There is a lot of discussion of Web3 lately. Is it a scam? Is decentralized finance Web3? Will Web3 destroy Web2? In this blog post we will talk about what Web3 is now and what Web3 allows us to build tomorrow.
What is Web3 now?
Right now Web3 is a technology paradigm which supports two main types of services Decentralized Finance (Defi) and Non-Fungible Tokens (NFTs). A lot of online discussion about Web3 focuses on whether NFTs are valuable or if Defi is a scam. People want Web3 to be a scam. In my opinion that is the same as looking at pets.com in 2000 and concluding that Web 1.0 was a scam.
We are just starting to build software using Web3. And it’s going to be awhile before someone creates the Amazon.com of the Web3 era. Right now we have NFTs and Defi. NFTs are an interesting way to sell ownership of digital goods. An NFT is not a JPEG on the blockchain. Strictly speaking an NFT is a unique identifier on the blockchain. Through metadata you can add any rights to that NFT you want to. Is that useful? Are all NFTs worth $60 million? I don’t know, some people think they are valuable. And we will see what products come out of it over the rest of the decade.
How about Defi then? There are two main Defi products I know about. Yield farming and token swapping. Yield farming is the idea that you give your tokens to a smart contract, and then the smart contract gives you interest in return. In my opinion yield farms are mostly scams. Yield farms are evolving to combine the characteristics of gambling and ponzi schemes. Does anyone really believe they can earn 10% interest per day by investing their money into Drip? I don’t think there is any real product that yield farms produce. Some claim they provide liquidity, but liquidity does not double dumb money every year.
However, token swapping is a real product. Decentralized exchanges allow you to swap your tokens for any of the myriad cryptocurrencies out there. In seconds, with relatively low fees. That is useful in a world with incredibly large numbers of tokens.
How is Web3 different from Web2?
Web2 is probably best exemplified by Facebook. You have a Facebook account, using that account you can post on Facebook and Instagram, message your Facebook friends, sell things on the Facebook marketplace, etc. Facebook owns your account data. If you want to rebuild your friend graph on another platform its going to take a ton of effort. And if you don’t follow Facebooks rules they can simply delete your account. In a core way you have created a digital identity using Facebook’s platform which Facebook owns.
The key difference between Web2 and Web3 is that in Web3 you own your digital identity. Your cryptocurrency wallet is now your digital identity. Specifically, your wallet’s public key is now your digital identity. This is very different from Web2. In Web2 you use other people’s services and your identity lives in those services. You create a Facebook account using your Gmail account. Your root identity is just an entry in somebody else’s database.
Why does owning your online identity matter?
First of all getting banned is much less of a concern. You control your online identity via ownership of your private key. If you buy NFTs via opensea.io and subsequently are banned from opensea.io all the NFTs you bought remain your property. In contrast if you bought League of Legends skins and were banned you lose your entire investment. Does it matter if NFTs and League of Legends skins are really valuable? No, but you definitely spent money on them. And you would be pissed if your $300 JPEG was lost.
Web3 is the difference between being a guest on Facebook’s servers and being a citizen of the internet. Being a guest is nice because Facebook takes care of everything. But guests don’t get a say in how they are treated.
It is hard to tell how big of a deal owning your digital identity will be in the future. So far we have Defi and NFTs as examples. Whats good in the Defi and NFT world? My favorite is how user accounts work. You may never have used opensea.io, maybe you bought an NFT from another platform. But you can still log in to their platform. They will ask for your email, but its not required. All they need is for you to prove ownership of your public key and they can populate your account data from the blockchain. Don’t like the UI or the fees? Log out of opensea.io and find another NFT marketplace. All your NFTs will be there too.
The process of logging in and out of websites is totally different because you own your digital identity. You don’t need to use an email to prove you are a real person. You don’t need a password because you just sign a message with your private key to prove your identity. The biggest losers of Web3 may very well be password managers.
The interesting part of Web3 is that the users own their digital identities. It will be a paradigm shift in how the internet works with some control moving from software platform providers (Facebook, Google, etc) to the end users. It’s not a scam, you really will be able to control your digital identity. But Web2 is not going anywhere anytime soon. Email isn’t going to stop relying on someone else’s machine. But you might finally be able to encrypt your emails because you know your friends public keys.