What Problem Does Web3 Solve, Anyway?
0xE4f6
June 10th, 2022

I want to start this post off by stating that I have very little interest in freakishly expensive cartoon animal JPEGs, private Discord servers, or hexagon profile photos. When people think of web3, or look at what the “people in web3” are doing, outside of direct scams this is generally what they see. It looks as though the highest achievement of this third web is that the rich and famous have been given a new way to show everyone how disconnected they are from reality. And they are. I don’t have a lot of explanations for it, and while I too got caught up and enamored with expensive cartoons during the peak of the mania, I have no desire to rationalize any of it away. Instead, for this post, I want to look beyond it.

My view of web3 is that it offers an important unlock for software developers. It allows them to build and consume general-purpose, open, permanent protocols and APIs that are paid for by their consumers in real-time. These protocols and APIs provide a universal database that can be used by anyone. It allows for permanent, unique objects that can be taken anywhere across the internet without losing sight of their owners, creators, and history. If ape JPEGs are a terrible cartoon use case for this new unlock, what other real-world use cases might be more exciting?

Most real-world web3 protocols and apps right now (that aren’t scams) are financial, like Uniswap for trading assets, Yearn for getting yield on assets, and Compound for borrowing and lending. At first glance, we might simply see new ways for degenerates to gamble. And we’d be right. If we change lenses, however, and simply look at what has been built we’ll see open protocols that anyone can build a frontend for without the need to ask for API keys. They can be incorporated into anything and remixed by anyone. And, if the promise of holds, they can't be shut down or their data corrupted.

To build other non-financial services at scale, we’re going to need to batch transactions saving users on insanely high transaction costs. This is happening, however, for the rest of this post, I want to ignore that. This post won’t talk about scaling solutions or different chains or throw obscure silly technical terms at you. Instead, I just want to answer the questions: “What problem does web3 solve, anyway? What will it look like?”

TL;DR: Web3 offers a general-purpose way to represent ownership of data, assets, and certificates that maintain their authenticity, history, and ownership state across the web.

The Limits of Web2

Asset titles, licenses, and certificates can't live on the internet easily in a truly meaningful and native way. If you do put them online, there’s very little one can do to ensure they are authentic or valid, especially if you want them to remain authentic across platforms without building special-purpose APIs and integrations. Allowing their ownership and control to be easily transferred between different people and applications is also not trivial.

If you graduated from Harvard and you want this achievement displayed on some online profile in a way that can be easily verified, Harvard would need to build and host an API that exposes their alumni list mapped to user accounts in their database, as well as a way for apps to authenticate their users to ensure that they are who they say they are. And Harvard would need to pay a full-time team to maintain these services. And all the apps that want to get this data would need to create a developer account with the Harvard Web Services and get an API key to ensure they don't spam the service. Assuming that anyone would want this for any reason, it’s entirely infeasible and almost certainly not worth the effort.

Instead, we can simplify the entire thing by schools issuing an NFT to students. So long as an app or user knows Harvards wallet address or domain name, they can verify that someone does have a real degree from Harvard, and it will work as well as someone’s ability to currently verify that someone has a “real ape NFT”. The amount of effort this would take is trivial.

Expand this Harvard example, which is incredibly general, to certificates and licenses in general. Companies want to build applications connecting licensed individuals who hold certificates with their clients, while removing manual verifications and minimizing fake accounts. NFTs allow us to do this without requiring issuers to build and maintain specialized APIs and integrations on a case by case basis.

As far as I can tell, bringing real-world assets and certificates online in a truly native way is incredibly powerful. Currently, if you are issued a certificate that says you are licensed to do {X}, the certificate can only be brought online within the confines of the issuer. You have to log onto their website/app to see any version that other people will trust. If other applications or people want to verify it outside of their site, the issuer has to build an API and service allowing you to authenticate yourself and verify it, or worse, email the issuer manually. The issuer has to host, serve, and control the certificate, and there’s no way for you to take control of it and bring it with you anywhere you want online, without each platform building special-purpose integrations for you. Instead, if a certificate issuer gives you an NFT representing your certificate, you can bring it with you anywhere so long as you can connect your wallet. Your real-estate, hairdressing, law, financial advisor, etc. licenses can all be posted to the top of your Instagram page automatically, allowing anyone to trivially check who issued it and verify its authenticity. All that is required is that you connect your wallet.

Based on many conversions I’ve had, people seem to be easily confused by this concept. “What makes one NFT authentic and others not?”, they ask. “Anyone can create an NFT of anything. I can create an NFT that looks exactly like all of the other real-estate licenses and post it to my Instagram. Who’s to say mine is fake? How would anyone know?” The answer is identity and provenance.

For something to be considered authentic, we need to know where it came from. In the art world, this concept is known as provenance, and NFTs give us perfect provenance. When I look at the real-estate license NFT on your Instagram account, I’ll be able to click into it and see its token ID, the contract/collection it belongs to, and who issued it. And if it wasn’t issued by NMLS, then I can be near certain that it’s a fake. If I’m feeling extra suspicious, I can open a second application like Etherscan and confirm. I’ll be able to see that you issued it to yourself. The fact that I am not relying on Instagram here is key. The data isn’t on instagram; it’s on a neutral permanent database called Ethereum. The same applies to Nike shoes, art, home titles, etc. If Instagram were so inclined, it could choose to control a list of verified wallets, so that NFTs issued by NMLS and Nike would automatically show a check mark, while others wouldn’t.

Extending Web2

Yelp owns all of the restaurant reviews instead of restaurants and reviewers. If someone wants to compete with Yelp they have to start from scratch. If a restaurant decides they don’t like yelp anymore, they can’t easily take their reviews to a new app or platform without the reviews losing their credibility.

In contrast, when I build an app or website today I sit on the shoulders of giants. I have a seemingly infinite number of code packages, libraries, snippets, and APIs available to me, and I can use all of these tools to help me build things faster. I don't have to reinvent the wheel every time I start a new project. However, if I want to build a competitor to Yelp, again, there is one major area where I have to start from scratch: the data and user base. Even if I scraped Yelp and ported all of their reviews, there’s no reason anyone should assume that the reviews are authentic, because they’ve been disconnected from their creators' accounts.

A web3 version of Yelp, if it lives up to its promise, takes the data and infrastructure and makes it available to anyone while not being under the control of any single entity. Any developer can build a new UI for it. Instead of restaurants and users being tied down to one company, they are free to pick and choose whichever apps they please that connect to open protocols. We would no longer have a single company called Yelp. We would instead have an open and permanent protocol and database, and a potentially infinite number of Yelp competitors connected to it, all sharing the same data. Instead of competing with each other on who can hoard the most data, they would compete on their user experiences and services.

Yelp is a pretty inconsequential example. We can apply the same logic to public transportation networks like Uber and Lyft, or services like Airbnb, Rotten Tomatoes, IMDB, GoodReads, or your Twitter social graph.

As an Airbnb host, you can’t move platforms easily without losing the credibility of your reviews. you might have spent years building your review score, but now are stuck with a company that continues to increase their take rate, when you want desperately to move to a new platform. If both your listing and it’s reviews were on a neutral protocol similar in kind to something like @LensProtocol, you could seamlessly move to any competitor also building on the same protocol. In fact, you could exist on all platforms built on the same protocol simultaneously.

On Twitter, @liron argues that the non-existence of a web3 Airbnb is evidence that not only is the project infeasible now but that almost nothing of value can be built here. And he’s right that none of these examples exist yet, but it doesn’t seem to me that we should assume they are impossible in principle. One example we can look at to confirm this is ENS: all of the rules, domains and associated data live on the Ethereum blockchain. Any app can plug directly into the protocol and build their own services around it. People are doing this by building ENS specific tools and no-fee marketplaces. The Rainbow mobile app is doing this by allowing their users to register ENS domains directly in their app. Any app (and there are many) can pull the ENS data automatically and verify that a wallet owns a specific domain without needing to ask for permission. Granting the assumption that Ethereum is capable of scaling, there’s no difference between the domain names on ENS and the restaurant reviews on a hypothetical web3 version of Yelp, or the listings on a web3 version of Airbnb.

But what will all of this look like? What should we expect to see?

Scams. Lots and lots of scams.

There’s more to say, of course, but I wanted to get the most obvious prediction out of the way at the outset: we should predict a lot of scams. Beyond that, I’m unfortunately incapable of predicting the future. But I enjoy envisioning it as much as the next science fiction fan. Thankfully, I don’t think it’s going to be too difficult to predict what web3 will look like over the coming years, because, well, a lot of it is already here.

If you own any NFTs or tokens, you can connect your wallet to any number of different sites and apps and see and manipulate your tokens in different ways. Some applications are special purpose, only surfacing specific types of tokens, while others, like NFT marketplaces, are more general and let you see everything. Depending on where you are, you can perform different actions, or unlock unique features, all dependent on what you hold in your wallet.

I believe this trend will only accelerate, evidenced by Instagrams recent NFT features. Applications and companies of all types will issue NFTs and tokens for a multitude of purposes. Some may be valuable generally, but most will probably be highly specific and valuable only to you. This idea that NFTs are inherently investment vehicles couldn’t be more wrong. Over time, we’ll start to think of our wallets the same way Ash Ketchum thought of his Pokédex. You’ll move through the internet, from service to service, collecting unique items you can carry with you that perform different functions. And to state the obvious: everything here is highly speculative. Don’t be surprised if these are wrong. With that said, here’s a non-comprehensive list of things we should reasonably expect to see over the next 5 to 10 years.

  • When you use an app to work out, if you connect your wallet, you’ll get badges and awards as NFTs. When you connect your wallet to your Instagram, these awards can automatically display on your profile, or get posted to your story. When you decide to test out another fitness app, you’ll connect your wallet, and be suggested the appropriate workouts based on your fitness level.
  • You’ll go to a concert and get a unique, limited addition attendance NFT from the band, which you can immediately post to your favorite social media app. Later, when the same band releases their next album, they might decide to give everyone holding their live attendance NFTs early access. You’ll go to their site and connect your wallet and prove to them that you went to their concert. The benefit for the artist to do this via an NFT instead of some other more traditional method is they can release the tickets themselves without relying on a third party ticket system like Ticketmaster. They can do this while ensuring that tickets in the future are authentic without managing and controlling the data themselves, or relying on another company doing it for them.
  • Using platforms like Royal, musicians will tokenize their music allowing them to sell equity in their future earnings. They’ll sell a set number of tokens to investors and fans which capture a percentage of earnings from their music. By supporting your favorite artists, you’ll be able to take part in the upside of their success.
  • When you complete an online course and get a certificate, it’ll be issued as an NFT. You’ll connect your wallet to LinkedIn, and add the certificate to display on your profile. Now any time someone sees your profile they’ll see your certificate, and can easily click in to see who issued it and verify its authenticity.
  • When you buy a car or luxury watch, it will come with a proof of purchase and authenticity NFT. If you feel inclined to post a photo to Instagram (as so many do), you’ll post it along with the NFT, to give your content legitimacy. And when you decide to sell, you’ll post it online along with the NFT, to prove to people that they can trust that you do own the car, even if you’ve never sold anything before.
  • Currently, buying digital movies acts as a form of platform lock-in. We can imagine a different world where giant tech companies compete on the services they offer; when you buy a movie from Apple you could be given an NFT granting you the right to watch the movie on any streaming service. Apple would take a cut of the sale of course, but other platforms could compete with them, allowing you to move to different services taking your movies with you. And when the movie studio releases a new title, they can give discounts to everyone who owns one of their other movies. (I don’t believe the platforms are directly incentivized to do this one on their own, so I assume some external pressure would need to exist for this to be realized.)
  • When you play a video game, the items you pick up as you play the game will be issued as NFTs, and proof of their ownership will be capable of being brought with you outside of the game. Third-party apps will let you connect your wallet and verify the authenticity of your items, and allow you to do things with them on their external service, like trading and selling, all while ensuring that the original game creator takes a royalty on the sales. Games will be able to check your wallet and change your experience depending on what you’ve acquired in other games. Games built by third-party indie devs could be built around the objects of other games, in a literal way extending the game's universe.
  • Your favorite charity will issue NFTs in exchange for your donations. Like the award NFTs given by the workout applications, you’ll be able to show off your charity donations on your social media profiles, simultaneously promoting your charity organization while signaling to your audience and friends. Charities will partner with other organizations and companies, offering special perks to their most philanthropic members. I heard this specific example as something that Sam Harris has wanted to do with one of his charities, however, I’m unaware of the status of the project.
  • Your favorite artist or content creator will release limited edition NFTs for their biggest fans. Ownership of one of these NFTs will give you special access to private groups where you get early access to content, and special access with the creator and other super fans. This will feel a lot like being part of a Patreon, with the important difference being that the content creator and their fans are untethered from any one specific platform. Currently, people who use Patreon are bound to it; they are under the total control of the platform. If they decide they no longer like Patreon, leaving isn’t an option, assuming they want to keep the majority of the fan base. NFT-based private groups change this. Anyone can build a platform that validates the NFTs owned by fans and allows them to come together as a private group. Each platform will compete on their UX and additional services they offer, instead of locking in creators and fans like we see today. If the content creator decides to move, everyone will be capable of transitioning seamlessly.
  • The NFTs that content creators sell online can be issued from special smart contracts that guarantee a % of future revenue made by the creator. This idea comes from a TED Talk given by the head of Instagram, Adam Mosserri. At a basic level, the tokens sold by the content creators can act as equity in the creators' future earnings. As an example, a creator could sell 1,000 tokens, raising $100,000, in exchange for 10% of future earnings for the next 5 years. Platforms like Instagram, Youtube, etc. can read the smart contract and automatically distribute the revenue to the holders. Every time a check rolls in from Youtube, 90% goes to the content creator and 10% goes to the holders of their equity tokens. Every time the content creator signs up to a new platform, they’ll connect their wallet, allowing the new platform to automatically pick up the contract and execute it for any revenue that is made there.

I could keep going. The examples I chose to present here are incredibly limited. But I hope you get the idea: what we can ultimately expect from web3, as I’ve presented, is the ability to generate or receive digital assets and objects which are capable of moving across the web seamlessly while maintaining their authenticity and history, without the need for issuers to stay in the loop or provide services to external parties who require authenticity. If I were to ever invoke the word “metaverse” it would be in regards to this very specific newly unlocked feature of the internet. It’s not about Facebook, specific mediums like AR or VR, or massive video game platforms like Roblox and Fortnite. The “metaverse” as I like to envision it, is a globally shared and permanent digital reality not owned by any single entity that any company, platform, or person can plug into, regardless of where they are or what device they’re using.

So, what problems does web3 solve?

Problem: The data for {X} is under the total control of company {X}. If a user wants to migrate to a new service, they can’t bring their history with them in a way that retains its legitimacy. Company {X} doesn’t want to let them, and even if they did, it wouldn’t be easy to do this at scale in a way so {X} doesn’t maintain total control. See: Twitter API being public with companies built on it, only to be shut down by Twitter.

Solution: Build an open immutable protocol and database that is not controlled by a single entity, like Lens and ENS. The database and protocol will become the equivalent of a global utility, accessible and open to anyone for any purpose. Optional: release a governance token as a way to monetize and democratize control of the protocol.

Problem: Real-world assets and certificates can’t be put online in a native way that allows them to be instantly validated, transferred, or used in any meaningful way. If I want to get a loan against my home or assets or prove to someone that I’m certified to do {X}, it won’t be as simple as clicking a button on a web form. The friction is too damn high.

Solution: The entities that issue assets and certificates can issue NFTs that represent them. By looking at the issuer/history of an NFT and verifying their address or domain name, we can be confident that someone does own a specific asset regardless of what website we are using.

Problem: Universal log-in, where you bring specific info with you to new apps and services, requires you to rely on a small number of giant tech companies - and the data you can bring with you is very limited and generally outside your control.

Solution: Private keys, ENS, and Sign In With Ethereum.


I think it might be reasonable to believe that single monolithic companies shouldn’t have monopolies on certain data that practically guarantees user lock-in. And that the internet might be better if some data were made completely open and available to any developer who wants to build on it while ensuring that the data can’t be edited by anyone that isn’t supposed to be able to edit it.

I think it might make the world more efficient if we were able to instantly verify the authenticity of assets, licenses, and certificates, without the need for every issuer to run massive APIs and authentication services. All one needs to do to ensure the authenticity of an asset is verify the identity and history of the issuer of its NFT.

And I think it might make the internet better if we became less reliant on a handful of giant tech companies. Or, at the very least, it might be better if we were given the ability to walk away from them without the need to start again from zero.

What About the Critics?

I don’t think there’s anything more divisive on the internet right now than web3, besides politics of course. There seems to be an unending number of intelligent people who believe that web3 is, without doubt, a giant scam; that there isn’t a single redeeming quality about it. The bear market hasn’t exactly helped things. One of their main concerns is that web3 has almost certainly produced far more harm than not. You don’t have to look far to see hoards of people losing their life savings to a web3 Ponzi scheme. And on this specific point, I have to agree. Smart contracts are general purpose. And Ethereum is open and credibly neutral. Anyone can use it however they see fit. And unfortunately, the vast majority of builders are those who want to steal your money. However, it should be obvious that just because a technology has negative externalities doesn’t mean that we should discard the thing altogether. Their argument, if sound, would have to be that web3 only enables scams, and nothing else. As I’ve argued in this piece, I believe that because something like Ethereum is general purpose and credibly neutral, it enables anything to be built on top of it, both good and bad.

There are a lot of other issues people have with web3. There’s no way I’m going to be able to run through them all, for one because I agree with a lot of them, and also because there are just too many. However, I do want to tackle some of the most common that I see. A large majority of objections you’ll see are specifically for Bitcoin, like PoW mining, which I’m going to ignore, because, for the most part, I agree.

OBJECTION: Just use a database. There’s nothing you need to use an NFT or blockchain for that you can’t do with a normal database.

RESPONSE: Ethereum is a globally distributed computer that requires a scarce resource to run which it both creates and destroys as it is used. As a consequence of desiring to use the machine for any reason, we naturally find ourselves valuing the resource, which incentivizes others to run it and keep it alive. It’s this incredible property that gives us assurance that it’s going to be around for a long time. It’s a permanent database anyone can use, while no single entity is solely responsible for keeping it running. Anyone can plug into the database, check its’ state, and be confident that it’s accurate. This is fundamentally different than a traditional database and opens up a whole new world of opportunities. If I don’t want my digital objects to exist and persist outside of my involvement, or be capable of moving across the web without continuing to build special purpose integrations, then a normal database is perfect. However, there are cases where the ability to set and forget something, or ensure authenticity is continually preserved is desirable. I want to be able to add something to the chain, leave it there for 50 years, and come back knowing it hasn’t changed. Proof of ownership is an obvious candidate for this functionality.

OBJECTION: To parrot Liron: no one will want any of this. You aren’t solving real problems.

RESPONSE: In principle, we can use Ethereum to build anything. Granting the assumption that something like Ethereum is capable of sufficiently scaling in the coming years while remaining both trustworthy and general-purpose, we should believe that solving real problems is possible if they exist, and as I’ve argued, I believe they do.

OBJECTION: Crypto is just a Ponzi scheme filled with more Ponzi schemes. There’s nothing real there worth paying attention to.

RESPONSE: I agree that crypto is filled with Ponzi schemes and other horrible scams and nonsense. And while people may use crypto to solely build Ponzi schemes and nothing else, it seems reasonable to believe that non-Ponzi products are also possible. This is reasonable because just as we can easily point to Scams, we can also easily point to non-scams, like the no-loss lottery protocol Pool Together, social protocols like lens, the domain name service ENS, and the borrowing and lending platforms Compound and Aave. Also, I think there’s an important distinction to be made between Layer one networks like Ethereum and the protocols and apps built on top of them. The Ethereum network is a global computer anyone can use to build protocols on. If everyone used Ethereum to build scams, it still wouldn’t mean that Ethereum itself is a Ponzi or scam, because the door would still be open for someone to build something useful on top of it.

OBJECTION: The Moxie Objection. One of the best criticisms I’ve seen has come from the CEO of Signal, Moxie, who makes a clear case for why we might not want to be so optimistic about this. The main claim that I want to focus on here is that web3 isn’t a great improvement from what we’ve seen before, because just like web2 is centralized around a handful of giant companies, like Google, Apple, Amazon, and Facebook, web3 isn’t doing any better. While it might look like you can use any wallet you want, and any app can plug directly into protocols on-chain, he says, behind the scenes, there are only one or two companies that everyone is plugging into. Everyone is using Infura and Alchemy to get data from the chain and using Opensea to pull NFT metadata. His takeaway and core criticism is that web3 is building centralizing forces even faster than we saw with web2.

RESPONSE: Each centralizing force and entity he points to such as Infura, Alchemy, and Opensea, are not gatekeepers to the data on-chain. The state of the network is open for anyone to access, explore, and use as they please by simply running a node. What Moxie didn’t explain well is that Infura and alchemy simply run Ethereum nodes, which anyone can do, and then provides easy to use interfaces into them for developers. Infura, Alchemy, and Opensea can all be replaced easily and with little barrier to entry. Clients could decide tomorrow that they are no longer aligned with them, and pick new data providers without issue. If you try building with Infura or Alchemy, you’ll see that the interfaces are in fact quite primitive, and while we can expect them to improve, over the coming years we should expect new providers to come onto the scene who offer better services and interfaces into the Ethereum network. We can already see this happening with companies like Moralis. This is not the case with any of the giant web2 companies. Their databases are closed off, and only accessible if you ask them for permission. If you get cut off, there’s no way for you to access the data. They are impossible to compete against let alone replace, because they act as gatekeepers to the data they collect, further locking users into their ecosystem.

In the end, there are a lot of problems still open to be solved. But I have yet to see one that I believe is even likely to be insurmountable.

Conclusion

Twitter was supposed to be a protocol allowing anyone to build products and services on top of it that drive value back to the parent company and investors. But it wasn’t a real protocol. It only pretended to be. As soon as the people behind the scenes changed their minds about what they wanted Twitter to be, the “protocol” side of Twitter got shut down. While this ruined a lot of businesses built on top of it at the time, it was perfectly predictable. Before web3, it was near impossible to build real application-specific protocols on the internet. And counter to the beliefs of the biggest web3 critics, web3 does allow you to build real, open, and neutral protocols. And we know this, because we have real-world examples like UniswapMakerAaveYearnENSPool Together, Lens, and many others.


Mine is a single answer in a sea of others. There doesn’t seem to be much consensus on what web3 is, let alone what problems it will solve. It doesn’t help that people seem to have gone insane and come under a trance trading hyper-inflated cartoon images. My view is that web3 solves different problems for different people. Smart contract platforms like Ethereum are general-purpose, meaning the protocols and services that can be built on them are near-infinite, and what people will do with them is unpredictable, like trade cartoon JPEGs.

People look at web3 and see the hyper-financialization of everything. And this is true; all on-chain assets can instantly be given their own stock market. They see cartoon apes trading for amounts that can only be explained by a world that has collectively lost its mind. And I don’t have good explanations for why that is, or what’s causing masses of people to lose touch with reality. However, if we put aside this Problem With NFTs, squint hard and look toward what we have unlocked beyond the insanity and hype, I believe we might see something real and historically important. The large-scale benefits are probably a little further down the road than I’m capable of predicting, but we might see a world that is made more efficient by the replacement of trust in crumbling institutions and giant tech companies with cryptographic truth.

fin


Disclaimer: as you might have guessed, I’m kind of an Ethereum maximalist. I’ll probably write about why in another post.


FAQ

  • Q: Aren’t you using web3 as a synonym for NFTs?
    A: When I was using the term "web3", I was referring to this new ability to build protocols and shared databases. An NFT is just a specific type of object in those databases that conforms to a standard. Conforming to that standard when building these protocols is optional, depending on what you want to do. Following the NFT standard simply ensures your items are compatible with other protocols. There are even different types of NFTs standards you can create, and you aren't limited to only creating NFTs. Imo we've barely scratched the surface exploring what we can do.
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