In recent months, crypto and Web3 have been difficult to escape. From the iconic Staples Center being renamed the Crypto.com Arena to crypto ads reaching record volumes on the London Underground, crypto mania is a global phenomenon.
Web3 crypto promises to revolutionize the world, but is it really the future? Not everyone agrees.
What Is Web3?
Web3 is an attempt to create a decentralized internet, empowering users by taking control away from large organizations such as Facebook, Amazon and Google and instead using multi-location, trustless platforms. Many Web3 projects use blockchain technology and cryptocurrencies.
Forbes contributor Bernard Marr explained the Web3-crypto link, saying, "A good example of a Web3 trustless transaction would be sending Bitcoin directly to another person, not via an online exchange or a wallet stored on a centralized server."
Web3 isn't just about transactions, however. Traditional platforms, including social media sites, are being replicated in Web3.
One example of this is Twetch, a Twitter-like app powered by Bitcoin SV. Posting to the site requires microtransactions, but users get paid a small amount of BSV for each interaction their posts receive. Content is permanently recorded on the BSV blockchain.
Web3 vs. Web2
A major driver for the development of Web3 is the increasing centralization of Web2.
According to G2 in 2021, the 10 best-selling hosting companies controlled 24% of the web hosting market.
Allie Fitzgibbon, writing for the University of London, claimed, “Google handles more than 40,000 searches every second — that's more than 1.2 trillion searches a year.”
She also added that Facebook’s active users have topped one-third of the global population, coming in a 2.74 billion.
The dominance of a few major tech companies has attracted the interest of the US government, which set up a committee to investigate competition in digital markets.
According to the committee's report, "The online platforms investigated by the Subcommittee — Amazon, Apple, Facebook and Google — also play an important role in our economy and society as the underlying infrastructure for the exchange of communications, information and goods and services. As of September 2020, the combined valuation of these platforms is more than $5 trillion — more than a third of the value of the S&P 100."
Web3 developers aim to offer an alternative to the "big four" digital companies, giving users new platforms where they're in control of their own data.
Web3 Crypto Projects — What Makes Something Web3?
The definition of Web3 is nebulous. To some, anything that's decentralized counts. To others, Web3 means something that includes blockchain.
Some common categories of Web3 projects include:
Decentralized platforms, such as Diaspora, Mastodon and PeerTube, aim to replace centralized providers like Facebook, Twitter and YouTube. These platforms don't run on a blockchain and don't use tokens to monetize themselves, but still fit some definitions.
However, as Columbia University researchers Ethan Zuckerman and Chand Rajendra-Nicolucci explained, "Decentralized platforms face significant challenges to their widespread adoption. Mainly, addressing their usability difficulties and overcoming the massive network effects of centralized platforms.”
Zuckerman and Rajendra-Nicolucci don’t know if decentralized platforms can rise up to meet these challenges. Instead, they believe the key to widespread adoption will require integration with existing platforms.
Another necessity, according to the researchers? Government intervention that forces current social platforms to enact open standards or share their APIs.
“Ironically,” they said, “it seems like for the decentralized movement to succeed, it may need to partner with the governments it once hoped to transcend."
Decentralized Autonomous Organizations
DAOs, or Decentralized Autonomous Organizations, form the cornerstone of many blockchain and Web3 projects.
The Ethereum Foundation gives the following definition of DAOs: "Think of them like an internet-native business that's collectively owned and managed by its members. They have built-in treasuries that no one has the authority to access without the approval of the group. Decisions are governed by proposals and voting to ensure everyone in the organization has a voice."
The decentralized nature of DAOs is their key selling point. A CEO can’t spend money on a whim, a sketchy CFO can’t cook the books. Everything is transparent, and, claimed the Foundation, “the rules around spending are baked into the DAO via its code."
Two examples of DAOs that run on the Ethereum Blockchain are MakerDAO and MolochDAO.
MakerDAO is a community that governs the Maker Protocol, which generates a digital currency called Dai. Users can then spend Dai on games, Decentralized Finance (DeFi) tools and more.
MolochDAO is a platform that issues funding for other Ethereum-based projects. Those with voting rights in the DAO can vote on proposals from developers and decide which projects to issue grants to.
DeFi, or Decentralized Finance, describes anything from DEX (Decentralized Exchange) projects to peer-to-peer lending platforms powered by blockchain.
Finance reporter Taylor Locke explained, "Through DeFi lending, users can lend out a cryptocurrency like a traditional bank does with fiat currency and earn interest as a lender. Borrowing and lending are the most common use cases for DeFi applications, but there are also many more increasingly complex actions, such as becoming a liquidity provider to a decentralized exchange."
The initial appeal of DeFi was that it offered banking-like services to people who were unable to access traditional financial services. However, as tax regulations evolve, it's unclear whether DeFi will remain appealing in the western world.
For example, the UK's HMRC recently ruled that if a person stakes tokens on a DeFi platform, giving the platform use of the tokens for lending, it could be treated as a disposal for tax purposes.
Other countries are also reevaluating their treatment of tax on cryptocurrency. India's Finance Minister Nirmala Sitharaman recently announced a 30% tax on crypto assets. In her post-budget speech, she stated, "Taxing does not automatically bring legitimacy."
Web3 Crypto Projects to Watch
In addition to the financial applications of cryptocurrency, there are some developers working on other ways to harness the power of decentralization. Some interesting Web3 crypto projects to pay attention to include:
The FileCoin network combines with the IPFS decentralized file storage protocol to provide a Web3 storage network for data.
Storage providers are rewarded for storing files in FileCoin, while clients purchase the service to store data in a decentralized cloud environment.
The Render network is similar to FileCoin, except instead of paying for storage, users can purchase GPU power.
Render gives developers, academics and businesses access to distributed graphics rendering power, offering up state-of-the-art rendering systems on demand.
One of the biggest issues with blockchain is the "oracle problem." Blockchains themselves are isolated and can't pull data from external sources or communicate with them. ChainLink acts as a bridge, allowing blockchains to use data from external sources in their smart contracts.
Will Web3 Really Change the World?
Cryptocurrency enthusiasts believe Web3 will change the world by decentralizing the internet. However, there are many skeptics who believe technology alone is not the solution to the web’s current issues.
Founder of Cantab Capital Partners, Dr. Ewan Kirk, explained, "The Web3 hype is just another reminder of how short-term the tech industry’s memory is. As someone that was mining bitcoins as far back as 2012, it’s clear that Web3 is just a new spin on the same blockchain tech that we’ve been discussing for the last decade."
Blockchain is designed to be decentralized and immutable. This means it's difficult to scale, and information can't be updated, corrected or removed.
Dr. Kirk claimed users can avoid the challenges of a distributed public ledger, saying, "You could, of course, have a private blockchain. But then, what’s the point? You might as well have a private SQL database."
Much of the current interest in Web3 focuses on monetizing interactions on the web. However, that interest is driven by venture capitalists, not user demand.
Developer and Tech Lead for Oyo Japan, Oskar Lindgren, described blockchain and Web3 as "a solution in search of a problem."
Lindgren predicted that the current hype will soon come to an end, adding, "When investors realize blockchain and cryptocurrency will not reach the anticipated market adoption, we will see a meltdown in investments in companies working on blockchain technology and the hype over blockchain will be over.”