Jack Dorsey vs Marc Andreessen

Why Web3? What is it good for?

Web3 is one of the hottest and most disputed terms in recent history. Talk to a zealot and you’ll hear that Web3 is the future of the internet. It will free us from the shackles of big tech and oppressive government. Talk to a cynic and you’ll hear that Web3 is a massive scam perpetrated by grifters that serves no purpose other than to cheat, steal, and fund criminal activity. Talk to a technologist and you’ll hear about decentralization, network consensus, Byzantine generals and Sybil resistance.

What is a person supposed to believe and understand about Web3?

What is Web3?

Before we can debate it we need to define it. Even that is hard. The term “Web3” was coined in 2014 by Ethereum co-founder Gavin Wood but the community hasn’t yet reached consensus on the definition. A simple search leads to a variety of definitions but common themes are user ownership, freedom, privacy, blockchain, smart contracts, and decentralization.

I’m a pragmatist. For this article we’ll avoid lofty philosophical definitions and describe Web3 by what it actually is today, in practice, from a technology perspective.

Web3 today is the web we all know and love (or hate) with the addition of smart contracts which are built on blockchain technology.

Yes, there are numerous other ways to define it based on principles, philosophies, politics, and utopian dreams. I don’t agree or disagree with those definitions but here we’re going to keep it simple and concrete. We’ll assume the following about Web3:

1. Your Web3 wallet is how you are identified, log in to applications, prove that you own stuff, and authorize things to happen. You can keep your wallet anonymous (actually pseudonymous) if you want to. The important thing is that you, and only you, control your wallet, which is referred to as being “non-custodial”.
2. You don’t need permission to use Web3. All you need is your Web3 wallet and enough currency in it to pay for the things you want to do. This is normally referred to as Web3 being “permissionless”.
3. The blockchain is trustworthy. You can trust a good smart contract built on a good blockchain more than you can trust an individual or a company. Smart contracts are referred to as “trustless” because you don’t need to trust the other party to do business with them through a smart contract. If used properly, you only need to trust the blockchain.

That last point (3) is contentious. Web3 cynics are already furiously typing away about how wrong I am and you can’t trust anything in Web3 because it’s all a big scam. However, I’m not saying you can trust any blockchain or any Web3 application. And I’m certainly not saying you can trust other Web3 users.

You can generally trust proven blockchains like Bitcoin and Ethereum (and probably a few others) more than you can trust individuals or companies. These blockchains have earned a trustworthy reputation through sound theory, transparency, auditing, and the test of time. Note that I said you can trust the blockchains but not necessarily the apps that run on them. Those need to be verified.

The term Web3 is misleading. Many think the “3” in Web3 is a product version implying it outright replaces Web2, making Web2 obsolete like the next iPhone does to the previous model. In reality it’s more like the next big layer on the web. Web3 is built on Web2 just like Web2 is built on the original Web (the World Wide Web). We still use the original Web today. Web3 doesn’t replace Web2. Web3 augments Web2 by adding smart contracts on top of it.

Why Web3?

Now that we have a definition of Web3, the question is why do we need it? Again, there are numerous potential answers depending on your values and goals. But there is a single, unifying theme that’s consistent across all the perspectives I’m aware of.

Web3 matters because it enables individuals (or entities) to do business and exchange value with each other across the internet directly, without a trusted intermediary (aka middleman).

There are a myriad of proposed use cases and grand ideas that build on this concept but it always comes down to this. Let’s consider each of the Web3 assumptions we listed above.

1. Your non-custodial Web3 wallet is your identity. In Web2, your identity is managed (and effectively owned) by the organization that stores your data. You might legally own your bank account but your bank has custody of your money and decides if and when you can use it. In Web3 this middleman (the bank) can be removed and you can have full custody of your money.
2. As a permissionless network, you can’t be blocked or censored from participating. In Web2, everything you do, say, or share goes through a central host who has the power to freeze, block, and cancel you. In Web3 this middleman is removed and you are always free to participate.
3. As a trustless computing platform, you can’t be cheated by smart contracts (within reason). In Web2, every deal you make or transaction you initiate is at the mercy of one or more trusted middlemen such as a marketplace, payment network, or trading platform. You must trust them to operate honestly. In Web3 these middlemen can be removed and you can rely on the smart contract to do what it was programmed to do.

Again, point (3) is contentious and I’ll explain the risks and responsibilities that come with trusting smart contracts later. The important thing is that all of these key aspects of Web3 boil down to removing trusted middlemen and enabling you to do business directly with untrusted counterparties across the internet without much risk.

Why eliminate middlemen?

Eliminating middlemen sounds good intuitively but why should we care? Are middlemen bad? No, not necessarily. Middlemen are useful or they wouldn’t be part of the equation in the first place.

But we frequently see industries that have evolved into a state where the middleman layer is inefficient, outdated, and unnecessary. The direct-to-consumer movement provides countless examples of middleman elimination benefiting consumers. Many of the most successful tech companies have built their empires by replacing outdated, inefficient middlemen with technology that outperforms them and serves customers better.

If a smart contract can replace a layer of middlemen and serve customers better then it’s an opportunity for entrepreneurs to eliminate waste, improve peoples’ lives, and create value. We generally consider those to be desirable outcomes.

Does it mean that all middlemen should be replaced by smart contracts? No! Only when it provides a net improvement for consumers. But it turns out there is quite a large opportunity for that across many large industries.

It’s not always obvious what constitutes middlemen in an industry. Sometimes what seems to be a core service ends up being viewed as an unnecessary middleman after the market evolves or a breakthrough technology is introduced. There are probably more opportunities to benefit consumers by eliminating middlemen than it seems.

On the flip side, eliminating middlemen can also benefit producers by allowing them to reach customers more efficiently. It can increase both sales and profit margin which enables producers, who face competition, to increase quality or reduce prices for their customers.

Eliminating the need for trusted middlemen can even help level the playing field for startups when the existing middleman layer is organized to favor the entrenched market leaders. This benefits consumers by increasing competition among producers.

Why not Web3?

If Web3 is so great then why isn’t everyone already using it? It’s growing fast but it’s far from being used by everyone. My answer to this might be surprising coming from someone who believes in Web3.

Not everything should be on Web3. Web3 is a technology design that provides certain benefits but comes at certain costs. It’s an engineering tradeoff that’s optimized differently than Web2 and comes at the expense of some good things.

Examples of the costs of Web3 are:

1. Blockchains are optimized for security guarantees based on redundancy and consensus that enable trustless computing. They are not optimized for performance. Smart contracts and Web3 applications have abysmal computing performance when compared to Web2 applications which results in a slower, more frustrating user experience.
2. Blockchains are more expensive to operate than Web2 computing environments for the same reason they’re slower. By this, I mean the true cost to operate, not how much companies might charge you. It’s cheaper to run an application on a single server than to run it simultaneously on many servers and achieve network consensus. This shows up in the form of transaction fees to use the network. Heavily-used, well-decentralized blockchains have significant transaction fees.
3. Having custody of your own identity and assets is empowering but it’s also a great responsibility. If you make a mistake there is no custodian to undo and fix it for you.

Web3 enables people to interact with each other securely, without a trusted middleman but it’s slower, it costs more, and puts the burden of responsibility on your shoulders.

Web3 zealots tend to believe the benefits of removing middlemen far outweigh the costs, or that the costs will be solved soon by technology improvements so they ignore or deny them. In my opinion, even as a Web3 believer, ignoring these costs is foolish. They do exist.

On the other hand, Web3 cynics tend to have the extreme opposite point of view. They believe there are no realistic benefits in blockchain-based, trustless computing platforms. Or that the costs always outweigh the benefits so it’s just not worth the trouble.

Reality is somewhere between the views of Web3 zealots and cynics. Web3 is tremendously valuable. It really is a big deal. But it’s not a panacea.

When is Web3 worth the cost?

We’ve established that:

1. Web3 builds on and augments Web2 with smart contracts but doesn’t replace it.
2. Web3’s primary benefit is eliminating trusted middlemen and empowering people to do business directly with each other.
3. Web3 has downsides compared to Web2 such as lower performance, higher cost, and more burden of user responsibility.

Then when does it make sense to use Web3 instead of just sticking with Web2?

There isn’t a simple answer but here are some criteria you can use to help determine whether to use Web3 today. We’re focusing on today and not some future version of the world where we imagine the costs of Web3 have been eliminated.

Profitable Middlemen

Middlemen thrive where they’re needed. But all other things being equal, middlemen increase costs and therefore must add enough benefits to justify their costs. A telltale sign of an application or industry where a Web3 app might be useful is when there is a layer of very profitable middlemen.

Another way to think of this is that Web3’s purpose is to replace the middlemen. The existence of a profitable middleman means a trust issue might exist between the parties in a deal so the middleman is serving as a trusted intermediary. It’s a clue that the industry may be ripe for disruption and there may be demand for a Web3-based alternative.

In replacing the middleman with a smart contract-based application, the decentralized application becomes the new middleman. It’s a more trustworthy, verifiable, and efficient middleman.

High-Stakes

Web3 applications should facilitate transactions where something of value is at stake. Web3 is optimized for security. If the application has nothing valuable at stake then it’s difficult to justify the costs of Web3. Why pay for security you don’t need?

Applications such as payments and finance are obviously high-stakes. It’s no surprise that the earliest applications to gain traction in Web3 were cryptocurrency and decentralized finance.

But this doesn’t mean Web3 should only be used for applications where money is explicitly exchanged like payment systems and finance. Organizational decision making can be high-stakes which explains why DAOs have gained traction. Rare collectibles can be high-stakes which explains NFT-based art. Freedom of speech can be high-stakes which explains censorship-resistant media. Legal contracts can be high-stakes and smart contracts can automate them.

There is no shortage of high-stakes applications currently being run through trusted intermediaries on Web2.

Feasible Inputs & Outputs

One of the hardest problems with smart contracts is that they are isolated on the blockchain. They can’t easily interact with the rest of the world, or even the rest of the internet. There are two options for a Web3 application’s inputs and outputs.

1. Only interact with what’s already on the blockchain. This is how Bitcoin as a currency works and why it was an ideal Web3 application to start with. When you’re sending Bitcoin to another wallet, everything you need is either already on-chain (your Bitcoin) or you provide it yourself (the amount and recipient). This is easy but severely limits the use cases that can be supported. Applications other than basic currency transfers usually depend on things that are off-chain.
2. Use an oracle. Oracles connect on-chain smart contracts with off-chain data and services. Most decentralized finance applications use an oracle to get off-chain data such as the current price of a token, stock, or commodity.

Since option (1) is severely limiting, we’ll assume option (2) — that an oracle will be used. The problem is that trustworthy data and services available from oracles have also been fairly limited in Web3.

Take life insurance as an example. The claim decision and payout can be done easily by a smart contract but reliably knowing when the person whose life is insured has died isn’t so easy. If the input to the smart contract is unreliable then the application is unreliable. No one wants unreliable life insurance.

Oracle technology is improving and projects like API3 are making more off-chain data and services available to smart contracts. Interestingly, one of the primary reasons that API3 and Airnode exist is to eliminate middlemen in Web3 oracles, which parallels the purpose of smart contracts themselves.

But for an application to be on Web3 today, it’s important that the inputs and outputs it needs are available to smart contracts today. Otherwise, it will be an obstacle when you try to build the app.

You can work around this problem by narrowing the scope of the smart-contract portion of the Web3 application. Perform what you can in the smart contract and only partially rely on off-chain middlemen. A simple example would be an application that sends someone a text message when an event occurs. A smart contract can’t send a text message by itself. But you can do the trustless decision-making portion in the smart contract and then have it call an SMS API (an off-chain service) to send the message.

Web3 might be a great choice for an application today if

1. There are very profitable middlemen
2. It’s a high-stakes application
3. The inputs and outputs can be done by a smart contract

Is Web3 an innovation, a revolution, or a scam?

It should be obvious by now. Web3, today, is neither the solution to all our problems nor is it a giant scam. It’s a breakthrough technology built on top of Web2 that adds the ability to replace industry middlemen with trustworthy (aka trustless) blockchain-based smart contracts. It enables entrepreneurs to create new, disruptive competitors to middlemen in high-stakes industries where the middleman layer is inefficient, outdated, and protected by regulation or concentrated market power.

Is Web3 a revolution? I don’t know, maybe. That’s outside the scope of this article. We’re focused on Web3 now and in the short term. There are many that see Web3 as a grand political or ideological revolution and you’re welcome to read what they’ve written.

Is Web3 a scam?

No, using our definition above Web3 is not a scam. Some definitions of Web3 might be centered around extreme philosophical ideals that are farther out and may not even end up coming to fruition but I’d rather focus on what’s real today. From a technology point of view Web3 is absolutely not a scam. It’s a breakthrough enabling technology.

Are there scammers exploiting Web3? Yes, most definitely. Web3 is a high-stakes, unregulated, immature space resulting from game-changing technologies such as blockchain and smart contracts. Of course it has attracted scammers. Lots of them. It’s not currently a space for the naive or gullible to play in. They will likely be taken advantage of. It’s the “wild west” as we say in the US.

Not only are there individual scammers on Web3 but there are bigger cons to watch out for. Some scammers go so far as to build applications, tokens, and protocols that they try to sell to you. A common crypto con is where the scammer creates a useless token, markets it aggressively to convince buyers it’s a good investment and then sells all their tokens when the price is high before it implodes. Don’t trust people, apps, tokens, or protocols on Web3 that you can’t verify are trustworthy.

The transparency (you can read the code) and immutability (it can’t be modified) of blockchain are what make smart contracts trustworthy. You can verify that the code will do what you expect by reading it, and you can be confident it won’t change after you’ve read it. But not many users are knowledgeable enough to be capable of verifying smart contracts. Most users will have to rely on the app’s reputation and the wisdom of the crowd to determine which smart contracts they will trust. It turns out that’s not such a bad approach. If you stick with widely-used Web3 applications that other people have verified (and they don’t smell like Ponzi schemes) then you can stay reasonably safe. Use good judgment.

Some cynics argue that Web3 is a failed technology because it hasn’t kept up with Moore’s law. But that argument is entirely flawed. Moore’s law is about computational performance which isn’t the goal of smart contracts. As I explained above, smart contracts are optimized for security guarantees that enable trustless computing, not performance. It’s like arguing that semi trucks have failed to follow the same performance trajectory as race cars. Of course not. They were designed for hauling not for racing.

Is Web3 worth the trouble?

I agree with cynics that Web3’s applicability is more narrow than zealots lead you to believe. Not everything should be on Web3. It’s not going to replace Web2. It’s not optimized for performance. Web3 today makes more sense for applications that meet the criteria above.

I disagree with cynics that Web3 is a failed technology or a scam. Everything is relative. The global economy is massive. Web3 doesn’t have to take over the entire internet to be very, very big. Even a slice of the global economy is still huge. Web3 has already started disrupting large industries such as banking, payments, and financial services.

We are still early in this seismic internet shift. It has a long way to go. Web3 will continue to disrupt trillion dollar industries by replacing inefficient, entrenched, sometimes even corrupt layers of middlemen with smart contracts. It’s in the best interest of consumers. It’s worth the trouble.

To some it all up:

• Web3 augments Web2 with smart contracts but doesn’t replace it.
• Use a non-custodial wallet or you’re not really on Web3.
• Web3 is a permissionless and trustless computing platform.
• Web3 enables applications that replace trusted middlemen. That’s what it’s all about!
• Web3 has costs as that need to be justified by its benefits.
• Web3 is good for high-stakes industries with profitable middlemen when the input/outputs can be done by a smart contract.
• Web3 is not a scam, although scammers do exploit it. Be careful.
• Web3 is a breakthrough technology that enables middleman-industry disruption.
• Web3 is positioned to disrupt a significant portion of the global economy.

This article reflects my own observations and opinions. If you agree or disagree, I want to hear about it. Comment or send me a message. Let’s discuss!