Another Leap for Web 3.0
This article is a translation of Mr. Louis Liu’s keynote address at the 2021 NEAR conference in Shanghai.
Web 3.0 is an unstoppable trend. If you participate early, you will reap the benefits and rewards of this emerging trend. If my explanation of Web 3.0 makes sense, and everyone believes in this trend, even if you don’t participate, the trend will still happen. And if more people participate, it will accelerate the arrival of Web 3.0, similar to the self-fulfilling prophecy in markets.
Let’s begin with what Web 3.0 is, and why it is inevitable. The phrase Web 3.0 is based on the phrase Web 2.0, which has been a massive economic phenomenon. Many internet giants were created during this phenomenon, and we call their economic models, platforms.
What is a platform? A platform is a type of internet service that coordinates the exchange of information and value between different parties. We call this a platform, two-sided or multi-sided platform, or two-sided or multi-sided market.
What is the magic behind the platform business model, which gave birth to all those Internet giants? In a word, network effect. For example, if we find a piece of unoccupied land, we can build a building and set up a bazaar. We invite everyone to come to this bazaar to trade, by convincing them that it has enormous potential. When more sellers come to the bazaar, it becomes more attractive to buyers. When a lot of buyers are gathered at the bazaar, more sellers are willing to do business there. Therefore, a bazaar creates value by facilitating interactions and exchanges of value among buyers and sellers. The more participants and higher concentration of participants, the more valuable the platform. This is essentially how marketplaces and cities which we live in were formed. It is the great business model of WeChat, Taobao, Meituan, DiDi…all of those internet platforms we use every day.
What is wrong with existing platforms? Web 2.0 platforms are owned by companies, which inherently creates two problems. Firstly, it is the duty of a company to maximize shareholder value. A typical internet startup journey begins with a founding team and an idea, subsequently venture capitalists invest in this startup in exchange for some ownership. Typically, the startup offers their service to users for free, sometimes even subsidizing users for using the platform. Why would they forego profits? This is because once you sign up, it will be difficult for them to leave the platform. Take transportation as an example, we are locked-in by DiDi, because all the drivers are on DiDi; The drivers are also locked-in by DiDi, because all the passengers are on DiDi. When this happens, the true nature of platforms will show up. The platform will try to maximize their share of the economic transactions on their platform. This is because as a company, their goal is to maximize shareholder value, not value for the participants, i.e. the passengers and drivers, that transact on the platform.
Fundamentally, when drivers are willing to offer their service and passengers willing to consume that service, the role of the platform is to decrease the transaction cost between them. However, when the platform becomes a monopoly, it will use that power to extract economic surplus which is created by these transactions, at the expense of other participants. In economics, this is called rent-seeking, that is to say while the value-add in economic transactions or productivity remains the same, the monopolist gains a bigger share in surplus by its special position or power. As a consumer, merchant or driver, we don’t want to be victims of rent-seeking behaviour from platforms.
The other problem with platforms is the unfair distribution of value, which essentially is created by all the participants of the platform. But when the platform becomes big and powerful, not only do they not share value with other participants, they extract as much money as they can from the people who made them successful in the first place. This is unfair.
We need to change the game, but how? The answer is Web 3.0. Web 3.0 is about online marketplaces created and owned by a decentralized community. Of course it also needs to start with a founding team, who uses appropriate technology to build the marketplace. But the newborn marketplace doesn’t have any buyers or sellers, what’s next? The creator of the marketplace distributes the ownership of the platform, in the form of tokens, to any buyer or seller willing to use this marketplace. These tokens represent ownership of the marketplace and the right to claim any future profits made by the platform. Sellers will realize instead of just profiting from the products they sell, in a decentralized marketplace they could also profit from the success of the marketplace itself. The seller might even be willing to sell products below market price on the decentralized marketplace to attract more buyers to the new marketplace so they will be rewarded with more tokens. Eventually, when this new platform is formed, it will not be controlled by any individual or a small group of people. It will be a platform controlled and owned by a community of token holders through a network protocol or cryptographic network.
Why is this trend inevitable? Because no matter how successful Web 2.0 companies are, they will not and can not distribute ownership to the participants. Web 3.0 tokenizes the value of the platform and distributes these to various types of participants. This will give Web 3.0 an “unfair advantage” to compete with Web 2.0 platforms. The open question is who will defeat these internet giants, which teams will initialize these marketplaces, design a fair protocol that shares the benefits and encourages more people to participate in the new platforms that will replace Web 2.0 platforms.
Blockchain startups are armed with the ability to redistribute platform value. However, outside of crypto speculation, there isn’t any Web 3.0 application that has become mainstream with millions of active users.
Why is that? When developers grasp how to program smart contracts, they’re easily trapped into “To a man with a hammer, everything looks like a nail”. After they develop a decentralized application (Dapp), they tell everyone that they have created something that’s decentralized, and they will distribute the value of this platform to anyone who uses it. Reality has taught us this approach doesn’t work. Why? Because users need a good product first and foremost, the application itself needs to be useful and attractive. Regardless of whether it’s a social network or a music platform, or a ride hailing, it needs to win the hearts of the users first. For example, if the user discovers a ride hailing DApp that’s even more convenient to use than DiDi, and then realize they will be rewarded a bunch of tokens. After the tokens are listed on an exchange they can sell the token for money. Of course the users will be pleased. So taking decentralization as a freebie rather than a major feature is more practical.
Is anyone doing this? Sure there are. Audius is a decentralized music platform, where users can listen to a lot of very good music. The platform has attracted many musicians from all genres, and it’s completely free and doesn’t require a crypto wallet to use. Recently, Audius announced that they have reached 4 million monthly active users, up from 3 million monthly active users just 23 days prior. It appears the platform has reached critical mass and entered into the fast lane.
This is the first Web 3.0 application as I know of that has neared mainstream adoption. But Audius never mentions Web 3.0 or blockchain in the promotional materials. It is a very well made Web application, its user experience is the same as any well designed Web 2.0 application, while sharing the future value of the platform with the musicians and fans on the platform. You will love it when the music app has iTune like experience, and you could earn AAPL stocks by using it.
So for Web 3.0 to be widely adopted, it needs to be a good product first. It also needs to be decentralized, owned by the community, and have a trustless incentive structure. First, it needs to design an incentive structure, then codify it on a blockchain. The blockchain should be cheap to use, very fast, with great user experience, large capacity (TPS) and low latency. If we want Web 3.0 to be adopted, don’t just talk about TPS all day, it’s only one fact among many to consider. The more important question is “How to create a great Web app?”.
The blockchain space, especially the blockchain developer community, priorities have been misplaced. But I think the NEAR protocol is on the right path. It’s the public blockchain with the best user experience, and it has the highest potential to support successful Web 3.0 applications, which could deliver user experience similar to Web 2.0 applications. It’ll only be similar, because as long as we utilize decentralized ledgers, the user experience will be more or less damaged.
Where will the user experience be most damaged? Upgradability. When we develop web applications, we can iterate very quickly, push out updates weekly. But when we develop on the blockchain, it’s decentralized, no one should have the privilege to make a change. So to upgrade we need legitimacy, a method to gather the community, form consensus, and then move on with the upgrade. Otherwise, we will need to rely on individuals or founding teams again. Upgradability with legitimacy is a hard problem to solve for blockchain technology.
There’s a huge opportunity in utilizing the new blockchain technology enabled for Web 3.0 applications. That is a new way to develop Web 3.0 applications called appchain.
Before Ethereum, the only way to create a decentralized application was to fork Bitcoin. Then, Ethereum developed a general purpose virtual machine, which enabled developers to run smart contracts on. This significantly lowered development complexity and fostered a huge wave of innovation, which is awesome! However, few applications, with the exception of crypto asset trading related projects, have been widely adopted.
Why is that? The most important reason is poor user experience. Users first need to install Metamask, and for Chinese users who couldn’t access Chrome Store, they can’t even install Metamask. After that, users need ETH, otherwise they can’t make transactions because for gas. How can a new user have ETH in the first place? If he resided in the US, he could open an account with Coinbase, exchange dollars for ETH, and then transfer the ETH to his wallet. The whole process takes a few days, more than 90% users would have lost. The process is not designed or determined by the smart contract developer, it is determined by Ethereum. Everyone who develops on Ethereum has to follow this process.
Is there a better way? A better way is to make an application on an independent appchain, where the entire stack could be customized, including the network layer, execution environment, and the application layer. It could enable users to make transactions without paying gas, use stable coins to pay for gas, or let the developer or a third party pay for gas. All these options are available for appchain developers.
A blockchain is a very complex system, it may accommodate thousands of configurations, and all could be tuned. If you develop your own chain, specifically for your application needs, you could achieve decentralization while guaranteeing the best user experience.
Then why hasn’t anyone done this? Because it’s extremely difficult before. To create your own blockchain, you need to have a deep understanding of peer-to-peer networking, consensus protocols, K/V data storage, it’s just too complex. However, things are changing. In 2017, Cosmos SDK was created. It used Tendermint as base layer, and you could use Go to develop your own blockchain. During the Web 3 summit in 2018, Dr. Gavin Wood created a blockchain in 15 minutes on Substrate and proclaimed the arrival of “The age of the appchain”.
Therefore to create a Web 3.0 application, unless it’s a DeFi protocol which needs to be embedded into a network with abundant liquidity, the first choice should be building an appchain with a blockchain framework, such as Substrate or Cosmos SDK.
Developers all know that a good developer tool is very straightforward to use for simple tasks yet powerful enough to support complex development needs. This is the advantage of appchains, it’s very easy to use for simple projects, and if your requirements are extremely complex, like if you want to do something very special, it will support it as well.
For example, Polymath is a STO(Security Token Solution) project, it used to be on Ethereum, but Ethereum couldn’t satisfy some of the needs of a STO project. For example, in a compliant securities market, Air Drops are not allowed. If you want to give me some security, you must have my permission. Why? Because after you give me security, I need to pay taxes for it. If you don’t ask for my permission and deposit securities in my account, it’ll cause a lot of problems. However, to implement this on Ethereum, where the token receiver must give permission to accept tokens, is incompatible with ERC20. Polymath attempted many ways to overcome all of these kinds of difficulties by proposing EIP1400. However, after a long period of exploration they concluded it’s just not possible to build a good STO application on Ethereum, and decided to build their STO appchain from scratch using Substrate.
This STO appchain is called Polymesh, it has been in development for 2 years and is fully compliant. It is unforkable, because in a compliant capital market, forking does not make sense. If an asset is split into two, which one is the real deal? In Germany, the electronic securities law mandates that any transaction on a distributed ledger, i.e. a transaction that happens on a blockchain, the settlement must be final. Again, this is very difficult to achieve on a public blockchain, and there are many more examples. When you want to create the best user experience, you will want to change many configurations, and have maximal design space.
Octopus Network
Cosmos SDK and Substrate are trying to solve the appchain development problem, but after an appchain is built, there’s still more work to do.
appchain needs security. Since the tokens of an appchain have no market value in the beginning, who is going to want to be your validator? You could spend a lot of money to promote the project and gain acceptance by the community, and then maybe a few professional miners will want to validate your chain. This will require at least several million USD.
appchainl needs interoperability. For example if you want to use USDT or USDC to settle payment, both of these tokens are not issued on your chain. If you want users to transfer their USDT on Ethereum for payment, you have to build a cross-chain bridge.
Besides having a bunch of validators, appchain also needs a lot of infrastructure, like a blockchain explorer, RPC gateway etc. For an isolated appchain, you’ll need to deploy these infrastructures yourself.
And most importantly, appchain needs a community. What is a community? As an appchain, no matter whether it’s a music platform or a decentralized blog, there needs passionate early adopters who are willing to give any Web 3.0 protocols a try. But where do you find these early adopters? You need a lot of active participants who use, invest and advocate the appchain.
Polkadot provides shared security. An appchain could connect to a slot and reach very high level security at once. This is very cool. But it comes at a cost of tens of millions of dollars per year in rent. Parachains need to issue their own tokens to pay for rent. This is a good deal for platform chains that could support tens of thousands of appchains, but for an appchain, you need to think about whether this security cost is reasonable.
Octopus Network embraces all appchain projects, appchain developers can decide how much security an appchain needs and pay only for that level of security. If it’s a small project, maybe 1 million USD worth of security will be enough. If the appchain project issues 100K USD worth of tokens to validators, or 100K USD worth of rent, there will be people willing to stake 1 million USD worth of OCT tokens to provide security. As the project becomes more successful, the network effect becomes stronger, and economic activity increases, the token price will also increase. Although the number of reward tokens hasn’t changed, the value of the tokens relative to fiat currencies will increase, which will encourage more $OCT staked on the appchain, hence the security level increase as well. If the appchain does not need to maintain a high level of security anymore, and wants to reduce the cost of security, that’s ok as well. The appchain could initiate a vote on-chain, holders of the native token could vote to lower the rewards for validators.
Octopus Network Relay runs on NEAR, which means appchains on Octopus Network are interoperable with NEAR as well. appchains on Octopus Network could also utilize the Rainbow Bridge on NEAR to interoperate with Ethereum. In the future, NEAR, Cosmos and Polkadot will be all connected with each other, appchains on Octopus Network will be able to interoperate with all these blockchains through bridges. Additionally, we developed the Substrate IBC module, Octopus Network appchains could interoperate with any IBC enabled blockchains , such as those developed with the Cosmos SDK.
Additionally, Octopus Network provides RPC Gateway and Indexer to appchains for free. Investors in Octopus Network hold OCT tokens, they can mine native tokens from appchains by staking OCT tokens for appchains, which provides security for them. Octopus Network is a community consisting of developers, investors and advocates.
Octopus Network’s mission is to lower the barrier for launching and running Web 3.0 application specific blockchain, from several millions of dollars to just tens of thousands of dollars. After our mainnet goes live, the cost of innovation for appchains will be lowered by 10X. Our long term goal is to lower this barrier by 100X. What can a 10X cost reduction do? When there are 100 million dollars invested in Web 3.0, if each project costs several million dollars, 100 million dollars will only be able to support 20 projects. If we lower the cost by 10X, the same amount of capital will be able to support 200 projects. If we lower the cost by 100X, the capital will be able to support 2000 projects! Web 3.0 adoption depends on the creativity of a diverse group of innovators to experiment with new ideas. Our work is to accelerate the evolving speed of Web 3.0.
Octopus Network will go online in September this year. If you’re interested in Octopus Network, feel free to, follow us on Twitter, email us or join our discord server. We are looking for ambassadors outside China, and welcome anyone interested to apply.
Web: https://oct.network
Email: hi@oct.network
Twitter: @oct_network
Github: https://github.com/octopus-network
Medium: https://medium.com/oct-network
Discord: https://discord.gg/6GTJBkZA9Q
