Web3 is an ideology referring to the next iteration of the internet built on blockchain, a distributed ledger technology that can securely and transparently record transactions between two parties without the need for a centralised entity.
It envisions a network of peer-to-peer communication channels and decentralised governance, transitioning the internet from an information-centric model to a user-centric model.
While Web3 advocates for complete decentralisation, many of its enabling technologies have historically been adopted through centralised entities. The most common example is cryptocurrencies, which despite innovations in the decentralised finance (DeFi) space, predominantly trade through centralised exchanges like Binance, Coinbase, and Kraken that take custody of a user’s crypto assets. This is fundamentally a consequence of decentralised applications (dApps) being complex to use, difficult to understand, and as a result, lacking the smooth user experience of their Web2 counterparts.
Finding a balance between Web2 and Web3
As such, some view a midground between Web2 and Web3 as the more likely outcome in the internet’s evolution, a worldview commonly referred to as Web2.5. Rather than shifting the entire Web2 technology stack towards a distributed network, Web2.5 strikes a balance between Big Tech control and decentralisation, fostering mainstream adoption of blockchain-based technologies without the complications that come with navigating dApps.
Several examples of Web2.5 materialised from 2020 – 2023. For example, Shopify and Reddit launched NFT marketplaces in 2022, while eBay acquired NFT marketplace KnownOrigin, all of which are centralised by nature. Amazon has announced the imminent release of its own NFT marketplace, although its release has been delayed several times throughout 2023.
Furthermore, centralised payments processors like PayPal and Stripe have released custodial crypto services for both businesses and consumers.
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Ripple, which many consider to be a gold standard in the crypto space, uses a public-permissioned blockchain mechanism whereby its ledger is visible to the public but enforces entry requirements for validators on its network. Similarly, Nexus Mutual, the leading DeFi insurance provider, requires prospective users to undergo KYC practices to be accepted as a member of its platform but still automates insurance payouts using smart contracts. The attempt to centralise aspects of decentralised systems is usually an attempt to make user experience and decision-making easier, but other times is an attempt by platforms to ensure they have complete control over their applications.
Is full decentralisation possible?
Many argue that it is impossible for Web3 to be fully decentralised. A study conducted by Messari in August 2022 revealed that three major cloud providers (Amazon Web Services (AWS), Hetzner, and OVHcloud) are responsible for 69% of the 65% of ethereum nodes hosted in data centers, with AWS accounting for 50% of this. Google Cloud’s node hosting service, launched in October 2022, was viewed by many as an attempt to control the majority of blockchain nodes, defeating the purpose of decentralisation.
The co-mingling of Web2 and Web3 business models can yield complications. For example, In December 2022, Apple claimed that the ethereum gas fees required to send NFTs through the Coinbase wallet app needed to be paid through their in-app purchase system, so they could collect a 30% fee. Coinbase subsequently removed NFT support from its iOS wallet app.
In addition, Meta’s blockchain consortium Diem failed in January 2022 due to what was cited as “regulatory uncertainty”.
While in many cases these complications stem from a clash of core principles, the Web2.5 approach ultimately suffers from the same issues impeding the Web3, namely a lack of regulatory progress in the cryptocurrency space and a subpar user experience.
If these issues are resolved, then its adoption will hinge on whether or not the current Web2 user base can find utility in Web3 offerings beyond speculation, which is still uncertain.