Your guide to (what could be) the future of the internet.
What Web3 Might Mean for Companies
Web3 will have a few key differences from Web2: Users won’t need separate log-ins for every site they visit but instead will use a centralized identity (probably their crypto wallet) that carries their information.
They’ll have more control over the sites they visit, as they earn or buy tokens that allow them to vote on decisions or unlock functionality.
It’s still unclear whether the product lives up to the pitch. Predictions as to what Web3 might look like at scale are just guesses, but some projects have grown pretty big. The Bored Ape Yacht Club (BAYC), NBA Top Shot, and the cryptogaming giant Dapper Labs have built successful NFT communities. Clearinghouses such as Coinbase (for buying, selling, and storing cryptocurrency) and OpenSea (the largest digital marketplace for crypto collectibles and NFTs) have created Web3 on-ramps for people with little to no technical know-how.
While companies such as Microsoft, Overstock, and PayPal have accepted cryptocurrencies for years, NFTs — which have recently exploded in popularity — are the primary way brands are now experimenting with Web3. Practically speaking, an NFT is some mix of a deed, a certificate of authenticity, and a membership card. It can confer “ownership” of digital art (typically, ownership is recorded on the blockchain and a link points to an image somewhere) or rights or access to a group. NFTs can operate on a smaller scale than coins because they create their own ecosystems and require nothing more than a community of people who find value in the project. For example, baseball cards are valuable only to certain collectors, but that group really believes in their value.
Most successful forays by traditional companies into Web3 have been ones that create communities or plug in to existing ones. Consider the NBA: Top Shot was one of the first NFT projects from a legacy brand, and it offered fans the opportunity to buy and trade clips, called “moments” (a LeBron James dunk, for instance), that function like trading cards. It took off because it created a new kind of community space for fans, many of whom may have already been collecting basketball cards. Other front-runner brands, such as Nike, Adidas, and Under Armour, similarly added a digital layer to their existing collector communities. All three companies offer NFTs that can be used in the virtual world — for example, allowing the owner to gear up an avatar — or that confer rights to products or exclusive streetwear drops in the real world. Adidas sold $23 million worth of NFTs in less than a day and instantly created a resale market on OpenSea, just like what you might see after a limited drop of new shoes. Similarly, Time magazine launched an NFT project to build an online community that leverages the publication’s deep history.
Bored Ape Yacht Club is the biggest success story of an NFT project going mainstream. Combining hype and exclusivity, BAYC offers access to real-life parties and to online spaces, along with usage rights to the ape’s image — further reinforcing the brand. An ape NFT puts the owner in an exclusive club, both figuratively and literally.
One lesson from these efforts is that on-ramps matter, but less so the more committed the community is. Getting a crypto wallet isn’t hard, but it is an added step. So Top Shot doesn’t require a one — users can just plug in their credit card — which helped it acquire interested users new to NFTs. The Bored Ape Yacht Club was a niche interest, but when it took off, it became a catalyst for people to create wallets and drove interest in OpenSea.
Some companies have had rockier experiences with NFT projects and crytpo features. For example, when Jason Citron, the CEO of Discord, a voice, video, and text communication service, teased a feature that could connect the app to crypto wallets, Discord users mutinied, leading him to clarify that the company had “no current plans” to launch the tie-in. The underwear brand MeUndies and the UK branch of the World Wildlife Fund both quickly pulled the plug on NFT projects after a fierce backlash by customers furious about their sizable carbon footprint.
Even the success stories have hit bumps in the road. Nike is currently fighting to have unauthorized NFTs “destroyed,” and OpenSea is full of knockoffs and imitators. Given that blockchain is immutable, this is raising novel legal questions, and it isn’t clear how companies will handle the issue. Further, there’s recent evidence that the market for NFTs is stalling entirely.
Companies who are considering stepping into this space should remember this: Web3 is polarizing, and there are no guarantees. Amid many points of disagreement, the chief divide is between people who believe in what Web3 could be and critics who decry the many problems dogging it right now.
System Error: The Case Against Web3
The early days of a technology are a heady time. The possibilities are endless, and there’s a focus on what it can do — or will do, according to optimists. I’m old enough to remember when the unfettered discourse enabled by Twitter and Facebook was supposed to sow democracy
the world over. As Web3’s aura of inevitability (and profitability) wins converts, it’s important to consider what could go wrong and recognize what’s already going wrong.
It’s rife with speculation. Skeptics argue that for all the rhetoric about democratization, ownership opportunities, and mass wealth building, Web3 is nothing more than a giant speculative economy that will mostly make some already-rich people even richer. It’s easy to see why this argument makes sense. The top 0.01% of bitcoin holders own 27% of the supply. Wash trading, or selling assets to yourself, and market manipulation have been reported in both crypto and NFT markets, artificially pumping up value and allowing owners to earn coins through sham trades. In an interview on the podcast The Dig, reporters Edward Ongweso Jr. and Jacob Silverman characterized the whole system as an elaborate upward transfer of wealth. Writing in The Atlantic, investor Rex Woodbury called Web3 “the financialization of everything” (and not in a good way). On a more granular level, Molly White, a software engineer, created Web3 Is Going Just Great, where she tracks the many hacks, scams, and implosions in the Web3 world, underscoring the pitfalls of the unregulated, Wild West territory.
The unpredictable, speculative nature of the markets may be a feature, not a bug. According to technologist David Rosenthal, speculation on cryptocurrencies is the engine that drives Web3 — that it can’t work without it. “[A] permissionless blockchain requires a cryptocurrency to function, and this cryptocurrency requires speculation to function,” he said in a talk at Stanford in early 2022. Basically, he’s describing a pyramid scheme: Blockchains need to give people something in exchange for volunteering computing power, and cryptocurrencies fill that role — but the system works only if other people are willing to buy them believing that they’ll be worth more in the future. Stephen Diehl, a technologist and vocal critic of Web3, floridly dismissed blockchain as “a one-trick pony whose only application is creating censorship- resistant crypto investment schemes, an invention whose negative externalities and capacity for harm vastly outweigh any possible uses.”
The tech isn’t practical (and it’s expensive). Questions abound as to whether Web3 — or blockchain, really — makes sense as the technology that will define the web’s next era. “Whether or not you agree with the philosophy/economics behind cryptocurrencies, they are — simply put — a software architecture disaster in the making,” says Grady Booch, chief scientist for software engineering at IBM Research. All technology comes with trade-offs, Booch explained in a Twitter Spaces conversation, and the cost of a “trustless” system is that it’s highly inefficient, capable of processing only a few transactions per minute— tiny amounts of data compared with a centralized system like, say, Amazon Web Services. Decentralization makes technology more complicated and further out of reach for basic users, rather than simpler and more accessible.
While it’s possible to fix this by adding new layers that can speed things up, doing so makes the whole system more centralized, which defeats the purpose. Moxie Marlinspike, founder of the encrypted messaging app Signal, put it this way: “Once a distributed ecosystem centralizes around a platform for convenience, it becomes the worst of both worlds: centralized control, but still distributed enough to become mired in time.”
Right now, the inefficiency of blockchain comes at a cost, quite literally. Transaction costs on Bitcoin and Ethereum (which calls them gas fees) can run anywhere from a few bucks to hundreds of dollars. Storing one megabyte of data on a blockchain distributed ledger can cost thousands, or even tens of thousands, of dollars — yes, you read that correctly.
That’s why the NFT you bought probably isn’t actually on a blockchain. The code on the chain indicating your ownership includes an address, pointing to where the image is stored. Which can and has caused problems, including your pricy purchase disappearing if the server it actually lives on goes down.
It enables harassment and abuse. The potential for disastrous unintended consequences is very real. “While blockchain proponents speak about a ‘future of the web’ based around public ledgers, anonymity, and immutability,” writes Molly White, “those of us who have been harassed online look on in horror as obvious vectors for harassment and abuse are overlooked, if not outright touted as features.” Although crypto wallets theoretically provide anonymity, the fact that transactions are public means that they can be traced back to individuals. (The FBI is pretty good at doing this, which is why crypto isn’t great for criminal enterprise.) “Imagine if, when you Venmo-ed your Tinder date for your half of the meal, they could now see every other transaction you’d ever made,” including with other dates, your therapist, and the corner store by your house. That information in the hands of an abusive ex-partner or a stalker could be life-threatening.
The immutability of the blockchain also means that data can’t be taken down. There’s no way to erase anything, whether it’s a regrettable post or revenge porn. Immutability also could spell major problems for Web3 in some places, such as Europe, where the General Data Protection Regulation (GDPR) enshrines the right to have personal data erased.
It’s currently terrible for the environment. Web3’s environmental impact is vast and deeply damaging. It can be broken into two categories: energy use and tech waste, both of which are products of mining. Running a network that depends on supercomputers
competing to solve complex equations every time you want to save data on a blockchain takes a tremendous amount of energy. It also generates e-waste: According to Rosenthal, Bitcoin produces “an average of one whole MacBook Air of e-waste per ‘economically meaningful’ transaction” as miners cycle through quantities of short-lived computer hardware. The research he bases this claim on, by Alex de Vries and Christian Stoll, found that the annual e-waste created by Bitcoin is comparable to the amount produced by a country the size of the Netherlands.
Whether and how these issues will be addressed is hard to say, in part because it’s still unclear whether Web3 will really catch on. Blockchain is a technology in search of a real use, says technology writer Evgeny Morozov. “The business model of most Web3 ventures is self-referential in the extreme, feeding off people’s faith in the inevitable transition from Web 2.0 to Web3.” Tim O’Reilly, who coined “Web 2.0” to describe the platform web of the early 2000s, claims that we’re in an investment boom reminiscent of the dot-com era before the bottom fell out. “Web 2.0 was not a version number, it was the second coming of the web after the dot-com bust,” he says. “I don’t think we’re going to be able to call Web3 ‘Web3’ until after the crypto bust. Because only then will we get to see what’s stuck around.”
If that’s true, then innovation is going to come at significant cost. As Hilary Allen, an American University law professor who studies the 2008 financial crisis, points out, the system now “mirrors and magnifies the fragilities of shadow banking innovations that resulted in the 2008 financial crisis.” If the Web3 bubble bursts, it could leave a lot of folks high and dry.
Early Days Are Here Again
So, where exactly is Web3 headed? Ethereum cofounder Vitalik Buterin has expressed concerns about the direction his creation has taken but continues to be optimistic. In a response to Marlinspike on the Ethereum Reddit page, he conceded that the Signal founder presented “a correct criticism of the current state of the ecosystem” but maintained that the decentralized web is catching up, and pretty quickly at that. The work being done now — creating libraries of code — will soon make it easier for other developers to start working on Web3 projects. “I think the properly authenticated decentralized blockchain world is coming and is much closer to being here than many people think.”
For one, proof of work — the inefficient-by-design system Bitcoin and Ethereum run on — is falling out of vogue. Instead of mining, which uses intensive amounts of energy, validation increasingly comes from users buying in (owning a stake) to approve transactions. Ethereum estimates that the update to proof of stake will cut its energy usage by 99.95%, while making the platform faster and more efficient. Solana, a newer blockchain that uses proof of stake and “proof of history,” a mechanism that relies on time stamps, can process 65,000 transactions per second (compared with Ethereum’s current rate of about 15 per second and Bitcoin’s seven) and uses about as much energy as two Google searches — consumption it buys carbon offsets for.
Some companies are adopting a hybrid approach to blockchain, which offers the benefits without the constraints. “There are a lot of really interesting new architectures, which put certain things on the blockchain but not others,” he tells me. A social network, for instance,
could record your followers and who you follow on the blockchain, but not your posts, giving you the option to delete them.
Hybrid models can also help companies address GDPR and other regulations. “To comply with the right to erasure,” explain Cindy Compert, Maurizio Luinetti, and Bertrand Portier in an IBM white paper, “personal data should be kept private from the blockchain in an ‘off-chain’ data store, with only its evidence (cryptographic hash) exposed to the chain.” That way, personal data can be deleted in keeping with GDPR without affecting the chain.
For better or worse, regulation is coming — slowly — and it will define the next chapter of Web3. China has banned cryptocurrencies outright, along with Algeria, Bangladesh, Egypt, Iraq, Morocco, Oman, Qatar, and Tunisia. Europe is considering environmental regulations that would curb or ban proof-of-work blockchains. In the U.S., the Biden administration issued an executive order in March directing the federal government to look into regulating cryptocurrencies.
With so much of Web3 still being hashed out, it remains a high-risk, high-reward bet. Certain companies and sectors have more incentive than others to try their luck, particularly those that got burned by being left out in earlier eras of the web. It’s not a coincidence that a media company like Time is interested in the opportunities of Web3 after Web2 decimated its business model. Other organizations — like Nike and the NBA, which already have experience with limited drops and commoditization moments — may have simply found that their business models are an easy fit. Other businesses won’t have as clear a path.
The soaring claims around Web3 — that it will take over the internet, upend the financial system, redistribute wealth, and make the web democratic again — should be taken with a grain of salt. We’ve heard all this before, and we’ve seen how earlier episodes of Web3 euphoria fizzled. But that doesn’t mean it should be written off entirely. Maybe it booms, maybe it busts, but we’ll be living with some form of it either way. What version — and how your company responds — could determine the future of the digital economy and what life online looks like for the next internet epoch. For now, that future is still up for grabs. Nothing, after all, is inevitable.