You’re Getting Web3 All Wrong

What if you could take out a loan against your future earnings potential?

What if an art museum could sell you a digital version of a physical artwork that updates as restorers learn new things about it?

What if you could take out equity on your home without a bank’s approval?

All this is part of the promise of Web3. Using smart contracts, tokens and decentralized identity, Web3 could transform our experience as digital beings. It could add liquidity to assets that historically have had no marketplace. And it could change the lifetime value a brand provides to its customers.

“The amount of time that we spend on our screens is obviously increasing,” says Gardner Loulan, who co-founded Reach, a company focused on empowering individuals around their data. “So there is clearly the need to cater to a digital community more and more.”

Globally, people are now averaging more than seven hours a day online, according to market research firm GWI, a 13% increase since 2013. Meanwhile, venture capital giants like Andreessen Horowitz and Union Square Ventures are banking on the increasing importance of our digital lives with major investments in Web3.

But some detractors are crying foul. The slew of startups behind crypto and blockchain sometimes seem to repeat the problem Web3 purports to solve, leaving them open to a fundamental criticism: What they’re calling decentralized is actually still centralized.

“I don’t think the people talking about this understand the words coming out of their mouths,” says Jon Hackett, group technology director at Huge. “When they say decentralized, they just mean moving away from the mega platforms.”

Let’s break that down: Blockchain decentralizes the ledger but not always the tools we use on top of it. And since the interoperability of Web3 assets isn’t solved yet, we’re still locked into systems that control our information with opaque usage rights buried in fine print few people read, much less understand.

This leaves gaping questions over whether an entity is decentralized or simply centralizing power in the hands of a new, smaller group — which Twitter founder Jack Dorsey has publicly warned about. While he may be right, this whole debate is obscuring the question that businesses and brands must ask themselves: What should or could be decentralized? And how can you prepare for the shake-up?

Defining Web3

Proponents will tell you that Web3 is the next evolution of the internet. The first flavor was read-only; then Web2 evolved with read-write, which led to the rise of social media; and now Web3 brings the opportunity for read-write-own by incorporating a decentralized blockchain.

The term Web3 was first coined by Gavin Wood (co-founder of the Ethereum blockchain platform) and is broadly defined as a blockchain-integrated internet, though others simply refer to it as “an internet owned by users.” This has led some to hold onto the term Web3 while dismissing the idea that blockchain is the only technology that can support it. In fact, the broader term “distributed ledger technologies” (DLT) is considered more inclusive.

“They’re circles in a Venn diagram. If Web3 is a big circle, then blockchain and crypto and decentralized apps are circles inside or overlapping that circle, but they’re not the same thing,” Hackett adds.

Embracing the broader DLT definition means we don’t have to debate (for the moment) whether blockchain is good or shitty technology or solves a meaningful problem with trust. Instead, we can ask the big, simple question: How would an internet owned by users work?

To answer that, we will explore the benefits and weaknesses of enabling portability and control over a user’s data and assets across three major topics: personal identity, banking and loyalty.

Decentralizing Identity

Many companies today capture and profit from people’s data, but often this is done with minimal awareness or consent. Web3 promises to treat people’s personal data as an asset for them to own.

Loulan calls this “data dignity” — something the Reach app has been trying to deliver in the Web2 space since it launched in 2019. For him, Web3 is the future solution. “The blockchain infrastructure layer is a mechanism that at its core is promoting individual or community sovereignty.”

Turning your personal data into an asset creates liquidity and a market where today there’s a sense of mass powerlessness.

“I prefer the idea that we’re giving control back to the people who actually own these things of value, and then letting them determine how they let people access that value,” says Rob Krugman, chief digital officer at the fintech firm Broadridge. Krugman envisions a world where the individual can explicitly decide who to share data with, what data to share, and whether that “informed” entity can retain or share that data. This system could also extend to other assets. For example, if the title of your home were tracked by the blockchain, there would be no more title search and no more title insurance.

“What everyone talks about now are cryptocurrencies and NFTs and other things that are somewhat financially related, but it could also be information about yourself,” Krugman explains. “It could be your health records. Really anything that has a perception of value you should now have control over.”

If that sounds scary for brands, it should, as so many trade in the data of their customers. And yet the brands that begin engaging in a space where the individual has these kinds of options could be the brands that win over the next audience. It’s a new kind of user-centrism.

“Soulbound tokens,” which are essentially nontransferrable NFTs, are one tool for enabling personal data ownership. Future-use cases are theoretically endless: These tokens could help you avoid fraud by validating your identity. Colleges could issue tokens instead of diplomas. Musicians might issue a soulbound token to their first 1,000 fans, thereby creating a digital record of who loved them before they were cool.

Decentralizing Banking

Cryptocurrency has had major ups and downs. Brands from Gucci to Tesla have embraced it, saying they’ll accept digital currency. But in many cases, it has seemed like little more than a grab for headlines and cred with a young crowd.

Krugman argues, however, that crypto makes a lot more business sense than just that — especially with stablecoins, which benchmark their value against an external thing (such as a commodity or currency) and not just hype or market demand. “There are hundreds if not thousands of cryptocurrencies right now. The vast majority are going to disappear,” he predicts. “I believe that stablecoin, which is actually backed by collateralized assets, is going to become a real big thing.”

As the name suggests, stablecoins remove much of the speculation of the market, making them more appealing for day-to-day transactions. In addition, brands accepting stablecoins (or any cryptocurrency) benefit from an improvement in operational efficiency by reducing third-party payment costs. “The cost of doing payments is very, very expensive,” Krugman notes. “But when you actually start to think about using blockchain technology and the Web3 capabilities to facilitate these activities, it’s so much less expensive, and it’s real time.”

No more waiting 48 hours for the old rails of finance to reconcile the exchange of funds. These are instantaneous transactions conducted privately between two parties. Regulation, however, is still an open-ended question. “There’s a lot of talk about how do you regulate this the right way. There are no protections for consumers right now. There’s no insurance. All that stuff is being talked about,” Krugman adds.

Decentralizing Loyalty

One of the biggest moves in Web3 loyalty in 2022 was Starbucks’ plunge into the space. The new 'Starbucks Odyssey' program, slated to launch by year end, will allow customers and employees to collect 'digital stamps' as rewards and unlock access to merchandise and private events.

“If there’s a way to have a more equitable system where both the company and the individual have ownership in the path forward of that system, then there is going to be higher engagement. There is going to be more loyalty,” Loulan explains. While Starbucks’ move caught a lot of attention, there’s still a long road to real innovation. Brands like Glossier, Delta and Patagonia have already proven the value of nurturing a community of interest. What Web3 does is allow a brand to connect that community more intimately with the values of the company.

Imagine what the loyalty program for a company like Starbucks could look like, creating a feedback loop between a physical store and its customers. As a collective, they could steer the music that plays or choose what seasonal food might be added to the menu. They might be able to more readily tip or acknowledge a helpful employee. Take this further, and they might be able to see the entire supply chain of the products they consume, to better understand their own carbon footprint.

For another brand, loyalty may look like a digital token that is the twin of a physical item — like a luxury bag with high resale value. The exciting part about that token is how it can attribute veracity to the physical product and prove it’s not a knockoff. It can also contain supply chain information, aligning the brand and purchaser to particular goals and outcomes.

Smart contracts are another major loyalty lever, when you think about secondary markets. For instance, anytime a token is sold (and a bag changes hands), the original design team that made that style might get a small fee from the sale. Today, resale value is usually missed by the original company, but it could become a revenue stream. By passing that revenue on to the creators (and not just the company itself), the brand would become more attractive to prospective employees. And it feels to customers like they have a chance to help the little guy.

Helping individuals and not just big corporations is part of what has made music fans embrace loyalty NFTs, while gamers, seeing them as yet another way game developers want to wrench away their money, have heartily protested. It’s a good reminder that decentralization is best used when making something people love, rather than just a new revenue stream.