Web3 has become a popular buzzword today, showing promise but has yet to deliver value at scale. The industry unanimously believes in the underlying blockchain technology, but is cautiously optimistic about the value created. A big problem with Web3 is the related business models that drive sustained monetization and affect the daily lives of businesses and users. Tokenizing everything and selling it is not as easy as one thinks; there has to be a real demand for the supply generated. The creation, delivery and equitable distribution of value is still being unraveled. Let’s take a look at some of the flawed business models that have failed or will eventually fail.

Everything decentralized

Web3 now stands for the decentralized web with shared ownership of everything, eg content, data, rights, infrastructure, etc. However, ownership is often centralized by people who own resources, including the amount of cryptocurrency (rich token) and the move to proof-of-stake solidifies these bets. In theory, any Web2 application can be built on a Web3 architecture, but its necessity is often questioned. Does the world need everything decentralized, from Slack to Zoom to Teams, etc.?

Web3 is unlikely to rip and replace all Web2 systems instantly. There is no incentive for an existing Web2 business to convert to Web3, giving away all its assets and property from shareholders who invested cash to the token-buying community. There are also a number of people whose livelihood is tied to the Web2 world who won’t find it worthwhile to leave their jobs for Web3.

Enabling some features of Web3 to scale and enabling new business models for Web2 will be the way to go in the short term and where value will be created. Blockchain has great features like decentralization, immutability, transparency, user ownership, etc. Companies and projects need to decentralize what makes sense, rather than decentralize everything, as it is unlikely to gain adoption or scale, creating unsustainable business models.

Products driven by hype

It’s easy to build a promise about the future based on ideology by throwing in terminologies like Layer-1, protocols, DAO, etc. However, building a product at scale adopted by the masses is key and these Web3 products need to be orders of magnitude larger. beneficial than what Web2 offers. Many products and companies have created protocols that are clunky and difficult to use, launching tokens and raising money against them by spending marketing dollars to generate hype.

During the favorable market, retail investors also indulged in this hype, temporarily raising prices. As the euphoria waned, products that worked on sheer hype lost value. This, coupled with a lack of business models, can create challenges on the road to recovery, with no real-world use cases. Ideology and marketing dollars cannot be a substitute for a long-term value-creating business model. An NFT with a real world use case and utility is much more likely to be adopted and used than a purely speculative JPEG file.

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Competing with ecosystems

This specific part is harder to understand for most projects. The modern era is all about ecosystems and communities. One must develop the ecosystem and find each a clear role that accrues to the entire ecosystem. Ecosystems have many signatures (eg, projects launched on the protocol, consumers or users of the project, and system integrators if you are competing for adoption). Building a competitive stance for any of them strains these ecosystems and dilutes value for all.

For example, an enterprise-focused Layer 1 protocol should avoid offering professional services that will compete with system integrators who may resell them. They must also resist the temptation to create products that compete with ecosystem projects. One can find a variety of examples of these business models that have not scaled up or attracted serious investment. Investors want their capital to grow, not stagnate.

anti-grid effect

Web3 is an ecosystem to ecosystem game; has the potential to take advantage of large-scale network effects, for example, from Metcalfe’s Law (Web2) to Reed’s Law (Web3). However, most of Web3 today is built in silos, creating challenges with scalability, security, and interoperability, and many try to address them with risky and fragile technologies like bridging, etc. There are protocols that have stood the test of time, surviving bear markets and generating developer adoption and network effects.

Many Web3 projects went against these existing network effects by promoting superior technologies and innovation, inventing their own virtual machines. To gain further adoption, some projects have made investments in EVM compliance to promote interoperability and further growth.

Always free

First, let’s clarify that Web3 is not and cannot be free. There are costs incurred by projects and companies towards infrastructure, marketing, product development, community development, etc. Web2 also promised free templates. Although the user did not pay any money, he was participating in giving up his data for the platforms to monetize by becoming a voluntary target for advertisers.

Web3 promises to make users own their data, so if Web3 is successful on a large scale, users will need to pay for Web3 projects eventually, either in crypto or fiat. Free forever business models are unsustainable as costs eventually rise for these players, and they charge or fall. An important lesson from business models alludes to the fact that moving from free to paid models is painful and alienates the communities that first subscribed to the promise of “free.” This is a flawed and unsustainable business model.

concluding thoughts

Most new technologies create advertising first, but that doesn’t mean they lack potential. Hype doesn’t solve real-life problems, nor does it create long-term sustainable value: real solutions have adequate supply, demand, and scale. Blockchain will change the way the internet is configured and it will alter the way business is conducted. However, companies must develop concrete business models that create value while avoiding the trap of chasing flawed business models.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice on your specific situation.

Nitin Kumar is co-founder of zblocks and a recognized leader, author, former consulting partner, and venture capital investor.

This article was published via the Cointelegraph Innovation Circle, a vetted organization of top executives and industry experts in blockchain technology who are building the future through the power of connections, collaboration, and thought leadership. Opinions expressed do not necessarily reflect those of Cointelegraph.

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