The Path to Web3
With the many narratives flying around about Web3, entrepreneurs and companies are flocking to the space to discover how they can create new businesses or adapt their existing businesses to capitalise on the biggest innovation to emerge since the world wide web.
Some of these early settlers have created brand new businesses that have embraced decentralization at their very core, with key projects emerging such as the Ethereum Naming Service (ENS), decentralized exchanges such as Uniswap, and even virtual worlds like Decentraland providing crucial services and new opportunities for the ever-expanding population.
Other companies have taken a more classic Web2 approach, where they provide the centralized platform for people and customers to access a subset of the opportunities available in the new world, but with their own restrictions in place to protect their users (and some may argue their profits). This approach has served leading digital asset exchanges such as Coinbase incredibly well, with its 70 million-plus users.
With all of this activity, there are many sitting on the fence who want to find a way for their company to transition to Web3 opportunities, but finding the right path is no easy feat, especially when these activities may be perceived as risky within their existing business.
For those who subscribe to Clayton Christensen's notion of the innovator's dilemma, Web3 opportunities need to be approached with a disruptive mindset, whereby there is a willingness to disrupt one's own business model, at the expense of potentially cannibalising existing business lines to really embrace the newly emerging technological threat.
Assuming that a company is willing to make a significant bet on Web3, one of the questions that will no doubt come up is, how decentralized should this new product or service be?
3 approaches to adopt Web3
Broadly speaking, there are three possible approaches organisations may take
- Web3 native or fully decentralized application
- Launch their own private-permissioned network
- Provide centralized Web3 enabler applications
The pure Web3 native option is to be a fully decentralized protocol offering a service, with its own token economics and governance model which are baked into the protocol via a utility token or governance token. Additionally, this type of structure would have ambitions to transition longer-term into fully decentralized governance via a decentralized autonomous organisation (DAO) too. This is the model that projects such as Uniswap have followed, where they live and breathe as protocols running exclusively on public blockchains.
At the other extreme, you have the private-permissioned blockchain network models, whereby your organisation creates its own private blockchain network. This model has been around for a number of years and was the approach taken by many organisations initially working with the technology. Whilst this approach appears to be a sensible default, the reality is that it requires a fairly high overhead to run and maintain once you move outside of the boundaries of proof of concepts, and is often motivated primarily by a single organisation. This results in significant onboarding times and complex legal and IP agreements that need to be created between participants.
For incumbents who already have a significant stronghold within an industry they are well placed to enforce this type of initiative, it can appear to be a natural way of embracing Web3. However, given the fact that the network is primarily governed by a single entity, it is unlikely to be able to evolve as quickly as some of its public network counterparts, resulting in them being of relatively high overhead to run and maintain.
In addition, the approaches these networks use for privacy are unlikely to be compatible with public networks, which will present significant challenges to migrate to public networks down the line. Hence the best place to use private networks is only in the early pilot or proof of concept phases of projects. Some will no doubt succeed, but I believe the mindset of many with respect to public blockchains has evolved which brings us to the next option.
The middle ground of these two approaches, which I believe is the right place to land. For many organisations, it's to start with a more traditional service that integrates with the Web3 ecosystem via public blockchains, enabling you to build out products or services that are unpinned by existing technology. This allows you to control how much of this new technology is exposed to your users. This is akin to the centralized exchange model used by the likes of Binance and Coinbase.
Objections to centralized Web3 enabler applications
One objection to this approach is on the grounds of privacy — how do you ensure that sensitive business data is not being leaked? This is where the evolution of cryptographic techniques such as ZK-SNARKs has been critical. Using modern cryptography on blockchains allows users to eliminate information leakage by only sharing proof of an activity or event taking place, or shielding the data in its entirety such as the existence of specific tokens and who their owners are. The rate of technical change here is staggering, which is why with modern privacy techniques, it's better to start thinking of public blockchains more akin to utilities that are readily available for organisations to use, rather than shiny, unproven technology as was the case a few years back. EY setting a great example here with its Nightfall technology.
Another argument that was historically used was how these public blockchain platforms were unproven. I would argue they have since proven themselves in past few years. Cryptocurrencies are owned by millions of people (in the UK 4.4% of people hold bitcoin), the Ethereum network settles over $6tn annually which is half of Visa's entire network and NFTs are now mainstream. To remain on the sceptical side of the fence with this technology just doesn't hold today given its wide adoption.
One other objection is that there is no point in embracing Web3 technology if you're doing this in a centralized way — this is the Web2 way of thinking. This approach may appear counterintuitive as you're wrapping up cutting-edge technology in a manner that makes it subject to many of the downsides of centralized platforms. However, there are a couple of benefits to this approach.
Firstly, and most importantly, the barriers to entry for using Web3 platforms are still very high. Try explaining what a cryptocurrency wallet is to someone who finds just keeping track of usernames and passwords the bane of their life. The last thing less digitally native folk want to do is be bombarded with a platform that makes their already complex lives more complex. These user experience challenges will iron out over time, but we're certainly not there yet.
Using a more traditional platform provides a far higher degree of freedom to bridging the gap between Web2 and Web3 platforms, which your users will thank you for.
The other benefit to this approach is that it provides your organisation with the opportunity to onboard with public blockchain networks and appreciate the many nuances that this comes with, such as the physical connectivity, the management of identities used on a ledger, and how you pay for transactions. The learnings from this will be invaluable, as any company wishing to transition to Web3 opportunities needs to have overcome these hurdles.
This more traditional approach isn't your end game however, it is merely the first step in building out a new Web3 platform offer, which you can bring additional features into as your users become more comfortable with this new domain. Think about how many exchanges and NFT platforms do exactly this.
They start off by offering users a familiar email-based signup process to their platform, which allows users to purchase cryptocurrencies or NFTs. Users then have marketplaces that can be used to trade these assets. The more advanced or power-users may wish to transfer the assets off the platform into a wallet that they maintain, but many users are happy to keep these assets on the exchange. Of course, there are many security considerations that need to be taken into account with this model, but ensuring users have a platform they will use and come back to is absolutely key here.
I believe these hybrid integrated Web3 services are likely to provide the best bang for the buck for organisations embracing Web3 technology. Whilst it results in some areas of centralization for your shiny new offering, the reality is, that it's very difficult for organisations with existing products and services to launch decentralized offerings. There's simply too much data or information used in the provisioning of these services that it can't fully exist on decentralized platforms.
In addition, by utilising existing blockchain platforms rather than launching your own private-permissioned variant, you can ensure that your organisation is embracing Web3 in a manner that is most future-proof and will be conducive to those who matter most — your users and customers.