What the hell is Web3 anyway?

Altcoins

Web3 — or Web 3.0 as crypto boomers like to call it — is a topical buzzword with only a very vague definition. Everyone agrees it has something to do with a blockchain-based evolution of the internet but, beyond that, what is it really?

Yet, the conversation surrounding the meaning and prospects for Web3 has become very fashionable in crypto communities. The term gets thrown about by big corporates trying to muscle in on the space while avoiding the negative connotations of “crypto.”

But, without an agreed-on definition, it can’t be properly evaluated.

Crypto influencer Cobie is among those deriding Web3‘s lack of specifics:

“Despite the deluge of undistinguished think pieces issued by the dominie of the day, nobody really agrees on what Web3 even is. Depending on which tribe you belong to, Web3 is a scam, Web3 is the future, Web3 is tokenizing the world, Web3 is VC exit liquidity, Web3 is just another name for crypto, you get the idea.”

He adds: “Even the crypto community can’t make their mind up on whether Bitcoin is Web3.”

Like many important terms in crypto, a key early crypto thinker coined the phrase and the community has had a few years to figure out what it means. There’s been a lot of reverse engineering driven by diverse ideologies and commercial realities.

What‘s becoming clearer is that Web3 is not just one simple idea. It is a series of ideas. It was arguably first coined in a blog post from Ethereum co-founder Gavin Wood in 2014. According to him, Web3 could foreseeably bypass the geopolitical data boundaries and his definition included “trustless transactions” as part of its tech stack. Wood went on to create the Web3 Foundation and the Polkadot network, which trades on being a Web3 alternative future.

The 2013 Etheruem white paper had earlier given devotees a chance to imagine what a DAO, for example, might look like.

Web3 is now peppered with various concepts: sovereign digital identity, censorship-free data storage, data divided by multiple servers and other ideas requiring an exegesis of Biblical proportions such as decentralized autonomous organizations. These various concepts and ideas interlace discussions about the “Web3” movement and its viability.

One thread links these concepts and Cobie’s starting definition of Web3. Web3 should include the “decentralization of power” and the “ownership of value” of one’s own content and data.

Like many, though, he’s cynical about the prospects of a utopian future coming to pass, noting that he wouldn’t be “surprised if crypto founders are too rich to care anymore and the new web gets built by late-stage capitalism greedcorps that make you buy a fractionalized micropayment NFT on Cardano to operate your electric toothbrush.”

Highly critical

The concept of Web3 has numerous critics who argue that it isn‘t practical or achievable. Critics like Moxie Marlinspike (creator of sslstrip and Signal/TextSecure) can never see a day where people run their own servers, as might be imagined by Web3. Protocols are much harder to create than platforms, he argued, in a much-commented upon piece in early January.

While that may be true, some projects like file storage protocol IPFS split data between servers and allow users to select which jurisdictions to share their data between.

Yet, complete decentralization is a hard problem to solve. Blogger suhaza replying to Moxie noted:

“People don’t want to run their own servers… companies have emerged that sell API access to an Ethereum node they run as a service… Almost all DApps use either Infura or Alchemy in order to interact with the blockchain. In fact, even when you connect a wallet like MetaMask to a DApp and the DApp interacts with the blockchain via your wallet, MetaMask is just making calls to Infura!”

So, here are the questions that need to be answered: What is Web3? Is it viable? Will it really be that decentralized?

Web3 history is driven by the disappointment of Web2

This is a story all about how the Internet got flipped-turned upside down…

First, there was the vision. Free for content creation and accessible by everyone. It was popularized by decentralized open-source believers including the internet’s inventor Tim Berners-Lee.

And, then there was the reality: data trade-offs for content creation and accessible for a price.

Web1 was like a huge Wikipedia page married to a massive Craig’s List. No ads, no logins and a private carve-up of its web pages. Web 2 is the current era of algorithmic targeted advertising and usually free usage in exchange for signing away your privacy and data.

Centralized by large corporates, our data is savaged by those giants. The internet is also fragmented by geopolitical walls such as the Great Firewall of China and their obtuse data localization rules.

Berners-Lee is desperately disappointed with how the internet has turned out and, so, a decentralized Web3 reflects Berners-Lee’s original vision: “No permission is needed from a central authority to post anything… there is no central controlling node and, so, no single point of failure.” He now runs Solid, his own Web3 data storage play.

So, Web3 begins with data privacy and decentralized servers.

Web3 starts with decentralized data storage

Decentralized storage of data is a key component of the emerging Web3 tech stack. In Web2, companies control closed databases. Large conglomerates including Facebook, Google and the other usual suspects go to massive lengths to hoard, control and monetize the data they collect. Web3 seeks to shift that.

Even by 2019, Web3 was being built at breakneck speed. (Source: https://multicoin.capital/2019/12/13/the-web3-stack-2019-edition/)

According to Gartner, five companies currently control 80% of the global cloud infrastructure market: Amazon, Google, Microsoft, Alibaba and Huawei. Web3 seeks to disrupt this status quo.

Decentralization means augmenting those power structures by giving participants partial direct ownership of the network. In Web3, users own their data on open encrypted networks. There are many projects in this space.

Censorship-resistant P2P data file storage and data sharing applications like Filecoin and IPFS have led the charge. A common characteristic for Web3 storage providers such as Filecoin is that data is replicated in multiple nodes across the network.

Yet, the emerging tech stack and ideology still leave many unresolved questions.

Empowering users to control their own data

Ryan Kris, chief operating officer of Verida, which is building in this space, described his “Web3 vision” to Magazine as “empowering people to control their own data.”

Verida’s target audience is Software Development Kits (SDKs) that solve problems in the Web3 stack: identity, messaging, personal storage and data interoperability.

An ambitious suite of applications? “Yes, but it’s a frontier technology,” he says, “without walled gardens.” Pragmatically, they are not only targeting crypto clients and are currently building a credentialing system for decentralized health in Bermuda.

But, how will Web3 bring us a fairer internet by enabling the individual to be a sovereign? Kris, who has a decades-long background in telecoms, finance, cyber security and blockchain consulting, acknowledges that it is a tough ask:

“There are also some good business questions as part of the viability of Web3,” he says. “How can personal data locked in centralized platforms be taken back by users? How are startups incentivized to build the products and tools to enable this transition? How are existing second- or third-tier Web2 companies incentivized to pivot to a Web3 business model so they can compete with existing market leaders?”

Kris notes there are regulatory and practical issues too with the new technologies:

“On storage, IPFS is great for sharing public data in a redundant and distributed manner, but it isn’t designed for securing private personal data. It is distributed in a way that users can’t own control. This introduces regulatory issues when data can not be guaranteed to be stored in a particular country.”

There are also various levels of decentralization in each project. If DApps use centralized storage, they are no longer considered “Web3” companies by the diehards. But, fully decentralized tech is extremely difficult to build.

More like Web2.5?

Some argue that what we‘re actually building at present is Web2.5, referring to businesses that are crypto-native but not fully decentralized in operation. This distinction is important. For example, the NFT itself might live on a blockchain but then there are centralized repositories of data connected to it such as OpenSea. If the server went down, valuable data could be lost.

OpenSea is the most high-profile platform for NFT sales, but it is “not exactly community-led,” notes Apollo Capital crypto analyst David Angliss. In 2021, OpenSea also took in major VC investing and made a failed Nasdaq IPO attempt, much to the chagrin of crypto folk.

This is where the Web2.5 definition is emerging.

“Web3 is not a segment in crypto. Web3 can be anything that uses a blockchain for censorship resistance, including NFTs and DeFi gaming platforms,” Angliss tells Magazine.

“Web3 will enable users to be sovereign over their data and identity. This does not exist in the Web2 digital landscape.”

“Web2 is similar to feudalism, as in walled-off ecosystems, governed by a select few. For example, an honest user-owned (the account name) “Meta” on Instagram, Facebook then rebranded and then had to make up a reason for suspending that innocent user’s long-term account. Web3 can stop that from happening again. In Ethereum’s name service, if I bought ‘Ethereum.ens,’ there’s no way Ethereum can take that off me.”

Angliss cites OpenSea as an example of a Web2.5 business. Being too decentralized, as in fully-censorship resistant, can be commercially unpalatable for a large business like OpenSea. For example, OpenSea “facilitates buying and selling of NFTs. But, in instances, it also disabled the sale of stolen Bored Apes.”

Web3 (or perhaps Web2.5, depending on what is being referred to) has been described as just another way to privatize the internet.

“Just because it exists in the crypto ecosystem doesn’t make it Web3,” says Angliss. The big danger is that we could just see centralized closed ecosystems rather than a burgeoning Web3.

Community-led platforms that are more decentralized than OpenSea are emerging including LooksRare and OpenDAO. LooksRare has even been conducting a “vampire attack” on OpenSea (stealing users away with greater incentives) which means a Web3 competitor to the Web2.5 NFT king could find favor.

The introduction of a token allows more options for these new NFT platforms in how they want to build customer loyalty. For example, OpenSea charges a fee, none of which is directed back to the community. LooksRare charges a similar fee (2% for every swap) on every basic sale, with LOOKS token stakers earning 100% of those trading fees.

So, maybe Web3’s time is coming?

Whose data is it anyway?

Sustained criticisms over the extent of decentralization in Web3 platforms may mean we‘re just too early. New business models and spaces like the Metaverse and play-to-earn games mean users want to own and house their in-game assets and NFTs on decentralized platforms. This is where Web3-native start-ups like Arweave, Sia and Aleph.im offer a different approach.

Web3 being truly decentralized requires the creation of new off-chain models that side-wipe cloud computing and Web2.5 definitions.

According to the 2021 Messari Report: “Arweave and Sia emerged this year as formidable competitors.” They seek to protect the risk of an NFT being lost because part of the data on a centralized server was hacked.

Another Web3 cloud competitor, Aleph.im, seeks to replace the cloud computing layer with an alternative service network. It’s a decentralized computing network supporting multiple blockchains by communicating with them through a messaging protocol to retrieve and encrypt important data.

Johnathan Schemoul, founder of Aleph.im explains to Magazine that: “the solutions that the Aleph.im network provides are a truly decentralized alternative where it’s needed the most: storage and computing. Blockchains are not designed to address large storage volumes or high-performance computing, as they typically focus on consensus and security.”

That means that large volumes of data are often stored off-chain, increasing the data storage risk for centralized databases like OpenSea.

Aleph.im enables users to rely on both blockchains as well as off-chain decentralized cloud technologies to provide true ownership of digital assets.

“To build a robust decentralized web, we need to extend the decentralization beyond layer 0 and 1 where consensus and security is handled. The growth of the Aleph.im ecosystem is proving that Web3 can be decentralized and we’re committed to continue this effort.”

Aleph.im raised $10 million in mid-January 2022, and its network is used by gaming company Ubisoft for its NFT storage, for example. This is the first time a mass consumer gaming studio has given this level of decentralized ownership to users.

Importantly, it also suggests Web3 could succeed as a B2B model, even if the average consumer doesn’t care about “decentralization.” Crypto trends often start with gaming.

Aleph.im is a middleware blockchain agnostic play. (Source: Image: https://aleph.im/#/)

Will tokenomics help Web3 adoption?

Consumer adoption of Web3 is a different realm. All of this attention on decentralization may not be something the average user cares about. The question of our time remains: How much do people value privacy over convenience? Can tokenomics overcome the privacy versus convenience conundrum?

Jonathan Hooker, managing director at Holon Global Investments suggests to Magazine that human internet behaviors will change. He starts his Web3 explanation by asking: “Do you own Bitcoin? How does owning and controlling your own self-sovereign wealth make you feel?” And, then:

“What if told you could own and control your own data like you control your Bitcoin?”

“The business model must find the thing that is important to that person,” he says. “Is that person suspicious of the government or placing their own health records on centralized systems they don’t control?”

“How important is it for that person to have those medical records at a critical time anywhere in the world? Filecoin and IPFS can solve these data concerns.”

Competition for NFT storage will be important for Web3 adoption. Filecoin launched its NFT.Storage in April 2021, also providing free off-chain storage of NFT metadata and assets.

One of the most significant implications of denationalization and blockchain technology is in the area of data ownership and compensation for lending, staking or using that data. This is the ground-breaking claim of Web3. Web3 provides value to users through tokenization and by enabling complex integrations with smart contracts.

Tokenomics can provide an “Internet of value over just the internet,” says Hooker.

Yet, as many simply sign into Web2 apps through a Facebook API without thinking twice, we have to question how much tokenomics can truly change human behavior. The big players, the Googles, Baidus, Tencents and the Facebooks (and its parent company Meta) all already own our data. Is it too late to get it back?

Maybe not. “Data is like fruit, at the beginning it is fresh but it decays over time,” he says. “Big tech’s data on us will have a shelf-life.”

Kris, the Web3 founder, agrees with Hooker that “privacy is not the issue, value for data is the issue.” People accept that they will lose their data privacy, so they might as well tokenize it. People give up their data readily, why not get paid for it?

“Personalized data offering is valuable in a personalization context,” he says. “I’ll sell my social media data but I won’t sell my health data, for example.”

Key management is a problem for both Web3 purists and mass consumer adoption

Others dispute this optimism about data tokenomics. Aaron Levie, founder of cloud computing company Box, while noting its great potential, questioned the viability of Web3 models in a Tweet thread:

“Why? Because data nearly always works in the context of an app. Twitter social graph, YouTube channels, Spotify playlists, Airbnb listings, Shopify stores: these develop over *years* within the context of a product and APIs that moved quickly to build value and trust over time.”

Levie argues further that tokenomics may make things more difficult. “With Web3 ideals, we’ve likely added community governance and tokenomics into the mix, which adds a new negotiation vector.”

This is the ease of adoption problem: “These are hard problems about human coordination, not about software or blockchains.” Many will choose a Facebook API for ease of use. It’s the business model and UX/UI experience that is crucial.

For example, there’s a common meme about the ease of logging to Web3 by the crypto faithful that is quite misleading. It goes something like: In Web1 there were usernames and passwords. In Web 2, you could sign in through a Google, Facebook or Twitter API and in Web3 you just connect your wallet. Sign in to MetaMask and pay with Ethereum, for example.

But, in truth, Levie is right. This meme ignores the stress of key management for blockchains. Even seasoned crypto folk have a heart attack every now and again, let alone the newbies.

Kris, the start-up founder argues that: “Web3 needs a better UX, public-key cryptography is a different way to login, it needs to be improved. What does key recovery look like for a user?”

And, at this stage, any possible solution is most likely not 100% decentralized. So, there’s room for improvement in Web3 key management. “The second someone loses control of their keys, it’s no longer Web3,” says Angliss.

So, fully decentralized key management remains a major problem for Web3 purists. Add this task to the too-hard basket for now.

Private key meme. (Source: https://memegenerator.net/instance/62834627/yoda-a-private-key-you-have-mhm)

Is 2022 the year of Web3?

Web3 needs to solve various problems first before it will be embraced by the mainstream. Importantly, it needs to be better and cheaper — or have other significant advantages — over Web2.5.

Scalability without sacrificing decentralization protocols remains a clear goal for Web3. But, decentralization is hard and centralized services are more user-friendly in many ways.

Ethereum co-founder Vitalik Buterin himself stated recently this is why (centralized) Binance to Binance transactions trump Ethereum payments in some places because they don’t have to be verified 12 times to be processed.

Referring to very high Etheruem gas fees, he went on to say: “I do think a lot of people care about decentralization, but they’re not going to take decentralization if decentralization costs $8 per transaction.”

“In order for blockchains to able to actually be something that people are going to adopt for mainstream applications, it has to be cheap… not by the standards of whales who bought crypto in 2014, but it has to cheap for the people who enter the system today.”

For now, it seems that Web3 is still an aspirational concept held hostage by the crossover between scalability, tokenomics, mainstream adoption and the diehard Web3 believers in decentralization.

Like much of crypto history.

But, watch this space.

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