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Is Web3 crumbling?
After a rocky few months in which crypto currencies have tumbled in value,
there are huge questions that need to be resolved if Web3 is to ever reach mass
adoption.
article here
Regulatory
oversight, user experience, and the underlying technology will all need to
further mature before it can fully establish itself.
The analysts at
McKinsey & Co. are here to shore up support.
“The value
proposition for consumers at the heart of Web3 — is a powerful one,” the
consultancy underscores in a new white paper titled “Web3 Beyond the hype.”
So powerful in fact
that ignoring the potential of Web3 is more of a risk for business than getting
on board with the tech in the first place.
McKinsey insists
business leaders shouldn’t confuse market “fluctuations or bad actors” with the
potential uses of digital assets and the technologies that underlie them.
“While there are
very real risks from this nascent technology and its uses, applications for the
next generation of the internet continue to spring up in a growing number of
industries with potentially transformative effects.”
So let’s remind
ourselves of the promise of the third phase of the internet.
Web3 is — in theory
— underpinned by new and open financial standards, protocols and organizational
structures encompassing everything we do online. Crucially, control is no
longer centralized in large platforms and aggregators, but widely distributed
through decentralized blockchains and smart contracts.
“Web3 potentially
upends the existing power structure with a shift back to users,” McKinsey says.
Governance — and
this is one of the trickiest aspects of Web3 — is meant to take place in the
community rather than behind closed doors. Revenues can be given back to
creators and users with some incentives to finance user acquisition and growth.
Yet in recent
months Web3 enthusiasts have had a “rough awakening,” McKinsey notes. The
market prices of major cryptocurrencies have declined significantly, the
trading volume of non-fungible tokens (NFTs) has slowed, and, most importantly,
some pioneers of the space have declared bankruptcy because of failed risk
management and misuse of consumer funds.
The paper examines
the main challenges ahead if Web3 is to achieve this dream.
The chief headwind
is regulatory scrutiny. According to McKinsey, regulators in many countries are
looking to issue new guidance for Web3 that balances the risks and the
innovative potential, but the picture remains unsettled.
“For now, there is
a lack of clarity — and jurisdictional consistency — about classifying these
assets, services, and governance models. For example, smart contracts are not
yet legally enforceable.”
This in turn limits
the potential for institutional adoption. Governance remains a work in
progress, and the integrity of decentralized autonomous organizations (DAOs) —
the collective community mechanisms that are supposed to oversee this new
decentralized world — ”varies widely and is often not yet rock-solid.”
There are more
hurdles. The user experience in this new ecosystem is not yet ready for
mainstream adoption.
“Interfaces are
often poorly designed, and the underlying technology is still too cumbersome
for users to have a seamless experience.”
Security is another
concern. “Until users have peace of mind, they will likely not adopt this
technology en masse. Fraud continues to be a risk, with a variety of ‘rug
pulls,’ Ponzi schemes, and social-engineering scams dogging the nascent sector,
while know-your-customer and anti-money laundering procedures are often
lacking.”
A prominent concern
is that users engaged in Web3 may not fully understand the risks of
decentralized technology, “thus expecting the same type of protections they are
used to from centralized (and often regulated) entities.”
For example,
transactions on the blockchain, by their very nature, are irreversible, so the
concept of clawbacks or user fund retrieval does not currently exist (although
it is technically possible).
Transaction cost is
also a factor, making some of the technology protocols too expensive to use at
present. For example, fees paid to complete and record a transaction on the
Ethereum blockchain (so-called gas fees) could be prohibitive for users in
large parts of the world, the analyst finds.
“Smart-contract
resilience is unproven, with new exploits of weaknesses in new code or ‘logic
hacks’ happening weekly, and the accuracy of ‘oracles’—that is, information
feeds that are used in decisioning by smart contracts — continues to be a work
in progress.”
Finally, given
their environmental footprint, proof-of-work blockchains could present specific
adoption challenges for corporations, and regulators, at a time of growing
attention to environmental, social and governance issues.
That seems like a
lot of steep mountains to climb — but McKinsey insists that Web3’s disruptive
potential remains an important internet trend to watch.
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“C-suite executives
may want to keep it on their radar, if only because of the potential for rapid
disruption that it represents.”
It reports that
leading Web3 players are aware of these challenges and are actively working to
address them, often funded by extensive venture capital. Indeed, VC investments
in Web3 exceeded $18 billion in the first half of 2022, remaining on track to
top the full-year total VC investments of $32.4 bn in 2021.
McKinsey advises,
“Executives could develop a deliberate strategy by asking how Web3 native
companies could disrupt their industry and what challenges and opportunities
this might present.”
Despite the recent
market downturn, the speed of innovation is unlikely to slow.
We are already
starting to see the emergence of Web3 native marketplaces, payment networks,
and deposit and loan platforms. The emergence of Web3 gaming, social, and media
platforms — the Web3 metaverse — could be next.
“Web3 is a building
block for an interoperable metaverse, an entirely virtual parallel universe
under construction that is attracting massive investment from consumer
companies and VCs, among others.”
Thousands of new
developers are joining the Web3 movement every month, McKinsey reports. Given
the open-source nature of the technology, developers can easily develop new
applications by building on established programs.
“It may be hard for
even the largest organizations to compete with this scale of global developer
base and innovation, and the speed could accelerate as more users and
developers join,” it warns.
What’s more
engagement is growing, especially for younger generations.
In a recent
McKinsey survey of 35,000 active online users in some of the largest
digital-asset markets — India, Singapore, the UK and US — 20% of respondents
age 25 to 44 said they own digital assets. Two-thirds of those had already made
payments using digital assets (presumably for peer-to-peer payments or Web3
commerce) and just over half had used NFTs as a form of digital identity or
performed play-to-earn activities with digital assets.
“As with any new
technologies billed as disruptive, it remains to be seen just how revolutionary
blockchain, smart contracts, and digital assets will prove to be. While
skepticism is significant among some parts of the public, especially following
the steep declines in the valuation of digital assets and the recent
bankruptcies of some funds and consumer deposit companies, user interest
remains high.”
The technology
itself may not be ready for mainstream adoption — but the Web3 dream remains
alive.
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