Return on composability

From wallets and key management, to on-ramps and gas fees, there is still a lot of deployment to be done before web3 is approachable by normal people. That said, I mostly consider these questions to be largely execution problems running through some known currents like layer 2s and layer 3s, smart contract wallets, MPC, batch transactions, social recovery and sign on etc. Our smartest people are on it, and basically we are on our way to having our Ethereum values cake and eating our web2 user experience cake too. It’s because of this that I find value risk to be a bigger threat to the future of web3 - the risk that these interesting and capable technologies are not really good for much outside of speculation.

Within that “value risk” question, the question of “does this web3 stuff provide value to everyday people?” is obviously the most important, but not too far behind is the question “does this web3 stuff provide value to existing businesses?” In today’s world, people have numerous existing commercial and cultural relationships with businesses, institutions, celebrities, products and services around which much of their lives revolve. While the cryptonative economy is growing fast and has been a fruitful proving ground for many of cyptos biggest ideas, and despite the fact that the breakout use cases which take crypto mainstream may very well come from the more cryptonative hacker side of things, it’s safe to say that web3 “going mainstream” will also involve some critical mass of existing web2 and real world economy businesses buying in to web3.

The question is, are they also buying into permissionlessness, credible neutrality, decentralization and composability? Or are they seeing commercial opportunities in things like tokens, NFTs, and trust minimized contracts that could just as well be serviced at the end of the day by much more centralized, custodial or other types of services which break web3’s core tenants. What are these existing orgs are “buying” when buying into web3?

It certainly can’t primarily be to reach some untapped mass of cryptonative users, a niche that is maybe tens of millions of people at most. In fact, it’s likely that these existing organizations would be the ones bringing their audience into a web3 experience and not the other way around. We must then assume that they see some additive opportunity to their business and a fear of missing out on a net-new opportunity that web3 represents for them. One answer is that it is a bet on the number of exciting emerging and potential use cases for blockchains and decentralized applications. The emerging and potential applications of blockchains and related technologies for real commercial use cases are growing exponentially. Call it web2.5 or otherwise, the Fortune 500 and web2 giants are jumping into this new world headfirst. But are we seeing the existing economy make a bet on web3 in its most expansive sense? Do they really need the “real” web3 to achieve their goals?

My bet is yes on a medium run time horizon, but it’s definitely a live question, and one whose answer bears heavily on the prospects for the web3 revolution. I think in a longer post I will go on at length about other core aspects of web3, and to what extent or another they are in alignment or tension with the needs of existing economic and cultural entities. But for now I want to cover perhaps the most important and promising of those aspects which only web3 can really deliver: composability.

Composability is very much related to other core pieces of web3 like decentralization and permissionlessness. Something which is composable describes a system as a whole (or a part of that system) in which functionality can be broken up into building blocks with well-defined interfaces to other building blocks, and where the pieces of the system can be combined and recombined into higher-order, more valuable systems (which themselves can be combined with other systems, and so-on). Blockchains and decentralized systems offer unparalleled opportunities for composability between services. If there are relatively more centralized and therefore less composable ways to solve some of the initial “web2.5” use cases that companies are experimenting with, but we see enough evidence of them participating in open, permissionless blockchains more and decentralized networks, then there must be some kind of “return-on-composability” that companies are either seeing or expect to see which explains their participation. Where might these returns come from?

One “vector” of composability in web3 is through open networks of liquidity. Companies who make their NFTs truly permissionless on-chain NFTs on something like Ethereum or Polygon can connect an audience of people new to crypto (say, the Reddit community) directly to the liquidity of the cryptonative community through (relatively) open NFT marketplaces like OpenSea. After all, Reddit’s NFTs got an enormous second wind of awareness and engagement once the Redditors started realizing cypto people were bidding on their avatars for thousands of dollars. Something similar seems to be happening around the edges between traditional banks and defi blue chip protocols. Cryptonative liquidity is potentially one kind of “composability tie-in” that will pull existing orgs onto public blockchains.

Another potential source of these benefits from composability centers around the remixability that NFT-defined audiences and communities afford. Alex Danco has spoken about the potential for one merchant to offer a special token-gated discount to both holders of its loyalty token, and the loyalty token of a related brand, or a partnership where users need to hold both loyalty tokens in order to access some exclusive drop. Interoperability across and between different brands’ ecommerce, loyalty and community stacks is made much simpler with tokens, which means partnerships and “collabs” can become much deeper and build upon one another in a combinatorial way. In some sense, the more web3 initiatives users are participating in, the more opportunities there are for new web3 initiatives to plug in, mash up and connect together.

Perhaps the most important driver here will likely be a shift in user preferences as individual, siloed web3 use cases start to pile up on each other and users begin want to take their “cursor” from one application seamlessly into another. Initially, many people are likely to come into crypto through the initiative of a single entity. An artist they follow drops a song as an NFT. Their favorite fashion brand experiments with an NFT version of an AR filter for Snapchat. Their bank offers self-custodial staking yield as a value-added service to their neobanking services. Their favorite game adds a new unlockable NFT avatar from their favorite movie franchise. What could start to happen is that not only are users likely to want to consolidate these “app wallets” over time (a totally separate discussion), but they may start to want these services to talk to each other in more fundamental ways. They may want to use tokenized KYC from one service to login to another one. They may want to wear their NFT avatar in multiple games. They may want to take their staked position from their bank and use it to get a secured credit line to instantly purchase something on a merchant’s site using crypto BNPL. They may want their web3 data backpack that stores their basic profile data for various social apps to be usable in applying for a job or joining a dating site. The more users are exposed to effortless interoperability in certain aspects of their online life, the more we are likely we are to see them expressing preferences for more of that interoperability in others. As users are exposed to web2.5/web3 experiences, my bet is that they’ll pave desire paths towards this interoperability from within siloed experiences and complain when things don’t play nicely while actively seeking ecosystems where everything “just works” together.

So, when watching existing companies dip their toe into web3 and crypto, what I’m looking most closely for in their approach is whether I can see a significant present or future return on composability. If we see too many of these types of “web2.5” initiatives where composability doesn’t really bring much of a benefit, then I fear that the overall web3 economy will stall out, contract, and collapse in on itself. It may very well be that out of a collapsed existing iteration of cypto might arise a more hardcore, cockroach like crypto in the form of something like DarkFi, but that would likely take decades and several apocalyptic events before a real impact would be made. If however returns to composability are strong, enough of the existing economy may very well be pushed and pulled into participating in an open, permissionless and decentralized web3 because they can’t afford to miss out. The latter world seems like a significantly better outcome for the web3 experiment than the former. We’ll have to see where things shake out.

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