There are those who believe in it unconditionally. But for some it is a utopia
by Thomas Stackpole
Do you remember the first time you heard about bitcoins? Probably, it was just a vague hint of a new technology that could have changed everything. Perhaps you feared for a moment of being left out, while those who bought them in time would have accumulated a small fortune almost overnight. Or maybe you've just wondered if you shouldn't have had a cryptocurrency strategy in case you did actually took off.
Most likely, as soon as you became aware of the phenomenon there was a collapse of the new virtual currency. Every one or two years, the bitcoin's value drops dramatically. Whenever it happens, skeptics immediately dismiss it as dead, saying it had always been a fool's trap and a perverse mechanism devised by techno-libertarians and people who hate banks. They say he had never had a future next to true technology companies, then they forget about it and go back to their everyday life. And then, bitcoin starts to rise again. Today it seems to be everywhere. Cryptocurrencies, however, are just the tip of the iceberg. The underlying technology, the blockchain, is called a “distributed ledger” - a database managed by a network of computers rather than a single server - which offers users an immutable and transparent way to store information.
Today the blockchain is used for new purposes: for example, to create "Certificates of ownership", which certify the ownership of unique digital objects - the so-called non fungible token (NFT). NFTs exploded in 2022, seemingly creating a market worth $ 41 billion out of nowhere. Beeple, for example, caused a sensation last year when the NFT of his artwork was auctioned at Christie's for $ 69 million. Even more esoteric relatives such as the DAO, an acronym for “decentralized autonomous organizations”, operate as companies without hierarchies: they collect and spend money, but all decisions are submitted to the vote of the members and are implemented according to codified rules. A DAO recently raised $ 47 million in an attempt to purchase a rare copy of the United States Constitution. Advocates of DeFi (or decentralized finance, which aims to rebuild the global financial system) are lobbying Congress and promising a bank-free future.
The whole of these efforts goes under the name of "Web3". It is a convenient abbreviation of the project aimed at reprogram the operating modes of the Network, using the blockchain to change the way information is stored, shared and owned. In theory, a blockchain-based web could break the monopolies that govern the control of information, the distribution of wealth, and even the way networks and large companies work. Its proponents claim that the Web3 will create new economies, new product categories and new online services; which will bring democracy back to the Net; and which will define the new era of the Internet.
Or is it just a utopia? While the convergence of energy, money and talents taking place on Web3 projects is undeniable, rebuilding the Internet is a huge undertaking. Despite all its promises, blockchain has yet to outdo the big boys technical, environmental, ethical and regulatory barriers that separate it from hegemony. A growing chorus of skeptics warns public opinion, explaining that the Web3 is corrupted by speculation, theft and privacy issues and that the trend towards centralization and proliferation of new intermediaries is already watering down the utopian idea of a decentralized Web.
Meanwhile, businesses and leaders are trying to assess the potential - and pitfalls - of a rapidly changing landscape that has the potential to pay huge dividends to organizations that do the right thing. Many businesses are testing Web3, and while some have been very successful, several high-profile companies (or their customers) are finding that it's not for them. However, most people don't even know what the Web3 really is: in an informal survey conducted on LinkedIn in March 2022, almost 70% said they don't know what this expression means.
Welcome to the ambiguous, opposed, utopian, fraudulent, democratizing and (perhaps) decentralized world of the Web3. Here's what you need to know.
From Web1 to Web3
To give you a better idea of what Web3 is, I'll give you a small summary.
In the beginning there was the Internet: the physical infrastructure of cables and servers that allows computers, and those who operate them, to communicate with each other. The US government's ARPANET sent its first message in 1969, but the web as we know it today did not come into operation until 1991, when HTML and URLs enabled users to navigate between static pages. Consider it the read-only web, or Web1.
In the early 2000s, things began to take another turn. To begin with, the Internet was becoming more interactive; it was an era of user-generated content, which is what could be called the web of reading and writing. Social media was a key feature of Web2 (or Web 2.0 as it is more commonly called) and Facebook, Twitter and Tumblr have come to define this. new experience of using the Net. YouTube, Wikipedia and Google, in addition to allowing us to post comments on content, have increased our ability to look, learn, search and communicate.
The Web2 era was also based on the centralization. Network effects and economies of scale have produced indisputable winners, and those companies (many of them listed above) have in turn produced mind-boggling wealth for themselves and their shareholders by collecting data on users and then selling targeted advertisements on their own. individual profile. This enabled them to offer “free” services, even if at first the users did not realize the actual implications of this exchange. Web2 has also created opportunities for enrichment for very ordinary people, especially through the sharing economy and the sometimes extremely profitable role of influencer.
There are many aspects to criticize in the system in place: companies that enjoy a near monopoly have not always used it responsibly; consumers, who have now understood of to be the product, they are less and less willing to give up control of their personal data; and it is possible that the personalized advertising economy is a fragile bubble it doesn't pay much for advertisers.
Thus we come to the Web3. Proponents of this view present it as a radical improvement intended to amend the perverse problems and incentives of the Web2. Do you worry about privacy? Encrypted document holders protect your virtual identity. Are you afraid of censorship? A decentralized database stores everything immutably and transparently, preventing moderators from interfering to delete any inappropriate content. Are you afraid of centralization? You have full voting rights on the decisions made by the networks you spend your time on. Most importantly, you get a stake in that is worth something - you are not products but proprietors. It is the vision of the web of reading, writing and ownership.
OK, but whatis the Web3?
The seeds of what would become the Web3 were planted in 1991, when researchers W. Scott Stornetta and Stuart Haber launched the first blockchain - a project for time stamping of digital documents. But the idea didn't really catch on until 2009, when bitcoin was launched in the aftermath of the financial crisis (and at least partially in response to it) by the inventor hiding under the pseudonym of Satoshi Nakamoto. The virtual currency par excellence, and the technology on which it is based, work like this: the ownership of the cryptocurrency is detected on a shared public ledger and, when a user wants to make a transfer, the "operators" process the transaction by solving a mathematical problem complex by which they add a new "block" of data to the chain and are rewarded with newly created bitcoins. While the bitcoin chain is only used for payments, newer blockchains offer other options. Ethereum, which was launched in 2015, is both a cryptocurrency and a platform that can be used to build other cryptocurrencies and other blockchain-based projects. Gavin Wood, one of its co-founders, called Ethereum "one computer for the entire planet" whose processing capacity is distributed across the planet and is not controlled anywhere. Today, after more than a decade, proponents of a blockchain-based web declare that we are at the dawn of a new era - the Web3.
Simplifying as much as possible, the Web3 is a 'extension of the cryptocurrency, which uses the blockchain in new ways and for new purposes. A blockchain can record the number of tokens contained in a wallet, the conditions of a self-executing contract, or the code of a decentralized app (dApp). Not all blockchains work in the same way, but in general, coins are used as incentives for operators to process transactions. On "proof of work" chains such as Bitcoin, solving the complex mathematical problems necessary to process transactions is a structurally high mental and energetic task. On "proof of stake" chains, which are newer but increasingly popular, transaction processing simply requires operators to verify legitimacy - much more efficient work. In both cases, transaction data is public, even if users' wallets are identified only by a cryptographically generated address. Blockchains are "write only" - it means that data can be added, but it cannot be deleted.
The Web3 and cryptocurrencies are based on "permissionless" blockchains, which have no centralized control and do not require users to trust other users (or even to know them) to do business with them. That's basically what people mean when they talk about the blockchain. "Web3 is an Internet owned by builders and users, orchestrated by tokens," says Chris Dixon, partner of venture capital firm a16z and an early supporter of Web3, as well as a major investor in this new technology, taking on loan a definition by the specialist consultant Packy McCormick. It is a revolution because it modifies a foundational dynamic of today's web, in which companies extract all possible data from users. Token and shared ownership, explains Dixon, solve "the critical problem of centralized networks, where value is accumulated by a single company, which then ends up fighting against its users and partners".
In 2014, Ethereum's Wood wrote a historical post outlining his vision for the new era. The Web3 is a "re-imagining of the things we already use the web for, but with a radically different model for the interaction between the parts, ”he observed. “Information that we believe is in the public domain, we publish. The information we assume is shared, we put it on a consent sharing log. The information we consider to be private, we keep it secret and never reveal it ”. In this view, all communications are encrypted, and identities are hidden. "In a nutshell, we organize the system to mathematically impose our previous assumptions, because no government or organization can be reasonably trusted."
Since then the idea has evolved and new use cases have begun to surface. The Web3 Sound.xyz streaming service promises more favorable conditions for artists. Video games based on the blockchain, such as the Pokémon Axie Infinity emulator, allow users to earn money while they play. The so-called "stablecoins", whose value is linked to the dollar, the euro or some other external reference, were presented as tools for improving the global financial system. And cryptocurrencies have taken hold as a solution for international payments, especially for users who operate in unstable environments.
"The blockchain is a new type of computer," Dixon told me. Just as it took years to understand the extent to which PCs and smartphones have transformed the way we use technology, blockchain has had a long incubation phase. Today, he adds, "I think we could be in the golden age of Web3, with all the entrepreneurs joining it." Although the focus of attention was mostly on the insane transaction prices, as in the case of the Beeple sale, the story is more complex. "The vast majority of the operations I see are much more modest and focused on specific communities," he notes - as is the case with Sound.xyz. While the number of users was a critical indicator of success for a Web2 company, user engagement is a more reliable indicator of what success on the Web3 might represent.
Dixon is betting heavily on this future. He and a16z began investing in the new business in 2013 and last year invested $ 2.2 billion in Web3 companies. The number of developers working on coding Web3 nearly doubled in 2021, to nearly 18,000 - not a staggering number globally, but still considerable. But the most important notation is that Web3 projects have become part of the spirit of the times, and the suggestion is undeniable.
But as high-profile self-immolating startups like Theranos and WeWork remind us, public interest isn't everything. But what will happen now? And what should you pay attention to?
What the Web Could Mean 3
Web3 will have some fundamental differences from Web2: users will not need separate logins for all the sites they visit, but will instead use a centralized identity (probably the encrypted document holder) that contains all their information. They will have more control over the sites they visit, because they will earn or buy "tokens" that will allow them to vote on decisions or unlock features.
It is still unclear whether the product will truly live up to expectations. The predictions on what the Web3 might look like once fully operational are just conjectures, but some projects have reached respectable dimensions. The Bored Ape Yacht Club (BAYC), NBA Top Shot and cryptogaming giant Dapper Labs have built successful communities around NFTs. Clearing houses such as Coinbase (for buying, selling and storing cryptocurrencies) and OpenSea (the largest digital marketplace for crypto collectibles and NFTs) have created Web3 access ramps for people who do not have sufficient technical know-how. .
While companies like Microsoft, Overstock and PayPal have been accepting cryptocurrencies for years, NFTs - which have recently become very popular - are the primary means by which brands are experimenting with the Web3. In practical terms, NFT is somewhere in between a certificate of ownership, a certificate of authenticity and a membership card. It can confer “ownership” of digital artwork (usually ownership is registered on the blockchain and a link leads to an image located somewhere) or access rights to a particular group. NFTs can operate on a smaller scale than coins because they create their own ecosystems and require nothing more than a community of people who appreciate the project. For example, baseball cards are only valuable to some collectors, but they believe truly in their value.
The most successful forays of traditional Web3 businesses are those that create communities or connect with pre-existing communities. Consider the NBA: Top Shot was one of the first NFT projects fielded by a traditional brand, and it gave fans the opportunity to buy and sell video clips, called "moments" (for example, a LeBron James dunk), that work as virtual stickers. It was successful because it created a new kind of community for basketball fans, many of whom already collected player cards. Other prominent brands, such as Nike, Adidas and Under Armor, have added a digital layer to their existing collector communities. All three companies offer NFTs that can be used in the digital world - and allow the owner to create an avatar, for example - or give access to limited edition products or special real-world sales. Adidas sold NFT for $ 23 million in less than a day and instantly created a secondary market on OpenSea, just as it might happen after a limited sale of new basketball shoes. Similarly, the magazine Time launched an NFT project to build an online community around its long and prestigious history.
Bored Ape Yacht Club is the most brilliant case of popularization of an NFT project. By combining advertising and exclusivity, BAYC gives access to real parties and online events, as well as granting rights to use the monkey image - for the benefit of the brand. A monkey's NFT gets its owner into an exclusive club, both figuratively and literally.
A lesson we can learn from these efforts is that ramps do matter, but become less important in the face of more community involvement. Getting a crypto wallet isn't difficult, but it's an additional step. Therefore Top Shot does not require it - users can simply enter credit card information - which has helped it to acquire users unfamiliar with NFTs. The Bored Ape Yacht Club used to be a niche business, but when it took off it served as a catalyst for the creation of wallets and the further development of OpenSea.
Some companies have had more complex experiences with NFT projects and crypto features. For example, when Jason Citron, the CEO of Discord, a voice, video and text communication service, hinted at the idea of introducing a feature that can connect the app to crypto wallets, users mutinied, forcing it to declare that the company "had no plans underway" to launch that innovation. Underwear brand Me Undies and the UK section of the World Wildlife Fund quickly ditched NFT projects after the uprising of customers and members, enraged by the environmental impact. Successful cases have also encountered serious difficulties. Nike is fighting a legal battle to have unauthorized NFTs “destroyed”, and OpenSea has to contend with a large number of imitators. Since the blockchain is immutable, this characteristic raises new legal questions and it is not clear how companies will manage the problem. Also, lately, the NFT market has stalled completely.
Companies that are considering entering this area should remember that the Web3 is polarizing and that there are no guarantees whatsoever. Among the many controversial aspects, the most important is the contrast between those who believe in what could being the Web3 and the critics who denounce its many current limitations.
The allegations to the Web3
The beginnings of a technology are always full of promise. The possibilities are endless, and viewers' attention is focused on what it can do - or what will make, according to optimists. I'm old enough to remember when it was said that the totally open dialogue allowed by Twitter and Facebook would spread democracy around the world. As Web3's aura of inevitability (and profitability) continues to attract new entrants, we need to take into account what could go wrong and take note of what goes already crooked.
Speculation abounds. Skeptics claim that for all the rhetoric about democratization, property rights and building enormous wealth for all, Web 3 is nothing but a giant speculative economy destined to make some of today's rich even richer. It is easy to see how this argument is justified. The first 0.01% of Bitcoin owners owns 27% of the total supply. Cases have been reported of wash trading, or selling assets to oneself, and market manipulation in both cryptocurrencies and NFTs, mechanisms that artificially increase value and allow owners to earn digital coins with bogus operations. In an interview broadcast on the podcast The Dig, reporters Edward Ongweso Jr. and Jacob Silverman have described the whole system as an elaborate upward shift of wealth. On The Atlantic, investor Rex Woodbury called Web3 "the financialization of everything" (and not in a good way). On a more analytical level, Molly White, a computer engineer, created the site Web3 Is Going Just Great, where he denounces the malfeasance that rages in the world of the Web3, highlighting the pitfalls of this contemporary Far West.
The unpredictable and speculative nature of markets may be a permanent feature, not a bug in the system. According to technologist David Rosenthal, cryptocurrency speculation is the engine that powers the Web3 - which could not work in its absence. «A permissionless blockchain he needs of a cryptocurrency to work and this cryptocurrency he needs of speculation in order to work, "he said in a speech at Stanford in early 2022. In essence, he describes a pyramid scheme: blockchains must give something to people in exchange for their voluntary contribution to computer processing and cryptocurrencies are the reward - but the system only works if others are willing to buy them in the belief that they will be worth more in the future. Stephen Diehl, a technologist and sworn enemy of the Web, has elegantly dismissed blockchain as' a static mechanism whose only application is the creation of censorship-resistant cryptocurrency investment schemes, an invention whose negative externalities and potential harmfulness far exceed all possible uses ».
It is an impractical technology (e expensive). Many are wondering if the Web3 - or more generally the blockchain - can truly be the technology that will define the next era of the Internet. "Even if you share the philosophy and economic logic behind it, cryptocurrencies are a heralded disaster in terms of software architecture," said Grady Booch, chief scientist for software engineering at IBM Research. Technology always involves trade-offs, Booch explained in a conversation on Twitter Spaces, and the cost of a trustless system is its inherent inefficiency, which allows it to process only a limited number of transactions per minute - very little data. compared to those that are able to process a centralized system such as, say, Amazon Web Services. Decentralization makes technology more complicated and further unapproachable, rather than simpler and more accessible, for inexperienced users.
Even if the problem can be solved by adding new layers that can speed up the processes, in this way the whole system is made more centralized, defeating its purpose. Moxie Marlinspike, founder of the encrypted messaging app Signal, puts it this way: "When a distributed ecosystem is centralized for convenience around a platform, it combines the worst of both worlds: control is centralized, but the system it is still distributed enough to remain stuck in time ».
Right now, the inefficiency of the blockchain has a cost that is far from negligible. Transaction costs on Bitcoin and Ethereum (which they call gas fees) can range from ten to a few hundred dollars. Storing a megabyte of data on a blockchain's distributed ledger can cost thousands, or even tens of thousands, of dollars - yes, you read that right. That's why the NFT you bought probably doesn't actually fit on a blockchain. The code that designates your property includes an address, which is that of the virtual place where the image is located. This can cause, and has actually caused, problems, including the disappearance of your expensive purchase if the server it is on actually it stops working.
Allows harassment and abuse. The possibility of unintended disastrous consequences is very real. "While blockchain advocates speak of a 'future of the web' based on public records, anonymity and immutability," writes Molly White, "those who have been harassed online are horrified, because obvious tools of harassment and abuse are overlooked. , if not presented as positive characteristics ". Although crypto wallets theoretically ensure anonymity, the fact that transactions are public implies that they can be traced back to individuals. (The FBI is very good at this, which explains why encrypted operations don't lend themselves well to criminal activity.) "Imagine what would happen if, when you pay half of the restaurant bill to a friend you met on Tinder with Venmo, the others could see all the other transactions you have made before", with other suitors, with the psychotherapist and with the grocer under the house. In the hands of a former abusive partner or stalker, that information could endanger your life.
The immutability of the blockchain also implies that data cannot be destroyed. There is no way to delete anything from a deplorable post to revenge porn. Immutability could also create major problems for the Web3 in some parts of the world, such as Europe, where the General Data Protection Regulation (GDPR) ensures the right to erase personal data.
It is currently very harmful to the environment. The environmental impact of Web3 is very heavy and extremely damaging. It can be divided into two categories: energy use and technological waste, both products of mining. Setting up a network that depends on supercomputers competing with each other for the solution of complex equations, whenever you want to save data on a blockchain, consumes an enormous amount of energy. It also generates electronic waste: according to Rosenthal, bitcoin produces «on average the electronic waste of an entire MacBook Air for each“ economically significant ”transaction», because miners use large amounts of hardware. The research on which this claim, conducted by Alex de Vries and Christin Stoll, shows that the electronic waste created annually by Bitcoin is equivalent to that produced by a country the size of Holland.
It is difficult to predict if and how these problems will be solved, not least because it is not yet clear if the Web3 will really catch on. Blockchain is a technology looking for real use, says tech expert Evgeny Morozov. "The business model of almost all the commercial initiatives that are based on the Web3 is extremely self-referential and is nourished by the faith of the people in the inevitable transition from Web 2.0 to Web3". Tim O'Reilly, who coined the term "Web 2.0" to describe the dominance of platforms in the early 2000s, says we are seeing an investment boom that closely resembles the dot.com era before the implosion. “Web 2.0 wasn't just the name of a version; it indicated the rebirth of the web after the dot.com crash, ”he says. "I don't think we could call Web3 by this name until after the end of cryptocurrencies, because only then will we be able to figure out what's left standing."
If that's true, then innovation will come at a significant cost. As Hilary Allen, a law professor at American University, observes, today the system "mirrors and amplifies the fragility of the banking innovations that produced the 2008 financial crisis." If the Web3 bubble explodes, it could leave many people plagued.
We are back to the beginnings
But where exactly is Web3 going? Ethereum co-founder Vitalik Buterin has expressed concerns about the direction his creation is taking, but continues to be optimistic. Responding to Marlinspike on Ethereum's Reddit page, he acknowledged that the Signal founder presented "a fair critique of current situation ecosystem ”, but reiterated that the decentralized web is gaining ground, and rather quickly. Soon, the work currently underway - building code libraries - will make it easier for other developers to collaborate on Web3 projects. "I think that the world of decentralized and properly authorized blockchain is now near and much closer than is commonly thought".
To begin with, proof of work - the structurally inefficient system on which Bitcoin and Ethereum are based, is going out of style. Instead of mining, which uses huge amounts of energy, validation is increasingly coming from user-members called to approve transactions. Ethereum estimates that the move to proof of stake will reduce the 99.95%'s energy use, while making the platform faster and more efficient. Solana, a new blockchain that uses the proof of stake and the "proof of history", a mechanism based on time stamping, is able to process 65,000 transactions per second (against the 15 and 7 that process today, respectively, Ethereum and Bitcoin) and uses roughly the same energy as two Google searches - a consumption that it compensates for by purchasing carbon credits.
Some companies are adopting a hybrid approach to blockchain, which offers the same benefits without carrying the limitations. "There are so many really interesting new architectures that put certain things on the blockchain but not others," Buterin told me. A social network, for example, could register your followers and the people you follow on the blockchain, but not your posts, thus giving you the possibility to delete them.
Hybrid models can also help address the constraints of the GDPR and other regulations. "To respect the right to erasure", explain Cindy Compert, Maurizio Luinetti and Bertrand Portier in a white paper published by IBM, "personal data should be isolated from the blockchain in a data store deposit outside the chain, leaving only the references exposed on the blockchain. cryptographic ". In this way, personal data can be deleted in compliance with the GDPR without damaging the chain.
For better or worse, regulation will come - slowly - and define the next chapter of the Web3. China has banned cryptocurrencies, as have Algeria, Bangladesh, Egypt, Iraq, Morocco, Oman, Qatar and Tunisia. Europe is considering environmental regulations that should restrict or ban blockchains focused on proof of work altogether. In the United States, the Biden administration issued an executive order in March requiring the federal government to prepare for regulation of cryptocurrencies.
With all these issues still under discussion, the Web3 remains a high-risk, high-earning gamble. Certain companies and certain sectors have more interest than others in trying their luck, especially those that were cut off in previous eras of the Web. It is no coincidence that a media company like Time is interested in the opportunities offered by Web3 after Web2 shatters its business model. Other organizations - such as Nike and the NBA, which have already experienced contingent sales and commoditization phases - may find that their business models integrate seamlessly into the new virtual environment. Other companies will not face such an easy choice.
The ambitious claims surrounding the Web3 - that it will conquer the Internet, overturn the financial system, redistribute wealth and make the Net democratic again - should be taken with a grain of salt. We've heard all of these things before, and we've already seen cases of Web3 euphoria ending up in a soap bubble. But that does not mean that it should already be considered finished. Maybe it will explode, maybe it will fail, but somehow it will still stay with us. The version that emerges - and how your company reacts - could determine the future of the digital economy and the life we will live online in the next Internet age. For now, that future is still within reach. Nothing, after all, is inevitable.
Thomas Stackpole is the senior editor of Harvard Business Review.
