What is Web3 and why (we think) it matters

“This is not the web we wanted”

-Tim Berners Lee, Father of the Web on the Web’s 30th anniversary

We’ve come a long way since the inception of the web. However, what started out as a tool to allow for the free flow of ideas and information that was owned by and for the benefit of humanity has not fully delivered on this promise.

Web 1.0

Back in the 60’s and 70’s the US had one computer system controlling its nuclear weapons and they worried an attack would easily disable the system. So, in 1970 they went live with a decentralised system of many computers across the country (Advanced Research Projects Agency Network — ARPANET) such that if a nuke hit one of the servers, the system would be operational ensuring the US would win a nuclear war.

It is a dark genesis of the tech we use to order Uber Eats today, but this is where the idea of a Decentralised System first came from.

ARPANET was only accessible to a select few people, but they saw the power of this decentralised system to share information and soon other networks were set up for researchers and academics to share information. The problem was that these networks could not talk with one another so on January 1, 1983 a new protocol was established that allowed these networks to share information with one another: the Transfer Control Protocol/Internetwork Protocol (TCP/IP). This is widely consider the birth of the internet — a common protocol for disparate networks to share information.

While you could send information over the network, it was very clunky to do so. In 1990, Tim Berners Lee, a researcher at CERN, released the hyper text transfer protocol (HTTP) that allowed you to link hypertext documents across any nodes on the network, launching the World Wide Web.

On launch, this was the extent of the internet:

Shortly thereafter (1994), two students at Stanford launched a similar, but expanded web page, hosted on a Stanford server that they called Yahoo! with a file structure of almost 24,000 pages that you could click through to find most of the pages on the web. There was also a nice little feature called “Search”.

In 1995 Web browsers browsers like Mosaic and Internet Explorer started to bring the Web more mainstream, but the system was slow (dial up connection) and web design was terrible.

Also in 1995, an innovative Pizza Hut owner allowed customers to order a Pizza — yes, the first thing ever bought on-line was a Pizza Hut Pizza.

These projects started the movement from the Internet being a platform used by academics and researchers to connect devices and share files, to a Web of Applications that allowed creators and builders to connect and communicate with users.

This is what we now call Web1.

Web1 had four key features:

1. It was decentralised — powered by regular computers sitting under desks and in closets that anyone could hook up to the internet
2. It was open source — anyone could build on it and businesses like Yahoo!, Google and Amazon did — which they could not have done if the Web had been private.
3. It was “Read Only” — only Webmasters with very technical skills could publish.
4. Value accrued to edges — builders and users reaped the value

Big Brands played a huge role in funding and creating Web1 and arguably drove mass adoption of the internet as they sought to engage consumers through this new channel. They built millions of websites with the goal of providing value and utility (however limited) to customers.

All of this changed around 2005 (10 years after the launch of the browser) with companies like Myspace(2003), Facebook(2004) and Twitter(2006) where anyone could publish content even if they didn’t have any technical skills.

There was also a premium placed on design and usability — so anyone could just walk up and use these services…and create their own webpages. This ability to self-publish and focus on usability brought the web to the masses.

Web 2.0 — The Information Web

This started a new era where anyone could publish and share content on the web: music, videos, art, books, messages and ideas — The Information Revolution.

In 2004, Tim Reilly popularised the phrase Web 2.0 to describe this new dynamic— also described as the social, information, or participatory web — as having these key features:

1. Participatory culture — where private individuals are not just consumers, but producers and contributors and can interact and collaborate with each other through social media dialogue in a virtual community

2. Ease of use — Web applications are intuitive and easy to use

3. Mobile First — With devices like the iPhone and increasing mobile speeds, Apps should be available from any device, on the go

4. Web Applications — Rather than just websites full of information, build micro-sites with features to accomplish a task — a job to be done — order food, order a car, map a route, etc.

While these new features made it easier to share ideas and communicate, they started creating silos of information stored in huge data centres “in the cloud” and we began drifting away from the idea of decentralisation and open source towards “walled gardens” of systems and data.

This was further accelerated by the introduction and advancement of mobile devices which allowed us to access information from anywhere. While this started with mobile web browsers, with the advent of Apple’s App Store, it morphed into apps for everything, creating even more walled gardens.

so many apps

While these apps created a whole new economy and made life easier in some ways, they also had a darker impact.

Problem #1: Walled Gardens

As people began to search, connect and spend more time on the internet, it became a new channel for brands to spend money on advertising.

Every website and App provided “free” content to draw customers in so they could generate revenue from advertising (and rarely shared this with creators — when was the last time you got money from facebook or twitter for the content you put on these sites?).

Google, Facebook, YouTube, Twitter, Apple, Amazon, Spotify, etc all tried to win the eyeball race and created HUGE walled gardens of features, systems and data.

Ideally, each of these Centralised Platforms also know who owned the eyeballs so they could personalise the content to enhance stickiness and engagement and deliver personalised advertising/services/products. This led to massive stores of personal data, stored in massive data centres owned by a handful of companies.

These Centralised Platforms followed a predictable life cycle. At first, they do everything they can to recruit users and 3rd-party complements like creators, developers, and businesses.

They do this to strengthen their network effect. As platforms move up the adoption S-curve, their power over users and 3rd parties steadily grows.

When the Centralised Platforms hit the top of the S-curve, their relationships with network participants change from positive-sum to zero-sum. To continue growing requires extracting data from users and competing with (former) partners and over time, increasing their “Take Rates” from their customers.

Famous examples of this are Microsoft vs. Netscape, Google vs. Yelp, Facebook vs. Zynga, Twitter vs. its 3rd-party clients, and Epic vs Apple.

For 3rd parties, the transition from cooperation to competition feels like a bait-and-switch. Over time, the best entrepreneurs, developers, and investors have learned (and yearned) to not build on top of centralised platforms.

With the rise of these Centralised Platforms, this also led to the disintermediation of creators and consumers with each of these big silos skimming revenue (“Take Rates”) from every value exchange and then selling the meta-data of the users and these exchanges back to the parties, resulting in huge Takes Rates and Revenue.

Problem #2: Data Breaches

All this centralisation of data created fat targets for hackers and exposed millions of people to fraud, identify theft and lost money. in 2018, 6.3 BILLION accounts were hacked. These organisations store all our information, along with our passwords (all those damn passwords!) and then leak them (or sell them) to bad actors.

To be fair, it is virtually impossible for a large enterprises to protect our data.

Problem #3: Customer Connection

So what started out as decentralised system that would allow people to share ideas, communicate and collaborate freely (Web1) has turned into a closed, private, opaque system where a few big players make tonnes of money off creators and trade on our private information(Web2).

Web2 hasn’t been great for businesses either. While Web2 has allowed Brands to engage customers (advertising) and sell stuff through a new channel (eCommerce), this information is often spread across multiple silos making it hard to truly understand the customer. Additionally, because there is no native currency on Web2, the “value exchange” between creators and consumers of value is limited, with the centralised platform taking monopolistic cuts of the value exchange.

As with Web1, Big Brands largely funded the creation of Web2 by pouring advertising dollars into Google Adwords and facebook/instagram advertisements, with increasingly diminishing yield. These platforms change their algorithms all the time, leaving Brands to spends more money on SEO/SEM strategy to stay connecting with their customers/audience who follow them.

Web 3.0/Web3

While many elements of Web2 are awesome, there are a few key pieces missing, which Web3 promises:

1. Digital Ownership will become a native feature of the internet
2. Decentralised Apps will offer all users (businesses, consumers, creators) new capabilities, revenue streams and business models
3. Users (and organisations) will have more control over their digital identities and data

Key Web3 feature #1: Digital Ownership

The creation of bitcoin, which was launched 9 Jan 2009, changed the way we can exchange value on the internet with the clever combination of four technologies:

1. Blockchain — a tamper resistant digital public ledger (database) for storing things of value
2. Cryptography — secure communications techniques that allow only the sender and intended recipient of a message to view its contents
3. Peer to peer networking — truly “trustless” networking — no need for a an intermediary (a bank, whatsapp, paypal, facebook, uber, airbnb, etc) to connect people and certify a transaction as value (and charge an exorbitant fee for this service)
4. Consensus algorithms — a process to achieve agreement on a single data value among distributed processes or systems which allows blockchains hosted on millions of nodes to maintain consistency and make blockchains virtually unhackable

This combination of technologies bring about two new major innovations:

Innovation #1: Digital Scarcity

For the first time ever we’re able to create items that are both digital and unique. In the past, if you sent an email from one computer to another, there were two copies. This is great for copying things like a movie, image, document, or song, but terrible for maintaining value and scarcity because money that can be copied (counterfeited) has no value.

With bitcoin, when you send one bitcoin (or a portion thereof — a satoshi is 100 millionth of a bitcoin) from one place to another, it is gone. This is because a bitcoin can only be at one address at a time.

The ability to create scarcity means we can now create digital items of value: memberships, certificates of ownership, player cards, etc that can be owned and traded on-line.

Innovation #2: Peer to Peer Networking

The other big innovation that bitcoin enabled was the ability to spend money and exchange value without using any intermediaries — who are skimming value off the transaction.

As such, Web3 could be thought of as the “Value Web” where anyone can easily and securely exchange value.

To understand how big this is, consider the transformation that occurred with Web2 that enabled the exchange of information in all its forms — The Information Revolution.

If Web2 was the Information Revolution — a completely new way for people to create and exchange information, Web3 is set to be the Value Revolution — completely new ways for people to create and exchange value — and especially exciting ways for brands to create and exchange value with its customers.

While bitcoin set out to replace fiat currency as a source of value by “tokenising money”, value goes beyond cash…many components of society have value:

• Real estate
• Credit
• Art
• Stock — business value
• Diplomas, certifications
• Credentials — driver’s licence, passports
• Music
• Video
• Collectables
• Contracts
• Fashion
• Loyalty points

These other “Containers of Value” can now be digitised, or tokenised, and bought or sold or traded — more on this later.

Key Web3 feature #2: Decentralised Apps (DApps)

In 2014, a new blockchain, Ethereum, launched that went beyond Bitcoin by introducing programmable tokens with smart contracts(more on this later). This has led to a boom in Decentralised Apps (as well as other blockchains and tokens).

If we use these key innovations — Blockchain, Cryptography, Peer to peer networking, Consensus algorithms, tokens, smart contracts — to build Decentralised Web Apps, we’ll be able to interact without any intermediaries. Just as every brand went on a tear to build Apps after App Stores launched, every Brand will soon be, (or already) building DApps. The opportunity for brands to get closer to customers AND increase revenues is huge, and as you can see below, many are rushing into the space. In fact, in 2022, 315 brands launched Web3 programs (50% of which had a market cap of > 1 billion USD) and generated 15 billion USD in revenue. As of 2023, Web3 is most certainly happening. By the end of 2024, it is expected every Fortune 500 brand will have a Web3 program. If you’re falling behind, BlockTrust can help accelerate a brand’s Web3 program through white label DApps that can be quickly deployed.

The Internet of Blockchains

Key web3 feature #3: Identity Control

To date, governments (driver licence, passport) and organisations (User Account) have been in charge of managing our identities and our data…and our identities, in classic Web2 fashion, have become increasingly centralised:

This means that private, for profit companies are now in charge of our identities and hold almost all our personal information, including our browsing, reading and buying habits to form a clear picture of who we are — that they can profit from by selling our preferences to the highest Ad bidder.

The promise of Web3 is that users can take back control of their data through the use of wallets (a Web3 User Account) where the user decides which information to reveal, ask to be forgotten and is the universal key to “registration”, which means:

• no more forms to give your personal data for no purpose
• one password for all your data
• own your data

So logging into an app should look more like this:

“Welcome Back, Alison!”

In other words, you won’t have to consistently login — your keys will be stored on your device and without revealing who you are and you can still receive a personalised experience.

For example, when you buy something, you give your credit card to the merchant — that merchant, or anyone who picks up the details along the way, or hacks the server where this information is stored, can charge your card willy nilly without your permission.

With Web3, you sign (approve) every transaction and every transaction has a unique id on the blockchain that makes it impossible to charge you more than once for anything.

Same goes for addresses, medicare & tax IDs — organisations ask for this information, store it on some server and after a while it gets stolen by a hacker.

With Web3 it is possible to sign any transaction with a wallet to prove that you are who you say you are and nobody can steal your money or identity.

Now, this is not to say wallets can’t get hacked, but hackers would have to go wallet by wallet 100 million times vs cracking one server with 100 million accounts.

Again, if you’re looking to reclaim your customer data and relaise the benefits of Web3, BlockTrust has a “Brand Wallet” purpose built for the unique requirements fo brands called ID3 — go to www.id3wallet.io to learn more.

The Opportunity for Brands and Creators

Rather than relying on big siloes of data (and the companies that own them) through which to engage audiences, brands and creators can now directly engage with their audience through tokens, and audiences can engage directly with brands and creators through their wallet.

The first time NFT was used was in 2014, when Anil Dash, a software entrepreneur, and Kevin McCoy, a digital artist, created Quantum, a color-changing pixelated octagon. The first fully-fledged NFT project was created on the NameCoin blockchain(forked from bitcoin) and presented at DEVCON 1 just three months after the Ethereum blockchain was founded.

Kevin McCoy, Quantum (2014). The first NFT ever minted.

Several NFT initiatives arose as the Ethereum blockchain gained traction over traditional token systems based on bitcoin. Despite the importance of initiatives like Cryptopunks, Colored Coins, and Rare Pepes in the development of NFT, it was the introduction of CryptoKitties in October 2017 that propelled the technology into the public. Some of these blockchain-based digital cats were sold for more than $100,000, causing the NFT ecosystem to explode.

While these first NFTs didn’t have much utility, they did prove three important attributes of NFTs.

Ownership

The primary benefit of non-fungible tokens is the ability to prove ownership. NFTs can assist in linking ownership to a single account because they are on a blockchain network.

At the same time, the ownership benefits of NFTs protect consumers against the risk of receiving counterfeit NFTs. NFT detractors have publicly said that individuals could just photograph NFTs and sell or give them away for free.

You can, however, have a picture of the NFT. However, you do not own the asset. Downloading a photograph of the Mona Lisa on the internet, for example, does not make you the own of that image.

Authenticity

The benefits of non-fungible tokens are primarily dependent on their uniqueness. NFTs are produced on the blockchain, meaning that they are linked to unique data. NFTs’ distinct characteristics demonstrate their potential for adding value. At the same time, NFT producers have the option of releasing a limited quantity of NFTs in order to create supply scarcity.

In the case of some NFTs, authors have the option of making numerous duplicates, similar to how tickets are made. The immutability of the blockchain on which NFTs are kept, on the other hand, ensures their legitimacy.

Transferability

In-game goods are available in many games, and players may purchase them to enhance their gaming experience. The in-game objects, on the other hand, are limited to the game’s setting, and players cannot use them elsewhere. Furthermore, if the game falls out of style, gamers may lose their investment in in-game souvenirs or goods.

In the case of NFTs, game creators might create NFTs for in-game objects that players could keep in their digital wallets. Players may then use the in-game things outside of the game or even sell them to get money.

Because NFTs are built on smart contracts, including the usage of smart contracts makes ownership transfers simple. Smart contracts specify precise criteria between the buyer and seller that must be met before ownership transfers may be finalised.

Beyond Digital Art — Utility

Since bitcoin(digital gold) and the first NFTs(digital art) — which are expectedly just skeuromorphs (real world things moved to digital, much the same way Apple did the first apps; a phone, a calendar, email) used to test the technology and drive understanding and adoption, things have evolved markedly since then allowing brands and creators to tokenise and add utility (capability, value, features) to these “containers of value”.

Utility relates directly to how the NFT creator adds or creates value, specifically in being helpful, profitable, or beneficial to others. For example, are you helping someone solve a problem, make more money, or feel good?

NFT utilities are ways to reward and engage NFT holders and make them feel a part of a community or give them a sense of belonging.

The 7 Categories of Utility

There are generally considered to be 7 categories of Utilities, but these are evolving all the time:

Because of the Smart Contracts that under pin NFTs, an endless amount of utility can be built.

Utility

Benefits received through a Smart Contract to the owner of the NFT can include:

Utility is critically important for Brands and Creators. Not only should the NFT have utility, the utility needs to fit within the Brand’s or Creator’s attributes — the utility needs to makes sense to the audience you’re trying engage and be aligned to what people expect from the Brand/Creator. For example, it would make no sense if an avid runner received an NFT when they bought a pair of Nike running shoes and got access to a ballet (nothing against ballet!).

As such, tokens can become valuable in the short-term as a container of future prosperity, but the most important determinants of a token’s ongoing value are:

1. The desirability of the ecosystem and community
2. The token’s utility within the ecosystem

The great news for brands is that they have a ready made community of customers and are laden with benefits to share with the community.

If you need assistance with where to start, deeper education on Web3, or to build a long term strategy/roadmap, BlockTrust can help here too.

In summary

• Web1 (roughly 1990–2005) was about open protocols that were decentralised and community-governed. Most of the value accrued to the edges of the network — users and builders.
• Web2 (roughly 2005–2020) was about siloed, centralised services run by corporations. Most of the value accrued to a handful of companies like Google, Apple, Amazon, Twitter and Facebook.
• Web3 (2009 — ?) We are now at the beginning of the Web3 era, which combines the decentralised, community-governed ethos of web1 with the advanced, modern functionality of web2 and new features such as digital ownership, peer to peer transactions and identity control. web3 is the internet owned by builders and users, with value sharing orchestrated with tokens.