Web3 - The User Controlled Internet / n. a model of decentralized networks where participants: 1. can interact without an institution; 2. are in total control over central aspects of their digital identity, including their underlying encryption keys; 3. control how their credentials and personal data is shared/used.The Internet has democratized information sharing, but it tends to concentrate power like any complex socio-technical system. Centered around the cloud infrastructure of tech monopolists like Amazon, Google, Microsoft, and Facebook, companies that own networks have unilateral power over who gets network access, supported features, and how user data is secured.We have accepted the platform-owned model until now because it has been the only viable option. Most users cannot store their data, social connections, and user accounts themselves. In return, the tech giants asked for access to our data. Suddenly a few big companies had all the data about everyone and everything happening across the web. That raises issues of trust. Can I trust the people and institutions that store and manage my data against any form of misuse—internally or externally, on purpose or by accident?The big promise of Web3 can be summarized in a single concept: user-control. A decentralized successor to the current Internet is being built. After decades of trading trust for convenience, people are finally glimpsing a future in which they can take control over their data back from corporations and institutions. Central to this utopian dream is the use of tokens to coordinate global digital communities. Free from the reign of tech conglomerates, blockchains promise to return power to the people.
The Web3 landscapeThe overview below highlights a mere fraction of what Web3 has to offer, spanning everything from career platforms to collaborative music platforms to decentralized credentials and reimagined versions of social media. I will dive deeper into all sectors in subsequent articles.
References to logos and projects are used for illustration-purpose only and do not represent a project’s perceived position in the ecosystem or an endorsement by Arcane Research. This overview is not all-inclusive, but the complete database is available here free to access. An export version is available upon request.
Current context: The rise of digital assets communitiesThe last 20 months have seen two consecutive waves of Web3 adoption that resulted in coalescing communities of token holders. The 2020 DeFi summer revolved around the idea of governance tokens managing decentralized protocols via Decentralized Autonomous Organizations (DAOs). In layman's terms, a DAO is an entity that replaces central leadership with a community organized around a set of rules enforced on a blockchain. This requires participants to buy tokens in exchange for voting powers to ensure they act in the community's best interest.The lending protocol Compound began the trend in June 2020 when it used tokens to incentivize early lenders and borrowers by providing rewards in the form of COMP tokens for participating. When the program launched in 2020, the total value locked in Compound jumped from ~$100M to ~$600M. Liquidity farming soon became a widespread method for DeFi protocols to kickstart their adoption by incentivizing usage. The token holders share a common goal of increasing protocol usage and collaborate to determine the necessary actions to achieve this goal.The second wave of Web3 adoption came by the NFT craze of 2021. Well-known NFT projects like CryptoPunks and CryptoKitties have been around since 2017 (the average price of a CryptoPunk was $20 in 2018 compared to $209,000 in August 2021), but the current NFT wave results from an ecosystem of marketplaces that has enabled a new generation to join the ranks of crypto enthusiasts. New and major NFT projects such as Pudgy Penguins and Bored Ape Yacht Club have found staying power by becoming native digital brands with committed fans.
These two waves illustrate how digital assets can organize communities. Shared ownership in a project through a token strengthens the ties between holders; Acquiring a token opens the door to new communities. From the first bitcoin holders to the latest NFT drop, token holders build connections.However, ownership was also the first promise of the ICO era, and the narrative was so powerful that it motivated some of the biggest crowd fundraises in history. Although the market has somewhat acknowledged this in the newest iterations of incentive design with more aligned vesting periods and airdrops, this does not fully solve for many projects being over-capitalized and lacking incentive.
Source: Dappradar, Dune analytics