By Toya Zhang, Chief Marketing Officer, BIT
Many crypto-sceptics have gleefully taken the collapse of FTX to represent the industry’s Lehmann Brothers moment. However, nothing could be further from the truth. Though details about what led to the downfall are still emerging, it already seems clear that nothing about the debacle was peculiar to crypto.
If anything, the old-fashioned business malpractices – whether fraud, commingling of funds, or investor deception – which resulted in the insolvency of a centralized exchange should serve to remind us of the fundamental value proposition of truly decentralized finance, and the new ecosystem which is steadily being built on top of it, known as Web3.
When the internet was first being developed, there was a shared consensus among enthusiasts that this new technology would be revolutionary. The world wide web seemed destined to change the way we communicate, work and even play. Much of this utopian vision has essentially come true. But as our dependence on the web has increased, we've also become accustomed to some of its more dystopian aspects. From data breaches to election interference, the internet is not the safe haven we might have thought it could be.
But what if there was a way to start again? To build a new version of the internet which is secure, decentralized, democratized and through which people could monetize their own data, the content they produce and even the time they spend on the internet – instead of being monetized by a small handful of tech monopolies?
This is the pipedream of Web3, but what is needed to make it a reality?
Global macro-economic trends are converging towards a point of inflexion. Or in other words, something has got to give. The current landscape of over-leveraged debt, skyrocketing inflation, rising energy costs, insecure supply chains and the concentration of data and economic value generated by internet users across the globe is not a sustainable - or desirable - set of circumstances.
The world is certainly in need of ‘a great reset’, but in a manner which returns power to ordinary citizens. Web3 is about creating new sources of value, and alternative methods of generating and storing that value.
In simple terms, Web3 is the third generation of the internet, and it's built on the philosophy that the internet should be characterized by a decentralized network of computers rather than a centralized one. This means there would be fewer single points of failure and fewer central authorities and intermediaries controlling the flow of information or economic value.
This is not to be confused with the Metaverse, which refers to a virtual reality-based parallel world in which users can interact with each other and digital objects in a 3-dimensional space. Web3 is about blockchain technology and the layers of novel infrastructure that can be built on top of it, including digital identity, smart contracts, and decentralized applications (dApps).
Where Web 2.0 is centralized and non-interoperable, Web3 is decentralized and interoperable. In Web3, the primary goal is to establish a new system of ownership and even lay the groundwork for a new financial system. This can be achieved via NFTs (non-fungible tokens) that can serve as products or services, which can be bought and sold with cryptocurrency via the blockchain, which constitutes the infrastructure of Web3.
According to Grand View Research, the global Web 3.0 blockchain market size was $1.36 billion in 2021 and is expected to expand at a compound annual growth rate (CAGR) of 44.9% between 2022 and 2030, meaning revenue for the sector is expected to reach $33.53 billion by the end of the decade.
But what was wrong with Web2, or to put it another way, to what problems will Web3 be the solution? In his book ‘Who Owns the Future’, Jaron Lanier coined the term ‘Siren Server’ to describe the concentrated data collection that characterizes much of the structure of Web2.
Lanier posits that ordinary internet users have become increasingly disenfranchised from online economies. By convincing users to give away valuable information about themselves in exchange for free services, firms can accrue large amounts of data at virtually no cost. Lanier calls these firms “Siren Servers,” alluding to the Sirens of Ulysses. Instead of paying each individual for their contribution to the data pool, the Siren Servers concentrate wealth in the hands of the few who control the data centres.
These data centres have not just extracted value from individuals, but concentrated control of previously competitive industries such as advertising in the hands of just one or two companies – Meta (then known as Facebook) and Google - to the detriment of some key engines of democracy, such as a free press that relies on ad revenues.
In this context, recent developments at Twitter serve as a useful illustration of what a shift from Web2 to Web3 might look like in practice. Thankfully, Twitter’s new Chief Executive Elon Musk appears to understand the Siren Server problem. This week Musk Tweeted his approval of a proposal made over a decade ago by Walter Isaacson, former Time Magazine editor – as well as the biographer of Steve Jobs, Albert Einstein, and Musk himself – that social networks should enable micropayments for stories, songs and videos, providing news publications with new revenue streams through their engagement with social media platforms.
Steps in this direction align with the philosophy of Web 3, which stands for the idea that economic rewards should accrue to those who create the content or original source of value. This philosophy also applies to Musk’s proposal for users to pay for their account’s verification. Simply put, such a policy would reverse the relationship between the user and Siren Server, making Twitter the product instead of the user. After all, if a service is free, it is because you have become the product.
The potential application of Web3 thinking extends far beyond the mere reimagination of Web2 monopolies. In essence, blockchain and digital assets have enabled the creation of community-centric economic incentives.
This represents a significant shift from previous technological advancements, since developers and content providers will be able to benefit directly from the consumption of their products. In the world of Web3, stakeholders will also participate more directly in the governance of the underlying products and networks.
In time, this convergence could even be extended into traditional sectors where the use of blockchain technology can enable fractional ownership of previously illiquid assets, such as real estate.
However the revolution will not occur overnight, and we are likely to spend some time living in a hybrid world of Web2 and Web3. Many companies that presently inhabit the world of Web2 - by the mere fact of having a website or an app - will gradually begin to migrate their digital identities onto Web3.
Crypto exchanges will by definition be early adopters of Web3 technologies. Given that assets traded on exchanges are fundamentally Web3 tokens, exchanges might even be characterized as portals through which Web2 players can enter the Web3 space.
But we must not be complacent and assume that Web 3 will bring about nothing but solutions without problems of its own. As Web3 will configure a new landscape of economic incentives, so it will engender a whole new dimension of ethical questions and moral hazards.
The lack of centralized oversight or regulatory clarity about Web3 will necessarily raise valid concerns surrounding privacy and data leaks, copyright infringement with NFTs, further ICO scams and outright theft, amongst others.
But new obstacles always rise with the ascending tide of technological progress, and shouldn’t deter us from exploring new heights. The decentralized world of Web3 is upon us, and if it all goes wrong, we’ll have nobody to blame but ourselves.