Following Parallel Paths? The Evolution of the Internet & Crypto

Executive Summary:

In order to understand how crypto may impact businesses and markets, it is helpful to re-visit the evolution of the Internet and its parallels to the current environment. This evolution can be characterized in three distinct phases.

• Web1 – The Early Days
• Web2 – Monetization
• Web3 – The Introduction of Cryptocurrencies

Web1 – The Early Days

In 1990, I was working in a research lab for a large technology consulting firm. We had a connection to the Internet, which was, at the time, a hodge podge of network links and clunky tools with names like Gopher and Archie. The tools were text based and mainly used as file sharing mechanisms. We also used the Internet to participate in Usenet Newsgroups, a bulletin board like service, where we found and exchanged information mainly on technical topics. Our company of 100,000+ employees had a dial-up connection to the Internet, and we would download and upload updates to newsgroups and file services. This was revolutionary at the time. It allowed us to exchange information, get answers to questions, and communicate with people across the globe. Often, these people were complete strangers.

Information Technology (IT) was not a user-friendly environment as interfaces were simple, interactions complex, and command lines often needed to be used. Because of this, the number of active users and the overall value of the network, was low.

With the advent of web servers and HTML in the early 1990’s, the standardization of email and web protocols, and technologies like Google later in the 90s, interfaces became easier to use and the Internet became a critical tool for the masses, setting off an avalanche of investment in both infrastructure and web applications. E- commerce became more prevalent in the mid-90s most notably with the introduction of Amazon in 1995. What was clear at the time was that this was a sea change in how information sharing, and business would be conducted going forward. The value of the network was increasing.

What was not clear was which companies and technologies would be the winners and losers. Stock prices and valuations rose dramatically, often with no earnings to back them. New IPOs were being launched seemingly every day as early investors and speculators tried to pick the winners. The inevitable DotCom crash occurred in early 2000 and many investors were devastated with stock losses. As Warren Buffett is famous for saying “Only when the tide goes out do you discover who's been swimming naked.” But the innovations were in motion.

Web2 – Monetization

In the early 2000s, with the rise of new web technology and other developments, a shift occurred. Instead of primarily being for the consumption of information (and e-commerce), the web also became a place for user created content. At first, this content came in the form of things like RSS feeds and blogs but was later integrated onto centralized platforms which enabled multi-media and other capabilities. These platforms were ultimately monetized through advertising dollars and the ability to leverage the large amounts of private data they had available to them which may be used for financial gain.

Companies that enabled users to connect with one another, create content, upload videos, and share information and opinions; like Facebook, Twitter, Instagram, YouTube, and others, emerged and established vast networks of users. The greater the number of users on the network, the greater the value created for the companies who controlled the network, through advertising and e-commerce integrations.

Individual content creators could make money from advertisements as well, but only as dictated by the platforms. With the new web technology there were also more ways for users to interact with websites and purchase goods. Because of this, e-commerce exploded. Many fintech companies sprang up giving users better ways to interface with their bank or invest their money, albeit using existing financial rails. Investors who bought stocks tied to the large platforms controlling many aspects of this second version of the internet like Google, Amazon, and Facebook, prospered.

Web3 – The Introduction of Cryptocurrencies

This brings us to current day, where we are in the midst of another shift. This shift is being enabled by the innovation of cryptocurrencies and crypto technology. Crypto technology has enabled not only the transfer of information, similar to the first two stages of the internet evolution, but also the store and transfer of value. This is driven through the use of a shared ledger and cryptographic proofs—without the use of a trusted intermediary. Web1 and Web2 democratized and globalized the instantaneous sharing of information. Web3 does this same thing, but with value.

This innovation started with Bitcoin which set the foundation of this trustless store of, and peer to peer transfer of, value. Soon after Ethereum followed which added an element called smart contracts, enabling a programmability aspect to this digital value, opening up an endless number of possibilities for what can be built around digital value and ownership. Many Ethereum and Bitcoin copycats have been started and thousands of environments and digital communities have been built on top of these foundational cryptocurrencies, leveraging their own cryptocurrency “token”, and are operating and offering their own version of ownership and utility.

Crypto technology has enabled the self-custody of value and data. What this means is that you can directly own your assets and only you are in control of them. Traditionally people have held their assets at a bank or brokerage, and they were a line item in a ledger, in other words a promise from an intermediary to deliver that asset upon request. Moving assets to other accounts outside the bank or brokerage, for example, may take several days rather than the near instantaneous transfer of value in the crypto world.

Looking Forward

Having direct control of their assets in this decentralized model allows users to participate in areas of the financial markets only available to institutions in the past. Developers are re-imagining how financial and other markets might work differently with this element of decentralization and self-custody.

Automated trading and lending markets, operating all day every day, have been built so that anyone with a crypto wallet may participate with their own assets, earning yields traditionally only available to institutions.

Developers are also re-imagining how other markets and social networks might work in a decentralized, self- custodial fashion. The development of NFTs (non-fungible tokens) which can represent digital ownership of an asset, has enabled innovations in the art, music, and gaming markets, eliminating middlemen and giving more control to creators. Maybe more interestingly from an investment perspective NFTs can potentially represent just about any asset in the world, opening up a wide range of ownership opportunities. Additionally, new social networks are starting to be built, hoping to replace the Web2 versions of social networks with solutions leveraging this ownership and self-custody feature of crypto tokens. to give users a financial stake and more control of their data, contributions to the platform and to create new communities.

As in Web1, many of the early applications and interfaces of Web3 are complicated for non-technologists to use. Adding the element of value to the mix hinders adoption as the risk scares off these same people.

However, with large amounts of money pouring in from venture capitalists and other investors, application interfaces and usability are improving.

Like the late 1990s, many early investors and speculators are sorting through the thousands of investment options, many of which will end up worthless. Similar to the Web2 evolution, technology will continue to be enhanced and be used in new, exciting, and unpredictable ways. This should clear the way for making it more accessible to a broader audience.

What it will look like, and who the winners and losers will be, is impossible to know. But crypto and the technology behind it is here to stay because the storage, transfer, and programmability of value should bring new and untold benefits to society in the form of ownership, productivity, and organization.

Investing in Crypto

Investing in cryptocurrencies and its technology will continue to evolve as well. Offerings through different platforms and investment vehicles have shown significant signs of growth. Whether it be direct coin investment through platforms such as Coinbase, Gemini, and FTX or through a more traditional brokerage platform like Robinhood, demand by investors has been massive. Investment has even been made available through publicly traded products like Exchange Traded Funds (ETFs), private funds for accredited investors, and through private equity.

It is important for investors to recognize that crypto is a relatively new space that lends itself to heightened levels of speculation and volatility. As with any investment, due diligence is of the upmost importance.

At Harbor, we specialize in investment and manager due diligence. For over 30 years, Harbor has served as a gateway for clients to access talented, institutional caliber asset managers through active, cost-aware investments. We conduct rigorous initial and ongoing research processes to identify specialists in each asset class.

If, and when, Harbor decides to enter the crypto space, investors can be reassured that we will apply these same rigorous due diligence practices to identify the right manager and strategy that is representative of Harbor’s high standards and commitment to excellence.

For more information about Harbor Capital, please visit www.harborcapital.com or call (866) 313‐5549.

Legal Notices & Disclosures

The views expressed herein are those of Harbor Capital Advisors, Inc. investment professionals at the time the comments were made. They may not be reflective of their current opinions, are subject to change without prior notice, and should not be considered investment advice. The information provided is for informational purposes only.

Investing entails risks and there can be no assurance that any investment will achieve profits or avoid incurring losses.

This material does not constitute investment advice and should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. The information presented does not represent the results that any particular investor may actually attain.

Actual results will differ, and may differ substantially, from the information provided.

Harbor Capital Advisors, Inc.

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