Over the last few weeks, we discussed the concept of network effects, platforms, and ecosystems. These are basics in understanding the digital world along with how things are being structured economically. Web 3.0has the potential to radically alter the way we distribute economic output.
That said, what about the generation of said value. Here is where things starts to get very interesting.
It is said that we have an Internet evolution that goes as follows:
This is something that makes sense. With the advancement into the digital world, we have the ability to create even greater social layers while providing a different ownership structure throughout the realm.
For this reason, it is important to highlight the change that we are seeing. In this article we will focus upon the social layer although it applies to other areas as well.
Platforms are a powerful tool These started to be discussed heavily around 10 years ago. Naturally, they were implemented as a model long before that, although it is debatable how much was based upon intention.
Either way, we know that platforms have great value. In fact, 4 out of the top 5 companies with the largest market capitalization are structured in this manner.
There is no doubt this was beneficial for Web 2.0. It is hard to argue with the success of Apple, Google, Facebook (Meta), and Amazon. This are some of the leading business that are platform based.
When it comes to social media, we see this in action. The value in platforms is that they offer the ability to capture even the slightest gain in value and spread it across to all users. Over time, through millions (or billions) of actions, this becomes evident.
On the individual level, it is easy to see how this can take place.
If we log onto a social media platform, each time we do something, it affects the entire system. Every post, like, or action undertaken is captured. Of course, we then can add in the fact the data generated is being fed into the machine learning engines and training their LLMs.
In other words, there is massive impact upon what we do.
This is why we have so much value on these platforms. In an ordinary company, we do something and it might affect one department. If the organization is in multiple locations, something might be done in one but not mirrored throughout. It is not uncommon for organizations to be doing things differently depending upon the area.
Platforms are different. This is why the impact is exponential.
To describe this, I came up with a simple equation. It goes as follows:
Thee is nothing deep about this. It does, however, capture the essence of what we are discussing.
In a normal organization, we have an impact of 1. This is our baseline. Each activity is, for the most part, linear. We can affect those around us in a minor way but, overall, the system-wide impact is rarely reached.
With traditional digital platforms, we see the impact go up, represented by 1.25. Please note this is not to scale so we are not saying the effect is 25% greater. It merely illustrates how value is captured and grows.
For example, take a developer. With a traditional company, a piece of software might have impact company wide. Contrast this with building an application that is placed in one of the mobile app stores. This addition enhances to potential utility of every users, generating more value.
In Web 2.0, this is the end of the story in terms of the impact.
At this point, we have to side note to ownership. Under this system, it is the owners of the platform who benefit. This is mostly shareholders and investors (VC companies). Even if it is a start, the buildup in value ends up monetized when they go public.
This is why Web 3.0 ownership is important.
There is another factor that should considered.
Under this scenario, we will be using a platform that is tied to a blockchain. Hence we have the concept of Web 3.0.
Similar to before, the effect of each activity is non-linear since we are dealing with a digital platform. Web 3.0 applications capture value similar to the others.
Here we see the same attributes according to our simple model: each activity is worth 1.25. Whatever we do enhances the utility, to some degree of all users. Since it is a platform, that translates into a growth in value. This is really of impact if one is a hub.
We know the ownership model can be different. If the platform is tokenized, the users can also be the token holders. Depending upon the distribution model used, participants could actually be getting more stake as their activities increase.
There is, however, another layer.
Here is where we move from the 1.25 to 1.50. On a Web 3.0 platform, there is something else to consider.
With traditional social media, the platform and ecosystem are basically the same. These are silos. While they can be part of a larger organization, as in the case with Google, we see how the impact is limited. Outside the machine learning, our impact upon YouTube does not affect their autonomous driving division or email system.
When we look at Web 3.0, we have to consider another level. This is the network itself, i.e. the blockchain.
A Web 3.0 platform is going to be tied to a blockchain. That means some of the data from the platform is pushed through to the base layer. Whatever is housed at that level is available to the applications built on top. This could be network authentication, wallet management, or simply text storage as is the case with Hive. Also, blockchains are ledgers so transactions are recorded, which become immutable and transparent.
Therefore, each activity, depending upon the structure of the platform, will also impact the entire ecosystem that is built upon the network. Unlike Web 2.0, there is some effect beyond the platform. When it comes to value, this is another exponential.
Of course, this is seen in the fact that the base layer also is tokenized. Here we see the opportunity for users to not only have stake in the platform but the network also. Think of this as Facebook the application versus its database. Separate the two and tokenize both.
This is exactly what Web 3.0 is.
The impact upon the network adds even more value to any activity. This is something that few discuss yet it is a basic tenet of the system. It is also why, in the long run, Web 2.0 organizations will not be able to withstand the onslaught from Web 3.0. Their business models simply will not allow it.
Many counsel companies on developing platforms and transforming their business. At some point, there is going to be a shift to businesses having to switch to the Web 3.0, or become obsolete.
The network impact is something that should not be overlooked when dealing with digital platforms. Under Web 2.0, it is the same. With Web 3.0, we are adding a new layer of value. Fortunately, through tokenization, that is captured.
