The first web revolutionized information. Web3 will revolutionize economics.
In an era of digitization, where human society is going online, the way we exchange information has already been disrupted. Next up: the way we exchange money.
It goes without saying that the internet has completely transformed human society. Innovations such as Google, YouTube and the iPhone have so fundamentally altered the way we live, think, and connect, that for those of us old enough, we can scarcely remember what life was like before them.
As transformative as it’s been, however, the internet’s impact on our lives has actually been quite limited — limited to the exchange of information. While information is foundational, underpinning culture and communication, there remains another pillar of society left relatively untouched by digitization, and that’s economics.
The first internet lacked a native protocol for handling money
In the 1990s, the original web brought us the web server and web browsers. Its native protocols, including TCP/IP and HTTP, created a global network for knowledge, enabling instant sharing of information among people around the world.
Money exchange, however, has never been within the internet’s core features. You can sense this as a user today. Interacting with information — downloading, posting, sharing, manipulating content — feels seamless, but the moment we have to pull out our wallet to pay for something, we’re bumped off the digital internet to the legacy world of credit cards, banks, and sharing of sensitive personal information.
Trading money goes beyond the simple exchange of bits — security, identity, trust and accounting are also required. To date, we’ve relied on physical institutions like banks, agencies and regulators to provide this trust layer, even when surfing the internet.
This is where web3 comes in. Web3 is a new generation of internet technologies and standards, including blockchains, cryptocurrencies and smart contracts, that are, for the first time, bringing this security and accountability layer as native features to the internet. The internet is gaining new core features, but for trade and exchange of value.
Web3 is basically “TCP/IP for money.”
From the web server to the digital wallet
When we look back historically, I think the internet will be remembered for bringing us two fundamental innovations, the web server and the digital wallet.
Prior to the internet, publishing information required a printing press or a television broadcast network. The web server brought us a fundamental new capability — the ability for anyone to cheaply and instantaneously publish and distribute information to anyone in the world with a web browser, and eventually, extended this capability to anyone with a mobile phone. The result has been the hyperconnected world in which we live today.
Web3 is bringing us a new foundational tool, that of the cryptographically secured digital wallet. Just as the web server enabled anyone to share information, the crypto wallet will enable anyone to securely transact and trade with anyone else on the internet. The digital wallet is encoded in the fabric of web3, enabled by blockchains, NFTs and smart contracts, and will fundamentally transform commerce, trade and economics.
What will this mean? While the first internet has been transformative, I believe we’re on the verge of an even more consequential transformation as the other pillar of human society, economics and money, moves to the digital sphere.
As the first internet emerged, it was often referred to as the “information superhighway,” Now, with web3, I believe that we’re about to embark on the economic superhighway.
What will the economic superhighway look like? Here are five early trends.
The ownership economy
Over the past decade, the “creator economy” has enabled millions of people to build a following on platforms like YouTube and Instagram and become entrepreneurs and mini-celebrities in their own rights. While this has been an awesome opportunity for these influencers, the lack of real ownership over their work and fanbases as well as the risk of being de-platformed have emerged as significant drawbacks to this system. Additionally, the true power and wealth have been accrued not by creators but by the corporations who own the software code that powers the social networks on which these creators live.
Paradoxically, the end users, particularly creators, should be credited for creating most of the value provided by these social networks. Creators bring in users and create the content that draw audiences in. In the end, however, creators have ended up owning little, and their entire business enterprise (fan base, content) could disappear at the whim of the social network’s policy team.
In web3, we’ll see a transition to what Li Jin of the Variant Fund refers to as the “ownership economy” where a new generation of social networks will be created by decentralized organizations with ownership governed by programmatic tokens which will be held by creators, developers, partners and end users. In the ownership economy, when you as a user participate and add value to a particular social network, you’ll have the option to own a piece of that network, and you may even accrue additional ownership through gamified incentives based on the on-network value you create.
We as users on web3 will not settle for less — we will demand a stake in the networks we help to build.
Micropayments have long been a pipe dream for internet entrepreneurs, publishers and creators. The vision for publishers of being able to charge very small fees for granular access to premium content (pay per article, pay per download) seems like the natural way to monetize content on the internet — but this has remained elusive.
The reason is the internet has always lacked a native protocol for sending money between parties. Whenever you want to buy something online, you must pull out your credit card, share sensitive personal data, and merchants must pay transaction fees. The whole process suffers from high friction and costs, so selling low cost items (less than a few dollars) has remained challenging for most online merchants.
The result has been the very centralized internet we have today, dominated by global corporations with the scale to aggregate all-encompassing content libraries and sell all-you-can eat access to these libraries through a credit card subscription fee structure. These corporate platforms amass billion dollar valuations while individual artists and creators are lost in the mix, with most earning relatively paltry sums as royalties.
Web3 adds the needed technologies for transferring money and recording transactions as native features of the internet. Sending small amounts of crypto from your digital wallet is simple, secure and fast, and as mining technologies improve, these transactions will carry very low costs as well. Internet based micropayments will unlock new business models for artists and creators to monetize their work directly with their fans, while also lifting the paid content industry as a whole — this will result in a better outcome for creators.
On the internet, information wants to be free. The fundamental nature of the internet is in making information freely accessible to anyone. Attempts to control or bottle up digital bits for the sake of charging for it fights the internet’s basic reality, so, beyond subscriptions, business models based on charging for access to digital content have found minimal to moderate success.
Web3 offers a new set of features to the internet. On web3, transactions want to be permanent and public. The fundamental nature of the blockchain is that of a permanent, public, immutable record of transactions that cannot be tampered with. This creates the mind-bending new reality that someone can now “own” a JPG image. While the bits — copies of the image — can still be infinitely copied and re-distributed, there can now be a public ledger (a blockchain) that displays proof of ownership over that particular JPG. If you own it, you will always own it, and no one can take that away from you, unless you sell it or transfer it to someone else.
Skeptics may argue then that anyone could create a separate blockchain and claim that they also own this JPG. This is where we get into the more philosophical area of social proof, but simply put, as of today, the world collectively recognizes that there’s one CryptoPunks blockchain (at this Ethereum address) and this is the “real” CryptoPunks ledger. I could theoretically create my own CryptoPunks blockchain and claim it’s the authentic one, but I’d be hard pressed to convince people. Collective knowledge is hard to manipulate.
Historically, creating formal partnerships or collaborations with other parties has required going through local governments to form a legal entity, enforced by legal contracts. These legal agreements help us codify the terms through which we collaborate and resolve conflicts when they arise.
In web3, smart contracts on blockchains enable us to codify such agreements purely in software. Instead of forming a legal corporation, we form a DAO (decentralized autonomous organization) by programming our agreed upon terms and policies in a smart contract on a blockchain, and these policies are then enforced automatically by the software. These DAOs can be backed by tokens representing ownership and control, much like stock shares in a corporation. Essentially, people can now form groups and collaborate with all the same features of a corporation, but purely through software with no government or other intermediary involved.
The implications of this cannot be understated. The friction in taking an idea to execution to realization is going from very high (attorneys, contracts, agency approvals) towards zero (creating a project in Github, minting a smart contract). The velocity of innovation on the internet is about to accelerate.
The rise of the artist as an economic force
Artists have historically received only a small slice of the economic pie generated by their own work. Labels, promoters, distributors and platforms have taken the lion’s share of profits, leaving artists with little to show for their work. Only in the most exceptional cases do artists generate real wealth and economic power.
The internet has helped to chip away at this imbalance by now providing artists with direct channels for reaching their audience and building their brands through social media. But the economic equation has remained unfavorable to artists and creators, with most relying on platforms such as Spotify, YouTube and Netflix to generate minimal royalty revenue for their content, or to resort to promoting third party products and morphing themselves into advertisers and promoters instead of focusing on their art.
In web3 — with the ability to sell digital goods (and earn royalties on secondary sales), launch their own social tokens, own a stake in the platforms they help promote and more effectively monetize their art in general — artists are beginning to take their economic destinies into their own hands. I think we’re at the cusp of a renaissance in art as an industry in which artists themselves will be self-sustaining, powerful economic entities in their own rights.