By Steven Ehrlich, Forbes Staff, Director of FDA; Editor, Forbes CryptoAsset & Blockchain Advisor.
One way to think about blockchain technology is as part of an important evolution of the internet, a phase some people call Web3. Web3 is often described as a series of open-source and interconnected decentralized applications powered by blockchain computing architecture. It is not synonymous with the Metaverse, which is an equally open-source environment for virtual reality. To understand Web3, it’s important to understand its antecedents.
Web1 is used to describe the internet from roughly 1990-2004. In the 1990s and early 2000s, the internet consisted of static pages that users would casually read, or surf. It was read-only and internet users were just consumers of information. Think of companies like Yahoo or America Online that would show news, weather, sports, entertainment and financial information. It essentially put physical newspapers on a global distribution network for anyone to access.
Web2 is a name for the current state of the internet, with which users can now interact with web pages. The internet no longer just displays information, but it can change based on a reader's preferences and users can upload content onto the websites of others. Web2 transformed the internet to a read/write model from the initial read only.
Popular examples include Meta’s Facebook and Google’s GOOG -0.5% YouTube. Facebook users could interact with one another by liking or commenting on pictures and posts. On YouTube, anyone can upload their own videos. Each user’s display changes depending on their previous likes and clicks, meaning no two news feeds are the same. Though great for a custom-made browsing experience, the interactivity introduced by Web2 also created concerns over centralization, data privacy and even political polarization.
Web3 has the potential to change the nature of the internet from corporate-owned networks to controlled by users while maintaining the Web2 functionalities people love today. It can also be described as read/write/own. Users can govern these blockchain-based networks through cryptocurrency tokens. As the network grows, value can accrue to the community through the rising price of tokens.
Why We Need Web3
The transition to Web2 from Web1 made the internet dynamic and fun. It also created a new business model for internet companies. Only when that model matured did people begin to realize that it was problematic. Web2 companies like Facebook and Google offer ostensibly free services, but there is a hidden cost to privacy as they exploit user data. The companies have generated billions of dollars of advertising revenue by packaging such data for advertisers to create targeted marketing campaigns.
More than 80% of Google’s revenue comes from advertisements. By collecting information on user likes, dislikes and attention, advertisers can get their marketing material in front of the demographic most likely to consume their products or services. But data harvesting techniques are not all moral or even legal. In 2019, Facebook received a $5 billion fine from the U.S. Federal Trade Commission for user privacy violations– the largest in the agency’s history.
Web2 companies can also change their user terms and conditions at a moment’s notice or simply ban people they do not like.
The idea of curated news feeds has arguably increased political polarization and contributed to decaying mental health around the globe. Web2 companies optimize their sites to keep users engaged. In other words, they are designed to be addicting. Unfortunately, this means feeding users the type of information they are most likely to consume, including inflammatory and bombastic headlines known as clickbait. The effects of a constant influx of derisive material on mental health is now a common field of study, and frequent social media use is linked to problems of anxiety, depression and low self-esteem.
Does Web3 Fix This?
Decentralized applications (dapps) are not controlled by a single entity, but by cooperative governance structures. Decisions are not made by a CEO, manager, or a board of directors but are agreed upon by a community of token holders. Furthermore, decisions are not made behind closed doors, but in the open and are publicly documented on a blockchain.
Imagine if every potential business decision made by Facebook and Google had to be proposed to its users before adoption. Most would likely not agree with the extent of data collection, bans and derisive content feeds you see today. Conceptually, Web3 eliminates many of the Web2 issues that derive from its centralization.
Why It May Not
Though Web3 has an ethos of decentralization and privacy preservation, one can make a strong case that it is not a panacea for the drawbacks of the current internet. For one, Web3 is not as decentralized as some people think. Below is a list of initial token allocations for major public blockchains. Major protocols like Solana SOL 0.0%, Avalanche AVAX 0.0%, Celo CELO +0.2%, and Flow FLOW2 0.0% have insider allocations in excess of 40%. Though the mechanics of a dapp is more decentralized thanGoogle or Facebook, founders and venture-capital funds typically retain significant control over these networks.
Public engagement in Web3 is a lot higher than that of private companies, but the point remains. Additionally, for many public blockchain projects, the only way for founders and early investors to realize returns on their investments is to sell their tokens to the public. In that regard, one might consider Web3 as the crypto Wild West, albeit with better marketing. It still operates on largely unregulated dynamics where early entrants make huge profits by selling to later participants.
We are still in a Web2 world. The FAANG stocks of Facebook (now Meta), Apple AAPL -0.4%, Amazon AMZN +0.5%, Netflix NFLX -0.1% and Google account for 10% of the value of the U.S. stock market. Will Web3 be the disruptor that brings about the end of internet giants?
In truth, Web3 is very far away from dominating the internet. The goal of many self-designated Web3 champions is to restructure the internet from corporate-owned to user-controlled networks by taking advantage of blockchain technology. To the extent that this is happening at all, it is far more centralized than many make it out to be, and the user experience is often seen as clunky, compared with internet giants that have had decades to refine their products. Despite this, the technology now exists to restructure the internet in a way that benefits users rather than companies.