Building a Web3 Business
Dec 2, 2022
We believe the business landscape in the future will be dominated by companies that adopt blockchain technology. That is why Bankless Consulting is on a mission to educate entrepreneurs and businesses on the potential this innovation brings. By driving the adoption of web3 tools and technology, we help businesses become the early settlers on the internet of the future, laying claim to a territory primed for exponential growth.
To know where we are heading, we first have to understand what web3 is and the basic tools available that will form the foundation of the next economic revolution.
What Is Web3?
Web3 is a vision of a newer, better internet. It is an emergent decentralized computer network built on blockchain technology, which is still in the early stages of adoption. The potential of this innovation is not yet fully realized and will lead to explosive economic growth as it becomes the foundation for a global crypto economy.
Many of the core building blocks of web3 are already in place and these tools will be the foundation upon which companies of the future will build.
Though the path between our present state and the future state of web3 is not clear, we can imagine that future and build our way forward by making use of the building blocks that we currently have to work with.
Web3 tools are currently being used to build a new economy in parallel to the current system. Right now, the crypto economy is much smaller and is still working out foundational problems and risks, but as the economy becomes more robust and resilient, people will start to make the switch, and many already have.
The Evolution of the Internet
To even begin to comprehend the significance of this new technology, we need to understand how the internet evolved and what motivates users to start using this upgraded version of the internet.
Web1: Read Only
Web1 was the first iteration of the internet. It was during this era that internet pioneers built open-source protocols like TCP/IP, FTP, SMTP, and HTTP, laying the foundation of the internet as we know it today. The user experience was limited, often to static websites like AOL, MSN, or Yahoo. There was little interaction between the website and the user, which is why we commonly refer to the web1 era as “read only.”
Web2: Read and Write
The next leap forward for the internet brought businesses that were built on top of the early internet protocols. Web2 came to be dominated by large, closed businesses like Microsoft, Google, Apple, Facebook, and the many other social media apps.
Web2 tech was driven by capturing the value of the user-to-user experience by giving the user the ability to write or generate content, so much so that we have the aphorism:
“If you're not paying for it, you're not the customer; you're the product.”
We are immersed in the web2 world. Every time we interact with these trusted, public, for-profit tech companies, they collect more information about who we are and what we like. They are the owners of that information, and they use it to monetize their platforms with ad-based revenue.
We trust these companies with our personal information despite regular and frequent data breaches and hacks which make our personal information available to the public, enabling malicious actors who can exploit that data, steal identities, and defraud innocent customers with elaborate scams. With no ownership of our data, we have little control over our digital experience and are confined to entertain ourselves within the boundaries of an experience that is optimized for us as the profit-generating product.
The web2 era of the internet will persist for a long time and may not ever really go away. But like the landline telephone or the fax machine, both of which still work together and are used by millions of people each day, someday web2 tools and technology will no longer be a fixture of our lives or dictate the way we work or live.
Web3: Read, Write, and Own
Similar to the early days of the internet, the core web3 primitives are building the next generation of the internet. While web2 relied on trusted intermediaries, web3 is built on blockchain technology with new values of decentralization, transparency, permanence, open-source code, and ownership.
Web3 is built, operated, and owned by users. It shifts power and control back into the hands of the community, and data and information back into the hands of the individual.
In web3 protocols and decentralized applications (dApps), users login using their crypto wallet, accessing the blockchain that contains a record of their data and information. Ownership of data creates new markets built on top of blockchain technology, allowing users to retain the value they have generated. For example, in web3 gaming, in-game items are usually NFTs owned by the users, who are able to sell these items to reclaim the value and time they have invested in that platform.
Ownership and self-custody of both financial and information assets puts privacy back in the control of the individual rather than in the hands of trusted, centralized entities. Ownership and self-custody wallets open the door to trustless networks where middlemen or third-party intermediaries, like agents or brokers, are no longer needed to facilitate transactions between users. Without having to rely on trusted intermediaries who take a percentage of the transaction fees, users can engage in peer-to-peer or business-to-business interactions across the globe, creating more capital efficiency and expanding existing markets.
Core Web3 Building Blocks
Web3 makes use of composable building blocks to design and build new protocols, dApps, and DAOs. Just as web2 was built on top of TCP/IP, FTP, and SMTP, businesses can make use of these core web3 building blocks to combine tools and protocols together like Legos, opening the door to new fields of innovation and opportunity.
By understanding some of these core primitives, you can start to appreciate the potential of web3 and set out on a journey of discovery.
Smart Contracts
Smart contracts are computer programs stored on the blockchain that formalize agreements with code. Smart contracts are cryptographically secured, logic-based, self-executing agreements built on conditional if-then structures. When the terms of an agreement are met, the smart contract is executed and enforced automatically, without the need for trusted intermediaries.
Cryptocurrency and Tokens
Every Layer 1 blockchain network, like Bitcoin or Ethereum, has its own native cryptocurrency, like BTC or ETH. These are digitally native assets, which are cryptographically secured by the network and are also used for transaction fees on that network.
Smart contracts built on top of Layer 1 networks can be used to create unique digital assets or tokens. On the Ethereum blockchain, these digital assets take two main forms: fungible tokens (tokens) and non-fungible tokens (NFTs).
Fungible tokens follow the ERC-20 standard, meaning each like token shares the same value. The ERC-20 standard gave rise to stablecoins, like USDC or DAI, as well as the full array of other tokens, including governance tokens and even shitcoins.
Non-Fungible Tokens (NFTs)
NFTs are also created by smart contracts. NFTs are non fungible because each represents ownership over a unique asset with unique metadata, whether it is of digital art, in-game collectibles, or even real estate. Because NFTs are secured by the Ethereum blockchain, no one can change the record of ownership without consent, giving users full control over the assets they own.
NFTs paved the way for the Creator Economy, changing the way artists, musicians, and creators are able to monetize and distribute their work. They can also help businesses engage with their customers in a new way by facilitating the creation of experiences that build stronger relationships between creators and audiences.
Decentralized Finance (DeFi)
DeFi is the foundational layer of the crypto economy, giving anyone with an internet connection the ability to use digital financial products and services. Bitcoin enabled the very first DeFi application, the ability to send digital assets to anyone, anywhere in the world without the need of a trusted third party. This peer-to-peer verifiable public ledger of transactions consecrated the Bitcoin blockchain as the first digitally native financial layer.
The Ethereum blockchain extended the layer of decentralized financial services by using smart contracts to create open, permissionless financial markets, what we now call DeFi. The wide variety of products and services available gives users an alternative to traditional financial products, including the ability to use their digital assets to invest, lend, borrow, and earn yield on savings. There are many equivalents of traditional financial products currently available as DeFi protocols, and due to the composable nature of these protocols, new financial products continue to be discovered and developed by innovative entrepreneurs.
Decentralized Applications (dApps)
dApps are the tools and applications we use to interact with the blockchain. Think of them as front-end user interfaces with smart contracts running on the back end. Because the back end is built using blockchain technology, these applications are open and accessible to everyone with an internet connection and a web3 wallet.
While there are significant advantages of dApps, currently the user experience is often poor compared to the polished interfaces we are used to in the web2 world. Interacting with dApps requires an understanding of basic crypto concepts and a learn-as-you-go mindset. Due to the high development and maintenance costs, many dApps start out centralized like tech startups, and then progressively decentralize as they find market fit.
Tokenomics
Tokenomics is the study and design of a token’s economics. Tokenomics concerns itself not only with the supply and demand of existing tokens, but also the factors that impact a token’s use and value, like incentive design, distribution, emission rate, burn rate, and total supply. When building a tokenized web3 project, it is important to consider its tokenomics from the very beginning, increasing the likelihood that the project will be self-sustainable for the long term.
Decentralized Autonomous Organizations (DAOs)
DAOs change the way we organize towards a common purpose and are the future of the way we work together in the global crypto economy. DAOs are community owned and operated organizations, usually with no central authority making decisions. By decentralizing decision-making power and ownership, communities are able to form around shared interests and work together towards a collective aim. Common types of DAOs include Protocol DAOs, Media DAOs, Collector DAOs, Service DAOs, Venture DAOs, and Impact DAOs.
Decentralized Identity (DID)
Decentralized identity is built from three components: a user's wallet address (public key), the assets they own on chain, and their transaction history. A web3 wallet becomes a digital passport powered by on-chain credentials that changes the way we access, share, and use information.
In web3, users who interact with protocols, dApps, and DAOs maintain ownership of their own data and information. By maintaining ownership of information, users can build an on-chain reputation based on their activity, provide information in a secure way, and verifiably establish proof of identity. Foundational elements of DID include Ethereum Name Service (ENS), Proof of Attendance Protocol (POAP), and BrightID.
Real World Impact
Innovative entrepreneurs and businesses are already using these core web3 building blocks to reimagine their industries.
Organizations like CityDAO are using the DAO organizational structure to own, manage, and use real property in Wyoming and Denver.
Earlier this year, Starbucks launched an NFT loyalty program for their customers, giving them the option to earn or purchase digital assets that unlock exclusive benefits or rewards.
Nike has started a metaverse marketplace with NFTs that will enable members to learn about, collect, and co-create virtual assets, such as shoes, jerseys, and accessories.
Gitcoin is a great example of how businesses can use these core building blocks to create robust economic engines for positive impact. They are changing the way public goods are funded using their DeFi Grants Protocol. Structured as a DAO, they have decentralized the funding process and give communities the power to support public goods. They also make use of decentralized identity (DID) protocols to verify unique users who donate to campaigns using Quadratic Funding, which is a mathematically optimal way to democratize community funding using a tokenomics model.
Ready To Build
These are just a few examples of the real-world impact of web3 tools and technology. Our mission is to help businesses understand its potential, and to work with them to develop innovative, actionable ideas to take advantage of this revolutionary economic engine. We put together this primer to help build a bridge for entrepreneurs and innovators into web3, so they can lead the way as the early settlers of the global crypto economy.
Web3 will disrupt many industries over the next decade. With a basic understanding of these core tools, businesses will be ready to reimagine their industry and start building on the newer, more powerful version of the internet.
Author bio
Greg Patenaude is a project manager and consultant at Bankless Consulting focused on using blockchain technology for real world impact. Follow him on Twitter @0xSiddhearta.
