Empty Buzzword Or The Next Evolution Of The Web?

In December 2021, Twitter Founder and Block CEO, Jack Dorsey, denigrated the Web3 movement and catalyzed a heated debate between tech leaders and crypto enthusiasts. 

The opinions of venture capitalists and tech leaders were split, with Balaji Srinivasan, Chris Dixon, Marc Andreessen, Brian Armstrong, and others touting the potential benefits and opportunities for new forms of value creation enabled by Web3 architecture. As the conversation continued, it became apparent that there was confusion as to what Web3 even is and its potential impact. 

 What exactly is Web3, and is it really the next evolution of the internet as we know it?

The existing technology landscape is dominated by an oligopoly of familiar tech giants. These incumbents provide free services (global communication, video streaming, access to content, publishing, social media, etc.), but capture all of the value by harvesting and reselling vast quantities of user data. 

Facebook wields sole autonomy over the access and use of their enormous data libraries. They alone can make changes to their database. This coupled with the sheer size of its global user base and ability to influence the views of 3 billion people is the source of Facebook’s power in the world. Acquired by Google in 2005 for $1.65 billion, YouTube is a major source of online education for 2 billion monthly active users. YouTube has regularly censored and demonetized content creators, effectively shutting down their primary source of income.

These companies wield outsized influence with real-world ramifications, while keeping all of the value amongst a relatively small group of founding team members, executives, and shareholders. Sometimes this value extraction is conspicuous, as in the case of Apple’s 30% commission for app store purchases. In other cases, user actions are logged, aggregated, and packaged to advertisers, delivering behaviors and insights unbeknownst to the users who are served as the end product.

Web3 is the vision to flip this paradigm on its head. The end goal is a re-architecture of the internet enabling users to own their data in decentralized environments through the use of open source protocols and applications. This model may eliminate the need for centralized gatekeepers, or at least reduce reliance on individual companies. If this vision is properly manifested, data would be ownable and easily transferable by users, and users would be compensated directly for contributing to the network.  

Web3 aims to make users “uncancellable” as it strips power away from centralized service providers that can unilaterally deplatform users and disconnect them from their audiences. This empowers users to more freely express themselves, produce content and have interactions without fear of personal or monetary consequences, increasing value for all participants within a network. This can even have political ramifications as it may encourage activists and dissidents to pursue their goals more openly and vigorously. 

Web3 encompasses all of the tools and primitives being created for users to own and monetize various pieces of their digital footprint including NFTs, DAOs, non-custodial crypto wallets, online identity and reputation, decentralized file storage, decentralized social networks, and governance tools. Through the implementation of protocol native crypto tokens, users and content creators can now own a piece of the underlying platforms and applications they rely on to produce their work.

Decentralized social networks in particular can leverage Web3 tools to restructure incentives and monetization methods. Content creators will have the ability to directly engage with their audiences in a peer-to-peer manner on these networks rather than rely on a third party. This model can apply to other online services such as music and video streaming, publishing, data storage and computation, and much more.  

Public blockchains Bitcoin, Ethereum, Solana, Stacks, serve as the underlying infrastructure for decentralized applications. These blockchains intertwine public and private interests – anyone with an internet connection can permissionlessly interact with these open protocols, yet individuals can own the protocols’ underlying tokens, representing an effective ownership interest in the network itself.

Additionally, entrepreneurs and project teams can leverage these protocols to build decentralized applications, providing services with differing economic models. Since these applications use the same unifying rails, this system fosters competition as users can decide to port over their data to competing service providers if they are deplatformed or feel their needs are not being met properly. The end result is a freer market where users have more choice and companies are forced to treat users as customers with power, rather than as members of a captive audience. 

Below is an example of one possible Web3 configuration. In Web3, it is possible for the data structures currently stored in centralized web, application, and database servers to be stored in decentralized IPFS, Ethereum, and Arweave nodes, respectively. The data stored in these decentralized servers could be requested by centralized application servers to then provide the centralized web server with relevant info. 

Additionally, the blockchain nodes could send the relevant info to a Web3 frontend applications such as a wallet (i.e. Metamask) or gateway (i.e. IPFS). The benefit of this system is the data is inherently decentralized without a single point of failure, and the user can retain control of the data even if a given application attempts to tamper with the user’s online presence. 

But how do users capture the value?

Dorsey’s main criticism of the nascent movement is that young Web3 networks have been co-opted by the usual suspects of venture capitalists and wealthy technology imperialists created by previous tech booms. Many projects are in fact financed by these investors and institutions, and they are in turn compensated with tokens that serve as financial interests and governance influence in Web3 networks.

Although this may be true, perhaps what is important is that power is being shifted back into the hands of users, even if this shift is incremental and still disproportionately rewards the cadre of traditional investors. Web3 incentive mechanisms are young, and new projects and protocols will continue to tinker with them to more optimally reward users.

Part of what makes Web3 so powerful is the ability for early stage projects to incentivize user engagement through financial rewards. Many Web3 crypto projects issue tokens directly to user wallets that interact with the project. This new form of growth marketing is instantly viral as user actions are immediately monetizable. These tokens often bundle several attributes into a single liquid unit of value: user participation in the upside of the protocol, governance rights, platform access rights, and/or claims to particular revenue streams (yield generation).

Consider the example of the Sushiswap protocol. Sushiswap is a leading cross-blockchain decentralized exchange. The protocol is seeing some serious usage. Over the last year, Sushiswap handled $162 billion in cumulative volume, and the protocol currently has a fully diluted market cap of $1.1 billion. The Sushi native token serves as a governance vote, claim on platform revenues, and investment asset with appreciation potential. Tokenholders can vote on protocol enhancement proposals, claim 0.05% of all platform trading volume, and possess an ownership claim with upside potential as the Sushi token price appreciates with increased usage. 

In its early days, Sushiswap incentivized liquidity on the platform by offering liquidity mining rewards to liquidity providers. These rewards were paid in the Sushi token, adding additional inflation to the circulating supply. Similarly, Uniswap, Compound, ENS and many other protocols have implemented similar incentives as well as free airdrops to bootstrap usage of their products and expand distribution of their native tokens. 

Decentralized governance is hard, and Web3 projects are experimenting with optimal ways for communities to govern themselves. Sushiswap was recently embroiled in internal controversy as there was a lack of transparency in the use of protocol funds, and the core team members argued they were not being adequately compensated, leading to internecine infighting. Through experiments being conducted in real time, the Web3 community is actively working on best practices for financial accountability, transparency, and a fairer diffusion of decision making ability amongst key stakeholders.  

Despite these early challenges, people are waking up to the possibilities of a user-controlled internet where they are able to capture the upside. Globally, the term “web3” just reached its highest search interest over the last three years according to Google Trends.

The transition towards Web3 will not happen in one discrete movement. Big Tech incumbents are multi-trillion-dollar entities that will fight tooth and claw to retain market share and user mindshare. However, as Web3 projects continue to build compelling infrastructure and applications, users will organically be attracted by the ability to monetize the time and attention they dedicate to the online services they use every day. The battle between Web2 and Web3 is just getting started, pitting centralized behemoths against decentralized grassroots alternatives. Ultimately, this increased competition stands to greatly benefit users in the long run.