What is Web3 and Why It Matters

I’ve waited a bit to weigh in on Web3, to see how it evolved and whether it actually took a meaningful and significant direction. While not exactly a new concept — many credit the term itself to Ethereum co-founder Gavin Wood in 2014, even though it has been discussed since the early Web 2.0 days back in the 2000s — Web3 as we currently know it today exploded onto the global stage in 2021 along with the metaverse, another popular and closely overlapping/adjacent concept.

Like its various predecessors, Web3 represents a major rethinking for a new iteration of the World Wide Web. This vision is both far-reaching and as we will see, truly transformative in nature. It requires us to fundamentally shift our ideas about many important concepts in the realms of digital data and the online world in general. The good news is yes, we do now have a general sense of how Web3 has evolved and whether it has become a significant force in the future of the Web.

My take: Web3 has very much arrived as a major trend with a towering stack of tech behind it and quite impressive economic results to match. It’s a trend that is now is increasingly informing technology evolution as a whole. Most organizations now need to understand what Web3 is and how it will affect their organization’s technology development trajectories and digital strategies going forward.

Related: Web3 is highly potent form of network orchestration, one of the most important and powerful digital strategies.

Web3 Defined

Now, the good news is that explaining Web3 can be achieved with some fairly brief definitions. The most cogent is simply the notion that the future of the Web, especially as it relates to creating, storing, and exchanging information, can be better achieved by incorporating decentralization based on blockchains. That’s really it, at its core.

That doesn’t sound like much, especially to the uninitiated, and probably wasn’t what many expected. But as it turned out, this idea of deep decentralization has proven to be a uniquely potent one that has given rise to several very significant and useful shifts. One proof point: Despite the ups and downs of the crypto markets, cryptocurrencies, including now NFTs, have resulted in nothing short of a global phenomenon that has led to the creation of hundreds of digital currencies, exchanges, application ecosystems, and supporting frameworks that has a combined worth today in the trillions of dollars.

Naturally, like most new higher-order technologies and the often disruptive changes they usher in, there are many underlying concepts and moving parts to them that make them work, which I’ll explore shortly. There are also a number of important implicit assumptions in the designs of Web3 technologies, that if one doesn’t understand going in, makes the first principles and design choices behind them seem both confusing and needlessly complex even after a good bit of study.

The Motivation for Web3

The why behind Web3 is perhaps the most interesting question of all. Let’s explore that first and then see what Web3 is really made of.

Web3 is borne of the growing criticism that the Internet of today tends to favor large, centralized organizations like Google, Amazon, or Meta (Facebook) over individual users — a trend I’ve long lamented — and that this should change. Conversely, there is a belief that decentralized, more autonomous infrastructures can tilt the balance toward a more user-controlled environment with various benefits that include (but are not limited to): The reclamation of data sovereignty back to individuals, improved — and really, total — transparency in our digital systems, and the inability for bad or misguided actors to disrupt or co-opt our shared digital environments that follow these rules.

Furthermore, Web3 is borne of the direct knowledge of the ongoing success of certain well-known radically decentralized systems to change the status quo, most notably Bitcoin and its now-famous underlying blockchain. It has essentially resisted all comers to date, many of which have been quite determined. Bitcoin’s underlying ideas have proven to work in practice over a sustained period of time (over a decade now and counting.) At the root of this is a growing belief that radical decentralization has wide applicability to much or most of what we do online, and that blockchains are so far the best vehicle we have to realize this.

Crypto Roots, Yes, But Much Broader Applicability

The flourishing of cryptocurrency over the last few years has certainly created a gold rush mentality, luring increasingly large investments, including vast venture capital involvement from the most sober firms. Crypto has also attracted to it some of the brightest tech entrepreneurs and makers in the world. The result has been nothing short of a global high-octane creative genesis that’s resulted a extremely dense, deep, and at times quite difficult to navigate set of interconnected projects, technologies, stacks, ecosystems, currencies, exchanges, and enabling applications. The sheer vibrance and velocity of these efforts have elicited great excitement, with numerous innovations and breakthroughs having occurred along the way.

It’s crucial to appreciate that back in the early days cryptocurrencies originally had — and still continue to have — a central problem to solve, namely answering the question of who would ever actually trust them as forms of currency. And they eventually came up with effective new models that successfully created the needed faith and buy-in by people in a way that still, to me, seems remarkable today. The premise is that the blockchains underneath many popular cryptocurrencies embody designs and rules in code that can be empirically verified even by the non-technical. One doesn’t need to technically understand the blockchain deeply in order to verify it works as advertised and trust it.

So, getting back to first principles, I would argue that at the core of Web3 concepts is the crucial and increasingly problematic question of trust in digital systems. How do you know who you can genuinely trust with your data? Who really owns and controls the data we store online? Is it possible to create ground rules that everyone is guaranteed to live by that fosters new trust? Can we store data online in a way that we will always remain in control of it? Are there designs for systems that make us hopeful that the online world can be a place that is safe for everyone over the long term? All of these questions are addressed inherently and explicitly by Web3 technologies in various interesting and practical ways.

Web3 is Based on Decentralized Trust

So I would also observe that trust is the fundamental basis for all human relationships. While Web3 is still working on trusted identity and I find it unfortunate that concepts like digital wallets — instead of people — play perhaps a too central role in the design of many of the resulting efforts, it’s clear that communities of individuals have come together to trust a given distributed system of data and its associated rules (blockchains). This is at the very core of how many Web3 efforts have succeeded as well as they have.

The blockchain is too complex a concept to go into detail here, suffice to say that what it brings to the table is a set of shared and well-documented processes for managing digital data, enforced consistently and relentlessly by code. If those behaviors are reliable, highly valued, and then profoundly decentralized in such a way that they cannot be easily co-opted, lost, or abused, then a community can — and apparently will with the right value proposition — form around it. And I do mean a human community. That this will happen has now been proven over and over again in the living laboratory of the online world.

Short version: A blockchain is like a digital nation with clearly enumerated rules that is made up of nothing more than people’s data and the rules of its operation codified in its very structure. Yes, these are today often digital currency records, but it can be and increasingly is digital information of any kind.

Once trust in a digital system exists and is sustained, and once a community has formed around such a living digital system — remember, it’s a dedicated decentralized network with countless distributed copies of the data that’s coupled with matching and well-documented rules realized rigorously in code — then the next outcome can safely and by design take place: Transactions. Or what more high-level thinking would call commerce or value exchange. This focus on transactions makes Web3 notably different that previous iterations of the Web, which certainly enabled the realization of e-commerce and other digital business models, but did not really have them in their core architecture.

Web3 in Practice

Web3 then is the realization that we now possess very specific and working designs for trusted decentralized systems of data with matching rules that can effectively attract human communities around them. This allows safe, trusted commerce at scale and genuinely seems to work well over time. These systems, with very specific design constraints, appear to foster human trust and cultivate communities if they do so in a way that provides shared value.

Again, like so much on the Internet, it’s taken countless trial and error to get where we are with today with Web3. It’s not a accident but a distributed yet mostly informal design effort in its own right to find ways to build better networks of digital systems, although organized groups do exist including the Web3 Foundation.

So how does Web3 actually work? This is where, from an implementation standpoint, that the result is nothing short of the proverbial technology rabbit hole. Web3 on a conceptual and technology level goes deep. Below, I explain its various parts and how they fit together as I see it. Just be aware that it has taken some of the most brilliant people in the world to have figured out the pieces and make them work together in a unique way that is compelling to the marketplace. The result has attracted the intense interest and participation of thousands of technologists and many millions of regular people around the world, pulled in by either the arguably positive notions that Web3 embodies, the evident results that it has produced, or both.

The Technologies of Web3

While there are a vast and oft-bewildering array of technologies, frameworks, and chain implementations that fall under the Web3 umbrella, the following are the core technologies most often associated with the trend:

• Blockchain. A data storage and retrieval system in which a typically immutable record of data and associated transactions is kept, often involving cryptocurrency but can be any type of data, are maintained across numerous distributed computers of multiple ownership that are linked in a peer-to-peer network. Distributed ledgers are similar but may not be on a peer network or have multiple ownership. Smart chains have emerged that have sophisticated smart contract and value-add AI features built-in. Consensus rules are often established to determine which data is actually stored as the official record.
• Wallets. In Web3, a digital wallet, usually associate with cryptocurrency, is a device, application, or service which stores the public and/or private keys used blockchain transactions. In addition to this prime function of securely storing the keys (the actual currency is stored in the chain), a cryptocurrency wallet often also offers the functionality of encrypting and/or signing information. Signing can for example result in conducting transaction or executing a smart contract.
• Decentralized Identity (DID). Decentralized identifiers are a newer type of identifier that enables a verifiable, decentralized digital identity. They are an important component of decentralized web applications. I believe they are vital to making Web3 a fully evolved architecture for the future. They are based on the concept of self-sovereign identity. A DID identifies any entity (such as a person, organization, object, data model, abstract entity, etc.) that the creator of the DID decides that it identifies. These identifiers are designed to enable the controller of a DID to prove control over it and to be implemented independently of any centralized registry. Over time DIDs are likely to become a core identity system of Web3 applications, allowing stronger communities, more trust to be established, and enabling many high value use cases. The respected W3C has now weighed in on a proposed standard for them as well, further bolstering their credibility.
• Exchanges. A exchange is a service that handles cryptocurrency and other forms of digital value that allows users to trade for other assets, such as traditional fiat money or other digital currencies. Exchanges are a key source of liquid value and usually accept credit card payments, wire transfers or other forms of payment in exchange for digital tokens or cryptocurrencies. Exchanges connect the Web3 world to the traditional world and are in numerous ways a crucial service to allow transactions to cross between them. Exchanges have been instrumental in fueling the crypto boom and will likely be just as key to the broader evolution of Web3.
• Decentralized apps (dApps). An application that uses smart contracts that run on a blockchain. Just like traditional apps, DApps provide a particular function or use to its users. Very much unlike traditional applications, however, DApps are technically not owned by any one entity. Instead, DApps distribute tokens that represent ownership. These tokens are allocated according to a pre-designed algorithm to the users of a blockchain-based system, diluting ownership and control of the dApp. In this way, since no one entity controls the system, the application becomes decentralised. A lot of the utility and innovation in Web3 comes from the add-on dApp ecosystem, which can work with data in the blockchain according to the smart contract associated with it.
• Smart contracts. Smart contracts are predefined digital agreements stored on a blockchain that run when predetermined conditions are met or transactions are conducted. They are usually used to automate the execution of an agreement within the rules of the blockchain so that all participants can be absolutely sure that the outcome will take place, without any intermediary’s involvement or effort. Smart contracts enable rich scenarios for ensuring that economic activity follows the rules and that the digital economy the blockchain support is open, transparent, and 100% rule-based in executable code. They are rapidly becoming the backbone of Web3 transactional systems and should in theory, also mostly eliminate the need for legal recourse.
• Distributed Autonomous Organizations (DAOs). A DAO is an organization represented by the rules encoded as a software system that is entirely transparent, controlled by the organization’s members and typically not influenced by a central government or authority. DAOs show what a genuine digital organizations might truly look like. They will help reshape management thinking and theory for the next decade at least. An example of a DAO is Augur, a decentralized prediction market platform.
• Metaverse. While Web3 apps can come in any type of UX form factor, one of the most interesting is the Metaverse, which is a still-mostly-notional deeply integrated virtual world that allows people to visualize, experience, formulate, publish and monetize digital information and content using virtual reality and other interfaces For now, this is still in early evolution but it will allow seamless 3D experiences that enable shopping, business deals/transactions, education, advertising, and entertainment and may other forms of business activity with a full multi-channel, multi-currency financial ecosystem behind it.

What Organizations Should Prepare for with Web3

The advent of Web3 has a number of significant yet often uncomfortable implications for enterprises that seek to adapt and take advantage of the energy, vibrancy, and innovation in the fast-growing sector. Or more importantly, avoid to disruption that it likely to occur in many key areas, from payments and e-commerce to customer experience and digital transformation as a whole.

Here’s is my best advice heading into 2022 on what the typical organization should be preparing for with Web3:

• Assess Web3 adoption in your industry. Understand what your competitors are doing, from blockchain-based loyalty programs and crafting their assets into NFT offerings all the way up to creating crypto payment strategies and building dedicated metaverses for customers, partners, and even employees. I’m seeing quite a bit of activities across all these fronts as we head into 2022 in my client conversations. Organizations in most industries should be conducting at least a high level assessment of Web3 competitive activity.
• Research and educate your staff on Web3. While Web3 is very much emerging technology, some parts of its are getting a decade or more old, and the subject matter is both large and complex, so time should be invested now, early on. Now is the time to begin getting your digital and IT staff up to speed where it makes the most sense. Basic blockchain education is a great place to start, but understanding cryptocurrency markets, smart contracts, and DAOs are all good areas for strategic staff right now, from digital strategists and transformation leads allway the way to the office of the CTO.
• Build Web3 capability . The reality is that most organizations will be interacting a growing portion of their business in various blockchains. Understanding how to conduct transactions safely, securely, and efficiently is key, as is understanding and maintaining a perspective on the strongest offerings, along with their pros and cons will go a long way to being prepare as vendors and suppliers increasingly conduct business using Web3 models.
• Revise digital strategy roadmaps with eye on opportunity. Once the Web3 competitive and opportunity landscape is understood, make time and resources available to incorporate it into the broader digital strategy and transformation roadmap.

Web3 is part of a major new generation of technology evolution that will dramatically change business and IT for the long term. It has far-reaching implications that can help enterprises identify significant opportunities as well as avoid disruptions in the road ahead. I strongly urge all organizations to begin to assess Web3 uptake in their competitive landscape and prepare for the necessary activities in technology adoption and evolution. Like many emerging technology developments at the present, Web3 also has significant business implications as well that will require tech and business leaders to come together to create and validate their roadmap going forward. It’s not an easy time, but Web3 represents enormous promise that will also remake numerous industries in the process.

Additional Reading

The Strategic New Digital Commerce Category of Product-to-Consumer (P2C) Management

A New Digital Experience Maturity Model for Improved Business Outcomes

Ray Wang’s View of the Metaverse, Web3, and DAOs

Why Microservices Will Become a Core Business Strategy for Most Organizations