Web3 is a hot topic that deserves attention. There is a huge debate in the technical fraternity about the pros and cons of web3. The right to data privacy and misuse of data by big tech has created a flux of interest in researchers, technologists, and activists to build solutions around safeguarding users. In this blog, I will explain Web3 as a technology, and the pain points it is trying to solve. Explain the concept of centralization and why centralization happens in the first place. It is really important to understand centralization as it explains the core problems with Web3’s decentralized networks. Also, I will present two main reasons which will limit the adoption of Web3. Finally, I will conclude and list the reasons why my readers should focus on this essay.
What is Web 3.0?
When the internet was designed in the 1960s, during the cold war era, by connecting computers in a network the goal was to survive a nuclear attack while preserving the information. This was achieved by building a network of computers around the country that could not be wiped out in a single nuclear blast. Then came the 90’s and started the era of Web1.
Web1 gave us the basic functionality, infrastructure, and most importantly the rules of the internet (TCP/IP). It gave us internet, software, network architecture, and protocols. Web1 made raw data readable and shareable. Web1 was a global library where you could find information, read news, send messages (emails) or even share a photo. Web1 allowed information to flow in one direction only: from creator to consumer.
Then came the 2000’s and the internet changed. Internet2 or Web2 was the internet of information. Information is the data that was getting processed, organized, and structured. Web2 gave users the ability to buy goods and services and trade things of value over the internet. Two big things happened with Web2:
1. Anyone could create and publish content
2. Data aggregators figured out a way to package and sell user information
If Web1 was all about technology, then Web2 was all about Money. Web1 gave us the libraries, it took the information and put it into a big open archive. Web2 was like a publishing machine, everyone and anyone could produce content and store them in centralized databases, giving the power of databases to monetize this data. Web3 will turn these databases into Data Banks which will be owned by you.
Web3 is the internet owned by the builders and users, orchestrated with tokens. Web3 is an ambiguous term which makes it difficult to understand the ambitions of Web3.
The reason decentralization is important is because it gives ownership and control to users. Users can own the piece of internet service by owning tokens, both non-fungible and fungible. Tokens give users property rights, and the ability to own a piece of the internet. Tokens align network participants to work together toward a common goal — the growth of the network and the appreciation of the token. This aims to fix the core problem of centralized networks, where the value is accumulated by one company, and the company ends up fighting its own users and partners.
I said a lot in the last couple of paragraphs. Let us look at it with an example. Your Twitter feed is currently monetized by Twitter (TWTR). You Tweet, and they get paid. You use Google maps to find the best route to your favorite restaurants. Google gets paid. But what if you got paid? What if your Twitter feed, or your Facebook feed, or even the image of your face, or your list of favorite local eateries, or the power generated by your solar panels, was monetizable (is that even a word, who cares!) by you.
Web3 makes it possible for the user to monetize the data. Currently, it can be monetized in a cryptocurrency format (e.g., bitcoin, ether, ripple). But you might also be able to monetize in other forms: imagine 25 Facebook posts being worth 100 Tweets, or 0.005 airline reward points, or .025 Starbucks lattes, or 3 minutes of electricity from your neighbor’s solar array. What is really happening here is that data is no longer central, user has taken ownership of their data and can move the platform per their will and monetize (if they wish to) to get personalized ads, relevant weather information, etc.
Three reasons why the centralization of platforms happens?
1. People do not want their own servers.
At this point, it is very important to understand why centralization in platforms happened. In my mind, the simplest explanation is people do not want to run their own servers and never will. Take email for example. Email is a decentralized protocol. Anybody can, in theory, set up their own email servers but very few people do. Instead, people use email clients and the market has centralized around a handful of providers, especially Gmail. And the simple explanation for this is – People do not want to run their servers.
Let’s say you do decide to move to your own server because you do not want Gmail to read your data, the person on the other end of every second email you send probably still uses Gmail, meaning a copy of your email always exists on Google’s server whether you want it or not.
2. Federation of protocols.
Federated application layer protocol into a centralized service is a sure recipe for a successful consumer product today. After 30+ years, email is still unencrypted; meanwhile, WhatsApp went from unencrypted to full E2E encryption in a year. People are still trying to standardize sharing a video reliably over IRC (internet relay chat); meanwhile, Slack lets you create custom reaction emoji based on your face.
If something is decentralized, it becomes very difficult to change and it often remains stuck in time. So while it’s nice that I’m able to host my own email, that’s also the reason why my email isn’t end-to-end encrypted, and probably never will be. By contrast, WhatsApp was able to introduce end-to-end encryption to over a billion users with a single software update. So long as federation means stasis while centralization means movement, federated protocols are going to have trouble existing in a software climate that demands movement as it does today.
3. Interaction in centralized systems is way too easy.
The easiest way systems communicate in Web2 is via APIs. APIs are even used in Web 3 to write to and from blockchain, handling all complexities involved. APIs simplify building blockchain tools, but nearly all of them rely upon centralized software and infrastructure. In other words: The extensive use of APIs will lead to the centralization of many critical blockchain functions. This will end up centralizing Web3 to a high degree. Currently, all Web3 apps rely on one of two companies, Infura and Alchemy to interact with the blockchain. Interestingly, ConsenSys owns both Infura and the most popular wallet, MetaMask.
Nearly all apps use MetaMask to access the blockchain. In short, all web3 apps rely on centralized services to access data from the blockchain. That’s a whole lot of trust for a system designed to make trust obsolete.Tweet
Centralization is not the only issue for Web 3 – two other issues
1. Compute, Bandwidth, and Storage
Compute: Continuing from the last paragraph, blockchain networks will not scale until they become centralized systems. Blockchains will have to design in a way to minimize program execution time because the entire network is forced to recompute every single program to reach consensus. This matching problem requires a ton of electricity.
By one estimate, if the countries of the world were ranked by energy consumption, the combined nation of Bitcoin and Ethereum would slot in between Italy and the UK.Tweet
Bandwidth: In Web3, Users need bandwidth to buy and sell tokens needed for the token-based economy. Likewise, all protocols need bandwidth to buy/sell and lend/borrow between themselves and the other protocols they interact with. As this data around transactions grows, additional bandwidth is needed to do things and move data. You can’t create Netflix until you have the bandwidth to stream movies reliably over the network.
Storage: Who owns our data? Web3 does not delete the data, it only appends the data which makes its databases immutable. So how do we build these immutable databases? The solution that Web3 advocates provide is users will lend their hard drives. The simple way to understand it is the Airbnb model. If you have extra storage on your hard drive you can rent it out.
Web3 is like Airbnb for storage, If you have extra storage on your hard drive you can rent it out.Tweet
2. Users don’t care about data ownership.
At the most basic level, let’s say we were able to build a decentralized system/platform on the blockchain. It works smoothly in that people can use it without getting a Ph.D. in cryptography. Users are able to control their own data and everything is open source. The thing is these users don’t really care much about data ownership and secure general ledgers. Users care about the fun and convenience of being with their family and friends. They want to be on a platform where their friends are. This slows the adoption. Web3 currently lacks the network effect that big social medial companies have. The reason I use Instagram is that my friends post their stories on Instagram. Most of my friends that are active on Social medial use Instagram and my incentive to use Instagram is to connect with them on this platform. At this point, I am not thinking about the centralization of my data. I have spent my day at work, I want to relax and chat with my friends and family.
As I mentioned throughout the blog there are genuine technological barriers to achieving Web3. For sure this gap will not be filled overnight or even in the next several years. Blockchain is not the solution to business problems. It’s a hyper word with limited use outside of Decentralized Finance (Defi). People are trying to fit blockchain for solutions that do not require blockchain. Both Web3 and Blockchain are getting more attention than they deserve.
This attention is causing creators to come up with solutions that are causing the Web2 diseases of data hogging and centralization to crop up in Web3 as well. No one will be able to beat the laws of nature, Bigger will always beat the smaller. OpenSea, the dominant NFT platform, is doing what big tech has done in the past. It is trying to grow fast enough to beat all competitors. It’s basically building another tech giant, this time in Web3.
If Web3 were to become a successful technology it will have to find ways for people to adopt it without building their own servers and providing incentives to use web3 applications. The answer to the incentive problem lies in tokenomics. Using game theory principles Bitcoin can incentivize everyone to act for the collective good. Using blockchain and tokenomics to get people to buy into a set of decentralized apps? It is still a fiction story and I don’t know how this will be done. So I am going to leave this essay with the last thought on why this essay is important for my readers below.
Why should readers focus on this blog?
Web3 and Crypto are the centers of all investment strategies now. Individual traders have access to multiple crypto trading platforms and that puts them in the line of fire. The crypto market behavior is very emotional. Many Web3 startups focus on luring users with the promise of growing rich by being early adopters. People tend to get greedy when the market is rising which results in FOMO (Fear of missing out). Also, people often sell their coins in irrational reactions to seeing red numbers. Understanding the future of technology should help my readers make valuable investment decisions in technology. Now, this article does not directly talk about crypto but it does talk about Web3 which is the base technology for building Defi, DAO, Ethereum, NFTs, etc. With a tough future ahead for building Web3, it’s important that we consider all aspects before investing.
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