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 decentralized governance, transitioning the internet from an information-centric model to a user-centric model.

Web3 is in its early stages and has a long way to go to match the functionality, reliability, and scalability of Web2.

Three key challenges must be addressed if Web3 is to scale and offer the benefits that its proponents suggest.

Challenge 1: Lack of a coherent proposition

Web3’s core proposition remains unclear. While many Web3 advocates cite issues with Web2 such as its centralized nature and its reliance on monetizing user data, it is not clear how serious these concerns are for the billions of people worldwide that still use Web2 platforms and services.

Web2 benefited from the development of killer apps such as web browsers, email services, and app stores, which enhanced its usability and overall appeal. For Web3, the killer app is difficult to identify. Cryptocurrency wallets are one area that has the potential to drive Web3 engagement, but they crucially involve the self-custody of digital assets, highlighting the need for robust security measures. Indeed, this is where the theoretical attraction of decentralization and the absence of an organizing authority or regulation meet the uncomfortable reality of blockchains and individual responsibility.

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Challenge 2: Limited adoption

Cryptocurrencies are the Web3 use case that has seen the broadest adoption. However, usage was sharply impacted by the collapse in the value of many cryptocurrencies and the failure of high-profile centralized exchanges to act responsibly (e.g. FTX in November 2022 and Binance in November 2023). These developments will impact the near-term outlook and future adoption of Web3 applications.

Other Web3 use cases have also seen limited traction. Virtual worlds such as Decentraland have struggled to meaningfully scale their user bases. According to DCL metrics, the average number of daily active users (DAUs) over a 30-day period at the end of 2022 was just under 7,000. These numbers starkly contrast the scale of many existing Big Tech platforms.

Challenge 3: Centralisation

Many Web2 platforms have been widely criticised for perceived failures around content moderation and data privacy. Meta’s Facebook has been subject to multiple fines in various jurisdictions over recent years for issues around infringements of data privacy laws. Repeated fines do not suggest that regulation is an easy fix, but at least the current ownership model provides an entity to be regulated. Web3 DAOs suggest that users can be the ones to undertake moderation.

However, if many users do not want to participate, a small number of people will dominate.   The EU Digital Markets Act, due to come into effect in March 2024, threatens both the current app-store model under which, for example, Apple currently takes up to 30% of revenues from all app sales). This will likely create new routes to market and a reduction in the fees payable by developers. Both would address some of the concerns that motivate the Web3 movement without the need for a plethora of complex decentralized technologies.

Web3: A flawed Utopia

The utopian promises of Web3 can sound appealing, but beyond the high-level appeal lurk some fundamental challenges. Managing the current Web2 internet has proved challenging enough, and it remains unclear whether a move to a more decentralized model will make this any easier. Indeed, there are concerns that the very decentralized nature of Web3, and its associated lack of accountability, would make regulation almost impossible.