Does Web 3 Need Crypto?

People used to say “yes blockchain, no crypto”. Now they say “yes web3, no crypto”. My answer to this is – you clearly don’t understand either blockchain, web3, or crypto! There is no blockchain or Web3 without crypto, simply because without crypto there is no incentive for blockchain or web3. Crypto is the incentive layer that powers development of blockchain-based systems and web3 businesses. Blockchain or Web3 without crypto is like musical notes arranged on a page, but no musician to give them meaning. 

In the non-crypto world, capitalism is predicated on the fact that you can incentivize people to do things using capital. Capital or even just the promise of capital is the incentive that drives significant effort for most people on this planet. People on game shows for example will do extraordinary things for money, entrepreneurs will take massive risks, and goods and services will pop up where the promise of capital is greatest. Crypto creates the same incentives for decentralized companies, as Capital creates for most people. It incentivises participation, good behavior, risk-taking, and creativity. All of which are the core components of a web 3 business, and without which a blockchain would be just a plain old database.

A Web3 business without crypto would be…..an internet business. The differentiating feature of a Web3 business is the ability to own what you consume, while consuming it. Therefore the ownership of a Web3 business becomes more and more decentralized over time, leading to less concentration of wealth in the hands of a few, as is the case with current internet and tech companies. Crypto is the mechanism that enables this distribution of ownership through consumption. 

Fundamentally, people will participate or consume the product or service from a web3 business because they get the product or service, and an ownership stake in the business. As more people consume the products or services, the business makes more money and an ownership stake becomes more valuable, incentivizing more people to consume the product or service because they earn more ownership. This becomes an economic flywheel that creates a profitable decentralized business. This is the ideal Web3 business model.

Ethereum illustrates this well. Ethereum is fundamentally a computational services business. You pay for running smart contracts on Ethereum with ETH, the native currency. The product and service is ETH and decentralized computation. When you buy ETH, you can use it to run smart contracts, but you also own a part of the ethereum network and can receive a portion of the transaction fees if you stake the ETH. As more people have used Ethereum over time for various DeFi and NFT smart contracts, the value of ETH has risen and the amount of ETH accruing to Staked ETH has gone up. ETH itself has become more valuable and will continue to do so as the demand for the platform increases. While all this has been taking place, more people own ETH and stake ETH, making ownership of the platform more decentralized.  

Another paramount reason Web 3 requires crypto is the establishment of trust and transparency in online transactions and interactions. Traditional online businesses often operate in “walled gardens” where data is siloed, and user trust is placed in the hands of a few centralized entities. This structure has led to widespread issues concerning data privacy, security, and ownership. In contrast, Web 3, underpinned by blockchain technology and crypto assets, introduces a paradigm shift towards decentralized architectures that distribute trust across all participants. This decentralization ensures that no single entity has control over the entire system, thereby increasing transparency and reducing the risk of censorship or manipulation.

Another critical aspect of why Web 3 businesses rely on crypto is for facilitating decentralized governance models. Crypto tokens enable distributed decision-making processes, allowing stakeholders to participate in governance directly proportional to their stake in the ecosystem. This model fosters a more democratic and equitable environment, where decisions reflect the collective interest of the community rather than a centralized authority. Tokens can represent voting power, investment stakes, or even access rights within the ecosystem, making them an essential tool for community-driven development and governance.

Tokenization is a core feature of Web 3, allowing real-world assets and services to be represented as digital tokens on a blockchain. This process can transform everything from art and real estate to intellectual property and personal data into easily exchangeable and programmable assets. Crypto tokens not only facilitate this transformation but also enable the creation of novel economic models and value exchange mechanisms within Web 3 platforms. Tokenization unlocks new opportunities for creators, investors, and users, providing a more fluid and accessible market for assets that were previously illiquid or difficult to trade.

Web 3 envisions a future where diverse blockchain networks and digital services operate seamlessly together, creating an interconnected ecosystem known as the “internet of blockchains.” Crypto plays a vital role in achieving this vision of interoperability, serving as the bridge that enables value transfer and communication across different platforms. Through standardized protocols and cross-chain solutions, crypto ensures that assets and data can flow freely between ecosystems, enhancing the utility and accessibility of Web 3 technologies.

Web 3 needs crypto, which is foundational to realizing a decentralized, transparent, and equitable digital economy. Crypto not only provides the necessary incentives for participation and governance but also enables the critical functionalities of trust, tokenization, and interoperability that distinguish Web 3 from traditional internet businesses. As the digital landscape evolves, the integration of Web 3 powered by crypto will continue to redefine how we interact with online platforms, own digital assets, and participate in the global economy. Without crypto, Web 3 would lose its essence, reverting to the centralized models of the past and failing to capitalize on the transformative potential of blockchain technology.