From Bricks to Clicks: Understanding the Internet-Native Economy

From Bricks to Clicks: Understanding the Internet-Native Economy

Initially, crypto may appear to be a modest evolution of existing products. Bitcoin might be perceived as a digital equivalent of gold, while DeFi could be seen as traditional financial services integrated into a blockchain. Similarly, crypto-gaming might seem like standard gaming using digital assets, and NFTs may be dismissed as simple JPEG files.

This surface-level perspective often leads people to associate crypto with pump n' dump scams, assuming it lacks genuine substance.

However, a deeper understanding is required to grasp the true significance of these developments.

We are witnessing the emergence of the world's first global internet-native economy. The implications of this transformative shift are far-reaching and call for a more informed appreciation of the profound changes underway.

Viewed from this perspective, it becomes evident that the apparent resemblance between crypto and existing products is misleading. Web3 products serve unique functions in the internet economy that offline counterparts cannot replicate.

Crypto tokens, being the first digitally native asset, are at the core of an entire internet economy that is evolving alongside the traditional economy.

What distinguishes web3 from the previous eras (web1 and web2) is ownership, enabled by tokens, which are the fundamental unit of value in crypto economies.

Tokens serve as internet-native assets, incentivizing collaboration among participants in open networks and eliminating the need for intermediaries or central authorities. The rules governing these networks are embedded into the protocol from the outset, enforced by smart contracts, and cannot be altered without the consensus of the network participants.

This decentralized approach empowers the creation of online protocols, networks, and applications governed by token holders rather than centralized corporations. Information about token ownership is recorded on a public and immutable blockchain, ensuring transparency and security.

There are two main categories of tokens in the internet economy: fungible tokens, which are interchangeable, and non-fungible tokens, which are unique. Each type of token plays a distinct role in facilitating the functioning of web3.

Using tokens on public blockchains distinguishes web3 from previous eras of the internet. These tokens facilitate internet-native property rights, marking a significant milestone as they establish the ownership layer of the internet for the first time.

The 5 blocks of the internet-native economy

As the web3 ecosystem matures, it becomes evident that web3 extends beyond being a mere internet-based currency (crypto). It is now evolving into a comprehensive parallel economy intrinsic to the internet, with the 'internet of money' representing just one vital facet.

These five fundamental components each play critical and interdependent roles in modern economies. Exchanges are essential for facilitating trade, and the division of labor would become impractical without them.

5 blocks of internet-native economy
Traditional Economy v Internet-Native Economy

Institutions enable coordination and cooperation among diverse economic actors, fostering a smoother functioning of the economy. As a medium of exchange, money ensures liquidity for transactions, eliminating the need for cumbersome barter systems. Productive assets are the foundation of goods production, and goods, in turn, are the lifeblood of any economy. The intricate interplay of these elements creates a dynamic and thriving economic landscape.

As it matures, the internet economy organically recreates the same five essential functions to parallel the traditional economy.

1. Fungible tokens

Fungible tokens are the currency of the internet-native economy. For example, ERC-20 tokens are fungible tokens on the Ethereum blockchain. They can be exchanged for other cryptocurrencies at a market rate based on demand for the underlying tokens.

In contrast with fiat currencies, cryptocurrencies are native to the internet, governed by decentralized networks, and secured against counterfeit and arbitrary supply increases by smart contracts on public blockchains.

2. Smart contracts

Smart contracts are the productive assets of web3. They are programmable contracts that automatically execute when preset conditions are met. Unlike other types of automation, smart contracts run on public blockchains. As a result, smart contracts are open-source codes that natively integrate with crypto tokens.

This allows developers to build complex apps across gaming, social, or financial services that are highly interoperable. The productive assets of the traditional economy (e.g., factories and machines) allow for the mass production of physical goods; similarly, smart contracts, which are the productive assets of the internet economy, allow for the mass production of digital goods (i.e., NFTs and fungible tokens).

3. NFTs

NFTs (non-fungible tokens) enable decentralized ownership over digital goods. Before NFTs, the ownership of digital items — like an avatar in Fortnite, for instance— was determined by the web2 company that hosted that specific digital environment.

The company's database keeps track of which user owns what Fortnite item, meaning that a player does not truly own the items in its characters' inventory — if Fortnite decides to erase the item, depreciate its rarity by 1000x, or confiscate it, it can do so at a whim. Moreover, a player cannot take the item he or she "owns" in another Fortnite game.

With NFTs, the ownership of a digital good is enforced by smart contracts on public blockchains, just as with fungible tokens. Nevertheless, unlike fungible tokens, NFTs can be used to tokenize (i.e., enable digital ownership) digital goods like works of art or media.

4. Decentralized Exchanges

Decentralized exchanges like Uniswap (a crypto trading protocol) and OpenSea (a peer-to-peer marketplace for NFTs) are to the web3 economy what the stock market, retail stores, or e-commerce are to the traditional economy. Just as the stock market allows you to buy and sell traditional equities, decentralized exchanges like Uniswap allow you to trade crypto trustlessly without a centralized intermediary like Coinbase or Gemini. Furthermore, just like you can buy physical goods at Walmart or online on Amazon or eBay, you can buy crypto-native digital goods on OpenSea.

5. DAOs

DAOs are decentralized institutions, decentralized versions of traditional companies which allow people who work or participate in the project to own it and make collective decisions using smart contracts. DAOs are a new way to finance projects, govern communities, and share value — native to the internet. Examples include ConstitutionDAO, which raised over $40 million in one of the most successful crowdfunding campaigns ever to secure collective ownership of an original copy of the US Constitution, which ultimately failed.

In the internet-native economy, DAOs play a role similar to what joint-stock corporations once did in the traditional economy. They present a novel approach to organizing people, enabling fractional ownership, joint ventures, pooled capital, product or service production, and collective decision-making.

Just as traditional corporations predominantly own productive assets like factories and produce physical goods such as food and cars in the traditional economy, DAOs are poised to become significant players in the web3 ecosystem. DAOs will likely take charge of owning many productive assets and manufacturing a wide array of digital goods within this evolving digital landscape.

When examining individual building blocks of the internet-native economy in isolation, it is natural to overlook their true value or utility. The significance of each part becomes more apparent when we consider their collective impact within a more extensive system.

By integrating all the components, Web3 enables the creation, ownership, and trading of internet-native products through blockchain technology in unprecedented ways.

This new paradigm expands possibilities that were previously unattainable.

The dawn of the internet-native creator economy

Furthermore, we may witness the emergence of an internet-native creator economy, where creators can generate revenue through NFTs.

Instead of receiving payment to a traditional bank account, the revenue could accumulate in an on-chain treasury contract. This system allows for clear visibility of capital inflows and outflows, and token holders can collectively decide how to allocate the treasury. Funds can be utilized for grant programs, bounties, and investments in other projects.

An on-chain treasury contract can be likened to an open and transparent multiplayer bank account. A prominent example is Uniswap, which boasts a multi-billion dollar treasury used to compensate individuals for building products on the Uniswap platform.

As creators and communities generate revenue through NFTs, the funds can be directed into treasury contracts determining their allocation. These treasury contracts can invest in other projects, support the community's growth, or earn yield by letting the funds remain in place.

NFTs offer various utilities, such as granting access to exclusive online communities (e.g., BAYC), providing licensing opportunities, and enabling participation in real-life events. Creators can generate revenue from different types of NFTs, each serving specific functions in fulfilling these purposes:

  • 1 of 1 NFTs — canonical NFTs represent unique digital artworks like the renowned Beeple piece that fetched a staggering $69 million at auction. The exclusivity of these NFTs means that only one individual can possess them, but the downside is that such scarcity often makes them unattainable for most people due to their high prices.
  • Open edition NFTs — are an emerging model that is gaining traction. These NFTs can be priced at various tiers based on their relative scarcity, similar to a gold (1 of 1) or silver version that becomes more readily available. This versatility allows for the creation of NFTs in various media, including art, content, music, writing, or videos.
  • Tiered subscription NFTs — present an innovative approach where instead of purchasing a traditional subscription, you acquire an NFT that offers displayable and interactive elements, granting access to additional benefits as you collect more subscriptions. These Subscription NFTs will be tradable on global 24/7 marketplaces, providing early backers with the opportunity to participate in the creator's success and share in the potential rewards of their work.
  • Staking rewards — in the Web 2 ecosystem, like those seen in platforms like Spotify, often lack transparency in curating media playlists. In contrast, open protocols offer a more democratic approach, allowing the community to influence content curation through tokens and voting rights. This participatory process creates a real-time leaderboard, showcasing the most favored content, and infuses tokens with value. Moreover, it creates exciting opportunities for content creators, as outstanding work can potentially be rewarded with a share of a prize pool, especially for those who reach the top of the leaderboard.

Other emerging spaces in web3

The potential and prospects for the future are virtually boundless. Like the early days of the previous web era, predicting the success of internet giants like Instagram (Meta's acquisition of a 'photo filter app' was initially met with skepticism) or Snapchat (where ephemerality became a feature, not a limitation) would have been challenging.

Web3 is still nascent, opening the door to endless potential developments. Alongside these exciting possibilities, other near-term market opportunities for the internet-native economy are also taking shape, such as:

  1. DAO tools are designed for specific verticals like musicians, artists, NFT collectors, investors, and writers.
  2. Identity and reputation management tools offer better ways to build and manage one's identity and reputation beyond the traditional long hexadecimal string address.
  3. Mobile wallets with enhanced fiat on-ramps and added social features encompassing discovery, profiles, and comments.
  4. Crypto boot camps and accelerators that teach individuals to become solidity smart contract engineers or community managers for crypto projects, with payment in tokens. This setup offers a universal token accessible to all.
  5. A potential bridge to IoT, such as the 'symbiotic web,' refers to a symbiotic relationship between humans and machines, possibly even utilizing direct brain-machine interfaces, also known as web4.

Indeed, the potential and prospects for the future in the web3 space are limitless. Comparable to the early days of the previous web era, predicting the triumph of internet giants like Instagram or Snapchat would have posed significant challenges due to their novel and groundbreaking concepts.

Challenges to the mass adoption of an internet-native economy

Despite the reasons for optimism surrounding web3's future, several obstacles must be addressed before the internet-native economy can fully thrive. These obstacles include the following:

  • Gas fees/scalability - are currently the most commonly cited obstacles in the Web3 ecosystem. However, promising solutions such as layer two protocols, ETH 2 upgrades, and side chains are actively being developed to address these issues within the next 6 to 24 months. These advancements hold the potential to alleviate the challenges posed by high gas fees and scalability, enabling a more efficient and seamless operation of the internet-native economy.
  • Smart wallet / UX - The transition from traditional currencies like $/€/£/¥ or fiat in a bank account to crypto in a smart wallet can be slow and cumbersome for users. However, as the web3 ecosystem evolves, this experience will improve significantly. Presently, users encountering web3 products may face initial friction during the onboarding process, but with further development and maturation of web3, this barrier will likely diminish over time.
  • There are not enough web3 builders - The scarcity of web3 builders is evident due to the multitude of challenges waiting to be addressed in this domain and the high demand for skilled builders capable of providing practical solutions. However, the situation is expected to ameliorate in the medium term as efforts are made to attract and cultivate more builders to meet the growing demands of the web3 landscape.
  • Lack of legal clarity - the legal clarity surrounding DAOs is currently lacking, as these decentralized autonomous organizations do not operate in a legal vacuum. Legal professionals face the challenge of fitting DAOs into existing legal categories without dedicated rules. The same holds for tax experts who grapple with determining appropriate taxation frameworks. It is essential for all stakeholders, including DAO participants, builders, and governments, to be mindful of this complexity. Each legal jurisdiction is responsible for defining how DAOs are treated from legal and tax perspectives and what specific 'connectors' might trigger the application of relevant laws and regulations.

Despite these obstacles, we have seen a clear inflection point in the level of enthusiasm and public interest in an internet-native economy.

The internet-native economy is, therefore, in its infancy.

Builders and creators have a generational opportunity to impact the next internet era meaningfully.

As for the public — just as the narrative that the early internet or that mobile was a novelty with no real-world usage died once internet adoption scaled to billions of people, so too will this narrative die when adoption for web3 scales to the point that its fundamental nature is clear to a broad base of users.

It is likely only a matter of time.

This post was published by David Bailey — a digital marketing expert and contributor to Internet Native Organization.