We, the authors, had the pleasure of connecting our respective areas of investing and operating experiences across enterprise and consumer platforms. Our collaboration takes a fresh perspective at Web3 enterprise adoption. We are energized when sets of expertise come together to innovate a frontier technology.
In this blog post, we consider what conditions need to be met for Web3 technologies to be ready for enterprise adoption. Web3 encompasses open and decentralized networks, built on blockchain layers, and that employ some form of tokens as a mechanism for collaboration and alignment of incentives. We see this as separate from the current discussions on the metaverse, which encompasses AR/VR components to enhance the end user Internet experiences.
Traditional enterprises will embrace Web3 when they see a path to new revenue growth opportunities: new products, new business models, new customer segments, new geographies, new sales models, and / or new workforce structures. New business models are historically introduced first by disruptive startups and embraced by enterprises later, as the technology matures. Web3-focused hackathons and accelerators today are the places where new ideas are born and incubated. These hackathons, many sponsored by specific blockchains, drive collaboration and creativity with blockchain native organizations. These groups are driven by ad hoc technical teams which create "projects" or applications that can become companies.
The first successful use cases in new technical segments are often focused on end-consumer applications that lead to widespread adoption. This echoes the trajectory of adoption for AI. The first major adoption for AI in the corporate realm was in companies like Facebook, Amazon, Netflix, and Google that collected massive amounts of user data and used that to drive recommendation engines and increase the engagement of each company’s particular content (e.g., ads for Google or movies for Netflix). There are several examples of the early consumer applications of Web3.
Bitcoin was consumer-driven for a decade led first by technical early innovators, then retail investors before the leading edge trading firms and hedge funds. Now some e-commerce businesses, some corporate 500 treasuries, and a few governments have moved forward with limited adoption.
The NFT (non-fungible token) technology burst on the scene first through the EIP 721 standard in early 2018 and then scaled towards mainstream awareness in 2021: first, video moments with the NBA, then art collectibles, and now sports and celebrity influencers seeking new ways to engage with fans and followers. The blockchain provides clear provenance of ownership, a critical value driver for digital products or services. More recently, AMC and other retail brands began initial engagements - as part of loyalty programs through limited minting.
P2E (Play-to-Earn) business models have been introduced for playing online blockchain-based games where NFTs are minted for gameplay and players earn digital coins or tokens. Dramatic experimentation with business models including staking NFTs in games to win more gameplay tokens and the use or sale of NFTs across games is in process now.
Staking, verifying transactions, renting, or lending of digital coins for specific periods of time in order to collect fees in the form of more coins is a financial innovation using the peculiar aspects of decentralization and blockchains. Today we see the rise of DeFi (decentralized finance which allows individuals to engage in practices known as yield farming.
The DAO (distributed autonomous organization) concept has initial consumer traction in several forms. Bankless DAO started from a podcast (“Bankless”), but has become a sprawling network of new businesses/services created by and for the community. Other examples are the ConstitutionDAO (and its failure to outbid Ken Griffin for the US Constitution) or LinksDAO (with its goal to acquire a golf course exclusive for members).
The infrastructure for these consumer applications is maturing quickly. Crypto exchanges (Coinbase, FTX, Binance) are accessible to the mainstream, simplify the buying and trading for fiat money for digital coin, and enable the purchase and sale of NFTs. Trades are allowed between different digital coins. These exchanges act as central points of liquidity for digital native transactions. Marketplaces like OpenSea have arisen for consumers to efficiently search, find, buy and trade tokens.
For enterprise adoption of Web3, we consider several conditions. There was a previous effort in 2017 to use the blockchain for enterprise applications, but that adoption did not occur. A perspective on why this is different now will be discussed in a subsequent blog post.
Scalable infrastructure must be available from the point of view of both cost, availability and speed. The cost of using We 3 resources must approach the cost of cloud hosting today. In Web3 there is already a migration to proof of stake for Ethereum to address the high transaction costs caused by the proof of work approach in Bitcoin and Ethereum 1.0. New alternatives, such as Solana, Polygon, Avalanche, Near and Wax, have been purpose-built to address the cost issue. Other innovations in Proof of Work include Kadena’s chainweb blockchain architecture.
The transaction speed must be capable of communication throughputs similar to current internet and transaction processing speeds. Already new blockchains, like Solana and Avalanche, have been engineered for high transaction speeds. Solana claims to be capable of 50,000 TPS with the combination of proof of stake and proof of history approach. This limit approaches Visa's TPS.
Identity/ privacy/ security infrastructure must be accepted, however, the ideas of privacy and identity are being redefined in Web3. The digital wallets used to store digital coins and NFTs have curious properties and implications in this area. These wallets are anonymous, but the contents are visible because the transactions leading to the wallet contents are immortalized in the open public ledger or blockchain. Wallets become the de facto identity in the Web3 world. However, since you can have multiple wallets, you can have and curate multiple identities. This is unique to Web3 and allows for individuals to segment reputations through the contents of their wallets. The wallets can prove, for example, that the holder has NFTs that were only given to attendees of certain technical conferences or to show technical literacy through the earning of badges. These NFTs act as validations of activity or ownership.
An understanding of tokens and their power to re-align incentives. Part of the allure of Web3 is the aligned user and growth incentives afforded by the use of tokens. These tokens are the means by which identity or reputation can be established for the purposes of access control, collaboration, or incentive structures. The potential for the increase in value of the tokens also sets the stage for a change in the software licensing model. The transfer of a token as part of a software licensing agreement would allow the buyer of software to have a stake in the success of the software developer and a say in the community of customers that use the software. The more the business model relies on key elements being on the blockchain, then the more likely a token will be a good incentive and governance addition to the business model. Conversely, non-blockchain companies will be very challenged in using tokens because they are not likely to be cost-effective, value-add, or strategic.
New possibilities for customer segments or employee organizations. The ability to see inside wallets while keeping identities private brings a new world of possibilities in customer segmentation and data control for the end-user. The ability for the end consumer to control and curate multiple identities may allow for the end consumer to monetize data (through the staking of a specific wallet) that is now gathered, controlled by, and profited by large data economy tech companies. DAOs could allow users to be part of entities where the benefits of unique membership, through special access or unique value, are validated by tokens. We see the potential for DAOs to become enterprise customer advisory groups or select corporate influencers or interest groups approved by HR in distributed organizations once the new governance models become more familiar to businesses.
Like many emerging technology adoption, the Web3 path to the enterprise will be bumpy with many starts and stops. Enterprises will eventually adopt and change after disruptive startups show the way to new customers and revenue, in much the same way that Google and Amazon did in their formative time decades ago. We are excited about this future.