The Promise of Web3

Crypto and blockchain have been present in the public’s consciousness for ~5 years. However, many have recently gotten re-energized about the transformative nature of crypto for everything, topped off by its rebranding as “Web3” (with Web2 being the internet you use today, and what are you are reading this blog in).

When thinking about Web3 recently, though, I have been struggling with the following question. What product or products has crypto created, to-date, that are obviously better than non-crypto alternatives? It’s tough to think of examples. Yet, blockchain (and blockchain excitement) continues to permeate the world. Why?

I think the adoption of blockchain in the world to-date (in all its forms — cryptocurrency, defi, NFTs) has been driven by two factors: 1) Volatile assets 2) Decentralization as a philosophy. Let’s take these in order.

Volatility: I believe a ton of the energy around crypto over the last few years is because it is a scaled yet volatile asset. It is easy to transact, but the prices are highly variable. It is the same energy you saw around GameStop — a few people get rich quick, and many other people notice.

The temptation would be to say that this is unsustainable and ephemeral, characteristic simply of an immature asset class. But, a key feature of blockchain is ‘tokenization’ — dynamically putting a price on any asset on the chain. And, people love collecting and trading assets — I saw the below data the other day, and found it really surprising. Just in traditional (aka non-digital) collectibles, there are multiple $1B+ markets.

Then, there are digital collectibles — the billions of dollars spent annually on clothes in Fortnite, for example. So, the value today that is being exchanged in not purely economically rational ways is much larger than we sometimes assume. And, blockchain is already helping this market grow (NFTs, social media stock markets, etc.). So, call this the “GameStop + stamp collector” use case. I think this is a decent sized market, but obviously wouldn’t make blockchain a transformative technology.

Decentralization: As I have listened to Web3 advocates, one thing has struck me. So much of the pitch for Web3 is a pitch that decentralization is inherently superior to centralization. And not because it is cheaper or more efficient — it definitely is not today (as fees rise above $100 for transactions). Further, it seems impossible that it ever will be. Blockchain replaces central authority with extreme redundancy, which, for all its merits, is not an efficient structure. And, centralized orgs are very good at optimization — decentralized orgs might not be (as we see Ethereum 2.0 timing continue to slip).

However, I don’t think excitement about Web3 is an economic decision — it is a philosophical one. The biggest reason to be bullish on crypto in the short term is, I think, also the biggest reason to be skeptical of its revolutionary potential. The set of people who believe that decentralization is inherently superior to centralization is larger than I would have thought, and it is driving significant crypto activity to-date. However, at the same time, it is hard to believe this is the majority of people. I think most people don’t care whether a solution is centralized or decentralized — they will care which solution delivers more value to them. Thus far, blockchain has not proven that it can build solutions that appeal to this group.

So, the question becomes — are there use cases out there in which most people would or will agree that decentralization adds value? I could think of a few possibilities that could drive a Web3 future.

Enabling Privacy + Autonomy: Blockchain enables private digital transactions, in which people can engage and exchange without an identity attached. In some ways, it is like paying in cash, but online. Obviously, this is why bitcoin is used for some illicit activity. However, this could also become a trend over the next 10–20 years. Cybersecurity concerns + big tech invasiveness could cause more and more people to look for ways to take their identity offline, while still maintaining their digital presence. This would be a big tailwind for crypto.

Outside of just privacy, though, blockchain can enable a new paradigm of how consumers interact with digital platforms. Today, most communities on the internet are free, but make money by taking your data. However, in Web3, you will be paid for your data or participation in a community (by earning coins in whatever ecosystem you are sharing into). However, you will then have to pay with those coins to engage in the community. So, you own your value, but everyone else does too. It is basically a digital “barter economy”, managed by people, not platforms. Again, given backlash to big tech, this has the potential to be a powerful social trend over the next 10–20 years.

“Amateur Equity”: This is an extension of the point I made above. As I have observed the NFT market, I have been struck by how blockchain enables people in disparate areas of the world, who don’t even know each other, to collaborate and build something together. They are doing it for fun and because they believe in it, but given the tokens or NFTs earned by contributors, they also (in a simple way) have a monetary stake in the success of the project or community. It is an easy on-ramp to an organization structure with “equity”. I don’t think this will revolutionize how businesses are organized, because at a certain scale, you have to formalize an organization. But, I do think it could be a force multiplier that enables ‘amateurs’ to band together to do some pretty cool things.

Corporate Collaboration: Corporations are pretty efficient at working internally, but still fairly inefficient at working together (just think of all the documentation that goes into various agreements). For example, sharing data between corporations, in a scalable, secure, and trusted manner, particularly when that data needs to carry credibility externally, could be a good use case for blockchain.

Anyway, blockchain is clearly here to stay — it has become extremely resilient, as we saw when China shut down 40% of global Bitcoin mining capacity yet the price of Bitcoin continued to go up. Additionally, large players are buying in — Stripe, Square, Twitter, Shopify, etc. are all exploring getting into crypto. But, can it be transformative? I think that has yet to be proven, but that mass privacy concerns + antipathy toward big tech are the likeliest catalysts to a decentrilized, Web3 future.