What are Web3 Business Models & Economics? With Web2 vs Web3 examples
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What are Web3 Business Models & Economics? With Web2 vs Web3 examples

In this series, we’ll first share an overview of Web3 infrastructure before we look at its economics and possible business models, to demystify and help you understand more about what it is, why it’s important, and its possibilities.

The Web3 Tech Stack – Laying the Groundwork

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The internet that we know today, is a diverse interconnection of conventions, standards and frameworks such as the Internet Protocol (IP) and DNS (Domain Name System).

These protocols were defined by technical experts, academics, and policy-makers who came together under organisations like W3C, to ensure the interoperability of the internet.

Similarly, to enable the next stage of Web3’s peer-to-peer (P2P) sending and receiving of transactions, many technical experts and academics are working on the blockchain tech stack – its code, mathematics, (e.g. smart contracts, cryptography), and protocols (e.g. Ethereum, Solana).

The tech stack evolves quickly and is still pretty fragmented, with various players being built differently with their own considerations and tradeoffs.

Players in the Web3 stack
Players in the Web3 stack. Source: Coinbase

We’re still in the midst of architecting the building blocks for Web3. But Ethereum seems to have unlocked the framework and potential for a new decentralised Internet, with its introduction of smart contracts.

Essentially, smart contracts are hard-coded, self-executing agreements. They're not controlled by a user, and run functions when conditions specified in those contracts are met.

A popular metaphor to describe smart contracts would be a vending machine which dispenses a snack when money is input and the snack is selected.

Vending machine as an analogy to smart contracts.
Vending machine as an analogy to smart contracts. Source: Finematics

These smart contracts can be anything from a simple agreement between two parties (such as a transaction), to a complex network of smart contracts that interact with each other to form an operational platform.

The result is businesses with communities where members can create, interact with, and modify at will.

Let’s take a look at the macro economics of this brave new world 🌏

Web3 Economics

Imagine Web3 like a bazaar – with various platforms and ecosystems that operate in different ways – trying to cajole users to choose them over the other.
Imagine Web3 like a bazaar – with various platforms and ecosystems that operate in different ways – trying to cajole users to choose them over the other.

The difference between Web2 and Web3 businesses, is that Web3 businesses are open-sourced.

Simply imagine Uber operating openly – anyone who wants to, is able to see all the transactions in its network.

There’s no proprietary secret hidden to defend itself from competitors (or even hackers). It’s all up to the community & its network, to cooperate and make sure that the ecosystem works.

To get there, Web3 platforms have to get as many stakeholders onboard to contribute, build, and make the ecosystem more robust and secure – stakeholders such as developers, creators, investors, third-party businesses.

And that’s why, like in Web2, Web3 platforms also count on network effects to grow as quickly as possible. The race is to become the “Google” of Web3 – the one, winning ecosystem that users gravitate towards and resist leaving.

Network effects of Web3 platforms.
Network effects of Web3 platforms. Image source: TechCrunch

What’s different from Web2, is that Web3 strives to cooperate with its community over time, rather than a bait-and-switch which extracts value once the community is hooked.

Web2 vs Web3 platforms’ relationship to their community of stakeholders.
Web2 vs Web3 platforms’ relationship to their community of stakeholders. Image source: a16z

Web3’s underlying blockchain technology is able to better capture value – with fungible crypto/social tokens and non-fungible tokens (NFTs) – by cooperating with contributors to grow its ecosystem, allowing the community to monetise their participation, or even digital IP to focus on quality over quantity.

Tokenomics – Incentivising creators & participants

Fungible Cryptocurrencies & Social Tokens – Getting rewarded for participation

Social tokens are a type of cryptocurrency issued by individuals and communities.

What’s exciting is that they allow creators and communities to have ownership of what they are building, and allow loyal fans a way to unlock access to various perks and exclusive content.

To understand why it’s exciting, we have to compare with Web2 tokens – such as comments, likes, tags and shares.

A brand might reward a fan who tagged the most number of friends. In this case, the incentives and reward system have to be designed around Instagram. This can be limiting for the brand.

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In Web3, crypto and social tokens are fungible – their value is interchangeable – and therefore have more flexibility as they can represent anything from a person’s time to specialised access to collective ownership of a community.

For example, $RAC is a community token issued through Zora, by Grammy award-winning recording artist RAC to engage and reward his early supporters. Token holders got to access an exclusive Discord group, merchandise, and perks. The token was also retroactively distributed to his earlier supporters on other platforms such as on Twitch, Bandcamp and Patreon.

Social tokens have been used across crypto exchanges, DAOs and GameFis, to build goodwill and incentivise adoption. Uniswap famously airdropped 15% of its governance tokens to distribute control to early users.

However, like a fiat currency issued by the government, cryptocurrencies and social tokens are tied to a brand for as long as they’re in circulation. The community must be able to trust the brand to uphold its end of the bargain. Otherwise, they’re not going to buy into the brand’s tokens or coins.

Owning Assets with Non-fungible Tokens (NFTs)

Non-fungible tokens, aka NFTs, are unique digital assets whose ownership is tracked on a blockchain.

They vary from in-game items that exist only in virtual worlds, to claims on physical assets, such as shoes or real estate.

Like art, NFTs are considered valuable because of their artificially limited quantity and the hype around the artwork.

Although, you may argue, you can actually create copies of the same artwork, duplicating a digital file as many times as you want, including art of an NFT.

The allure of an NFT, is to own the original version. And that’s where the illusion of scarcity – where owning an original Van Gogh beats a dozen imitations – launched the craze around NFTs.

Of course, simply minting anything as NFTs and tapping on scarcity isn’t the answer. For example, a crypto entrepreneur bought Jack Dorsey’s first tweet NFT for $48M, but ended up with a top bid of just $280 when he tried to sell it again.

The possibilities of NFTs lies in combining non-fungibility with decentralised finance (DeFi), allowing creators to monetise their work.

A parallel Web2 example is the subscription model – customers are charged on a recurring basis for a product or service.

Potential possibilities into NFTs is fractional ownership, where researchers, artists, authors and musicians can potentially co-create new possibilities with each version, adding value to a creation. Creations can evolve over time, yet stay true to its origins.

For example, Ocean Protocol launched Data NFTs, to represent intellectual property (IP) on-chain – allowing institutional researchers to sell their findings as NFTs to other institutions.

A more visual example, is Async Art, a digital art marketplace known for programmable art. Artists on Async have a “master” copy of an artwork that is made up of several layers. Collectors can own individual layers and adjust their attributes over time – such as the colour of the sky or even position of a character.

Digital paintings are split into "Layers" which can be adjusted to affect the overall image
Digital paintings are split into "Layers" which can be adjusted to affect the overall image. Image Source: Async.art

The Reality of Web3 Today – Are the ideals of decentralisation even attainable?

Tokens and crypto has ignited creative possibilities for a Web3 economy that is owned/operated by the community, designed around a lack of trust in central authorities/middlemen (trustlessness).

Essentially, trusting in technology and the community to make and manage decisions for the good of the ecosystem.

Don’t trust; verify!” – Bitcoin catchphrase

In the earlier days of developing blockchain – the technology necessary for decentralisation – hackers exploited its loopholes with double-spending and 51% attacks.

But as the ecosystem matures; as the number of nodes, miners, developers and users grow; as consensus mechanisms evolve to be more sustainable and scalable; as verifications become faster, the likelihood of such errors being accepted in the blockchain becomes slimmer.

It’s certain that the science and technology behind Web3 is advancing and will only become better and more reliable.

What’s less certain, ironically, is the community. In fact, it’s a key reason why the industry is still fraught with risk – with $14 billion worth of crypto stolen just last year, in 2021.

For example, in 2021, at the height of the buzz around the show, Squid Game, scammers created a bogus cryptocurrency to lure investors, which rapidly drove up its value. Then its creators did a rug pull, cashing out Squid tokens worth over $3 million and leaving investors in the dust.

It will probably take a much longer time to figure out the incentives and mechanisms that encourage the right behaviours & principles.

We don’t know what that future looks like looks like. We don’t know if new Web3 companies will takeover the world, or if Web2 behemoths may instead evolve and adopt Web3 philosophies. In fact, some naysayers even argue that “blockchain is solving a problem that does not exist.”

Millions of years of evolution has shown us the laws of nature – that living organisms (humans included) tend towards simplicity, because of our constraints in time, energy and attention.

And today’s world seems pretty convoluted with middlemen, hierarchies and bureaucracies.

The ideals of Web3 is an aspiration. Quite likely, the future of Web3 may look very different from what was envisioned.

But one thing we all know, is our human ingenuity to solve our most painful problems with science, technology and innovation. We believe that it is only a matter of time before we figure out how to build a better world, in Web3.

Join today’s startups making waves in Web3!

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Web3 will revolutionise the economy, and there are many people figuring out how to make it work. Join the teams building the future of Web3 – on CryptoJobs!

Further Reading