Many people are aware of the rise of cryptocurrency and how it is touted as the future of finance and are also wary of the supposed benefits it can bring us. Cryptocurrency is part of a larger online movement called Web3, which aims to revolutionise how the internet works and is used. Currently, the internet operates through centralised systems and servers, which allows for potential exploitation and failure. Web3 aims to change that, by democratising the internet through the decentralisation of protocols, thereby making the internet no longer reliant on a few central systems.
There are many different opinions on whether the approach Web3 is pursuing is the best course of action. Some argue that it is the way of the future, while others see it as unsustainable and an upgraded Ponzi scheme. Regardless, the central issue behind these opinions is that they disagree on who actually ‘owns’ Web3 if it is decentralised.
In this article, we’ll be breaking down how Web3 distributes its systems and what stakeholders are involved that might give us an indication of who actually runs Web3. Keep reading to find out more if you’re interested in all things deep tech and Defi!
The best way we can figure out the inner workings of Web3 is to look at a real example. Looking at Solana’s initial token supply, we can identify the three main stakeholders, that being the development team, investors and the community.
In Solana’s case, we see that the development team holds about 25% of the tokens while investors hold anywhere from 15% to 50%. The rest of the tokens from the initial supply are ‘owned’ by the community for various activities and rewards. These activities can include pre-mined rewards, whereby the community can use their computing power to generate new tokens, to airdrops and yield farming.
This is in stark contrast with previous equity distributions in Web2, where only the development team and investors or funds own all the equity. This is because, in the older Web2 system, the community is unable to provide any form of development towards the project, and is thus locked out of receiving any stake or gain. Web3’s ability to let the community participate means that there is an inherent advantage in passing economic incentives to the community in return. This means that equity is greater shared across society, and not just held by those who already possess the most capital.
How much do Venture Capital Funds and Private Investors benefit from Web3?
Even though Web3 has an inherent share of its equity given to the community, some may have concerns that VCs and large, private investors may still hold enough of the supply to de-facto control and ‘own’ Web3.
Though the VCs do end up getting a large part of the equities available in Web3, it is important to see where their capital comes from. With most VCs, their ownership structure is often composed of nonprofits and schools, like in the case of Sequoia. In these instances, the VC acts mainly as an intermediary or broker that helps these organisations (who are mostly nonprofit and schools and pension or national funds), who are the actual investors, make investments on their behalf. Of course, the VC doesn’t do this for free, and the going rate for most VCs is 20% carried interest on investments, meaning that 80% still goes back to these organisations.
Although it appears that VCs have a lot of ownership of the equity of Web3, they are merely the vehicles that help facilitate investments between many different investors. This is in stark contrast to VCs and asset management firms that operate in the Web2 space, where firms like Blackrock and Vanguard actually own most of the Web2 companies rather than helping to assist investment. Statistically, four companies approximately run and own 70% of the international cloud infrastructure that Web2 is based on.
All of this means that Web3 is, in large part, a lot more decentralised in ownership than Web2, meaning that equity is greater spread across society using the Web3 model.
Will Web3 fall into the same fate as Web2?
As discussed previously, the VCs do exercise a fair amount of control over Web3 despite them not owning a vast majority of the equities and assets in Web3. However, this is because of how investing has been conducted up till this point, and the way investments are being made is changing. Web3’s decentralisation movement has led to the rise of decentralised autonomous organisations or DAOs.
DAOs are focused on investing with the purpose of achieving a defined goal or vision, rather than achieving profit the way VCs do. Similarly, there are other investment projects like dHEDGE, a social asset management protocol. that aim to crowdsource the assets of retail investors together to increase buying power, which will then be used by both an experienced fund manager and algorithms to generate returns. Both of these approaches aim to democratise investing and shift power away from large firms and VCs from taking complete control over Web3 the way they’ve done with Web2.
With that, we’ve reached the end of our article about who Web3 belongs to and why it matters. Though we have covered extensively how Web3 is inherently resistant to ownership by a single entity and promotes increased diversity in equity ownership, it is important to be cognizant of the fact that Web3 is still a new frontier for all of us. With all of its grandeur and big ambitions, it can be easy to be critical of some of its claims and be pessimistic about the good it touts to claim.
It doesn’t help that there have been more than a fair share of scandals, scams and ‘rug pulls’ in the Web3 space that definitely doesn’t inspire confidence. However, we should not let this cynicism blind us to the very real potential that web3 and its projects can provide. If recent trends are anything to go by, Web2 will only become more and more centralised in ownership, and Web 3 is only going to become more democratised as adoption and development increase.