Author: ChainLinkGod
Compilation: The Way of DeFi
Web3 represents a fundamental evolution of the Internet as we know it today, replacing centralized gatekeepers and intermediaries with decentralized protocols and community-retained ownership. The inherent properties of Web3 are very attractive to those who live and breathe crypto. However, we must also acknowledge that Web3 is still a niche industry that has yet to be adopted by the mainstream.
While the narrative surrounding blockchain scalability limitations is most often cited as the reason for Web3’s lack of adoption (usually as a reminder that we’re still in the early days), I believe this is just one of many reasons why the average consumer isn’t considering Web3.
This article will analyze the 6 main reasons why Web3 has not yet been adopted by the mainstream, and what can be done to realize the true benefits of this technology for society.
01 Techno-Babble
Web3 can be a difficult concept to explain to newcomers, especially with a universal definition. Everyone has their own interpretation of its most valuable features. This inevitably leads to questions like: “Why should I care about Web3?” and “How can Web3 benefit me in my daily life?”.
Often various properties of Web3 are mentioned — decentralization, censorship resistance, immutability, transparency, etc. These explanations often include overly technical breakdowns of Web3 infrastructure, filled with industry jargon and tech gibberish (tech terms that are difficult for the average person to understand).
Although such explanations are helpful in understanding the core value of Web3 and its underlying technical implementation details, these are only a means to an end. The real question that must be answered is: How do these esoteric concepts and intangible values ultimately translate into Web3 applications that ordinary consumers can understand and are interested in participating in?
Of course, to answer a question like this, one must be able to point to clear real-world use cases.
02 Speculation-driven circular economy
The first major Web3 application was the creation of digital tokens (such as Bitcoin) with predefined monetary policies and built-in peer-to-peer payment capabilities — all without the need for a centralized middleman. While digital tokens are attractive to many, the utility of tokens used only to transfer money from one person to another is quite limited compared to traditional currencies, and they suffer from significant disadvantages in terms of volatility and limited merchant acceptance.
DeFi vs TradFi, DeFi removes the middleman in value transfer
Without obvious systemic failures in the traditional financial system, the value proposition of minting and transferring tokens alone is not enough. This realization ultimately led to the creation of the next clear Web3 use case: decentralized finance (DeFi). DeFi expands the use of digital tokens beyond simple value transfer and uses them for financial primitives that consumers are already accustomed to, such as lending, borrowing, exchanging, and hedging.
However, given that many DeFi applications are still primarily focused on tokens, a circular economy of speculative tokens has been created whose value is derived in part from the monetization of speculation. This is not surprising, as Web3 natives who already hold tokens are the obvious initial product-market fit for DeFi products, but if consumers are not owners of crypto tokens, then DeFi seems more like a casino than an alternative financial system.
An example of speculation-driven “yield farming” in the DeFi circular economy (source)
Tokenized assets to the rescue?
This is not to say that all DeFi today is purely circular in nature. Stablecoins, a token whose value is pegged to another asset (such as fiat currency), can create so-called "programmable dollars" that can be traded globally and settled in seconds. Today, digital currencies are more relevant to ordinary consumers because their lives already revolve around acquiring, saving, and spending this currency.
Currently, there is $140 billion worth of stablecoins that can be used in DeFi applications, making the DeFi ecosystem more useful and relevant to consumers, such as by creating on-chain savings accounts. When applying Web3’s value attributes to assets that consumers already use today, the “why” of Web3 becomes even more self-evident.
Stablecoins are the Trojan Horse that brings smart contracts to the masses. Why? They are likely the first and only fully sustainable and rapidly scalable real-world use case for cryptocurrencies today.
Beyond stablecoins, I believe this general approach of on-chain financial skeuomorphism — emulating and reimplementing existing real-world financial primitives on-chain — provides a clear path to introduce Web3 applications to the general population in a way that is actually relevant to everyday life.
In particular, tokenized real-world assets (RWAs), of which stablecoins are a subset, offer an opportunity to short-circuit the circular speculation that exists in DeFi. They can include real estate, corporate/government bonds, revenue-sharing agreements, commodities, and any other asset in the traditional financial economy. Tokenized RWAs do not come without a price, however, especially in terms of decentralization and trust minimization. However, Web3 applications that support RWAs can expand the value share of Web3 by an order of magnitude.
03 Hyper-Financialization
While DeFi, stablecoins, and RWAs present a huge opportunity to scale Web3 to the mainstream, it’s important to consider that the average consumer doesn’t really care about finance. They may not use many financial services, nor do they care about the technical details of how financial products settle on the back end. At the end of the day, they just want to engage in commerce, like buying some groceries using a credit card. If the primary hype for Web3 is based on hyper-financialization, then a large portion of the total potential market will be completely missed.
This is where a lot of the confusion about Web3 comes from. If Web3 is a “decentralized version of the existing internet,” then where are all the typical internet use cases we’re used to? Messaging, social media, video streaming, online commerce, or that blog you’re reading right now?
Web1 vs Web2 vs Web3
Web3 is about defining how producers and consumers of content interact, so where are these Web3 content platforms?
While non-financial use cases for Web3 are still in their early stages, some clear use cases are emerging. For example, a Web3 implementation of a social media platform could take the form of a decentralized protocol where users truly own their online profiles, including all the content they produce and their social graph of followers/followers. Their profiles could then be ported to a variety of front-end interfaces with different content moderation policies.
Aave’s Lens Protocol is an example of a decentralized social graph protocol that aims to achieve this goal. By storing interaction information on the Polygon PoS blockchain, a user’s social graph is portable across applications. The ability to own your own social identity is a powerful Web3 primitive that directly addresses concerns about existing platforms.
Decentralized social graph protocols allow independent interfaces to be built on top of them (source)
Decentralized social media may or may not be the ultimate killer non-financial Web3 application. Instead, it may be the creator economy, gaming, the metaverse, DAOs, or any number of other use cases. What is clear, however, is that we must expand our industry away from pure hyper-financialization.
04 User Experience Landmines
In theory, Web3 offers a user experience (UX) that is far superior to the status quo of the internet. Instead of having to manage a plethora of unique usernames and passwords for each website, or entrusting a centralized service provider, Web3 enables users to authenticate themselves through a single private key that can be universally used in any Web3-enabled application. Not only does this greatly simplify the user experience, but users can truly own their data and access applications directly without the approval of a centralized middleman.
When it works, it works very effectively.
Differences in login experience between different versions of the network (source)
However, that’s only “when it works.” In practice, users must navigate different incompatible authentication standards, manually handle private keys and seed phrases, download and learn how to use new browser extensions or mobile wallets, and adjust all of this to comply with different blockchains with their own set of standards. The result is often frustration and confusion.
Another standard will solve Web3 authentication issues (source)
Mnemonics? Chain IDs? Gas prices? Token approvals? Reverting transactions? Finalization? These are all fairly esoteric and highly technical concepts that Web3 native users need to understand if they want to interact with on-chain Web3 applications today. Even with a good understanding of these concepts, interacting with Web3 applications often feels like walking on eggshells, hoping that something in the interaction flow (hardware wallet -> Web3 extension -> front-end website -> RPC node -> blockchain) doesn't break.
Just like users didn’t need to understand the underlying architecture of Web2, they shouldn’t need to understand the technical nuances underlying Web3 (source)
The poor user experience on Web3 right now isn’t the fault of any particular project or protocol. There are many ongoing efforts to unify the experience. However, it’s undeniable that the user experience on Web3 today is less than ideal. Secure private key management is also a serious responsibility, and consumers have little analogue in the Web2 world. Unfortunately, there’s no “reset password” option if your seed phrase is lost.
With interfaces like the one below so common in Web3, it’s no wonder that churn among new users is so high.
"Connecting the wallet" is a rabbit hole in itself, good luck
Overcoming this user experience (UX) hurdle requires a first principles approach to minimize the technical details and risks faced by users. I believe this will ultimately lead to the creation of Web3 "super apps" that abstract away the various complexities inherent to Web3 infrastructure and provide users with only what they need to see in order to interact in the Web3 world. Coinbase and Robinhood are two examples of consumer-facing apps that are leveraging their experience to create frictionless Web3 wallets.
In particular, Coinbase built a Web3 browser directly into its main mobile app. The browser uses secure multi-party computation (MPC) which enables private keys to be generated in a distributed manner. The result is a “semi-custodial” wallet system in which a user’s private key is split into three entities, and any two of the parts are required to sign a transaction. The user and Coinbase each hold part of the key, and the third part can be held as a cold storage solution, or kept with a trusted third party. If a user loses access to their device (and therefore their part of the key), a recovery mechanism is available to regain access to the wallet.
While not as trust-minimized as a purely self-custody solution, this type of compromise significantly improves the user experience and may be a safer solution for the many users who are susceptible to accidentally losing their keys. Other solutions, such as social recovery, also provide a viable path to creating the type of UX that users have become accustomed to in the Web2 world.
05 The Dial-up Era of Web3 Throughput
Currently, one of the most commonly cited limitations of Web3 is the limited scalability and high latency of widely adopted public blockchains. As discussed in my previous article on the true trust model of blockchains, scalability is often considered equivalent to increasing transaction throughput. However, a more comprehensive interpretation of scalability is to increase transaction throughput while keeping the verification cost of the blockchain ledger low. Higher throughput blockchains do exist, but their transaction throughput still has an upper limit, and they usually require trade-offs in decentralization, security, or reliability.
The blockchain trilemma shows the trade-offs that traditional blockchain design must make
As Vitalik Buterin once said, “The Internet of Money shouldn’t cost 5 cents per transaction.” This is a bit ironic given the gas costs of using Ethereum over the past few years, but most people generally agree that it’s a valid statement. Even with clear real-world use cases and an improved UX, the next billion users won’t be able to join Web3 if transactions take a long time to complete and cost a lot of money.
Since this is one of the most obvious barriers to mass adoption of Web3, many blockchains are very focused on improving scalability, whether through parallel computing, modular rollups, sidechain clusters, or other methods. Many of these solutions are still in their infancy, but I firmly believe that scalability is a technical challenge that can and will be largely overcome in the coming years. What is not clear is what a highly scalable Web3 ecosystem might look like: a multi-chain world of independent L1/sidechains, a multi-rollup world of layer 2 solutions, or a high-throughput server farm layer 1 blockchain? Perhaps all three will coexist?
Comparison of different scaling technologies from Matter Labs of ZkSync (source)
06 The Elephant in the Room
When discussing the obstacles facing Web3, we must also address the "elephant in the room": the lack of a clear legal framework and guidance on crypto assets, decentralized applications, and decentralized organizations, which limits Web3's ability to reach global scale. As with any new technology that fundamentally disrupts an existing industry, growing pains are inevitable, but not everything can be solved by technological means alone.
Without a clear legal framework or policy guidelines, traditional institutions and organizations do not have the clarity they are accustomed to and crave to confidently participate in the Web3 ecosystem and deploy resources into it. Once such a framework and guidelines are in place – achieved through industry collaboration to avoid stifling innovation – institutions and organizations are more likely to actually begin to engage with Web3, either as service providers or Web3 gateways to their existing customer base.
To be clear, I am not advocating for any particular legal framework or policy guidance, but rather acknowledging the reality that mass adoption of Web3 depends heavily on clear and reasonable guidance. What form this takes will depend on a multitude of variables. Stifling innovation is not a viable or positive outcome for the Web3 ecosystem, but being viewed as a “Wild West” environment for Web3 is also not conducive to its long-term growth.
Institutions may feel uneasy in an ecosystem where fraud is perceived to be uncontrolled (source)
Looking ahead
Web3 represents a paradigm shift in the trust properties of applications, shifting power from centralized intermediaries to deterministic and transparent software. But as with any innovative new technology, there are various obstacles that must first be overcome before global adoption can be achieved. While there are many more bottlenecks to mass adoption of Web3 than what is outlined in this article, by addressing the challenges above head-on, Web3 will be better positioned than ever to extend its benefits to all aspects of society.