It’s been in brewing for a while of course, but suddenly the term Web3 is on everyone’s lips. A radical and fresh iteration of the World Wide Web bristling with concepts like decentralisation, blockchains and token-based economics, Web3 promises a democratised future free of big tech monopoly. But if you’re a member of the C-Suite with plenty on your plate right now, you might well be asking the key question: ‘Web3, why should I care?’
Well let me skewer that straightaway. For one thing, Web3 represents a major new source of revenue. A vast, transformative, expanding source of revenue that will define a new generation of winners and losers. Digital services will flourish on Web3, and digital services are already big business. To put that in perspective, digitally-enabled services exports from the US in 2018 reached $2.9 trillion, half of total global services exports.
My intention then, is to explore the potential of Web3 through the lucrative lens of digital services innovation. In this first article, I’ll define what we mean by Web3, explain its key component parts, and table counterarguments to some of the popular criticism that it’s attracted. In a second companion piece, I’ll go on to discuss the benefits that Web3 will deliver through the new business models it creates. Essentially, I’ll be itemising several of the irresistible reasons why you should sit up and take notice of Web3 sooner rather than later.
But let’s begin with the basics. Right now, Web3 is in the vanguard of technological advances that promise to transform the human experience. From nascent research work into human-machine understanding to the scramble for real estate in the much-heralded metaverse, technology innovation is challenging us all to recalibrate conventional thinking and our approaches to business. More prosaically, I’d describe Web3 as the best so far in the web franchise.
Web3 is the real blockbuster
In the history of movie franchises, the magic is usually lost when it comes to the third in the series – I’m thinking here of Shrek3 or Pirates of the Caribbean: At World’s End. But when it comes to the internet franchise it looks like Web3 is going to be the real blockbuster. Just over a year ago I wrote about the growing rise of decentralisation to implement digital services. Since then, these ideas have come to the fore and Web3 has moved centre stage into the technology spotlight.
Actually, I’m not sure I have ever seen a new technology area that quite divides opinions quite as much. A year on, what progress has been made to the goals of Web3 decentralisation that specifically provides a new approach in digital services innovation? To help answer this, let’s be clear about the breadth of technologies that makes up Web3. Let’s acknowledge a number of concerns from some quarters and look at how they are being tackled. And lastly, let’s recognise it is still early days in the release of Web3.
In terms of a definition, Web3 is the next iteration of the internet via new networks and protocols which are: decentralised (no reliance on intermediary organisations); trustless (security is inherent, hence no need to trust others); able to provide tokenisation (digital representation and ownership of valuable data); and permissionless (allows everyone to be involved).
Where Web1 was primarily about reading data and Web2 was about reading and writing, Web3 adds the two key properties of ownership and execution. Ownership means that participants are rewarded with their interaction with Web3 through the ability to take a stake in the network. They have some say in the operation of the network – and that encourages a more democratic and equitable operation.
It is executable since the protocols that run on top of the networks provide executable (smart) contracts that allow the rules of the organisation to be captured in code. This lets business operations be autonomous and auditable, and allows the creation of Decentralised Autonomous Operations (DAOs) as an alternative to traditional companies.
Distributed ledgers and a whole lot more
The foundations of Web3 are distributed ledgers that include blockchains. But the Web3 platform is now sourced from more than 1800 individual open-source projects, each of which is an economic experiment. Some of these are large and influential such as Ethereum, some are much smaller like Lens Protocol, and some may be experiments that will fail. There are now multiple layers in the Web3 stack enabling many Decentralised Apps (DApps) that are built on the layer one and layer two protocols. An infographic of some of the selection of projects that make up Web3 is shown in Figure 1.
This number of projects speaks to the diversity of Web3 utilisation – but also highlights the complexity in making the right technology decisions and working out the right pattern of technology choices to match a particular business problem. There is clearly huge investment going into the implementation of these projects, a great deal of engineering effort and vast amount of intellectual and innovative thought in creating the projects. A lot of software engineering effort that is hard to ignore.
Let’s now turn to the criticisms of Web3. While all new technologies tend to come up against resistance to change and a reluctance to move from entrenched positions, Web3 has certainly enraged the critics more than most. At the risk of spreading negativity, but in keeping with the Web3 goal of transparency, allow me to highlight some of the key gripes.
Accusation: cryptocurrencies are Ponzi schemes
Critics argue that there is no intrinsic value in cryptocurrencies, and that they are simply Ponzi schemes that fuel money laundering.
Cryptocurrencies (decentralised finance DeFi) provide frictionless transactions and avoid unnecessary intermediaries that are not needed in modern transactions. There will likely be forms of lighter regulations for cryptocurrencies to avoid some of these risks. The exchanges that allow access to the currencies have tightened up controls with Know Your Customer (KYC) protocols. The arguments for the need for intermediaries in the financial system will carry on.
It’s still early days for marketplaces where cryptocurrencies can be used to buy digital assets. The way in which the financial institutions are responding with their own alternatives such as Central Bank Digital Currencies and backed stablecoins may be sufficient transformation. Note that up to this point I hadn’t mentioned bitcoin – I have now! DeFi is only one of the many Web3 DApp classes. Not liking DeFi does not stop you from using others.
Accusation: Web3 has unacceptably higher carbon emissions
Global warming and the need to limit carbon emissions is the number one priority for society. Current blockchains consume vast amounts of computing resource to commit transactions to the chain.
This is something very much at the forefront of engineering in the industry, and there are many tactics in place to tackle it. Bitcoin itself deploys custom ASICs to efficiently execute some of the algorithms. Key organisations have committed to the Crypto Climate Accord to ensure they only use sustainable sources of energy. Ultimately the key reason comes down to the consensus mechanism which is at the heart of the security and trust techniques used in the blockchain.
Proof of Work (PoW) is very energy intensive and used by Bitcoin and Ethereum. Ethereum is about to complete a move to Proof of Stake (PoS) which will reduce its energy consumption by 99.95% - something called the Merge. These are trade-offs captured in what is called the ‘blockchain trilemma’ which trades the three forces of decentralisation versus security versus scalability. Moving to PoS will reduce security somewhat. There will be instances (defence applications maybe) where PoW is still necessary.
The Ethereum network is probably the most important when it comes to supporting new digital services. The Merge is likely to happen this autumn and there is a further series of improvements planned, referred to as ‘surge, verge, purge and splurge’.
Accusation: Web3 is insufficiently performant
Ethereum currently supports about ten transactions per second (TPS) and bitcoin about five. These rates are not conducive for supporting modern digital services.
Again, this is part of the balance in the blockchain trilemma. Post the merger, Ethereum 2.0 should be delivering 100,000 TPS. Indeed, this challenge has sparked a lot of innovation and has spawned layer two protocols and sidechains to conduct some of the key operations away from the main network (mainnet).
These provide high performance and then commit roll-ups of the transactions at less frequent times back to the mainnet to maintain transaction integrity. This is done, as per the trilemma, at the price of low security. Some new protocols such as the NEAR protocol are adopting sharding, proof of stake into a layer one protocol to provide more secure and energy efficient technologies. Just a sign of the constant evolution of approaches in this emerging world of Web3.
Accusation: Web3 is never truly decentralised
Decentralisation is often quoted as the primary goal but there seems to be lots of contradictions in how Web3 is currently implemented. For example, key digital wallets are provided and operated by centralised organisations.
This criticism is probably the hardest to refute since true decentralisation would result in a trade off with end user convenience. If all aspects of Web3 system relied on things being conducted at the network edge it would push many responsibilities into the hands of users. They would neither have the skill or the inclination to conduct the actions in return for the incremental improvement in data ownership and control. Decentralisation is a target that helps avoid the extreme centralised control we have ended up with the FANGS (Facebook, Amazon, Netflix and Google) of Web2.
As my colleague Ivan Petrov described in his article, analysis of the use case can help determine when a truly decentralised system is warranted. In most cases a semi-decentralised approach will suffice. In retrospect organisations that have found themselves operating key parts of the Web3 infrastructure – and hence potentially operating in a centralised mode – may reimagine themselves as DAOs to decentralise some of the control.
Rather than see these criticisms as barriers we at Cambridge Consultants see these as innovation opportunities. After all, at the beginning of the Web2 epoch the application and engineering of the Web2 solutions was not all resolved – in most cases they were just crude technology ideas that would be constantly improved with the constant evolution of Web2 based digital services. The ideals of Web3 are positive and this feeds nicely into the proverb that ‘necessity is the mother of invention’. The drive to solve the Web3 concerns will bring more innovation. Email me if you’d like to continue this conversation – and do please catch my follow-up Web3 article when you have a moment.