When designing a custom software solution, one of the most important…
What Is Web3
Imagine you decide to purchase something on a platform, like buying a set of ads for your business on Instagram or paying for an upgrade to your favorite online game. Then, all of a sudden, the platform decides to delete your account. As a result, the value of the items you acquired on the platform have been lost along with your deleted account. This example points out some of the issues with the way the current web works. Platforms have a lot of power and ownership over a user’s data – bringing to light a question: is there a way users can maintain ownership of their digital assets aside from a platform? Enter web3.
Before the development of the web as we know it was web1. Web1 began around 1990 and lasted until around 2004. Read-only, static websites were the hallmark characteristics of the first iteration of the web. The next and current iteration of the web, web2, brought users the ability to not just read a website but contribute to it. With web2, users can now bring value to a platform by creating content, giving rise to social media giants like Facebook, Twitter, and YouTube. Web2 bred a centralized system where a handful of companies have large control over the web, leaving those who use the platforms with little say in how companies should run and manage their business. In the current system, users lack true ownership of their data and are unable to realize rewards from using a platform.
Ownership is a key differentiator of web3. With web3, users would be able to read, write, and own. For example, in the scenario presented at the beginning of this post, with web2 a user could lose the value associated with a purchased digital item if a platform decided to delete the user’s account. The concept of web3 would allow the user to maintain ownership of the purchased digital asset independent of the platform it was purchased on. This can be accomplished through technologies like blockchain and NFTs (Non-Fungible Tokens). While the goal of web3 is to enable users’ ownership over their own data, the details of exactly how this will be achieved are still in the working stages. Time will reveal how exactly web3 technologies like blockchain and NFTs will be best implemented and add the most value to businesses and their customers. As web3 continues to be ironed out, we can assess some of the potential upsides, downsides, and implications of a future with web3.
Pros of Web3
A user’s ability to maintain ownership over their digital assets calls for a decentralized web. Rather than a user’s data being stored in a centralized location, it can be distributed across nodes in a network. Each node contains an identical copy of the data which can then be compared against each other to validate whether or not a single node is corrupted. Blockchains are a key facilitator of decentralization. Blocks, each representing a group of transactions or some piece of information, can be verified across the nodes of a network. Once verified, the block can be added to the existing list of blocks (a blockchain) on each node. Other than adding new blocks, the blockchain is to remain unaltered. This allows any changes in a chain’s history to reveal corrupted data when compared to another node’s chain.
To Trust or Not to Trust
Decentralization in web3 enables a trustless system. Currently, we often rely on a trusted third party to verify that both entities in an interaction can be trusted. With decentralization, if every node has the same copy of data, any change or alteration to a node’s data signals to others that the changed node is untrustworthy. With a trustless system, DeFi, or decentralized finance, has emerged. Instead of involving third parties, such as banks, encrypted transactions can happen directly between two entities verified using blockchain technology. As a result, service fees normally encountered by third parties can be eliminated.
Web3 brings to light another interesting ability. Users could have the ability to own not just their data, but a whole platform through DAOs. DAOs are Decentralized Autonomous Organizations that rely on smart contracts to enforce agreed-upon terms. A user can acquire tokens, representing the ability for that user to vote on how a platform’s resources should be spent. This is similar to the idea of having shares in a company. When users come to an agreement, the smart contract contains code that is automatically executed to carry out the decided-upon agreement.
With today’s web, users are left to manage more profiles than we can probably count on our fingers. One idea behind web3 is for users to have a digital wallet that would be their one profile to use across various interactions on the web. This wallet would contain all the user’s assets and identity. Currently, wallets are being used to perform transactions on the blockchain. A public and private key are associated with the wallet. The public key is like an address where requests for transactions are sent. Only the person with the private key can authorize the transactions received.
Given the blockchain is to remain unchanged, transparency becomes another useful characteristic of this web3 technology. Provided the blockchain is implemented properly to allow for transparency, the history of a holding or transaction can be assessed using the public key associated with the transaction. This can help further establish trust in how an entity is managing its resources.
Additionally, one problem often cited with AI is people’s lack of trust in the data used to train the AI. In theory, a blockchain’s data – since it is immutable and transparent – could be used to train an AI. Then, AI users can take comfort in knowing what kind of information is driving the AI’s behaviors. Check out this post about a new AI chat bot that is making waves in the AI world.
Another potential use case could be state-issued money. If the blockchain contained a record of all state-issued transactions, individuals could better understand exactly how government money is being spent by reviewing the transactions. With transparency, individuals can have more confidence in the elected government putting assets into areas the officials claimed they would support.
Cons of Web3
On one hand, web3 technologies can eliminate the middle man in many transactions. However, this does not mean we are completely free of fees that come along with transactions. Instead of service fees, blockchain transactions have their own type of fee – sometimes referred to as a gas fee. This fee is necessary to incentivize miners (a powerful computer) to dedicate computational energy towards confirming transactions and adding a transaction to the blockchain.
While blockchain enables a decentralized, trustless web3, there are several drawbacks to the technology. For one, as the number of network nodes increases, the security of the blockchain increases, which is desirable. However, as the number of network nodes increases, the performance of the blockchain decreases. There are now more nodes to cross-verify with for a block to be added to the chain.
Another drawback is the energy usage required to mine and complete a transaction. The energy usage is largely determined by a blockchain’s consensus mechanism: the method used to determine whether network nodes agree. The Bitcoin blockchain utilizes the proof of work consensus mechanism. According to research conducted by the White House Office of Science and Technology Policy, global Bitcoin requires about as much energy as the country of Argentina. In order for the blockchain to be more widely used, the energy consumption for proof of work consensus mechanisms will have to be addressed. Proof of stake is one example of a different consensus mechanism with the ability to greatly reduce energy consumption.
The ability to own your data and control how it is used is a benefit of web3; however, it now becomes the user’s responsibility to manage that data and ensure its security. For example, wallets are used to make transactions through the blockchain. This wallet contains a good deal of important information about a user’s identity and also holds all their digital assets. It is the user’s job to protect the private key authorizing transactions with their wallet. In the current system, an individual may have several accounts where money is stored (credit card, savings account, investment account), hopefully, each using a different strong password. Someone with malicious intentions would have to obtain multiple passwords in order to acquire access to an individual’s full breadth of assets. On the other hand, if the goal of the wallet is to centralize assets into one place, under one profile, the private key becomes the key to all a user’s assets.
Issues Left to Solve
As noted before, web3 is still being defined. There is still much work to be done to figure out how to best implement web3 technologies into daily interactions with the web for businesses and their customers. One specific issue has come to light regarding the immutability of the blockchain. In Europe, the General Data Protection Regulation (GDPR) defines how personal data can be collected and used. Under this regulation, individuals are given the “right to be forgotten” in Article 17 of the GDPR. As a result, users can request an entity to delete his or her personal data it possesses. If you remember from before, one of the key features enabling the blockchain transparency was its immutability. However, what if I decide as a user I no longer want my transaction history to be present on the blockchain? Do I still have the right to be forgotten? Few regulations have been defined in regard to web3 and there are more scenarios like the one presented here that are yet to come to light.
Recent Discoveries in Web3
NFTs, or non-fungible tokens, have been big recently as businesses have recognized a way to monetize digital products. An NFT is kind of like a unique, one-of-a-kind, baseball card, except it is digital. Digital art, news articles, tweets, and video clips have all been sold as an NFT. Lately, there has been a downturn in the volume of NFTs being sold; however, there have been some more mainstream companies entering the web3 space and unveiling their own NFTs for sale. For example, Starbucks recently revealed a new experience for customers, called Starbucks Odyssey. Members can earn or buy NFTs that will unlock access to a variety of benefits and immersive experiences. While some companies like Starbucks are incorporating NFTs into their business model, some companies have taken a harder stance against NFTs, like Minecraft. In a July blog post from Minecraft, the company claimed NFTs were not inclusive and misaligned with the community values. As a result, there appears to be some division as to whether to make use of NFTs or not. The metaverse is one future technology that plans to make use of NFTs in a big way.
Metaverse is another technology continuing to gain interest. The metaverse is a virtual world where users can learn, play games, and interact. Web3 technologies, like blockchain, would ideally be used to construct the metaverse, facilitating a decentralized virtual world. Additionally, NFTs could be used to acquire digital assets for avatars. AR (Augmented Reality) and VR (Virtual Reality) are other technologies that could be utilized to connect users with the metaverse. Check out how Zirous is getting involved in the AR space. In a report constructed by McKinsey & Company, corporations, venture capitalists, and private equities invested more than $120 billion in the metaverse within the first five months of 2022. Compared to the $57 billion invested throughout 2021, this is a significant increase. McKinsey & Company notes 5 metaverse use cases companies are already beginning to implement: marketing campaigns, employee learning, metaverse meetings, events and conferences, and product design. With the value of the metaverse estimated to reach about $5 trillion by 2030 (according to McKinsey), it is clear that the metaverse is gaining further interest. Further discovery will reveal the full value the metaverse can bring.
Will Web3 Impact the Future?
There has been a lot of hype around web3 and its technologies, but as these technologies continue to develop and evolve, we can’t help but wonder, is it all just hype? Will web3 actually be useful in the future? Does it bring any value to everyday businesses?
Emerging Technologies for 2022
According to the Gartner 2022 Hype Cycle for Emerging Technologies, an emerging theme for technology is the evolution and expansion of immersive technologies. Giving users more control over their data is one way this theme aims to expand immersive experiences. Specifically, technologies like decentralized identity, distributed ledgers, digital wallets, NFTs, the metaverse, and web3 are all expected to play a future role in immersive technology. Moreover, Gartner places web3 close to the “peak of inflated expectations” on their hype cycle, and web3 is expected to reach the “plateau of productivity” in 5 to 10 years. Based on this projection, there are still 5 to 10 years before the true real-world use cases of web3 are clearly defined and have been adopted by many businesses.
Blockchain and Web3 2022 Outlook
More specifically, Gartner has a 2022 hype cycle focusing on web3 technologies. The hype cycle identifies cryptocurrencies and blockchain wallets as two categories that will reach the “plateau of productivity” within less than 2 years. Decentralized applications, DeFi, and smart contracts are all expected to reach the “plateau of productivity” within 2 to 5 years. In general, Gartner notes that true use cases are yet to emerge for web3. In order to take the place of the current web system, web3 needs real use cases that will greatly improve daily life over what that already exists. There have been some improvements in this with enterprise applications involving blockchain technologies finding use in fields like aircraft maintenance and food safety. Despite some successful uses, there are still very few regulations for web3, leaving some areas of the web3 landscape to seem risky. With some regulations, some risks could be mitigated as a more standardized approach for web3 technologies is enforced.
How will web3 impact my business?
Overall, based on Gartner’s projections, it seems likely web3 and its associated technologies will play some role in the future. The Gartner estimates show that most of the web3 technologies will reach full benefit realization within the next 10 years. While it is unclear what web3 technologies will be largely adopted and present real-business value, here are several ideas to consider on how web3 may impact your business:
- Ownership over own data may yield enhanced customer trust
- New ways of conducting financial transactions online
- Third-party interactions could be eliminated
- Learning curve associated with understanding new web3 technologies, like blockchain
- Need for change management and continuity plans
- How to properly adopt web3 strategies?
- How to safeguard data in a blockchain environment?
- New ways of monetizing a platform
- Pay users for sharing personal information or viewing advertisements
- NFT games and commerce
- Ensuring adopted web3 strategies meet imposed regulations
And the list of potential implications could go on. At this point, given the lack of clarity to best realize value from web3 technologies and the limited regulations in place, adoption of web3 technologies could be risky. As the hype around web3 subsides and the focus shifts to extracting real business value from web3 technologies, it will be important for businesses to stay up to date with where web3 is headed. While web3 is currently not something being implemented for Zirous clients, Zirous aims to stay on top of the latest trends, including web3, in order to provide the most cutting edge, best-in-class solutions to our clients. In the coming years, we can expect to develop a further understanding of how our clients may benefit from the adoption of web3 technologies.