The Web3 Bubble is a Revolution in the Making

It’s one of the most popular phrases being bandied around by Silicon Valley execs, with some of the world’s best known tech entrepreneurs arguing over its very definition. It’s attracting huge amounts of money too, with investors injecting an incredible $30 billion into web3 startups over the last year. Celebrities are scrambling to jump on the bandwagon, paying millions of dollars to acquire the rights to cartoon apes and other digital tokens to represent themselves on social media.

With so much money being thrown around the web3 space recently, there’s been a lot of talk of a bubble emerging. O'Reilly Media founder Tim O’Reilly, the man who coined the phrase “web2” many eons ago, penned a recent blog post in which he stated web3 is almost certainly in a bubble and that it’s way too early to get excited about the idea just yet. His thoughts were echoed by a similar article in the Financial Times and by bloggers such as CoinYuppie, to name just a few. The “web3 bubble” has often been likened to the “Dot.com bubble” that occurred in the late 1990s, when hundreds of highly valued Internet startups collapsed virtually overnight following years of growing investment in the then-nascent industry.

What’s interesting about web3 is that it’s able to attract so much money despite most people not even being able to agree on exactly what it is. The term “web3” is shorthand for Web 3.0, which is usually, but not always, spelled with a capital “W”.

The idea is this: Web 1.0 was the original Internet that first emerged with the development of web browsers in the early 1990s and the first static websites that were mostly just informational. Web 2.0 emerged around a decade later with the rise of Internet giants such as Google and Facebook and concepts like social media.

Now, we’re said to be on the cusp of Web 3.0, which is a vision of a future Internet where control of data, and therefore ownership, is more democratic. For many of its proponents, web3 represents a new and positive trend in the Internet’s evolution, one which will be more decentralized and lean heavily on things such as blockchain, NFTs, cryptocurrencies and the much-vaunted metaverse. It’ll be an Internet where users have full control over their data and personal information, and a much higher degree of anonymity.

The idea of web3 was first introduced by the Ethereum co-creator Gavin Wood, who now heads up the Polkadot blockchain. His simple definition of web3, which he described back in 2014, is of an Internet with “Less trust, more truth”.

The Dot.com Bubble

It’s not really surprising that many people equate the rise of web3 with the infamous dot.com bubble. It was a fairly momentous event that’s still in living memory for many of us. It was one of the craziest bubbles of recent times. From 1995 until 2000, investors poured millions of dollars into new Internet startups, believing they were on the verge of a new digital era. At one point during the bubble, the Internet sector grew by over 1,000% in just two years, equaling almost 6% of the U.S.’s entire market capitalization and accounting for 20% of all its publicly traded equity volume.

With such incredible gains to be had, thousands of people borrowed money to invest in early-stage Internet firms to take advantage of that stunning growth.

It all came crashing down though. As with all bubbles, the result was a bloodbath, with the NASDAQ index hitting a peak score of 5,048.62 on March 10, 2000, before subsequently losing almost 80% of its value in the next two years. Numerous overvalued firms, most famously Pets.com, went out of business as the market lost over $7 trillion in value.

Is web3 In A Bubble Too?

The simple answer is probably. The longer answer is that bubbles are usually a consequence of the early adoption of revolutionary new technologies, and so they demand closer inspection. In her book Technological Revolutions and Financial Capital, the economist Carlota Perez notes that virtually every major industrial transformation over the past few centuries has resulted in a bubble. The first Industrial Revolution, the rise of steam power, the age of steel, the invention of electricity, mass adoption of cars, oil, the introduction of mass production and finally, the Internet, were all accompanied by financial bubbles.

Perez describes a 50- to 60-year innovation cycle that has four stages. In stage one, investors kick off with foundational investment into a new technology. That eventually gives way to speculation, in which more investors, desperate not to miss out on the growing opportunity, pour growing amounts of cash into the emerging sector. This speculative bubble eventually pops, resulting in stage three, a period of more sustainable consolidation, before the technology finally matures to enter a golden age where it becomes fully integrated into society.

Perez’s explanation suggests that bubbles are simply the result of early adoption of a revolutionary, but still immature technology.

It’s a phenomenon that has been well studied, with mass adoption of new technologies generally following an “S-Curve” of growth, which is exponential at the start, linear in the middle before eventually hitting a plateau.

If we look at the dot.com bubble and adoption of the Internet, we can see that its S-Curve began around 1993 and lasted until 2003, before giving way to more sustainable growth rates.

The dot.com bubble burst in 2000 because that was the first year where growth in its adoption began to slow. The market quickly acknowledged that it would not continue to grow as fast as it had done pre-2000 and there were even fears that growth may stall entirely. The big investments of the late 1990s were made assuming the Internet would continue to grow at much faster rates. That’s what caused the market to crash.

The dot.com bubble resulted in a bear market that lasted for years, but it also gave birth to a transformational new technology that today, impacts the lives of almost everyone.

What we can infer from this experience is that bubbles, although driven by speculative investments, are not just speculation. Rather they reflect the growth of game-changing new technologies among the masses.

While it might be too early to analyze the emerging web3 industry in the same way, this framework can be applied to something that’s often seen as synonymous - cryptocurrency adoption.

According to Osprey, this is where Bitcoin currently sits on its S-Curve - it’s just entering its speculative growth phase:

Osprey said in January 2021 that Bitcoin had hit an adoption rate of about 30%, which means it’s just entering its linear growth phase.

So if web3 really is in a bubble, it may be that some of the best investment opportunities are already behind us. That said, Bitcoin is just one of many parts that encompasses web3, along with numerous other cryptocurrencies and technologies such as the metaverse.

In other words, web3 is even less advanced than Bitcoin has become in terms of adoption. It’s still in its very early stages of growth and the S-Curve is likely still some way off.

Why web3 Will Reach The Golden Age

There are lots of good reasons to think that when web3 does hit an S-Curve and its adoption slows down, it will nevertheless continue to grow, albeit at a much slower rate.

The promise of web3, or the decentralized web, is that it will become a more nostalgic take on the original vision of Web 1.0, with greater privacy, data security and more human-like interactions. This vision of transparency in the Web is decades old, but up until recently the technologies and tools necessary to deliver that decentralization didn’t exist. With the emergence of Bitcoin came the blockchain - a distributed ledger that enables peer-to-peer digital storage.

Web3 will lead to a paradigm shift in the way people browse the Internet, interact, work, shop and trade online. Web 2.0 famously improved communication and interaction on the Web, and Web 3.0 will lead to improvements around personalization, collective ownership, and sharing of data. Blockchain will be one of the key enablers, supporting the growth of decentralized networks.

Decentralization will bring about many advantages, leading to a new, Golden Age of the Internet.

Great strides have been made in the area of privacy. Manta Network, for example, has built a protocol for web3 that aims to address the lack of privacy and blockchain interoperability. It’s designed as a layer-1 solution, meaning that privacy will be built into the fundamental architecture of blockchain. The protocol relies on cryptographic zk-SNARKs and will eventually contain a decentralized privacy payment system, privacy token exchange protocol and privacy loan and synthetic asset protocol.

“In the current internet we have a lot of convenience but it comes with tradeoffs in terms of privacy and control over your own digital identity,” Manta COO Kenny Li said in a recent podcast.

“Privacy as a utility rather than a luxury is something we’re extremely focused on - primarily it’s financial - even with NFTs - whether it’s metaverse or art or video,” he added.

Another company, called Partisia Blockchain, is leading the charge in the decentralization of data - or in other words, giving users back control over their data. At present, people do not own their data. Large organizations such as Google and Facebook have built profiles of every single user, with their personal details and information on their income, interests, dietary habits, financial status and so on.

Partisia Blockchain is building a more sustainable, data-driven web that introduces confidentiality to the blockchain via a network of computation nodes that process encrypted data, without knowing what that data is. The technology works using zero-knowledge proofs, allowing Internet services to maintain contact with targeted users but without knowing who those users actually are. Partisia Blockchain believes this will eventually create a powerful new revenue model that will remove the middlemen - namely, tech giants.

“If individuals own their data and are in a position where they control who can access and leverage that data, a new world of opportunity is unleashed where users are in a position to earn their fair share of the billion dollar pie those tech giants are generating year on year,” Partisia President Kurt Nielsen wrote on Medium last year.

Perhaps the best showcase of web3 at this time is the emerging decentralized finance industry. DeFi, as it’s known, provides web3 users with access to an array of financial instruments without relying on intermediaries such as banks, brokerages and exchanges. Instead of those institutions, DeFi relies entirely on smart contracts on the blockchain.

DeFi also makes those instruments easier to use. HyperDex, for instance, is a decentralized finance platform that makes it simple for anyone to invest in cryptocurrencies and digital assets. Investment products are offered as “cubes” with varying levels of risk, eliminating the need to possess an in-depth understanding of complex investing strategies and finance mechanisms. Users can select from a super-safe Fixed Income Cube that provides a fixed return over a set period of time, an Algo Trading Cube that provides a variable return over a set period, or a Race Trading Cube, which allows users to speculate on the price of specific assets over a set period.

With HyperDex, users can also exchange tokens and provide liquidity through staking to earn rewards based on swap fees. Most importantly though, HyperDex is completely anonymous and accessible to everyone, meaning anyone can enter the world of financial trading with a choice of investment options to meet their goals.

One more benefit of web3 will be the ability for people to freely trade their labor and expertise on an open marketplace and be rewarded for their work. The HUMAN Protocol works by tokenizing, verifying and finally, rewarding all kinds of work that people perform. Users can request work - essentially post a task that needs to be completed - and pre-fund a reward for whoever completes that task.

The HUMAN Protocol is not a marketplace, but rather the open-source infrastructure that will facilitate the creation, settlement and automation of multiple decentralized marketplaces. Think something like Upwork, but without the middleman.

For workers this means they will no longer need to sign up to workpools or third-party marketplaces that take a big cut from their earnings. Instead, they get to deal directly with the people who hire them and keep all of the money they’re paid. They also have the security of knowing they will definitely be paid once the work is delivered. For work requesters, the primary benefit is access to a global, diverse and targetable pool of millions of skilled professionals. Once again, the HUMAN Protocol is only possible because of web3.

These are just a few examples of what web3 will deliver. While it’s impossible to say what web3 will look like when it truly arrives, it’s clear that it will go above and beyond the initial use case of cryptocurrency. It will cryptographically connect data from people, companies and machines with highly efficient AI-based algorithms, leading to the rise of multiple, fundamentally different markets and business models and a level of freedom and privacy that was simply not possible with Web 2.0.

It might be very early on in the web3 era, and we may even be approaching a bubble, but there’s never been a better time to get involved.