Web3, next to NFT and DeFi, is another buzzword that you hear everywhere. But what is fundamentally different from Web2? yea clear… it utilizes the blockchain and it is decentralized and you own stuff and all that, but what is shifting from a value perspective?
I was thinking for a while about this. Web3 is an umbrella term that captures cryptocurrencies (stablecoins & digital gold), smart contract computing (Layer 1 & Layer 2), NFTs (digital ID & property rights), DeFi (financial services in a decentralized manner that allow e.g. swapping and lending), the Metaverse (digital commons built in game-like environments) and community governance (decentralized autonomous organizations i.e. DAOs). I am sure there will be many more verticals coming in the Web3 space. Web2 on the other hand encompassed centralized services and applications think FAANG (Facebook, Apple, Amazon, Netflix, Google and alike). The value and data are captured by these centralized entities.
I read some time ago an article about the fat protocol thesis, that was first published in 2016. The fat protocol view might be one way how to pin-point the differences between Web2 and Web3 from a value-captured perspective. I put my own tweak into the illustration in red. Let me explain.
Protocols are a set of standard rules that allow the communication and exchange of information with different devices, clients and servers. Common shared protocols are HTTP (foundation of any data exchange on the web), SMTP (delivering emails safely and securely) and others.
In the Web2 world, these shared protocols are re-aggregated on top of the application layer (e.g. GMAIL and use of SMTP protocol) to provide a service. Smart money has flown into the application layer as it produced higher returns than protocol standards. We speak here about “thin” protocol — “fat” applications.
In Web3 it is exactly the opposite. Value is concentrated at the shared protocol layer whereas the value of the applications using the shared protocol is only a fraction of it. Hence “fat” protocol — “thin” application.
Shared protocols in Web3 are the blockchains such as Bitcoin, Ethereum and Solana, and applications building on the shared protocols are Uniswap, Bancor and thousands of others. Shared protocols in Web3 are able to capture value through the blockchain-specific speculative cryptographic token. For example the Ethereum blockchain and Ether (ETH) or the Solana blockchain and its SOL token. The applications built on top of the shared protocol layer and the success of the applications will directly fuel the growth of the shared protocol. This interesting dynamic in Web3 leads to the fact that the market cap of the protocol always grows faster than the combined value of the applications built on top of it. To validate this you simply need to have a look at Coingecko and go through the ranks by market cap.
In this list, you see the top cryptos by market cap are the shared protocols or in other words the blockchains. USDT and USDC are for example stable coin applications using the Ethereum blockchain.
From a value-captured perspective, the FAANG of WEB2 is the BESCA of WEB3.
Have a great Sunday!
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