Decentralized Finance (DeFi) is a blockchain based method of making financial transactions. Unlike a bank, which pays the consumer interest for deposits, which it uses to make loans at a slightly higher rate, a DeFi transaction is mediated by a protocol, not a middleman who gets additional fees for services. DeFi cuts out the bank, and instead runs the transactions through a marketplace, theoretically saving money, speeding the transaction, and adding security with a blockchain-based transaction.
The hallmarks of emerging technology are two fold: lots of conferences and confusion over language. People in immersive computing continue to reject the catch all XR, insisting on AR/VR instead. No one cares anymore, honestly. And there are far fewer conferences about AR and VR. They are about Metaverse and web3 now.
Current uses of web3 Technology
web3 is an approach to decentralizing the internet using peer-to-peer protocols to create a decentralized open network free of gatekeepers like Apple, Amazon, Meta and Google. The term was introduced by Ethereum co-founder Gavin Wood in 2014 and popularized last year when leading technology venture capital firms established multibillion dollar funds for new web3 projects.
A good example of the decentralizing power of web3 technologies is Otoy, a company you’ve probably never heard of because it works quietly in the background of the games and entertainment business, helping to turn the work of artists, captured as code, into 60 frames per second of high-resolution 2D or 3D images. This process is called “rendering”. Otoy adds a proprietary “secret sauce” of AI and machine learning to make the process faster and cheaper while eliminating “noise” or mistakes that sometimes mar the output. While you’re not using your computer at night, Otoy rents your processing power. Producers pay for processing with render tokens (RNDR) which can be sold for cash on a crypto exchange, and fluctuate in value depending on demand.
Another notable web3 application is wi-fi network Helium, which provides public wifi hotspots to customers who get paid for sharing their connection. These hot spots can reach 200 times farther than most Wi-Fi hotspots. Owners collect $HNT, a cryptocurrency they can exchange for cash. Lime Scooters is a prominent user of the Helium wireless network.
The Disruptive Potential of Web3
We are already seeing web3 used in the world of art and entertainment, which could be one of the most prominent and visible uses of NFTs or tokens, in the near future. The token gives users access, and even a financial interest, in the artwork, movie or music. Studios and Labels and distributors like Spotify and Netflix would be replaced by protocols that disintermediate them. The Bored Ape Yacht Club just raised $320M through a virtual land sale to build a virtual world, Otherside, that does not yet exist.
Finally, depending on the smart contract embedded in the blockchain record of the transaction, the owner may have to compensate the artist when selling the work. Artist’s can now benefit if the value goes up. Studios and labels could avoid Google and Amazon. Andreessen Horowitz just established another $4.5B web3 Fund. It’s the fourth. They are doubling down on its crypto investments despite the spring 2022 market downturn.
Web3 and an Open Metaverse
For the better part of a decade, web3 had nothing to do with the spatial 3D Internet, which is now called The Metaverse. web3 and VR recently converged in Somnium Space, which has its own cryptocurrency, CUBE, and virtual land, as does Decentraland, whose currency is MANA. There are play-to-earn crypto games like Axie Infinity, and the open-world game Sandbox, where users also buy “land” and own digital goods. We navigate these 3D worlds through our 2D interface, like a traditional video game such as the Fortnite game metaverse.
Boson Protocol has made a system for retail sales on Somnimum Space that they hope to expand to a wide range of metaverse retailers. Luxury Goods makers have been among the first to seek web3 solutions. Their middlemen get such an enormous cut of their expensive merchandise, and own the customer relationship.
Many people advocate an open Metaverse, filled with protocols to enable ecommerce, user generated content, and an open marketplace for the cross platform sale of digital goods and services. These kinds of disintermediating technologies are not good news for companies like Meta. It will be much harder to monetize users without their data. On the other hand, consumers get a lot of benefits from centralization. Google and Apple charge for services that can be provided more cheaply than others, but not as easily or even as well.
An Alternate Meaning to web3
Shel Israel and Robert Scoble in their influential 2016 book The Fourth Transformation, describe four phases of the development of computing (1) PC (2) Internet (3) Mobile and (4) new, emerging spatial computing. This is distinct from web3, which sees three phases of the Internet, distinct from computing. Web1 (or is it Web 1.0?) was based on protocols (and a pain in the ass to use) but open and decentralized. web2 (the current Internet) is controlled by the centralized power of big tech companies like Amazon and Google, who make vast fortunes on our data, and the user generated content we freely contribute. web3 seek to change all that.
I was having lunch yesterday with a Microsoft executive who used “web3” so many times in our conversation I finally had to ask him what he meant. “To be perfectly honest,” he said. “I’m not sure. Everyone I talk to uses web3 instead of the word metaverse. The Metaverse now belongs to Meta. That’s why they chose the name.” So true. Every time you say “metaverse” you have to say Meta. Ironically, a few minutes before the announcement of the Facebook name change, Zuckberg said his company was approaching its work in The Metaverse with “humility and openness,” without realizing he was doing the opposite by appropriating the word Meta minutes later.
In a May, 2022 interview with Protocol, Janko Roettgers asked Zuckerberg if Meta’s branding “signals a desire to monopolize the metaverse.” Zuckerberg insisted that “by doing this, and choosing that name, we were pretty clear about what we wanted the focus of the company to be.” Zuckerberg went on to explain that Meta is not a monopoly because Fortnite and Nvidia are working on their own versions of the Metaverse.
The alternate meaning of web3 seems to have grown out of the visceral reaction to the Meta Metaverse, like my contact at Microsoft had. It feels a bit like a capitulation to write “Meta Metaverse.” Web3 rolls off the tongue. For these reasons, the phrase web3 may yet subsume the word Metaverse.
Unlimited Potential, Unprecedented Risk
Centralization exists for a reason. Apple, Google, Meta, Amazon, Microsoft, have invested billions in centralizing platforms. I pay Google and Apple $2.99/month respectively. I would gladly pay more. Also, incumbents are not going to sit by and do nothing. They have the resources, and are working on projects using this technology as well.
At the same time, it’s not hard to see how financial markets could be disrupted. There are trillions of dollars, if not whole economies, at stake. A market disruption of this scale would potentially create the next Google. These possibilities are creating powerful incentives for innovation. Web3 appears to be game driven, or have something to do with ecommerce, but it’s much more than that.
“There’s all this stuff happening in so-called web3. It’s genius marketing, given that blockchain was in the tank and climbing out of an abyss a few years ago.” Said Tony Parisi, a former Unity executive turned web3 consultant. “Yes there is the usual marketing hype but it’s because these massive, disruptive uses for blockchain are real. Great tech is being created right now. The shitty UX is getting in the way of mainstream adoption. Add to that all the theft and fraud. It’s hard to parse it all.”
The very nature of crypto is anonymity. This is not the best thing for a marketplace, because it removes responsibility. The creators of Bored Apes tokens will not be harmed if they take years to build a cheap, unappealing world you wouldn’t live in if land was free. Vietnam-based web3 game Axie Infinity had to issue more digital currency to avoid the collapse of its tokens following a $650M crypto heist. Venture Investors got a cut of their sales, too, generating revenue for them far sooner than they would be entitled to in a regulated marketplace. Perverse incentives, and the lack of transparency, have made crypto currency one of the most volatile and risky bets an investor can make, but it’s not going to be that way forever. And it’s based on web3 technology.
This is a chapter of my upcoming book Dissecting the Metaverse (Fall 22) from Quintess.