Introduction: Yesterday, Vitalik indirectly drove traffic to Railgun through participation and commentary, resulting in a price increase of over 190% for its token. Adding some basic information, Railgun is considered one of the competitors to Tornado, focusing on privacy protection for on-chain transactions using cryptographic algorithms like zero-knowledge proofs. Compared to Tornado, Railgun offers stronger composability and better nesting capabilities for DeFi products. At a time when Tornado faced significant scrutiny and pressure, supporting an alternative competitor seems to be the underlying motive behind Vitalik’s actions. This once again highlights his immense influence. However, it also triggers some reflections. While the preference for combating censorship and favoring privacy protection is evident in this “crypto emperor’s” ideology, is it crucial for Web3? Will following this ideology truly make Web3 better? I am not entirely convinced. Therefore, I hope to initiate a discussion on this event to explore where the future development of Web3 may lie. To delve into this, I believe it’s necessary to start by defining what exactly Web3 is.

What is Web3

In order to understand the future of Web3, we must have a clear and concise understanding of the current definition of Web3. Explaining this is not a simple task. In fact, one of the criticisms of Web3 lies in its vague concept. While this seemingly provides infinite room for defense when facing scrutiny, it also greatly restricts its further development. A loose and vague definition or vision lacks persuasive power, making it difficult to stimulate cohesion and enthusiasm within the community.

After reading some materials, I believe an article published in the Harvard Business Review provides a comprehensive and objective explanation of the definition and development context of Web3. It seems to give us the answer. Moreover, this concept is not unfamiliar to practitioners:

Web3 utilizes various blockchain-related technologies, offering a read/write/own version of the web, in which users have a financial stake in and more control over the web communities they belong to.

A key feature emerges here: in the world of Web3, ownership of digital assets is returned to users. Taking the classic Web2 company Twitter as an example, since user-generated data is owned by the platform, the platform can utilize this data to generate revenue through an advertising-driven model. However, strictly speaking, these data are generated by users and should be owned by users, and therefore the benefits derived from them should naturally accrue to users. This is a common criticism of Web2 by Web3 practitioners.

Within this narrative logic, consensus has gradually formed around the current design principles of Web3, as documented on Ethereum’s official website, seemingly becoming the Bible for practitioners:

Web3 is decentralized: Instead of large swathes of the internet controlled and owned by centralized entities, ownership gets distributed amongst its builders and users.

Web3 is permissionless: Everyone has equal access to participate in Web3, and no one gets excluded.

Web3 has native payments: It uses cryptocurrency for spending and sending money online instead of relying on the outdated infrastructure of banks and payment processors.

Web3 is trustless: It operates using incentives and economic mechanisms instead of relying on trusted third-parties.

However, considering the current market status of Web3, I believe that some of these principles actually constrain the further development of Web3. Therefore, it is time to re-examine the business we cherish.

Web3 Current Issues

Although Web3 has not been around for long, it has seen rapid development, with increasing financing and significant growth in market capitalization. Everything seems rosy, but there are also significant criticisms. The main criticisms of Web3 currently include:

(1) This is a dangerous testing ground full of fraud and behind-the-scenes manipulation: there is already a wealth of negative news to support this view. The incessant rug pulls and hacking incidents, along with fraudulent transactions surrounding tokens and numerous phishing websites, pose a significant threat to the asset security of ordinary users. According to the FTC, since early 2021, crypto scams have caused over 46,000 people to lose more than $1 billion. Behind this heartbreaking figure are many once-happy families burdened with debt. However, any attempt to regulate Web3 companies is met with strong resistance from the community. Meanwhile, decentralization and anonymity also increase the difficulty of regulation from a technical standpoint.

（2) The business model is highly volatile and unsustainable, with the majority of enterprises having short lifecycles. It is undeniable that token-based business models are the key to Web3’s success and have become standard for Web3 enterprises. Unlike traditional business models, the most direct source of revenue for Web3 enterprises is typically based on the appreciation of token value. However, the results show that this profit model is usually not sustainable.

（3）The blockchain technology underlying Web3 is expensive and contributes to environmental pollution through energy waste. Critics argue that public blockchain technology is costly, as users typically incur significant fees (Gas) when utilizing this technology. This seems to contradict the evolutionary path of any technology. Additionally, due to the security of Proof of Work consensus relying on brute-forcing a mathematical answer, typically in a high-energy-consuming scenario, the annual electricity waste caused by Bitcoin alone exceeds the annual electricity consumption of the Netherlands.

It must be acknowledged that the above criticisms are objective phenomena. So, where does the problem lie that has led to such negative evaluations of Web3?

(1) The excessive pursuit of permissionless has turned Web3 into a secret playground for children：

A permissionless peer-to-peer electronic currency transaction system is the beginning of every story. Decentralization and anonymity endowed Web3 projects based on blockchain technology with permissionless characteristics, resulting in two direct effects: the conduct of any business does not require reliance on third-party permission, and similarly, the participation of any user does not require reliance on third-party permission. This seems very promising because, for the first time in human history, the power of technology has overcome authority, providing protection for the majority and achieving “absolute fairness” through technology. However, reality may not be as we expected. This characteristic brings great risks to the majority.

The key reason for such a large deviation from our original intention lies in our excessive pursuit of permissionlessness, making “anti-censorship” the political correctness of Web3. Any regulatory authority becomes the object of our resistance. Our pursuit of absolute fairness is turning this great endeavor into a secret playground for children because “anti-censorship” allows us to avoid any responsibility for our actions.

In fact, the establishment of absolute fairness built by blockchain technology is conditional. It requires that the cognitive level of relevant participants regarding this technology and related business models does not exhibit significant deviations. This condition may have been valid in the early “technical forum” stage, but with the development of Web3, an increasing number of ordinary users are entering the scene, effectively breaking this condition. A significant information gap has emerged between experts and ordinary users. Due to resistance and fear of any regulation, Web3 lacks sufficient means to protect ordinary users effectively and lacks effective means to restrict malicious behavior. This greatly hinders the industry’s development because the interests of the majority cannot receive the most basic and effective protection.、

(2)Excessive emphasis on incentives and economic models while neglecting product experience optimization has led Web3 enterprises to lack the drive to build sustainable and stable profit models, greatly affecting their resilience to market risks.

In the narrative of all Web3 projects, we can easily find descriptions that heavily emphasize their own economic models. The profit models of most Web3 projects are typically built on complex economic models established based on token incentives. The recurring wealth myths have also led people to view this innovation as a reshaping of the current internet business model. However, with the global asset market cooling down, volatile market value performances, and the continuous occurrence of Web3 project scams, this viewpoint is facing significant challenges.

The reason for this, I believe, is that this high-efficiency capital profit model has led many Web3 project parties to excessively emphasize incentives and economic model design in their business model design. We have become accustomed to creating demand for tokens through sophisticated model designs, continuously raising the market value of Web3 enterprises through continuous purchasing demand, while specific operational businesses are ignored or become part of our business stories. After all, product development and optimization usually require a significant investment of time and money. The most direct impact of this phenomenon is the creation of a bubble economy, giving rise to a large number of “house of cards” enterprises. High market values without competitive real businesses to support them are typically unsustainable, making enterprises extremely weak in their ability to withstand risks.

(3) Web3 projects overly rely on the decentralized nature of blockchain technology for trust establishment, which in the short term cannot provide a user experience similar to traditional Web2 projects.

Since Web3 projects are built on blockchain, the performance of blockchain technology greatly affects the technical capacity of Web3 projects. For a long time, constrained by the development of blockchain technology, high energy consumption, high costs, and high latency became characteristics of Web3 projects, significantly impacting Web3’s development. Fortunately, today we have seen many efficiency-oriented solutions such as POS, Layer2, Sharding, which is a welcome development. I believe that before long, these stereotypes will be greatly reversed.

However, there always seems to be a voice questioning these technical solutions. The root of these criticisms lies in the belief that these technical solutions largely sacrifice decentralization to some extent, leading to a decrease in trustworthiness. Such criticism often comes from “right-wing tech geeks” who believe that only Bitcoin’s POW can bring ultimate trust. Although this seems like a conservative view, it also reflects the over-reliance on technology in the current trust-building methods of blockchain-based Web3 projects. This may inevitably affect the future imagination of Web3. Therefore, finding more ways to establish trust and overcoming the limitations of technological development is another issue we need to address.

The Future Development Direction Of Web3

Let’s take a fresh look at the Web3 industry with an objective and rational perspective. Solutions to the aforementioned issues seem to become clearer:

(1) Define a clear and specific vision for Web3, distill its most valuable features, and amplify them. The Web3 industry is still in its early stages, akin to a child in need of meaningful and proper guidance to thrive. To provide better direction for its development, a more comprehensive and specific discourse on the vision of Web3 is necessary.

Previously, it was widely believed that the vision of Web3 aimed to create a better and fairer internet. However, such a vague vision fails to specify what constitutes a better, fairer internet, and the specific path to achieving it. Consequently, people have equated decentralization and anonymity with fairness and goodness, which is a narrow perspective.

I believe that Web3 should not be narrowly interpreted as attempting to completely replace existing mainstream internet technologies with decentralization and anonymity. Decentralization and anonymity are merely technical features of blockchain widely adopted in the Web3 industry. However, they should not limit our imagination. It’s time to rethink what true value Web3 brings us. The following points seem to be more representative:

Low-cost trust guidance:

By observing successful directions in the Web3 industry, it’s easy to notice a common characteristic: whether it’s currency or finance, these businesses were predominantly monopolized by nations or super-corporations before the emergence of Web3. This is because these businesses typically require strong endorsements of trust. However, with Web3, we can swiftly enter these domains and achieve remarkable results. The fundamental reason lies in our utilization of technological power to establish a new paradigm of trust, significantly reducing the costs associated with trust guidance.

The most direct bene fit of this characteristic is expanding the scope of business innovation in Web3. It democratizes the right to innovate high-threshold businesses to a broader user base. This represents the most foundational value that Web3 brings to us.

Verifiable interactive experience:

After understanding the underlying value of Web3, it’s essential to ponder on the core competitive advantage of Web3 products compared to others. This will influence our product design approach and marketing strategies. I believe the core competitive advantage of Web3 products lies in providing users with verifiable interactive experiences.

We know that one technical feature of blockchain is that all data and operations maintained within the system are tamper-proof and transparent. This allows Web3 products to prove to users, or give users reasons to believe, that all actions and outcomes within Web3 products can be verified. Therefore, in scenarios where trust and credibility are paramount and subject to scrutiny, Web3 products will have a competitive edge.

Innovative and flexible business model:

Whether it’s based on token-incentivized economic models or DAO-based models, they both showcase the remarkable scalability of Web3 in terms of business models. It’s precisely built on the premise of verifiability that we have the ability to achieve organized cooperation among various stakeholders. As A16Z partner Chris Dixon put it, Web3.0 offers a new way for all participants to contribute over time while ensuring their own interests.

Let’s revisit the initial question. After summarizing, a clear Web3 vision gradually emerges:

Web3, through a series of blockchain-related technologies, aims to create a business design paradigm characterized by “low-cost trust guidance, verifiable interactive experiences, and innovative yet flexible business models,” supplementing existing web applications.

(2) Explore multidimensional ways of building trust, expand business scope, and achieve a new wave of growth.

While reducing the cost of trust is at the core of Web3 storytelling, current solutions that solely rely on technology as the only source of trust are actually more costly in terms of trust compared to traditional centralized mechanisms. This is primarily because the cognitive cost of this trust-building method for ordinary users is too high, and ordinary users are the soil for the next stage of development in Web3. Therefore, we need to find multidimensional ways of building trust beyond technology, expand business scope through protecting the rights of ordinary users, and achieve more long-term breakthroughs.

With this conclusion in mind, we may adopt a more open and gentle attitude towards approaches that may seem to contradict the principle of decentralization. For the sake of Web3’s longer-term development, it’s appropriate to let go of the obsession and idealism of being “technical geeks.” Take regulation, for example. Instead of trying to avoid it as much as possible, we should discuss how to guide the determination of regulatory boundaries to benefit the development of the Web3 industry.

In exploring this issue, establishing a clear vision becomes crucial. As long as any approach to innovation and protecting the rights of ordinary users is based on the three fundamental characteristics of the Web3 industry mentioned above, it will provide the driving force for a new wave of growth in Web3.

(3) Stable operating revenue may help us establish a more efficient and sustainable Web3 business model

I believe we need to acknowledge that for the foreseeable future, enterprise organizations will remain the primary driving force behind Web3 development. This is because the current governance model based on DAOs exhibits noticeably weaker decision-making and execution efficiency compared to centralized business entities. Thus, we face an inevitable question: how to establish a more efficient and sustainable model of interest distribution and management among Web3 enterprises, users, and related stakeholders. This will determine the upper limit of Web3’s future development.

Currently, it seems that we have reached a consensus: the majority of revenue for most Web3 enterprises comes from ownership of a portion of tokens that are locked and gradually unlocked over time. However, this approach may have already shown its limitations. We can find answers in the financial statements of Web3 enterprises, where they typically have very high non-operating income and minimal operating income. This is because we have become accustomed to relinquishing the operating income of enterprises, stimulating the high growth of tokens with this portion of funds, and thus maintaining a paradigm of higher non-operating income.

Perhaps this is the root of the problem: excessive reliance on non-operating income. On one hand, it can easily lead enterprises to focus solely on stimulating token prices, thereby neglecting optimization and iteration of the product itself, and making enterprises poorly resilient to risks from capital market fluctuations. On the other hand, as tokens are gradually released, ownership of the project gradually shifts to the community, which can easily trap the product development planning of enterprises into short-termism, as it cannot provide sustainable incentives to enterprises.

In conclusion, I believe that Web3 enterprises still need to retain a stable and continuous operating income stream in their business model design. This may bring about longer-term and sustainable development for Web3.

Conclusion

We are currently at a crossroads filled with change and opportunity. Therefore, by returning to a state of calm and reexamining the endeavors we are passionate about, we will find the glory that belongs to us.

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