24 Feb 2022

Delving into the User-Owned Internet: Part I

For some people, Web3 is the metaverse. To others, it is bewildering and abstract, tangled in complex cryptosystems that seem overwhelming to newcomers. This article is the first in a series on Web3, and will explain what Web3 is—and why you should care.
We are currently seeing a generational shift from the Internet to crypto—from online to on-chain. People are increasingly resonating with how crypto can transform traditional asset classes as the investment thesis and the use cases develop. There is not a “one-size-fits-all” model. Instead, we are seeing several revolutions emerge in parallel with Bitcoin’s monetary revolution. 
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 landscape
The 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.
The Web3 Landscape
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 communities
The 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.
NFT sales volume by platform
Source: Dappradar, Dune analytics
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. 
The allure of Web3
Web3 protocols can power communities in a way that Web2 companies cannot. Communities often fail to scale because they rely on rules that can be hard to define, and even harder to enforce. Protocols can make communities stronger and scale faster by codifying and enforcing rules to manage a shared resource properly. More specifically, protocols can align the community’s goals, define boundaries, and create transparency.In the presence of shared network effects, incentives change as well. The shared data makes building on existing products more accessible than ever, so entrepreneurs can create better products much faster. And for users, switching costs between applications fall dramatically because the data comes with them. This means that there will be more economic value in creating useful applications than building a massive, exclusive user base for its network effects.But Web3 is not just about technology. It’s a cultural movement. Many of these applications could have been built on existing tech and make little to no difference to the end-user. The Web3 movement is so compelling because of the beliefs, ideals, memes, and emotions that manifest on top of it. Community and shared values are at the very core of every human society and movement. They are also why a massive movement led by tech primitives is spreading so quickly through our culture. While not everything will move towards Web3 tech stacks, there will be an increasing consumer expectation of products and services to behave more like the principles in Web3. In part II of this article series, I will explore what that means in practice, and the Web3 use cases will come into sharper view.
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