We don’t need to repeat why crypto and web3 are going to be at the forefront of the next generation’s companies. We believe in it, and text our frens “gm” and “wagmi” every morning. We’ll cut the bullsh*t and get straight to the point.
It’s hard for the average person to understand what this noise is all about, so we took the initiative to write up a series of posts that dive into what’s actually inside the rabbit hole.
If you don’t know us already, Ripple Ventures is an early-stage venture fund looking to back extraordinary founders building market-shifting software tools. We’re focused on anything enterprise, creator, and developer-focused in web2 and web3.
This is the second of a seven-part series covering:
The Benefits and Drawbacks of Web 2
Why Does Web 3 Matter?
What’s the Metaverse?
What the Crypto Market Looks Like
A Simplified View into the Web3 Ecosystem
Web 3 Dictionary Resource
Next week, we’ll be launching our next post covering Why Web 3 Matters?
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Since “state” is user data, Web 2 saw the rise of “state aggregators” who replaced the open protocols of Web 1 with their free and easy-to-use software that collected and aggregated massive amounts of user data for monetization.
The primary benefit of state aggregators was that they enhanced the experience of using the internet in four ways:
Easy to use experience: Creating a Facebook page, signing up for Gmail, etc. are seamless, frictionless, and more intuitive than figuring out HTTP, SMS, or SMTP.
Customized experience: Since state aggregators collect data your online experience is more customized. YouTube can tell you that you already watched a video, Netflix can recommend movies you might like based on watching history, etc.
Convenient experience: All your content is in one place. The “feed” of different social apps like YouTube, Twitter, Facebook, Instagram, etc. aggregates all the content you want to follow into one application.
Useful experience: In addition to Web 2 companies building on top of the open protocols on Web 1, new state aggregators began to build and fill in the gaps left by Web 1 protocols. Paypal entered the payment space, Google entered the search space, Facebook, Instagram, Twitter, etc. entered the social media space, etc.
State Aggregator: Case Studies
Here are a few more concrete examples of how Web 2 state aggregators made using the internet a lot easier than Web 1’s open protocols:
Medium/Substack & SMTP: Online bloggers who release content on websites like Medium or Substack would find it very difficult to write their content on top of Web 1’s SMTP. However, websites like Substack or Medium make writing content and sending it out to a list of email subscribers very easy.
YouTube & HTTP: YouTubers create online videos and release them to the internet. Most YouTubers wouldn’t be able to release their videos on top of Web 1’s HTTP by coding their own website. Instead, they use Google’s video-sharing platform YouTube, which has an easy-to-use UI/UX for consuming and uploading video content. This makes it easy for the YouTubers to release content since they interact with YouTube’s UI/UX instead of HTTP, and users who watch YouTube only have to go to one website to watch all of their favorite creators.
Problems with Web 2
However, Web 2 began to move away from the open, transparent nature of Web 1 as private large tech companies began to store and monetize user data in private silos. This became an issue because of the following two reasons:
Large Dependance: Starting from the early 2000s, internet adoption through computers and mobile devices exploded in popularity. As the internet saw more users come online, centralized platforms such as Facebook and Google began to exponentially increase users. This meant that the data of billions of users across the world were centralized and dependant on only a handful of tech companies. Globally all developed countries have 50%+ of their population online, with the USA having 99% of the Gen Z population online.
Starting from the early 2000s (and earlier in some countries such as Canada and Norway), internet users began to explode as personal computers and mobile phones began to penetrate the consumer technology market.
Controlled Ecosystems: Due to factor #1 (a large number of new internet users trusting and using a handful of centralized companies), Web 2 is plagued with issues that stem from when you provide too much power to centralized parties.
Rule Changes: Centralized platforms can at any time change the “rules of the game” on users and developers. This includes removing people from the platform, removing the ability to monetize an individual’s online content, changing fee structures, and even altering how users view content via algorithm changes. While users can protest rule changes by switching platforms, this is often not feasible due to the large followings and dominant market positions the companies have. For example, if Apple decides to increase the App Store commission from 30% to 45%, developers will have no choice but to accept this or risk not being able to access users with iPhones. If YouTube or Twitch bans a creator’s channel, the creator could switch to an alternative platform like Patreon, however the ability to access the massive audience on each of those platforms is permanently lost for that creator.
Deplatforming (Removing a Creator’s Audience): Companies such as YouTube, Shopify, Meta, and Twitter “de-platformed” former President Donald Trump from creating content on any of their platforms.
Demonetization (Removing a Creator’s Income): Companies that pay creators to release content on their websites (notably YouTube and Twitch) have the power to de-platform or demonetize creators, essentially removing their ability to create content and attract an online audience. These companies often have arbitrary and vague guidelines that creators have to tiptoe around to be eligible for monetization.
Community Rule Changes: Companies can change the layout of their applications without the approval of the communities that use them — sometimes leading to heavy criticism. A recent example would be YouTube making the decision to remove the dislike button, a decision that has been met with heavy criticism and disdain from the creators on the platform that actually create the content on YouTube.
Commissions: Apple and Google can both command high commission fees of 15–30% on all transactions that happen on their mobile operating systems.
Algorithmic Black Boxes: Technology companies each create their own algorithms that dictate what appears on user’s “feeds”, and what goes into determining what to show users is mostly hidden from the public. This has led to several issues, such as Instagram promoting images that negatively impact teenage mental health, and Facebook promoting posts that incite polarizing political views and violence.
Security: Centralized platforms have had data breaches and downtime that have impacted users significantly.
Data Breaches: Companies like Facebook are notoriously terrible at protecting user data and have had multiple data breaches. The most recent one in 2019 leaked private data of over 530 million users.
Security and Reliability Issues: AWS, Amazon’s cloud computing platform, powers several other websites. When it went down in November 2020 websites such as Glassdoor, Flickr, OnePassword, The Washington Post, and Coinbase all went down too. Similarly, in June 2021, cloud computing platform Fastly went down, bringing down major websites like Twitch, Reddit, and The New York Times. In, Oct 2021, Facebook’s suite of apps, Facebook, Messenger, Instagram, and WhatsApp were down for several hours impacting billions of global users.
Overall these issues stem from the fact that centralized systems have a single point of failure and a single decision-making body. YouTube could at any moment remove the content of any creator on their platform since they are a centralized entity. YouTube could also be susceptible to data breaches of their users or website issues since they rely on centralized cloud computing platforms like GCP.
Centralized platforms also follow a life cycle where their relationships with their end-users change. At the beginning of their growth phase, companies do anything to attract new users and developers who build out the ecosystem. However, as more developers create more applications, and more users come onboard, centralized platforms begin to extract value from ecosystem participants. They do this by monetizing the massive amounts of user data they have collected thus far. An example would be Google and Facebook using user data to target advertisements. This mindset of extracting value from users once growth has peaked further exacerbates the negative side effects of rule changes and poor security since centralized platforms know they no longer need to attract users and there are few if not no other alternatives for their software.
Why Web 3 Solves These Problems
Decentralization: Since Web 3 uses blockchain, data and computing power is not centralized like Web 2. This means that there is no central point of failure and that there could be anywhere from 10 to 10 million individual computers validating transactions, storing data, or providing computing power to back the applications happening on Web 3.
Transparency: Companies in this space operate with much higher transparency compared to Web 2 companies. Transactions are auditable, decisions are made in public, data is immutable.
Community Driven: With the rise of DAOs, decisions are made by the community and not one central power. While not every company in Web 3 operates as a DAO, builders in this space are very cognizant of the impact of their decisions on the entire user/customer base. Trust and integrity are top of mind and companies that breach this don’t last very long.
Value Added, Not Extracted: Instead of extracting value from users like Web 2 companies, Web 3 empowers the users by having open protocols and ownership of the content that is created online.
At its core, Web 3 aims to allow users to not only read and write content but also own their own content so that they can’t get de-platformed or demonetized by centralized tech companies. Web 3 also aims to revert back to the open-source protocols of Web 1 where the rules are standardized for all market participants so that large tech companies can’t stifle innovation and market competition.
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