Today’s Internet is undergoing major changes. While the mainstream media are now holding onto their treasure trove of user data and maintaining a considerable advantage with the Internet effect, new companies are coming up with a whole new way of surfing under the “Web3” model that is being promoted today.
Web2 versus Web3
Today’s dominant Internet platforms are built on the basis of user aggregation and user data. As these platforms have grown, their ability to deliver value has increased and they are way ahead – thanks to the power of the network effect (the power of web 2.0).
For example, Facebook’s (now renamed Meta) user behavior data has helped it fine-tune its algorithms to push content feeds and ad targeting to users significantly better than other platforms. Meanwhile, Amazon has used its granular insights into customer needs to optimize its logistics and delivery services and develop its own product line. YouTube has built a vast library of videos from a wide range of creators, allowing it to offer content on virtually any topic to its viewers.
In these business models, targeting the attention of users and their data is a key source of competitive advantage. As a result, traditional Internet platforms typically do not share data, and even simple aggregations of data are difficult for users to export, let alone their social graphs and other content. As a result, even if users are dissatisfied with a particular platform, they don’t easily give up using them.
But all this is quietly changing. While it’s hard for emerging players to challenge giant “Web 2.0” companies like Meta on their own, they are making a novel value proposition in the “Web 3.0” model. While there has been a lot of public discussion around the metaverse and various Defi and NFT projects, for web 3.0, many developers agree that it is fundamentally different from other topics. It evolves on the premise of building open platforms that share value directly with users and create more value for everyone in addition to making money for the platform, not just for the platform to make money by using users to access data.
Why Web3 is unstoppable
In Web3, any content that users create (such as posts or videos) and the digital objects they purchase (such as NFTs) are owned entirely by the users themselves, not the platform that controls the underlying data. In addition, these digital assets are typically created according to interoperability standards on a public blockchain, rather than being privately hosted on a company’s servers. This makes their assets “portable”. In principle, users can leave any particular platform at any time, and they can exit from the application along with their data and move to another platform.
This is a major shift. It has the potential to fundamentally change the way digital companies operate: the ability to transfer data from users’ platforms creates a new source of competitive pressure, which could force these original giants to update their business strategies. Because if a platform isn’t creating enough value for its users, they can turn their heads and walk away. In fact, in Web3, these upstarts have already started to blatantly attract big V users to them – for example, the recently launched NFT platform LooksRare, which rewards people with a “vampire attack for example, the recently launched NFT platform LooksRare, which offers a “vampire attack” to attract OpenSea users to switch to their side by giving them door-to-door rewards.
But at the same time, Web3 is less of a zero-sum game, which means that the overall value creation opportunity for a platform can be greater. Because it is built on an interoperable infrastructure layer, platforms can easily link to other content networks, thereby expanding the scale and type of value services they can offer to users. For example, Web3 Art Gallery could allow users to create artwork on an existing blockchain, rather than requiring them to upload it directly to the platform.
This is a valuable method of scaling content even for currently established giant platforms; Twitter recently launched a feature that allows users to display the NFTs they own in their profiles; Instagram is developing something similar. For new platforms, gaining early momentum can be challenging due to a lack of content in the initial stages, and the ability to integrate existing digital assets is critical to solving the so-called “cold start problem.
In addition, a well-developed infrastructure layer means that the costs associated with creating trust with users are much lower in Web3. Managing digital assets on a public ledger provides a clearer picture of what assets are available and who owns what, which has previously been a challenge on the Web. For example, if a digital artist claims that a new artwork is limited to 489 editions, a potential owner can verify this directly on the blockchain without having to verify trust in the artist himself, and without the need for galleries or other intermediaries to provide such assurances.
This trust framework extends to software running on the Web3 platform: key operations can be coded on the blockchain in auditable and immutable “smart contracts”. This allows platform creators to pre-implement certain design features, such as pricing rules, royalty agreements, and user rewards mechanisms.
All of this means that, at least in theory, it is much easier to launch a product in Web3. Even an unknown entrepreneur can build a product that plugs into an existing network without the permission of a particular platform. In fact, in Web3, users sometimes don’t need to trust the company (or person) behind the project. Instead, they only need to trust the code itself. For example, some recent fundraising campaigns to support humanitarian aid efforts in Ukraine have been conducted through smart contracts that automatically transfer all funds received to the Ukrainian government or relevant charities; this means that donors can trust that their funds will be used properly, even if the campaign organizers are completely anonymous.
Of course, given the early financial use cases of Web3 and the large number of transactions, many bad actors used the hype to plan fraudulent campaigns. Many of today’s Web3 experiences are designed for advanced, tech-savvy users, while the average user may have limited knowledge of the actual functionality of an application or platform, let alone review the source code to verify that it functions as described. As it stands now, Web3 technologies have a long way to go before they are safe and available to the average consumer.
In addition, plugging into an existing network in practice does not mean you can automatically unlock an engaged user base that wants to stay. As in all startups, it is critical to build a product that meets the needs of real users. However, once you have addressed user needs, it is much easier to deploy and scale business activities through Web3 with an established network.
This makes the back end of the platform open and interoperable, enabling compound innovation and incentivizing builders to invest directly in the infrastructure layer. For example, koodos – a Web3 service that allows people to create collections of things they like from the Internet – is building shared infrastructure that any network can plug into and improve. (PS: Esber co-founded koodos and Kominers provided marketing design advice for the company.)
Shared infrastructure means that applications can focus on building great experiences and thus place more emphasis on platform design as a key source of competitive advantage. An application’s knowledge of its market is reflected in its user experience and interface – so even in Web3, user insight is still an important measure of how good a product is.
Web3 platforms also have the potential for a novel and particularly powerful form of network effect, namely unlocking social cohesion through community engagement. Ownership of digital assets fosters a sense of psychological ownership, which can also be interpreted as a sense of belonging, that creates strong user stickiness and motivates users to maintain the platform and their digital assets. Users of the platform effectively become “fans” who form bonds through the shared experience of the platform, similar to how fans of sports teams or obscure bands see themselves as a community.
Adam Bomb Squad NFT, owned by one of the authors (Kominers)
For example, popular streetwear brand The Hundreds recently sold NFTs featuring their mascot “Adam Bombs.” Holding one of these NFTs provides access to community events and exclusive merchandise, which provides a way for fans of the brand to meet and interact with each other, greatly inspiring them. The Hundreds has also spontaneously announced that it will pay royalties (in the form of store credit) to owners of Adam Bombs-related NFTs used in certain clothing lines. This allows users to have partial ownership of the Ralph Lauren logo and gives them a cut of each new line of polo shirts that uses the logo. Decentralizing the value of the brand in this way, but members of The Hundreds’ community became even more attached to the IP and went out of their way to promote it-so much so that some community members even went so far as to get Adam Bombs tattoos.
Another example is SushiSwap, a “fork” of the decentralized financial platform Uniswap – meaning that SushiSwap’s underlying algorithm is a clone of the code published by Uniswap. The main difference is that SushiSwap has built a strong brand and community, while providing an active and ongoing reward system for its users, which drives higher user engagement and positive sentiment towards the platform; this has quickly made it a successful competitor to Uniswap.
More to the point, shared ownership allows for more consistent incentives between the product and its derivatives, thus motivating everyone to become builders and contributors. The underlying technology standard also allows every Web3 company to build on top of it. This means that communities around the platform can co-create in a way that is much less adversarial and more derivative than in the past, making the platform ecosystem stronger.
In the short term, this model cedes some of the consumer surplus to the builder or creator. But because the builders get more, they are more strongly incentivized to invest and add to the total pie for everyone. This means that in the long run, Web3 should also increase consumer surplus.
In summary: Web3 has the potential to unlock a more valuable Internet for everyone. It is easier for new companies to build communities around their brand and product concepts on a Web3 infrastructure than it was for previous iterations of the Web. Even established platforms can harness these forces by plugging into blockchain-based content networks and giving their users some ownership over their data. All of this means that the next era of the web could look very different and more open than the one we live in today.