Everything You Wanted Know About Web3, DAOs and NFTs But Were Afraid to Ask

This year’s buzzword is undoubtedly Web3, which, combined with NFTs and DAOs — liberally sprinkled with crypto and a hefty dose of wishful thinking — are setting the stage for every transaction we make online: business, personal, financial, entertainment, political.

The technologies are highly specialized, but the concepts behind them, and their potential applications, are less so. There are evangelists and critics lining up on either side, but there’s agreement at least that each will play a role in the future of the internet. It’s important, then, to get a first base grounding on what it all actually means.

If you already know, then this primer is not for you. If you are less sure, this quick walk through the current state of Web3, DAOs and NFTs, which leans exclusively on an excellent trio of guides written as part of “The Latecomer’s Guide to Crypto” by The New York Times technology columnist Kevin Roose, should cement knowledge or enlighten.

Web3: A Primer

READ MORE: What is web3? (The New York Times)

Web3 is the name some technologists have given to the idea of a new kind of internet service that is built using decentralized blockchains — the shared ledger systems used by cryptocurrencies like Bitcoin and Ethereum.

Packy McCormick, an investor who helped popularize Web3, has defined it as “the internet owned by the builders and users, orchestrated with tokens.”

Proponents envision Web3 taking many forms, including decentralized social networks, “play-to- earn” video games that reward players with crypto tokens, and NFT platforms that allow people to buy and sell fragments of digital culture. The more idealistic ones say that Web3 will transform the internet as we know it, upending traditional gatekeepers and ushering in a new, middleman-free digital economy.

But some critics believe that Web3 is little more than a rebranding effort for crypto, with the aim of shedding some of the industry’s cultural and political baggage and convincing people that blockchains are the natural next phase of computing. Others believe it’s a dystopian vision of a pay-to-play internet, in which every activity and social interaction becomes a financial instrument to be bought and sold.

Back to Basics: Web1 and Web2

Web1 refers to the internet of the 1990s and early 2000s — the internet of blogs, message boards, and early portals like AOL and CompuServe. Most of what people did on Web1 was passively read static web pages, and much of it was built using “open protocols” like HTTP, SMTP and FTP.

Web2 was the next phase of the internet, from 2005 or so — characterized by social media and user generated content. People began actively participating in the internet rather than passively reading it. But most of that activity ended up being distributed and monetized by big companies, which kept most, if not all, of the money and control for themselves.

Web3, the story goes, will replace these centralized, corporate platforms with decentralized, community-run networks, combining the open infrastructure of Web1 with the public participation of Web2.

Crypto investor Li Jin and writer Katie Parrott sketched the Web3 vision this way: “If the pre-internet/Web1 era favored publishers, and Web2 favored the platforms, then Web3 is all about tilting the scales of power and ownership back toward creators and users.”

Power To the People

Web3 proponents argue that a blockchain-based internet would give creators and users a way to monetize their activity and contributions in a way that today’s mega-platforms really don’t.

Today, for example, Facebook makes money by aggregating user data and selling targeted ads. “A Web3 version of Facebook could allow users to monetize their own data, or even earn crypto ‘tips’ from other users for posting interesting content. A Web3 Spotify could allow fans to buy ‘stakes’ in up-and-coming artists, effectively becoming their patrons in exchange for a percentage of their streaming royalties. A Web3 Uber could be owned by the drivers on the network.”

“Internet behemoths like Facebook and Twitter are essentially autocracies. They can unilaterally seize usernames, ban accounts or change their rules on a whim. A blockchain-based social network could delegate those decisions to users, who could vote on how to handle them.”

— Kevin Roose

Web3 is seen as an essential part of the metaverse, because it would allow for the creation of metaverses that aren’t controlled by a single company or governed by a single set of rules.

“It is envisioned that your metaverse avatar might be an NFT. Your metaverse house might come with governance tokens or qualify you to join a neighborhood DAO. The mortgage on that house might even be packaged into a mortgage-backed security token and sold on a decentralized exchange.”

Further, Web3 platforms could be democratically governed in a way that Web2 platforms aren’t.

“Internet behemoths like Facebook and Twitter are essentially autocracies. They can unilaterally seize usernames, ban accounts or change their rules on a whim. A blockchain-based social network could delegate those decisions to users, who could vote on how to handle them.”

Then there’s the idea that Web3 would be less reliant on advertising-based business models than Web2, and people would have more privacy as a result, with fewer trackers and targeted ads following them around and fewer giant companies vacuuming up their personal data.

Of course, all of this is a highly idealistic version of Web3, “sketched mostly by people who have a financial stake in making it happen.” The reality could be much different.

Or even sinister.

Web3 Project Resistance

For instance, there is an idea — seen as a positive one by Web3 fans — that the technology will usher in a “decentralized identity.” This is the notion that, in the future, we could all have a kind of “reputation score” that consists of a blockchain-based tally of the jobs we’ve done, events we’ve attended and projects we’ve contributed to. These records would essentially become permanent records of our online lives, and other people could look them up to decide whether to hire us, trust us with some task or even date us.

It’s an extrapolation from our current obsession with social media presence (such as the number of followers we have) and was satirized in the Black Mirror episode “Nosedive.”

Writer and technologist Robin Sloan, for example, wrote that the ability to delete things, “an operation basically antithetical to Web3,” was actually a desirable quality of current internet services.

Stephen Diehl, an outspoken crypto detractor, went even further, calling Web3 “the hyperfinancialization of all human existence.”

Others attack Web3 from a technical perspective, arguing that blockchains are significantly slower and less capable than standard databases, and that today’s most popular blockchains couldn’t even begin to handle the amount of data that Uber, Facebook or YouTube use on a daily basis.

To make Web3 services perform as well as consumers demand, they argue, you have to build centralized services on top of them — which would defeat the whole purpose.

There are also those including former Twitter CEO Jack Dorsey who believe that Web3 is an attempt by wealthy investors to pay lip service to decentralization while building new, centralized services that they control — making themselves, in effect, the new middlemen.

NFTs: A Primer

READ MORE: What are NFTs? (The New York Times)

We all probably know that NFT stands for non-fungible token, but what does that actually mean?

Let’s nail the basics.

$1 is fungible, because you and a friend can trade $1 bills, and each of you will still have the exact same spending power. Most cryptocurrencies are fungible, too — a Bitcoin is a Bitcoin, and it doesn’t really matter which Bitcoin you have.

But most objects in the physical world, such as cars and houses, are nonfungible — meaning they have unique qualities, and you can’t just exchange them for others of the same type.

Until recently, nonfungible goods didn’t really exist on the internet. As described by Roose, the internet essentially works like a giant copy machine — any digital file can be duplicated an infinite number of times, and every copy is exactly the same as the original.

The Value of Scarcity

The infinite copy-making quality of the internet was great for making digital objects abundant. But it was horrible for making them scarce.

Then people realized that blockchains — the shared, decentralized databases that power Bitcoin and other cryptocurrencies — could be used to create unique, uncopyable digital files. And because these files were simply entries on a public database, anyone could verify who owned them, or track them as they changed hands.

That realization prompted the creation of the first NFTs. So, NFTs are basically a way to claim ownership of a digital file; a certificate of authenticity. It is scarcity that gives a lot of objects in the offline world their value, so bringing this quality to the internet through NFTs will unlock a whole new market for scarce digital goods.

Once they’re released, or “minted,” NFTs become a kind of digital collectible as well as a membership card to an exclusive club. Many NFT groups have their own chat rooms on the Discord messaging app, where owners hang out and talk among themselves. Some community NFT projects even organize offline events and parties, which you can only get into by proving that you own one of their NFTs.

“These community NFTs signal a kind of in-group status, and it’s become customary for owners to display them as their Twitter profile picture, marking themselves as a Bored Ape or a Cool Cat, or whatever. And everyone in crypto world knows that NFTs from the most valuable collections sell for millions of dollars apiece, which is why you see celebrities like Jay-Z and Snoop Dogg showing off theirs on Twitter.”

Do NFTs Actually Include Ownership or Usage Rights?

Not necessarily. In many NFT sales, what the buyer gets is simply the unique entry in the blockchain database that identifies them as the owner of the digital good — the token, rather than the thing the token represents.

NFT creators can choose to include additional rights in an NFT sale, but they don’t have to. And there have already been high-profile copyright disputes over NFTs, such as the lawsuit filed by Miramax against Quentin Tarantino last year, after Tarantino announced he would be auctioning off unpublished excerpts from the Pulp Fiction screenplay as NFTs.

NFTs Help Decentralize the Internet and That’s a Good Thing

Right now, most people who make media on the internet (artists, musicians, video game streamers, etc.) put their work on platforms like Spotify, YouTube, Facebook. Those platforms are great for building an audience, but they’re not great for making money. NFTs, proponents argue, make it possible for creators to sell unique digital objects directly to their fans, keeping a much bigger chunk of the revenue for themselves.

Why? Well, per Roose, there are some structural forces that could make it harder for big companies to seize control of the NFT market.

For starters, NFTs are personal property, in a way most other digital goods aren’t. When you upload a video to YouTube, YouTube hosts that video on its servers and effectively makes all of the decisions related to that video — whether it violates community guidelines, whether it’s eligible to run ads, whether it gets recommended by the algorithm, and so on.

But NFTs live in their owners’ crypto wallets, which aren’t chained to any particular platform, and they can use them any way they choose.

There’s also the idea of interoperability. One feature of NFTs is that they can be made interoperable — that is, unlike buying a skin in Fortnite that can only be used inside Fortnite, you can theoretically take NFTs with you from one virtual environment to another. Or if you get mad at OpenSea, you can easily take your NFTs (which live in your crypto wallet, not on OpenSea’s servers) and trade them on a different platform.

That kind of thing doesn’t happen in social media. If you have a YouTube channel, you can’t simply port your subscribers over to TikTok when you feel like it.

The Negatives of NFTs

It’s possible that the people buying NFTs will one day find their investments as valuable as original Picassos and Monets. But the NFT market appears to be cooling off these days. Even NFT mogul Gary Vaynerchuk recently predicted that 98% of NFTs would lose money.

In response there’s now an increasing focus on “utility” — basically, bundling other things with an NFT purchase (like concert tickets, signed memorabilia or early access to future releases) to ensure there’s something of value included, even if the value of the NFT itself goes to zero.

It’s also true that NFT ownership is relatively centralized, in the sense that a small number of people appear to control the majority of high-value NFTs.

The biggest issue however are the scammers.

Criminals follow the money, and NFTs are attracting a lot of investment preying on the naïve and loopholes in the system. Common risks include “rug pulls” — when a crypto developer abruptly abandons a project and runs away with buyers’ money.

“Money laundering and wash trading — a scheme that involves selling something to yourself in order to inflate its perceived value — and other shady practices are almost certainly happening in the NFT market, too.”

This isn’t unique to NFTs — but crypto might just make it easier.

NFT thefts via stolen passwords are increasingly common. Hackers recently stole $1.7 million worth of NFTs from users of OpenSea, the largest NFT trading platform.

Another practice called “whitelisting” invites well-connected (read: rich) folks to buy new NFTs before they’re available to the general public. It’s not illegal, but it’s a form of insider trading in which certain individuals get their NFTs at a discount and can sell them for more once they’re released publicly. A study by Chainalysis found that whitelisted users who resold their NFTs made a profit 75% of the time, versus 20% of the time for non-whitelisted users.

“Ultimately, the big selling point for NFTs isn’t that they make trading digital goods easy and cheap (they don’t), or that they’re permanent and indestructible (the tokens may be, but the digital files they link to typically aren’t), or even that they represent the future of intellectual property (we’ll still need lawyers to hash out copyright disputes). It’s that they allow people to create and trade scarce digital objects — for better or worse.”

DAOs: A Primer

READ MORE: What are DAOs? (The New York Times)

DAO stands for Decentralized Autonomous Organization: a new kind of organizational structure built with blockchain technology. In its most basic form, a DAO is a new way for a group of people to aim a large amount of money and organizing energy at a project — whether it’s buying the United States Constitution, building a new social network, or influencing an election (yes, more on that below).

That’s a big, transformative idea, and it would be wise to pay attention while it’s taking shape.

DAOs are still in the dial-up phase — there aren’t a lot of successes to point to. The recent DAO boom has raised eyebrows among regulators and law enforcement agencies, concerned that some DAOs may simply be fronts for fraud and amount to pyramid selling or Ponzi schemes.

But proponents believe that DAOs are capable of doing a few things better than traditionally run organizations:

In theory, DAOs can be more transparent than traditional organizations, because the group’s important decisions get made “on-chain,” using governance tokens and votes that appear on the permanent blockchain ledger.

DAOs might be more democratic than traditional organizations because every participant can vote on group decisions, not just boards or executives.

“DAOs can help course correct the internet back to its original, idealistic vision: power and money pushed to the edges, networks growing and flourishing together, a level playing field for talent anywhere in the world, a thriving creative middle class, and a generally diverse and interesting place.”

— Chris Dixon

Another potent idea is that DAOs can be more nimble and fast-moving than traditional companies, because they’re often project-specific and you can set them up and wind them down quickly, with significantly less red tape than forming a traditional start-up.

But there’s a lot of skepticism that DAOs can, in fact, make more complex business decisions.

The more evangelic advocates of Web3 believe DAOs can underpin a new form of collective ownership for the next phase of the internet.

DAOs, they argue, could allow us to build a new set of organizations and platforms that are owned by their users, governed in fair and transparent ways, and native to the internet.

“You could have, for example, have a DAO-governed social network, where users could vote to take down certain types of inflammatory posts, or award tokens to people who posted lots of valuable or enlightening content. Or a DAO-ified version of Amazon Web Services that was run like a co-op, with members pitching in to build new features and keep the network running.”

Some people have even predicted that DAOs could become a force in politics, enabling a kind of loose, unregulated crypto PAC that could swarm campaigns and lobbying efforts with money and organizing support.

Venture capitalist and crypto investor Chris Dixon recently argued that DAOs “can help course correct the internet back to its original, idealistic vision: power and money pushed to the edges, networks growing and flourishing together, a level playing field for talent anywhere in the world, a thriving creative middle class, and a generally diverse and interesting place.”

It’s fair to say that DAOs have attracted people for all kinds of reasons: speculative gambling, trend-chasing and utopian true belief among them.

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