Riding the wave of the next digital revolution

Brace yourself for Web3, the next generation Internet

Imagine a new digital environment where our data is portable, democratized and challenges current monopolies. Web3 promises to be such an environment, and to understand this shift it is helpful for investors to consider the evolution of the Internet.

The first phase, Web1, gave users unprecedented access to information and connectivity (think AOL, Yahoo! and Google). Then came Web2, which improved the experience by allowing personalized, user-generated content to be delivered through apps (think Facebook and Twitter).

As the next iteration, Web3 runs on a global, peer-to-peer infrastructure powered by blockchain technology. Like Bitcoin, the Web3 network is decentralized, meaning there are no middlemen; no entity controls it.

At its core, Web3 aims to address data monopoly, privacy risks, and algorithmic bias, and promote a fairer and more open Internet. We will see a shift from platform-centric to individual-centric data and identity management, leading to new technologies and business models.

But for this network to really come into being, users, both humans and machines, must actively participate. To do this, developers can use tokens (think Ether or Polkadot) to manage activity and record transactions on the blockchain. Other key components of this next-generation ecosystem could also include smart contracts and digital wallets.

Investment in Web3 companies

Blockchain technology, with its “trustless” systems, is seen as a remedy to the growing distrust in several traditional institutions. But recent failures by crypto-related companies, including FTX and Silvergate, have created uncertainty among digital asset investors, casting a shadow over Web3’s future.

Take a look at the chart below, taken from a recent report by Deloitte. Early-stage investors have invested approximately $94 billion in Web3 companies between 2016 and 2022, most of it in the past two years, with investments peaking in Q1 2022 at $13 billion. time high of nearly $69,000.

However, as Deloitte points out, there are parallels between the slump in digital asset prices and the dot-com crash of the early 2000s. Just as the Internet became an integral part of life and work over time, the transformative Web3’s potential is likely to continue, attracting venture capital and private equity investors.

AI, the rising star of corporate America and the Metaverse

The buzz around artificial intelligence (AI) has also grown, and it shows in corporate America. An analysis of earnings conference calls for the first quarter of 2023 shows a significant increase in the number of S&P 500 companies discussing AI. During this period, 110 companies cited AI, a notable increase from the five-year average of 57 and the ten-year average of 34, according to an analysis by FactSet.

Along the same lines, the development of real-time, 3D virtual applications by companies such as Meta, Roblox and Apple is expected to drive spending on AI servers, which is already expected to grow at 19% per year through 2032. This is due to the increasing demand for generative AI from popular applications such as ChatGPT and Midjourney.

In case you’re wondering, “generative AI” refers to applications that can create unique content based on simple directions submitted by users. As I shared with you earlier this year, ChatGPT is the fastest growing app in history, reaching 100 million users in just two months after launch.

To run efficiently, these metaverse applications require advanced graphics and AI processors, increasing investment in powerful AI chips from companies like NVIDIA and AMD and in data center operators like HIVE Blockchain Technologies. According to Bloomberg Intelligence projections, spending on AI servers could account for nearly 30% of total workload spending by 2032, a significant increase from about 15% in 2022.

Generative AI could be a $4 trillion to $7 trillion industry

But what can generative AI be used for in the ‘real world’? McKinsey & Co. found 63 such AI applications across 16 business functions, and if applied, could generate between $2.6 and $4.4 trillion in economic benefits annually. This would add 15% to 40% to the current $11 to $17.7 trillion potential value of non-generative AI and analytics.

Goldman Sachs’ projections are even more optimistic. According to the bank, advancements in generative AI could have a significant impact on the global economy, leading to a 7% increase in global GDP (equivalent to nearly $7 trillion) and a 1.5% increase in the productivity growth over a ten-year period.

For example, Amazon Web Services (AWS) last week announced the launch of the AWS Generative AI Innovation Center, a $100 million initiative to help customers develop and deploy generative AI solutions. This move is part of the company’s broader strategy to expand the accessibility of generative AI to customers and partners around the world.

People are adopting new technology at a faster pace

Some readers are understandably mystified by all this, but it’s worth remembering that technology cycles emerge every 10-15 years. Web3, AI and digital assets are no exception.

Admittedly, widespread adoption of Web3, AI, and assets like Bitcoin won’t be easy. The main roadblock is probably the user experience. For example, the process of setting up crypto wallets can be complex and demanding, and standard web browsers may not even support Web3 without additional plugins.

To encourage mass adoption, Web3 needs to provide a user-friendly interface similar to Web1’s shift to the current, more interactive version of the Internet. This transition could be led by big technology companies like Meta, who understand the potential benefits of simplifying Web3 for everyday users.

The good news is that people seem to be getting better at adopting new technologies. A 2013 study from MIT’s Technology Review confirms this trend. For example, it took phones half a century to become commonplace in American homes, while smartphones reached 40% penetration in just 10 years.

Likewise, I expect things to move quickly when it comes to the digital transformation. A survey conducted last summer found that 75% of retailers plan to accept digital currency as a means of payment within the next two years. Blockchain technology, the backbone of Web3, is expected to usher in a new digital era, with a potential global user base of 1 billion by 2031, according to Andreessen Horowitz. (By comparison, the Internet reached 1 billion users in 2005.)

Original published by US Global Investors on June 26, 2023.

For more news, information and analysis, visit VettaFi | ETF trends.

Holdings can change daily. Investments are reported from the end of the most recent quarter. The following securities mentioned in the article were held in one or more accounts administered by US Global Investors as of (3/31/2023): Apple Inc.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices of US companies.

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