web3 primer

February 2022

Web3 is here. This is a short primer to lay out what it means and where we’re going. The power of web3 comes down to openness (blockchains) and ownership (digital property rights). These two elements combined, web3 fundamentally rearchitects how money and power get distributed online.

The internet has been through a few epochs since Tim Berners-Lee created the world wide web in 1990. Web1 started as a greenfield space full of open source communities. In web2, platforms built walled gardens and turned the internet into a zero-sum game.

Web3 blends elements of both: openness and decentralisation with great products.

History lesson

Web1 ran from around 1990 to 2005. Open and decentralised protocols were the game in town. This was the foundation of the internet. HTTP (loads web pages using hypertext links), SMTP (email), and TCP/IP (moving data between networks). Nobody owns the protocols. They were bottom-up community-driven. Products built on top were basic and skeuomorphic (credit Chris Dixon) as people replicated items from the analogue world (like newspapers) online. The internet was “read-only” - static web pages with text and images. Passive consumption was the default.

Circa 2005, web2 started. This was a “read-write” internet built with siloed, centralised products. Users could interact with each other and share content they created. New enterprises packaged together networks with a smooth user experience. In the last few years, the internet has consolidated around a cluster of tech giants, which capture the lion’s share of the value.

Web3 is a counterrevolution that takes power from centralised clusters and pushes it out to the fringes again. There’s a lot that’s powerful about web3, but it has two core engines: openness and ownership. Everything else is downstream of these two forces.

Open blockchains = trustless + permissionless x composable

Openness is rooted in blockchains. Here, we mean openness in a general sense: transparency and accessibility. Crypto blockchains take the code and data that up until now has sat behind walled garden web2 platforms and embed it on a decentralised network, underpinned by protocols (rule books). In web2, product code and data are monopolised by corporations. Access is controlled via APIs that they can revoke at any time. Web3 brings them into the open for everyone.

Open blockchains create a trustless and permissionless internet and release the power of composability. Blockchains are trustless because the rules of the network are written into code (rather than being adjudicated by a fallible human) for everyone to see and they’re immutable - meaning they can’t be changed (except per the protocol). This creates a “credibly neutral” base layer where users and builders can be confident investing their time and energy. As Chris Dixon says: web2 was defined by “don’t be evil,” but web3 “can’t be evil.” Blockchains are accessible to everyone and can be permissionlessly built on. Because the base layer is neutral, the decentralised applications on top also enjoy autonomy as they run automatically on smart contracts.

Open code makes web3 applications and tokens completely composable. Composability means assembling software components like building blocks. Combining them generates more value than the sum of their parts. The magic of composable software is that each problem only has to be solved once (Naval). Products can get built more efficiently and innovation is juiced. This creates an integrated and symbiotic ecosystem where applications piggyback and build on top of each other. Everyone gains.

So, the trustless and permissionless structure of blockchains incentivises developers to build applications on top and users to create and spend time in those applications. Then, composability augments this by fuelling continuous innovation.

Digital property rights = owned, not borrowed, internet

Property rights online are the precondition to a more equitable internet. Property rights are enshrined in the physical world, and we know the benefits. But they’ve been deficient on the internet until now. 

Packy describes web3 as “an internet owned by the builders and users, orchestrated with tokens.” The internet becomes “read-write-own.”

Tokens are the web3 unlock because they enable digital property rights. Ethereum was the real genesis of tokens. They’re the “asset layer” on the Ethereum blockchain. Before tokens, domain names were the only fully “ownable” asset on the internet. Everything else is rented (hat tip Li Jin). 

Digital property rights shift the balance of power from platforms to users and builders. In web3, we’ll see a more reciprocal relationship between both sides, rather than the one-way extraction of web2. Users will enjoy more leverage and a fairer share of the economics from their output.

Chris Dixon sets this out beautifully. À la Ben Thompson’s Aggregation Theory, web2 platforms (“aggregators”) focus on “owning demand,” then forcing creators (supply) to commoditise and modularise on the aggregator’s terms. They start out delivering a good user experience to win the initial demand and cooperate with supply partners (including content creators and developers) to get network effects going. But once they’ve reached the top of the “s-curve” and growth from adoption plateaus, they shift to extracting more from their users to squeeze out greater monetisation (data and algorithm manipulation to keep users beholden to the platform) and competing with supply.

Hence, the classic quip about web2: “if you’re not paying for it, you’re the product being sold.” With web2, the site of accountability and value accrual is externalised: shareholders. Shareholders want more profits which leads to more extraction.

In web3, users are owners, and first and foremost they want a better user experience (“network health”), which, in turn, will produce higher profits.

Web2 platforms own user data and content. This leaves users at the mercy of platforms - at risk of being exploited or booted off any time.

With web3, users own their data and content in digital wallets (secured with a private key) and can permit selective access to whoever they want. In web3, platforms go from owning everything to just providing the infrastructure. When users own their data and content, they can migrate around the internet with minimal switching costs because they’re tied to them, not the platform (Chris Dixon, again). The interoperability of blockchains makes this possible as users have one consistent identity across the entire internet. Everything is portable. This gives users more leverage vis-a-vis platforms, which drives better user economics.

While web2 platforms have the leverage to set chunky “take rates,” web3 platforms are more inclusive because they need to incentivise users to stay. For investors, the larger markets of web3 platforms (given their user appeal) more than offsets lower take rates.

By holding tokens, users and builders can also own a stake in the platform and participate in its value creation and governance. Creators can become the biggest winners of the platform’s success. You might call it “democratisation” (cringe at using that word). Platforms benefit because tokens align users’ incentives in the same direction. Users want to grow the network and increase the value of the token they own. Skin in the game makes them product evangelists.

Like Munger says (though he’s not a crypto fan): incentives are everything. Products sell themselves on web3. Paid marketing becomes obsolete, unlike ad-addicted web2.

Closing

Web3 will revolutionise the internet as we know it - pushing money and power out to users and builders. This sea change is underpinned by open blockchains and digital property rights. There’s still a lot left to unfold. And all this talk of a new internet era shouldn’t obscure the fact that the different eras can coexist. We still have elements of web1 today and we may see some parts of web2 persist. We’re still early.

PS, I’m writing this at the beginning of my crypto/web3 journey. More to come.