Web3, Decentralization, And Token Economy: The What & Why

We all know that web3 is the word that is being used to describe the next phase of the internet aka a decentralized internet: an internet that’ll be owned by people.

But what is web3 in layman’s terms? Why does it matter? Aren’t we happy with centralized companies doing their best in the web2 world? Is web3 a better promise or a false hope? What’s so great about the token economy?

Well, there is a lot for us to cover. Grab a coffee and continue reading.

What is Web3 and Why does it matter

So what is “web3 or web 3.0”? To understand that, we need to know the history of the internet.

Do you know? The terms web 1.0 and web 3.0 exist because web designer Darci DiNucci coined the term web 2.0 in 1999.

Web 1.0

When the internet started, very few people started putting content on the internet. And most of the internet users used to only read stuff. Yahoo is a great example of this case. And that’s web 1.0.

  • Few content creators
  • Static web pages
  • I own my DNS
  • A very open but underdeveloped internet

DNS is the unsung hero of web1. A mapping between the network layer (domain name) and physical layer (IP), controlled fully by users, enabling them to keep centralized services in check with a credible ability to exit.

Chris Dixon

Web 2.0

Then in the early 2000s companies like Google, Amazon, and Facebook boosted the world wide web development and that phase is referred to as web 2.0.

We have a better search engine to find content. We can find friends online and chat with them (a two-way communication that was not possible in web 1.0). We can order products online without any hassle.

And finally, the web 2.0 phase lead to the development of a lot of centralized apps. Apps that I am using by paying the rent, and I don’t own them fully.

Ok, what do I mean by that?

It means Twitter can ban me from using the app. But because I assumed that they won’t do such things (and also I don’t have other options), I am using it.

Ok, but Twitter or any other social platform is free to use? What are you paying here in rent?

Data. If you own the data, you almost own everything. Facebook uses my data to generate more revenue with better ad targeting practices.

Also Read: How Web 3.0 Can Fix The Problem: “Not Getting Paid For Sharing The Data”

Twitter can influence someone’s political thoughts. Google can influence my purchase decisions based on my search history. AWS can ban your website. The internet which became fully better and well developed became centralized. The power that was open during the web 1.0 phase, was now in the hands of very few companies.

If you lose your followers or content, you lose all the hard work that you put in. And in a web2 world, you don’t own your followers. The platforms do.

So, in web2:

  • More content creators
  • I don’t own my DNS (AWS or some other company owns it)
  • A very advanced internet yet closed internet (a few companies control the whole internet)

Web 3.0

Now, the goal of web 3.0 is to achieve web1’s decentralization (with open-source protocols) combined with web2’s advanced functionality. And thanks to the invention of Blockchain technology by Satoshi Nakamoto using which he created Bitcoin.

If it were not for cryptography (the security behind web3) and immutable ledger (blockchain), there won’t be a web3 movement.

The definition of web3 can be: an internet built on blockchain technology – to achieve decentralization and help people participate in a better economy aka token economy where the incentives are aligned to the efforts they put in.

So, if I have to build an app like Facebook in the web3 world, its features can be something like this:

  • People will own their accounts. No centralized data storage or hosting.
  • I can’t ban someone. No censorship. (Can’t ban is web3. Don’t ban is web2)
  • People will get paid in tokens for sharing their data (of course, privately & safely so no one can directly access it but put the data for better use – like Ocean Protocol).
  • Token holders will decide the future of the app by voting on the best possible decisions.

Of course, all of this is easier said than done. And I am not sure if the app model I described is better or not.

But you get the main points, right?

  • Decentralization
  • Unhackable tech
  • Token Economy (Skin in the game)
  • No single point of failure

And, here is a graphic showing the evolution of web3:

Image Source: Fabric Ventures

Decentralization

Decentralization, the opposite of centralization, simply means that you ‘truly’ own your assets without relying on some third party.

Let’s understand this in both web 2.0 & web 3.0 scenarios with an example:

We use banks to store money and earn interest over that stored money. But we have seen financial institutions getting hacked. We have seen the government freezing bank accounts.

But with blockchain technology, it is impossible to hack. No government can freeze the funds that I have in my Metamask wallet.

You might be wondering..”Well, you are still using an App. And the team of Metamask can still do whatever they want you to do?”.

Yes, they can. But even if Metamask suddenly stops existing one day, the funds are still safe.

Because Metamask is just providing an infrastructure to use my funds and interact with DApps (Decentralised Apps) on the blockchain. My funds will be safe because they are stored in an open ledger called Blockchain and only I can access my funds.

Of course, Not your keys, Not your coins. So that point is you’ll own the coins no matter whatever the wallet company does as long as you own the keys (seed phrase).

This is just a basic example of why decentralization is important. Keeping the power in the hands of people instead of a big company.

Note: If you’d like to learn more about Platform Decentralisation, Application Decentralisation, and Project Decentralisation, I’d recommend reading this Twitter thread.

Chris Dixon pointed out a big problem with centralized companies in an article where he mentioned how the centralized parties’ relationships with network participants change from positive-sum to zero-sum.

Once we get addicted to the platform, the platform extracts data from use, to generate more revenue with better ad targeting.

If all these platforms are built on open protocols – in other words, “If all these platforms are decentralized”, we don’t have to give up our privacy and control of our data.

Token Economy

Ok, if not for centralized companies holding the power, how is the power distributed to users? Well, that’s when Tokenomics (Token + Economics) & DAOs come into play.

Here is a graph that Balaji Srinivasan shared in the Crypto Startup School video.

We all know that the value of a network grows with the users. If not for users writing content, what’s the point for Google in building the world’s best search engine?

If you are an early user of Facebook, you might have invited your friends too. But that value you get from Facebook is better now than in the previous 10 or 20 years. Why? The network grew like hell. The algorithm was made better than ever.

So, the question is… What did you get for being an early user of Facebook? You worked hard to bring more people in. You are part of facebook’s insane growth. But that value you got from the app was years later when the network became big.

In the case of crypto networks, early users are rewarded with tokens. These can be governance tokens or tokens that can be used to exchange value on the network. In the web3 era, the users are the marketers (paid). And early contributors to web3 projects get paid in tokens and will be rewarded well.

From Ethereum’s perspective as long as people are building apps on Ethereum, ETH will hold value. And early users/developers who earned ETH will benefit more.

Even if you are not using a particular web3 product, you can still benefit from the project if the token appreciates assuming that you are holding that token.

That means users and builders will have skin in the game. And that is why every asset will get tokenized sooner or later.

For example, CitaDAO is trying to tokenize real estate and put it on the blockchain.

Sooner or later, everything becomes a token, fungible or non-fungible.

Conclusion

So, is web3 better than web2? Fundamentally, yes.

We can get paid in the tokens (You work for a DAO, you have skin in the game). We can truly own the assets (We’ve seen that with NFTs). We can truly own our funds (We have seen that with wallets and Defi protocols).

But there are a lot of problems with the current apps, blockchains, and DAOs. Of course, these aren’t problems that can’t be solved, so I guess web3 shouldn’t make us worry in the long term.

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