At first glance, crypto seems to be a slight iteration on existing products. Bitcoin is "just" a digital version of gold. DeFi is "just" existing financial services on a blockchain. Crypto-gaming is "just" gaming with digital assets. NFTs are "just" jpegs.
This surface-level view explains why many people see crypto as an industry that’s only good for scammy pump n’ dumps.
Greater clarity is needed to help people understand the deeper reality of what's happening. What we're actually seeing is the birth of the world's first global internet-native economy.
Seen from this lens, it becomes clear that the superficial similarity between crypto and existing products is far from reality. Instead, web3 products perform specific functions in the digital economy that offline analogues can't fulfill. Crypto tokens are the first digitally native asset and an entire digital economy is developing around them that is parallel to the traditional economy. This is the real significance of web3.
To fully understand how web3 represents the emergence of a digitally native economy, let's first briefly review what web3 actually is and how it is distinct from previous eras of the internet.
The 3 Eras of the Internet – read-only, read / write, and read / write / own
The history of the internet is often divided into three main periods.
Web 1 was the "read-only" era of the internet. Roughly from the 1980s to the early 2000s, it’s when most of the internet consisted of static websites. Internet users read online content or information without interacting with or generating content themselves — characterized by websites like Geocities, Yahoo, and AOL.
Web 2 is the "read / write" era of the internet that we're familiar with now. Internet users don't only consume online content, but generate much of it themselves — social networks like Instagram, Twitter, YouTube, and TikTok are platforms supplied by user-generated content. Data is "written" to these platforms — centralized databases that own user data and can do whatever they want with it irrespective of users' wishes (including selling it to advertisers or arbitrarily taking down content and/or banning users for any reason they wish).
Web3 is the “read / write / own” era of the internet that is emerging. It leverages blockchain technology to enable users to own digital assets and their data. Web3 also represents a return to open-source protocols that cannot be altered or manipulated according to the whims of centralized companies like Google and Apple. As Chris Dixon has pointed out, blockchains are computers that can make commitments. In web3, users are able to create content and build applications on top of blockchain protocols without fear of being "rug-pulled" by arbitrary changes.
What distinguishes web3 from the two previous eras is ownership, and that ownership is enabled by tokens, which are the fundamental unit of value in crypto economies.
Chris Dixon has called tokens a "new digital primitive, analogous to the website." Tokens are internet-native assets that incentivize open network participants to work together without requiring a human intermediary or central authority. Instead, the operating rules are encoded at the inception of a protocol, enforced by smart contracts and can't be changed without the consent of network participants.
As a result, tokens enable online protocols, networks, and applications to be built in a decentralized way — governed by token holders rather than a centralized corporation. Data about who owns which tokens are "written" to a public and immutable blockchain.
There are two broad categories of tokens — fungible (i.e., interchangeable) and non-fungible (i.e., unique) — which play different roles in the digital economy. Tokens stored on public blockchains distinguish web3 from previous eras of the web. These tokens enable digitally-native property rights which for the first time will unlock the ownership layer of the internet.
The Building Blocks of the Digital Economy
In 2017, Balaji Srinivasan called web3 the "internet of money." As the ecosystem matures, we are seeing that web3 is broader than just magical internet money— it’s now developing into a full blown parallel economy that is native to the internet, with the "internet of money" being just one important aspect.
To understand this, let's break down the traditional economy into its component parts:
These five basic parts all perform necessary, complementary functions in modern economies. Without exchanges, goods would be hard to trade and the division of labor would become impossible. Without institutions, coordination and cooperation between different actors in the economy would be more difficult. Without money, exchanges would not have liquidity and we'd have to rely on a much more inefficient barter system. Without productive assets, there would be no goods, and without goods, there would be no economy.
As it matures, we are seeing that the digital economy is recreating the same five basic functions organically to parallel the traditional economy.
1. Fungible tokens
Fungible tokens are the currency of the internet-native economy. For example, ERC-20 tokens are fungible tokens on the Ethereum blockchain. They can be exchanged for other cryptocurrencies at a market rate based on demand for the underlying tokens. In contrast with fiat currencies, cryptocurrencies are native to the internet, governed by decentralized networks, and secured against counterfeit and arbitrary supply increases by smart contracts on public blockchains.
2. Smart contracts
Smart contracts are the productive assets of web3. They are programmable contracts that automatically execute when preset conditions are met. Unlike other types of automation, smart contracts run on public blockchains. As a result, smart contracts are open source code that natively integrate with crypto tokens. This allows developers to build complex apps across gaming, social, financial services, etc. that are highly interoperable. The productive assets of the traditional economy (e.g. factories and machines) allow for mass production of physical goods; similarly, smart contracts, which are the productive assets of the digital economy, allow for the mass production of digital goods (i.e. NFTs and fungible tokens).
NFTs (non-fungible tokens) enable decentralized ownership over digital goods. Prior to NFTs, the ownership of digital items — like a sword in World of Warcraft, for example— was determined by the web2 company that hosted that specific digital environment. Blizzard’s database keeps track of which user owns what WoW item; this means that a player does not truly own the items in its characters’ inventory — if Blizzard decides to erase the item, or depreciate its rarity by 1000x, or confiscate it, it can do so at a whim. Moreover, a player cannot take the item he or she “owns” in WoW to another game.
WIth NFTs, the ownership of a digital good is enforced by smart contracts on public blockchains, just as with fungible tokens. But unlike fungible tokens, NFTs can be used to tokenize (i.e. enable digital ownership) for digital goods like works of art (e.g. a Beeple painting) or media (e.g. a video card on NBA Topshot).
4. Decentralized Exchanges
Decentralized exchanges like Uniswap (a crypto trading protocol) and OpenSea (a peer-to-peer marketplace for NFTs) are to the web3 economy what the stock market, retail stores, or ecommerce are to the traditional economy. Just as the stock market allows you to buy and sell traditional equities, decentralized exchanges like Uniswap allow you to trade crypto trustlessly and without a centralized intermediary like Coinbase or Gemini. And just like you can buy physical goods at Walmart or online on Amazon or eBay, you can buy crypto-native digital goods on OpenSea.
DAOs are decentralized institutions; decentralized versions of traditional companies which allow people who work or participate in the project to own it and make collective decisions using smart contracts. As Packy McCormick recently put it, “DAOs are a new way to finance projects, govern communities, and share value” — native to the internet. Examples include ConstitutionDAO, which recently raised over $40 million in one of the most successful crowdfunding campaigns ever in an attempt to secure collective ownership of an original copy of the US constitution, which ultimately failed.
DAOs are to the internet-native economy what the joint stock corporations were to the traditional economy — a new way of organizing people to fractionalize ownership, engage in joint enterprises, pool together capital, produce products or services, and make collective decisions. Just as traditional corporations own many of the productive assets (factories) and produce many of the goods (food, cars) of the traditional economy, it is likely that DAOs will end up owning many of the productive assets and producing many of the digital goods within the web3 ecosystem.
Seeing the whole picture
Considering any of the individual building blocks of the crypto economy by themselves, it’s easy to miss their true value or utility, just like it’s hard to see the value of any individual part of a larger system in isolation.
But putting it all together, we’re able to see that Web3 enables digitally-native products to be produced, owned, and traded via blockchain technology in ways that were not previously possible. The best way to understand different parts of the web3 ecosystem is according to the economic function they perform within a new internet economy that is both separate from and parallel to the internet economy.
What's next for Web3?
The framework of "web3 as an internet-native economy" also clarifies how web3 is likely to evolve.
Today, for example, we have the following at scale:
- Cryptocurrency (money) - ETH, BTC
- Crypto finance - DeFi protocols for exchanging, stablecoins, lending, borrowing
- Crypto art - early NFTs like Bored Apes, Crypto Punks, etc.
- Crypto media - a more generalized form of NFTs. Any form of writing, video, or generative art (art based off of code that changes based on certain factors) that has been tokenized.
Soon, we could see massive adoption of the following:
- Crypto social networks - crypto-native versions of YouTube, Spotify, Instagram, etc. (perhaps built on layer 1 protocols like deso.org) where people are rewarded for creating content with tokens; and instead of relying on algorithmic curation of feeds and lists, people with tokens get to decide on how content is curated. Moreover, things like "likes" and "shares" can be turned into portable tokens owned by users themselves. This could be used to completely change how social interaction happens online.
- Crypto gaming- the ability to own in-game items that are portable across different gaming environments and tradeable on a global 24/7 marketplace.
- Crypto work - DAOs with freelancers getting paid in stablecoins and equity tokens with streaming payment solutions. Or, task-based payment for discrete tasks, as currently exists on 1729.com.
- Crypto firms - new types of organizations built without a CEO or board of directors, and governed by tokens and small, focused-committees (i.e. DAOs).
- Crypto states - Balaji Srinivasan has talked a lot about the fact that you could see a successful community in crypto buying a small plot of land, having all the payment being via tokens, and having decisions done through an on-chain governance process.
The birth of the crypto-native creator economy
Additionally, we could soon see the evolution of a crypto-native creator economy in which creators generate revenue through NFTs.
Revenue could then accrue to an on-chain treasury contract instead of being paid to a bank account. People can then A) see capital inflows and outflows, and B) token holders can decide to spend the treasury on grant programs, bounties, and investing in other projects.
You can think of an on-chain treasury contract like a multiplayer bank account that's open and transparent. For example, Uniswap has a multi-billion dollar treasury, and they use a portion of that to pay people to build products on top of Uniswap.
When creators and communities are able to generate revenue through NFTs, it can flow into treasury contracts that then decide how the money gets used, whether investing in other projects, investing in the community, or just letting it sit there and earn yield.
NFTs provide utility in a number of different ways, such as access to an online community (e.g. BAYC), licensing potential, and IRL events. There are different types of NFTs that creators can generate revenue from which can perform these functions:
- 1 of 1 NFTs — canonical NFTS, things like the Beeple work which sold for $69 million. Only 1 person can collect it, with the downside that this usually prices out most people
- Open edition NFTs - an emerging model we're starting to see. These can be priced at different tiers according to their relative scarcity, like a gold version (1 of 1), silver version, etc. that gets more common. These can be any type of media; art, content, music, writing, videos, etc.
- Tiered subscription NFTs — instead of buying a subscription, you can buy something you can display, and play with collecting subscriptions to unlock other benefits. Subscription NFTs will be tradable on global 24/7 marketplaces and enable early backers to share in the upside of a creator’s work.
- Staking rewards — Web 2 companies like Spotify have opaque ways to curate media playlists. With open protocols, you can have the community decide via tokens and voting rights to surface their favorite content and create a real-time leaderboard, thus giving tokens value while also creating potential rewards for producing outstanding content (maybe if you're at the top of the leaderboard you get part of a prize pool).
Other emerging spaces in web3
Web3 is still in its very early stages, so a list of possible future developments would be endless. With that said, other near-term market opportunities for the internet-native economy likely also include things like:
- DAO tools for specific verticals like musicians, artists, NFT collectors, investors, and writers.
- Identity & reputation management tools. Right now you just have a long hexadecimal string as your address, what are better ways to build identity and reputation?
- Mobile wallets with better fiat on-ramps and more social features around discovery, profiles, comments, etc.
- Crypto bootcamps / accelerators. What if you teach people to become a solidity smart contract engineer or community manager for a crypto project and they get paid in tokens and you get a percentage of their tokens, similar to ISAs in Lambda School but now with a universal token that everybody can buy into?
The opportunities and possibilities for the future are virtually endless, and no one can perfectly predict what will happen, just as at the dawn of the previous era of the web it would have been difficult to predict the success of huge swathes of the internet like Instagram (Facebook was famously ridiculed for its acquisition of a "photo filter app") or Snapchat (ephemerality as a feature, not a bug, would have been hard to predict from first principles).
But while there is great reason for optimism for Web3’s future, there remain a few obstacles to overcome before the internet-native economy can fully flourish.
- Gas fees / Scalability - this is the most frequently mentioned obstacle today, but things like layer 2 solutions, ETH 2, and side chains are being developed which aim to solve these within the next 6-24 months.
- Smart wallet / UX - going from $ or fiat in a bank account to crypto in your wallet is still pretty janky, but this will change as web3 begins to mature. Users onboarding to web3 products typically experience a lot of friction up front.
- Not enough builders - there are a lot of problems to be solved in this space and huge demand for builders who can deliver the solutions. This is also likely to improve in the medium term.
Despite these obstacles, we have seen a clear inflection point in the level of enthusiasm and public interest in web3 in 2021. So much so that the hype has probably outrun reality for the time being — if we were to chart our current position on the Gartner Hype Cycle, it would probably look like this:
But if we pull out to a longer-term view, the digital-native economy is barely more than 10 years old, and some key aspects of it (NFTs, exchanges) are much newer. As Chris Dixon recently pointed out, today, there are only about 10 million Ethereum users, which is 0.2% of the total number of internet users. Adoption is likely to massively scale over the coming decade.
The internet-native economy is therefore in its infancy. Builders and creators now have a generational opportunity to meaningfully impact the next era of the internet.
As for the public — just as the narrative that the early internet or that mobile was a novelty with no real-world usage died once internet adoption scaled to billions of people, so too will this narrative die when adoption for web3 scales to the point that its real nature is clear to a broad base of users.
It's likely just a matter of time.