My good friend and former colleague from IBM, Nitin Gaur emphasizes that the true value of web3 stems from web3 giving users the ability to traverse the value (of digital assets) across networks and ecosystems (paraphrased here from Nitin’s podcast Beyond Bitcoin which he co-hosts). The man nails it. It is the best description from a ‘tokenomics’ (token + economics) perspective of the economic value web3 brings to a general user of web3 tech. In this blog post I delve deeper into the meaning of Nitin’s statement, and how I believe the true value of web3, and why it will succeed as the next generation of the web, lies in the democratization of digital asset value.
This post is not a technical post – I have a multi-part series I am working on that will come soon-ish. This post is about the economic value web3 promises to bring by freeing up the digital assets you and I own, or may own in the future. I close the word ‘promises’ with intent. Web3 is far from ready, as many people who have argued both for and against web3 have stated. But the promise, when it does deliver, getting away eventually from the crypto-speculation that is driving much of the noise around web3 today, will change how many industries operate – from banking to education to health to art. To reiterate, this is certainly not a post on ‘let’s go out and all invest our life savings in NFTs’, far from it. This is my thesis of how web3 promises to enhance the value proposition for someone who today may or may not own digital assets but most certainly will in the future.
Many people own digital assets today but do not even realize it. Don’t think Bitcoin or a NFT of a bored simian. Think a book on Kindle or some ‘power pack’ on your gamer console. Heck, any app on your phone that you paid for and bought is a digital asset you attested value to. I am typing this out on the Scrivener app. It is a digital asset I purchased a license for. I own it. And yes, the license is a digital asset that I have an entitlement to as I purchased it. These are traditional digital assets existing in a web2 world. Their ownership is recorded in a centralized ledger (in my case the Apple App Store) that records the entitlement of ownership of the digital asset to belong to me, an apple ecosystem user who purchased it. The word ecosystem is key here. This digital asset is locked to the Apple ecosystem. If tomorrow I (heaven forbid) switch to an Android tablet, unless the makers of Scrivener have a program that allows me to ‘transfer’ that license from Apple to Android, I will need to acquire a new license of said digital asset. I do not have any ability to move the value of my digital asset across ecosystems.
The root of this problem lies with the fact that the entitlement record of ownership of my digital asset is locked into a closed, private, centralized ledger (database) owned completely by Apple. This is not an indictment of Apple. That is how things work in web2, our current system. If Apple’s ledger gets corrupted and they lose my record of ownership, I am toast. If Apple’s Terms and Conditions of ownership on their App Store changes, I could be negatively impacted. People who bought movies on Apple TV learnt this the hard way. Their ‘owned’ movies disappeared when Apple lost the license to stream said movies. The ownership was fraught with risk dependent upon how the centralized entity defined ownership. They had full authority to act as they wanted within the terms and condition they originally defined and changed as they pleased. This is not wrong. This is web2.
The Democratization of Digital Asset Value
In order for anything to be democratized four things need to occur. These are, in my opinion, the four tenets of democratization of digital assets. These four tenets can be applied to test if anything is democratized, not just digital assets. In the past I have spoken for example on how DevOps and Cloud democratized Cybersecurity, using the same four tenets as the basis of my thesis.
The four tenets are:
- Self Service
- Permission to Act
- Guardrails to Protect
- Trustless Transactions
Before we examine each of these from the perspective of owning a digital asset in the web3 world, lets step back and describe how the ownership and associated entitlement of a digital asset, and our ability to traverse the value of said assets across ecosystems in the current web2 model differs from the future web3 world. In web3, first and foremost, the record of entitlement of the digital asset is recorded on a distributed ledger – specifically a Blockchain. The a web2 world it is recorded in a traditional database, or on a non-blockchain distributed ledger. Most importantly, in the current web2 world ownership is recorded in a ledger owned and managed by a centralized entity. It is not-Permissionless – only the central entity can modify it, or at most control who has permission to modify it. It is not immutable – the ledger can be altered at the discretion of the controlling entity. It is governed by written terms and conditions which you accepted (most likely without reading) when you opened your account, which in turn can be updated by the controlling entity without any say from you. How many times have you received an email or pop-up telling you the terms and conditions had changed (which again you accepted without reading)? The controlling entity also decides which personal identifying information of yours, and that of your behavior on their system they retain, or even monetize. The controlling entity controls whether you can take the digital asset and transfer it to another ecosystem. In most cases they make sure it is impossible to do so.
In a web3 world the record is stored on a blockchain which is (in most cases) public and immutable. Any terms and conditions are embedded as code on the blockchain too as a smart contract and the code too is public and available for inspection. Furthermore, the changes to the code needs to be approved by voting members, who are either all users, or a subset that chose to put skin in the game by acquiring a ‘participation’ token. Having the blockchain be a decentralized, distributed ledger allows for it to be shared as a distributed ledger for any ecosystem that is built upon it. This allows for a owner of a digital asset to be able to traverse ecosystems on the blockchain with zero friction, and they can execute a transaction moving their asset without needing ‘permission’ from any centralized authority. With the evolution of cross-blockchain or cross-layer-1 bridges, web3 is evolving to a place where this ability to traverse ecosystems will be possible with no friction even across multiple blockchains. The underlying blockchains assets currently exist on are getting abstracted away.
With this context in place, let’s examine my four tenets of democratization.
Self Service in the context of web3 implies that anyone, on their own, can participate and can execute a transaction on the said digital asset. Yes they need to create an account and in some cases may need to prove their identity, given the regulatory environment the digital asset operates in. They do not need anyone to approve their participation. And here comes the kicker – they can take the digital asset they own and move it to another ecosystem, on their own! They do not need to open a ticket to move their asset from one ecosystem to another. This is simple if the ecosystem they are moving to is on the same blockchain, but is just as doable using cross-blockchain bridges. The digital asset is theirs via self-service across its lifecycle. They can acquire it on their own, using the currency (crypto or fiat) of their choice. They can dispose of it on their own. They can move it to another ecosystem on their own. They can choose to store the asset in a wallet of their own – whether custodial or self-managed, and change which wallet it is stored in. They can even destroy it on their own, where possible. They do not need to go to an ‘agent’ and open a ticket or a request for the agent to do it. It is all self-service. As the blockchain ecosystems evolve, there are newer abstractions being build on the underlying blockchains and the ecosystems built on them to make the self-service more user friendly and improving the user experience across the life cycle of the asset. This is making \ self-service more accessible to the common user.
Permission to Act
For self-service to work, it needs to come with permission to act. One may say – hey my bank is self service – I can open an account, put in money, withdraw it, move it to another account at another bank, all from my mobile App. Is that not self-service? Yes, but not truly. True self-service comes with blanket permission to act. That is not there with your bank. There are automated or manual actions based on rules that approve each transaction. Transactions in many case require manual approvals. Try opening a account at a traditional bank without going to branch – not always possible. Most banks require physical presence. I recently tried to wire transfer money to pay off a loan at the same bank – and a manager needed to approve it. In a web2 world, the ability to act requires permission from the authority that manages your asset for you. Try moving your gaming ‘coins’ you have already paid for from Zynga to Niantic. Not happening. No self-service. No permission to act. Web3 fixes that.
Guardrails to protect
This ‘self-service’, with ‘permission to act’ comes with guardrails to protect you, the user. This capability is built into the blockchain and maybe even the digital asset. No owner of a digital asset can know all the regulatory regimes the asset ownership is managed under. Is it a security? Is it’s value market based or as in the case of a stablecoin, tied to a fiat currency? In a web3 world, the guardrails that govern the digital asset are encoded into the smart contract that lives on the blockchain. This was one of the issues, in opinion that killed the ICO gold-rush of a couple years ago where every company from Ice tea vendors to camera film manufacturers issued coins without fully understanding the fluid regulatory environment they were issuing them in, resulting in most of them becoming worthless. In current systems, thanks the ability for all Etherium and later blockchains to be able to execute code on the blockchain, that allows for guardrails to be embedded in the digital asset. The public nature of these contract will over time root out the kinks and become a truly ‘open’ set of guardrails that will protect the average user. There is still work to be done here, as we have learnt from ‘the code is the law’ failures that have allowed the code to be misused, or exploited for personal enrichment of a few.
Buy something on eBay ever? How do you have trust when you pay that the product will actually arrive? How can you trust that the product will match what was described in the description? You don’t worry about trust because the centralized entity – eBay, becomes the agency that takes the responsibility of ensuring trust for you. If you do not receive the product, or if it is not what you were sold, you can get a refund from eBay, and they become responsible for clawing back the proceeds from the seller. That is trust in the web2 world. You require a centralized authority to ensure and validate trust. The web3 world is Trustless – the onus of trust does not lie with a centralized agency. It lies with all the users and is achieved by devising a incentive system that minimizes the need for trust. When I acquire a digital asset in a web3 space I am acquiring it by executing a peer-to-peer transaction. There is no centralized agency or middleman that manages the transaction and owns the responsibility of ensuring the authenticity of the asset and completion of the transaction, hence owning the responsibility of trusting both parties involved. In web3, the blockchain itself ensures via the algorithm built into it that there is reconciliation of the transaction as it occurs, ensuring the asset is authentic, and the transaction fully executed and completed. There is no need to the parties to worry about needing to trust the counter party. Further guardrails can be added around the transaction via code on the blockchain that ensures that any regulatory reporting that is required is also completed as needed. The web3 world is Trustless.
With web3, the democratization of digital asset value is here. Web3 is bringing us self-service for the complete lifecycle of digital assets; the ability to do what we please with the digital assets, without an ‘agent’ providing permission to do what we want, as we have the ability to move the value of our digital assets across ecosystems; and do so with guardrails protecting us and those we transact with; and do so in a Trustless environment where we are not fearful of losing our digital assets’ value to a untrusted participant. That is democratization. Come join me as the web3 journey takes off.
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Sanjeev Sharma, Head of Emerging Tech and Automation, Truist
My opinions do not reflect those of my employer