Web3 – 4
Gilad Edelman in Wired:
If cryptocurrency was originally about decentralizing money, Web3 is about decentralizing … everything. Its mission is almost achingly idealistic: to free humanity not only from Big Tech domination but also from exploitative capitalism itself—and to do it purely through code.
Bitcoin, the original blockchain-based cryptocurrency, created a way to send and receive digital money without needing a bank to approve those transactions. Instead of regulators and cops, a set of carefully designed incentives would, in theory, keep everyone acting in the best interests of all Bitcoin users. Web3 aims to apply these two concepts—decentralization and game theory—to all of digital life.
…One way to think about Web3 is right there in the name: It’s the successor to Web 2.0, the era that was supposed to democratize the internet but instead became dominated by a handful of huge platforms, like Google and Facebook. Web3 is about re-decentralizing the web.
…At the most basic level, Web3’s approach to financial incentives is an ingenious way of solving new technology’s adoption problem. Let’s say you make a new decentralized platform built on the blockchain, one that works so smoothly that people can use it without getting a PhD in cryptography. Users control their own data and everything is open source. The thing is, those ordinary users probably don’t care much about data ownership or immutable public ledgers. They care about convenience and fun and being where their friends are. So how do you get anyone to use your new Web3 app?
The answer is tokenomics. The business model of nearly every proposed Web3 platform entails distributing tokens to everyone involved, thus incentivizing them to use and improve the platform to make the value of those tokens go up. In Web3-speak, this is called “aligning the incentives.”
Jad Esber and Scott Duke Kominers in HBR:
Web3 platforms…have the potential to unlock a novel and especially powerful form of network effect through community engagement and social cohesion. Ownership of digital assets fosters a sense of psychological ownership that can make consumers feel so invested in a product that it becomes almost an extension of themselves. A platform’s users literally become “fans” who form a bond through the shared platform experience — similar to how fans of a sports team or obscure band see themselves as a community.
…More generally, sharing ownership allows for more incentive alignment between products and their derivatives, creating incentives for everyone to become a builder and contributor. The underlying technology standards also enable every Web3 company to be built on top of. This means the community around a platform can co-create in a way that’s much less adversarial than in the past and with more derivatives in circulation — making the platform ecosystem grow even stronger.
…In the short-run, this model gives up some share of consumer surplus to the builder or creator. But because the builders get more, they’re strongly incentivized to invest and grow the total pie for everyone – which means that in the long run, Web3 should raise consumer surplus as well.
In their textbook on economics, Tyler Cowen and Alex Tabarrok have a chapter on Cryptoeconomics. They end with a couple open questions: “The first is how effectively crypto and blockchain innovators will be able to capture additional gains from trade. The second question is how the authorities will regulate these markets. Cryptocurrencies and decentralized finance are not immune to problems of traditional finance including bubbles, excess leverage, and bank runs. Thus, as these markets get bigger, we may expect more regulation. As regulation increases on crypto innovations that may slow their future growth and also make traditional and decentralized finance more similar. Governments may also create new digital currencies of their own, sometimes called central bank digital currencies (CBDCs), which will be convenient but won’t necessarily have the privacy or security of an unregulated digital currency like bitcoin.”
It is the second question which has been worrying governments – the loss of possible control in the future, especially on their fiat currencies.
