Feb 2024 | Dr Sachin Lodha | 1122 words | 4-minute read
In the early 2000s, a technological revolution called Web2 began. This defined an internet that depended heavily on the centralisation of information and server infrastructure needed to process it correctly and efficiently. Gradually, increasing reliance on very few large service providers, led to a monopoly or near monopoly, causing them to have excessive power and control over the acquired information, and lose sight of the end users’ needs and interests. Consequently, it soon became impossible to challenge any of them for their policies and practices, resulting in multiple lawsuits in recent times.
This concentration of power, lack of transparency, and invisible exploitative policies by major Web2 players in well-entrenched service classes, which include social media, online markets, and streaming services, appeared to have one root cause — centralisation. Naturally, then, the advent of Bitcoin and other related decentralised technologies gave rise to the thought that a move to decentralisation may help here. A system where no single entity owns all the infrastructure, with a peer-to-peer replicated service design that is defined in order to give more control and autonomy to users, addressing concerns of robustness and trustworthiness of the associated service, could be created.
Benefits of the Web3 paradigm
The paradigm shift offered by Web3 is based on the old yet contemporarily critical design principle of replicated state machines in distributed systems. With the hype initiated by Bitcoin, consensus-based peer-to-peer systems saw a revived interest, ushering in a new specification of service guarantees for users, including that:
- there is no single major player, the associated community controls the service;
- the users themselves have custody of their resources;
- there are no intermediaries in service provision;
- the associated systems are transparent, censorship resistant, and protected by cryptographic protocols and distributed systems’ technologies, and
- the associated systems are moderately scalable with the ever-increasing improvements in blockchain technology.
A few prominent Web3 trends
The decentralised internet holds the potential for defining better versions of existing Web2 services, and new versions of novel financial and business services. Below are some contemporary Web3 services.
- Cryptocurrencies like the ever-famous Bitcoin.
- Central bank digital currencies (CBDC): Programmable, state-backed currency systems, deployed over the web, as a contender to existing centralised payment systems and the evolving landscape of cryptocurrencies.
- Decentralised finance (DeFi): Creation and deployment of existing and novel peer-to-peer financial instruments that leverage the non-custodial nature of the decentralised web. DeFi has the potential to define an internet bank.
- Metaverse: Virtual social interaction and gaming worlds, deployed over the decentralised web, where entities mutually interface with their digital avatars. Metaverse can revolutionise social interactions and telemedicine through decentralisation, by facilitating interconnected networks of virtual spaces.
Macro trend #1: An internet of value
The biggest enabler that Web3 promises to be is in defining an internet of value.
- The market cap of cryptocurrencies, which have facilitated a new peer-to-peer barter system, has touched nearly $3 trillion in the last few years, which would make us believe that they would persist as a competitor to fiat currencies.
- CBDCs are essentially cryptocurrency competitor legal tenders issued by central banks. Since these CBDCs are issued by central banks, they cannot be fully decentralised. However, permissioned blockchain-based CBDC systems are being seriously considered by some developed nations.
- DeFi allows the decentralisation of various financial primitives, including exchanges and lending services. Contemporary DeFi platforms have hundreds of billions of US dollars locked in value. The removal of intermediaries allows DeFi users to lower transaction fees and faster settlement times. Other advantages over traditional financial services include greater accessibility, transparency and efficiency. The greatest advantage is that it claims to provide a service to underprivileged non-banking communities.
Macro trend #2: An immersive, commercial and secure virtual world
As consumer demands for new and more sophisticated social experiences evolve, the metaverse is a solution concept that merges virtual reality, augmented reality, mixed reality and extended reality in a global context. It allows users to interact in the virtual world with equivalent legal rights borrowed from the real world. To enforce accountability in these virtual worlds, blockchains from Web3 are being contemplated. Blockchain technology would also be deployed in the metaverse for security, privacy, data sharing, healthcare and enabling decentralised wallets and exchanges.
The road ahead
The seminal contribution at the origin of Web3, Bitcoin, is the market dominator of a currently $1.3 trillion cryptocurrency economy. The valuation of one Bitcoin is expected to touch $100,000 by 2025. Bitcoin block reward halving will occur in 2024, which might increase the value of Bitcoin, if we can rely on tradition.
It is anticipated that China will pilot the digital Yuan in 2024. Other countries planning to pilot and/or launch a digital version of their legal tender in 2024 are Sweden, the UK, the Bahamas and Nigeria. As countries start adopting CBDCs, it is anticipated that the CBDC transaction value will see a cumulative growth exceeding 200,000% by 2030.
DeFi has gained momentum since 2020. The maximum total value locked in DeFi systems exceeded $250 billion in December 2021, with Ethereum emerging as the major player in the economy. Unfortunately, for four years, starting April 2018, ‘malicious DeFi incidents’ have resulted in an exposure of over $3 billion. One suggested step to mitigate these attacks and consequent exposures is to devise protocols and mechanisms to detect adversarial smart contracts. It is predicted that the revenue from DeFi markets can grow by almost 50% in 2024. Post 2024, the revenue growth rate should be stable, around 19%, till 2027. DeFi has a promising future if computational protocols are appropriately designed and deployed in the coming years to ensure economic stability of underlying assets.
The next generation of the internet will continue to become more immersive and secure. As part of the metaverse, online digital identities (avatars), unique digital assets (such as non-fungible tokens), community groups and corporations that vote online on the democratic passage of laws and regulations and the election of representatives will see rapid growth.
All this said, one inherent problem seems unavoidable for Web3 in the coming decade. Most decentralised Web3 systems are evolving towards a stake-based distributed system design — the participation of enforcers in some representative protocol is based on the capital they can invest as part of the protocol. This can be exclusivist against low capital stakeholders. Consequently, Web3, under current design choices, doesn’t automatically imply fairness and equity to all. This remains an important systemic issue that needs to be addressed by the community as a whole.
Dr Sachin Lodha is Chief Scientist at Tata Consultancy Services