*The inner workings of tomorrow's internet

* To start, we would do well to recap what we explored in Part 1 of this series. 

The early internet started as a network governed by standardized and open protocols. Protocols will be mentioned many times in this piece, so it’s worth clearly defining what they are. A protocol is a defined way of transferring data between computers to complete a particular task.  When a protocol is ‘standardized’ it means that it is the widely accepted, de facto way of accomplishing that task, like sending an email When a protocol is ‘open’ it means anyone can use the protocol to accomplish the task, like how we don’t need special permission to connect to the internet  The opposite of an open protocol is a proprietary one, where the rights to use the protocol are owned by private interests and companies The early web, which we call Web1, was dominated by open, standardized protocols, like HTTP for connecting websites or SMTP for sending emails. These protocols still form the backbone of the internet, but are no longer the whole internet.  Midway through the internet’s history (early 2000s), there was a pragmatic and philosophical battle between those who saw the future of the web as open, and companies who built proprietary solutions. In the end, proprietary development won, mostly due to two major challenges in building the open web: The state problem: Web1 never developed open protocols capable of storing data about users and their online activity. Without capturing this data, known as the internet’s ‘state’, early web applications couldn’t rely on Web1 protocols for a wide array of tasks (i.e. payments, search, etc.) The challenges of open development: The process for developing and ratifying new open protocols was incredibly arduous. Collaboration and alignment were required across huge stakeholder groups, slowing down the rate of progress on new internet standards In contrast, companies easily overcame the state problem by storing data on centralized databases, and could iterate on products without needing to move the entire industry with them. This advantage defined the current generation of the internet as being decisively led by companies and their proprietary internet solutions. We call this paradigm Web2. Over time, Web2 companies grew to effectively become THE internet. Nowadays, the majority of our online experience is routed through a handful of mega-platforms that own distribution. While consumers have certainly benefited from great products and better online experiences, there are also critical problems with Web2’s composition: Distribution Dependence: We rely on major platforms to provide the internet experience, and thus are exposed to profit motives and other rent-seeking behavior Locked Value Chains: Winner-take-all network effects have centralized resources, enabling deep moats that prevent fair competition on most of the internet’s value chain Digital Islands: Web2 operates as though built on siloed, digital islands. Data and users can’t be transferred across platforms <loud exhale!>  How’d I do? If this is your first read through and you’re feeling in need of more depth, you can get that context from the first piece here.  The Necessary Ingredients for Web3 Now that we’ve defined Web1 and Web2, what about the fabled Web3? How might we describe it? Luckily, we don’t need to theorize on what Web3 might look like - the movement to create a new generation of internet has already started and is relatively well-defined. The current model for Web3 is a return to Web1’s vision for an open internet. It’s a digital experience where users and data can move more freely, enabled by open protocols that operate over a shared state.  As you might have guessed, the bolded words are important. But even this description is filled with many promises. Open protocols for everything? Applications and users all sharing the same data? Didn’t we just outline crucial flaws that prevented these properties from existing in the open web? You’re right. But much has changed over the past decade. New tools and platforms have rejuvenated our ability to collaborate over the internet. Breakthrough technologies like blockchain offer a solution to the open web’s technical shortcomings. In short, we can explain the rise of an open Web3 by answering the following two questions: Have we solved the open state problem? Is the process for open development now competitive with proprietary development? We’ll answer both these questions, and along the way gain highly useful context for how Web3’s building blocks fit into the picture: blockchain, tokens, and a radical new approach to software development. Fragmented vs Shared State The state problem we’ve defined here is specifically the challenge of managing network data using open protocols. When computers successfully work together to manage this data, they have a shared network state - a dataset that everyone on the network has access to. In contrast, Web2 has what we might call a fragmented state. There is no one snapshot of the network as a whole. Instead, Web2’s view of the internet is partitioned across different company databases. Company databases are siloed (purple), and can only communicate through proprietary APIs (blue) Let’s imagine that today we want to create a new standard protocol for managing state across Web2. Our greatest challenge would be that everyone who owns a slice of the internet needs to be convinced to adopt our protocol. But the companies that own the greatest pieces of the internet are the least incentivized to do so. They are better off holding onto their data advantage, and building solutions on top of their private databases (problem #3, digital islands). A great example here is Gravatar. Gravatar is an open API that website owners can use to establish user identity. The value here being that a user only has to make one Gravatar profile to have a compatible account on many websites. Despite Gravatar’s 15 year run, it hasn’t been able to realize the vision of a shared online identity. As users, we still end up with dozens of accounts and passwords that need to be managed individually. Consider that nearly every website needs an account, but nearly every app builds their own solution. In fact, our closest experience to a universal account is logging in through Google or Facebook (problem #1, distribution dependence). Moving forward, we’ll want the internet to be capable of supporting massively concurrent multi-user experiences, like the shared virtual reality space from Ready Player One. Except with a fragmented network state we are simply unlikely to achieve greater complexity. A Solution to Open State So just for fun, let’s picture the opposite: a massive database of containing a network’s state, with every application on top having read/write access. To escape generalities, this particular database will be used to manage payments by keeping track of user funds. Different snapshots of the network state are viewed as a single entity (purple), communicating through open protocols (blue). To make this work, we’ll define an open protocol for debiting and crediting user accounts. No matter which application is used, whenever a user transfers funds, the transaction needs to be reflected in the shared state. Right off the bat, we can see that managing data in this way has a number of interesting implications. Any application that uses this database will have to honor the payment protocol. Otherwise, they risk separating users from their funds by inappropriately managing state. In other words, open state motivates adherence to open protocols Open protocols exist in the world as open source code. This means anyone can make a better protocol for managing money simply by copying or ‘forking’ the code and adding useful new features. If successful, a better payment network could easily rise up overnight, meaning networks themselves become more agile Now that all apps obey the same rules for managing money, it’s much easier for users to move around between any app using the database. So we also see that open state reduces switching costs for users This seems to be an exciting new digital landscape, except for one thing: real life networks have bad actors. There is no guarantee that everyone will play by the rules. Especially in a network of money, if everyone has read/write access, anyone can fudge the data for individual gain. And when the data in a shared state can’t be trusted, the network on top is worthless. This problem turns out not to be a technical challenge, but rather one of game theory. Can we create a system where all participants are incentivized to play by the rules? To do this, we’d want our system to have a few properties: Transparency: Anyone can audit the database at any time Consensus: All members of the network must agree on its current state Economic Incentive: There is more to be gained in playing by the rules than breaking them The first network to successfully combine all three of these properties was Bitcoin. Blockchain met the needs of a transparent and consensus-driven database. And Proof of Work attached a cost to network participation - to have a vote in consensus you’d need to do something expensive like set up a Bitcoin node. More important, however, are the incentives that keep participants from misbehaving. In Bitcoin, a bad actor can only manipulate state if they overcome consensus, and to do this they need to own a majority of the network’s computers. This is hugely expensive, especially when you can play nice and receive Bitcoin as a reward. It turns out that we can only maintain an open state by infusing networks with economic incentives. At first glance, it’s common to see tokens like Bitcoin and Ether as only an added layer of speculation on top of a blockchain. But the reality is that tokens are a mechanism for transferring value within the network, and fulfill the economic requirement needed to maintain an open state. A Tool for Digital Collectivism Since discovering that tokens are the key to open state, we’ve been developing exciting new ways to encode networks with incentives. Each new mechanism, like Ethereum’s Proof of Stake, adds to our toolkit for building new open networks. That’s why today we have networks that can do far more than manage payments. It’s also why there’s no understanding Web3 without understanding tokens. On a base level, tokens establish incentives for network participants to choose collective interest over individual interest. And it goes deeper than preventing bad behaviour. It’s actually about encouraging stakeholders to engage in the best possible behavior for the network. At this point in time, the best example for this is OlympusDAO’s OHM token. OlympusDAO has popularized the idea that if all token-holders act in the collective interest, it will enable peak financial return across the community of token-holders. The table below is OHM’s Payoff Matrix - which is a visual tool used to express the game theoretic results of player’s choices in a game. Notationally, the choices of player 1 and player 2 are represented by (#, #), where ‘#’ is the amount of benefit a player’s choices awards the system.  If an OHM-holder decide to stake their tokens, this provides a system-wide benefit by buying OHM from the market (+1), locking away supply (+1), and providing liquidity for the protocol (+1). When two players do this, (3,3), they net the system 3 + 3 = 6 ‘benefit points’. OlympusDAO is one of the first communities to directly popularize the merits of collective behavior, and as a result, the (3,3) meme has caught like wildfire across Web3 Twitter. The ‘(3,3)’ nomenclature appears in many Twitter handles, broadcasting an individual’s solidarity with the collective. https://twitter.com/tferriss/status/1454080758189019144?s=20 Did I mention they refer to each other as "“Ohmies”? https://twitter.com/gscalzo3/status/1454081537243185168?s=20 None of this would be possible without tokens creating explicit incentives for collectivism, making the idea of working together memetic and contagious. Community Captured Value By design, when stakeholders work together, networks are able to accrue value much faster. But tokens do more than define incentive structures, they also introduce a radical new way to include users in the value captured by digital networks. When networks are early in their lifecycle, their value prop and utility are relatively undefined. A network might have a powerful narrative, but is unable to fulfill its promise without buy-in from the community. That’s likely why many crypto-networks were dismissed when they had low adoption numbers. Critically, this phenomenon is not unique to Web3, but is actually common to all businesses based on network-effects, like social media sites and online marketplaces. Both AirBnB and Uber were laughed at until their marketplaces matured and communities bought into the concept of entering strangers’ homes and cars. A key difference is that Web3 networks use tokens to implicate users in the success of the network. This enables a virtuous cycle, as all token holders, in some sense, are paid influencers. We see this clearly when Twitter users ‘shill’ one another their favorite cryptocurrencies or engage in tribalist discourse in the replies. While this quality can give any product a Ponzi-like after-taste, it is unreasonably effective at increasing the odds of network success. I’m reminded of the following line from our recent article, Tokenize Everything: “Ethereum seeded its own success by making its core developers rich, as they can now work full time on increasing the value of the Ethereum network" Whereas Bitcoin’s virtuous cycle is merely a social flywheel, Ethereum’s virtuous cycle gives its top contributors financial freedom, motivating talented individuals to build out the network. Developers can only increase the value of their position by increasing the value of the network as a whole. A weak example of this in Web2 products are customer referral programs. It’s only by making participation akin to ownership that a network can manifest the full power of this flywheel. So far, we can only do this using tokens. A fascinating framework to conceptualize the impact of tokens is by using the infamous CAC metric (Customer Acquisition Cost). CAC is effectively how much a business pays to bring in new users. The goal of all businesses is to make more money from a user than it costs to bring them onto the platform. https://twitter.com/midroni/status/1453125588089069575?s=20 In traditional products, businesses pay for customers by advertising or offering discounts. In Web3 products, tokens create flywheels that self-perpetuate virality. In effect, token network effects give businesses ‘negative CAC’ - a funny concept meant to imply that existing users are bringing new users onto the platform, at no cost to the business. But it’s more than just businesses that can benefit. In CommUNITY Economics we explored how NFTs infuse communities with network effects by making them compatible with vibrant digital ecosystems. At this point you might be asking yourself: “All this token stuff seems pretty cool, but how does it… you know… work?” I hear you. It’s hard to visualize how tokens fit into the internet because Web2 doesn’t really provide a way to ‘own’ things like tokens. A consequence of a fragmented state is that it’s near-impossible to track identity, and so ownership becomes an infeasible ideal. This is another area where Web3 brings profound changes. A New Digital Identity As we experience each day, Web2 companies define our identities as being dependent on applications and platforms. This looks like getting a new ‘identity’ or account for every service you use. In contrast, Web3 has what we’ll call an identity-focused model for the web. Applications define their services around a universally recognized notion of an account.  Web2 apps encompass identities as features. Web3 apps sit on top of and depend on identities. src: Inventories, Not Identities. Now that an identity can be recognize by any application, it’s much easier to keep track of what you own. In fact, ownership in Web3 is like traversing the internet with a backpack of belongings. Your photos, articles, and subscriptions can move with you from platform to platform. This is achieved via cryptographically secure wallets that hold your digital possessions. From a tech perspective, adding new functionality to your identity is as simple as creating new ways to ‘own’ digital things. In other words, adding new protocols.  This is in stark contrast to Web2’s value-locked paradigm: where you can’t use your Instagram log-in to load photos onto Pinterest, or migrate your purchased apps from the Google Play store onto an iPhone. The Self-Sovereign Identity Identity isn’t just the schematic center of Web3, but a philosophical one as well. Web3 operates on the principle that a user should control all aspects of their online persona without any intermediaries. This is embodied by the idea of the Self-Sovereign Identity. Achieving the Self-Sovereign Identity requires changing the web on two main fronts: trust and ownership. We already understand how tokens and wallet-based identities fulfill principles of self-sovereign ownership, so it’s worth explaining how Web3 removes the need for intermediaries.   Web3 systems aim to be trustless. You should be able to partake in a Web3 transaction without needing to bring ‘trust’ to the table. The modern legal system is an example of a trustless system in the real world. When you and a business partner both sign on the dotted line, your shared trust in the law creates the abstraction of trust between you.  Web3 accomplishes this same effect with code and cryptography. It’s an online network where you can engage with any party because you trust the program defining your interaction. And unlike the law, code is not open to interpretation. Between understanding open state, tokens, and this new model for identity, we arrive at quite a full understanding of Web3. To me, these ideas are best captured by one of my favorite definitions, from (you guessed it) Chris Dixon. Chris defines Web3 as: “An internet owned by users and builders, orchestrated by tokens”. I think that sums it up quite nicely, don’t you? The Fundamental Forces of Web3 So far, we’ve discussed ideas that are foundational to a new internet, but remember that our interest in Web3 had certain aspirations. We want to know if Web3 can undo the problems we inherited from Web2 (Distribution Dependence, Locked Value Chains, and Digital Islands). With a new internet comes new forces that govern the ebb and flow of value and control. Web3 operates on entirely new rules, Fundamental Forces that shape the experience of all users and builders: These forces are: The Law of Implicit Distribution The Principle of Fluidity Plug, Play, and Improve Dynamics The Law of Implicit Distribution In Web3, there is no such thing as an application having an entrenched user base. Users interact with the internet through their cryptographic wallets, and the set of wallets is maintained by the network itself. In a sense, all applications and users are on an even playing field when it comes to distribution. Any Ethereum address is accessible to any Ethereum application, and vice versa. This is the the Law of Implicit Distribution. This creates a huge economic incentive for businesses to solve user problems. Companies don’t have to work as hard to build out distribution - in fact the problem of distribution in Web3 is almost entirely reduced to the effort of marketing. Users need to know about projects before they can try them out. This explains why products with high ‘meme-value’ have a natural advantage. Successful projects harness virality by doing something culturally notable or functionally meaningful. Once enough users have validated a project, the flywheel starts spinning. The Principle of Fluidity Web3 users have lots to gain by being early to a great project. There are meaningful, even life-changing rewards, to be had by obtaining an informational edge. This creates a huge incentive for users to try new products and networks, which they can do by simply exchanging a few tokens (e.g. Bitcoin → Ethereum). Implicit distribution allows users to transfer value into any project as soon as it’s live. Combine this with the incentive for experimentation, and the velocity of value transfer goes supersonic. This is the Principle of Fluidity. It’s never been easier for users to try new things, and there’s never been greater incentive to for them do so. A result of this principle is that businesses can acquire a majority of their addressable market in what seems like record-breaking speeds. There are plentiful examples of this happening:  OlympusDAO’s treasury increased in value from $5M to $638M between August 2021 and November 1st, 2021 Axie Infinity’s peak daily users increased from 5500 in October of 2020, to a whopping 2 million daily users in October of 2021 Plug, Play, and Improve Dynamics A version of the Principle of Fluidity also appears in product development. Because Web3 operates on code that is open and standardized, applications are vastly composed of open source code. This code is freely available to be copied and used by the community, which translates to absolutely ludicrous product velocity. That’s why there seems to be a hot new product or trend sweeping through Crypto Twitter every week. Because there is. My favorite analogy for the Web3 ecosystem is that it behaves like an evolutionary petri dish. Every product and use case generates offspring, each a genetic remix of its predecessor recombined with crazy new ideas from the community. Every now and then, a new combination resonates with the ecosystem and becomes a new primitive for further innovation. You’ll often hear that Web3 software behaves like ‘lego blocks’. Code can interoperate and work together frictionlessly because code is accessible, open, and standardized. For this reason, Web3 is the ultimate, plug, play, and improve ecosystem.  Vast stretches of the value chain are exposed to the peering eyes of the community. Any proficient developer can identify a weak spot in the chain, fork the code, and offer a better solution to the entire network. Whereas Web2 platforms look like monolothic, single-owner platforms, Web3 value chains look more like a river delta; branching layers of code created and owned by communities. Final Thoughts In truth, there is so much more to say. This series likely deserves a Part 3 to dive deeper into other topics, analyze case studies, and speculate even farther into the future. There are so many questions worth exploring together, like: How should we think about the speculative, bubble-like behavior that results from using tokens? Should we be concerned about the hyper-financialization of our world? Will Web3 be followed by a generation of internet that once again becomes centralized? Or have we created an internet that is impervious to centralization? Why does Web3 matter compared to other problems we’re facing, like climate change and rising social inequality? What is the intersection between Web3 and these problems? Each of these inquiries deserve an article in their own right. If you’re reading this right now, I applaud you for your curiosity and dedication to learning. Web3 can be daunting. It’s the fastest moving area of technology I’ve ever encountered. I hope this series has provided you with useful frameworks and inspired you to dive deeper. If you feel like you’ve only scratched the surface… join the club. But no matter what, at the end of every piece I’m always left with the same feeling. What a beautiful and exciting world to live in. How to get started in Web3 For further reading, you can check out my curated Web3 reading list. Get paid to learn about Web3 by using the crypto-onboarding platform RabbitHole Follow thought leaders on Twitter. My favorite follows are: Annika Lewis (@annikasays), Chris Dixon (@cdixon), David Phelps (@divine_economy), Gaby Goldberg (@gaby_goldberg), Mario Gabriele (@mariogabriele), Natasha Che (@realnatashache), Nick deWilde (@nick_dewilde), Packy McCormick (@packym), 6529 (@punk6529) - and probably others I’m forgetting! If you have any questions or areas you need further clarity on, you can reply to my newsletter or DM me on Twitter. I see every message. If you enjoyed this article consider subscribing to my newsletter for weekly content on the technology that will shape our future! If you really enjoyed this article consider sharing it with an intellectually curious friend or family member! Let me know what you thought about this piece on Twitter. With gratitude, ✌️ Cooper

The need for a new generation of internet

Before we begin, a quick prelude on learning.

It’s the nature of the world that information arrives reverse-chronologically. We tend to hear of the most recent happenings first. As a result, we are almost always context-deficient. This is a disastrous outcome for our learning because to understand you need to figure out an idea’s ‘why’.

I’m a big fan of Simon Sinek’s What-How-Why circle. Understanding, like narrative, is composed of layered concepts. The WHAT layer is made of events and occurrences; random blips on our radar that don’t paint much of a picture but act as a signal of activity. HOW describes the mechanism, the set of rules and principles that help us recognize patterns and direction. But WHY is where the magic happens. WHY contains the compelling viewpoints and rationale that explain an idea’s purpose in the broader world. WHY is not science, but art. To understand the WHY of Web3, we first must take it back to where it all began.  

The evolution of the Web

Nearly everyone reading this article should be familiar with cryptocurrencies, like Bitcoin and Ethereum. Maybe you’ve done the extra reading and are familiar with decentralized finance or NFTs. These are applications of Web3, sitting somewhere between the WHAT and HOW layers.

Web3 in itself is a far greater concept than any one use case. Implied in the name is that it will define a new generation for the internet. This is difficult to understand because we rarely think of the internet as having distinct phases, and instead consider it to be a continuous line of progress. So let’s watch the Web evolve in a matter of minutes, and use history to contextualize the disruption of today.

When the heck did we get to 3?

Most people’s knowledge of the internet is a blurry interpolation between historical events: the Department of Defense funded ARPANET, the dot com bubble rose and fell, somewhere along the way Microsoft got sued… This anecdotal account makes for a good story, but history is about the societal, economic, and ideological influences that manifest these events. 

It was in the early 1980s that the backbone of the internet was created. Our foundational development was creating a set of protocols that could let any computer navigate from website to website using hyperlinks.

But hold up, what are protocols? A protocol is a set of rules for formatting or processing data. Computers that use the same protocols send and receive messages in the same format, as though they are speaking in the same language. Now many of the internet’s protocols were designed to be both open and standardized. Standardization means establishing a de facto way of communicating or exchanging data. Open means that any device can join this network of computers simply by using the protocol.

The opposite of an open protocol is a proprietary one. Skype, for instance, has a protocol for voice communications that is not in the public domain. As a result, no one outside of Skype can send or receive Skype calls. Users are locked into the network by design.

And that’s all you need to understand Web1! The earliest version of the internet was built on top of open and standardized protocols. But the idea of open protocols wasn’t just a means to an end, it was a veritable movement. As the internet matured, people were certain the open nature of the internet would continue to its next evolution; Web2. In his piece, The Weird Thing About Today’s Internet, Alexis Madrigal captures this moment in time:

“Web 2.0 was not just a temporal description, but an ethos. The web would be open. A myriad of services would be built, communicating through APIs, to provide the overall internet experience. The web itself, en toto, was the platform, as Tim O’Reilly, the intellectual center of the movement, put it in 2005. Individual companies building individual applications could not hope to beat the web platform.”

The web was viewed as the entity that would fully absorb the value of network effects. Each new website and every new user would add to the web’s unstoppable momentum. It seemed to many like the internet was destined to be open… but we know how that story ends.

Fatal flaws of the open web

While Web1 protocols could define the transfer of necessary communication-level data, there were no effective methods for managing and storing user data. When applications maintain a set of information about their users and activity, this is known as capturing an application’s ‘state’. As a result, Web1 protocols were stateless. Websites had no way to determine who was visiting their site or if they’d had any prior interaction with Web1 users.

We’ve all encountered internet cookies before. Well the entire system of cookies is actually a work-around to the problem of a stateless internet. Cookies fly around the internet as text files that store data to help websites identify you, and associate you with other useful pieces of information. Even today, websites can only recognize users via their cookies.

While the state problem was fatal in its own right, the early internet had other birth defects. Web1 was missing protocols for many functional areas like payments, search, and social media. So where the open web lacked functionality, markets rose to create their own solutions. Companies like Facebook, Twitter, Google and Stripe filled in the protocol gaps with proprietary code. This was an implicit competition to define the next generation of the internet. Web2 stood to be defined by either proprietary or open source development.

Despite the effort of the open internet’s keyboard warriors, the process of building new open protocols was filled with friction. Defining new standards for the web involved mass coordination across stakeholder groups, requiring multiple phases of review and prototyping. On the flip side, any company could simply create an internal solution to any of Web1’s technical shortcomings. Chris Dixon describes this advantage well:

“As a result, proprietary services were able to create better user experiences and iterate much faster. This led to faster growth, which in turn led to greater investment and revenue, which then fed back into product development and further growth. Thus began a flywheel that drove the meteoric rise of proprietary social networks like Facebook and Twitter."

It’s worth pausing here to emphasize that the early internet was caught between two ‘camps’ of software development theory: the open source movement and the rise of proprietary development. As history shows, proprietary development proved to be a far superior method for advancing the internet.

Where Web1 struggled with the state problem, it was easy for Web2 companies to use centralized databases. The proprietary flywheel established huge economic value on top of a version of the internet powered by private code repositories. Even at this point, debate still raged about whether the open source rebellion could push back. It was the mobile revolution that put the final nail in the open web’s coffin. Post-mobile, people’s view of the internet increasingly became app-centric. In a matter of years, digital experiences were mostly contained inside centralized apps, and people’s engagement with the open web reduced dramatically.

With the final bell rung, Web2 became defined by the progress of proprietary networks. This privately owned internet exploded into the age of online abundance that we exist in and benefit from now. There’s no sign that the march of proprietary development will slow, as the lever of technology becomes more powerful by the day. Our lives have measurably improved from the innovations brought by Web2. This, of course, begs the question - why do we even need a new generation of internet?

The need for Web3

Any analysis of the web’s next evolution will demand that we call out weaknesses and areas for improvement in the current internet. Indeed, this argument is a delicate balance between acknowledging Web2’s contributions and scrutinizing its shortcomings. 

It’s important to note, that there will be no wholesale replacement of Web2. HTTP is still foundational to how we experience the internet just as email remains a pillar of communication. But just as the proprietary Web2 addressed the problems of the early open internet, we must work to ‘find the gaps’ and understand what opportunity there is for a new generation. 

First, the good: Today’s internet companies are training grounds for generations of our greatest builders and thinkers. Their success creates an economic incentive for people to become technically literate. Web2 products have defined the current era of online collaboration: multi-user document editing, shared code repositories, teleconferencing, digital collaboration spaces like Discord and Slack. Web2 makes the world feel smaller, allowing distant strangers to connect over shared interests - ironically, even including those who aim to work on Web3.

Now, for what can be improved. In my opinion, there are three major flaws with our current internet.

• The entire internet experience is vastly defined and controlled by a handful of mega-cap companies.

• Excessive success reduces competition at nearly every layer of the internet value chain.

• The current internet is defined by platforms that subscribe to a value-locked-in paradigm

The dilemma of borrowed distribution

Over the past year, it’s become more obvious that internet users aren’t so much inhabiting their digital spaces, as they are renting them. It’s the major internet companies that ‘own the rails’ and choose what content - and even which users - can live on their platforms. We know this as the issue of censorship, but censorship is a side-effect of relying on a minority of companies to curate the internet experience.

Podcaster Tim Ferriss is fond of quoting his friend who owned a million dollar business built out on a Facebook page. He’d say: 

“Well, it’s going great, but it feels like I have the most profitable McDonald’s in the world built on top of an active volcano”. 

That’s funny, until you realize that the volcano is a metaphor for Facebook’s ability to change their algorithm. You might spend years generating free content and developing a relationship with your audience, and then one day you need to buy ads to reach them. As Chris Dixon mentions in Why Decentralization Matters, this is not paranoia, but rather the logical order of operations for businesses. 

In the beginning of their life cycle, platforms create value by attracting users and partnering with complementary companies. The platform’s goal is to encapsulate and support a vibrant ecosystem of online activity. This is the bottom of the S-curve in the graphs below. Companies still have much to gain by bringing users and 3rd-party solutions into the fold. But in the long run, this strategy offers diminishing returns. Eventually companies reach an inflection point when cooperation is no longer the best path to capture value.

As described in the article:

“When [companies] hit the top of the S-curve, their relationships with network participants change from positive-sum to zero-sum. The easiest way to continue growing lies in extracting data from users and competing with complements over audiences and profits. Historical examples of this are Microsoft vs. Netscape, Google vs. Yelp, Facebook vs. Zynga, and Twitter vs. its 3rd-party clients.”

Companies are first and foremost economic agents. Their prime directive is to increase shareholder value. The dilemma of borrowed distribution is that the profit motive is not inherently evil, but can at times be fundamentally misaligned with the values of users.

The blunting of competitive edges

While all software companies benefit from low capital costs, it’s really the winners who can take off into orbit. Once a high-margin product achieves a certain economy of scale, cash flows can be wholly used to build out the future. 

Often this future means capturing more of the value chain with increased, multi-market product offerings. A consequence of this is that companies ‘featurize’ entire product categories simply to add another feather to the cap of their flywheel. Consider what Twitter Spaces did to Clubhouse, or what Apple Music is trying to do to Spotify. Even Netflix executives must be sweating with Amazon and Apple dropping billions into TV and film content. When these product lines don’t translate to significant revenue opportunities, they become stagnant layers in the value chain. Did anyone catch the latest Gmail update? Neither did I. 

What we want is more brains, resources, and talent on every problem - at every layer of the value chain. We want users to vote on the best solutions with their time and money. This can’t be done when products are excessively bundled and companies are willing to soak the costs of ‘necessary’ product lines. It’s a problem when young entrepreneurs plan company roadmaps towards being acquired by one of today’s giants. 

The inescapable gravity of centralization

In software, value capture is often a function of data capture. Data is the fundamental resource that companies use to know more, do more, and become more. The nature of a proprietary stack means that a company’s window into the internet is limited to what can be stored on their servers. As a result, there is very little incentive for companies to pursue integrations, when instead they can expand. This is why we find ourselves on monolithic platforms offering full-stack services. 

This leads to the problem of walled gardens. Any value you create on a platform is locked into existing on company servers. Forget storing your medical records in one place, you can’t even transfer a Spotify playlist to Apple Music! Web2 built the internet on top digital islands, and neither users or data can cross from shore to shore.   

Looking to the future

It’s clear that modern companies are the winners of Web2. But the features that cemented the proprietary web’s victory also define its shortcomings. In the name of growth, companies are resorting to value-extractive practices, claiming ever-growing chunks of the internet. As these platforms increase the scope of their borders, they exert an inescapable pull on users and their data.

While regulation is catching up to this dilemma, it’s clear we can’t get out the same way we got in. The next generation of the internet will need to find ways to overcome the competitive moats of modern giants, all while offering users the quality of experience they’ve grown accustomed to.

We now live at an interesting point in time. Collaboration on the internet has never been easier. The public is far more technically proficient than they were in the 1980s. Could it be that the scales are tilting in favor of the open web?

Indeed, the leading model for Web3 is a return to Web1’s values. A digital experience governed by open protocols. A network of networks where both data and users traverse the internet fluidly. Blockchain, tokens, NFTs - these are new primitives for a digital world where users, not companies, are the focal point of value.

What’s left for us is to define Web3. Next week we’ll take the plunge and understand how these shifting technologies work together in harmony to create the next-generation of the internet.

What a beautiful and exciting world to live in.

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If you really enjoyed this article consider sharing it with an intellectually curious friend or family member!

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With gratitude, ✌️

Cooper

Ever since I started writing about Web3, my friends and family have been asking me a lot more questions. Usually, these conversations are framed around cute NFTs, Dogecoin mimics, or crypto memes they’ve seen online - but this is actually a mirror image of my own learning journey. In a lot of ways, the superficial silliness is like an approachable gateway drug to Web3. You can’t go full metaverse and self-sovereign identity on someone who is only casually interested in blockchain. The packaging of education matters and pictures of cartoon apes and meme-coins are shockingly good at capturing our attention.

This has all reminded me of the importance of a beginner’s mind; the idea that we should approach every topic with a clean mental slate and a healthy dose of curiosity. We should be kind to ourselves as we learn new topics, and not be afraid to revisit old concepts we thought we understand. I was going to make next week’s article non-Web3 related (to show you that I’m more than just a one-trick pony), BUT you’ve inspired me to dedicate next week’s article towards revisiting Web3 from the ground-up. At the end of the article, there will be a survey for you to fill out with your top questions - and I’ll make sure to answer them all.

As always, thanks for taking time out of your day to read Future Proof. I’ve been amazed so far by the power of writing online. Posting an article is like sending out a news bulletin to your network, showing everyone the topics you’re interested in and the problems you’re thinking of. Hitting publish is an open invitation for discussion, and I’m grateful to have connected with others in my network who are on their own Web3 journey (and soon to be other topics I promise!). I hope these articles can continue to be educational and entertaining for you all. So without further ado…

Let’s get to it 🚀

A common question I’m asked is “What do your friends in crypto do?”, and the strange thing is I actually have very few ‘friends in crypto’. It’s a fascinating realization. I’ve been part of so few IRL discussions regarding much of what I write about, but somehow I find myself with devout beliefs on where Web3 is going.

Usually, our opinions form as a result of our direct environment. It’s the conversations we have and communities we are a part of that have the strongest influence on us. For all of history, this has meant our schools, workplaces, and cities. In spite of this, it’s hard to describe how immersed I feel in the Web3 community, as though I’m part of some digital nation. Each time I read ‘gm’ it’s like a secret handshake sent across the internet from another member of my tribe. I know that on some level they are a believer like me.

That’s why I think Web3 is a paradigm shift in how we form digital communities. I think people are armed with new ways of establishing feelings of belonging and shared identity. And I’m convinced this is something entirely new, something that Facebook, Twitter, and LinkedIn haven’t been able to give us. This thought first crystallized in a tweet reply I made earlier this week.

Web2 networks are purely a digital extension of the connections we’ve made in the real world. It’s really Web3 networks that experience their entire life-cycle online and thus are truly digitally native.

In a way, Web3 is what we were promised at the advent of the internet: a feature-rich digital world where identities and communities can move online. It’s only right now in this curious sliver of time that our abilities and rights as digital citizens far underperform what we can do in the physical world.

I think that’s all about to change, and it starts with our ability to form meaningful online communities. Much like we’ve learned to build code-based products, we’ll need to learn to build code-based societies. We’re creating an entirely new technology stack for digital connectivity as we move toward a future based on open source culture. At the heart of open source culture is the notion that we can all participate in the creation of the digital future. Today we’ll attempt to understand what this new era has to bring by exploring:

• The emergence of digital identity groups

• The meme gradient theory of community value

• Differing schools of thought on community formation

The emergence of digital identity groups

Belonging to a community is essential for humans, instinctual even. We first used cohesion for survival but it stuck because coexistence leads to deeply meaningful bonds and boosts in productivity. For most of human history, we’ve formed communities based on physical proximity, but geography is only correlated with shared identity, not the cause of it.

The internet dramatically changed the nature of connecting with others, and in the process gave rise to a concept that is entirely separate from the notional idea of community. This is the identity group, a set of people whose inclusion is not bound by physicality, but by ideology. Communities are who you go to high school with, but identity groups are who you sit with at lunch. Members of an identity group connect over the premise that they are ‘made of the same stuff’ and that everyone aligns on a few important dimensions.

Now identity groups aren’t native to Web3, or even unique to the internet at all. Today’s strongest identity groups are also our oldest - those premised on race, religion, and sports teams. And this isn’t a coincidence.

Pre-internet, people bounced around like molecules in a liquid state; mixed together in a heterogeneous soup of values and beliefs. Identity groups were limited in their scope and scale due to the constraints of geography and trait-discoverability. Groups could only form around the broadest attributes as individuals had no way to scalably communicate their thoughts and opinions to the world. Real life offered quite a poor ‘search layer’.

Then came the internet. And with it, the ability to properly enumerate your opinions. Posting online became an entirely novel way to share your uniqueness with the world. Many people put their full dimensionality on display, making it easier to be found by like-minded others. As our social networks cataloged great and greater swathes of our communities, it became feasible to form identity groups around the most granular of topics.

Though the advent of blogging and tweeting was a great boon to the formation of identity groups, such groups are not without their flaws. The digital groups of today suffer from a lack of structure and permanence. To date, the best outcome an identity group can achieve is to catalyze their movement into IRL activism in the hopes of bringing about meaningful change. We’ve seen climaxes of activism that move millions onto the streets, and their success shines in the mark they’ve left on our culture. But all movements inevitably suffer a loss of momentum as public attention shifts and peripheral members of the collective disband. Digital communities are yearning for better form factors.

Can disruption be playful?

Rallying together for a common cause is just one way identity groups form. Over the last few months, we’ve seen countless identity groups created over a much simpler, perhaps juvenile, shared belief. This belief can best be described as: “Wow, these JPEGs sure look cool!”.

It’s easy to dismiss the current NFT landscape as incapable of meaningful action. I get it. What impact are all these internet monkeys going to have on the real world? But the playful wrapper of NFTs is precisely what makes them systematically underestimated. In a canonical 2010 post riffing on disruption theory, Chris Dixon wrote:

This is one of the main insights of Clay Christensen’s “disruptive technology” theory. This theory starts with the observation that technologies tend to get better at a faster rate than users’ needs increase….Disruptive technologies are dismissed as toys because when they are first launched they “undershoot” user needs.

What could appear more toy-like than the current NFT landscape? Their whimsical nature completely obscures the innovation underneath. Tokenization directly addresses the two shortcomings of digital collectives: lack of structure and lack of permanence.

Verifiable ownership solves permanence because members of an identity group can now exist in a precise and measurable form. An NFT community IS its 10,000 token owners. No more and no less. If any owner feels uncertain about belonging to this particular group, they can list their token on an exchange and trade ownership into stronger hands.

If enough token holders feel the community is misaligned, even more tokens will be listed and the price of the group’s tokens will trend towards zero. A flatlining price is a signal that the very premise of the identity group was invalid. Community tokens are an embodiment of group formation through the lens of market forces.

The path to an established community…

There is no riskier time for an identity group than immediately after its initial formation or in Web3, after its token distribution. Once formed, a digital collective is merely an empty shell with a dream. It’s up to the community to use their 10,000 tokens as a platform for the community to build a desirable culture and narrative.

In CommUNITY Economics, we talked about exactly this. We explored how NFTs create a method for harnessing cultural energy into what we call cultural batteries. NFTs allow groups to store culture, much in the same way that art and music become representational stores of culture. But in the past we took for granted that such a process exists, using a posteriori evidence by way of the BAYC community. So let’s take this time to dive deep into what you can DO with that battery, and how it gets charged with energy. After all this time surfing through Web3, I think I have an answer.

is paved with memes

Memes? Yes, memes!

Memes are the cornerstone of any community. They are the currency of cultural value within an identity group. Nearly every definition describes memes as elements of culture or as ideas and behaviors that spread from one person to another. Some memes are public and permissionless, like those we see on Twitter and Reddit. Others are private and meant only for a targeted audience.

Essential to the idea of memes is the rush of dopamine you feel when you ‘get it’. This is an evolutionary response that pushes you to stay on top of the dynamic nature of group culture. This feeling is a neural reward for understanding something fundamental about society. But not all memes are made equal, and the best ideas are not uniformly distributed. Cultural power naturally flows to individuals and groups that can generate, taste-make, and gatekeep the best ideas. These communities tend to thrive and attain ‘insider status’. It is the goal of all communities to become meme-rich. (P.S. for a great article on memes, check out Nathan Baschez’s How Memes Control Everything)

If identity groups are the empty vessel, then memes are the object to be stored within. So it goes without saying that the most valuable communities have the highest meme gradients.

Meme gradient theory is simple: The value of any community is proportional to the value of the memes trapped within it. Society tends to have a background level of meme density, where all the public domain memes get passed around. Every now and then a new meme format or especially hot take will surface, and those closest to the source benefit from a temporary cultural edge. If a community can reliably prove they generate valuable/sought-after memes, they become culturally influential almost by definition.

This gives us a new lens to assess the price activity around the hottest NFT communities. Is buying a Cryptopunk a means to acquire a trendy profile picture, or is it a limited availability ticket to the most influential identity club in Web3? Bored Apes aren’t just handsome digital primates, they are an invitation to engage in the hidden alpha of gated discord channels. Especially because the financialization of NFTs and tokens means that cultural alpha directly translates to financial alpha! The meme-affluent Punk 6529 describes this concept perfectly through the lens of Cryptopunks:

Imagine the same concept applied to any other industry. How would you price any of the following?

• One of 10,000 seats at a forum of private equity’s most influential leaders

• Lifetime membership to a community of 10,000 of the tech industry’s top taste-makers

• The opportunity to rub digital elbows with the 10,000 most visionary scientists

It just so happens that people are willing to pay A LOT to belong to a community of Web3’s strongest believers?

This $9.5M offer on a mid-tier Cryptopunk was rejected. The token holder **would not sell **(💎🙌). To them, the value of maintaining their Cryptopunk identity and membership far surpasses any price.

Memes of greater importance

All of a sudden NFT prices start to seem a lot more reasonable. As intellectual spectators it’s our duty to see past the wrapper, to view the undercurrents rippling beneath the surface. This is a new organizational structure for digital communities and online movements.

The outsider’s view is that NFTs are used to attain clout in the crypto-world. But insiders know that NFTs are a method of tokenizing any of society’s cultural intangibles. In Tokenize Everything, we explored how tokens can be used to give owners an interface to a multi-functional online world. NFTs specifically are a token used to capture the fuzzy je ne sais quois that gives value and meaning to art, music, fashion, and culture.

Take for instance, the recent HOUSE OF HALLE and HOUSE OF TIARA PartyBids. PartyBid is a platform that allows large numbers of individuals to pool funds in a group bid on a single digital asset. The organization of the HALLE and TIARA bids was an effort to reclaim cultural artifacts that represent communities of color. After their successful bid, all fund contributors were issued $HALLE and $TIARA tokens in proportion to their contribution to the pool. These tokens continue to operate as a means to connect these communities for further collective action.

Schools of thought on community formation

So let’s say you’ve already issued your token to a group of holders, thus creating an identity group. And we’ll take it one step further and assume you’ve captured a meaningful quantity of early believers/adopters. What do we do now?

Now we build.

This is where Web3 communities have a choice. The path to building a sustainable community typically forks in two different directions. These are best described as Top-Down and Bottom-Up approaches to community formation.

• Top-Down Communities: Top-Down groups typically have a leadership team that determines and executes on long-term vision. Roadmap decisions are processed by leadership in response to community feedback. Leaders engage the community by offering rewards for completing challenges that promote social media presence and increase the token utility (e.g. making token-gated web apps). Over time, Top-Down groups have an organizational hierarchy with roles populated by community members that have made outstanding contributions (i.e. one of my PFP communities recently appointed a Community Manager). Value accrues to token holders and the founding team. Early DAOs, PFPs, and most decentralized apps operate in a top-down structure. Many have long-term goals to become Bottom-Up to validate their communities as self-sustaining.

• Bottom-Up Communities: Bottom-Up groups rely on cultural and market forces to define their roadmap. They rely heavily on community experimentation to create an ecosystem of apps that add value to their token. As a result, the most important actions taken by founders are engaging with the community and injections of inspiration. Most of the value in these communities is ‘up for grabs’ as anyone on the internet can create the next hot app and get in on the action. Mature DAOs and decentralized apps are Bottom Up.

Perpetual culture machines

We’ve spent quite some time already exploring Top-Down communities in our analyses on PFP groups, so I think it will be far more worthwhile to open your eyes to the madness that is the Bottom-Up world. Far and away the most interesting Bottom-Up community in Web3 is Loot. We can understand the primary concept of Loot by reading their OpenSea description:

Loot is randomized adventurer gear generated and stored on chain. Stats, images, and other functionality are intentionally omitted for others to interpret. Feel free to use Loot in any way you want.

If you’re wondering what this looks like, you’re probably thinking too hard:

That’s right. Just a list of items. No art, no statistics, not even a set of rules for how to play. This is the bare minimum you need to create the game, but not the game itself. And the community went wild…

AI-generated pixel art. GPT-3 generated backstories and quests. You name it. This community has thrived using Bottom-Up principles. Its success is so great that spin-off community projects like LootRealms (8000 procedurally generated maps like the one displayed above) have traded over 1.2K ETH ($4.48M) in volume.

Users don’t own Loot bags for the purpose of identity signaling - Loot bags are the key to unlocking virtual worlds and experiences. Most of which have yet to be made. There’s even a website, Loot Watcher that indexes and acts as a search layer to discover new projects. The best projects thrive when they find resonance and engagement in the Loot community.

Loot currently trades at a minimum floor price of 4.2 ETH ($15.7K) with over 69.6K ETH ($260M) in volume. But fear not, as all users can own ‘synthetic loot bags’ just by owning an Ethereum wallet. With synthetic loot, creators can make the decision to open their experiences to the masses - all the while maintaining and adding value to the ecosystem as a whole.

Bottom-Up development is a perpetual culture machine. Done right, a universe of lore and intellectual property can be generated in a matter of weeks. This is Web3’s superpower: Iteration as fast as the community can code, creativity and divergence at the speed of GitHub pull requests. This is only possible when community members feel a sense of ownership and identity over their participation.

This type of decentralized community engagement could one day be a competitor to our largest and most talented game and movie studios. Let’s see Disney and Valve compete with the self-funding, self-organizing force that is online communities.

I think we know how this story plays out.

The internet always wins.

What a beautiful and exciting world to live in.

If you enjoyed this article consider subscribing to my newsletter for weekly content on the technology that will shape our future!

If you really enjoyed this article consider sharing it with an intellectually curious friend or family member!

Let me know what you thought about this piece on Twitter.

With gratitude, ✌️

Cooper