Web3 Trends & Threats: a review of 2022 and projections for 2023
There have been numerous publications regarding web3, but much information remains fragmented. In our first article, we will cover an introductory-level overview of the web3 concept, what trends and threats emerged in 2022, and what the 2023 future might look like for the industry.
Written specifically for those who need clarification about modern developments and have no time to follow 100+ Twitter crypto influencers’ accounts.
Triumph of the Internet revolution
This is a tricky word “web3”, isn’t it? It gives you a feeling that you need to be aware of what is happening to avoid falling behind. Well, that could explain the success of the name. Initially, it was introduced in 2014 by Gavin Wood, Ethereum co-founder, and then it drew the attention of other market players, taking over the narrative since 2021. It is a reference to the evolution of the Internet. And it is powerful because of that. It assumes that the new blockchain-based stage is the inevitable future of the virtual space.
According to it, the whole history of the Internet can be divided into three periods. In the early days, the Internet was simply a source of information where website owners published content and users were merely its consumers without any space for influence or contribution. Check the website of an airport in your city and you’ll get an idea. The second phase of Internet development, “web2”, opened up opportunities for more active users’ involvement. Social media, marketplaces, wiki platforms, and content hosting platforms created room for users to exchange their knowledge, skills and… humor (yes, those cat/dog videos you watched today are included).
At that moment, the value of a “web company” came from its content and the user base itself. Instead of focusing on content production, companies devoted their efforts to building user-friendly interfaces and creating incentive mechanisms for active user participation.
Users enjoyed seemingly unlimited chances for self-expression and information exchange. But fundamentally, there was no freedom; all the power and ownership were still associated with the platforms and their management. The users have no leverage over the decisions that the platform makes. Changes in interface design, new ad pop-ups, privacy violations, arbitrary bans of users and other unfavorable decisions are widespread these days. Not to mention a complete lack of revenue sharing with the user base, even though it is the core value of these platforms. (We don’t list here the company names, you know them already)
All these concerns powered a discussion of alternative infrastructure for web products. With the tools offered by blockchain technology, the Internet is entering a new stage in its evolution called ‘web3’. Built on top of the ideas of web2, it introduces a new concept of decentralized ownership, which is transparent and fair.
Any result of contribution to a given platform or experience becomes a digital good. Minted into NFT, any such digital goods can be easily monetized or, in the most recent trend of cross-platform integrations, even moved outside the platform by the user.
How does one manage this revolution?
Not only is the ownership concept reconsidered in web3, but also the platform management or “governance.” As opposed to the single corporate points of failure & control, web3 offers distributed governance.
With the help of the DAO system (decentralized autonomous organizations), the users can determine the future of the platform they belong to. Of course, there are a lot of challenges that are associated with DAOs. Still, it is the first time democratic; participatory ideas were brought to the daily self-management on the Internet.
In short, ‘web3’ is a democratized, transparent and fair Internet concept.
Trends of the web3 space in 2022
We observed many patterns in 2022, but it is crucial to be familiar with such trends as the tokenization of assets and the future of work.
Tokenization of assets
Nowadays, almost every web3 project launches its own tokens.
In simple terms, a token is a unit of exchange or value on the web3 platforms. The most significant difference between a cryptocurrency and a token is that cryptocurrencies are the native asset of a blockchain like BTC or ETH. In contrast, tokens are built on an existing blockchain using smart contracts.
Token economy or tokenomics is a topic that deserves a more in-depth overview. To get a general idea, it is the type of research on the intersection between micro- and macroeconomics, where the principles of monetary policy are used for the platform economies. A tiny Central bank (aka treasury) stands behind every website and app in web3.
Different types of tokens exist:
● Utility Tokens — can buy access to a company’s product or service,
● Social Tokens — tokens for a particular community, usually among the fan base
● NFT — ownership certificates
● Soulbound Tokens (SBT) — non-exchangeable tokens, usually used as digital identity
● Governance Tokens — tokens for participating in DAOs
● Security Tokens — can buy you a stake in the company itself.
All of them use different blockchain standards, used for various purposes and their mechanisms differ as well.
Future of work
Another huge trend is rethinking the concept of work, creating a new way for people to earn tokens than just buying them. It became popular as people saw it as a new system for rewarding users for targeted actions. These are the most popular forms:
● Play-to-earn — turning the game experience into digital goods
● Learn-to-earn — a promotion technique to motivate the users to learn how to use your product
● Create-to-earn — any marketplaces for content
● Judge-to-earn — qualitative data-generating projects
● Move-to-earn — well-being and exercise-oriented projects
● Participate-to-earn — loyalty programs and rewards
Please, don’t quit your current job after reading about them. All these projects are still far from substituting “boring” jobs (unfortunately).
The Elephant in the room named “Threats”
Since web3 is still in its early days, it faces several challenges and threats. We listed the most crucial ones below.
Legal: no proper legal framework
Most countries’ lack of regulation has both benefited and harmed the industry. On the one hand, it creates relatively low barriers to entry; on the other hand, there are severe restrictions to growth opportunities. With no legal framework and the unpredictability of regulators, companies operate in an environment where they can be accused of a crime at any moment.
NFTs: IP infringement, a web server dependence
The most serious concern in the NFT space is no protection from IP infringement. Most minting NFT platforms do not verify IP rights, creating a dangerous situation where anyone can mint an NFT of stolen work and earn rewards from it.
DAOs: crisis management, legal & operational concerns, low voting participation, quasi DAOs
DAOs face the same challenges as any modern democratic regime. There are issues of collective management, such as its inefficiency during a crisis or rapid development. Additional, significant barriers of administrative and legal nature. It is impossible to do proper accounting and formal contracts with DAOs as the law does not recognize them as a form of incorporation. Until then, any paperwork with DAOs would feel like a complete nightmare. The only place where DAOs are recognized is Wyoming, the USA.
Tokenomics: unstable, poorly designed models are at risk.
Tokenomics or the design of token economies is a very tricky field. It is easy to make mistakes in models and projections and those mistakes can be fatal, leading to a massive loss of token value and, as a result, a financial crisis within the platform economy.
Promotion: Google/Meta restrictions, anonymity, lack of data
Web3 projects have a hard time growing their user base as traditional marketing channels are often unavailable for them (Google and Meta have restrictions on ads of crypto). Also, crypto adoption is far from achieving mass scale. Often, companies lack users’ data that they can use for better strategies due to both the industry’s short history and anonymity.
The current state of web3 and predictions for 2023
Web3 is a mirror, reflecting events happening in other industries. At the end of 2022, people thought this mirror had cracked. In reality, web3 was simply affected by the overall economy, harmed by the energy crisis and Covid-19 consequences, and it predictably has shifted from the bulls market to the bears market.
This web3 cycle might be longer than previous ones not only because of internal factors but also due to the overall state of the global economy. The current dynamic is exacerbated even further by the collapses of big industry players plugged deep into the key infrastructure projects. FTX, BlockFi, Celsius, Voyager filed for bankruptcy, Gemini and Genesis announced new restrictions and so on. Bitcoin lost nearly 25% of its value. The market players turned into hover mode. (Oh, do you get goosebumps too, when you read this?)
All these unfortunate events have underlined a still unresolved issue of the prevalence of semi-centralized agents in the industry. Such actors often focus on product revenue optimization, neglecting transparency and open-source pillars of the web3 narrative.
Sadly, no mechanics exist yet to guarantee that similar tectonic movements won’t happen in 2023. However, some hedging strategies can be employed. For existing projects, this calls for revisiting their treasury management and revenue generation to build a robust financial backbone. Launching initiatives, alternatively, have the opportunity to establish secure connections with various industry players and diversify risks from the start.
However, winter is more beneficial for crypto than most people think. Firstly, the purge of money-grabbing projects attracted only by hype contributes to a healthier ecosystem. The remaining actors are here for the long run, so it is time for builders who deeply understand the system and strive to create better infrastructure.
Investors’ attention remains on DeFi and infrastructure projects. The largest investments still happen in that subindustry, despite the fact that DeFi fell the most among all the subindustries in 2022. After its peak in 2021, DeFi TVL dropped almost 5 times to $39b . Regarding the infrastructure, the top priorities are still on mass crypto adoption, making products more user-friendly and secure, as well as L2 applications and cross-chain functionalities. For example, rollups grew the fastest this year and became a de facto solution for scaling.
Developing activities continue, and more and more smart contacts are deployed. Ethereum, NEAR and Polygon experience MAU growth, whereas other chains on the opposite saw a decline. Solana blockchain has experienced the greatest decline in TVL, falling from $1.65 billion to $585 million, representing 64.66% in USD but just 18% in SOL.
Another hot subindustry is gaming, especially play-to-earn / GameFi and metaverse, which was a new focus and is likely to continue to grow. The trend of bringing web3 mechanics into Gaming and VR will also spill over into 2023. As one of the critical drivers for mass adoption, it will force a surge of web3 UI/UX improvements.
Overall web3, is a place where pioneering and creativity thrive as well as creating the right tokenomics and distribution system for its owners. There is still a lot to be discovered in this space, but as in any adventure, you should always expect danger around the corner. Crypto winter will have the survival of the fittest spirit and only the most knowledgeable users have a chance to prosper in this space. The question is will you be among them?