What is Web3? Why does it matter?

Welcome to the edition #2 of Mondays in Metaverse.. Technically, I have written more posts on the topic but that was before the newsletter. Anyhow, the topic for this week is Web3.

Have you come across the term Web3 or Web3.0 recently and are wondering what is it? In this post I will try to explain what Web3 is and what problems is it trying to solve from Web2.

The best definition of Web3 that I have come across is by Chris Dixon – who is a famous VC at Andreessen Horowitz

So let’s dig in a bit deeper into what these terms Read, Write, Own mean and how they relate to the different eras of the Web.

Each era of Web has been quite revolutionary and has opened up opportunities that were not possible before. At the same time, each of these eras had some problems which eventually led to a newer players coming in and shaping the next era of the Web.

Web 1 – Read-only

Timeline – 1990s to early 2000s

This is when the web was primarily bunch of static web pages linked to each other via hyperlinks. This was the time when AOL, Yahoo etc were popular. Even Google was found in this era.

Many people call this as the Golden age of innovation, as the internet was open. There were open protocols – TCP, IP, HTTP, SMTP – that you could build on and no one owned those protocols. So as a developer, founder, creator you were controlling your own destiny.

This was revolutionary at the time, as now you could put your ideas out in the world without anyone’s permission. Before Web1, to put your ideas out there you would need to either be on a radio channel or TV or newspaper which were all controlled by large corporations and thus controlled by them.

This was also the era of biggest %age growth of internet users.. Internet users went up from 16 million in 1995 to 700 million in 2003 (data source). A whopping 4200% increase in less than 10 years, but it was still a very tiny percentage of world’s population

Challenges with Web1

There was a big challenge, that these open protocols weren’t easy for everyday users to interact with and the functionality was limited. To build a website and put your ideas out there you would need to buy a domain name, set up web hosting, create a webpage with html, css etc.

Let’s just say the user experience of Web1 wasn’t great and the functionality was quite limited.

Web 2 – Read and Write

Timeline – mid 2000s to current

Web2 solved the UX challenge of Web1 and made it really easy for people to come online and express their ideas.

With Web2 you didn’t need to buy a domain name, you didn’t need to buy web hosting. You just needed to create a Facebook, Twitter, LinkedIn account and you would get your page. It was much easier..

And of course, if you are reading this you know that Web2 was a big success. In terms of absolute numbers, we grew from 700 million in 2004 to more than 5 billion internet users in 2021. 4.3 Billion people have come on the internet during the Web2 era and know the Facebook, Google, Instagram, Whatsapp, Youtube as the internet.

This is the era of the user generated content and also the era of losing user privacy.

When I say user-generated content, I mean it to be much bigger than just posting status updates. If you think about it majority of internet today is based on user generated, user owned content and the sharing economy.. Let’s take some examples

Facebook, Twitter, LinkedIn – user generated posts/status updates
Instagram, Snapchat – user generated photos
YouTube – user generated video
Airbnb – user hosted stays / user rented properties
Uber – user driven cars
Spotify – user (artist) generated music
Apple Appstore or Google Playstore- user created apps
Even marketplaces like Amazon, Ebay – user selling their stuff to other users

The question to be asked though is that who captures most of the value generated from this user content – the users or these large platforms?

Challenges with Web2

The success of Web2 is obvious from the sheer number of people online today. But this has also come at a cost – we have moved away from open protocols to closed ecosystems.

As a creator in these closed ecosystems, you don’t own your audience. With open standards such as SMTP for email, you are free to choose which newsletter service you want to use. If you are unhappy with one, you can switch to other and still retain your audience. But with a closed ecosystem like Facebook, Twitter, LinkedIn, YouTube you can’t switch platform and have the same audience elsewhere. If any of these platforms decides to de-platform you, you can lose your audience built over years in seconds.

These closed ecosystems have led to various monopolies or oligopolies, which means more power in hands of few and far lesser competition. All of these companies are networks of some sort, each new driver on Uber makes the value of Uber more lucrative. These network effects give these companies strong economic moats and make it really hard for competition to survive. Did you try to switch from Whatsapp to Signal when the privacy policy updates were being pushed? How successful were you? How many message did you send on Signal last week? That’s the power of network effects.

As a result, we have huge internet giants that capture most of the value that internet is generating. Even though the most of the value is being generated by the users, but the value is being captured by these large platforms. This is why we see so many developers fighting against Apple for taking 30% of the AppStore fees. YouTube keeps a much bigger cut of the revenue than it shares with the creators. On Spotify, the artists make very little even though they may have very passionate fan base. Early drivers on Uber or Early hosts on Airbnb had outsized contribution to the success of these companies but the $70 billion market cap of Uber didn’t change the lives of those drivers significantly.

Not just that, this centralization has also led to number of privacy issues being surfaced. How many of you have had an experience of talking about something to your friend and seeing a Facebook ad the next day? The business model of free Web2 has led us down the rabbit hole of collecting all data (often without consent) at all cost, and using that data to push ads. Isn’t it strange that the goals of some of the best minds and smartest people of our time is to show more ads?

In short, the issue with Web2 is that it is centralized, controlled by a few giants and we have privacy issues.

Web3 – Read, Write, Own

This leads us to Web3. The big difference in Web3 is that now the users of the network can own the network without the intermediary of the “company”. Imagine, Airbnb where the guests and the hosts are part owners of the network. Uber where drivers and passengers own and help build the platform.

Blockchain technology enables the ownership of the internet, thus enables Web3.

I talked about Bitcoin in my last post. Bitcoin is also a network, it is a network of money. Thanks to blockchain technology, it is owned by the participants on the network. There is no Central Bank that owns or prints or issues or tracks Bitcoin.

In Web3 internet services are owned and controlled by the users, creators, developers. This ownership and control is managed via Tokens issued by the network. The control is managed by Decentralized Autonomous Organizations (DAOs) based on voting done by the token owners. These tokens can be fungible (Bitcoin, Ethereum) or non-fungible – NFTs (unique items – art, music etc).

The tokens help align incentives, as all the token holders have a common objective which is to ensure the success of the network which could be by adding new features, onboarding new users etc. Tokens also provide a good way to break the network effects of current centralized companies by providing incentives to the early users.

Identity also works differently in Web3. You don’t use user-ids, password, date of birth, SSN etc to log in to a central server. Your data is stored on the chain, No central organization is storing your data. This gives you more control over your data, and you can choose what access to grant to who using your private keys using your Wallet such as Metamask. You can choose to share different information with different applications based on the utility.

To summarize, Web3 brings us the open protocol standards of Web1 and without sacrificing the functionality and user experience of Web2. It puts the control of the internet back in the hands of users, creators, developers and out of the hands of few tech giants.

You can already see this happening – many artists are able to directly connect with their fans and make more money than they have ever made in their lives selling NFTs. This 14-year old sold 8000 NFTs for over $1M and donated $100k of that for Beluga Whale Conservation.

Decentralized Finance (DeFi) is disrupting traditional finance such as Banks, Insurance companies etc and enabling peer to peer borrowing, lending and providing much better interest rates.

It is still early days for Web3. It is just the beginning. The future is web is being created right now and I am excited about it.

I dropped a bunch of terms in the post such as Blockchain, NFTs, DAOs, DeFi etc. Please comment and let me know which ones you would like to me to cover and explain in the upcoming posts.

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What jobs do people hire Gold for? A JTBD comparison of Bitcoin and Gold

This post is a Jobs to be Done analysis for Gold, the precious metal and comparing it to Bitcoin.

If you are new to the Jobs to be done Theory, here’s a quick summary

JTBD Theory

JTBD was popularized by the famous Harvard Business School Professor Clayton Christensen who is well known for his Disruption Theory. Anthony Ulwick and others have also have a big role in putting this theory into practice as well.

The theory states that Customers don’t buy your products, they hire them to get a job done. If there’s another product/service that gets more of the job done faster, cheaper and more accurately customers will fire your product and hire that instead.

The jobs remain stable over time, even as the technology changes. Jobs have Desired Outcomes or Needs which also stay stable over time.

For example, the job of listening to music has stayed stable over time and the technology has changed from Walkman to Mp3 players to streaming services. Another example is the job of filing taxes has remained the same while the technology has changed from pen and paper, to desktop software to taking a picture of W2 on your phone.

In this post, I will try to take an example of what jobs people hire Gold (old technology) to do and see if Bitcoin (new technology) does those jobs faster, more accurately and cheaper.

To explore what jobs people may hire Gold to do.. Let’s go back in time to 1947..

1947 – Partition of India and Pakistan

For those who aren’t aware of what happened at the time, by some estimates roughly 2 million people lost their lives and 14 million were displaced and lived as refugees.

As I grew up in Punjab, all of my friends and I had heard stories from our grandparents about how well off they were on the other side of the border and had to run overnight leaving all their belongings behind to save their lives, and they had to start their lives all over again from zero. We’ll try to explore the jobs that gold can be hired for with a background of partition in mind.

Stage 1 – Run to save your life

At the time of partition, Gold would have been the most useful asset as it was easy to carry around large sums of money and would have been easily transportable. In comparison, if you had a very big house you couldn’t move your real-estate as it’s not transportable. You would have to leave the house behind. During this transfer you would have liked to minimize likelihood of your gold being stolen or misplacing it, these would be a needs related to the job. Each job can have multiple needs associated with it.

JTBD 1 – Transport value over distance

Examples of few needs associated with this job.

Minimize the risk of value getting stolen
Minimize the likelihood of losing all or some percentage of the value in transfer
Minimize the time it take to transport the value
Minimize the value lost to wear and tear (durability)

Stage 2 – Find shelter on the other side of border

You reached on the other side of border (hurray!) and now you want to find some safe place to stay. You may want to exchange some of your gold with someone in return for shelter. This leads us to our Job #2

JTBD 2 – Pay others for goods and services

The needs associated with this job might be –

Minimize the likelihood of overpaying or underpaying others
Minimize the % of value lost in transaction fees
Minimize the time it takes to complete the transaction
Maximize the number of people who you can trade with

This is an area where Gold would struggle. If you had a 8gm gold coin, it won’t be easy for you to give 0.01 gm to someone. You could trade it with someone for currency, but then those choices would be limited, as regular people may not be able to distinguish between 22k gold vs 18k gold. You could go to a jeweler and he/she might try to con you as well and not pay a fair price.

Stage 3 – Establish life again

Now, you are settled fairly in the new country, and you still have excess gold left. You deposit it in a locker in the bank or bury it in the ground in a secret place and come back to recover it in 5 years. Gold would still be in a good condition given the durability of the gold, which we can’t say for paper money. But not only that, Gold would have still maintained it’s purchasing power. That is because Gold is globally scarce, we only have 1.5% of new gold being mined every year. The supply is constrained and the demand has been there for last 5000+ years, so gold would have done well with the job of maintaining purchasing power thanks to it’s scarcity.

JTBD 3 – Maintain purchasing power over time.

Some example needs could be –

Minimize the value lost over time due to wear and tear
Minimize the value lost over time due to discovery of new supply

1947 vs today

Although it may seem like that the situation described above of Partition may be unique and a one time event, it isn’t true.. In the last century, there were many times in different countries where people have faced similar situations – Jews during the time of Nazis, more recently people in Syria, Venezuela, Afghanistan have been trying to find refuge in other places.

And even you and me, who may not be refugees but we are struggling to maintain the purchasing power of the paper money with skyrocketing inflation thanks the ton of money printing by so many countries in response to COVID.

Also, as mentioned earlier based on the JTBD theory, the jobs remain stable over time. So the 3 jobs that we have discovered are also stable over time.

Another job people hire Gold to do is to make jewelry. But being a Male, Engineer, MBA – I wouldn’t dare to comment on that job :). I don’t claim to understand it either. I’ll conveniently skip that from the rest of the discussion.

Gold vs Bitcoin – JTBD Analysis

Gold was the best technology for the last 5000 years to get these jobs done, but with Bitcoin entering the scene we have a competitor that does these jobs faster, cheaper and more accurately than Gold.

Now let’s compare how Bitcoin performs the jobs mentioned earlier.

JTBD 1 – Transport value over distance

If you had bitcoin in 1947, you would just store your wallet key on paper and try to cross the border. Transporting value over distance wouldn’t need anything more and would be done automatically.

You can transfer thousands or millions of dollars across geographies using Bitcoin in a matter of seconds or minutes. So, bitcoin is faster for this job than gold.

It is also more accurate, as there will be an automatic ledger entry created, and no one can argue if the transaction was off by a few hundred or thousand dollars.

It would also be much cheaper, as you don’t need to transfer a physical good, that would need to be secured by humans or spend anything on flight tickets, shipping etc.

BTC is a clear winner for this job and 100x at least..

JTBD 2 – Pay Others for goods and services

Bitcoin is a winner here again. Not by much though. It is hard to use gold for this purpose because Gold is not easily divisible or even the purity of gold is not easily recognizable.

Bitcoin beats gold on the dimensions of divisibility and recognizability. 1 Bitcoin is made up 100,000,000 Satoshis and you can transfer 1 satoshi worth to someone.

Why I said that Bitcoin wins but not by much is because people don’t use bitcoin extensively for this purpose today as the transaction fee are a few dollars, which is still quite high. So, you wouldn’t use Bitcoin to buy a bread or fill gas in car. Moreover, the bitcoin price has been rising and people don’t want to risk losing potential gains over pizzas. Example, someone spent 10,000 bitcoins for buying 2 pizzas in 2010.

BTC is a clear winner for this job as well, as it is faster, cheaper and more accurate to pay others for goods and services using Bitcoin compared to Gold, but may be 10x this time

JTBD 3 – Maintain purchasing power over time.

Gold has maintained it’s purchasing power thanks to Scarcity and mining of Gold being hard. But, Bitcoin is more scarce than Gold. There is 21M supply that is fixed and known. Only 21M bitcoin will be ever produced. No more. It’s part of the code

With Gold’s 1.5% supply increase every year, gold in your locker loses the value by 1.5% every year, unless demand continues to grow.

This is more of a social/emotional job than a functional job, as the demand of Gold or Bitcoin is dependent on how many people find it valuable, which is subjective. So it’s hard to apply the faster, cheaper, more accurate lens to this. But you can think of maintaining purchasing power as a form of progress that you are trying to make in your life.

The plus point to Gold here is that it has much longer history of proving that it can hold purchasing power compared to only 12 years of history of bitcoin. But if those 12 years are anything to go by, Bitcoin has not only maintained but significantly increased the purchasing power of holders.

Summary

Bitcoin is a better technology than Gold for the jobs described above. So based on the JTBD theory, over time people will fire Gold for doing these jobs and hire Bitcoin and other digital currencies for the same jobs.

What does that mean for you and me?

Gold’s market cap today is $11.8 Trillion and Bitcoin is $1.1 Trillion. Over time, Bitcoin will eat market share from Gold. If you think, you are late to buy bitcoin, you are not.

Disclaimer – This is not a financial advice, please don’t sue me 🙂 if Bitcoin drops tomorrow by 40%. As I mentioned in an earlier article my policy is to define a %age allocation of my portfolio that I want in Digital Assets and slowly try to accumulate them over time.

This is not a price projection for Bitcoin. This is my analysis as a student of technology and business based on my 15 years of experience working in Technology as an engineer and as a Product Manager.

In the next post, I’ll discuss how Ethereum and the Decentralized Applications built on top of Ethereum are disrupting Traditional Finance such as banks, insurance etc.

Next Steps

I am planning to start a newsletter where I will cover the topics of Metaverse, Crypto Currencies, Decentralized Finance regularly.

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