Web3: The Tokenized Web

We are witnessing the emergence of a new internet era. The early web sought to make information globally accessible (see Figure 1). It allowed data to be digitally consumed but lacked sophistication. There was no way to personalize the web experience, as users were passive consumers of simple, static corporate websites. Web2 arose to fix this: companies built closed platforms on top of the early web’s open protocols that facilitated social connection, user-generated content creation, and marketplace economies. Although users can easily generate content in Web2, the lion’s share of value goes to the platform owners. Apple, for instance, charged developers a 30% fee to publish apps on its app store up until last fall¹ and YouTube takes a 45% cut of all ad revenue generated by content creators.² Moreover, there is little disagreement over Web2’s additional pain points: data breaches, misinformation, and a growing disdain for how much control companies and authoritarian governments wield over user data top the list of grievances.

Web3, the next and third iteration of the internet, is a tokenized web that aims to correct Web2’s shortcomings. Built on public blockchains, it leverages smart contracts and programmable tokens to shift monetization control from centralized intermediaries to users. It also uses blockchains’ distributed node architecture to diminish single point of failure risk, hopefully making it more resilient against data breaches and hacks. Driving Web3’s development:

Blockchains that inject state into the web, decentralizing its underlying infrastructure. Public blockchains are shared, immutable records that operate over a distributed network of hardware devices called nodes. They capture and share what computer scientists call state—all preceding events and interactions in a system—as each full node maintains an identical copy of all on-chain activity. Web2 companies such as Meta (formerly Facebook) and Apple attempted to artificially capture state by collecting user data within walled gardens because there was no other way to observe and verify everyone’s actions. Blockchains eliminate the need for such intermediaries. This means now both individuals and centralized intermediaries can be compensated for helping secure and maintain the network, either by deploying hardware devices (i.e., bitcoin mining) or contributing capital (i.e., staking crypto assets to proof-of-stake blockchains). Many Web3 companies use crypto networks to incentivize and compensate users for helping them decentralize the web’s underlying compute, storage, bandwidth, and indexing architectures. Helium, for instance, is an open wireless network that runs on the Helium blockchain. Users who deploy hotspots (which provide wireless coverage, transfer data, and power the blockchain) are compensated with Helium tokens (HNT). HNTs can be sold in secondary markets or burned as a data credit so token owners can use the wireless network.³ Likewise, Filecoin is a decentralized peer-to-peer file storage blockchain that aims to let anyone store, retrieve, and host digital information.⁴ Filecoin tokens are used as payment for services and as an economic incentive to ensure files are reliably stored over time.

Programmable tokens that redistribute value and control back to users, developers, and small firms.⁵ Token programmability means two things: First, it facilitates innovation on top of public blockchains (i.e., decentralized finance). Second, it means token holders are co-owners and operators of Web3 applications. Consider Spotify’s Web3 rival Audius. Built on the Ethereum and Solana blockchains, Audius is run by a community of AUDIO token holders, rather than a centralized entity. Audius artists earn 90% from all sales revenue and have complete distribution control. The remaining 10% of sales revenue is distributed to AUDIO token holders as compensation for maintaining the Audius blockchain.⁶ Audius isn’t alone. Braintrust, a Web3 talent network, uses its BTRST token to connect highly skilled technical freelancers with employers like Goldman Sachs, NASA, and Deloitte, while Rally enables brands and individuals (i.e., celebrities, athletes, tech influencers) to launch their own social tokens, affording new ways to grow and profit from social media followers.⁷

Decentralized Autonomous Organizations (DAOs) that coordinate community governance and value management. DAOs are internet-native, global collectives that share resources, build projects, and work together toward common goals.⁸ They are community-led smart-contract organizations that, in addition to coordinating borderless resource allocation, serve as a new way to incubate and scale ideas. Traditional corporations and non-profits maintain a vertical hierarchy: boards and senior executives determine the structure and strategy of the firm.⁹ DAOs, on the other hand, are governed by a community. The rules and governance of each DAO are coded in smart contracts on the blockchain and cannot be altered unless voted upon by the DAO’s members. Voting power is sometimes weighted according to the monetary amount the member has contributed to the resource pool. In most instances, membership is obtained by buying the DAO’s governance tokens, but in some they can also be acquired through structured finance rounds. DAOs can be used to coordinate anything from investing to the equivalent of proxy voting. And while their investing legal standing remains murky, assets under DAO management grew from $607.3 million to $9.6 billion from June 2021 to June 2022.¹⁰ Backed by Singapore-based derivatives exchange Bybit, BitDAO raised $230 million from 2,497 investors within 20 minutes of launching its MISO token.¹¹ Add to that the money it raised through its fundraising round, and its treasury manages one of the largest DAO-managed asset pools. The Friends with Benefits DAO is like Web3’s version of a think tank or country club, as interested creatives and technologists must complete a member application, join the FWB Discord server, and purchase 75 FWB tokens ($918 in June 2022) to be considered for membership. If approved, individuals receive invites to online spaces and in-real-life events such as a members-only Discord server, live-auction NFT gallery, city meetups, dinners, and afterparties.¹²

Why It Matters

Former Netscape CEO James Barksdale once said, "there’s only two ways to make money in business: one is to bundle; the other unbundle."¹³ Web2 is a bundled web that delivers tremendous power, control, and profits to platform owners. Web3 aims to unbundle Web2 and build on top of open source public blockchains that give greater control to participants, not platforms. We need to begin to prepare for this tokenized web because it:

Ushers in the ownership economy. Web2 gave rise to the creator economy. Users were no longer passive consumers of static websites, but active content creators: tagging friends on Facebook, dancing in TikTok videos, and posting reviews on the likes of Yelp, Amazon, or Airbnb. Web3 changes consumers’ roles in the web, empowering them to become co-owners of the platforms they use. Tokens can ensure secure, digital ownership rights, while blockchains facilitate decentralized value exchange. Together, this means endless aspects of the web can be decentralized, from content and application creation to the web’s underlying architecture. Web3 then, is a community-led economy for sharing value, built around secure digital ownership. It’s a place where users are equitably compensated for their contributions and offered new ways to collaborate and organize.

Rearchitects the internet’s back end. Web3 will be built on multiple, specialized blockchains that will require a mix of decentralized and centralized data storage solutions and new indexing capabilities. Blockchains are great at replicating small amounts of data across thousands of devices but are limited in the amount of data they can store on-chain. State channels, sidechains, and layer 2 solutions are all in development to either store data off-chain or compress the amount of data stored on-chain, but the fact remains that storing data on-chain is costly. It is unrealistic to think Web3 will be fully powered by individual IoT devices, or that it will run on top of one monolithic blockchain. Instead, it will run on multiple chains, with each requiring unique node compute and storage requirements, strong blockchain interoperability, and the ability to query and retrieve on-chain data and ingest off-chain data. We are already beginning to see bespoke solutions emerge to solve these problems. In Q4 2021, Google Cloud inked a multi-year partnership with Dapper Labs to help scale its Flow blockchain, a specialized chain designed to support the creation and storage of NFTs and blockchain video games.¹⁴ Additionally, Arweave, a file storage blockchain that requires users to pay a one-time upfront fee to store data in perpetuity, increased its cross-chain interoperability by allowing end users to pay for data uploads with Polygon’s MATIC token.¹⁵

Creates new opportunities for innovation. Web3 utilizes crypto networks to reimagine business models and provide new tools to develop software and manage people. It leverages the decentralized and open-sourced nature of public blockchains to shift control away from Web2’s centralized intermediaries and to Web3’s creators and builders. Will intermediaries still be needed? Of course. However, those firms who recognize users have more autonomy and choice in Web3—and create products that make it easier for users to navigate this new computing paradigm-- have the potential to become BigTech’s next dominant players. Products that leverage Web3’s inherent transparency, audibility, co-ownership, and composability are also likely to thrive. We’re beginning to see early innovative approaches. Gelato Network uses a decentralized network of bots to automate smart contract execution.¹⁶ Its most prominent use case aims to protect crypto traders from loss by automatically rebalancing their portfolios. Similarly, Tribute DAO provides a low-cost framework that guides individuals through the legal and organizational complexities of establishing a new DAO.¹⁷

Conclusion

Net/net, Web3 appears poised to usher in a more decentralized and community-oriented internet. As it develops there will emerge risks associated with extensive decentralization and unbundling. The manifestation of Web3 will not happen overnight but will, more realistically, come into play over the next two decades as policymakers clarify regulatory uncertainties related to crypto assets and decentralized finance (DeFi) and firms upgrade their infrastructure to facilitate interoperability with public blockchains.