The Bull and Bear Case for Web3 in Africa

The Bull and Bear Case for Web3 in Africa
December 20, 2021 Peter Kisadha
The Bull and Bear Case for Web3 in Africa -Future Africa

In March 2019, the World Wide Web (commonly known as the web) celebrated its 30th anniversary with half of the world online. At the time of its invention, it was unfathomable that the web would transform the world to today’s scale. With web 1.0, whose era lasted between 1990 to 2000, use cases were limited – personal web pages were the standard – consisting mainly of static pages hosted.  The user’s role was primarily to read the information provided, and there was no option to communicate back to the content producers. 

But, after the dot-com bubble burst, the world ushered in web 2.0 – also commonly referred to as the social web or read-write web – which peaked with the invention of the smartphone. Its era primarily lies between 2000 to 2010 though it continues even now and facilitates interaction between web users and sites, allowing users to communicate with other users. Some famous web 2.0 applications include Facebook, YouTube, Flickr and Twitter.

Historically, new models of computing tend to emerge every 10 to 15 years: mainframes in the 1960s, personal computers in the late 1970s, the web in the early 1990s, and smartphones in the late 2000s. Each computing model enabled new classes of applications built on the platform’s unique strengths. For example, smartphones were the first truly personal computers with built-in sensors like GPS and high-resolution cameras enabling applications and companies like Instagram, Snapchat, and Uber/Lyft now used by billions of people.

The latest is Web3, the internet owned by builders and users, orchestrated by tokens and whose proponents believe that open, distributed, and permissionless ledgers will reshape the global economy. As this paradigm shifts, incumbents will lose their primary competitive advantage, including data monopolies and associated network effects, creating massive opportunities for new value creation and wealth.

Because Africa missed out on web 1.0 and 2.0, mainly being on the receiving end of the technological advancements in the two waves, the continent must pay close attention to web3. Throughout the first two web periods, the continent lacked the essential building blocks, including a ubiquitous internet infrastructure and the technical know-how to generate value on the same scale as the West and some parts of Asia. 

Decades later, Africa has a widespread and growing internet infrastructure network with 30% of sub-Saharan Africa connected. Many technologists, entrepreneurs, and investors view Africa as the world’s true last frontier.  As web3 gains mainstream adoption, what will Africa’s role this time around be? In this research article, we explore a few possibilities.

 

Web3 in Africa: Notable Highlights and Opportunities

In January 2021, GameStop and other securities experienced a short squeeze, causing significant financial consequences for hedge funds such as Melvin Capital and enormous losses for short-sellers. The short squeeze was initially and primarily triggered by users of the subreddit r/WallStreetBets, with a membership north of 11 million. Ten months later, a rare copy of the US constitution sold for $43.2 million with the buyer – Citadel CEO Ken Griffin – outbidding the ConstitutionDAO, a community of more than 8,000 crypto enthusiasts who banded together and raised over $40 million worth of ETH on Juicebox, an early stage DAO platform.

Both events represent what is possible when a group of individuals choreographically meet on the internet and are provided with the necessary tools to demonstrate value. It is a unique case study into the art of on-ramping swaths of people into rallying behind projects in a manner fathomable a few decades ago but limited by the prevailing technologies. Today, all this is becoming possible, and all the themes powering it have the underlying defining characteristics of web3 – decentralisation. 

In Africa, related events and initiatives are happening on a smaller but promising scale. Yele Bademosi, the founder of Microtraction and Bundle and Binance’s first Director for Africa, announced his next play – Nestcoin – in November 2021. The company wants to “democratise access to economic opportunities by demystifying cryptocurrency.” Nestcoin is investing in and building out products spanning DeFi, Blockchain, Bitcoin, DAOs, DApps and NFTs to advance crypto adoption. These are the central building blocks of web3.

The Bull and Bear Case for Web3 in Africa

There is also funding currently being funnelled to web3 companies or those with proximity. When Payourse raised a $600,000 pre-seed, it declared its intention to build a ‘web3 powerhouse’. Despite this ambition, the company is still majorly focused on “making cryptocurrency accessible to everyone”. This description fits many companies and projects across Africa that are nursing web3 ambitions. 

While others may not have publicly or privately declared these ambitions, it is also not difficult to connect the dots regarding how they can execute a cross-over from crypto to integrating other web3 aspects. The general observation is that most are starting with crypto-related products and offerings. The majority of crypto companies that raised funding in 2021 are operating exchanges, including Yellowcard and Bitmama that raised $15 million and $350,000, respectively. Other fintechs with diverse offerings, such as Chipper Cash, also introduced options to buy and sell crypto.

Crypto is a crucial subset and building block of web3 that has already taken root across Africa, one of the fastest-growing crypto markets globally. Six countries – Kenya, Nigeria, Togo, South Africa, Ghana and Tanzania – gained spots on the 2021 Global Crypto Adoption Index Top 20 list. Crypto is an obvious entry point for any web3 company on the continent. 

Although Africa captures only 2 percent of the global value of all cryptocurrencies received and sent, making it the world’s smallest cryptocurrency economy, the continent registered $105.6 billion worth of crypto assets between July 2020 and June 2021, growing over 1,200% by value received in the last year. Africa has topped peer-to-peer (P2P) payment platforms in transaction volume across all regions using this metric.

The Bull and Bear Case for Web3 in Africa - Future Africa

Source: Chainalysis

However, despite this astronomical growth, use cases for crypto and other web3 related products across Africa are so far limited. In a report published by MetaMask, in partnership with Emerging Impact, most respondents in Nigeria indicate that they use MetaMask’s wallet to invest or hold crypto. Others shared stories about using crypto gains to offset financial losses incurred from the pandemic or as a way to achieve specific goals, like paying for university tuition or buying a property. 

Of course, there is no denying that part of the meteoric crypto adoption could be playing to the already worse gambling culture on the continent, especially among the youth. But digital assets have already become an established investment market in their own right. In early 2021 the value of the combined cryptocurrency market crossed $1 trillion for the first time, and in November, it crossed $3 trillion.

In another typical instance, crypto is a swift, convenient, and direct peer-to-peer channel for remittance payments, international commerce, and savings. According to a Chainalysis report, the largest crypto channel connects Africa to East Asia, explained by the magnitude of Chinese nationals working in Africa.

The Bull and Bear Case for Web3 in Africa - Future Africa

Source: CoinMarketCap

The continent has also witnessed government interest in crypto. In October 2021, Nigeria became the first African country to issue a Central Bank Digital Currency with the E-Naira. Ironically, the country has been unfriendly towards crypto and related projects. Early in 2021, Nigeria’s central bank ordered that deposits by banks for crypto-based projects be cut off. Despite the country being constantly ranked among the fastest growing in terms of crypto adoption and transaction volumes, all this is happening.

All the products and use cases around crypto and web3 built so far by individuals, startups, and governments solve significant problems. However, more needs to be made for the technology to become as ubiquitous and economically sound – or even more – as a more straightforward product such as mobile money. 

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Below, we look at the various building blocks of web3 and what their potential use cases in Africa could be like.

          a. Decentralized Finance (DeFi)

When Yellowcard raised their Series A, one of the investors – James Fitzgerald of Valar Ventures – noted that “Africa is poised to benefit tremendously from cryptocurrency’s potential to transform financial services”. For starters, with an increasing rate of African migrants, crypto helps with quicker adoption and acceptance of cryptocurrency as a base for remittances. 

However, DeFi also can offer more value to emerging economies displeased with current financial infrastructure as it provides a method for individuals and economies to do away with intermediaries. There is also an opportunity to integrate DeFi and mobile money wallets to extend financial products currently unavailable to mobile money users. 

Emerging Impact’s first product, Umoja, is an open banking platform for mobile wallets initially built on the Celo blockchain. The API allows traditional financial institutions and fintechs to deploy blockchain-based financial services to mobile money users. Umoja is currently interoperable with M-Pesa, MTN Money, Airtel and Digitel, making it available to anyone with a feature phone. New approaches to lending are also possible. 

Unlike traditional finance, which usually requires physical collateral, with DeFi, a user can access loans with crypto and other digital assets as collateral. These loans are executed through smart contracts, which specify the repayment and interest terms and the security in terms of collateral. Besides institutions, individuals can also lend directly to other individuals (peer-to-peer) or crowdfund into a pool (pool-based) to provide others with finance, thus eliminating intermediaries from the process and making such loans cheaper.

          b. Non-Fungible Tokens (NFTs)

This year, Hulio, a 19-year-old Zimbabwean digital artist whose real name is Nyasha Warambwa, saw his work go from his bedroom in Harare to one of the world’s most popular public spaces without any art gallery gatekeepers. Thanks to the phenomenon called NFTs, which gives creators new ways to earn. 

In web3, products can be tokenised, which converts an asset and claim to it into a digital representation or a token on a blockchain network. By representing content ownership with Non-Fungible Tokens (NFTs), owners or creators can present the public with a smart contract and directly relate with the people consuming their products.  

NFTs pose an opportunity for several African creators (beyond digital artists) to market their products to a global audience. In March this year, Nigerian artist Jason Osinachi sold $75,000 worth of NFTs in ten days and became the first African artist to issue a social token $OSINA with rewarding his community and the collectors of his work.

Web3 provides a platform for NFTs to be safeguarded, and a token ID acts as a unique identifier for an NFT, which establishes its existence, authenticity and ownership, so even if copies of the digital product are made, the actual digital asset lies with the holder of the token ID. Based on this, a South African startup NFTfi already provides a platform for Africans to use NFTs as collateral for loans.

          c. Decentralised Autonomous Organizations

As illustrated with the example of ConstitutionalDAO, decentralised autonomous organisations (DAOs) provide an effective and safe way to work with individuals across the world on common goals. Because of their decentralised nature, existing as code on the blockchain with all operations executed via smart contracts, these organisations are community-owned and collectively managed by the members. 

DAOs have in-built treasuries where members can donate or contribute funds to a cause, and these funds cannot be accessed without the group’s approval. DAO decisions are governed by proposals and voting to ensure everyone has a say in the organisation’s happenings. This presents a use case for African organisations to practice proper democratic governance in business, charitable and government-related causes. 

In 2020, the Blockchain Nigeria User Group, a vibrant group of Blockchain developers helping to drive adoption and awareness of the technology in Nigeria and across Africa, voted to migrate the community into a DAO on its Telegram Group. The proposed organisation – BNUGDao – is Africa’s first crypto native organisation and is building a decentralised financial ecosystem open to all. 

DAOs can also help companies choose their next projects, citizens to choose their next leader or venture funds to decide on startups to invest in. GetEquity, a Nigerian fundraising and venture portfolio management company, has a product – EquityDAO – that wants to enable other startups to raise capital in a decentralised way. 

          d. Decentralized and Centralized Exchanges 

Because crypto is gaining widespread adoption across Africa, it is paramount that users looking to buy, sell or trade crypto are protected. One way to do this is through exchanges – whether decentralised or centralised.

Decentralised exchanges (DEXs) facilitate peer-to-peer trading by relying on automated smart contracts to execute trades without intermediaries. Unlike a centralised exchange where a user’s funds and cryptocurrency are stored in the intermediary’s wallet, the entire process of buying and selling on DEXs are carried out on the blockchain and users trade directly with each other. 

Decentralised exchanges give room for traders to cut out the middleman, protect their data with increased security and an opportunity to earn tokens based on their contributions. Though, Africa’s cryptocurrency landscape is still composed of majorly centralised exchanges with players like Helicarrier, Revix, Bundle, Quidax and Patricia. In other instances, there are also hybrid exchanges such as Binance that facilitate both.

          e. Talent

According to a Gartner 2021 survey, IT executives see the talent shortage as the most significant adoption barrier to 64% of emerging technologies, compared with just 4% in 2020.  This year, a lack of talent availability was cited far more often than other barriers, such as implementation cost (29%) or security risk (7%). In some markets such as India, blockchain engineers are already in short supply, and when available, they command huge paychecks. 

The Bull and Bear Case for Web3 in Africa - Future Africa

Source: web3 Jobs

On the other hand, the unemployment rate in Africa’s largest economies, South Africa and Nigeria, stood at 34.4% and 33.3%, respectively, as of Q2 of 2021. Similarly, South Africa and Nigeria are also hot spots for tech talent. This shows there is an opportunity for even more Africans – not limited to the two countries – to penetrate the technology ecosystem and participate in building web3.

Perhaps the most straightforward area where Africa should play a significant role is in supplying the talent to build out web3. Given the changing landscape, these can work either remotely or emigrate. In both instances, Africa gains from an increase in foreign exchange inflow. With a median age of 19.7 years, the continent has an endless supply of young and talented individuals. Coupled with the rising unemployment, there is a significant opportunity to train and position millions of young people as the talent buffer for regions and companies suffering talent shortages.

 

Web3 Associated Risks in Africa

While an open, trustless and permissionless network sounds like a leap of innovation, some challenges come with it, leading to concerns around web3. We recognise that both technical and non-technical challenges need to be addressed for web3 to be fully adopted and functioning. However, this section focuses on governance, economic and socially related risks that are current or likely barriers to the broader adoption of web3 across the continent.

Firstly, despite all the benefits of financial decentralisation that web3 brings or enables, it is still difficult for the people that most need it to adopt it in its current format. For example, to smoothly use crypto, one needs to be banked or at least heavily knowledgeable about how banking works. But Africa generally has the lowest levels of financial literacy. DeFi’s current forward requires a given education level to use existing crypto and web3 products. For a population that is still financially (and otherwise) uneducated, convincing them to put their money into 16 figure address wallets operating on a system without governance, identities or reversals is going to be difficult. 

Web3 and the blockchain competition in Africa is thus apathy and familiarity, making it likely that many will, for now, stick with traditional banks, as problematic as they might be because they are familiar and easier to hold accountable. The other alternative to decentralisation – as we have seen with crypto exchanges – is centralised platforms that offer the same level of familiarity banks and telecom companies provide with some of the benefits that a decentralised platform offers. It, however, goes without saying that these will become the intermediaries that DeFi preaches against.

Secondly, as much as web3 is a significant beneficiary from the adoption of crypto, it is also closely derailed by its criticism. It is not so often that several stakeholders, including laypeople and regulators – even in mature markets such as the US – confuse the two. In countries such as Nigeria, crypto has suffered to the extent of the central bank going after players by banning their bank accounts and threatening further actions. There should also be concerns that regulators – who have largely failed to understand the technology powering crypto and web3 – may wrongly speculate that web3 is crypto. 

Thirdly, another outstanding risk is the fear that governments will lose control over individuals in web3 due to the lack of an identity system similar to one that many currently use. For example, part of the CBN’s scepticism rests on the claim that crypto is prone to be misused for illegal activities – a claim most crypto sceptics reference based on some of the projects that have conned many millions. OneCoin, for instance, was going to be the crypto to rule them all—until it turned out to be a Ponzi scheme. The founder, Ruja Ignatova, disappeared in 2017 with billions in scammed cash; and she’s still on the run.

Since users do not have to provide real identities to deploy or interact with Decentralized Apps and platforms, verifying customer identities becomes challenging. With all the talk about eliminating the trust needed to conduct transactions, businesses and customers may still find it challenging to trust decentralised storage platforms enough to migrate completely. In the case of data erasure or tampering, it will not be easy to hold anyone accountable like it is with centralised entities or platforms. 

Lastly, whilst smart contracts prevent fraud between two contracting parties, it provides the perfect infrastructure for them to conduct illegal activities. This could apply in client-criminal relationships, such as drug deals or criminal-criminal relationships, including proceeds sharing in criminal organisations. As criminals cannot look to the social contract for redress concerning crimes committed, they often had to develop trust in other ways. With the advent of smart contracts, they have been presented with a ready solution.

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 Beyond the above, there are also other concerns – though not unique to Africa – around web3 worth mentioning that need to be addressed to avoid such a predicament where after it gains mass adoption, the fruits of web3, just like 1 and 2, are unevenly distributed and end up resting in the hands of a few. Some of these concerns are stated below:

1.Because Web3 is supposed to be the internet ‘for the users by the users’, token distribution is critical in determining the distribution of power in blockchains. But most of the initial token allocations on all the most extensive token networks have historically been held by insiders. For example, 48% and 50% of Solana and Binance tokens respectively are held by insiders, including the team, company, and VCs.

2.The web3 community is hellbent on eliminating centralised bodies but cutting out the intermediary doesn’t seem to have a significant impact, especially the transaction costs. Ethereum, the most used smart contract blockchain, is practically unusable because of hefty fees. Minting an NFT on Ethereum will generally cost between $60 and $250, depending on the time of day and the stress on the network and the more users are competing to get their transactions in the chain’s next “block,” the worse the fees.

3.Decentralized infrastructure also allows the token ecosystem to operate like unregistered securities, given that most new tokens are pre-mined or picked up for pennies by insiders, and then traded for higher amounts later. Although not representative of the entire ecosystem, it has mostly ended in bubbles so far. In the fiat world, users – especially the less sophisticated ones – always have a regulatory body such as the Securities and Exchange Commission that they will rely upon to guard them against unscrupulous products and entities. With web3, unsophisticated users are at the mercy of robin hood-looking evangelists, who most times are really not much more than insiders in an unregulated securities space.

4.There are also concerns around the theme of smart contracts central to concepts such as DAOs which have a missing element regarding user protection. For example, a fatigued owner of Bored Ape number 3,547 mistakenly listed their NFT worth $300,000 for $3,000. The transaction closed in microseconds with no possibility of reversal. The NFT was instantly snapped up by an automated account – and put back on sale at nearly $250,000.

 

Looking Ahead

The internet has grown at a stunning pace since its invention, but much of its impact worldwide remains uneven and more work needs to be done in regions such as Africa. This article is primarily aimed at investors and founders. Still, African government officials and corporate entities should also pay close attention and ensure Africa is a significant player in web3 by driving the continent towards mass adoption and building tangible value around the technology.

Like web 1 and 2, web3 will profoundly alter Africa’s economic, social, and political landscape, probably even more than in the West and parts of Asia where suitable infrastructure is already in place. As a reference point, developments in internet and mobile communication had the most impact in Africa as they provided possibilities for African countries to overcome wireline infrastructure constraints. 

In the earlier days of the web, Africa was among the biggest beneficiaries; at the time, a ten-minute voice phone call from the Netherlands to Ghana cost $34, while a 2,000-word email would take seven seconds to reach Accra from Amsterdam and cost $0.40. The widespread adoption of smartphones on the continent has made communication more affordable and accessible to the masses, including the illiterate. As of 2021, WhatsApp and other over the top communication modes have made email and text messages even less of a necessity. 

All this sounds familiar with the current challenges the continent faces with remittances, cross-border payments, and banking for the unbanked, where customers pay hefty fees and have to wait for days or even weeks for transactions to complete. The cost of remittances in sub-Saharan Africa was the highest, averaging 8.17 percent in the fourth quarter of 2020 compared with 4.9 percent in South Asia, the lowest average cost. 

This is where key players in the ecosystem should educate and collaborate with governments and regulatory bodies on how best to accelerate the adoption of web3 technology and the development of products unique to African use cases. As of today, across Africa, regulation is still the biggest threat to mass adoption of web3 products and services. Although web3 is billed as the decentralised internet, it still needs to operate within the realm of the law. 

Not everyone will or can use a decentralised exchange, nor shall all data generated by centralised platforms be made freely available for the rest to use. Therefore, governments will need to proactively get involved to ensure the standardisation of products and protocols across board and ensure that vulnerable users are first and foremost protected. This will help avoid the issues that arose with web 1 and web 2, where multiple stakeholders were involved in bringing and spreading the internet across Africa, albeit in a non-coordinated way. Such chaos led to certain crucial assets such as management of the .ug domain ending up in the hands of individuals.

 

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