Web3: What's all the Hype About
Guest post by Grace Isford of Lux Capital
We’re mixing things up here at Software Snack Bites with a guest blog post by Grace Isford of Lux Capital dropping some knowledge on crypto/Web3. Give her a follow on Twitter!
Today I’m going to explain why Web3 matters, Web3’s cryptographic foundations and the exciting opportunity in the crucial infrastructure systems that have yet to be built. Will break today’s post into three parts:
Why should we care about Web3?
Where are we in cryptography?
What’s missing to bridge the gap and make Web3 happen?
Before we jump in: If you’re looking to get a quick industry briefer before narrowing in on crypto infrastructure, I’d recommend perusing my Web3 world deck, a16z crypto’s web3 reading list or Fabric Ventures’ Why Web3 Matters manifesto.
Why does Web3 matter?
If you’ve searched it before, the canonical definition of Web3 is a version of a web that is community owned and operated. There are typically three key tenets: 1) running atop public blockchains or cryptographic tokens 2) no centralized authority in control, and 3) value accruing and/or being owned by the builders and users.
If you read that definition or perhaps have read Moxie’s impressions of Web3, and are still struggling to understand what all the hype is about, I’d agree with you. We certainly are not in a Web3 world yet and we’re still decently far away from a fully decentralized web. As I’ll explain in a moment, I’d argue the better way to think about Web3 is through the lens of cryptography applied to business productivity - leveraging the work of Dan Boneh’s lab at Stanford.
Per Fabric’s definition, Web3 enables a future where distributed users and machines are able to interact with data, value, and other counterparties via peer-to-peer networks without the need for third parties. Web3 creates a privacy-preserving computing layer.
A few exciting applications of the aforementioned computing layer are as follows:
Minimization of trust to exchange value -
Individuals, businesses or machines can trade value (e.g. information, data, work) immutably and directly with any global counterparty they do not know or trust.
An individual maintains ownership and sovereignty of its data and digital footprint while being able to trade value discreetly with anyone else, without knowing the counterparty’s identity.
Example: international money transfer via cryptographic store of value - transactions happen P2P without centralized intermediary or governing body.
Coordination focused on ownership and contribution -
A participant or user’s value captured in a system is proportional to its value generated or contributions (rather than an inner circle of founding execs or investors taking home a bulk of value).
Example: the ownership economy (see Variant’s take on this) - especially manifested via creators, musicians, designers, performers who can capture value proportionate to their contribution and fans proportionate to their interaction without any middleman taking cuts.
Growth of positive sum networks -
In Web2 networks, there comes a certain point of maturity as organizations grow and centralize where mindset goes from value creation to value extraction - e.g. once a critical mass of folks join a network there are decreasing marginal returns to most participants in networks with value accruing in centralized orgs.
In Web3 networks, those participating in the organization also partially own and operate it proportionate to the value they contribute. Those who participate deeply capture more of the value overtime.
Example: Organizational structures where incentives are aligned with value capture - e.g. crypto exchange Uniswap imposes transaction fees but rather than Uniswap itself capturing the fee, the company pays that fee out to market makers providing the liquidity and contributing to the product. The more they contribute the more they capture.
In short, Web3 takes the most advanced techniques of cryptography available today and offers us new ways to organize our economy and social networks.
Where are we in cryptography?
Cryptography has been around for centuries. Quite literally, cryptography is defined as “secret writing” or the “enciphering and deciphering of messages in secret code or cipher.” Dating back to Babylonian times, the field has iterated from ciphers to rotor machines and public key cryptography breakthroughs across empires and industrial data encryption standards. While the manifestation of the technology has evolved and improved, the secure communication between two parties with the formation of a shared key has stayed the same. I’d argue cryptography passes the Nassim Taleb’s Lindy test, or is a technology that stands the test of time - a constant in an ever changing, faddish world of dropping public and crypto market prices.
We’re already using cryptography today and have been for many years - we have a federally implemented advanced encryption standard that protects user data across the internet. Cryptography allowed Web 1 and Web 2 to happen, because it enabled private credit card processing and concealed identities on the web. Without cryptography, we couldn’t buy anything on Amazon, and no one could really have a password or private data in the “cloud.”
Web3 asks “what happens if we take a bunch of more cryptography concepts and theories developed over the past two decades and make them widely and easily accessible? What does that empower us to do?”
Per our earlier definition, Web3 is a catch-all term for the ecosystem of apps running atop a public blockchain, cryptography is the enabling technology that makes it all work. Working with the blockchain (or the public digital ledger that records transactions between P2P nodes in the network), cryptography is like the glue that helps encrypt, send and record transactions securely between users and store that data on-chain. Cryptography is working in the background to enable transactions to be stored at once securely and irreversibly.
We’re in the first inning of exploring all of the exciting applications of cryptography - digital signatures, anonymous communication (e.g. WhatsApp, Signal), anonymous cash transactions, secure-multi-party computation for protocols (e.g. private voting and auctioning) and varying manifestations of zero-knowledge proofs (e.g. being able to share that you have knowledge without giving away the underlying fundamentals.)
What’s missing to bridge the gap and make Web3 happen?
We have this bold vision of the potential of Web3 and we also have a bunch of cryptography technologies that can enable that vision. So why don't we have Web3 today?
The answer is quite simple - we’re missing fundamental crypto infrastructure platforms to enable applied cryptography and thus Web3 applications atop the blockchain to work securely and reliably at SCALE.
We’re lacking robust crypto data and developer stack tooling, or the “picks and shovels” to enable any company to run cryptographic applications atop the blockchain for hundreds of millions of users such as:
Hypercritical scaling solutions (layer 2, zk-rollups etc.)
Reliability (nodes, systems running reliably at multi-million user scale)
Developer tooling (how to easily code in solidity, blockchain development)
Data infrastructure & storage (how to index and invest data off the blockchain & store data)
Monitoring (how to track health of blockchains and applications)
Crucial security systems (how to escure deployed smart contracts and remedy bugs)
Beyond data and developer tooling, we’re missing crucial pieces of the privacy, risk and compliance and identity stack enabling more users to interact, onboard and securely trade units of value atop the blockchain such as:
Building sophisticated risk engines (fraud detection, KYC/KYB)
Compliance & regulatory tracking (AML, tax software to keep track of transactions at scale)
Privacy safeguards (protecting PII and business data on & off-chain, programmable privacy solutions cross-chains at scale)
Web3 matters because of the positive sum networks, and opportunities to exchange and capture value based on contribution. We’re just beginning to see these cryptographic technologies being applied at scale. I’m excited about the crucial bridge of cryptographic infrastructure that will help us build the foundational Web3 platforms and enable that vision.
If you’re building in any of these spaces in the crypto infra world, I’d love to chat. Feel free to dm me on twitter or email me at grace@lux.vc.