Why should internet builders rush to Web3?

Written by: Jad Esber, co-founder of koodos, Scott Duke Kominers, research partner at a16z

Compiled by: Aididiao, Foresight News

The internet is undergoing significant changes. While dominant large platforms are almost invincible due to their control over user data and network effects, the Web3 model is establishing new value propositions. In Web3, users own any content they create (such as posts or videos) and any digital products they purchase, rather than the platform controlling the underlying data; users own and can transfer these digital assets. This new model has several important advantages:

• New companies can more easily compete with established firms by providing a good user experience;
• The system is no longer zero-sum, and retaining users is not the primary goal;
• Platforms can more easily gain user trust, as key operations can be encoded on the blockchain through immutable "smart contracts."

All of this means that launching a product in Web3 will be easier.

Today's dominant internet platforms are built on aggregating users and user data. As these platforms grow, their ability to provide value also increases, thanks to the power of network effects that allow them to maintain their lead. For example, Facebook (now Meta) uses data on user behavior to optimize its algorithms, making its content and advertising services far superior to competitors. Meanwhile, Amazon leverages big data on customer demand to optimize delivery logistics and develop its own product lines. YouTube has built a vast library of videos from numerous creators, enabling it to offer content on almost any topic to viewers.

In these business models, locking in users and their data is a key source of competitive advantage. Therefore, traditional internet platforms typically do not share data, and users cannot use this data to create value. As a result, even if users are dissatisfied with a specific platform, they often cannot leave.

But all of this may be changing. While newcomers find it difficult to challenge "Web 2.0" companies like Meta in their own way, working under the "Web3" model holds promise for resolving this issue. Despite the controversies surrounding the metaverse and various hyper-financialized NFT projects, the most important development is that some developers have reached a consensus: there is an alternative to monetizing user data, which is to build open platforms that directly share value with users, thereby creating more value for everyone, including the platforms themselves.

In Web3, users typically own any content they create (such as articles or videos) and any digital products they purchase, rather than the platform having complete control over the underlying data. Furthermore, these digital assets are often created based on interoperable standards on public blockchains, rather than being hosted on company servers. This makes assets "portable," allowing users to leave any given platform at any time simply by uninstalling the app and migrating their data to another platform.

This could fundamentally change how digital companies operate: the ability for users to migrate data from one platform to another creates new competitive pressures, forcing companies to rethink their business strategies. If a platform does not create enough value for its users, they can easily leave. In fact, in Web3, new platforms have more incentives to attract users. For example, the NFT trading platform LooksRare recently incentivized users to leave OpenSea and trade on LooksRare by launching a "vampire attack" campaign.

At the same time, Web3 is no longer a zero-sum game for existing resources; the overall value creation opportunities for platforms are greater. Built on interoperable infrastructure layers, platforms can easily integrate into a broader content network, expanding the scale and types of value they can offer users. For instance, a Web3 art gallery could guide users to create artworks on the blockchain instead of requiring them to upload artworks directly to the platform.

For some Web2 platforms, this is also a good way to acquire content. Twitter recently launched a feature that allows users to showcase NFTs they own on their profiles; Instagram is also developing a similar feature. For new platforms, it can be challenging to attract users early on due to a lack of initial content, and integrating existing digital asset data may be a key step in successfully achieving a "cold start."

The infrastructure layer means that the costs associated with building user trust are much lower in Web3. Managing digital assets on a public ledger allows for a clearer understanding of what assets exist and who owns what, which is a challenge on Web2 networks. For example, if a digital artist claims to own a new artwork, the owner can verify this directly on the blockchain without needing to trust the artist or rely on galleries or other intermediaries to provide such guarantees.

This trust framework extends to Web3 platforms: key operations are encoded on the blockchain in auditable and immutable "smart contracts." This allows platform designers to pre-commit to certain functionalities, such as pricing rules, royalty agreements, and user reward mechanisms.

All of this means that, at least theoretically, launching new projects in the Web3 world will be much easier. Even an unknown entrepreneur can launch their own product without the permission of established platforms. In fact, in Web3, users sometimes do not need to trust the company (or person) behind a project.

Instead, they only need to trust the code itself. For example, some recent fundraising campaigns supporting humanitarian aid for Ukraine were conducted through smart contracts that automatically transferred all received funds to the Ukrainian government or relevant charities; this means that even if the campaign organizers are completely anonymous, donors can trust that their funds will be used appropriately.

Of course, in the early days of Web3, there were many financial cases and a lot of illegal transactions, with many speculators exploiting hype to orchestrate scams. Moreover, many Web3 applications are designed for tech-savvy advanced users, and ordinary users may have limited understanding of the actual functionalities of applications or platforms, let alone reviewing source code to verify whether their functions match descriptions. Web3 technology has a long way to go before it is secure and accessible for ordinary consumers.

In practice, a new application does not necessarily mean it will be favored by users. As with all startups, it is crucial to build products that meet real user needs. Once user needs are addressed, leveraging established networks through Web3 can facilitate easier deployment and further development.

Making platform backends open and interoperable can foster composite innovation and incentivize developers to build the infrastructure layer. For example, koodos (a Web3 service that allows people to collect their favorite things from the internet) is building a shared infrastructure that any network can access and improve.

Shared infrastructure means that applications can focus on building excellent experiences, placing greater emphasis on platform design, which will be an important competitive advantage. An application's understanding of its market is reflected in its user experience and interface. Therefore, even in Web3, user experience remains an important criterion for measuring product quality.

Web3 platforms also have a particularly strong network effect formed through community participation and social cohesion. Ownership of digital assets fosters a sense of psychological belonging, which creates strong user stickiness and motivates users to maintain both the platform and their digital assets.

For example, the popular streetwear brand The Hundreds recently released NFTs themed around its mascot "Adam Bombs." Holding this series of NFTs grants access to community events and eligibility to purchase limited-edition merchandise, while providing brand fans with a way to meet and interact, thereby enhancing their enthusiasm.

The Hundreds also announced that it would pay royalties to NFT holders related to Adam Bombs. This way, holders can have partial ownership of the Ralph Lauren logo, and each new Polo shirt series using that logo will generate a certain dividend. This approach decentralizes part of the brand value, leading The Hundreds' community to become more attached to the IP and actively promote it, with some community members even tattooing Adam Bomb on their bodies.

Another example is SushiSwap, which is a "fork" of the decentralized finance platform Uniswap—this means that SushiSwap's underlying algorithm is a clone of Uniswap's code. The main difference between the two is that SushiSwap has built a strong brand and community while providing users with an active and ongoing rewards system, driving higher user engagement; this has quickly made it a strong competitor to Uniswap.

In general, shared ownership can incentivize everyone to become builders and contributors. Underlying technical standards can enable every Web3 company to build on top of them. This means that communities around a platform can co-create in a more harmonious way, making the platform ecosystem stronger.

In the short term, this model leaves part of the consumer surplus to builders or creators. However, because builders gain more, they will work harder to build the platform, thereby making the pie larger, which in turn increases consumer surplus.

In summary: Web3 can create a more valuable internet for everyone. Compared to Web2, new companies can more easily build communities around their brand and product concepts on Web3 infrastructure. Even established platforms can increase blockchain-based content networks and grant their users ownership of data. All of this means that the next era of the internet will be vastly different from the one we live in today, and much more open.