What Is Web3 and Why Is Everyone Suddenly Talking About It?
Meet the new hype cycle about new tools for online decentralization.
Technological improvements have tended to follow a predictable pattern of initial excitement, subsequent disappointment, and eventual resurgence called a hype cycle.
First, a new technology is dreamed or introduced, and suddenly everyone can't stop talking about how it is going to change everything forever. These buzzy pronouncements inevitably fall far short of the imagined renaissance, making many write it off as a waste of time. But a core set of believers continues to build and eventually produces a solid, if not exactly miraculous, standard that does genuinely improve life somewhat. Then the new hot thing catches the eyes of the VC class and the cycle kicks off again.
Most innovations in the past decade or so—smartphones, the sharing economy, big data, machine learning, the Internet of Things, virtual reality, "blockchain technology"—has traveled more-or-less neatly along this cubic function of technology expectations.
If you've heard a lot about "web3" recently, you've been drawn into the creeping peak of a new hype cycle, this time concerning tools for online decentralization. Most of the technologies mentioned above fit into web3 in some ways. And like those now-settling past darlings of the tech boom, web3 will eventually fit into an unremarkable part of daily life.
Web3 evokes the idea of a "web 3.0" in contrast to the internet that we have today and the largely hobbyist and institutional web 1.0 (a retronym) before that. Web3 is supposed to be a truly decentralized and accessible online environment.
The first web wave was simultaneously "open" in ethos yet cloistered in practice. Although naturally limited by infrastructure access and ability—you basically had to be in academia or just a huge nerd to actively participate online—today's concerns about censorship and content controls were virtually unheard of. There were small communities of forums and bloggers and a larger mass of lurkers, but very few people actually "created content" or made a living online like we do today. Content controversies remained at a scale where communities could capably address them on their own.
Then came "web 2.0," the Facebookification of the internet, where big technology companies built tools that at the same time made the internet more accessible but also much more "legible" or controllable. Although "Big Tech" is a punching bag today, it was the rise of the humble browser that kicked off the concept of the internet as a platform on which anyone could build and extend functions into existing domains of life.
The problem was the platforms. While the foundations of the internet itself were decentralized—upheld by community consensus-driven standards like TCP/IP—the platforms that flourished upon it were not. This irony at the heart of the old new internet is by now a cliché. The 2006 Time Magazine person of the year—"you" and me—might best signify the ethos of that age. But today we are well aware that Alphabet gets to decide which of "you's" gets to stay and has to go on "You"Tube.
Enter web3. This suite of tools for enhanced online sovereignty aims to marry the openness of the early internet with the scale of big tech platforms. In general, web3 technologies employ peer-to-peer computing methods to place the individual in more control.
The "web3" meme is new, but the by now decade-old bitcoin is a good example of this spirit. The first blockchain technology removed the need for a centralized platform—like a bank—to move money around. With bitcoin, individuals can send money directly to anyone without relying on a third party, just like a cash transaction.
Web3 technologies aim to extend this functionality to all kinds of data, not just simple monetary transfer. So far, "all kinds" seems to mostly mean DeFi and NFTs.
Decentralized finance or DeFi is blockchain-based advanced finance. DeFi is usually built on smart contracting platforms like Ethereum or competitors like Solana or Binance Smart Chain, but DeFi projects like Sovryn are growing on bitcoin as well. DeFi allows people to directly trade, invest, or lend out liquidity for a yield—often much higher than what is available with traditional centralized financial vehicles—and can be managed by an internet-native governance structure called a decentralized autonomous organization (or DAO) and held together by a native token.
DeFi depends on smart contracts, which are kind of like a very fancy virtual vending machine. A smart contract is programmed to do certain things in response to certain other things, just like a vending machine is built to release certain items in response to receiving a certain amount of money. Put in the dollar bill—or in the case of a smart contract, send the token to a multisignature wallet—and the apparatus automatically does what it was built to without any human operation. Until the vending machine breaks down…or the smart contract gets hacked.
Profit-hungry definanciers use smart contracts and DAOs to lend out money and liquidity, invest in enterprises, arbitrage price movements, and yes: sometimes pull a rug pull and run away with a bunch of n00b money. There's a lot of risk, almost unheard of reward in a time of money printers going brrrr, and a good amount of Discord intrigue as "degens" conspire to pump and dump for maximum profits and minimum care of who gets burned along the way. No wonder the Biden administration is sniffing around.
NFTs, as you may be sick of hearing about, are a way to own a token that points to specific data, often a JPEG monkey. Some people will pay good money to "own" that monkey. They don't care if you save it and send it. They are the ones who own the cryptographic key, dangit!
Okay, so how do DeFi and NFTs "decentralize the internet"? That's a good question. It's true that these technologies remove the need for a trusted third party in advanced data transfers, but in practice it sounds mostly like a lot of financial speculation. Without downplaying the upside of unfettered financial opportunity (and without forgetting the commensurate perils), it's hard to see how having a MetaMask Ethereum wallet browser extension that allows me to buy an NFT in Discord without navigating to a separate credential screen is all that revolutionary. How about a persistent communications space that people actually use?
This is where it's helpful to recall the technology hype cycle. Right now, a startup can get a lot of VC interest if they call themselves a "web3 company" or an "NFT platform" or a "metaverse company," even if they are only tangentially related to the space or if they don't have a product at all.
Many of the oldest web3 projects originally marketed themselves as something much different than they are today. Take Ethereum, which was originally supposed to be a "world computer." By today it has pivoted to power DAOs and DeFi that are supposed to be decentralized also. It just so happens that a lot of the "decentralization" in the web3 world relies on a handful of very-expensive-to-run nodes hosted on Amazon Web Services and maintained by insiders. This is how hype works.
And web3 itself is a marketing term. Smart contracts, DAOs, and NFTs are years old. They just used to be called opcodes, multisignature wallets, and Crypto Kitties. Actually, some of the same people who propelled the rise of Web 2.0 with the Netscape browser are doing it again in the form of a lobbying push for web3-friendly federal laws. This is partially why this new term for a lot of old tech has so much buzz right now.
None of this means that web3 technology isn't useful or that genuinely new applications are not being developed. It's closer to the opposite: some of the flashier elements that are attracting comment and critique are overshadowing the new, real, and less glamorous improvements that decentralization technologies can bring.
Take NFTs. As easy as it is to make fun of NFT investors—and it is very easy—the core idea of an NFT is secretly very useful. Differentiated tokens can serve as a persistent decentralized identity, in contrast to the "login with Facebook" dynamic we are stuck with today.
That scowling monkey that is today merely a Twitter avatar and butt of anti-NFT jokes could theoretically be a universal login credential. There would be no need to hassle with separate logins for each website or just outsource the authentication bit to big company like Facebook or Google that would have auxiliary power over data and access. Signing a cryptographic key could be just as good as a password, and the scowling monkey could be a memorable designator for our human monkey brains. Reputation, work opportunities, and cryptocurrency payments could accrue to particular NFTs as reward for value creation, and perhaps you would want to employ different identities for different community contexts. This is already happening on the bleeding edges of active web3 communities.
Or we can take the monkey out of it altogether. Plenty of projects are attacking the problem of identity with "decentralized identities" or DIDs.
There is Microsoft's ION, which is building a DID based on bitcoin. The head of that project recently decamped to Jack Dorsey's Square to build an alternative bitcoin-based DID product. It doesn't have to be bitcoin-based. There are plenty based on the Consensys suite of Ethereum offerings, too.
Then there's Urbit, which seeks to rewrite computing to be more user-oriented across the entire stack from servers to social media. The team at dcSpark recently unveiled a decentralized identity tool called Urbit Visor, which would integrate DID functionality into the cohesive Urbit ecosystem. Anyone can go to the Chrome Store and install Urbit Visor to turn their Big Tech browser into an extension of the Urbitverse with one click.
There's lots of problems with web3 technologies and still many bugs to hammer out. The biggest issues seem to be the high fees, called "gas prices," and congestion on the Ethereum network as well as "decentralization in name only" that characterizes many smart contracting platforms. And of course, there is a lot of hype and dumb money sloshing around as you would expect to find on this part of the cycle.
But past the inevitable trough of disappointment are the seeds of a true shift in computing that can help us to be more sovereign in our internet experience. If you notice your browser suddenly offer a native cryptocurrency wallet—like the privacy-focused Brave Browser recently did with its Brave Wallet—that's web3. Amidst all of the silliness of Constitution-bidding DAOs and literal monkey business there is a quiet movement to reclaim control of the net for individual users, and that is something worth your time and attention.