Web3’s Grand Promise Meets Harsh Reality: Can the Decentralized Internet Still Deliver?

There has been buzz in recent years about a new iteration of the internet that is expected to change how it works. Dubbed Web3, it promises to decentralize the internet that we know today.

Back to the early days of the internet in the 1990s, Web1 was born. It was a collection of static, read-only websites. Then came Web2. It is the social, interactive internet that we use today, built on user-generated content and dominated by a few giant corporations.

Now, blockchain advocates are championing the next Internet evolution.

Coined by computer scientist Gavin Wood, Web3 is expected to shift control away from the handful of Big Tech corporations that dominate today's Internet, to its users.

What happened to the Web3 buzz?

Enthusiasm for the idea once seemed unstoppable. Between 2018 and early 2022, investment in Web3 technologies skyrocketed. Cryptocurrency exchanges handled billions of dollars a day and Super Bowl ads promoting Web3 projetcts promised a decentralized tomorrow. And then came the crypto winter.

Major failures, most notably the collapse of the FTX exchange, shook the industry and cooled the excitement. The downturn had a domino effect that led to other high-profile implosions, including the algorithmic stablecoin TerraUSD which wiped out billions of dollars from the crypto market in a couple of days. As Web3 projects struggled, the popularity of generative AI stole the spotlight, leaving many to wonder if the dream of a decentralized internet would ever be accomplished.

Today, Web3 supporters insist that the work continues as they quietly build the foundation for what comes next.

So, what exactly is Web3?

At its heart, Web3 is an attempt to solve a problem many of us experience on a regular basis and that is the internet being controlled by a few large companies.

Below are the key technologies that make it work:

Blockchain technology: Think of blockchain technology as a shared digital ledger distributed across thousands of computers. When a new transaction is made, it is added as a "block" to a digital chain that is permanent and unchangeable. Because no single person or company controls it, the system is incredibly difficult to tamper with or shut down.

Smart Contracts: Smart contracts are programs that run automatically on the blockchain. They work like digital contracts that automatically execute a deal. For example, in the context of a flight insurance policy, a smart contract could automatically issue a payout to a traveler's digital wallet the moment a flight delay is confirmed by a trusted data source, all without human intervention.

Digital Assets and Tokens: These are digital assets on Web3. They include cryptocurrencies, stablecoins, and NFTs (non-fungible tokens). They can also represent real-world items such as a title to a house, a piece of art, or a ticket to a concert. The process, known as tokenization, is a central focus for financial institutions exploring blockchain.

How is Web3 different from the internet we use today?

The key difference comes down to control.

In today's Web2, a small group of established technology companies act as gatekeepers over users' digital life. According to industry analysts, technology firms have access to personal user-data and dictate what content can be showcased on their social media platforms. They sometimes also manage and facilitate digital payments. Ultimately, users are left with little choice but to trust the corporations to act in their best interests.

Web3 is engineered to be trustless. Instead of placing trust in a corporation, users put their faith in the underlying code. The system is designed around principles of self-sovereign identity, a model that enables individuals and not platforms to control their own digital credentials. The technology itself is built to cryptographically verify transactions and identities, making it possible for users to connect and transact directly with one another.

A major upgrade to global trade

For decades, sending money across borders has been a slow and expensive process, with traditional banks charging large fees and taking days to complete transactions. The issue is experienced most acutely in developing nations, where remittance payments make up a significant portion of the gross domestic product.

Supporters say Web3 addresses this problem. Using digital currencies such as cryptocurrencies and stablecoins, funds can be sent across borders almost instantly and at a fraction of the cost while bypassing intermediary banks.

Significant challenges remain

The biggest challenge for Web3 is unclear regulations. Governments worldwide are scrambling to figure out how to regulate decentralized systems, creating an uncertain environment for both Web3 businesses and users. A key point of contention for regulators is how to apply existing anti-money laundering and know-your-customer laws, rules designed for centralized financial entities, to anonymous decentralized networks.

Scalability is another major roadblock. When usage on some popular blockchain networks spikes, transaction fees can soar and processing times slow to a crawl. The scalability problem undermines the technology's core promise of being fast and affordable.

Furthermore, since the user experience remains complicated for the average person. Managing private keys, using decentralized apps, and understanding smart contracts also requires a level of technical knowledge most users lack. As such, the road to widespread adoption looks difficult. Additionally, environmental groups and policymakers have criticized the energy consumption of some networks such as the Bitcoin network due to their outsized energy consumption.

There is hope

Major financial institutions, including some of Wall Street's largest firms, are beginning to offer cryptocurrency services amid a broader adoption of Web3 and blockchain solutions. BlackRock, an asset manager of significant scale, has recently introduced a bitcoin trust for institutional investors. Fidelity Digital Assets has also extended similar offerings to its client base.

Some other major corporations are also exploring business models based on the technology, with some utilizing non-fungible tokens for marketing purposes. At the same time, central banks and government agencies continue to develop their own digital currency programs.

The success of the adoption will heavily depend on continued technological improvements, clearer regulations and a significantly improved user experience.

Analysts say that the potential reward is significant and that the technology could potentially help unbanked people in developing economies have more direct access to financial services. With respect to the global population, the World Bank reports that around 1.4 billion adults do not have a bank account. The technology could allow such marginalized groups of people to use global financial services with just a smartphone and an internet connection.

The pace of innovation seems steady. The total value of assets committed to decentralized finance protocols has grown substantially in recent years, a development that indicates a growing interest in financial systems operating outside of legacy institutions. New Web3 financial products, governance models, and business structures are being tested and implemented in the Web3 space at a speed that far outpaces traditional finance.

What the growth of Web3 means for the future

Since Web3 represents more than just a technological update, experts believe the global economy of 2035 could look very different. International trade might flow through programmable smart contracts and traditional banks could operate alongside decentralized protocols. In addition to changes in commerce and banking, some industry observers predict a future where individuals gain greater control over their personal data, monetizing the information themselves by means of new decentralized identity platforms.