The idea of Web3 is to create software and platforms that do not depend on traditional companies.
New Delhi: If you follow the world of cryptocurrency even casually, you know that it produces a steady supply of jargon. There are NFT, dapp, DeFi, and tokenomics, just to name a few. Brace yourself for a new one: Web3. The idea is that crypto is not just for sending money or speculating, but can be used to build a whole new web. If the believers are right, this is a piece of crypto that is worth familiarizing yourself with, even if you never touch Bitcoin.
Of course, the software behind the Internet is constantly changing. What makes Web3 different — and more than a little weird — is that it would build financial assets, in the form of tokens, into the inner workings of almost everything you do online. And by doing so, the drivers say it could replace corporations with decentralized, Internet-based organizations governed by software protocols and the votes of token holders. “It’s the first real consumer penetration” for crypto, said Jeff Dorman, chief investment officer of crypto fund Arca. “Over time, every business became an Internet company. I think it will happen here in digital assets.”
Skeptics – and there are many – say this stuff is far from proving its use outside of niche applications, many of which are tools aimed at crypto traders. It could also be an attempt to circumvent regulations, at a time when policymakers are gearing up to adopt clearer rules for crypto. In short, Web3 is an intoxicating mix of creative new projects, techno-utopianism and financial engineering. Here’s a beginner’s guide to what you need to know.
Why is it called Web3? What were web 1 and 2 again?
The term Web 1.0 generally describes everything from the earliest interconnection of computer networks in the 1970s and 80s to the first boom of browsers and websites in the 1990s. In the next phase, Web 2.0, companies built applications, from social media to search engines to wikis, based largely on user-generated content. While that made much of the web decentralized in a sense, most things still run through large corporations. The idea of Web3 is to create software and platforms that do not rely on traditional businesses and Web 2.0 business models such as advertising. For example, users can pay for services directly with tokens. In an ideal world, Web3 services should be managed, owned and enhanced by user communities. (Why it’s Web3 and not Web 3.0, mostly write it on changes in how developers talk online.)
What does this have to do with crypto?
Bitcoin, the original cryptocurrency, works by having a public database called a blockchain that records every transaction. It is decentralized because this ledger is not maintained by one company, but by a huge network of computers all connected to the internet, whose operators are rewarded for the work with the chance to earn more Bitcoin. But you can do more with a blockchain than record digital coin transfers. You can use it to create contracts and determine how software and apps work.
Web3 applications are often based on a technology called Ethereum, which, like Bitcoin, rewards the users who help maintain the network. The coin is called Ether, which has a total market value of $511 billion. The apps themselves can also have associated tokens, which not only pay for services but also act like voting shares that determine the development of the apps and even the fee structure. At least in the beginning, a big part of the incentive for this activity is often the chance of appreciation in the price of the token. It can rise as more users join the community, but of course it can also be blown up by speculation. There is a lot of that in crypto.
Why am I hearing more about this?
The speculative boom is a big part of it, but it’s also people starting to see the technology in real life. As Bitcoin and other cryptocurrencies rally earlier this year, venture capitalists put billions of dollars into building and improving distributed apps, or dapps. Many dapp teams also received distributions of coins, which increased in value, sparking more interest. “We are at a turning point that will lead to an even faster pace of innovation and growth in Web3,” said Ali Yahya, a crypto general partner at venture capital firm Andreessen Horowitz. (Bloomberg LP, owner of Bloomberg Businessweek, has invested with Andreessen Horowitz.)
Tracker DappRadar lists more than 8,700 active dapps. They contain many crypto trading platforms and games. Sometimes the line between them is blurred: Many games involve winning and trading non-replaceable tokens, or NFTs, which are virtual characters or collectibles that can earn sky-high prizes.
Working over a distributed network can be inconvenient, but the user experience keeps getting better. “It’s still early days, but it’s been transformed in the past six months,” said Jonathan Dotan, founder and director of the Starling Lab, a nonprofit research organization that grew out of Stanford and the Shoah Foundation at the University of Southern. California working to use cryptography and decentralized networks to help preserve and verify documents, including sensitive historical data. One of the group’s projects is to upload more than 55,000 video testimonials from genocide survivors to Filecoin, a distributed network where more than 3,500 providers around the world store files on their computers in exchange for FIL tokens. The Starling Lab can now pour three times more data into Filecoin per day than at the beginning of the year, Dotan says.
In October, Dish Network Corp. along with startup Helium Inc. for 5G wireless connectivity. Hotspot providers are paid in the token HNT for providing coverage. “People are starting to realize that this is a whole new opportunity reminiscent of Airbnb or Uber,” said Helium Chief Executive Officer Amir Haleem. The City of San Jose is setting up 20 Helium hotspots to earn HNT tokens to help cover internet access for some low-income residents.
The engineers at Twitter Inc. working on Bluesky, a decentralized version of social media. Gaming company Ubisoft announced on December 7 that it will let players get NFT collectibles such as vehicles for their characters in one game. In other words, decentralized apps will face a lot of competition from traditional web players. “The biggest battle here is with the big tech companies,” said Aaron Brown, a crypto investor writing for Bloomberg Opinion. “The financial incentive of these companies is actually to hijack Web3” with Web3-like versions of their apps.
Do I care if apps are decentralized?
“Centralization is helpful,” Brown says. Web3 is probably “a place for niche groups. People who develop new ideas.” The goal of many such ventures is to become a DAO or decentralized autonomous organization, basically thousands of users controlling a project through chat groups and their tokens. “I think DAOs today will be as ubiquitous as corporations, clubs, nonprofits, and various types of ‘official’ organizations,” said Maria Shen, partner at venture capital firm Electric Capital.
What are the disadvantages?
While Web3 is often described in terms of idealistic co-ops, decentralization can also be a cover for business as usual with less responsibility. Regulators are concerned about some projects, especially Decentralized Finance or DeFi, apps that allow people to borrow, borrow and trade coins, often without verifying users’ identities or conducting money laundering checks. Many developer teams claim that they are not responsible because they have handed over control to their users. “What are these dirty little secrets that nobody talks about?” said Avivah Litan, an analyst specializing in blockchain at researcher Gartner Inc. “Right now, DeFi is run by centralized companies. But the difference is that you can’t stop the protocols. You can arrest the people, the supervisors can put them in jail, but you can’t stop the protocols.”
There are environmental concerns about the sheer amount of computing power some blockchains require, although newer systems may facilitate that. And with much of the code created over nighttime hours, there are a lot of software bugs and malicious hacking attacks. Many projects don’t even list contact numbers, although they can maintain online chat groups. If you accidentally type a mistake and send money to the wrong account, it could be lost forever. You cannot solve the problem as you would by calling a bank’s customer service.
Many Web3 businesses have few paying customers, but can take advantage of the appreciation of the underlying token, leaving them vulnerable to a wild market. Take Piknik & Co., which employs about 30 people and operates two data centers that support Filecoin. It makes money by generating FIL tokens, which have nearly doubled in value this year. But they are down 82% since the April peak. CEO Kevin Huynh says he has customers in pilot programs that will eventually start paying him. He took a big gamble on Web3. He trained as a surgeon before diving into Piknik, liquidating his 401(k) and collecting small contributions from about 70 relatives and friends to get started. “I think it’s going somewhere,” he says.
