When you get past the marketing hype and dig down into what Web3 actually is, it’s hard not to ask whether it’s a real revolution that’s going to remake the internet or simply a far more successful rebranding of blockchain technology.
In a report released Monday (Sept. 26), “Web3 beyond the hype,” consulting giant McKinsey & Co. said that in practice Web3 amounted to “making disintermediation a core element” of digital applications.
Web 3, “potentially upends that power structure with a shift back to users,” it said. “The intent is that control is no longer centralized in large platforms and aggregators, but rather is widely distributed through ‘permissionless’ decentralized blockchains and smart contracts … users and creators could gain the upper hand.”
Which is roughly the standard pitch for Web3: Cut out the big middlemen, let people have control of their private data, and build everything on an immutable blockchain for security.
Yet when asked to describe Web3, McKinsey, like most supporters, falls back on a pretty standard, blockchain-based decentralized finance (DeFi) project: Lending protocols, in which the private ledger and proprietary credit and risk models of centralized finance — whether a bank or a FinTech — are replaced with a smart-contract-controlled public blockchain ledger that automates lending decisions, doing away with the need for actual human management.
Which is a business model that has worked when people put up 150% collateral — a lot more than banks ask for, or that most borrowers can do. When actual human managers were involved, too many for comfort — notably companies like Celsius and Voyager Digital — went belly up, costing depositors whose funds were being loaned out huge losses.
When it comes to buying into the Web3 hype, it’s helpful to understand four unresolved questions:
The Linux question: The way users and creators can gain the upper hand, McKinsey said, is through “open-source rather than proprietary applications” giving them “incentives to innovate, test, build, and scale.”
Which is great if you’re the techy type that knows how to use open-source technology. But as $2 billion in cryptocurrency bridge programs hacks this year alone have shown, open source blockchain is tricky to use at best. The reason Apple has become one of the big tech firms Web3 claims it will unseat is by creating a tightly integrated ecosystem of its own design that may suck a lot of money out of the doing business on it. But it’s very easy to use, so that’s where the customers are.
The DAO question: At least in theory, most of Web3 would be built on blockchains run by decentralized autonomous organization (DAOs) and managed by self-executing smart contracts, with changes voted on by governance token holders, which McKinsey compared to shareholders.
If that sounds like a system in which shareholders have to be polled for any decision to be made, there’s a reason for that. One DeFi project notably could fix a software bug that allowed a massive hack for a week — even though a patch was available in hours — because that was how long the smart contract required voting to remain open.
The server cord question: Web3 assumes a distributed infrastructure — including distributed data storage — in which tech giants like Google Cloud and Amazon Web Services don’t run everything. That raises the question: Who’s paying the power bill for the ground-based server farms that the cloud actually runs on?
Web3 is built on blockchains — that’s where the privacy and security come from with centralized, private corporate ledgers — yet blockchains today can’t even store an NFT image due to the size and cost.
The personal information question: A core tenet of Web3 is individual control of personal data. That’s one of its main reasons for being, to protect privacy from data-mining tech giants and marketing firms. Which leads to an inescapable question: Does anyone really care? Enough to shout about it, sure. Trust that Facebook is doing the right thing with personal data is very low. But how many people actually deleted their profiles because of it? Apple and the EU’s data privacy laws have done a lot more than individuals.
The idea that people can control their personal data and only give away the minimum necessary runs into a brick wall: Everyone already gives away their private data to companies when they pay them for entertainment content or shop on their websites. Why would the actual content providers and merchants do anything differently on a blockchain-based internet? The fact that users can give out only what they want doesn’t mean the companies they want to do business with have to accept it.
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