Since childhood, Gavin Wood has been interested in the convergence of economics and game theory.1 He even co-published a board game of strategy. He was also an avid computer programmer, having started at age eight.
When Gavin became an adult, he worked at startups as well as Microsoft. His main focus was on leveraging computer visualizations and machine learning for music and audio systems.
In 2013, he met Vitalik Buterin, a programmer who wrote a paper about Ethereum, which was based on the emerging blockchain platform. Gavin was intrigued and coded the first workable client for it, which he referred to as PoC-1 (for “proof of concept”). He presented this at the North American Bitcoin Conference in January 2014.
Ethereum would quickly get adoption. But Gavin also saw this technology as the basis for a new type of Internet. He called it “Web3.”2 According to him: “This is [the] technology that is being used to build the new world — the world that’s going to drive human civilization for the rest of this century, at least.”3 He then co-founded Polkadot, a technology startup, and the Web3 Foundation, a nonprofit organization that supports the category.
So, then what is Web3? Why has it received so much buzz? And why is it important for entrepreneurs? In this chapter, we’ll take a look.
Definition of Web3
Web3 is still in the nascent stages. This means that the definition of this term is evolving. In a way, it’s similar to what happened with the emergence of the Internet in the mid-1990s.
The Web3 Glossary: “Web3 (noun, adjective) [is] the next iteration of the web being ushered in as we speak, which leverages blockchain technology, open-source applications, and the decentralization of data and information. Web3 aims to remove control of the web from monopolistic tech companies and return ownership of data and content to its users. Also referred to as the ‘read-write-trust web.’”4
Ethereum.org: “Web3, in the context of Ethereum, refers to decentralized apps that run on the blockchain. These are apps that allow anyone to participate without monetizing their personal data.”5
Digiday.com: “Web 3.0, or stylized as Web3, is the label being applied to a decentralized version of the internet that would be jointly owned by the users and the builders. Essentially, this is the antithesis to how centralized platforms like Apple, Google and Facebook operate, by monetizing data extracted from users on a daily basis.”6
There are some common themes. First, Web3 rests on the blockchain stack of technologies. This means it is decentralized since users create the network and even own it. With it, they can engage in direct peer-to-peer interactions.
The fast-growing network is not controlled by a central entity, such as Facebook or Apple. In a sense, Web3 is a democratized version of the online world. Everyone owns their data and can monetize it themselves.
Now it’s true that the Web2 Internet is based on a myriad of free protocols – and this is certainly a form of decentralization. But the reality is that – for most people – they need to use the large Internet providers to do anything meaningful, such as make connections, read or view content, and so on.
Web3 is also permissionless. This means that anyone can use it without having to create login credentials or get authorization from a central provider. When you are on the system, you cannot be kicked off.
Of course, all this only scratches the surface of Web3. But these concepts get to the high-level essence.
The term Web3 has different variations. When Gavin Wood coined the term, he referred to it as Web 3.0. But it has also been called Web 3. Yet the general usage now is for Web3.
Web1
To better understand Web3, it is important to get a brief backgrounder on Web1 and Web2. No doubt, both of these periods were full of drama and rapid technological change. There was also a major impact on society.
Now the origins of Web1 go back to the late 1960s. The Internet was known as ARPANET, or the Advanced Research Projects Agency Network, and had the backing of the U.S. Department of Defense. At the core of this technology was packet switching, which allowed computers to communicate with each other. The idea was to have a network that could survive a nuclear war.
However, ARPANET would be primarily for academic purposes. For example, the first online connection happened between research labs at UCLA and Stanford. Even though the message just had “Login,” the system crashed anyway!7
During the 1970s and 1980s, programmers developed a variety of protocols that were freely available. Some examples include Transmission Control Protocol and Internet Protocol, or TCP/IP, Domain name system (DNS), SMTP, or the Simple Message Transfer Protocol, and File Transfer Protocol (FTP). All these have remained critical for powering today’s online world.
But in 1990, the Internet would change in a big way. Tim Berners-Lee created the World Wide Web, which allowed for hypertext links. For him, he thought this was a much better way for searching and reading academic papers.
But it would not take long until the Internet would become mainstream, allowing for searching and ecommerce. In 1993, college student Marc Andreessen helped to create the Mosaic web browser. From the start, it got huge numbers of downloads.
A year later, tech entrepreneur Jim Clark contacted Andreesen to build a company, called Netscape. The main product was the Navigator browser – and the growth was staggering. On August 9, 1995, Netscape came public at $28 a share and the price ended the day at $58.8 The market valuation was $2.2 billion, even though the revenues for the past six months were only $16.6 million. There was a net loss of $4.31 million.
Few people created content. Simply put, it was difficult to develop websites. You had to know HTML and scripting code. The dialup Internet connections made it challenging to use video and images.
Creating startups was expensive and required the help of venture capitalists. You had to buy expensive servers and databases. It was also hard to find talent who could create the web technologies and there were not many useful development tools.
A popular business model was advertising. This allowed for content sites like Yahoo! to provide their services for free. The ads were usually based on the number of views or “eyeballs.”
The Internet was still for a small part of the global population. By 2001, only about 50 million had access to broadband Internet.9
Portals like Yahoo!, Lycos, Infoseek, AltaVista, and Excite became very important for the growth of Web1. They allowed many people to easily get useful information in one place.
According to Chris Dixon, a general partner at a16z: “Web1…was about open protocols that were decentralized and community governed. Most of the value accrued to the edges of the network — users and builders.”10
The bottom line: It was very similar to the vision of Web3. Interestingly, a common notion is that Web3 is really a way to get back to the original principles of the Internet.
Yet this is likely an exaggeration. The fact is that Web1 saw centralization. And this was not necessarily a bad thing. It actually helped get a large number of people to participate in the ecosystem.
Part of this was due to the power of AOL, which was the Facebook of its era. AOL was like an alternative version of the Internet – and it held tremendous power. Because of its huge user base, the company was able to generate massive amounts of revenues from advertisements and sponsorships.
Then there was AOL’s hugely popular chat system. It connected millions of users like a modern-day social network.
The Web1 world also highlighted something important that we’ve seen in Web2: The network effect. This is where a system gets more useful and powerful as more people join it.
A classic case of this was eBay. True, there were various other online auctions. But eBay quickly turned into the clear dominant platform because sellers were attracted to the large number of buyers and vice versa. In fact, today the company is still the leader in the space.
Web2
The dot-com implosion was brutal. Many companies like Pets.com, Webvan, eToys, Go.com, and DrKoop.com simply ran out of money.
Venture capital dried up. Many people left Silicon Valley and went into other industries, like Wall Street. Everything seemed hopeless.
But the tech industry would rejuvenate itself and Web2 or Web 2.0 would emerge.
IT engineer, Dracy DiNucci, coined the term back in 1999 in an article entitled “Fragmented Future.”11 Her vision was that the Internet would become much more immersive and be prevalent across platforms outside of a computer, such as the TV, car dashboard, cell phone, and game machines.
But it was not until 2004 that Web 2.0 became part of the Silicon Valley buzz. For the most part, the concept was evolving from DiNucci’s concept to where the Internet would be user centric. Anyone could create their own content and share it.
The leading companies in this era included Google, YouTube, Facebook, Snap, and Twitter. And yes, they remain very much relevant today. They are also exploring how to evolve in the Web3 world.
In 2006, Time Magazine chose Web 2.0 as the Person of the Year. The story noted that the Internet had “became a tool for bringing together the small contributions of millions of people and making them matter.”12 At the time, the red-hot property was MySpace.com. This social network allowed for users to create content and connect with friends.
The belief was that Web 2.0 was the beginning of a new egalitarian Internet. It was common to think of it as decentralized, since the users had the power.
But this would eventually fade. The mega operators like Google, Facebook, and Twitter would control much of the online world – including the valuable data on billions of people.
These companies would amass enormous power. Just look at Google. In the fourth quarter of 2021, the company posted revenues of $75 billion, up 32% on a year-over-year basis, and the profit was $20.6 billion.13 The company had ten online properties with over 1 billion users.
The company also was more than search and online apps. It owned Waymo, one of the world’s largest autonomous driving operators. It also controlled device companies like Fitbit and Nest.
So, was there too much power concentrated among too few companies? Many in the tech world believed that the answer was yes. And this was leading to major problems. After all, could a startup take on Google search? Or go after the Apple iPhone? Or dethrone Facebook’s massive social network?
It would not be easy. The fight would also take huge amounts of resources.
As a result, the tech industry wanted to create a new paradigm – one that was truly decentralized and in control of the users. It was the Web3 paradigm.
“Web3 appeals to so many different kinds of people that have been slighted in one way or another by corrupted centralized parties,” said Josh Neuroth, who is the head of product at Ankr. “Platforms like Facebook used and manipulated user data in ways we never thought possible. Governments failed citizens with economic policy, sanctions, hyperinflation. Now, people see ways to regain some privacy, autonomy, and freedom in Web3.”14
Despite the criticism of Web2, there are definitely some key benefits. Keep in mind that centralization was necessary. The reason is that it would not have been possible to have enough scale to allow billions of people to become part of the online world. The advertising model was also key, as it meant much less friction for users to participate.
Catalysts for Web3
Composability: This is similar to an API (Application Programming Interface), which allows for Lego-like components to build programs and systems. In the Web3 context, composability uses the blockchain to evolve the applications – to build on each other. It’s a way of “not reinventing the wheel.”
Need for a new platform: Today’s Internet is similar to the one that existed in the early 1990s. But over time, there have emerged many new innovations. So shouldn’t the foundation of the Internet better reflect this? Definitely. For Web3, this is essentially using blockchain as the core for a new architecture. But the platform will not just be limited to this. Web3 will also leverage other technologies like Virtual Reality (VR), Augmented Reality (AR), artificial intelligence (AI), IoT (Internet of Things) and 5G.
FOMO (Fear of Missing Out): Yes, there are many entrepreneurs and investors who do not want to miss out on the next big thing.
New business models: The monetization approaches for Web2 include advertising, subscriptions, and usage. But Web3 offers interesting new options. With the growth of cryptocurrencies and tokens, these may ultimately be the new way for monetizing the online world. Users will also essentially become the “shareholders” of the platform that they participate on. This could perhaps be the biggest motivator to get people to adopt Web3.
Utopian Vision: Some influencers believe that Web3 will have a seismic impact on society. For example, Vitalik Buterin, who is the cofounder of Ethereum, believes that the technology will improve housing, voting, the distribution of goods, city planning, and even lifespans.
Venture Funding: The interest has quickly reached fever levels. In 2021, venture funding in Web3 and crypto deals hit $27 billion.15 This was more than the amounts raised during the prior ten years.
The Metaverse: This is essentially a part of Web3. This is an immersive Internet, which involves VR and AR. Facebook CEO Mark Zuckerberg has bet his company on the Metaverse. He even changed the name of the company to Meta. In 2021, Zuckerberg spent $10 billion on his vision of the Metaverse – with a big focus on VR technologies.16 Microsoft was also looking to the Metaverse. To this end, the company agreed to pay $70 billion for Activision. “The metaverse is no small matter, with investors projecting that it could bring in $30 trillion in revenue over the next decade,” said Marie Tatibouet, who is the CMO Of Gate.io. “The metaverse is part of the next evolution of the internet (Web 3.0) and has many avatars such as gaming, online communities, businesses, etc. It combines entertainment, traveling, business, and more with virtual reality and augmented reality, allowing users to live in a digital space. The metaverse marries both the physical and digital worlds.”17 However, with mega tech taking the lead in the development of the Metaverse, this is likely to lead to centralization. This could mean little choice and control of data for users.
We’re also looking further ahead to the future and have been following everything happening in Web3 as a source of inspiration to continue innovating on YouTube. The past year in the world of crypto, nonfungible tokens (NFTs), and even decentralized autonomous organizations (DAOs) have highlighted a previously unimaginable opportunity to grow the connection between creators and their fans. We’re always focused on expanding the YouTube ecosystem to help creators capitalize on emerging technologies, including things like NFTs, while continuing to strengthen and enhance the experiences creators and fans have on YouTube.
Ironically, when this letter was published, several of YouTube’s executives departed for Web3 startups.
Web3 and Crypto
When Russia invaded Ukraine in early 2022, the values of cryptocurrencies surged. Part of this was due to people looking for safe havens for their wealth. But people were also using cryptocurrencies to help the people in Ukraine. Within a few weeks, there were over $64 million in donations, according to blockchain analytics firm Elliptic.18
But there was a dark side to this as well. It looked like cryptocurrencies were helping Russia avoid some of the sanctions. They could also be a way for oligarchs to hide their assets. Because of this, Massachusetts Senator Elizabeth Warren introduced legislation to deal with these issues. She noted that – in 2021 – close to three-quarters of all ransomware was due to Russian-linked entities.19
Note that this controversy with cryptocurrencies and blockchain was nothing new. It began in the early days of these systems and technologies. For example, it was common for tax evaders, drug traffickers, human traffickers, and hackers to use cryptocurrencies and blockchain to bolster their illicit activities. Unfortunately, these remain problems today.
As a result, Web3 may actually be an attempt to essentially rebrand cryptocurrencies and blockchain. It is a way to make it more of a normal technology. Besides, if Web3 takes off, this will also mean much more demand for crypto.
Larry Fink is the CEO of BlackRock, which is an asset management firm that has about $10 trillion in assets. He believes that the Russian-Ukraine war will accelerate the adoption of crypto. In his annual shareholder letter, he wrote: “The war will prompt countries to re-evaluate their currency dependencies. Even before the war, several governments were looking to play a more active role in digital currencies and define the regulatory frameworks under which they operate.”20 If so, this will likely be a major positive for Web3, which relies heavily on crypto.
The Downsides of Web3
Segway: Launched in 2001, this was a motorized scooter with two wheels on the side. The driver guided it by leaning. John Doer, the famed venture capitalist, said that the Segway had the potential to be bigger than the Internet.21 Well, unfortunately, it was a major flop. The Segway would become the object of jokes.
Speech Recognition: In late 1997, Bill Gates said: “The PC five years from now — you won’t recognize it, because speech will have come into the interface, the screen will be a flat screen, the performance will be 20 times what it is today.”22 He was far off the mark with speech recognition. The fact is that this technology was incredibly challenging to develop. It really wasn’t until the great strides in deep learning – from 2012 or so – that speech recognition became useful to users.
OK then, so when it comes to Web3, what are the nagging issues? How might this technology not live up to the expectations? Could it even just be another fad?
Performance: So far, it is not very impressive. Blockchain networks are generally slow and have high transaction costs. Consider that they are a big user of energy. In 2021, Bitcoin transactions consumed about 91 terawatt-hours of electricity. This was more than the usage for Finland.23 The reason is that Bitcoin transaction involve solving complex mathematical problems, which take up enormous amounts of compute power.
User Experience: For the most part, it is fairly difficult to use Web3 systems. The interfaces are often not intuitive, and you may need a technical background. The jargon and concepts of Web3 can quickly get complicated, such as with the use of dApps. This will make it difficult to get mainstream adoption.
Bubble: There has already been intense interest from VCs drove. The result can be a bubble that ultimately pops. For Web1, this happened from 1996 to 2000. And perhaps the same could happen with Web3. Although, bubbles are not necessarily bad either. They are common when there is a massively disruptive technology.
Dystopia: The world of Web3 may turn out to be worse than Web2. After all, many of the transactions will have some type of payment mechanism – and it may not be clear how viable the tokens will ultimately be. There could also be lots of fragmentation, with people focusing on micro platforms. Something else: Web3 will track everything and make the transactions public. But many people may value privacy more.
Centralization: When you look at the history of technology, there is a similar pattern. First, there are new innovations that emerge, and this attracts a growing number of people. They create their own startups to capitalize on the opportunity. Many will ultimately fail or be purchased. And yes, the result will be centralization. This was the case with megatrends like mainframes in the 1950s and 1960s, and the PC and software in the 1980s and 1990. So why will Web3 be any different? It very well may not. Besides, the current incumbents like Facebook, Apple, and Google have tremendous power – and will certainly wield it to protect their global platforms.
Another lingering issue with Web3 is that it is male dominated. It’s actually kind of a proverbial bro culture.
This will definitely need to change. For Web3 to be successful, there must be true diversity.
Now there are some encouraging signs of change. Just look at Katie Haun. From 2006 to 2017, she served as a federal prosecutor, and she focused on cyber and crypto crimes.24 She created the first federal cryptocurrency task force, which investigated the Mt. Gox hack and the criminals on the Silk Road network.
After this, she moved to the private sector and became a general partner at Andreessen Horowitz.25 At the firm, she led investments in breakout crypto companies. She would also go on to serve on various boards, such as for Coinbase.
In early 2022, she raised $1.5 billion for two funds for crypto and Web3.26 In aggregate, they were the largest ever with a female general partner.
The web3 projects that emerge over the next decade will be even more expansive, applying the breakthrough mechanisms of the last decade to every industry from transportation and commerce to fashion, sports, music, and more. We think consumer demand for digitally native experiences and goods will continue to increase. As more people embrace these products, there will be a shift in individuals’ expectations for greater control of their personal data and a new generation of creators will demand and enjoy better economics. We think open platforms will win through loyalty, transparency, and trust by delivering better incentives than the walled gardens that came before.27
The Billionaire Web3 Spat
In late December 2021, Jack Dorsey departed as the CEO of Twitter and then changed the name of the other company he served as CEO: Square. He renamed the firm “Block.” This was because of his fervent belief in the power of blockchain and crypto. He noted: “I don’t think there’s anything more important in my lifetime to work on.”28
At the time, Block had roughly $220 million in bitcoin on its balance sheet. On Dorsey’s Twitter bio, it just had one hashtag: #bitcoin.
Then what about his opinion about Web3? Interestingly enough, he is not so sanguine. He tweeted: “You don’t own ‘web3.’ The VCs and their LPs do. It will never escape their incentives. It’s ultimately a centralized entity with a different label. Know what you’re getting into…”29
This was certainly provocative. It was a direct hit against one of the central themes of Web3.
The tweet sparked reactions from other tech billionaires. For example, Elon Musk tweeted: “Has anyone seen web3? I can’t find it.”30
Dorsey was quick to respond to this. His tweet was: “somewhere between a and z.” No doubt, this was a clear shot at venture firm, Andreessen Horowitz, one of the largest investors in crypto and Web3. The firm is often referred to as “A16Z.”
Things got so heated that Marc Andreessen would block Dorsey on Twitter. Dorsey then tweeted: “I’m officially banned from Web3.”31
It is really too early to see who will be right. However, it seems inevitable that VCs will be critical to the growth of Web3. They will not only provide much-needed capital to build the infrastructure and scale the systems, but they will be helpful in providing strategic advice.
For entrepreneurs, having venture funding will likely be a key ingredient – even if it may ultimately dampen one of the Web3 ideals of decentralization.
“There will likely always be centralized systems or components within the web, and that is okay,” said Josh Neuroth, who is the head of product at Ankr. “But Web3 is about getting the communities engaged and decentralizing power, not always the systems themselves.”32
In late December 2021, Elon Musk tweeted: “I’m not suggesting web3 is real – seems more marketing buzzword than reality right now – just wondering what the future will be like in 10, 20 or 30 years. 2051 sounds crazy futuristic!”33
The Web3 Platform Shift
In the history of technology, there have been various platform shifts. This is when there is a disruptive change in the core layer. This is what happened when the mainframe industry transitioned to minicomputers. Then, minicomputers would transition to the PC industry.
When this happens, the incumbents often suffer. They have to cannibalize their existing businesses to make the changes. But often there is little change. For example, many of the leaders during the 1980s in the PC software industry would lose their positions in the 1990s. This was because the platform changed from DOS-based applications to the Windows platform. The result is that companies like Borland, WordPerfect, Novell, and Lotus came under tremendous pressure. Of course, Microsoft would benefit from the changes since it controlled Windows. But there were many new entrants that came to the market.
As for Web3, this could represent a massive platform change – and it is likely to last for many years. According to Sequoia partner, Michelle Bailhe, the firm’s conviction is that “crypto is one of the most important platform shifts of our time.”34
This means there are huge opportunities for entrepreneurs to create innovations and build the new ecosystem.
The Startup
Team: While Bill Gates and Paul Allen were young, they actually had lots of experience with computers. True, they were mainframes. But Gates and Allen learned the core fundamentals of the technology and liked to experiment with new approaches. They would also recruit very smart developers – which helped to accelerate the growth. This, in turn, would attract more and more developers.
Strategic Vision: Gates and Allen knew that the PC would revolutionize the world. It would impact businesses, the home, everything. They also understood that software would be the key value driver.
Market Size: The mission statement for Microsoft was simple yet powerful: “a computer on every desk and in every home.” In other words, Gates and Allen were thinking very big. They saw that the market was enormous, and that Microsoft would be the clear leader.
Platform: Microsoft was not just a set of different tools. Rather, it was a platform. In the 1980s, this was based on DOS, which was the dominant operating system. It became a significant cash generator. Gates and Allen then parlayed this into building the next OS, which was Windows. They always looked at their technology strategically.
Partnerships: As a small company in the early days, Microsoft did not have many resources. But it was able to leverage the power of partnerships. The main one was with IBM. Microsoft would become the default OS for its PC.
The preceding will definitely be part of most successful Web3 startups. But then, what is different? Well, it really comes down to understanding the major trends and the customer needs. These feed into the strategic vision, market size, and partnership opportunities. In fact, success can easily come down to making a few right choices.
To continue with the Microsoft example, the company could have easily become a footnote in technology history. The reason is that – when IBM came to the company – it did not have an operating system. Instead, the dominant player in this category was Digital Research, which had CP/M. Funny enough, Gates recommended that IBM visit the company. However, the CEO of Digital Research was skeptical. So Gates saw an opportunity and purchased QDOS (which stood for “quick and dirty operating system”) from Seattle Computer Systems on July 27, 1981 for $50,000.35 This would become the core technology for MS-DOS and lead to billions of dollars in revenues.
Conclusion
Again, Web3 is still in the early innings. It will take years for there to be clear-cut themes and breakout applications. This should not be a surprise. It’s the case with any major shift in technology.
But for Web3, it is generally about decentralization of the platform, which is powered by blockchain and crypto. There will also be new management structures and business models. Then there will be a need to improve the performance of the underlying blockchain technology as well as to build a new type of infrastructure. Oh, and the user experiences need to be simpler and much less technical. There will also need to be more diversity. All in all, this means Web3 will offer more than enough great opportunities for entrepreneurs.
There are some Web3 influencers who believe that this new approach will revolutionize the world – and it will be mostly a good thing. But while there will certainly be many positives, there will be problems too. Yet again, this means more opportunities for entrepreneurs. Building the Web3 world will take patience and lots of hard work.
A successful Web3 startup will have many of the same qualities of any tech startup. There will need to be a strong team, the solving of tough problems, and a large market opportunity. However, in the context of Web3, entrepreneurs will differentiate themselves by understanding the pathways of the technology.
So, in the next chapter, we’ll look at the core tech stack, which includes blockchain and Ethereum.