Ownership All The Way With Web3
Web3 is a vision for an internet owned by its users
Most people continue to default to money when they think about crypto. For the longest time, that's all it was. Even today, most of crypto continues to be dominated by finance, but it's not the only use case. In FinTech Didn't Disrupt Much, I explained how finance is usually the first use case for new technologies. Money is constantly exploring avenues to multiply, which generally includes betting on technologies that can make that happen quicker. Crypto is no exception — DeFi is web3's first mainstream use case. But there's more to web3 than finance.
Centralized platforms have been dominant for so long that many people have forgotten there is a better way to build internet services. Cryptonetworks are a powerful way to develop community-owned networks and provide a level playing field for 3rd-party developers, creators, and businesses. We saw the value of decentralized systems in the first era of the internet. Hopefully we'll get to see it again in the next. — Chris Dixon
It's no surprise that web3 is what excites me the most about cryptocurrencies. The internet feels more like an intranet controlled by a handful of tech giants. Our consumption is driven by black-box algorithmic feeds, our work and property are only ours to borrow, and our value creation has been severely discredited. We don't own any of our digital properties, and we've been wired to accept it.
For example, why does an Instagram account with 1M followers have to seek external partnerships while Facebook keeps 100% of the ad revenues displayed to their audience? It's crazy that a few companies own most of what's created on the internet today. Their real creators are simply renting it from them. Creators can decide to leave, but exiting the walled garden would result in taking multiple Ls, including forfeiting everything they created on said platform.
Web3 is trying to fix that broken model by adding property rights to the internet. Users can now own pieces of the internet. Not just the surface layer tokens but also the underlying protocols and infrastructure that power the new paradigm. You can buy NFTs, the services that facilitated the exchange of said tokens, and the protocol infrastructure behind the services from comms to storage. It's ownership all the way down.
NFTs prove that one thing on the internet is unlike the other. People like to joke that you can right-click and save million-dollar jpegs, but that's one of the problems NFTs solve. Think of my blog. Anyone can clone and host a new version of tolusnotes with a new domain like therealtolusnotes.com, and most people wouldn't be able to tell them apart. Anyone can copy and paste anyone else's image, video, and entire e-commerce store on the internet. NFTs solve this by making it easy to prove authenticity. I could clone and launch the whole cryptopunks project, but everyone will know that my version isn't authentic unless I have control of the original wallet or contracts.
NFTs are very popular because they are the building block of the new web. The million-dollar visual jpeg you see may not even be the most valuable part of the NFT. Sometimes the code is the most valuable part of the art. Some artists have integrated the minting address & block into the result, making it 100% unique to the owner. Some require owning an existing NFT to mint a new version of the former. Beyond jpegs, they can be music, videos, or any digital item. This idea is not new; people have been trading digital collectibles for years.
The screenshot above looks like it's from an NFT exchange with the items priced in dollars rather than eth, but that's far from it. The image is from Skinport — a third-party marketplace for in-game digital assets. The knives? In-game assets from Valve's CS:GO. To better understand why NFTs are critical to digital collectibles, let me take you back to my first year in college.
My friend, CJ: Yea, I create and sell skins for CS:GO weapons.
ME: Cool. Don't they sell for a couple of cents?
CJ: Depends. They sometimes go for hundreds or even thousands.
The year was either 2013 or 2014, and I was getting to know fellow computer science students while studying at UC Irvine. I hadn't played CS:GO yet, but I had logged hundreds of hours into the original Counter-Strike and Source. To me, Steam was a platform for playing games and engaging with the gaming community. But to my friend, CJ, Steam was a significant income source, at least for a college kid.
Game skins like the ones above are cosmetic visual finishes for in-game items. They provide no additional benefit to the in-game item or gamer other than looking cool. And guess what? Most people want to look cool! Most skins sell for cents, but the rarest skins can go for hundreds of thousands of dollars.
CJ told me what the public knew, that trading skins can be profitable. He didn't divulge that Valve, the game's publisher, paid $40,000 on average when a creator's finish is accepted and used in-game. On top of that, creators continue to earn royalties every time their skins get traded. CJ, for example, will continue to make something as long as CS:GO's servers are live, and his skins continue to change hands. As of writing, the 48-hour peak player count on CS:GO is over 700,000. The game is almost a decade old, and it continues to be relevant though longtime players love to hate it.
Though CS:GO skins are digital collectibles, they aren't NFTs. Steam owns all these skins regardless of who paid for them. Third-party marketplaces exist only because Steam limits how much an item can be sold for, and doesn't allow collectors to withdraw their earnings. Real money can be used to buy Steam items, but once sold, the real money becomes Steam money and can only be spent on the platform.
It makes no sense, but we've accepted it because we didn't have the technology to do it right. Web3 allows you to own your items regardless of what platform you're using them on. The idea is detrimental to those platforms, and I was not surprised to see Steam ban games that incorporated NFTs. Legal limitations aside, the old model is simply incompatible with how things work now.
One of the core differences between web3 and previous generations of the web is how incentives are structured. If you were a part of any product team in the last decade, you know how much resources are spent on gaining and retaining users. Here's a crazy idea: why don't you make them owners? The very ownership structure that underpins web3 is excellent at bootstrapping new products. Protocols don't have to deal with the sluggish bootstrapping phase that traditional startups go through because tokens are great at helping them reach escape velocity sooner.
Once bootstrapped, users stick around as they start to earn fees generated by the protocol. The more users onboard, the more fees are generated. I've written a few posts about web3 and airdrops, but the recent ENS retroactive drop ignited something in the community. Readers started to ask better questions once they noticed their peers getting thousands of dollars worth of value for simply owning ENS names.
At its core, ENS resolves ethereum names to addresses. So instead of remembering
0x123blahblahblahblahblah, you can simply use
tolusnotes.eth. And whenever I switch my wallet, I don't have to update you. Instead, I can point my ens name to the new address. The airdrop triggered a wave of new registrations and revenue, effectively kick-starting the flywheel. New users don't get the airdrop, but they can now buy ENS and become owners. The tokens give users power in deciding the faith of the protocol and the millions of dollars in its treasury.
A reader mentioned that the drop made no financial sense; she questioned why anyone would give out so much money for free. Liquidity aside, centrally owned protocols can't survive in the new paradigm. They'll get forked. The goal for all web3 startups should be to decentralize and release the project to the community eventually. If done well, everyone involved should benefit in proportion to their value-add. That includes contributors, investors (if any), and the community of users that have kept the project alive. Airdrops aren't simply free money. Viewing them through that lens misses what's happening.
In programmable money, I wrote about how smart contracts remove the need for translators in finance by helping us speak the same language through code, but that's a limited DeFi viewpoint. Crypto and web3 represent a social evolution, as Chase points out in her tweet. Finance and technology aside, we've found a standard set of rules that many people agree with. DAOs are practical examples of this social evolution — a bunch of people in a group chat with what's essentially a shared bank account. Their mission? Whatever they want to accomplish. Some are currently trying to buy the U.S. Constitution. Internet strangers have always been unstoppable once driven, and web3 scales that relationship by making it trustless.
Ownership is the big idea here. It empowers creatives to properly monetize their work and lays the groundwork for the next evolution of the web. Web3 native companies could likely displace web 2 faster than web 2 displaced web 1. It is still a work in progress, but it's one that every notable company is thinking about and hiring for. If you've decided to avoid all things crypto, I recommend rethinking your stance and diving down the rabbit hole yourself. I'm willing to bet that first-hand knowledge and experience will convince and inspire you to build a better web.
I got into the world of crypto in 2017 by buying bitcoin, ethereum, litecoin, and a shit ton of ripple for some reason. Then came the ICO wave that turned me off for a while. I took another look and used my first DeFi app in 2020 and got some tokens as a result. It was my first time holding governance tokens, and it changed everything. No longer was I betting on what crypto could do, it was already doing it. The real-world use cases that I'd been waiting for were finally starting to emerge. Like me, many people got burned in 2017. I used to think that all of crypto's potential was lost on short-term profits and scams but I'm glad I was wrong.
This blog is much about decision-making as it is about finance. Most of what I knew about crypto pre-2019 were assumptions from what I learned in 2017. I had to relearn the space to form my newfound belief in the ecosystem. Be open-minded, and do your own research. As always, my DMs are open on twitter.
If you enjoyed this post, forward it to your friends or post it on social media. Subscribe (email/feedly/rss) | I post stuff on twitter (@tolusnotes)