Web 3.0 Dreams and Reality

Every industry consolidates to a handful of centralized competitors. That will never change regardless of current dreams of decentralization from Web 3.0.

Modern computing is a constant struggle between decentralization and centralization. Centralization wins eventually, and it will again.

The First Computing Decentralization

In 1980, a component to my computer science thesis was a discussion about the new “distributed computing” possibilities with the development of the personal computer (note that the IBM PC had not been introduced yet, but the trend was quite clear). It seemed obvious that computing power was going to shift to businesses and even individuals at home. While this was debated back then, distributed computing won. However, that did not create a decentralized industry or market.

While the shift from mainframes to personal computers gave individual users more power, the industry consolidated to one software provider (Microsoft) and one hardware provider (Intel). Microsoft and Intel (the Wintel system) grabbed a monopoly-like position with its proprietary operating system and integrated circuit architecture.

So much for a distributed market.

But It’s Free Anywhere (Except Everywhere)

More recently, open-source software, free to users via download and easily adapted to their needs, took over from proprietary programs in parts of the industry. So, decentralization had another chance. But, once again the industry was reappropriated by centralized software – this time the mobile operating system tech giants (Google with Android, or Apple with iOS) or cloud-computing data centers (Amazon, Microsoft, and Google).

The internet is perhaps the greatest centralization of all. Web 3.0 is a reaction to this. Web 1.0, the original, decentralized web lasted from 1990 to about 2005, populated by flat web pages and governed by open technical rules compiled by standards bodies. The next iteration, Web 2.0, brought the rise of tech giants such as Alphabet and Meta (Facebook), which managed to amass huge, centralized databases of user information.

It’s All in the Block

Now, Web 3.0 is purported to combine the decentralized, community-governed ethos of Web 1.0 with the advanced, modern functionality of Web 2.0. This is possible thanks to blockchain technology, which turns big tech’s power – the centralized databases – into a common good used by anybody without permission.

Good Luck with That

Blockchains are a special type of ledger not maintained centrally by a single entity (compared to a ledger at a bank that controls all its customers’ accounts) but collectively by its users. Blockchains have outgrown cryptocurrencies, their earliest application, and spread into NFTs and decentralized finance (DeFi). Now they are increasingly underpinning non-financial services.

Venture capital investments offer a glimpse into this new world. One large VC firm has already invested in more than 60 startups, at least a dozen of which are valued at over $1 billion, all focused on some form of Web 3.0 technology and services. Many are developing infrastructure, such as tools for others to build blockchain applications, much as cloud computing makes it easy for developers to create web-based services.

Others bet on serving end-users, such as creating NFT applications such as digital creations or collectibles (e.g., new music, unique photos, etc.) or decentralized investment clubs hoping to be autonomous organizations governed by “smart contracts” (rules encoded in software and baked into a blockchain).

What all these companies have in common is that it is hard for them to lock in customers. Unlike Google and Meta, they do not control their users’ data. OpenSea (an NFT marketplace and trading platform) is essentially a pipe to the blockchain. If their customers are unhappy, they can move to a competing service. There is no proprietary technology, ecosystem, or “walled garden” keeping them.

I have customers. Where’s the Money?

Remember peer-to-peer systems?

Web 3.0 companies must try harder to satisfy customers and keep innovating to keep them. Whether they can do this while also making money is another matter. It is not clear how much demand exists for truly decentralized projects. That was the problem of peer-to-peer offerings or the first attempt at a decentralized web. These services never really took off. Their successors could face the same problem. A harsh truth is that services like OpenSea are likely to be much faster, cheaper, and easier to use with all the Web 3.0 parts eliminated.

Centralization, One More Time

Even if Web 3.0 works as smoothly as Web 2.0, it is likely to lead to centralization, nonetheless. History is certainly on this argument’s side, and it is the evolution of every business, and it is likely to be the evolution of Web 3.0, as well.  

Customer retention (euphemistically referred to as “an ecosystem”) emerges almost automatically. The history of the internet has shown that collectively developed technical protocols evolve more slowly than technology devised by a single firm. If something is truly decentralized, it becomes very difficult to change and often remains stuck and less efficient. That creates opportunities: A sure recipe for success has been to take an existing protocol, centralize it, and iterate quickly. One does not need to look far to find examples in Microsoft, Google, Amazon, Meta, Apple, etc.

It Will Happen This Time

Centralization and customer ecosystems have been incredibly lucrative (i.e., Apple, Meta, Google, etc.). Web 3.0’s boosters may be counting on something like this happening again. It already is – to a degree. Despite being a relatively recent phenomenon, Web 3.0 is exhibiting signs of centralization. Because of the complexity of the technology, most people cannot interact directly with blockchains—or find it too tedious. Rather they rely on middlemen, such as OpenSea for consumers and Alchemy for developers, among a few others. Expect these services to centralize and be dominated by a few competitors.

Also, there are emerging points of re-centralization. One is that the ownership of the computing power that keeps many blockchains up to date is often very concentrated, which gives these “miners”, as they are called, undue influence. It could even allow them to take over a blockchain. In other systems the ownership of tokens is heavily skewed: at recently launched Web 3.0 projects, between 30% and 40% are owned by the people who launched them.

Web 2.5?

These dynamics, combined with the latest crash that may cool investors’ appetite for all things crypto, suggest that Web 3.0 will not dislodge Web 2.0. Instead, the future may belong to a mix of the two, with Web 3.0 occupying certain niches. Whether or not people keep splurging on NFTs, such tokens make a lot of sense in the metaverse, where they could be used to track ownership of digital objects and move them from one virtual world to another. Web 3.0 may also play a role in the creator economy, assuring intellectual property ownership. NFTs make it easier for creators of online content to make money. In this limited way, at least, even the masters of Web 2.0 see the writing on the wall: on January 20th both Meta and Twitter integrated NFTs into their platforms.