Tim Ferriss mentioned he couldn’t sleep for days when we started looking into Web3. I’ve got no desire for insomnia, but I thought I should probably get a deeper understanding than I currently have.
Web3 was coined a few years ago1, but it’s recently taken as the new word that encompasses the blockchain age: terms such as smart contracts, NFT, DAO, and DeFi. Web3 is a new type of internet, so requires a new type of thinking. Here’s a definition:
Web3 refers to a potential new iteration of the internet that runs on public blockchains, the record-keeping technology best known for facilitating cryptocurrency transactions. The appeal of Web3 is that it is decentralized, so that instead of users accessing the internet through services mediated by the likes of Google, Apple, or Facebook, it’s the individuals themselves who own and control pieces of the internet.
What happened to Web1 and Web2?
- Web1 (early 90s to mid 2000s) was the early internet, where users were primarily consuming information. Websites were static and were essentially digitised offline data (e.g. information lookup). Examples are news and reference sites
- Web2 (mid 2000s to late 2010s) saw the advent of the smartphone, platforms, and two-way information exchange. The platforms are owned by large corporations that provide these services in exchange for personal data, or a commission
There are no clear-cut boundaries between the terms, and many services have aspects of both. Also, it’s important to realise that successive versions don’t replace earlier ones. We still use a lot of Web1 functionality at the moment.
Why is Web3 different, and why is it important?
Web3 gives control of data to users by bypassing central organisation. Here are some use cases: single login across the entire internet with control of personal data, uncensored markets and platforms, and digital scarcity through NFTs.
Highlighting two aspects:
- Data security and privacy - in a Web3 world all data is open, but it’s secured using a private key. Users choose who they wish to give access to.
- Value - in a Web2 business, contributors don’t get a significant share of the value they create. An example is an artist on Spotify, who makes a very small percentage of the overall profits they generate. In the Web3 world, creators can get a larger slice of the pie: they can directly monetise their fans through issuing tokens or NFTs. Superfans who placed early ‘bets’ will see these assets appreciate as the artist gains popularity.
Company building
Web3 sounds great for users, but what about entrepreneurs? Forbes lists are littered with the names of entrepreneurs who’ve amassed fortunes by setting up Web2 companies. Does Web3 discourage innovation? No, it still requires entrepreneurs to set up organisations. Generally, those who set up Web3 organisations will have a greater share of tokens, which could appreciate in value.
Here’s a physical analogy:
Property developers start developing a barren piece of land. At first, the property prices won’t be high, accurately reflecting the value2 of the neighbourhood. As more people move to the area, its value increases and this brings some secondary effects: fancy coffee and restaurants shops pop up, and amenities get better overall. People now want to move to this area because it has great amenities, and the flywheel is set in motion: property prices increase. Assuming the entrepreneur (i.e. property developer) held on to some of the assets, they’re set to gain significantly.
Similarly, a decentralised organisation issues a token in exchange for participation. The entrepreneurs benefit in that the token then goes up in value.
Current issues
- Security and theft are major issues at the moment. Ownership of the new internet is in the form of a token - just an alphanumeric code. There are no third parties or arbitrators if your token is lost, your account is hacked or a transaction is made by mistake. At the moment, you can put your holdings into digital custodians and armories to get around this issue, but this isn’t ideal.
- Smart contracts aren’t so smart - for them to be useful, they often have to rely on external information, which can break the ethos of decentralisation.
- Immutability - blockchains are immutable, until people decide they aren’t.
- Some other issues include costs and scalability (everything has to be duplicated on the network)
If you’re interested in perspectives from outside the rabbit hole, this is a good post on some of the philosophical and technological challenges of Web3.
What’s next? This won’t be a brand new paradigm that erases everything that went before it: the emergence of Web3 won’t mean that Web2 companies disappear suddenly - there will be some use cases of Web2 that serve the world better.
This post was meant to give a broad overview of Web 3. In the process of writing it, I’ve found aspects that I need to dive deeper into to solidify my understanding. Perhaps I’ll address these in future posts.