The Defiant

Web3 Washing the Emperor's New Clothes

Why even Web3 commerce first-movers are headed for disruption and what they can do about it.

By: Justin Banon

Web3 Washing the Emperor's New Clothes

If Ethereum and Consensys Co-founder Joseph Lubin is to be believed, “with the recent usage of our [Web3] tech by so many major brands, we now find ourselves in the era of Web3 commerce.”

However, my claim is that most of this innovation isn't truly Web3. The majority of these early-adopting major brands have retained Web2 business models, merely incorporating blockchain technology and, of course, NFTs. Furthermore, almost all implementations of the technology lack the core principles and user benefits intrinsic to authentic Web3.

During the last crypto summer, many brands declared themselves authentically and eternally Web3. Now, some are choosing to drop Web3 altogether and relabel NFTs as ‘stamps’, ‘cards’ or ‘digital collectibles’ to avoid being perceived as pushing nasty crypto on the kids. Tell me: what is the point of implementing Web2 commerce business models, using Web3 technologies, and then banning any mention of Web3? Bring back the old VC question: why do you need to use a blockchain at all? All is forgiven.

It’s not my intention to bash the brands that have adopted early. My intention is to call out Web3 washing for what it is: the Emperor's new clothes. I want to chart a path for brands to authentic Web3 adoption, which will not only unlock huge benefits for their community but also deliver a competitive advantage, whilst hopefully staving off their obsolescence.

Web3 washing is bad for customers

The reason Web3 washing is bad for customers is that it is just Web2 dressed differently — and Web2, to quote Ethereum and Polkadot Co-founder Gavin Wood, “is broken by design”. Web2 is a system of technologies and business models designed to extract maximum value from participants. You can go to business school and learn these dark arts — I did.

In contrast, Web3 is designed to be an antidote to this; it’s designed to be open, fair, and equitable. The danger of Web3 washing is that if you accept the thesis that we will be spending more time in these digital environments, then we cannot, as a species, afford to be value-farmed the way we have been. We need an authentically Web3 system to prevent our children from being economically captured in the same way that we are currently within, for example, social media and commerce.

Web3 commerce is good for customers

Web3 is an inclusive set of building blocks, standards, and protocols that replace traditional web technologies, and enable a new class of applications which provide many new benefits for users, including protection from economic exploitation, data misuse, and monopolies. Equally, Web3 provides users with a fair share of the value they create, ownership and governance of their networks and brands, as well as a direct relationship with the brands that they choose to interact with.

More specifically, for Web3 commerce, the core user benefit is the conveyance of hard property rights, which can be defined as trust-minimised, strong, and verifiable guarantees, that are enforced by cryptography.

Taking a monetary example, if I send you a Bitcoin payment, you don’t have to trust me or a centralized intermediary in order to own or retain it; you have hard property rights. The transfer is trust-minimized with strong and verifiable guarantees that you own the Bitcoin once it is in your wallet, and all this is enforced cryptographically via your ownership of a private key for the Bitcoin blockchain.

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Web3 commerce challenges

Fundamentally, Web3 commerce is segmented into two categories: on-chain and off-chain, or real world assets (RWAs). On-chain assets, typically represented as NFTs, rely on blockchains for both payment and asset transfer. This meets the criteria of hard property as the underlying blockchain can natively ensure trust-minimized, verifiable exchange enforced by cryptography.

In contrast, transacting real world assets via blockchains introduces two major challenges in maintaining hard property rights. Firstly, If Alice tokenizes her car and Bob purchases the token, how can Bob be certain he will receive the car? This is the physical asset oracle problem. Secondly, How can disputes be resolved if, for example, the car does not meet the promised specification? This is the fair exchange problem. Both of these problems are difficult to solve whilst maintaining hard property rights.

Most current implementations of physical ‘Web3’ commerce work in completely Web2 and centralized ways, as follows. The seller mints an NFT which it sells to a buyer with the promise that the seller will redeem the NFT for a physical item upon request. It's basically a bearer instrument, just like many fiat banknotes, which declare "Will Pay to the Bearer on Demand". In this case, the asset that will be paid is the physical asset. This is not Web3 because these are not hard property rights. While some might trust a central bank, such physical NFTs are just like cheques, payment cards, gift cards, or vouchers. They are subject to rug pulls - if the issuer defaults, the bearer would need to locate the seller and take their chances with the governing legal system. This is slow, expensive, and has a high risk of failure compared to automatic enforcement of hard property rights using Web3 technologies. Such challenges remain unaddressed, even in recent developments, such as Opensea’s recently announced ‘redeemable standard’.

Authentic Web3 commerce solutions

Within Web3 there exists a wide range of open protocols that have solved some of the sector’s hardest challenges, from decentralized token exchange to decentralized commercial exchange, in an authentically Web3 way. For decentralized, or Web3 commerce, instead of directly tokenizing physical assets, protocols can secure parties' commitments to carry out a commercial exchange. This is done in the form of a forward contract, encoded within smart contracts and tokenized as redeemable NFTs. The majority of disputes are managed by a game-theoretic algorithm embedded in the protocol's smart contracts. Any escalated disputes are directed to decentralized dispute resolvers. The outcome is a trust-minimized process for tokenizing, exchanging, and settling real world assets.

Such protocols provide a more rigorous answer to the fundamental question with the tokenization of any off-chain asset: what is the mechanism for making good the claim? If a trusted intermediary is required, this retains costs, counterparty risk, friction, and monopoly power. In contrast, authentic Web3 commerce protocols that leverage decentralized and trust-minimized designs provide strong and verifiable claims that either the holder of the token will receive the RWA or their money back. Such protocols convey the same level of assurance as DeFi as commitments cannot be defaulted on without penalty. This level of assurance provides ‘harder’ tokenized RWAs whose reliability enables them to be the foundations of a more programmable, interoperable, and composable Web3 economy.

Web3 washing is bad for brands

As Prof. Clayton Christensen cautions in his seminal book "The Innovator's Dilemma”, incumbent firms often integrate disruptive technologies into their legacy business models. As a result, these incumbents don't address the evolving needs of a rapidly expanding user base, fail to unlock the full competitive advantage of the technology, and are thus vulnerable to disruption by market entrants who are more native to the new technology. A classic example is travel agents. Upon first using the web, travel agencies used to direct their web users to book travel in physical stores. True e-commerce efficiency came only when they enabled direct online bookings. Fast forward 10 years and most of these physical travel agencies have been displaced by web-native ones.

Why are brands Web3 washing?

Research, coupled with Prof. Christensen’s theory, suggests that first-movers are tending towards Web3 washing instead of authentic physical Web3 commerce for the following reasons:

  • A lack of understanding. Legacy sellers don’t understand the values and benefits of authentic Web3 commerce. This is the classic and often fatal disadvantage of incumbents.
  • Their current customers don’t care. Most consumers don’t understand or care about authentic Web3 commerce just yet. However, “The Innovator’s Dilemma” cautions that consumer preferences rapidly become more sophisticated, and washers will get found out.
  • They’re simply following digital Web3 commerce. Sellers are merely following the commerce patterns for NFTs. For the reasons stated, physical Web3 commerce has specific challenges that digital Web3 commerce patterns do not solve.
  • They’ve been told what they want to hear. An entire industry has emerged, consisting of Web3 agencies, NFT consultants, software providers, and NFT marketplaces that promote Web2 business models dressed as Web3 commerce. These 'experts' provide brands with palatable narratives and easy-to-sell solutions.
  • It’s too hard. Sellers don’t have the capability to develop authentic solutions to the physical Web3 commerce challenge. This is an almost insurmountable obstacle but for alliances with authentic Web3 protocols.

How can brands authentically embrace Web3?

There can be no simple recipe for navigating such a complex and rapidly evolving landscape as Web3, however, here’s a start:

  • Develop your knowledge of Web3 by learning and hiring people who understand the real benefits and drivers of Web3.
  • Look beyond the NFT bros and sisters, they are a great bunch, but many do not get the point of Web3 beyond profiting from expensive jpegs.
  • Connect with the real grassroots crypto and decentralization movement, and come to ETH Denver instead of NFT NYC.
  • Partner with the real decentralized leaders in this space, whether that’s for Web3 commerce, identity, provenance, or authenticity.

And most importantly, remember - Web3 is coming - the next bull run will create a new crypto-rich demographic for whom real, not fake Web3, will be critical. Don’t get caught washing the Emperor's new clothes.

Justin Banon is the Co-Founder of Boson Protocol. Boson Protocol is Web3’s decentralized commerce layer, enabling the trust-minimized commercial exchange of any physical thing as redeemable NFTs, without centralized intermediaries, just code and independent dispute resolvers.