Web3 is being touted as the future of the internet, where users can have financial involvement and more power over their Blockchain-based communities, such as cryptocurrencies, NFTs, DAOs, decentralized finance and others. It could be as revolutionary to being online as PCs and mobile devices were. However, there are some concerns with it, including possible environmental effects and speculation (and potential for deception) which accompany Web3 projects.
Blockchain is touted as a remedy for privacy, centralization, and financial exclusion matters; however, it has generated fresh varieties of many of these issues. Companies must contemplate both the advantages and disadvantages before plunging in.
– Web3.0 Summary
Do you recall when you first heard about Bitcoin? Maybe it was a quiet murmur regarding a revolutionary technology that could alter everything. You might have felt a slight twinge of FOMO as the people who invested early suddenly made huge profits — even if it was uncertain what the “currency” could be legitimately used to purchase (like an expensive pizza with BTC payment?). Perhaps you mulled over whether your business should develop a crypto plan in case it became popular in your industry, regardless of how much interest you had in it.
It is likely that shortly after Bitcoin first caught your attention – no matter when that was – there was a market crash. Over the years, bitcoin’s value has taken several nosedives, prompting skeptics to write it off as a failed enterprise and deem it nothing more than an oddity championed by libertarians and those with an aversion to banks. Such people would argue that Bitcoin had no chance of succeeding alongside authentic tech firms before quickly forgetting about it and getting on with their lives.
Of course, the return was inevitable.
Bitcoin has become a pervasive presence. As we’ve all been busy, cryptocurrencies have quietly infiltrated the public consciousness. We only became aware of this when Larry David was mentioning them in his Super Bowl ad; celebrities such as Paris Hilton, Tom Brady and Jamie Foxx have been promoting them in commercials; and a Wall Street-style robotic bull was presented to the world in Miami, which was rather intimidating. What had originally been an interesting concept that was then treated as a speculative investment is now a major industry.
Crypto is merely the beginning of what blockchain technology can do. Blockchain is a decentralized database which offers users an immutable and transparent way of storing data. It has been utilized for various new applications, such as creating digital records for unique digital items, known as Non-Fungible Tokens (NFTs). This year, the NFT market has seen considerable growth and was worth $41 billion at one point. An example of this trend was when Beeple’s artwork sold for a staggering $69 million at Christie’s.
Even more specialized relatives, such as DAOs or “decentralized autonomous organizations,” act like businesses without directors: they collect and spend money, but all choices are voted on by members and implemented through encoded regulations. Recently, one DAO raised $47 million in an effort to purchase a rare version of the U.S. Constitution. Proponents of DeFi (or “decentralized finance,” which strives to transform the international financial system) are lobbying Congress and advocating for a future without banks.
The collective endeavor to transform the web is known as “Web3.” This term serves as a handy summary for the mission of restructuring the web’s operations, utilizing blockchain technology to alter how data is stored, distributed, and owned. If successful, a blockchain-based internet could break up the power structures in place regarding access to information, revenue generation, and even how networks and entities function. Supporters maintain that Web3 will generate new markets, novel kinds of products and services online; it will restore freedom online; and it will shape the future of the web.
Web3 is unavoidable, much like Thanos from the Marvel universe.
It is undeniable that a lot of energy, money, and talent are being invested into Web3 projects, but it should be noted that completely transforming the web is an ambitious task. There are various technical, environmental, ethical, and regulatory challenges standing in the way of blockchain achieving widespread acceptance. Additionally, many people have argued that there is excessive speculation and theft within Web3 as well as privacy issues; they even claim that the trend towards centralization is diminishing the potential for a decentralized web.
Businesses and leaders are attempting to understand the potential benefits and risks of an ever-changing landscape that may help organizations thrive if managed correctly. Many companies are currently experimenting with Web3, some achieving great success while some renowned firms have run into difficulties or customer dissatisfaction. Unfortunately, most individuals do not even comprehend what Web3 is; in a survey conducted among HBR readers on LinkedIn in March 2022, almost 70% declared they had no idea what it meant.
Greeting you to the perplexing, debated, thrilling, idealistic, deceptive, catastrophic, giving people power over their own lives (maybe), and decentralized Web3 universe. Here’s what is essential for you to comprehend.
Install Update: From Web1 to Web3
In its inception, the internet was a network of cables and servers that enabled computers and people to communicate. The U.S. government’s ARPANET transmitted its initial message in 1969, yet the web as we understand it today did not arise until 1991 when HTML and URLs made it possible for users to move between static pages. This can be thought of as the ‘read-only’ web, or Web1.
In the early 2000s, a transformation began to take place. The internet was transitioning to a more interactive platform known as the read/write web, or Web2 (or Web 2.0). Social media outlets such as Facebook, Twitter and Tumblr had become integral components of this new online experience. YouTube, Wikipedia and Google provided users with an increased capacity for watching videos, accumulating knowledge, searching for information and communicating with others; not to mention the ability to comment on content.
The Web2 period has been one of centralization. Network effects and economies of scale have caused certain clear victors, and those businesses (many of which are listed above) have created immense wealth for themselves and their investors by collecting user data and offering targeted ads with it. This has enabled services to be provided without cost, though users originally didn’t understand the implications of that agreement. Web2 also produced new methods for ordinary people to make money, like through the sharing economy and being a successful influencer.
The Web2 period has been one of concentration. Network effects and economies of scale have caused certain clear victors, and those businesses (many of which are listed above) have created immense wealth for themselves and their investors by collecting user data and offering targeted ads with it. This has enabled services to be provided without cost, though users originally didn’t understand the implications of that agreement. Web2 also produced new methods for ordinary people to make money, like through the sharing economy and being a successful influencer.
Many are questioning whether there is a better future for the web as it has become centralized and corporate. There is much to criticize about the current system: companies with concentrated or near-monopoly power have not managed it responsibly, consumers are becoming more aware that they are the product and don’t want to give up control of their personal data, and perhaps the targeted ad economy does not really benefit advertisers.
This takes us to the concept of Web3. Supporters of this outlook are promoting it as a thorough overhaul that will address the issues and distorted incentives of Web2. Concerned about privacy? Encrypted wallets safeguard your digital identity. Anxious about censorship? A distributed database stores all information unalterably and openly, blocking moderators from intervening to delete inappropriate material. Centralization? You receive a genuine vote on choices made by the networks you spend time on. Plus, you gain something that is valuable – you’re not just a consumer, but an owner. This is the vision of the read/write/own web.
So, what exactly is Web3?
The origin of what we now know as Web3 began in 1991 when scientists W. Scott Stornetta and Stuart Haber initiated the first blockchain, a concept for timestamping digital documents. However, it was not until 2009 that the idea really gained traction with the introduction of Bitcoin by the anonymous creator Satoshi Nakamoto, who was likely motivated at least in part by the financial crisis. The technology behind Bitcoin operates on a shared public ledger where ownership of cryptocurrency is tracked; when someone wants to transfer it, “miners” process this transaction by solving a complex math problem which adds data to the chain and entitles them to newly created bitcoin as payment for their work.
After over a decade, those in favor of a blockchain-based web are proclaiming the arrival of Web3. Ethereum, created in 2015, is both a digital currency and an open platform for developing other blockchains and crypto projects. Gavin Wood, one of its cofounders referred to it as “one computer for the entire world” since computing power on this network is spread throughout the globe and not concentrated anywhere. Unlike Bitcoin, which only serves as money, Ethereum enables more than just financial transactions.
Essentially, Web3 is a progression of cryptocurrency, making use of blockchain technology for new objectives. A blockchain can store the amount of tokens in a wallet, the terms of an autonomous contract, or the code for a decentralized program (dApp). Not all blockchains operate in the same way, but generally coins are used as incentives for miners to process transactions. On “proof of work” chains like Bitcoin, solving mathematical problems needed to conduct transactions is deliberately energy-consuming. On “proof of stake” chains which are more recent but increasingly widespread, verifying transactions only necessitates that those with an interest in the chain agree that a transaction is valid – a process that is much more efficient.
In both cases, the details of transactions are open to the public, however wallets are marked solely by a cryptographic address. Blockchains are designed so that information can only be added and not removed.
Web3 and crypto run on “permissionless” blockchains, which are not governed by a central entity and don’t compel users to rely on or be aware of other users for transactions. This is generally what is meant when people mention blockchain.
“Web3 is the internet owned by the builders and users, orchestrated with tokens,” says Chris Dixon, a partner at the venture capital firm a16z and one of Web3’s foremost advocates and investors, borrowing the definition from Web3 adviser Packy McCormick. This is a significant shift as it alters the fundamental nature of the current web, in which corporations exploit users in order to accrue data. Tokens and shared ownership, Dixon says, fix “the core problem of centralized networks, where the value is accumulated by one company, and the company ends up fighting its own users and partners.”
In 2014, Ethereum’s Wood wrote a foundational blog post in which he sketched out his view of the new era. Web3 is a “reimagination of the sorts of things we already use the web for, but with a fundamentally different model for the interactions between parties,” he said. “Information that we assume to be public, we publish. Information that we assume to be agreed, we place on a consensus-ledger. Information that we assume to be private, we keep secret and never reveal.” In this vision, all communication is encrypted, and identities are hidden. “In short, we engineer the system to mathematically enforce our prior assumptions, since no government or organization can reasonably be trusted.”
The concept has been altered over time, resulting in the emergence of novel applications. Sound.xyz, a Web3 streaming platform, offers a better deal to artists. Games such as Axie Infinity, based on blockchain technology, allow gamers to gain money while playing. Stablecoins with their value linked to the dollar or euro are seen as enhancements to the global monetary framework. Moreover, crypto has become a go-to option for cross-border payments; this is especially beneficial in regions where instability is an issue.
“Blockchain is a new type of computer,” Dixon tells me. Just like it took years to understand the extent to which PCs and smartphones transformed the way we use technology, blockchain has been in a long incubation phase. Now, he says, “I think we might be in the golden period of Web3, where all the entrepreneurs are entering.” Although the eye-popping price tags, like the Beeple sale, have garnered much of the attention, there’s more to the story. “The vast majority of what I’m seeing is smaller-dollar things that are much more around communities,” he notes, like Sound.xyz. Whereas scale has been a key measure of a Web2 company, engagement is a better indicator of what might succeed in Web3.
Dixon is taking a huge gamble on the future of Web3. In 2013, he and a16z began investing in the sector and last year they put $2.2 billion into Web3 companies. His goal is to increase that amount twofold by 2022. The number of developers writing code for Web3 projects has almost doubled in 2021, with approximately 18,000 individuals involved – although still relatively small compared to global figures, it’s still noteworthy. Even more significantly, people are starting to talk about Web3 projects; the buzz is unmistakable.
However, as high-profile startups such as Theranos and WeWork have demonstrated, hype is not the only factor. So what can be expected in the future? What should people be wary of?
What Web3 Might Mean for Companies
Web3 will have a couple of primary distinctions in comparison to Web2: People won’t require various sign-ins for each website they go to, but rather will utilize a unified identity (likely their digital currency wallet) that carries their data. They’ll have more authority over the sites they visit, as they acquire or purchase tokens that permit them to cast a ballot on choices or open up features.
The effectiveness of the product is yet to be determined. Speculations about what Web3 would look like at its most developed stage are just suppositions, although certain projects have gained considerable traction. Examples include Bored Ape Yacht Club (BAYC), NBA Top Shot, and the cryptogaming phenomenon Dapper Labs who have all constructed thriving NFT networks. Firms such as Coinbase (for buying, selling, and preserving cryptocurrency) and OpenSea (the biggest digital store for crypto collectibles and NFTs) have provided Web3 entryways for those with limited or no technical expertise.
For a while, companies such as Microsoft, Overstock and PayPal have been utilizing cryptocurrencies. Nevertheless, the recent surge in NFTs has prompted brands to experiment with Web3. In basic terms, an NFT is a combination of a deed, certificate of authenticity and membership card. It can grant ownership of digital art (this is usually documented on the blockchain with an attached image link) or access/rights to a particular group. Unlike coins which require larger networks for support, NFTs are able to run on a smaller scale as they only need people who see the value in them to form their own ecosystems.
Baseball cards are valued only by specific collectors, and this group holds these items in high regard.
Traditional businesses have found success in the Web3 space by forming or connecting to existing online communities.
The NBA was an early adopter of NFT technology with its Top Shot project, which let fans buy and trade clips or “moments” (like a LeBron James dunk) that operate like trading cards. It struck a chord due to its ability to provide an online collecting hub for already avid card collectors. Other brands, such as Nike, Adidas and Under Armour have also incorporated digital elements into their collector communities. These companies offer NFTs that can be used in the virtual realm (e.g., for outfitting avatars) or grant access to physical goods or exclusive streetwear drops in reality.
Adidas managed to generate $23 million in sales from NFTs within a 24-hour period, and quickly developed a secondary market for them on OpenSea, analogous to what one would find after limited-edition shoe releases. Moreover, Time magazine has initiated an NFT initiative in order to construct an online following that draws on the magazine’s extensive past.
The Bored Ape Yacht Club has been a massive success in bringing NFT projects into the public eye. By blending appeal and exclusivity, BAYC grants access to physical gatherings and online hangouts, as well as usage rights of the ape’s image – strengthening the brand even further. Becoming an owner of an ape NFT implies membership in a private community, both figuratively and literally.
The experience gained from these endeavors has shown that on-ramps are important, but less so in cases where the community is highly invested. Setting up a crypto wallet isn’t a difficult process, however it does add an extra step. To make life easier for users Top Shot doesn’t require one — customers just need to input their credit card information — which assisted in drawing newcomers to NFTs. The Bored Ape Yacht Club was something of a niche interest at first, but once it took off it acted as an impetus for people to set up wallets and stimulated enthusiasm for OpenSea.
Certain companies have encountered difficulties with NFT projects and crypto features. To illustrate, Discord CEO Jason Citron had to clarify that the company had “no current plans” to launch a connection between their app and crypto wallets after users revolted upon hearing his announcement of such a feature. MeUndies and the UK branch of the World Wildlife Fund both swiftly cancelled their NFT projects due to customers’ vehement disapproval of its large carbon footprint. Even those initiatives deemed successful have experienced hiccups along the way.
Nike is attempting to have unauthorized NFTs eradicated, yet OpenSea is full of phony and replicas. As blockchain cannot be altered, this has created an entirely new set of legal issues that corporations are struggling to tackle. Moreover, there’s evidence that the NFT market is coming to a standstill.
Organizations that are thinking of entering this field should keep in mind: Web3 is controversial, and there are no guarantees. The main difference lies between those who have faith in what Web3 could become and those who criticize the various issues it currently faces.
System Error: The Case Against Web3
The initial times of a technology are often exciting. There is an abundance of potential, and people concentrate on what it can achieve — or what optimists think it will be able to do. I am old enough to recall when Twitter and Facebook were predicted to spread democracy everywhere due to the unrestricted communication they provided. As Web3’s predicted success (and potential financial gain) draws in more believers, we must remember that bad things could happen and be aware of what is already happening.
It is full of guesswork. Doubters maintain that despite the speeches about democratization, ownership prospects, and wealth generation on a large scale, Web3 is nothing more than a grand speculative market which will likely just make some already affluent people even wealthier. It is easy to understand why this opinion makes sense. The wealthiest 0.01% possess 27% of the total supply of bitcoin. Wash trading and market manipulation have been seen in both crypto and NFT markets, causing value to be inflated artificially and allowing owners to gain coins from pretended trades. During an interview on The Dig podcast, reporters Edward Ongweso Jr. and Jacob Silverman depicted the whole system as an intricate transfer of wealth from bottom to top.
In The Atlantic, investor Rex Woodbury referred to Web3 as “the financialization of everything” (not in a positive way). As an example of the potential problems, software engineer Molly White created Web3 Is Going Just Great, which follows the numerous hacks, frauds and failures in the Wild West-style unregulated field of Web3.
The volatility of the markets may be a beneficial feature, not a fault. According to David Rosenthal, a technologist, speculation on digital currencies is what powers Web3 — it is an essential element. He remarked in his talk at Stanford in early 2022 that “a blockchain without restrictions needs cryptocurrency to work and this cryptocurrency relies on speculating for its process”. Basically, he was explaining the concept of a pyramid scheme: blockchains must give something to those who volunteer computing power and cryptocurrencies are used for that purpose but only if people think they can gain value from them over time.
Stephen Diehl, a technologist and strong adversary of Web3, labelled blockchain as “a single-use tool whose only use is for forming censorship-resistant crypto investment systems, something whose destructive outcomes and potential for damage greatly surpass any possible applications.”
The technology is not practical (and costly). There are many questions as to whether Web3 or blockchain will be the defining technology of the web’s next era. Grady Booch, IBM Research’s chief scientist for software engineering, expressed on a Twitter Spaces conversation that “Regardless of whether you agree with the economics/philosophy behind cryptocurrencies, they are fundamentally a software architecture disaster waiting to happen”. All technology comes with trade-offs and Booch noted that the cost of having a “trustless” system is its inefficiency; it can only handle a few transactions per minute which is miniscule compared to centralized systems such as Amazon Web Services.
Decentralization has the effect of making technology more complex and less accessible for the average user, rather than easier to use and more available.
Adding new layers to fix the problem can be done but it will make the system more concentrated, which is not ideal. Moxie Marlinspike, creator of Signal messaging, stated that when a decentralized environment centralizes for convenience it becomes an amalgamation of both centralized and distributed systems and thus gets bogged down in time.
Currently, the lack of efficiency in blockchain systems comes at a high price. Transaction fees for Bitcoin and Ethereum (which are referred to as gas fees) can range from a few dollars to hundreds of dollars. Storing one megabyte of data on a blockchain ledger can cost thousands or even tens of thousands of dollars – yes, you heard that correctly. That’s why your NFT probably isn’t actually stored on the blockchain. The code on the chain indicating your ownership includes an address pointing to where the image is located, which has caused issues such as your costly purchase vanishing if the server it resides on crashes.
The potential for serious unintended consequences is very real. Blockchain technology, which touts public ledgers, anonymity, and unalterability as the “future of the web,” can make possible harassment and abuse. Molly White points out that this has been overlooked or even celebrated as a feature by some. Even though crypto wallets are meant to be anonymous, public transactions can still be traced to individuals (the FBI knows how to do this). Imagine if when you sent your Tinder date money through Venmo they could also see all of your other payments – including those made to other dates, your therapist and the convenience store near where you live.
Having that data in the possession of an abusive former partner or a stalker could put someone’s life at risk.
The unalterable nature of the blockchain means that data is permanently stored and cannot be taken down. This includes any posts or images that are not desirable, such as revenge porn. However, this could lead to potential issues in certain areas, such as Europe, where the General Data Protection Regulation (GDPR) grants people the right to have their personal data deleted.
The environmental ramifications of Web3 are considerable and damaging. This can be divided into two areas: energy consumption and technological waste, which are both consequences of mining. Maintaining a blockchain network where supercomputers have to compete to solve intricate equations every time someone wants to save data requires significant amounts of energy. It also leads to e-waste: according to Rosenthal, Bitcoin produces “an average of one whole MacBook Air worth of e-waste for each ‘economically meaningful’ transaction” as miners use up large quantities of short-lived computer hardware. The study conducted by Alex de Vries and Christian Stoll that Rosenthal relies on indicates that the yearly amount of e-waste created by Bitcoin is similar in size to the Netherlands’ output.
It is difficult to predict whether and how these topics will be handled, partly because it remains uncertain if Web3 will become widely accepted. Technology author Evgeny Morozov claims that blockchain is a technology trying to find an actual purpose. He also states that the majority of Web3 ventures rely heavily on people’s belief in a prospective shift from Web 2.0 to Web3. Tim O’Reilly, who first used the term “Web 2.0” to describe the platform web of early 2000s, states that this period has created an investment surge reminiscent of the dot-com era before its collapse. O’Reilly goes on by saying that “Web 3” cannot be officially referred to as such until after crypto’s downfall occurs.
Only then will we find out what has persisted.
The potential cost of innovation is high, according to Hilary Allen, a law professor from American University who researches the 2008 financial crisis. She states that the system currently reflects and intensifies the weaknesses of shadow banking progressions which led to the 2008 financial crisis. If Web3 fails, many people could be left in an unfortunate predicament.
The Start of Something New
Vitalik Buterin, cofounder of Ethereum, has voiced his worries about the path taken by his invention yet is still optimistic. Responding to Marlinspike on the Ethereum Reddit page, he accepted that the Signal founder had made a “correct criticism” of the existing condition of the system but noted that progress in decentralized web is happening rapidly. The current work done on coding libraries will soon allow other developers to join Web3 projects. He concluded by saying “I believe a securely authenticated decentralized blockchain world is coming and it’s much closer than most people think.”
Proof of work, which is employed in Bitcoin and Ethereum but is very energy-inefficient, is becoming less popular. Instead of mining for validation, users can now simply buy a stake to approve transactions. Ethereum predicts that this shift to proof of stake will reduce their energy usage by almost 100%, while also making the platform faster and more efficient. Solana, a newer blockchain using proof of stake and “proof of history” (a system based on time stamps), can process 65,000 transactions per second (as compared with Ethereum’s 15 per second and Bitcoin’s seven) but only uses as much energy as two Google searches – something it compensates for with carbon offsets.
Some firms are taking a blended approach to blockchain, offering the advantages while avoiding the limitations. “There are some very intriguing new designs,” he informs me, “which place certain elements on the blockchain but not others.” For example, a social network could record your followers and who you follow on the blockchain but not your posts, providing you with the ability to delete them.
Hybrid models can be used by companies to adhere to GDPR and other regulations. Cindy Compert, Maurizio Luinetti, and Bertrand Portier in an IBM paper explain that “the right to erasure” necessitates keeping personal data away from the blockchain in a separate storage unit; only its cryptographic hash should be shown on the chain. This way, personal data can be removed without disrupting the chain’s functioning as per GDPR requirements.
Regulation is gradually beginning to take shape, which will determine the fate of Web3. China has completely prohibitedcryptocurrencies, along with Algeria, Bangladesh, Egypt, Iraq, Morocco, Oman, Qatar and Tunisia. Europe is exploring environmental regulations that could reduce or forbid proof-of-work blockchains. In the United States of America (USA), President Biden’s executive order in March requested the federal government to inspect regulating cryptocurrencies.
Given the still-developing nature of Web3, it is an investment with both great potential and considerable risk. Companies and industries that were negatively affected in the past by being excluded from Web2 have a particular incentive to take a chance on Web3. It should come as no surprise that Time, a media organization whose business was heavily impacted by Web2, is now exploring possibilities for success on Web3. Meanwhile, companies like Nike and the NBA which are experienced in selling limited-quantity items may find that this new technology lends itself well to their existing models.
Other companies may not have as straightforward a route.
It is wise to be wary of the lofty expectations surrounding Web3- that it will take charge of the internet, revolutionize the financial system, even out wealth distribution and bring democracy back to the web. We have seen this kind of enthusiasm before in regards to Web3, only for it to dissipate. Nevertheless, it should not be outright dismissed. It could either become successful or unsuccessful but we will be living with some form of it regardless. How your company responds and what version prevails could determine how digital economies look like during the following internet age.
At this moment, the future is yet to be determined. Nothing is certain.
