3 minute read / Apr 7, 2022 / crypto /

Four Fundamental Innovations of Web3 that Will Upend Web2 Incumbents

As I’ve explored web3 I’ve been forming a mental model of the major innovations powering this enormous wave of innovation. At the moment, I see four clusters:

  1. A permanent ownership record that exists beyond and outside a company. The photos I take, the movies I buy, the music I rent, the emails I write and receive, the messages I send - all of these are captive. They exist within a database controlled by Google, Netflix, Spotify, Gmail, WhatsApp. If these services disappear, so does my ownership/rentership record. In a future where digital assets are worth not $10 or $20, but hundreds or thousands of dollars, ownership that survives a company becomes an essential substrate of commerce.
  2. Paying customers in “equity.” Internet hegemons have decimated entire spaces: social networks, advertising technology, video streaming and rental, paid email, infrastructure. Their economies of scale and network effects mount significant barriers to competition. What’s a startup to do? Compete on a different axis: reward users with tokens. A social network rewards its most valuable users in the coin of the realm. Same for music or file storage or graphics processing. As the network becomes more valuable, so does the user’s stake in the company. Web3 companies employ tokens to reward their customers for providing value. Because this technique is so new, startups have the upper hand: Innovator’s Dilemma redux.
  3. Regulatory arbitrage. Twenty years ago, startups IPOed after 4 years. Today, it’s 12, driven by several factors but regulatory costs present the principal one. Crypto companies access pools of capital web2 companies cannot because the regulation doesn’t exist. Where nascent rules are present, the regulation isn’t yet a warren of legalese- yet. Within this freedom to maneuver, Defi protocols invent new financial instruments. The perp, a perpetual swap, has become the most traded crypto derivative). Perps don’t exist outside crypto.
  4. DAO/Foundations: open-source software is arguably the most important motive force powering innovation in technology. Open-source software powers every server and most software. Crypto empowers open-source projects to monetize their innovation in a way web2 never achieved. DAOs bind the loose community of open-source software contributors through tokens. Tokens provide an ongoing financial link that aligns long-term incentives. Foundations endowed with significant token stakes fuel the ongoing protocol development, balancing the capitalism needed to fuel progress with the benevolence intrinsic to the open-source ethos.

But, wait. There’s one more!

The fifth cluster of innovation benefits central banks, not startups. If I were an economist with aspirations of working within a central bank, I would be jubilant for the future. Central Bank Digital Coins (CBDCs) are akin to discovering quantum physics for central banks.

I can imagine the quips in the halls at the Fed, “Pshhh. Paper money is so Newtonian.”

CBDCs are programmable money: central bank digital coins enable a government to focus stimulus as granularly or as broadly as they like. Imagine a reserve bank stimulating the electric bicycle industry in the Kansas City metropolitan area by providing residents new US digital dollars that are only valid within bike shops in Kansas City.

As the number of developers in the ecosystem grows geometrically, as the foundations of this ecosystem are lain, and the applications blossom, I’m confident web3 will enable a tsunami of innovation. And at the core, those products, systems, and infrastructures will take advantage of some of these four core advances. This quartet equips web3 companies with advantages web2 businesses simply can’t counter.


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