tokens) Infrastructure and NFT enabled services (but not PFP or JPEG NFTs) and any other applications that will emerge and that make sense to us and leverage the blockchain technology.
Risk
The nature of investing in crypto and Web3 is considered high-risk (compared to other assets like real estate ) given its nascency and the uncertainties around regulations and adoption etc.. Within the crypto world, our fund is considered mid-level risk as we largely believe in well-established networks such as Bitcoin and Ethereum, while also acknowledging the fact that high upside and returns also come from exposure to various risk levels. We have defined three levels of risk depending on various factors such as maturity, resilience, team, backers, crypto-inherent risk, and market cap. Our portfolio will feature all of these risk levels.
Risk Level 1 (Low): 30% of portfolio – this will include tokens that are well established, such as Ethereum and Bitcoin, and have a lower risk level with an assumed lower potential returns than other tokens.
Risk Level 2 (Medium): 45% of portfolio – this will include tokens such as Solana and Polygon that are established and considered mid-level in terms of risk and reward.
Risk Level 3 (High): 25% of portfolio – risky bets which are considered moonshots offering massive four or even five-digit gain potential.
The entire portfolio will consist of tokens purchased through equity, never on leverage or trade derivatives. In addition to investments, the crypto world is witnessing high yield activities and interactions, such as staking and liquidity pools. These are activities we will take part in, while keeping in mind the minor risks involved.
Based on the above investment ethos and risk management, we are aiming to achieve a return of 20x your investment over the next five years.
Fund Terms, Benefits, and Features
The fund is purely focused on the web3 world as described above. It has no target or limit; it operates as an open-ended fund, meaning there are no specific timeframes on which investors are admitted but rather investors can join at any time.
3GI does not currently charge any management fees. The fund managers are however entitled to a 25% performance fee, calculated as a percentage of the profits achieved at the time the investor wishes to exit the fund.
Once the investor enters the fund, the investor will transfer a number of stablecoins (USDT), and in return, they will be issued a certain number of 3GI tokens as a certificate of ownership that represents their share in the fund. There will be an initial one-year lockup to any investor, after which investors will be free to exit at any time.
If unfamiliar with the process, new investors will be walked through the step-by-step process of opening a self-custody cryptocurrency wallet, funding that wallet, and transferring the funds to 3GI’s wallet. The vault is the fund’s official wallet and is controlled and managed by all partners of the fund.
Further down the line, we will be setting up a legal entity and asset manager in the most appropriate jurisdiction under which the fund’s operations will be folded.
We are launching an exciting initiative to help grow our community by compensating existing investors who refer their friends. Investors who help bring in new clients to the fund will receive 5% of the profits of the investors they bring in and will be paid upon exit of the referred investor. This will be taken out from the 25% performance fee of the fund managers.
Conclusion
If you’ve got this far, it means that you have just read over 4,200 words about the crypto world and, if you’re anything like us, you are probably super excited about its potential.
We believe that humans are very bad at predicting the future since we can only base our predictions on what we know from the past, the present, and a little pinch of imagination. Yet, we are a bunch of optimistic people (otherwise what are we doing on this earth?) that are very excited about whatever the future will bring. We believe that investing and planning for the future is a critical activity that each person must do, and we’re opening up a new door for you to diversify your portfolio by allocating some of your investments to the crypto world.
If you are reading this thesis any time after February 2022, there is a high chance that many major developments have taken place in this space given the rapid speed at which crypto moves. However, we will not be updating this thesis to reflect any such events as we will be too busy managing your money.
We’re inviting you to join us and be part of this journey together. Let’s make some money and have some fun!
P.S. Talking about and discussing Web3 is our favorite activity of the day, so if you’d like to join the conversation, please don’t hesitate to reach out to any of us and join our discord.
Contact Details
Email us: info@3gi.ventures
Twitter: @3giventures
Feel free to contact any of the partners at the following emails:
Anas@3gi.ventures Rami@3gi.ventures Saeb@3gi.ventures