The internet today is broken. We do not have ownership of our data, nor do we have a native value settlement layer – built in today’s architecture of the Web. Data is centrally stored and managed on a server and sent or retrieved by a client. Every time we interact over the internet, copies of our data get sent to the server of a service provider.
Why should we care? Trust.
Web2 is stateless whereas Web3 is stateful.
In a network, state refers to information or the status of:
Who is who?
Who owns what?
Who has the right to do what?
With this in mind, let’s try to explore how we – citizens of the Web – can build a better, more decentralized digital economy.
In today’s increasingly connected world, the internet doesn’t have a native mechanism to transfer what computer scientists call “state”. The ability to transfer value easily in a peer-to-peer fashion (P2P) is essential.
Why is “state” critical? Running efficient, smooth, and transparent markets.
“State” is a key property to manage and transfer values which are represented by cryptographically secured tokens. They live on tokenized networks powered by blockchains – the backbone of Web3.
Dex vs. Cex: a Fierce Battle over Trading Revenues
To illustrate, let’s turn to Decentralised Exchanges (DEXs) vs. Centralised Exchanges (CEXs): Amidst the current crypto bear market, Uniswap Lab’s daily trading volume is near to flipping Coinbase. DEXs are now rivalling CEXs. The leading DEX, launched in late 2018, runs a very sophisticated version of an Automated Market Maker (AMM). Essentially, anyone can create a liquidity pool for any pair of tokens without any form of identity requirements.
In fact, Mid-July this year, Uniswap’s daily share of volume for all pairs/pools compared to Coinbase has more than doubled since January 2022. Deep liquidity is decisive to bring about a healthy market for traders: to act as liquidity providers (LPs) across a vast array of pairs, from stablecoin swaps to more volatile assets with less of a correlation.
If you can’t hold state, transferring value without centralized institutions acting as clearing houses is mission impossible! This goes to show that Decentralised Finance (DeFi) is maturing, and “state” has never been more critical in building the internet of value, namely Web3.
Why did Bitcoin usher in a new paradigm?
The Bitcoin network was the very starting point of this new form of public infrastructure where the state of all Bitcoin tokens is collectively maintained by the operating nodes of the network. The Bitcoin whitepaper of 2008 introduced a new gearing system for each network participant to send and receive tokens, and record the state of tokens, in a digitally native format. The consensus protocol, Proof-of-Work (PoW) gives the Bitcoin network its security and reliability.
In fact, like clay tablets drying in the sun – the original accounting system in Mesopotamia, in which you would encode your accounting relationships when it was wet, set it up in front of the sun to dry and lay it out before the temple so that everybody knew who owned whom and what – Bitcoin is a synthetic version of this.
Over time, proof of burnt energy/inputs gets attached to the ledger and it becomes harder, probabilistically, to reverse the transaction. The ledger costliness is what links the digital database to the physical world and gives its weight and substance. Immutability yields confidence in the user’s eyes so they can interact safely and know for certain their transaction will settle.
In reality, there’s nothing truly revolutionary in the conceptual design of the Bitcoin ledger since the idea dates back to probably more than 10,000 years ago! However, what makes it a ground-breaking innovation is the fact that it ensures, in a decentralized manner, the orderly linear history of the ledger without a single coordinator.
It stores about $800B in this non-state, wealth storage medium. At peak, it settles $20B in transactions/day. Web3 leverages this universal state for decentralized computing.
Coordination failures are all around us
They tend to occur when a community could achieve a desirable outcome by working together but fail to do so because they don’t coordinate their decision-making. It’s why we consume fossil-fuel-burning products, even while knowing the aggregate harm they impose on the environment we live in. The tragedy of the commons. Games of theoretic dystopias. There is no one to blame though… we just don’t have the coordination technology to solve these issues and ultimately slay Moloch!
Ultimately, the goal of Web3 is to defeat Moloch – the God of human coordination failure (medieval dark figure inspired by the Old Testament) or the embodiment of the Prisoner’s Dilemma. Is Ethereum – the decentralized open-source blockchain – the sword that Humanity needs to overcome Moloch?
Only the future will tell, but distributed ledger technology (DLT), specifically blockchain, is probably our best shot now. Game theory lies at the core of Web3: incentive design mechanisms and tokenomics are a key component of the underlying infrastructure of Web3 running on smart contracts.
ReFi & the provision of public goods
For instance, let’s briefly touch on the emerging Regenerative Finance (ReFi) space. Kevin Owocki is one of the lead advocates and believes in Ethereum’s ultimate legacy to build public goods for the greater good. Given we can now program our values into our economic system, the final form of a stateful internet could allow us to coordinate our actions on a global scale to solve coordination failures. The founder of Gitcoin supports and seeds public goods through creating collaborative, decentralized funding mechanisms, as part of GitcoinDAO (Decentralised Autonomous Organisation).
Concluding Thoughts
I firmly believe in the disruptive potential blockchain brings about in shaping Web3. We’re still early… but I wanted to make a point of how big this is to ignore it. You can’t easily walk away when you grasp the fundamentals of this new distributed accounting system. Web3 is here and it’s taking over, whether you like it or not.
Unlike Web2 which was a front-end revolution, Web3 is a back-end revolution. It challenges the way we think, what world we want to live in, and to some extent who we are… red pill or blue pill? The choice is up to you!