Zone’s Principal Solution Architect, Adam Jackson, explores technologies and emerging sectors that fall under the umbrella term Web3, including current and potential use cases.
Today, I want to explore web3 beyond the Metaverse. Web3 has become a catchall term for a range of technologies (i.e. blockchain, metaverse, crypto, etc). I will be talking about NFTs, DeFi and DAOs, which are backed by Blockchain infrastructure.
Blockchain is about public networks with no centralised owner, no single point of failure, and the use of self-custody wallets to store value and to allow trustless transactions (no middle person required, see smart contracts). All blockchain actions are recorded to a public, permanent, digital ledger. For sure, this technology is not perfect and has its own issues to resolve, such as energy consumption, though these can be addressed; see Ethereum’s recent move to Proof of Stake (99% more efficient).
There’s also an argument on whether something can be truly decentralised (a core tenant) due to underlying infrastructure or the need to on/off ramp to fiat (traditional money) among other reasons. We are still very early in its development, and below I wanted to look at some current and future uses rather than judging the merits of one paradigm vs another.
NFTs
Probably the most widely known use case, non-fungible tokens (NFTs) created a market for digital artists that didn’t exist, but let’s look beyond the financial speculation. An NFT is a unique, non-divisible identifier that is recorded in a blockchain, including who created it and who currently owns it (both unique addresses are generally accessed via a wallet). As mentioned, the main current use case is for digital art to be the linked item but this could be anything. I’m not delving into the subjective merits of valuing art, but whether physical or digital markets determine there is value in owning an original piece, and an NFT can facilitate this identification.
What is also new is on-going royalties, such as the original artist continuing to receive a small percentage of each subsequent sale. This is more a feature of an NFT marketplace platform rather than inherent to NFTs, but due to its identifiers, ledger record and smart contracts, this is a simple trustless transaction. Royalties are currently a hot topic in the NFT market, as during the wider macro downturn, collectors have looked for ways to cut costs and circumvent this mechanism.
You can also have fungible tokens that are divisible and non unique — the biggest current use case would be cryptocurrencies like bitcoin. A common use for fungible tokens can be gaming assets; think of an adventure game with equipment to buy. A non-unique sword can be represented via a fungible token and purchased many times over by players of that game.
Gaming is an interesting example of potential interoperability. You buy an NFT hero to be your adventurer and also some equipable items for your backpack. As the ownership of these NFTs is attributed to your blockchain address and not specific to a gaming world, if another gaming world supports the same NFT protocols, you can move your character freely between them. If that game closes down in the future you can still continue to use your character.
Other use cases include token gating (checking you own x amount of a specific token) for services and membership, both online and offline. Recent NFT conventions have had specific offline events where proof of ownership of a specific token gated access. Many online membership groups (see Daos further down) have token gated access to their membership services.
What this shows is with unique and non-unique items:
- we can have trustless transactions
- we can self-custody (only you have possession through control of a private key)
- we can attribute ownership
- we can attribute the creator
- we can move between systems that support the protocols (interoperability)
If we think wider, we can see the above attributes remove the need for many middle-person institutions currently necessary to transact. Looking at the future use cases, I can see an evolution in legal documentation, affecting many markets, given you can have both public and private (token gated) information with attributed ownership.
As an example for the UK, the house purchasing process with the back and forth of legal documentation between purchaser, vendor (surveys, etc.), estate agent and solicitor, which requires signing in some cases, could be massively sped up if moved to such a mechanism. Landregistry is already a digital ledger of sorts.
DeFi
Probably the most disruptive in terms of financial value is DeFi (decentralised finance). When we talk about DeFi we are referring to services like Uniswap and dydX. For an explanation of differences between CeFi/DeFi and TradFi, see this article.
Most of the current use cases look to replicate the functions of traditional finance and investing but without the need for centralised market makers (as anyone can act as one), trustless transactions (already covered) and a lot of the middle-person transaction costs. The main disruptive element is that anyone can participate — the current regulation of TradFi restricts access to individuals and organisations with certain licences or proof of a certain level of wealth. This may change with future regulations, but apps like Robinhood have already started to open up this sector.
Staking and interest rates have been a big part of the sector; it’s not uncommon to see saving rates of 5–7%, dwarfing what is available through traditional banks and is accessible through stablecoins like USDC, which are pegged to the dollar and backed 1:1 with assets (USDC 1:1 with the dollar). This has also led to some of the largest cases of fraud where CeFi has offered unsustainable APR and then gambled with people’s money.
In terms of future use cases, it really depends on future regulation, but it looks like this is more about replacing inefficient TradFi mechanisms and opening those up to a wider audience (giving more choice) and removing the need for a lot of the middling processes and costs. The current TradFi market (in the trillions) dwarfs current DeFi market size, so there is a lot of value to capture here with only a small movement in market share (DeFi October 2022 report).
DAOs
The first DAO (decentralised autonomous organisation) was launched in 2016 and collapsed after massive fraud (a common theme in crypto). However, in the last two years, DAOs have resurfaced and exploded in growth. Many types of DAO organisations generally coalesce for a single purpose or topic, from Investment DAOs that use membership to scale their opportunities to Social DAOs that look to replace current social media networks. There are some common themes — most, if not all, have their own token; these tokens are used to vote on proposals, and the more tokens you have, the larger the vote share. It’s quite a wide topic to cover, but I’m going to focus on Social DAOs.
A good example of a social DAO would be FWB (Friends with benefits). They have a token-gated discord, which has a wide variety of topics and online and offline events aimed at “socialising”. One way these look to improve upon existing social networks is in the differences in business models. Traditional social networks’ relationship with their users is parasitic; they look to extract value from their users, predominantly through data and profiling.
Social DAOs achieve business value through the shared benefit of the value of its token — a symbiotic relationship (common to all DAO types). The token is considered to have a certain amount of value, and depending on the success and ventures of the DAO, this either increases or decreases over time. You will need a certain amount of the token to be a member, and often there are further levels that give you access to differing functions and services. Tokens can be given from a treasury or from a member’s own wallet to other members as a reward for doing something of benefit to the wider DAO. This positive behaviour reinforcement has an additional advantage over traditional social networks in that it becomes a self-policing mechanism through encouraging positive (in the eyes of the DAO) behaviour (i.e. the opposite of trolling).
With the token having real-world value this does create a barrier to entry for new users. For example, you need to be early or wealthy to become a member as the value scales. Some DAOs have tried to combat this by creating a form of scholarship whereby you start with limited access and can earn your way in via positive contribution.
In terms of future use cases, there have been experiments with DAOs replacing the current mode of the workplace, such as finding some tasks you can carry out for the DAO that are compensated from the treasury (a trustless mechanism, often requiring a vote); this becomes your day job. However, DAOs can be very chaotic; most use Discord for pretty much everything, and whilst it’s good for immediate text and voice chat, it’s not great as a store of documentation/information and is hard to search. The use of Discord has grown more from gaming culture, where a lot of early crypto participants originated rather than it being a suitable tool for the job.
There’s also been a host of useful plugins created for Discord (like token gating), which has made it more attractive. I’m not sure I see DAOs replacing the traditional workplace. Yes, there is a better-shared benefit of value, but giving employees share options is becoming more commonplace and wouldn’t be difficult for other organisations to adopt if losing staff to DAOs. My personal view is that the power of DAOs is in its cooperative nature, and the speed with which they can move, given the ability for trustless transactions. I think the key future use case continues to be leveraging this cooperative power for whatever the purpose of the DAO — it’s an evolution of VCs in some respects.
Final word..
I hope this article has given an insightful introduction to some of the topics outlined; there is much more to dive into on each if you find them interesting.
If you want to explore these topics further, I would learn about wallets (metamask is a good place to start), gas fees (functions on the blockchain cost gas), and understand which networks you should use for a given token. If you do carry out any financial transactions, use small denominations to test stuff first; remember, it’s the wild west out there at the moment!
