Why Web3 Will Change Everything

Introducing ‘Making Web3 Real’ – a newsletter focused on the real applications and impact of everything Web3 and blockchain. Let's move beyond the hype and explore this looming wave of innovation.

The future of Web3, crypto, blockchain, and the metaverse (pick your buzz word!) is all the rage these days. With a lot of hype and opinions being tossed around, it’s become really, really hard to make sense of this emerging space. Is this all vapor that will crash and vanish, or is this a set of technologies that will revolutionize the world as we know it? From flipping JPEGs to providing farmers access to climate insurance, the tangible utility that blockchain projects can deliver to people and society can vary substantially. These dynamics make it extremely hard for the everyday person to understand what, if, and how Web3 will change their personal finances, business, or way of living. As someone who learns and thinks through writing, I’m starting this blog (‘Making Web3 Real’) to share my thoughts and learnings about this evolving space. Personally, I strongly believe that blockchain technologies and Web3 will change the world as we know it just as remarkably as the internet has since the days of using dial-up modems to log onto AOL. While future posts will be focused on specific industries and real use cases and applications, this post is dedicated to why I believe Web3 (through blockchain technologies) will change and disrupt the world as we know it. By the time I am done I think you will agree. Or at least be a lot less confused – this is a complicated space! Let’s dive in…

Brief History: How we got here

There’s a remarkable number of people, actions, companies, and plenty of chance that got us to where we are today. We live in a world that in many ways is substantially better than the days before floppy disks, the world wide web, and 5G. Information is (mainly) free and accessible to all. It’s far easier to stay in touch with existing contacts and make new relationships through easily searchable social platforms (both personal and professional). Almost anyone can learn about any topic at little to no cost, and content creators can efficiently reach millions of potential consumers of such content. However, this progress has come with a set of serious downsides, including the mental health impact of ‘doom scrolling’ and inequitable financial returns. Before we get to what problem Web3 is solving, I think it’s important to provide an uber quick trip down memory lane and overview of ‘the web’ to date. In other words, before we dive into Web3, let’s remind ourselves what the heck Web1 even was and what Web2 is today. One quick caveat here – I’m not a trained tech historian or a deep technologist. I’m looking at the world through the lens of a user and consumer. For anyone out there who is and notices glaring issues here, please reach out :). DMs on Twitter are open (@JoeButcher).

Web1 (read-only)

Tim Berners-Lee is known as the founder of the world wide web. He got inspired by the challenge of sharing information from one computer to another and went on to build the first web browser and send the first email. Fun fact: This was done on a Next computer and operating system which was founded by Steve Jobs during his stint away from Apple. Berners-Lee developed the addressing system called Internet Protocol (IP) which allows computers to be identified by a numeric address. Coming from this, the Transmission Control Protocol (TCP) system was developed to help control how information was sent from one IP address to another. In the early days of the web, most users were in the government, military, and research organizations. The Defense Advanced Research Projects Agency (DARPA) in the U.S. also played a critical role in shaping and developing the early web through the development of ARPANET. During this time period, the UI/UX of the web just wasn’t quite there for the masses to both understand and use (sounds a lot like where Web3 is today doesn’t it?).

Think of Web1 as static and read-only. We had the ability to send email and messages and view static web pages, but little ability to interact with content, content creators, and other users more generally. During Web1, we had the emergence of companies looking to provide basic internet capabilities and personal computers (PCs) to consumers across the world. Think Microsoft, AOL, Netscape, and computer manufacturers (HP, Apple, etc.). The transition from Web1 to Web2 revolved around the mass adoption of PCs driven by the lower cost to entry and the value of search and basic computer functionalities (printing word documents, simple gaming, etc.) Mass market adoption of PCs generated a ton of innovation from companies seeking to provide value to users at the massive scale of the world wide web. Google’s PageRank algorithm is a great example. Larry Page and Sergey Bin’s innovation with Google drastically improved how users can search for any information hosted on the web. This effort and those like it paved the path for Web2 now that the basic infrastructure was more established. 

Web2 (social web + platform business models)

Once we had the ability to send email and search for information, the next stage of this evolution was to allow users to share and interact with content and other users. Companies began to explore the idea of creating platforms that make it efficient for users to share and engage with all sorts of content (photos, short posts, blogs, videos, etc.) Web2 is where we have all the big tech incumbents come on scene. Enter the infamous FAANG: Facebook, Apple, Amazon, Netflix, and Google (among others of course). These companies created large platforms and business models based on providing users the ability to engage with digital content and each other. Social networking makes it easy to find and engage with literally anyone on the planet. App stores (iOS and Android) make it efficient for developers to offer their apps to customers. Search and e-commerce make it easy for people to find information and/or things they want to buy at a rapid clip. .

It’s important to mention the advancements made in hardware throughout this period and the important shift from PC to mobile, further accelerating the transition from Web1 to Web2. Moore’s law continues at full tilt, meaning we double the number of transistors we can fit in a dense integrated circuit every two years. This not only drastically improves our computers’ speed and performance, but also makes computers cheaper and cheaper to manufacture. Large chip manufacturers’ ability to develop and deliver continuously enhanced hardware powers tech companies’ ability to process massive troves of data and better predict and create what users want to see. Just as importantly, this powers the innovation in mobile devices with smartphones. The prominent Web2 companies we know and love started with PC-based platforms due to the mass market adoption of PCs mentioned earlier. However, the evolution from basic cell phones (oh the days of playing snake on your Nokia) to the corporate craze around the Blackberry and eventually the mass market adoption of iPhones and smartphones in the late 2000’s resulted in an aggressive shift to mobile for both existing and new Web2 platforms companies. The momentum around the .com investment craze and reemergence of tech innovation within the smartphone ecosystem after the bubble burst resulted in the dynamic that a16Z coined as “software eating the world.” This resulted in not only the emergence of new, app-based companies (think Uber/Lyft, DoorDash, AirBnB, etc.) but also incumbent players being forced to adapt or die. To accelerate all of this innovation even further, we had the emergence of “the cloud” with AWS and on-demand compute, storage, and all the other services AWS and other cloud providers offer. This allows companies to scale rapidly and innovate with digital services without having to invest in their own data centers and servers. 

To summarize, in a matter of roughly 15 years, we went from mass market adoption of home computers to legitimate global .com platforms organizing the world’s information and networks and eventually to mass smartphone adoption and app-based innovation. Powering all of this is the rapid reduction in infrastructure costs and the power of on-demand cloud services which enable agility and innovation at scale (on the cheap!). This results in massive amounts of talent flocking to space (see the ‘data science’ craze) to shape the amazing internet ecosystem we live in today. Companies can deliver value to users via apps on almost any hardware device you can think of (smartphone, TV, iPad, laptop, desktop, Amazon Echo’s, etc.) As a user, you can seamlessly interact with content and users on your favorite app across all of these devices. Pretty amazing if you think back to where we started. While value to users is important, it’s critical that we cover how Web2 companies monetize their offerings and the associated business models. 

The business models for Web2 primarily consist of: 1) monetize user attention via advertisement revenue, 2) subscription models, 3) revenue generation via a take rate when running an online marketplace, and 4) sell hardware to power social and other platforms. Here’s a quick rundown of these business models and the players associated with them before getting to the problem at hand.

1. Ad Revenue: Probably the most heavily discussed and scrutinized of the bunch, large tech companies are monetizing attention and eyeballs via ad revenue. Google’s PageRank algorithm and dominant search platform generates more than 80% of its revenue from ads. Facebook (now Meta) has built a ~$460Bn company by enabling hyper targeted ads to users who are addicted to the constant, yet random rewards of finding interesting posts and updates from friends.

2. Subscription Models: Originally made famous by Microsoft and their dominance with the MS Office Suite. Netflix and its peer streaming companies are other great examples here. Pay a monthly fee, get unlimited access to content and/or services. Other platform companies leverage this model across many industries, including music (Spotify, Pandora), fitness (Peloton), and education (Masterclass).

3. Take Rates: Marketplace companies generate the majority of their revenue through capturing a % of each transaction. Uber’s take rate is reported to be ~25%. Apple’s highly disputed take rate sits at 30% (see: Epic Games v. Apple). Marketplace companies enabling economic exchanges between users and consumers are capturing large percentages of each sale.

4. Hardware: Apple generates almost 58% of its sales from iPhones and 80+% off hardware products more generally. Social platforms are only possible with the mobile phone hardware that puts a computer in the palm of our hand. The likes of Intel, NVIDIA, and others created massive companies by powering the ecosystem.

Incumbent tech companies have become large, powerful players that generate significant value for shareholders and users, so what’s the problem here!? Let’s dive into the problem Web3 is solving. 

The Burning Broken Platform: What’s broken and why do things need to change?

While large tech companies and platforms do provide value to users (many times at little to no cost), there are misaligned incentives that have put users, content creators, and participants in the broader financial system at a tremendous disadvantage. Moreover, other dynamics have developed over time that have put “the masses” at an enormous disadvantage when it comes to developing and sustaining wealth. The American Dream of working hard to achieve personal and family success (wealth and otherwise) is not dead, but it certainly doesn’t feel like everyone has an equal chance to succeed. You layer all of this on top of political strife and polarization, and you end up looking at society and thinking that a lot is just broken. There’s a lot to unpack here, but let’s break it down into three key areas: 1) social media, 2) creative content development, and 3) financial ecosystem.

Social Media

Many of you have probably heard of the phrase “if you’re not paying for the product, you are the product.” Today, many tech platforms have successfully created moats that significantly limit users’ options. Moat creation has come in the form of acquiring any competitor in sight (see Facebook) and/or successfully creating such a large network effect that you can’t imagine using another service. While there are competitive alternatives, it’s hard not to use Google for search, Meta’s ecosystem for social networking, LinkedIn for professional networking, and Netflix as one of your dominant streaming services.

It’s important to look at incentives here. Social media and search platforms generate most of their revenue through well placed ads. To maximize revenue, their aim is to keep as many eyeballs on their platform for as long as possible. Product teams seek to engineer platforms that ostensibly support user interaction, but that also make the product as “sticky” (i.e., addictive) as possible. On the other hand, users go to platforms to engage with their friends, contacts, and content developers with the goal of exchanging ideas, sharing updates, and engaging with entertaining content. While they do have the ability to do these things, users don’t extract any financial benefit or value from engaging on said platform. Moreover, they find themselves addicted to the random yet always prevalent rewards that come their way and can’t seem to stop spending time on apps even though they are certain of the negative mental health impact (I’ve been here myself… numerous times).

In summary, we have large social media platforms that have eliminated most competition and are generating loads of revenue at high margins without giving the users the ability to own their data and generate value from what they are contributing to these platforms. Seems great for these tech company’s executives and shareholders, but not so great for users and your average American. All of this is directly connected to issues around creative content development.

Creative Content Development (music, authors, artists, movie/tv, etc.)

There’s a lot of different types of creative content that hopes to entertain, enlighten, and enliven — music, books, art, movies, and much more. Creatives are constantly putting their heart and soul into what they love to do with the hopes of reaching you and me. The odds of being successful across these industries is extremely low. You have to get a lot of consumers of your content to not only like it but share it with their friends and networks. You also have to get large companies (think Columbia Records, Universal, Penguin Random House, etc.) to make a bet on you.

So, what do creatives do in today’s world? They turn to social media to get as many likes and followers as possible on Twitter, Facebook + Insta, TikTok, etc. Generating a following is the easiest way to show how likeable and sellable their content is to the companies positioned to bring it to the mass market. Turning back to the problems with social, content creators are incentivized to play the social engineering game and take advantage of addictive social platforms to increase followers at a rapid clip.

Additionally, large tech platforms are positioned to extract the majority of the value both creators and fans create. The average payout from each stream on Spotify is $.003 (yes! that’s 3/10 of 1 cent). In 2021, only 52,600 out of the more than 2.6 million artists made more than $10,000 per year (~2% of artists). That’s crazy! Meanwhile, Spotify generated just over $11Bn in revenue in 2020 (though profitability still eludes them). Lots to break down here, but something is clearly broken.

Why does it have to be this way? I don’t think it does. They are clearly mechanisms we can leverage through digital ownership to build followers in an authentic way that gives users upside along the way. Imagine if you (as a fan of a new music artist) purchased ownership of digital songs and a stake in Taylor Swift before Taylor became Taylor. You build wealth and Taylor gets the capital needed to build her brand and community. Rather than like and follow artists on Spotify, YouTube, etc., you purchase a music NFT at an affordable price and engage with other fans in the community organically. More to come on this soon…

Financial Services

Engaging in the economy is one of the most fundamental activities we partake in. Earning an income and putting food on the table for our family is foundational to a stable and peaceful society. Personally, I decided to transition from the U.S. military to business as I had a fundamental notion that economic incentives and business were the most critical levers to prevent conflict and improve relations between and within cultures and countries.

While there’s a lot that works well in our economy, there’s also a lot that’s broken. Thanks to the web, most people have access to banking and financial services, and it’s far easier to both learn and engage in the finance world today than in the early 20th century. You can create bank accounts, deposit money, and trade equities all online without visiting a bank. However, the finance world is still foreign and hard to understand for most people. Moreover, large financial institutions (e.g., the Goldman’s of the word) and hedge funds hire really smart people to not only study and analyze the ins and outs of this heavily regulated industry, but also develop advanced trading algorithms to maximize returns on assets under management. It feels harder and harder for the average person to compete. Families and individuals who have built and invested in generational wealth over time continue to get farther and farther ahead than families with limited ability to generate wealth. The rule of 72 tells us how to estimate how long an investment will take to double given a fixed annual rate of interest and the power of compounded growth, which is a beautiful thing. But how do people catch-up to families that are 10, 20, 50+ years ahead and have seen their assets grow exponentially, only making it easier to hire the best financial institutions in the world to make their wealthy family ever wealthier?

Some people are shocked by how many people have tossed tons of money into speculative investments (e.g., NFT PFPs, altcoins, etc.) The people most critical of these types of activities also tend to be people that are on the better side of the equation here (i.e., they make $100K+ or have access to generational wealth). If you’re someone that feels that far behind, why would you not take outsized risks to catch-up (especially if the government is giving you ‘free’ money to play with).

Finally, the notion that central governments should control the printing and management of currencies via mechanisms such as interest rate modification and quantitative easing is one that should be analyzed and challenged as we try to shape the best financial system for society moving forward. Bankless raises worthwhile questions in one of their earlier episodes around whether 12 unelected individuals in the U.S. should have almost complete control of monetary policy and the printing of fiat currency and whether a computer protocol-based approach is better for society. Worth a listen if you have the time.

In a society that likes to look at things in black and white (or red and blue?!), there is clearly a lot of gray across the board here. Can Web3 solve all our problems? Of course not. Will it transform a whole lot of what we know today? I think so…

Enter Web3: How shifting from incumbent platforms to decentralized ownership and organic communities can create more value for more people

Prior to blockchain and Satoshi’s infamous whitepaper, digital ownership of goods and assets was hard to prove. The benefit of “software eating the world” and tech was that you could easily copy and paste code and scale rapidly, resulting in near zero marginal cost. Just right-click, save as, and that new profile pic is yours :). Owning, tracing, and selling a digital asset from its origin to current state wasn’t feasible.

Satoshi’s whitepaper and Bitcoin popularized and made real the concept of proof of work and the ability to use concepts of cryptology and mathematical proofs to create blocks linked in a chain, creating a shared, immutable ledger that facilitates the process of recording transactions and tracking assets across a distributed network. This was developed with a specific use case in mind – creating a new global, digital currency (Bitcoin). However, the concept of ‘blockchain’ can be and is being applied across industries and use cases.

Now, anyone new to crypto is probably reading this and thinking… yea, yea, I’ve heard this spiel 10+ times in different ways but I don’t get it or believe it. Let’s take an example anyone can understand – digital IDs (drivers licenses, passports, marriage licenses, etc.) To verify our identity, we often scan or take pictures of these physical documents and email them to individuals that can verify the information is accurate.  Not only is this inefficient, but it has two critical flaws: 1) it is relatively easy to alter docs and 2) the owner of these documents lose personal control of personal information by sending it across the open web. Blockchain and digital ownership of assets allows for validation and verification while 1) preventing the need for a central clearing house (i.e., efficient peer-to-peer validation using technology) and 2) allowing users to maintain control of personal information and data. With blockchain, you can have a digital wallet that allows you to verify your unique credentials and digital goods anywhere in the world as long as you have an internet connection. No need to save it on your personal cloud, a tech company’s cloud, or your smartphone. With your unique ‘keys’ (i.e., password), you can always access your money, IDs, art, contracts, etc. When you think of Web3, think of personal ownership of data and any digital good in a way that is decentralized, meaning people can engage and interact in a peer-to-peer manner without big, centralized platforms (e.g., Google, Facebook, JP Morgan, etc.) capturing unnecessary value.

While Bitcoin (BTC) popularized this concept and paved the path to where we are today, Web3 is going well beyond digital or cryptocurrencies. Coming out of this innovation, Vitalik Buterin shaped the ambitious vision and goal of creating Ethereum (ETH) and a world computer based on blockchain technology that enables and supports the development of decentralized applications (dapps). Dapps are applications that have their backend/code running on a decentralized network and not a centralized server like the Web2 applications we know and love. These applications operate based on ‘smart contracts’ or ‘protocols’ that are a set of rules that run ‘on chain’ for everyone in the network to see. This enables the mediation of agreements and transactions (financial and otherwise) in a decentralized, peer-to-peer fashion without any one person or company controlling it. 

While BTC and ETH get a good chunk of the mind share (especially outside crypto twitter), there are a lot of innovations and trends happening in parallel that are going to power the looming wave of innovation. This features faster, more scalable blockchains (see Solana and other “layer 1’s”), the tokenization of community engagement, and the world of decentralized finance (or DeFi). There’s a whole lot to cover here, and I’ll feature a lot of these topics in future posts. However, there’s a trend that often gets forgotten and certainly doesn’t get the attention I believe it deserves. This is a cultural trend. I’m talking about the pace of innovation and (more importantly) the ability to both rapidly collaborate on ideas AND raise money to execute GLOBALLY. Yes, Web2 powered the ability for us to do this, but there’s a lot more at play that is powering Web3 innovation. The story here currently revolves around Discord and the way this ecosystem is engaging in a fully decentralized manner. DAOs (decentralized autonomous organizations) are definitely part of this, but that’s also too much to cover in the first post :).

For those of you who have not spent time on Discord, you should. On the surface it looks like a Slack alternative that provides the same (maybe worse?) functionality. That’s at least what I thought at first. Far from the truth. The engagement and collaboration happening across Discord servers is mind blowing for a few different reasons: 1) ability to move across Web3 communities and actual companies, 2) ability to link digital assets (NFTs, tokens, etc.) to accounts, and 3) the pure global and borderless aspect of Discord servers. In Web3, you can talk directly to builders and founders of companies, DAOs, and dapps that are not working directly with VC funds, but rather talking to individuals invested in their project or protocol. In Honey Finance’s Discord server (one Web3 project I’m invested in), a group of 10,000 of us who are invested in the NFT and project have real discussions with the founder and builder of the project. Very different from the VC world that invested in the tech companies we know today. Are VCs also investing in Web3? Of course. But there’s a ton of non-VC investment and engagement that truly excites me. And for those already in the space, is Discord perfect? Hell no. It can be clunky and feature a lot of spams and bots, but think about what this engagement is doing culturally and how it differs from Web2. 

When engaging in Web2, you are stuck on the platform you are using and its parent company. I mean, that’s the whole point, right?! Facebook’s goal is to get you to spend as much time across their suite of products. While Web3 companies are also working hard for you to engage within their community, the ability to efficiently move across Web3 companies and communities on Discord servers, Twitter spaces, and AMA town halls is really accelerating both the exchange and execution of ideas. The new business models being developed have the potential to incentivize sharing of code and communities in order to add more value to the emerging Web3 ecosystem. 

Want a real example of people rapidly mobilizing to fund and try to execute an idea and project? Look no further than ConstitutionDAO. In a matter of days, you had just over 17,000 individuals raise $46M dollars with the goal of buying one of the only remaining copies of the U.S. Constitution. Was there an active Discord server? 100%. Were there thousands of people watching the YouTube live of the auction bombarding the chat with WAGMI (‘we’re all gonna make it’ for the noobs out there) and WGBTC (‘we’re gonna buy the constitution’)? Oh, yea. Yes, they lost to a hedge fudge billionaire, but this is not the last time the crypto community will take on the established finance 1%’ers.

I am so passionate about what these communities can do through this new set of technologies, that it’s hard to find the words to express it. It takes diving in and exploring to really grasp what I’m talking about and feel what I’m feeling. My hope with this blog is that I start to make this a little bit easier for everyone to understand by exploring industries we know and love and describing how they can benefit from this wave of innovation.

Up Next: The Music Industry of the Future — How music NFTs can revolutionize the industry as we know it

Music NFTs are starting to get a lot of hype these days. If you’re following this on the surface, you might think this is either a great opportunity to make outsized returns or the new fad that will crash and burn. From my perspective, this is the perfect industry to dive into first. Beyond all the hype and speculation, I think there’s a new business model that can emerge out of the blockchain and NFT revolution and provide more value for both musicians and their passionate fans. If you want to get primed ahead of time, I highly recommend that you check out this Acquired podcast on Taylor Swift for the history of the industry and this a16z video on crypto business models.

If you made it this far, thank so much for reading! This is my first post and first ever blog and would greatly appreciate any thoughts or feedback. Feel free to drop in the comments section below or DM me on Twitter (@JoeButcher)

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