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Monthly Market Review - November 2021

Updated: Mar 8, 2022

In this note, we look at Web3 and how it may change the fundamental structure of how power and money flow through the internet.

A brief history of how the web has developed until the present: the first generation of websites, known as Web1, were static and mirrored offline items such as magazines, brochures, and newspapers. These websites dominated the 1990s and early 2000s. Critically, all content, ownership, and control were produced and managed by separate independent companies, resulting in a decentralised web of power.

Web2 companies launched the next version of the web from the mid-2000s onwards. In the Web2 era, the most popular websites were platforms where users uploaded their content and built social followings. Facebook, Instagram, Twitter, and YouTube are the archetypical websites of this era. But also, Shopify, Spotify, and a long tail of business-focussed platforms. In this iteration, power was centralised with the platforms.

The pitfalls of this era are gatekeeping and audience ownership. These platforms own the network and have complete control over audience and revenue share. Content creators receive no direct financial benefit from their content on most platforms and instead attempt to profit through tangential means, such as marketing products to their audience. At the same time, the companies that own the underlying network, such as Meta, thrive.

Web3 promises to alter who has the power of the internet's networks. In the idealist version, power will shift from companies to network users, and the network's value will accrue to the most valuable users – not a third-party company. At this early stage, the best rules for accruing value to users is still unknown. There are hundreds of different economic models that use token-based incentives to try and bootstrap networks and share value according to the network's stated goals. Network tokens also serve as powerful marketing tools as users are now directly motivated to help a network grow.

The shift from Web2 to Web3 can only happen because blockchains are decentralised, programmable, and allow value to be transferred between users effortlessly. The transition could happen quicker than many think because composability means users and ideas can easily be imported into new networks as code and data is available on public blockchains. Composability allows new Web3 projects to benefit from the work of other projects as they can build on previous projects' ideas, and users can seamlessly port across. Secondly, well designed token rewards help supercharge the growth as incentivised users spread the word. The table below shows an excellent overview of some of the salient differences between the three different stages of web development.

As Web3 develops further, it will serve as a solid counterbalance to the centralised nature of Web2. Web3 is unlikely to completely replace Web2, much as Web2 hasn't wholly replaced Web1. Instead, Web3 will enable a powerful new mechanism of controlling power and money on the internet. In time, Web3 projects may dominate where most of the power and money reside.

Web1, Web2 and Web3 structures. Source: Twitter

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