“Wallets, crypto basics, and community—your starter guide to thriving in the Web3 era.”
SUMMARY:
Web3 is regarded as the future of the internet. This next blockchain-based web envisions cryptocurrencies, NFTs, DAOs, decentralised finance, and other features. It provides a read/write/own form of the web in which users have a financial stake in and more influence over the web communities they participate in. Web3 promises to alter the online experience in the same way as PCs and cellphones have. However, it is not risk-free.
Some corporations have joined the arena, only to face criticism for the environmental effect and financial speculation (and possibility for fraud) associated with Web3 initiatives. While blockchain is marketed as a solution to privacy, centralization, and financial exclusion concerns, it has actually exacerbated many of these issues. Before plunging in, companies must weigh the risks and advantages.
Do you recall when you first heard about Bitcoin?
Perhaps it was a whisper about a new technology that will revolutionize everything. Perhaps you felt a twinge of FOMO as those who got in early suddenly accumulated a small fortune — even if it wasn’t apparent what the “money” could genuinely be spent on (very pricey pizza?). Maybe you merely wondered if your organization should be developing a cryptocurrency strategy in case it took big in your market, even if you didn’t care either way.
Probably, a crash occurred shortly after Bitcoin came to your notice, whenever that was. Every year or two, bitcoin’s value plummets. Each time it happens, doubters rush to dismiss it as dead, claiming that it was always a hoax for geeks and thieves, a fringe oddness promoted by techno-libertarians and bank-haters. They’d argue that Bitcoin had no future alongside real-world technology businesses, then forget about it and go on with their lives.
And of course, it would return.
Bitcoin suddenly appears to be everywhere. Among all the demands on our attention, many of us failed to see how cryptocurrencies were gradually entering the mainstream. Until suddenly, Larry David was marketing them during the Super Bowl; celebrities like Paris Hilton, Tom Brady, and Jamie Foxx were pushing them in commercials; and a really horrifying Wall Street-inspired mechanical bull celebrating cryptocurrencies was revealed in Miami. What began as a curiosity and then as a speculative niche has grown into a lucrative industry.
Cryptocurrency, however, is only the tip of the spear. Blockchain, the underlying technology, is a “distributed ledger”—a database maintained by a network of computers rather than a single server—that provides users with an immutable and transparent mechanism to store information. Blockchain is already being used for other purposes, such as creating “digital deed” ownership records of unique digital objects—or nonfungible tokens.
NFTs boomed in 2022, creating a $41 billion market apparently out of thin air. Beeple, for example, made a splash last year when an NFT of his work sold for $69 million at Christie’s. Even more exotic relatives, such as DAOs, or “decentralized autonomous organizations,” function like headless corporations: they raise and spend money, but all decisions are voted on by members and carried out by encoded rules. One DAO just raised $47 million in an effort to acquire a rare copy of the United States Constitution. Advocates of DeFi (or “decentralized finance,” which seeks to reshape the global financial system) are lobbying Congress and promoting a world without banks.
The entirety of these activities is known as “Web3.” The name is a simple abbreviation for the idea of rewiring the web, utilizing blockchain to alter how information is stored, exchanged, and owned. In principle, a blockchain-based web might break down monopolies over who owns information, who generates money, and even how networks and organizations operate. Advocates claim that Web3 will generate new economies, product classes, and services online; that it will restore democracy to the web; and that it will define the next phase of the internet. Web3 is unavoidable, much like Marvel’s nemesis Thanos.
Or is it? While it is obvious that passion, money, and skill are pouring into Web3 initiatives, redesigning the web is a massive effort. Despite its potential, blockchain confronts tremendous technological, environmental, ethical, and legal challenges before it can achieve hegemony. A increasing chorus of doubters warns that Web3 is riddled with speculation, theft, and privacy issues, and that the draw of centralization and the emergence of new intermediates is already weakening the utopian vision of a decentralized online.
Meanwhile, companies and executives are attempting to make sense of the opportunities — and risks — of a quickly shifting world that might deliver significant returns to firms that get it right. Many organizations are testing the Web3 waters, and although some have had significant success, some high-profile firms are discovering that they (or their consumers) do not like the temperature. Most people, of course, don’t actually know what Web3 is. In an informal survey of HBR readers on LinkedIn in March 2022, over 70% claimed they had no idea what the word meant.
Welcome to the complicated, contentious, fascinating, idealistic, scam-ridden, calamitous, democratizing, and (maybe) decentralized world of Web3. Here’s what you should know.
From Web1 to Web3
To put Web3 into context, let me offer a quick refresher
The internet began as a physical infrastructure of cables and servers that allowed computers and the people in front of them to communicate with one another. The United States government’s ARPANET transmitted its first message in 1969, but the web as we know it today did not exist until 1991, when HTML and URLs enabled users to browse between static sites. Consider this the read-only web, sometimes known as Web 1.
In the early 2000s, things began to shift. For starters, the internet was becoming more participatory; it was the age of user-generated content, or the read/write web. Social media was a crucial aspect of Web2 (also known as Web 2.0), and Facebook, Twitter, and Tumblr helped define the online experience. YouTube, Wikipedia, and Google, coupled with the ability to comment on information, have increased our capacity to watch, study, search, and interact.
The Web2 era was similarly characterized by centralization. Network effects and economies of scale have resulted in obvious winners, and those firms (many of which are named above) have generated staggering wealth for themselves and their shareholders by collecting users’ data and selling tailored adverts based on it. This has enabled services to be provided for “free,” albeit users were initially unaware of the ramifications of the arrangement. Web2 also pioneered new methods for ordinary people to earn money, such as the sharing economy and the often profitable vocation of being an influencer.
There’s lots to criticize about the existing system: Companies with concentrated or near-monopoly power have frequently failed to use it responsibly, consumers who are now aware that they are the product are becoming increasingly wary of giving up control of their personal data, and the targeted-ad economy may be a fragile bubble that does little to benefit advertisers. As the web has matured, consolidated, and become more corporate, many people have begun to ask if there is a better future ahead.
Which leads us to Web 3. Advocates of this vision see it as a fundamental overhaul that will address the flaws and perverse incentives of Web2. Concerned about privacy? Encrypted wallets secure your online identity. What about censorship? A decentralized database keeps everything immutably and transparently, preventing moderators from intervening to remove offensive content. Centralization? You have a genuine say in how choices are made by the networks on which you spend time. More importantly, you receive a valuable interest – you are not a product, but an owner. This is the idea behind the read/write/own web.
Okay, but what is Web3?
The foundations that eventually would become Web3 were sown in 1991, when scientists W. Scott Stornetta and Stuart Haber established the first blockchain, a project to time-stamp digital records. However, the concept did not gain traction until 2009, when the pseudonymous creator Satoshi Nakamoto released Bitcoin in the aftermath (and at least partially in response to) the financial crisis. It and its underlying blockchain technology work as follows: ownership of the cryptocurrency is tracked on a shared public ledger, and when one user requests a transfer, “miners” process the transaction by solving a complex math problem, adding a new “block” of data to the chain and earning newly created bitcoin for their efforts. While the Bitcoin chain is primarily used for cash, newer blockchains have additional alternatives. Ethereum, which was founded in 2015, is both a cryptocurrency and a platform for developing additional cryptocurrencies and blockchain projects. Gavin Wood, one of its cofounders, defined Ethereum as “one computer for the entire planet,” with computing power spread throughout the world and managed from nowhere. After more than a decade, proponents of a blockchain-based online argue that a new age — Web3 — has begun.
Simply said, Web3 is an extension of bitcoin that uses blockchain in novel ways to achieve new goals. A blockchain can include the quantity of tokens in a wallet, the conditions of a self-executing contract, or the code for a decentralized software (dApp). Not all blockchains operate in the same manner, although coins are often utilized as incentives for miners to execute transactions. On “proof of work” systems such as Bitcoin, solving the hard math problems required to execute transactions is energy-intensive by design. On a “proof of stake” chain, which is younger but becoming more popular, processing transactions just needs that the chain’s verifiers agree that a transaction is legitimate – a far more efficient procedure. In both scenarios, transaction data is public, but users’ wallets are recognized solely by a cryptographically created address. Blockchains are “write only,” which implies that you may add data to them but not remove it.
Web3 and cryptocurrencies employ “permissionless” blockchains, which have no centralized authority and do not require users to trust — or even know anything about — other users in order to transact with them. When people talk about blockchain, they mainly mean this. “Web3 is the internet owned by the builders and users, orchestrated with tokens,” says Chris Dixon, a partner at the venture capital company a16z and one of Web3’s most vocal supporters and investors, taking the concept from Web3 consultant Packy McCormick. This is significant because it alters a fundamental dynamic of today’s web, in which firms squeeze consumers for every amount of data they can. According to Dixon, tokens and shared ownership address “the core problem of centralized networks, where value is accumulated by one company, and the company ends up fighting its own users and partners.”
In 2014, Ethereum’s Wood released a seminal blog post outlining his vision for the new age. It’s a “reimagination of the sorts of things we already use the web for, but with a fundamentally different model for the interactions between parties,” as he said. “We post information that we believe is publicly available. We store information that we presume is agreed upon on a consensus-ledger. Information that we believe to be private is kept secret and never revealed.”
“Blockchain is a new type of computer,” Dixon says. Blockchain, like PCs and cellphones, has been Vincubating for years before we realized how much they changed the way we use technology. He elaborates: “I think we might be in the golden period of Web3, where all the entrepreneurs are entering.” Although the eye-popping prices, such as the Beeple sale, have received a lot of attention, there is more to the tale. “The vast majority of what I’m seeing is smaller-dollar things that are much more around communities,” he says. For example, Sound.xyz. Whereas scale has been a critical metric for a Web2 organization, engagement is a stronger predictor of what will thrive in Web 3.
It’s yet uncertain whether the product lives up to its promise. Predictions about what Web3 will look like at scale are only assumptions, yet some projects have become rather large. The Bored Ape Yacht Club (BAYC), NBA Top Shot, and the cryptogaming behemoth Dapper Labs have all established thriving NFT communities. Clearinghouses such as Coinbase (which buys, sells, and stores bitcoin) and OpenSea (the largest digital marketplace for crypto collectibles and NFTs) have developed Web3 on-ramps for users with little to no technical experience.
While firms like Microsoft, Overstock, and PayPal have long accepted cryptocurrencies, NFTs, which have lately gained prominence, are the major method corporations are now experimenting with Web3. An NFT is essentially a combination of a deed, a certificate of authenticity, and a membership card. It can grant “ownership” of digital art (usually, ownership is stored on the blockchain and a link leads to an image someplace), rights, or access to a group. NFTs may function on a smaller scale than coins since they build their own ecosystems and just require a community of individuals who appreciate the initiative. Baseball cards, for example, are only valued to a small group of collectors, but they are extremely precious to them.
Traditional firms’ most successful efforts into Web3 have been those that develop new communities or integrate with existing ones. Consider the NBA: Top Shot was one of the first NFT ventures from a heritage brand, and it allowed fans to buy and exchange clips known as “moments” (like as a LeBron James slam) that functioned similarly to trading cards. It took off because it provided a new type of communal area for fans, many of whom may already be collecting basketball cards. Other leading companies, including Nike, Adidas, and Under Armour, have added a digital layer to their existing collector communities. All three firms provide NFTs that may be utilized in the virtual world, such as allowing the owner to outfit an avatar, or that grant access to items or unique clothing drops in the real world. Adidas sold $23 million worth of NFTs in less than a day, resulting in an immediate resale market on OpenSea, similar to what you could see following a limited release of new shoes. Similarly, Time magazine began an NFT effort to create an online community that draws on the publication’s extensive history.
Bored Ape Yacht Club is the most successful example of an NFT initiative turning mainstream. Combining excitement with exclusivity, BAYC provides admission to real-life events and online places, as well as usage rights to the ape’s picture, therefore promoting the brand. An ape NFT enrolls the owner in an elite club, both metaphorically and physically.
One takeaway from these attempts is that on-ramps are important, but less so the more engaged the community is. Getting a cryptocurrency wallet is not difficult, but it is an additional step. As a result, Top Shot does not require one – customers can simply enter their credit card — which has helped them attract new consumers interested in NFTs.
Some firms have had more difficult experiences with NFT projects and cryptocurrency functionality. For example, when Jason Citron, the CEO of Discord, a voice, video, and text communication service, previewed a feature that might connect the app to cryptocurrency wallets, Discord users mutinied, prompting Citron to explain that the firm had “no current plans” to introduce the integration.
The Bored Ape Yacht Club was a niche hobby, but when it took up, it prompted individuals to develop wallets, which increased interest in OpenSea.
One takeaway from these attempts is that on-ramps are important, but less so the more engaged the community is. Getting a cryptocurrency wallet is not difficult, but it is an additional step. As a result, Top Shot does not require one – customers can simply enter their credit card — which has helped them attract new consumers interested in NFTs.
Following a heated outcry from customers angry about their huge carbon impact, the underwear firm MeUndies and the UK division of the World Wildlife Fund both abruptly halted NFT programs. Even the most successful stories have encountered setbacks. Nike is presently seeking to have unlicensed NFTs “destroyed,” and OpenSea is rife with counterfeits and imitators. Given that blockchain is unchangeable, this raises new legal concerns, and it is unclear how businesses will manage the situation. Furthermore, new research suggests that the market for NFTs has completely stalled. Companies thinking about entering this market should keep in mind that Web3 is controversial, and there are no assurances. Among many grounds of contention, the main division is between individuals who believe in what Web3 might be and opponents who condemn the numerous issues that plague it right now.
System Error: The Case Against Web3
The early days of technology are an exciting period. The possibilities are limitless, and the emphasis is on what it can — or will — do, according to optimists. I’m old enough to remember when Twitter and Facebook were intended to foster global democracy through unrestricted conversation. As Web3’s air of inevitability (and profitability) gains traction, it’s critical to evaluate what may go wrong and acknowledge what is currently wrong.
It is replete with conjecture. Skeptics claim that despite the rhetoric of democratization, ownership opportunities, and mass wealth creation, Web3 is nothing more than a massive speculative economy that will mostly benefit the already wealthy. It’s clear why this argument makes sense. The top 0.01% of Bitcoin holders control 27% of the supply. Wash trading, or selling assets to oneself, and market manipulation have been documented in both the cryptocurrency and NFT sectors, artificially inflating value and allowing owners to gain coins through fake exchanges.
In an interview with the podcast The Dig, reporters Edward Ongweso Jr. and Jacob Silverman described the entire system as an intricate upward transfer of wealth. In The Atlantic, investor Rex Woodbury described Web3 as “the financialization of everything” (and not in a positive way). On a more granular level, Molly White, a software developer, founded Web3 Is Going Just Great, where she chronicles the numerous hacks, frauds, and explosions in the Web3 realm, highlighting the dangers of the uncontrolled Wild West.
The markets’ volatile and speculative nature may be a feature rather than a defect. According to engineer David Rosenthal, speculation on cryptocurrencies is the motor that powers Web3, and it cannot function without them. “[A] permissionless blockchain requires a cryptocurrency to function, and this cryptocurrency requires speculation to function,” he stated during a discussion at Stanford in early 2022. Basically, he describes a pyramid scheme:
Blockchains require users to offer something in return for contributing processing power, and cryptocurrencies serve that purpose — but the system only works if other people are prepared to buy them, believing that they will be worth more in the future. Stephen Diehl, a technologist and prominent critic of Web3, derided blockchain as “a one-trick pony whose only application is creating censorship-resistant crypto investment schemes, an invention whose negative externalities and capacity for harm vastly outweigh any possible uses.”
The technology is impractical (and pricey). There are many questions about whether Web3 — or blockchain in general — makes sense as the technology that will define the next phase of the web. “Whether or not you agree with the philosophy/economics behind cryptocurrencies, they are — simply put — a software architecture disaster in the making,” argues Grady Booch, principal scientist for software engineering at IBM Research. All technology has trade-offs, Booch explained in a Twitter Spaces conversation, and the cost of a “trustless” system is that it is highly inefficient, capable of processing only a few transactions per minute — minuscule amounts of data when compared to a centralized system like, say, Amazon Web Service. Decentralization complicates and excludes basic consumers from technology, rather than making it simpler and more accessible.
While it is feasible to address this by adding new layers that can accelerate things, doing so makes the entire system more centralized, defeating the objective. Moxie Marlinspike, inventor of the encrypted messaging software Signal, stated, “Once a distributed ecosystem centralizes around a platform for convenience, it becomes the worst of both worlds: centralized control, but still distributed enough to become mired in time.”
Blockchain’s current inefficiency comes at a cost, quite literally. Transaction prices on Bitcoin and Ethereum (known as gas fees) can range from a few dollars to hundreds of dollars. Storing one megabyte of data on a blockchain distributed ledger can cost thousands, if not tens of thousands of dollars—yes, you read it right. As a result, the NFT you purchased is unlikely to be on the blockchain. The code on the chain showing your ownership includes an address that points to where the picture is kept. This may and has created issues, such as your expensive purchase vanishing if the server on which it is stored fails.
It promotes harassment and abuse. The possibility of devastating unexpected effects is quite high. “While blockchain proponents speak about a ‘future of the web’ based around public ledgers, anonymity, and immutability,” said Molly White, “those of us who have been harassed online look on in horror as obvious vectors for harassment and abuse are overlooked, if not outright touted as features.” Although crypto wallets ostensibly guarantee anonymity, the fact that transactions are public allows them to be tracked back to people.
(The FBI is quite adept at this, which is why cryptocurrency isn’t ideal for illegal enterprises.) “Imagine if, when you Venmo-ed your Tinder date for half of the meal, they could now see every other transaction you’d ever made,” even with other dates, your therapist, and the corner store near your house. That information in the hands of an aggressive ex-partner or stalker might be deadly.
The immutability of the blockchain also implies that data cannot be deleted. There is no way to remove anything, whether it is a bad post or revenge pornography. Immutability might also pose significant challenges for Web3 in some regions, such as Europe, where the General Data Protection Regulation (GDPR) guarantees the right to have personal data wiped.
The immutability of the blockchain also implies that data cannot be deleted. There is no way to remove anything, whether it is a bad post or revenge pornography. Immutability might also pose significant challenges for Web3 in some regions, such as Europe, where the General Data Protection Regulation (GDPR) guarantees the right to have personal data wiped.
It is currently horrible for the environment. Web3’s environmental impact is massive and devastating. It may be divided into two categories: energy consumption and technological waste, both of which are byproducts of mining. Running a network based on supercomputers competing to solve difficult equations every time you wish to preserve data on a blockchain requires a lot of energy. It also creates e-waste. According to Rosenthal, Bitcoin generates “an average of one whole MacBook Air of e-waste per ‘economically meaningful’ transaction” as miners cycle through large amounts of short-lived computing gear. Alex de Vries and Christian Stoll’s research, on which he draws this assertion, discovered that the annual e-waste generated by Bitcoin is similar to that produced by a country the size of the Netherlands.
It is difficult to predict whether and how these challenges will be handled, in part because it is unknown whether Web3 will gain traction. Evgeny Morozov, a technology writer, describes blockchain as a technology in quest of a genuine utility. “The business model of most Web3 ventures is self-referential in the extreme, feeding off people’s faith in the inevitable transition from Web 2.0 to Web3.” Tim O’Reilly, who invented the term “Web 2.0” to characterize the platform web of the early 2000s, says that we are seeing an investment boom similar to the dot-com era before the crash. “Web 2.0 was not a version number, it was the second coming of the web after the dot-com bust,” he shares. “I don’t believe we’ll be allowed to name Web3 ‘Web3’ until after the crypto bust. Because only then will we be able to see what has stuck around.”
If this is true, then innovation will come at a high cost. Hilary Allen, an American University law professor who researches the 2008 financial crisis, notes that the system now “mirrors and magnifies the fragilities of shadow banking innovations that resulted in the 2008 financial crisis.” If the Web3 bubble collapses, it might leave many people high and dry.
Early Days Are Back
So, where is Web3 headed? Vitalik Buterin, cofounder of Ethereum, has expressed reservations about the path of his project but remains optimistic. In a post to Marlinspike on the Ethereum Reddit page, he acknowledged that the Signal creator made “a correct criticism of the current state of the ecosystem,” but argued that the decentralized web is catching up, and rapidly at that. The current initiative, which involves establishing code libraries, will eventually make it easy for other developers to begin working on Web3 projects. “I think the properly authenticated decentralized blockchain world is coming and is much closer to being here than many people think.”
For starters, proof of work, the inefficient-by-design technique used by Bitcoin and Ethereum, is becoming less popular. Instead of mining, which consumes a lot of energy, validation is increasingly coming from users who buy in (own a share) and approve transactions. Ethereum predicts that the proof of stake upgrade will reduce energy consumption by 99.95% while making the network quicker and more efficient. Solana, a newer blockchain that uses proof of stake and “proof of history,” a time stamp-based mechanism, can process 65,000 transactions per second (compared to Ethereum’s current rate of about 15 per second and Bitcoin’s seven) and consumes roughly the same amount of energy as two Google searches, for which it purchases carbon offsets.
Some firms are taking a hybrid approach to blockchain, which provides the advantages without the limits. “There are a lot of really interesting new architectures, which put certain things on the blockchain but not others,” he told me. A social network, for example, may store your followers and who you follow on the blockchain but not your postings, allowing you to erase them.
Hybrid models can also help businesses comply with GDPR and other requirements. “To comply with the right to erasure,” say Cindy Compert, Maurizio Luinetti, and Bertrand Portier in an IBM white paper, “personal data should be kept private from the blockchain in a ‘off-chain’ data store, with only its evidence (cryptographic hash) exposed to the chain.” That manner, personal data may be destroyed in accordance with GDPR without disrupting the chain.
With so much of Web3 still being worked out, it remains a high-risk, high-reward proposition. Certain businesses and industries have a greater motivation to try their luck than others, particularly those who have been burnt by being left out in previous eras of the internet. It’s no accident that a media organization like Time is looking into Web3 potential after Web2 wrecked its revenue model. Other companies, like as Nike and the NBA, which have prior experience with limited releases and commoditizing events, may have simply discovered that their business models are a natural match. Other firms will not have such a clear route.
The exaggerated predictions about Web3 — that it will take over the internet, upend the financial system, redistribute wealth, and make the online democratic again — should be treated with a grain of salt. We’ve heard all of this before, and we’ve seen previous bouts of Web3 ecstasy evaporate. However, this does not imply it should be written off totally. Whether it swells or busts, we’ll have to deal with it in some way. What version—and how your organization responds—may define the future of the digital economy and what life online will be like in the next internet age. For the time being, that future remains uncertain. Nothing, after all, is predetermined. (Stackpole, 2022)
Citation & Reference:
Stackpole, T. (2022) What is Web3? https://hbr.org/2022/05/what-is-web3.
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