Web3 is the next iteration of the world wide web, which aims to decentralize the web and move ownership of data and services from Big Tech corporations like Google, Amazon, and Meta to developers and users.
Developments in blockchain technology, pioneered by Ethereum, have allowed for the creation of decentralized apps using smart contracts. However, the blockchain has been a victim of its own success, with network congestion leading to slower transaction volumes and high transaction fees. Layer-2 solutions and newer blockchains are helping address the scalability issues with planned upgrades to Ethereum itself expected to bring about more long-term fixes.
The need to take away from the influence of Big Tech, along with concerns around digital privacy and censorship due to the centralization of the internet, has been a key driver of Web3. In addition, Web3 promises to open up new monetization opportunities to participants via non-fungible tokens (NFTs) and decentralized social media that directly reward users for engagement instead of monetizing them for ad revenues.
The Web3 ecosystem can be broadly divided into three: 1) the use case layer—comprises user-facing decentralized applications (dApps) and projects; 2) the access layer—comprises dApp browsers and wallets to hold the tokens required to interact with the Web3 ecosystem; and 3) the infrastructure layer—comprises the blockchains (layer-1), scaling solutions (layer-2), and developer tools required to build applications on the blockchain.
Overall, over 60% of all the startups in this industry were at an early/seed stage as the industry continued to focus on developing user experience and the technical infrastructure needed to bring Web3 to the masses. As a result, the infrastructure layer also accounted for the most number of startups within the Web3 ecosystem. Most disruptors across the use case layer operate as decentralized autonomous organizations (DAOs), where holders of the application’s native token are able to vote on strategic and operational matters of the project.
Incumbent activity was seen across the access and infrastructure layers. In the former, established cryptocurrency exchanges such as Coinbase and Binance are offering Web3 wallets and dApp browsers to engage with the Web3 ecosystem. The infrastructure layer had the most incumbent activity. This was notably among Big Tech companies such as Microsoft and Google, who provide the required infrastructure and tools such as nodes for developers to build Web3 applications.
Across the access layer, established cryptocurrency exchanges such as Coinbase are extending their crypto wallet offerings to provide access to the Web3 ecosystem. These come as natural extensions to their cryptocurrency product offering, as Web3 tokens often operate on the same blockchain (such as Ethereum) and involve the use of cryptocurrencies to acquire native tokens of the application.
Big Tech companies such as Google and Microsoft have begun to accumulate a notable presence in the developer tools segment, as they provide the required infrastructure and tools needed to create Web3 applications. Notwithstanding any centralization arguments against the involvement of these companies in the Web3 ecosystem, they stand to uniquely benefit, as the existing clientele from their very dominant cloud offerings look toward expanding into Web3 and related technologies. Google, for example, already has partnerships with existing disruptors such as Dapper Labs and Sky Mavis to support their network infrastructure.