The Evolution of Web 3.0: Follow the Money
Web 3.0 is the latest evolution of the World Wide Web. There’s been much talk about the technologies that might underlie Web 3.0, but I’m more interested in the business models that might drive it.
The problem is that the moniker “Web 3.0” is still fuzzy, holding different significance for different factions, from those that envision a transactional web to those that espouse a more decentralized, peer-to-peer experience to a place where we might finally own and track all of our data. Which faction is winning? Hard to say right now, but you can bet that the ultimate winner will be the one that generates the most $$, and the easiest way to predict that is to follow the money. Let’s start at the beginning.
Web 1.0 Business Model
Remember back in the early days of the internet when information just wanted to be free? Those heady days of Web 1.0 when anyone could be their own publisher as long as you had a domain, an index.html and (optionally) a poor sense of design. The Web was a barren landscape by today’s standards, where the dearth of places to visit meant that content was king and the value of each site was measured in eyeballs. Given the law of supply and demand, people should have been willing to pay for content, but the paywalls and microtransactions that were tried at the time by and large failed, and only really caught on in the world of online video games (more on this later).
Arguably, Web 1.0 died due to the inability to generate reliable revenues while squandering VC money on superbowl ads. But it was just as doomed by the general public’s unwillingness to hand-bomb web sites by editing and uploading HTML files in order to publish their holiday photos or celebrate their favorite indie band. Time for a reboot.
Web 2.0 Business Model
Because Web 1.0 publishing was too onerous for most of us, the door was open for any company willing to make it easy for the public to become content creators in the emerging digital realm. The winners this time around are the familiar content platforms that dominate today, from Facebook and Instagram to YouTube and TikTok. Awash in content, mostly in the form of pictures, videos and text, the measure of worth in the Web 2.0 world evolved from passive eyeballs to interactive clicks, likes and followers.
More importantly, the irrational exuberance of the dotcom properties that proliferated and then went (mostly) extinct during the Web 1.0 days were replaced by a set of pragmatic monetizers that figured out how to give us something for nothing, while still providing their investors significant returns. Magic? Maybe, but it’s really just a reincarnation of the magic of TV.
Recall that during the TV era, networks paid for filler (aka programs) in order to create a product (aka viewers) that they could sell to advertisers (aka corporations). Prima facie, the Web 2.0 economic model is just TV for the internet age with one key advantage: the general public creates the filler for ~free*, making the Web 2.0 Platforms far more profitable than the TV networks ever were.
No wonder the Web 2.0 Platforms are so successful, but for the general public it turns out that there is no such thing as a free lunch, even if it’s a virtual one. As Shoshana Zuboff pointed out in her book “The Age of Surveillance Capitalism,” the price we pay for using the free Web 2.0 properties to like, share, follow, tweet and click-through is our privacy. Makes sense, since advertisers want to advertise to as specific a target group as possible. Thus, the more the Web 2.0 Properties know about us from our online behavior, the better the product they can sell to advertisers.
But the general public has started to revolt against the Web 2.0 business model. Even those of us with nothing to hide don’t want our lives to become a Truman Show. Of course, there are ways to opt out by using ad/cookie blockers or managing privacy settings, but the truth is that unraveling the Gordian Knot of application configuration escaped the control of the average user long ago. As a result, governments have started beating the drum of regulation. For the moment, the general public is stuck with the Web 2.0 model even if it is irreparably compromised, but is there a better way?
Web 3.0 Business Model
We’re now on the cusp of Web 3.0, which, like most cutting edge technology is already with us, just poorly distributed. In fact, distribution is one of the key principles of Web 3.0, sometimes described as a decentralized version of the Web. Again, though, there’s no real consensus on what exactly decentralization means. To some, it’s a peer-to-peer version of the Web similar to the way that BitTorrent works today, but if we continue following the money the version we want uses decentralized blockchains.
Quick Explanation: blockchains are most strongly associated with cryptocurrencies like Bitcoin and Ethereum, but the actual technology is just a distributed ledger that can be used to keep track of anything. Since it’s distributed (i.e., many different parties own a copy) and uses a mathematical proof model to verify transactions it’s very hard to cheat, which makes it a good way to track transactions such as when something (money, the deed to a home, horse armor in a video game, etc) changes hands.
A good example of a decentralized Web 3.0 site that makes use of blockchain technology is Decentraland.org, which is essentially just a virtual world where your avatar can wander around and interact with different properties. The trick here is that everything you see and interact with is priced in a proprietary cryptocurrency called MANA:
- Creators pay MANA to buy plots of land in a virtual world (aka properties) that they can develop into a shop or an interactive experience. For example, JP Morgan and Skechers are creating properties you can visit.
- Creators also pay MANA to create the items/wearables/consumables that you can buy to equip your avatar with.
- As a visitor to Decentraland, you might pay MANA to take part in some experience, such as a casino game, or as an admission fee to a concert or VIP area.
- You might also want to use MANA to purchase digital goods, such as Skecher shoes with which to equip your avatar.
If Decentraland sounds a lot like an online video game featuring microtransactions, it’s for a very good reason: the microtransaction model has propelled video game revenues into the stratosphere, far exceeding the revenue generated by both the movie and music industries combined. The business model innovation Decentraland offers advertisers over Web 2.0 (and video games) is twofold:
- Businesses can create the content (i.e., by developing their property), which doubles as the ad. In this way, they can better tailor their content to their target customers.
- Businesses can derive $$ from direct purchases “in game” rather than from a far more inefficient click-through on a Web 2.0 ad.
And the more successful creators are at building compelling experiences that lure in more users, the more Decentraland stands to earn since popularity will drive up demand for their MANA cryptocurrency.
Web 3.0: Not Ready, Player One
While Web 3.0 virtual worlds offer compelling income potential for the owners and participating businesses, it’s unclear today what’s in it for the general public over and above traditional Web 2.0 resources or established multiplayer online video games, both of which are already introducing their own virtual worlds (such as Meta) and interactive experiences (such as Fortnite) to their huge, existing audiences.
Multiple arguments have been proposed for why the general public will want to make the move to Web 3.0 properties, but most of them come down to the promise of letting users earn income by:
- Either by being rich enough to speculate in the virtual real estate market or talented enough to create and monetize compelling digital experiences/wearables. Unfortunately, the general public with this amount of disposable income is a minority at best.
- Using virtual worlds as a job, and earning cryptocurrency for achieving in-game goals. This method may not be viable in the long term.
- Earning digital assets in the virtual world (weapons, clothes, etc) and selling them to earn cryptocurrency.
Note that this player income model has existed for years in online video games without the need for cryptocurrencies. For those wanting to make a buck, the drawback has always been the stranded assets that disappear when the online game/virtual world inevitably declines in popularity and is shut down. Even if the assets persist on the blockchain beyond the life of the game/world, it’s hard to imagine there being significant demand for them except perhaps as souvenirs.
This cryptocurrency-based Web 3.0 model also has a number of other drawbacks, not least of which are the volatility of (and speculation in) cryptocurrencies, which may result in gambling and securities regulations being applied to these virtual worlds before they can even get off the ground.
Web 3.0 is still in its infancy, but we’ve essentially come full circle back to another version of the Web that features a dearth of content and limited ways for the general public to benefit. The business model needs more work, specifically around providing users uniquely compelling reasons to abandon evolving Web 2.0 properties and take up residence in this crypto-driven virtual world. Otherwise, it seems destined to be nothing more than a niche part of the Web 3.0 landscape.