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By now, you’ve heard the rumblings of Web3 (or Web 3.0). What exactly is it—and are we already in it? Here’s a breakdown of what Web3 means for small businesses (even yours!).
Web3 is just what you’d expect: the third iteration of the internet. Although it’s clear we’ve surpassed the initial version of the web, the shift from Web2 to Web3 is less obvious. In some ways, Web3 is hard to define.
Olga Mack, blockchain lecturer at University of California, Berkeley, says it best: “You don't have to know how electricity works to understand the benefits. Same is true of the blockchain.” While small business owners don’t need to understand the nuts and bolts of Web3 in order to profit from it, they do need to have a working knowledge of developments in the digital world.
Let’s get started:
A timeline of Web1, Web2, and Web3
Need a refresher on the evolution of the online world?
Web1 (Web 1.0) was the very first entity of the World Wide Web, and it was quite one-dimensional. Kids today would likely be confused by a web page from those earliest years, existing from around 1991–2004.
Most Web1 pages in the first iteration were static, meaning they were like a book page and hosted on web servers. They had a read-only function; users could not interact in any way.
Web2 (Web 2.0) emerged around 2004, along with social media. Internet pages were no longer static, but interactive and participatory. Early companies like Facebook, Twitter, and YouTube led the charge, with corporate centralization a staple of the development.
A big change in Web2: Communication became two-way. Not only could you find useful information online, but websites could get data on users as well. Tracking and targeted advertising emerged, a practice where companies and bots gather user data for profit.
Web3 is already en route. Around 2021, people became fascinated by the idea of Web3 and the metaverse.
How will Web3 differ from Web2?
For one, many believe that users will gain back more control of their online data in Web3. Giant, centralized companies like Facebook and Google may eventually give way to a decentralized version of the web. Decentralized protocols could take the place of corporate platforms.
Something we may see in Web3 is a more seamless integration of smart devices with decentralized networks and machine learning advancements. Some refer to Web3 as the “spatial web,” in which information exists spatially, layered on the physical world.
There are plenty of Web3 skeptics. Professor James Grimmelmann of Cornell University has noted that Web3 doesn’t exactly exist yet in practice, saying, “It's a promised future internet that fixes all the things people don't like about the current internet, even when it's contradictory.” That is to say, it promises to fight centralization on the web by centralizing it on blockchain, which is decentralized (but we digress).
Even if Web3 falls short of expectations, it’s already drawing massive amounts of funding.
Fun fact: In 2021, venture capital firms invested $12.75 billion in Web3 projects, up from $2.75 billion the previous year.
Twitter founder Jack Dorsey is also publicly skeptical, claiming that Web3 is “merely a centralized entity with a different label.” He’s criticized Andreessen Horowitz, which has invested heavily in Web3 through its crypto venture capital (VC) arm a16z. Though Web3 fans claim it will be totally decentralized, Dorsey has pointed out that this doesn’t rid the internet of its tech rulers, stating, “You don’t own ‘web3.’ The VCs and their LPs do.” Dorsey, however, is a huge proponent of the Bitcoin blockchain and cryptocurrency.
Key Web3 terms to understand
The following terms may help build a basic understanding of Web3:
|Blockchain||Digital database within a decentralized, publicly accessible network|
|Ethereum||A blockchain that was instrumental in developing the concept of Web3|
|DAO||Decentralized autonomous organization, or a group that is not governed by a single entity|
|Decentralization||The idea of something not under the governance of a single entity such as a corporation or individual|
|DeFi||Decentralized finance, or financial technology that ends the need for banks or institutions to control funds and services|
|Cryptocurrency||Digital currency that is managed in a decentralized manner on a blockchain|
|dApps||Decentralized apps based on a blockchain|
|Metaverse||Shared virtual environment where users can interact with others and their digital environments in virtual worlds|
|NFTs||Non-fungible tokens, or digital representations of an asset|
|API||Application programming interface, a software intermediary enabling communication between two applications|
Industries that could benefit from Web3
Certain industries lend themselves more naturally to Web3 applications than others. Here are a few:
- Healthcare is a prime opportunity for decentralized records. Blockchain-based patient records can provide better privacy and accuracy since they’re harder to tamper with. Healthcare providers could also benefit from robot-assisted surgical procedures (aka telesurgery). Powered by AI, telesurgery relies on blockchain technology to prevent cyber breaches in automated surgery.
- Insurance can also benefit. IBM is already demonstrating this with its IBM Blockchain initiative. The organization uses smart contracts to cut costs and increase efficiency. It plans to automate claim settlement and reduce fraud through greater accountability.
- Technology—both software and hardware—is an indelible part of the metaverse and Web3. Big tech as well as boutique tech providers can benefit.
- Social media, including Meta Platforms (formerly Facebook), is a big part of the metaverse. Meta calls the metaverse the “next evolution of social connection.”
- Automotives are also poised to compete for top billing in the Web3 automotive industry. Though applications of Web3 in that industry aren’t crystal clear yet, the emerging prominence of electric vehicles seems logically linked to a blockchain-managed ecosystem. Take Tesla, for example, which recently rolled out automatic software upgrades to resolve safety issues efficiently.
Any industry that lends itself to rewarding customers for loyalty, information, or completion of tasks can use Web3. Cryptocurrency rewards within games or for customers’ use of a product can help draw in business.
What types of Web3 applications will impact small businesses?
Tillful CEO Ken So is part of different Web3 communities and has an eye for what’s to come for small businesses. In part, your success as a business owner depends on your business credit score. Historically, all types of credit scores have bias, much of which is due to centralization.
“In general, if you think about credit scores, whether it’s consumer or business, it’s really been centralized in three major credit bureaus,” Ken says. “On the business side, it’s Dun & Bradstreet, Experian, and Equifax. With the presence of Web3, what if all that is decentralized and giving the power back into the hands of the actual user rather than the reporting agencies?”
Some applications of Web3 could impact day-to-day operations for small business owners. Just a few potential uses include payment solutions, NFTs as products, blockchain-based record-keeping, and crypto lending.
Two basic questions you can ask yourself as a small business owner are: Will you accept cryptocurrency? And will you pay workers in cryptocurrency? Enabling cryptocurrency payments could help you reach new demographic groups and bring access to diverse sources of capital, while enabling crypto payments could open up international talent—especially as the US dollar inflates.
NFTs and digital products
NFTs and other digital product lines hold potential for small business owners as well. Companies can release NFTs of certain products on a limited basis or use NFTs to offer access to exclusive perks or events. In some cases, NFTs may be tied to physical goods, allowing retailers and influencers to earn royalties over time.
Applications of blockchain in business operations
Bookkeeping and record-keeping is a must for small businesses. Blockchain technology can ease the burden. If a business moves all of its record-keeping onto a blockchain, transactions and other personal data stored there are unchangeable and accessible to all on that blockchain. Small businesses are investing in blockchain and smart contracts to enable document storage and digitization (Fiverr saw a 64% increase in searches for smart contract services).
Within Web3, crypto lending adds flexibility, although there are risks involved (namely flash loan attacks, which mean hacking a crypto “flash loan” that takes place in a single transaction). Crypto lending lets users loan their crypto to others in blockchain-based transactions. Lenders receive rewards in the form of crypto. This is slightly different from blockchain-based financial tracking, in which companies authenticate loans, bank accounts, and other financial information and store the data on the blockchain.
Businesses that rely heavily on certain supply chains, like those in the food industry, can use Web3 to accurately track ingredients. Those who run farm-to-table restaurants, for example, can document and verify the origins of food products via the blockchain.
Web3 has a big impact on a small businesses that conduct international business. The blockchain can quickly facilitate international transactions, moving stores of value and converting it via cryptocurrency wallets. In many cases, this is more secure than paying or receiving fiat currency across borders—though there are still risks.
Possible opportunities in Web3 for small businesses
Web3 is based on the ideal of decentralization—a huge selling point for cryptocurrency proponents. The idea of one’s business no longer being beholden to a large company that owns their social network is appealing. Web3 has potential for creators to regain some control of their data and content from major corporations.
Blockchains can potentially help small businesses experience faster growth. There’s also the possibility of gaining access to capital otherwise unavailable to companies as DeFi brings financial products and services to a larger demographic. Startups and other businesses now have the ability to raise money to sell pre-orders of goods and services through things like NFTs.
Unlike corporate records, blockchain data is public. This transparency enables bias-free algorithms, which could change the game—especially in the financial industry, where lending and credit bias have historically been the norm.
Ken says banks and lenders struggle with KYC (Know Your Customer) and KYB (Know Your Business) compliance. These traditional financial institutions must run KYC and KYB checks multiple times for the same businesses. “It’s highly inefficient and costly to do that,” Ken says. “What if you could just do it once?” Blockchain technology can solve this. Ultimately, this can speed up the compliance process for small-to-medium businesses and further protect you and your customers from fraud.
In Ken’s eyes, a major opportunity lies in the people coming together for something new. He says, “You can build a community around this. The more people are getting in on this, that’s a whole base of customers you can grow and build upon.” For small businesses, a thriving community is essential to long-term success.
Web3 is definitely on the rise, as demonstrated by a recent report from Electric Capital, a venture capital firm that invests in Web3 companies. The data found that 34,000 new developers committed code for Web3 projects in 2021, a record amount.
Peeking into small businesses and Web3:
The Strange & Unusual, an oddities parlor in Pennsylvania, launched an NFT collection for its macabre artifacts.
ROYBI Robot, a smart educational companion for kids, is currently working on the first edutainment metaverse.
RayCo Media is helping a domestic violence nonprofit accept cryptocurrency donations and sell NFTs to earn income for women in Sierra Leone.
Zeer, a next-gen AI emergency platform, uses blockchain to solve crime and incentivizes community members with crypto rewards for safety engagement and learning.
Possible risks of Web3 for small businesses
As with any new technology, the transition won’t be seamless, and small business owners should consider the risks inherent in Web3 as they make decisions. Whether these downsides of Web3 affect your business directly or indirectly, some issues are inevitable.
Uncertain blockchain regulation
One issue to consider is that crypto tokens are still a relatively unregulated currency. As governments figure out how to treat cryptocurrency, businesses that enable crypto payments will need to stay on top of new developments in taxation and regulation to remain compliant. Even though Web3 is intended to be permissionless and decentralized, there’s still the possibility that individual governments will find ways to work around that.
Hacks and heists are fairly common in the crypto world, and illicit activity does operate on different blockchain networks. There are ways to stay secure, but it’s worth noting. In March 2022, Binance fell victim to a $600 million crypto heist; one month later, they only recovered $5.8 million of that.
Environmental and energy costs
The environmental costs of crypto mining is also a concern. Many blockchain-based protocols require huge amounts of energy. Ethereum is in the midst of a long transition to a new protocol that requires less energy—but that transition takes place over the course of years and it doesn’t wipe out the environmental impact of other, less efficient blockchains. Plus, there is a financial cost of running transactions on a blockchain (often called gas fees), which may be too expensive for people in developing countries.
Outstanding questions of usability
How will Web3 solve the problem of scalability? For mass adoption, global users will have to adopt massive server and device upgrades. As more people use blockchains, transaction times could slow.
Another downside that could hamper the adoption of Web3 is its usability. Although theoretically Web3 is open to anyone, there’s a steeper learning curve than there was with Web2. Shifting your small business to Web3 applications may be beneficial, but remember that customers may not be quick to adapt.
Using the blockchain can be complicated, and the extra steps may be prohibitive to some small business owners and customers. For example, people may need certain plug-ins to manage a cryptocurrency wallet (like MetaMask wallet for Ether ETH, or Phantom wallet for Solana SOL). The task of bringing Web3 education to the masses is a big one, and many aspects must be simplified for wide adoption.
As for NFTs, Ken says not all NFTs have long-lasting value, and many will go away. “That speculation could be a big risk factor for anyone.”
Finally, one of the hallmarks and selling points of Web3 is its focus on DeFi and the lack of a need for intermediaries or gatekeepers. A decentralized internet sounds appealing for its boundless freedom, but unlimited freedom comes at a cost.
As we’ve seen in the case of social networks like Twitter, people often want freedom until they’ve seen it used in ways they dislike. Certainly, business owners who want to maintain control of how they run their business appreciate the freedom of a decentralized platform, but it remains open how free Web3 will remain, and what the consequences may be.
Steps small business owners can take to prepare for Web3
The first order of business for those who own their own company is to simply read up on Web3. Set up a Google alert or subscribe to useful newsletters on the topic. Listen to podcasts and join communities on platforms like Discord (half the battle is deconstructing the jargon, and this can help!). Be mindful of the changes that Web3 may bring, and watch for news of how small businesses are leveraging Web3 to their advantage. Be aware of the hype, but follow your own strategy.
Small business owners might consider purchasing a Web3 domain for their businesses if they feel that’s right for them. Ethereum blockchain users can already register for an Ethereum-based Web3 domain. There’s a lot to be discovered and developed in Web3, so most entrepreneurs don’t need to rush into adopting changes like setting up a virtual workspace in the metaverse. However, there may come a time when the push to adopt is much stronger—just as it was with social media in the early aughts.
Last word on Web3 for small businesses
Lior Messika, founder and managing partner at Eden Block, told TechCrunch last December: “Web3 is the key to the real metaverse. Web3 will house our financial institutions, social interactions, personal identities and much, much more in the not-so-distant future.” However far off these changes may be, businesses should not ignore that changes are coming.
Even if Web3 truly is “vaporware,” as Cornell University technology professor James Grimmelmann says, small business owners should be aware of developments. The process could take another five to ten years, many experts say, before society fully enters the Web3 phase.
However, much of the Web3 infrastructure is already in progress. That means people have time to research, experiment, and adapt—a few skills that business owners have always held.
Final insight from Ken So, Tillful CEO: Ken reminds us that even virtual worlds are finite, much like real estate or other real world assets. “Attention is finite,” he says. “Big brands are buying into this virtual metaverse land because they want to attract attention. Ultimately, that’s the value you’re getting in the virtual world today—capturing that attention and building on that.”