It’s time to cut the crap, put the hype aside for a minute, and think critically about Web3. Crypto’s rapid rise to prominence in the past 12+ months has been polarising to say the least. Some think this is the largest bubble we’ve ever seen, others see it as the coming of internet Jesus. For those of us who have fallen down the web3 rabbit hole, we are at risk of self-reinforcing biases - the crypto community is incredibly welcoming and positive, coupled with the fact the majority of content is from people who are drinking the kool aid. Matthew Rosenfeld’s article was a great look into the shortcomings of Web3 from a technical perspective, and gave me a moment of much needed reflection. Is this all just hype? Are we in a bubble? Here is how I see things…

WTF is Web3 (again)

The majority of people reading this already know what Web3 means, and thankfully a lot of great content has already been made on this (What is Web3. Why Web3 Matters). For readers who are already familiar with these concepts, I suggest you skip this section, as it is more for the benefit of people new to the space.

Web3 is the next iteration of the internet and to understand this, we need a brief history lesson.

• Web 0 (pre 1989): Technically the ‘internet’ was created in the 1960’s as a government project, however it wasn’t until the late 1980’s when it existed in a form we as users recognise. 1983 marked the creation of TCP/IP (Transfer Control Protocol/Internetwork Protocol), a universal language enabling communication between distributed networks, at which point practical use cases started to emerge

• Web 1 (~1989 - 2005): In 1989 Tim Berners-Lee first proposed the WorldWideWeb project and invented HTTP, the application-layer language of the internet. The following 15 years were characterised by static internet experiences, where we as users could only interact with content in primitive forms. Search was in its infancy (Google was founded in 1998), internet speeds were slow (remember dial-up?), and the whole Web 1 consumer experience was fairly basic. Yahoo, Netscape and Internet Explorer ruled this era, and to borrow from Chris Dixon, the internet was ‘Read’ only, where we could only digest what we were served.  

• Web 2 (~2005 - present): Aka the ‘Social Network’ era. New programming languages like CSS, Java and HTML5 created a more dynamic front-end experience for the internet. We could for the first time ‘write’ content - Facebook (2004) and Twitter (2006) let us upload cat images and Shopify (2006) allowed us to create our own webstores. User generated content went exponential and the iPhone was invented (2007), however the majority of this value accrued to the great overlords who hold all our data. As a result, you could argue Web2 is controlled by a handful of centralised companies - Facebook, Google, Twitter, Amazon - who operate an extractive relationship with users. We make the content, they keep the money.

• Web 3 (Being built): Aka the ‘Decentralised Web’, and not to be confused with ‘cryptocurrency’. Back-end developments (blockchain, AI and others) have unbundled the internet, separating data, execution and application. We as users now own and control our data, carrying it with us throughout the world and having the ability to determine if and when we give this data to corporations. The Web3 economy is built on decentralised apps powered by smart contracts which aren’t controlled by central authorities. Tokens are the universal system of record, value transfer and governance, shifting the power back into the hands of the consumer and ensuring we all share in the value being created. 

What Web3 actually means for consumers

Web2 works just fine and it is easy to forget that amongst the Web3 hype. Technologists know that mass market adoption isn’t achieved through incremental benefits, but rather exponential improvements. For Web3 to really matter and live upto the hype, it needs to be 10x better than the status-quo, which leads to my core Web3 use cases, the bastions of rationality in an irrational world.

Web3 Use Case 1 - Empowering Creators:

Creatives are the heart of our society. As someone dominated by left-brain characteristics, I have huge respect and appreciation for creatives, not to mention a hint of jealousy! Art, music and literature (+ all the other creative fields) are what separate us from animals and machines. They nurture our soul and give us reprieve from the grind of existence. Yet sadly, creatives have for the longest time been relegated to a class of ‘suffering artists’ due to constraints of the existing system. Before Web3, the majority of creatives were hamstrung by complex distribution processes, price discrimination and limited resources. Centralised platforms or marketplaces extract maximum value, and that is before we consider the difficulty faced by creators outside of developed nations.

Web3 has flipped this all on its head via tokenisation (both fungible and non-fungible). Now, creatives have full on-chain visibility of their creations, and share in future upside via embedded royalties. They have one-to-one relationships with their fans (away from centralised platforms), resulting in new ways of expression and collaboration. At the same time, platforms like Opensea, Rarible and Foundation, have given creatives access to a global audience of ready buyers while charging almost negligible fees. It is staggering to think Opensea is already a decacorn and has a takerate close to zero, illustrating how Web3 has unlocked latent consumer demand in entirely new products/assets.

You could argue that Web3 at its core is a pure expression of creativity and empowerment. It took creative minds to design Ethereum, the CryptoPunks or Royal.io (as examples), and we finally have a system which rewards these individuals instead of exploiting them. Any creative would be mad not to leverage Web3 technology and it is hard to see them going back to Web2. If the creators are building our future, they are building it with Web3.  

Coming back to the 10x rule, and to borrow from Chris Dixon, Twitter’s take rate is 100%. Sotheby’s is 20-25%. OpenSea’s is 2.5%. You can do the math.

Web3 Use Case 2 – Revolutionising Finance:

I break this down into two sub-categories, 1) the Underbanked, and 2) New payment rails.

Starting with #1 - Web3 is the great financial enabler for the  1.7billion people in the world who do not have access to traditional financial services. This is 1 in every 5 people on the planet. The issue these people face is they don’t conform with the existing system. Many of them don’t have birth certificates or residential addresses, they are paid in cash or live in areas where bank networks cant reach. Financial literacy and availability is strongly correlated to GDP and living standards, and sadly these 1.7 billion people aren’t given the chance to compete on an equal footing with the rest of us. Enter the magical world of DeFi (Decentralised Finance). If you have a crypto wallet, you have a bank account (Crypto Wallets as the new bank account), and thankfully, all you need to open a wallet is an internet connection. Once you have a wallet, the $200bn DeFi market has all the products you could ever need, from loans and staking, to derivatives, stablecoins, trading, investing and much more. Suddenly, the underbanked have access to a stable financial system and the sorts of instruments we all take for granted. 

Every time you buy something with your card, Visa and Mastercard charge the merchant 2-3% for using their rails. How about when you want to send money overseas to your relatives? This time it's likely the banks who are taking a cut for facilitating, and you still need to wait several days for them to get it done. These rails have existed for decades and their roots lie in our history, when sending money actually meant moving and securing physical bills or gold bullion. In a digital world this boils down to changing a few numbers in a ledger somewhere… why should Visa and Mastercard generate close to $40 billion in revenue a year when the Web3 alternatives are free and faster to use? Admittedly, blockchains need to address scalability issues before we get close to facilitating the transaction volumes needed for a global financial system, however I find it hard to imagine the likes of Visa and Mastercard existing without significant innovation in 10+ years.

Sense checking the 10x rule again - Traditional payment rails charge fees and take days. Web3 rails are free (once scalability is addressed), instant and permissionless. Traditional financial services are selective, Web3 services are permissionless and freely accessible. 10x feels like an understatement.

Web3 Use Case 3 – The Ownership Economy:

Decentralisation and tokenisation are shifting the platform-to-user relationship from extractive to collaborative, meaning we as consumers now have some degree of control over the applications we use. Governance tokens allow us to vote on roadmaps and product strategy while at the same time rewarding us financially for being part of the community. This creates stronger alignment between consumers and platforms, and fosters a harmonious relationship which should ultimately lead to faster growth (for the platforms), superior products and higher value.

We don’t need to look any further to evidence this than the Looksrare ‘vampire attack’ on Opensea. In a matter of days, Looksrare were able to syphon away the majority of Opensea’s volumes, with the exact same product, by having a community-aligned token. As of writing this article, Looksrare’s daily volume is 2-3x higher than Opensea although we know wash trading is a large driver and its TBD how this plays out in the long term. Perhaps a better anecdote is the Uniswap/Sushiswap attack which resulted in the creation of the $UNI in defence. In this case, Uniswap were ultimately able to defend their position via the issuance of a community token, however Sushiswap remains a large and successful protocol in its own right, processing >$10bn in monthly volumes.

Thinking more broadly, we can apply the ownership economy framework to multiple use cases and industry verticals. Braintrust is a great poster-child for how the ownership economy can disrupt traditional business models, in this case, creating a global talent network which incentivises and rewards users for participation. The native $BRST token is earnt by inviting talent to the network, vetting their work, or more broadly adding value to the community. It can then be spent on perks, software discounts, or in the case of companies, staked to improve hiring chances. Everyone in this ecosystem wins, only the web2 analogous companies lose. [I really recommend reading Packy McCormicks deepdive into Braintrust for a far more detailed breakdown]

Is democratizing small amounts of ownership fundamentally game-changing? Admittedly this use case is a little hard to conceptualise for those not in the web3 ecosystem and many of the people I talk to find this the least compelling - “Who wants to own 0.001% of their platform”, “Rewards tokenomics are not sustainable in the long-term”, “How does this differ to traditional equity?”. The long answer will require another article to be written. The short answer - owning something is infinitely more valuable than owning nothing, irrespective of how small that something is.

Short-term bubble, long-term behaviour

We’ve established three core use cases where Web3 is 10x better than Web2, but that doesn't answer the question of whether we are in a bubble or not. Bubbles by definition are hard to spot until they’ve burst, but largely seen as environments where asset prices deviate significantly from underlying value. If I could ascertain the underlying value of crypto tokens I’d probably be on a yacht somewhere and not writing this from my couch, which goes to say, I don’t think anyone has landed on a reliable framework for crypto valuations (I’m more focusing on L1’s than DApps FYI). We’ve tried Metcalfe’s law, discounted cash flow models, and several other methods, none of which have come close to predicting or supporting the meteoric rise we’ve had in crypto prices. As someone who has spent 10+ years valuing companies, I can safely say the majority of valuation techniques are next to useless in high volatility + high growth environments, like web3 today, and incredibly sensitive to the underlying assumptions. Is the fair market value of ETH $10k or $2k today - it's anybody's guess at this stage and speculation is the name of the game. In my view, the current price environment is a function of market immaturity, low relative supply levels, high concentration of assets held by retail investors and massive speculation / FOMO, but perhaps that's something to unpack another day. 

With a slightly cynical view, and at risk of offending readers, I think current crypto prices are overhyped (even after the recent sell-off in January) and parts of the market are in bubble territory. Should the combined market cap of public crypto projects be c.$2trillion? Probably not. Should Dogecoin be worth close to $20billion? Definitely not. We are in a young market and sadly there has been a lot of misinformation and opportunism. I struggle to see how Bitcoin can sustain a trillion dollar market cap based on the concept of digital gold (counter arguments welcome). I hate the fact we have over 17,000 tokens on Coinmarketcap, and don’t get me started on all the shit NFTs that are floating around OpenSea. 

As the market matures, I hope these issues evaporate to leave a core of real value - projects like Helium, a decentralised wireless network for the people, Terra, programmable money, or Audius, a platform for emerging music artists. This dichotomy between value and trash is the opportunity - finding the gems amongst the noise. So let's all try to ignore the hype, educate the non-believers, and support the projects that are making a difference. It's time to pop the crypto bubble. 

(The projects listed in this article are purely examples and definitely not investment advice). 

Written by JPizzolato.eth

Special thanks to Chia Jeng Yang for his input into this article