Web 3: A Path Forward
Web 1: The Unraveling and Web 2: The Crisis broke down the series of events, innovations, and issues that brought the internet to where it is today. It’s apparent that we live in a predominantly digital era and most websites today still follow the Web 2 business model where the users are the ultimate product.
Web 3, however, is a technical philosophy that has disrupted this model by empowering users to own the products they’re using and it is a controversial topic at the moment. Some say it’s a myth and others may define it differently than how you understand it, but there’s no denying that users’ relationship with the internet is changing.
For clarity, below is a one line description of each time period.
Web 1 = Content delivery networks.
Web 2 = Content creation networks.
Web 3 = User owned networks.
Web 2 is the bridge between Web 1 and Web 3 and it was absolutely necessary but it presents a pandora’s box of issues regarding privacy concerns, censorship, and content distribution. All of this stems from the centralized intermediaries who have become monopolies over the past few decades. They govern news feeds, browser searches, and how people connect and spend their time online.
This article is going to break down how users of Web 3 can own the networks they’re a part of, how open source ideology is transforming the fabric of the internet, and how Web 3 generates unforeseen value.
A Way Forward
Throughout this deep dive series, advancements in technology and culture have been viewed through the lens of the Strauss-Howe Generational Theory which details a recurring cycle of generations that introduce archetypes who possess behavioral traits associated with the time period in which they grew up.
The surrounding context of the respective upbringings of these generations directly influences how they view the world and how they behave as adults.
Artists & Heros
According to the theory, the generation known as Artists grew up during the Crisis period (~2001-present) and we left off with them butting heads with the Hero generation who grew up during the Unraveling Period (~1982-2000) and are now in monopolistic positions of power.
Artists are known to grow up into thoughtful adults as they tend to emphasize equality and practicality in contrast to the chaotic indecisiveness they inherited from the context of their upbringing. The divide between these two groups is very much a result of the impending power transfers that Web 3 is enabling.
Currently, the Heros like Mark Zuckerberg (Born 1982) and Evan Spiegal (Born 1990) are not in a position where they want to decentralize their control. Web 2 has worked out very well for those in power as magnificent amounts of wealth has been generated at the cost of users’ privacy and autonomy. The Artists archetypes who are participating in Web 3 see massive opportunity although most of the generation is still confined to the restraints of Web 2 due to their digital lives being maintained by Web 2 platforms.
Assets & Valuations
Artists are growing up during a time period in which asset valuations around the world are at unprecedented levels. This is usually the case as global GDP grows, but the rate of change in regards to the rise in asset prices has never been this parabolic. From a traditional economic standpoint, the fact that interest rates have been declining for multiple decades is also a sign of a fragile global economy.
With stocks and risky assets at all time highs and bonds and risk-free assets yielding all time lows, where should all the money go?
Decentralizing control and building new assets is one method of working around the present system. The crypto industry has introduced more innovation and financial products than most people can keep up with and these assets are serving entirely new use cases and don’t fit the molds that traditional finance has come up with.
Balajis Srinivasin has a great quote that sums up the enhancements being implemented:
“Tokens are not securities in the same way that YouTube is not Television.”
Some tokens may have qualities that mimic securities but they also have new qualities that have not been defined by any regulatory frameworks. These qualities are effectively enabling users to own the networks they are a part of.
User Owned Networks
When the web was first envisioned, developers had a utopian perspective of free information, borderless interconnectivity, and individual solidarity. This was all good in theory, but in practice, the web ended up being controlled by a handful of companies who now have far too much influence on humanity’s trajectory. Web 3’s focus on decentralization and interoperability looks to dismantle this paradigm and usher in a more equitable and capable internet.
You may think that user owned networks have existed for a long time given that you can invest in the stock of a company but it’s not the same thing. Investing in companies requires far more barriers to entry than participating in a network does. This concept is best described with a simple thought experiment: Imagine being paid in Facebook shares based on the value you brought to the platform. This new model of user engagement incentivizes value creation and ultimately beckons a better Facebook for all users of the network. This benefits the users and Facebook. Win-win. So why wouldn’t Facebook do this?
First of all, Facebook went live in 2004 which was more than a decade before Ethereum’s private sale. Ethereum was the first programmable blockchain in the sense that it enabled smart contracts and its innovations were necessary for user owned networks to be possible. Smart contracts enabled the ERC20 and ERC721 standards to exist, which have since changed the entire crypto landscape.
ERC20 & ERC721 Standards
ERC20 tokens enabled anyone to deploy a fungible token to the Ethereum blockchain and ERC721 tokens enabled anyone to deploy a non-fungible token (NFT) to the Ethereum blockchain.
These standards have inspired others and have been implemented across other chains including Solana, Terra, and Avalanche. In each of these cases, users now have the ability to own the network they are a part of. There were no standards even remotely similar to these that existed when Facebook hit the market, as there were no blockchains for these standards to operate on. Facebook has operated and helped pioneer the Web 2 model of generating cash flow which focuses on advertising monetization and the collecting and selling of user data.
Cryptocurrency as Equity
If you were to go to most financial advisors right now and ask them how to position your portfolio with regards to cryptocurrencies and equities, your answer would probably be 95% equities and 5% crypto or even 0% crypto. This draws a clear line in the sand between cryptocurrencies and equities when they are actually more alike than they are different.
Sure, some cryptocurrencies serve zero use cases and are nothing more than a speculative instrument but others are entire networks. If you were to invest in ETH, SOL, AVAX, ALGO, or LUNA for example, you would be owning a piece of these networks and this tradable ownership could be considered equity. Each of these cryptocurrencies are the native coins used to operate on their own respective blockchains, and as the value of these networks grow, so does the value of their coins.
Tokens, such as the ones conforming to the ERC20 standard, are built and deployed atop these networks. These tokens can have their own subnetwork of users so owning a high quality token like RAY or SLRS will be no different than owning equity in these subnetworks.
Of course, each of these tokens have their own use cases, tokenomics, and distribution and should be diligently researched before speculated on.
Another vital component of Web 3 thus far has been the innovations in the fundraising industry. Traditionally, startup companies have either gone through a series of venture capital funding rounds or have been bootstrapped. This was until Mastercoin implemented the world’s first Initial Coin Offering (ICO) in 2013, an innovation which spurred the imagination of many investors later on during the 2017 ICO bubble.
This bubble, which was relatively similar to the Tech Bubble but at a much smaller scale, displayed the excitement that people had in regards to how projects and companies could now raise money. Some were raising a lot of money, and this attracted quite a few nefarious actors and influencers like John McAfee and Floyd Mayweather who promoted garbage. The ICO industry has since evolved into multiple variations of ICOs that each serve different purposes. These will have lasting impacts on Web 3’s fundraising and development going forward.
For the record, there are still far too many nefarious influencers promoting garbage. Kim Kardashian promoted Ethereum Max. Influencers like BitBoy are constantly exposed for malfeasance. When there is money involved, anything can happen so be wary who you follow.
ICO / IDO / ITO / IAO / Etc.
ICOs are a spin off of Initial Public Offerings (IPOs), which is the traditional method of large scale fundraising for companies looking to enter the public markets, so it’s not surprising that there are so many spin offs of ICOs. These include but are not limited to the following:
NFTs have endless utilities. Just think of them as a medium to facilitate digital ownership. Their fundraising potential has only begun to be tapped and will likely affect how many projects finance their operations going forward.
Aurory recently issued 10,000 Aurorians which have become one of the most traded NFT projects on Solana. This resulted in 1,000 SOL (~$180,000) in minting sales and passive, perpetual income due to secondary sales.
Then the developing team raised over $108 million with an IDO.
Anyone who minted and held an Aurorian has experienced significant price appreciation, a personal relation to all the other people who own (and perhaps identify) with Aurorians, and now this community has a financial stake in the development of the project.
The Infinite Garden
There is also a documentary being made titled Ethereum: The Infinite Garden that raised nearly 1,036 ETH, now valued at over $4 million, through the sales of NFTs associated with the movie.
Electronic music producer 3LAU decided to list his previously released album from a number of years ago for sale as an NFT and he netted over $11 million. This has enabled him to finance present projects such as Royal.io which is set to disrupt the royalty industry with NFTs.
Grants are great. They’ve historically been able to fund important projects within academia and elsewhere but have recently kicked it up a notch due to crypto related innovations like DAOs.
Gitcoin was designed to enable the funding of public goods. These goods are most often open-source software so many of the grants go to coders, developers, and founders. Gitcoin grants are decided upon by the Gitcoin DAO which is composed of GTC holders. Gitcoin’s definition of public goods is based on non-rivalrous and non-profitable endeavors which is usually related to public digital infrastructure.
Gitcoin has instituted the use of quadratic funding, which in summary, is a format for projects with the most number of backers to have priority in regards to funding when compared to projects with ample funding but less backers. For more detail, read Vitalik’s post on his website about it, and then read all of his other posts for good measure.
Blockchain & Project Grants
If you follow crypto related content on LinkedIn and casually scroll through your newsfeed, you’ll be hard pressed to not find articles related to new blockchain investment funds. Blockchains and DeFi projects are constantly doling out grants that are meant to help improve their surrounding ecosystem.
Treasury Grants & DAOs
DAOs are still an unproven technology yet their utility and benefits seem very hopeful. Their legal status and funding mechanisms are both still a grey area although some have succeeded to implement payments to participants and projects in their communities.
My favorite example of this is NounsDAO.
NounsDAO is an ambitious NFT project that is going to Mint One Noun Every Day Forever. After 103 days, these Nouns’ sale prices are averaging well above 100 ETH and each one signifies entrance into NounsDAO. The entire project is governed by smart contracts and 100% of every sale is deposited into the community’s treasury, which at the time of writing holds over 14,456 ETH, or $69,388,800. That’s an average revenue stream, and profit, of $673,677.67 dollars per day. Good luck finding any startup with those numbers.
This treasury is used to help build products and projects surrounding the Noun community, such as Nouns.com, a hot or not game between pairs of different Nouns, and even a hangout area built within the CryptoVoxels metaverse. They also decided to donate 30 ETH to charity and you can actually see the record of them doing so. Below is an image of transactions from their public treasury wallet.
Imagine the possibility of a crypto friendly city like Miami, Lisbon, or New York deciding to level up their transparency and operate all financial transactions on a public blockchain. It probably won’t happen but with a Web 3 framework, it could.
Blockchains are the fundamental settlement layers of all the Web 3 dApplications (decentralized applications) being built and public blockchains are open source. dApplications are also open source, which helps explain the ridiculous level of development that occurs within the crypto industry every year. Developers usually have access to the entire backend of a dApp and there exist functions that can be forked, or copied and expanded upon.
Interoperability is the property of Web 3 that gives these DeFi applications the ability to interact with one another. You can now trustlessly and permissionlessly cultivate and manage your own wealth. A prime example of this new model of how money can be made and managed is in Yearn’s vaults.
As you can see, there is a complex network of interactions going on behind the scenes that utilizes 3rd Party DeFi Service and a series of actors whose actions are all governed by smart contracts. An example of these 3rd party services being used in tandem is below.
- A trader wants to maintain exposure to ETH but also wants to provide liquidity to a DAI/ETH pool to generate a yield.
- The trader can deposit ETH into MakerDAO and generate DAI which can then be used in conjunction with ETH to be deposited into a liquidity pool on a platform like SushiSwap. They will receive LP tokens which need to be sold back to the pool or burnt in order for the rewards (interest) and the principle to be withdrawn.
- Once the rewards have been claimed and the principle has been withdrawn, the trader can sell back the DAI to MakerDAO in return for the deposited collateral, ETH.
This trader has now effectively generated a yield on a borrowed asset while maintaining exposure to their collateral. Imagine how complicated this can get. It becomes an art referred to as Yield Farming.
Money managers and banks custody assets and need ways of keeping tabs on them. While financial dashboards may not seem like an important topic to most people, they’re products that can lower one’s need for any bank or money manager. They’re tools for you to go bankless.
DeFi enables you to do basically everything you can in traditional finance and more in a permissionless and trustless fashion. In Web 2 and traditional finance, you can connect your banking and investment accounts to dashboards like Mint and Copilot but you have to divulge all your accounts’ information to do so. In Web 3, you can have multiple wallets operating across multiple chains doing multiple complicated activities such as liquidity providing, borrowing, or utilizing synthetic assets and have it all displayed within one interface.
When you connect to a multichain wallet dashboard like DeBank, all of your activity will be present, filterable, and graphically represented. Other worthy dashboards include ApeBoard, YieldWatch, and SonarWatch.
These dashboards not only give you the ability to self custody your money but they do so without having any access to your information.
When DeFi is enabling extremely risk-adjusted rewards of 18-20% APY on stablecoin lending through platforms like Anchor, why would you opt to keep all your money in a Chase Savings account yielding 0.1% annually? This is not financial advice, it’s just a question.
As the saying by Pablo Picasso goes, “good artists borrow and great artists steal”.
Such is the case for many DeFi protocols as they are often forked versions of each other with attempted enhancements. Forking can enable unprecedented levels of innovation but it can also enable bad actors to make nefarious platforms very easily, especially on blockchains with low fees like Binance Smart Chain (BSC). Forks are ultimately provoking competition and they help instill a constant need for projects to stay on their toes rather than become complacent.
An infamous example of a forked project is SushiSwap. During the DeFi Summer of 2020, Uniswap had been the go to DEX for most people as its daily volume was surpassing that of Coinbase’s. A competitor called SushiSwap came along and forked the project while adding an enhanced incentivizing reward system through their issue of SUSHI tokens.
This drained a substantial amount of volume from Uniswap and they responded by issuing an airdrop of UNI tokens to anyone who had participated on the platform earlier. UNI token holders govern the platform and UNI’s market capitalization has since risen to nearly $13 billion at the time of writing. SUSHIi’s market cap is just over $2 billion.
Uniswap and Sushi are great examples of how an open source system promotes competition and innovation. Decentralized networks that run on cryptocurrencies have more utilitarian use cases than centralized networks without cryptocurrencies. Liquidity pools are an easy way to explain this.
To learn more about Liquidity Pools in detail, read this. For the sake of this article, you just need to understand that liquidity pools enable anyone to provide liquidity for somebody else to trade off of in an anonymous manner.
These pools generate trading fees which are transmitted to the liquidity providers and in many cases, to a community governed treasury. The liquidity providers are earning a yield that doesn’t exist in traditional finance. Its creation is a result of being a byproduct of the utilization of non-custodial wallets and the AMMs built within liquidity pools.
Below is a screenshot of Token Terminal’s home page which displays the profitability metrics such as Price/Sales and Price/Earnings ratios of each DeFi protocol and underlying blockchain.
All of this value has been generated through the innovations that make up Web 3.
Industries have been defined by centralized intermediaries building and investors obsessing over what are called economic moats, which are facets of a business that separates it from others.
Moats exist in Web 3 in theory but they don’t serve the same purpose as they have in Web 1 and 2. Sure, innovation is incentivized and rewarded but the competition is unbridled due to the open source nature of development. When more eyes are looking at something, more mistakes are noticed.
You’ll continue to hear stories of white cap hackers that expose vulnerabilities in open source protocols in return for a reward or just for the good of the community. This inadvertently generates massive amounts of value by securing the network.
White Cap Hackers
There was a hacker who managed to steal over $600 million dollars from the Polygon Layer 2 scaling solution and it was all returned. The Polygon team then attempted to recruit said hacker and he declined by responding with messages written into smart contracts such as the one below.
There was another hacker who exposed a $850 million dollar vulnerability and he was awarded with a $2 million dollar bug bounty.
This generation of value through white cap hacking and bug bounties was not an intended consequence of Web 3 but it is a happy accident. Unfortunately, black cap hacking is still an issue as there have been over 70 DeFi exploits resulting in losses of over $1.5 billion.
While most of the world still operates under the umbrella that Web 2 is holding out, everyday there are more people switching their desired use of the internet to function in ways that only Web 3 enables. Heros are either adapting to this new paradigm or fighting it off. The Artist generation recognizes this along with the inherent issues of Web 2 and the immense value propositions of Web 3.
It’s not just a complex web of financial and security related innovation but it’s an even more complex web of communities that are coalescing to form a global perspective. This perspective is naturally more decentralized and permissionless than the centralized vision of Web 2 and it aligns more so with the original, idealistic vision of the world wide web that the early developers had at the beginning of Web 1.
There are people who doubt this new paradigm exists or has any legs to stand on in the same way that there were people who doubted trusting a website with their credit card information. These are the same people who are right clicking and saving NFTs while doubting any substance or potential value within them. We here at Solflare like the .jpegs.
The world has evolved and will continue to do so but the implications will be staggering once Web 3’s innovations are adopted into the mainstream. This adoption may take a while due to governmental bodies, regulatory restrictions, and financial incumbents wanting to remain in control but fortunately for the world, Web 3 is not just around the corner, it’s already here.