When I first started paying attention to crypto, one of the first things I kept asking questions about was why I should care about decentralization. As I’ve gained conviction and knowledge, I wanted to write an easy-to-understand piece as a resource for all my crypto curious but skeptical friends <3.
Before we dive into why decentralization matters, let’s briefly talk about the internet from the beginning. The first phase of the internet starting from the 80s to early 2000s, Web1 was purely static online content and information. This meant consumers could only consume content online, but not interact with it. Some examples include Craigslist and Yahoo, however if you’re born in the early 2000s like me these examples probably mean nothing to you. Another example I like to use to help visually understand what Web1 was like are those bare bones HTML personal websites that computer science and physics professors often have.
Moving on to Web2, which is the era of the internet we all know and use. This is when the internet became usable, you could finally consume, interact, and create content online. This all sounds great, but everything comes with a price. You may have noticed that the internet is largely dominated by four big tech giants, Meta (Facebook), Apple, Amazon, and Google. This means that although consumers could now contribute to the internet, everything you contribute is controlled by these tech corporations. The key word in Web2 is centralization, the internet is owned by these corporations also known as centralized entities. Examples of power being exercised includes, social media profiles wrongfully being taken down, YouTube demonetizing videos, Apple taking a cut out of all in-app downloads and purchases. We are all likely familiar with these scenarios, but it doesn’t need to be this way forever.
Which is why we’re moving towards a decentralized internet, Web3. To put it simply, instead of the internet being owned by corporations, the internet is collectively governed and owned by the people. Instead of benefitting these centralized entities, the users are being benefited. The reason it’s decentralized is because at its core, open-source protocols are used to build these services and products. Some examples of Web2 → Web3 “replacements” are, Instagram → Showtime, Spotify → Audius, Substack → Mirror. In Web3, You don’t need to ask for permission in order to participate in these new networks and you don’t need to worry about censorship. If you’re a third party developer, you might be familiar with asking for API access to build on top of these Web2 platforms. If you end up building a company on top of Twitter, if Twitter decides that they want to build a competitor, they could just revoke your API access and completely get rid of your product overnight.
Since we’ve only ever known Web2, the concept of Web3 may be hard to wrap your mind around at first. Let’s go back to the previous example of social media profiles being wrongfully taken down in Web2. In Web3, this would not happen because the control of the platform isn’t up to a centralized entity.
As a refresher, decentralization is when there isn’t a single entity in charge. Stepping out of the internet context, let’s think about our money and how it’s currently stored. For the average person, banks are storing your money for you. The bank is the centralized entity that is in charge. If you live in a country where the government is corrupt, your money isn’t safe, at any time everything you own in your bank account could just disappear. Whereas if you stored cryptocurrency in a hardware wallet (think of a USB-like device that gives you access to your crypto assets!), no one has access to the funds other than yourself. I don’t want to mainly focus on social and political issues here, but instead give an example of decentralization in a different context.
Moving on, decentralized platforms have a huge advantage over their centralized counterparts, which brings us to the topic of cryptonetworks. A great definition of cryptonetworks I came across by Nick Grossman of USV defines them as “decentralized networks built on top of the internet that provide a wide variety of digital services, such as data storage, computation, and interactive applications.” Cryptonetworks are open source and participation in the ecosystem is permissionless. Tokens play a huge role in cryptonetworks, but I want to focus more on the participation aspect of it in this piece. When anyone is allowed to contribute, this helps organically grow the platform.
Reddit is an online forum that has minimal moderation from the actual company. To be clear, Reddit is centralized and is very much Web2. However, anyone can essentially post whatever whenever. Redditors often post their honest experiences and reviews with services or products on a subreddit. Compared to a website run by the said company, reviews on the website could be deleted. People trust communities (subreddits) vs. a more heavily moderated platform. Transparency comes with decentralization.
A criticism I once had and most people do is that not all Web3 applications are decentralized. OpenSea, being the main complaint. OpenSea is a centralized NFT marketplace. So let’s reframe our thinking about it.
If I decided to delete my Instagram one day, all the content I’ve ever posted on the platform will disappear and I won’t have access to it unless I reactivate my account. Instagram controls all the photos, videos, messages, followers, etc. The more I use Instagram, the more value I get out of it, which makes it extremely hard for me to replace Instagram with a different social media app if I decide to delete my Instagram account because all the value is lost once I do so. This is what network effects are.
However, If I decided to delete my OpenSea account, my NFTs are still my NFTs, they don’t disappear with the platform. In Web3, the actual networks (blockchain) are decentralized, OpenSea is just a service to help you use the network in a user-friendly way. Ultimately, there will be centralized services in Web3, but their role will be a lot less powerful.
I see a future where an internet company might start off centralized to get things going and then move towards decentralization once the initial product or service is launched. Such as rewarding and incentivizing participation by issuing tokens to early users that allows them to have a say in the company.
Feel free to DM me on Twitter if you have any questions or want to chat!