NatSpecs

Web3: Boom or Buzzword?

By Andrew Jensen on March 10, 2022

NextGen Internet series #2/3

The emergence of Web3 has come alongside an explosion of activity across social media pointing towards speculative assets, new and emerging technologies, and shifts in the way people interact on the Internet. And yet, while the term is thrown around often, the definition of Web3 is not clear.

Web3 is built on cutting-edge technologies that are not well understood or fully functional, making it difficult to conceptualize. Fundamentally, it can be understood as a new proposal for Internet structure, one that changes the way content and data are perceived, processed, and stored. Notionally, Web3 would evolve the current iteration of the Internet from its present state as a system that reads and writes data, into a tokenized economy that allows users to read, write, and execute contracts without third-party intermediaries. The purported aim of this new infrastructure is to shift power and governance away from centralized organizations to algorithms and individual stakeholders. 

In this way, Web3 has sometimes been described as an answer to the centralization and associated misuse of data and information by large technology companies. Further, some advocates have painted Web3 financial technology as a solution to move power away from financial organizations to individuals. Advocates of Web3 say that the system could remove dependence on walled-garden ecosystems that have become common among large technology and finance companies. Andreesen Horowitz, in an October 2021 policy agenda, advocated for Web3 as a solution to questions around regulation of the technology sector. 

The Acronymization of Web3 Technology

Web3 amalgamates well-known technologies like cryptocurrency, non-fungible tokens (NFTs), along with newer, more sustainable infrastructure solutions like Decentralized Finance (DeFi), Decentralized Applications (Dapps), and Decentralized Autonomous Organizations (DAOs). 

Of these technologies, cryptocurrency is perhaps the most common and well known, with Bitcoin, Ethereum, and memecoins like Dogecoin and Shiba Inu making substantial gains this year, garnering attention from celebrity voices such as Mark Cuban, Elon Musk, and Snoop Dogg. Cryptocurrencies have gained attention as being a potentially higher yield investment vehicle than traditional investment mechanisms, as well as effective alternatives to digital payment systems. Cryptocurrency holds additional appeal, as it allows users to transfer money internationally for a much lower fee than traditional international wire transfer platforms.

NFTs have also made impressive gains over the last several years and are another foundational piece of the Web3 system. NFTs are virtual objects that are stored and maintained through the blockchain, allowing verifiable ownership of that virtual object. Many NFTs have important utility functions that provide monetary value. The most high-profile sale of an NFT happened in early 2021, when Beeple sold artwork as an NFT for $69 million at an auction. Though this is certainly the most high-profile NFT sale, NFTs sales in the low millions occur regularly, especially for collections like the Cryptopunks, Bored Ape Yacht Club, and other collections. Notably, collections like these offer member-only perks like exclusive merchandise and access to community groups.

DAOs are an emerging technology, driven by cryptocurrency and blockchain, that permit individual stakeholders to participate in an organization, the rules and procedures of which are governed by algorithms. The first widely-recognized DAO, The DAO, was an investor-directed VC fund that allowed stakeholders to use staked capital to make investment decisions. Any return on investments from the fund were meant to be funneled back to individual investors. A crowdfunding campaign for The DAO raised $150 million in Ethereum, making it one of the largest crowdfunded projects of all time.

In June 2016, a hacker found a loophole in the source code of the project, allowing the criminal to drain $70 million of the available funds, and highlighting the difficulty and complexity associated with Web3 security. After consulting with The DAO, the Ethereum team decided to create a hard fork, that is to force all users to update, to pull back the stolen $70 million from the hacker. Some members of the Ethereum community said that this could be classified as a bailout, which would violate the basic tenets of blockchain technology. The DAO bailout was likely a move by the developers of Ethereum to ensure that the technology remained viable and wouldn’t push the millions of people that participated in The DAO away from Ethereum more broadly.

Current Web3 Infrastructure

Another DAO, MakerDAO, is a more recent example of the potential of DeFi and Dapp technology in the next iteration of the Internet. Introduced as the eDollar on a Reddit forum in 2016, MakerDAO’s coin, the Dai, has evolved into a substantial powerhouse in the decentralized finance world. There are 5 billion Dai in circulation, with around $8 billion locked in smart contracts according to the Maker Foundation CEO. Dai is a stablecoin cryptocurrency, meaning that the value of the token is always equal to the United States dollar. As described in the MakerDAO whitepaper, the Dai token remains relatively consistent against the US dollar by utilizing smart contracts called Collateralized Debt Positions (CDPs), which leverage Ethereum assets as collateral to generate any Dai tokens.

Through the MakerDAO system, users can take out collateralized loans through the Oasis platform, which trades the collateralized loans for Dai tokens. When the value of the Dai starts to fall, MakerDAO burns extra Dai tokens to push the value back up. Since the inception of MakerDAO in 2017, the value of the token has remained at $1, marking the DAO and token as the first sustainable DeFi and Dapp platform reaching a critical mass of users. Further, in July 2021, the MakerDAO CEO announced the full decentralization of the platform, leaving the platform in the hands of the growing community. As a successful decentralized alternative to the US dollar, the MakerDAO and Dai token are good examples of the potential that Web3 has to seriously disrupt the future of finance. As of 2021, over 400 apps and services have integrated Dai into their platform as well, allowing the DAO and token to reach even more users worldwide. 

Outside of just decentralized finance and applications, Web3 has other interesting applications, including in the gaming industry. In 2017, a small Vietnamese start-up called Sky Mavis raised $7.5 million in Series A funding for a low-cost game called Axie Infinity, a play-to-earn (P2E) game in which users battle and upgrade cartoon monsters, called Axies. The difference between Axie Infinity and other P2E games is that Axies are stored on the blockchain, and can be bought, sold, and traded for real-world currency. During the pandemic, Axie Infinity grew to include over 2 million users, moving over $30 million in daily transactions, according to a report from 2021. During the early days of COVID, illustrative phenomenon developed where a significant number of people in the Philippines started playing the game, because they could make more money through the game than working traditional jobs. In 2020, Andreesen Horowitz led the Series B funding for Sky Mavis for $152 million, valuing the company at $3 billion dollars.

Other Web3 applications that are less-utilized, but growing quickly, include dedicated web browsers, metaverse land management platforms, gaming platforms, and NFT marketplaces.

The Geopolitics of Web3

Web3 technologies will also have a significant impact on geopolitics worldwide. In 2021, the President of El Salvador pushed legislation making Bitcoin legal tender throughout the country. The next iteration of policy decisions around cryptocurrency by the South American nation include the development of a Bitcoin City that will be fully funded through bitcoin-backed bonds. It is worth noting that the most prevalent use of cryptocurrency is in countries with historically lower GDPs, like Nigeria, Vietnam, the Philippines, Turkey, and Peru. In Nigeria, nearly one-third of the population reported using or owning cryptocurrency in 2020. Cryptocurrencies also have a significant capacity for disrupting the global geopolitical landscape. Hillary Clinton, former Secretary of State, has said that cryptocurrencies have the potential to “undermine currencies, undermining the role of the dollar as the reserve currency, and destabilizing nations.” As nations with historically lower GDP continue to embrace cryptocurrencies and other Web3 technologies, they may have a balancing impact against the US dollar, threatening its role as the backbone to the global economy.

Furthermore, as the use of Web3 becomes more ubiquitous, large companies like Walmart, Meta, Twitter, and YouTube are actively exploring how to integrate the technologies, specifically cryptocurrencies and NFTs, into their applications and products. In the past several years, the NBA, Taco Bell, and Coca-Cola have all explored the use of NFTs in products and platforms.

Every day, more Web3 organizations are launched, especially around social impact topics like data privacy, climate change, and preserving historical documents. 

The market for Web3 applications and technologies is growing rapidly, especially in the Ethereum ecosystem. In 2016 there were 40,000 Ethereum addresses and 0 of those addresses interacted with decentralized protocols, according to Consensys. In 2021, there were 170 million registered Ethereum addresses with an estimated 3 million interacting with decentralized protocols according to the same report. This rapid growth highlights the increasingly critical role that Web3 technologies play in the world.

With this growth, it is also critical to understand who funds Web3 technologies. While some apps and platforms, like the DAO, are funded with individual crowdfunding campaigns, most platforms are funded by large venture funds as is the case with Sky Mavis and Axie Infinity. The largest funds behind Web3 platforms include venture firms like Andreessen Horowitz, Coinbase Ventures, Pantera, and Paradigm. This has led to some criticism, with public figures like Jack Dorsey claiming that Web3 is fully controlled by these venture funds, and that individual investors do not have a say in the development of the platforms. This has led to intense debate around whether or not Web3 is the future of the Internet.

Whether the technology is effective or not, the anonymity and decentralization offered by Web3 is attractive to individual investors and large venture funds. The world needs to prepare for a Web3 future.