Why Web3 Will Eat the World

Note: Data in this section last updated September 12th, 2022

What is Disruption?

The concept of “disruption” is overused and often misunderstood — many writers, consultants and researchers use the word to refer to any situation where a new player enters a market and starts to displace incumbents.

But the academic theory is much more nuanced — disruptive technology isn’t necessarily “better” (in fact, it’s often worse), it’s just so fundamentally different from the status quo that it can’t be replicated by incumbents or competitors. This gives it the ability to gain a foothold in an industry and, as technology improves, gradually eviscerate the market.

For a real-world example, we need to look no further than AT&T — one of the original disruptors.

In the late 1800s, Western Union dominated communications with a huge infrastructure of network cables and a massive consumer base. Although early telephones were largely inferior to the telegraph because their signals only traveled a few miles, the technology was much cheaper for short-distance communication and was therefore rapidly adopted by local businesses.

In a textbook case of disruption theory, Western Union couldn’t react because serving these local businesses would be unprofitable. This gave AT&T the niche they needed — as telephone technology gradually improved they were able to continue to take share from Western Union, eventually rendering the incumbent all but obsolete.

Birth of a Nation

I believe that Web3 represents a classic case of disruptive innovation and has the potential to create digital entities that rival (or even replace) existing nation-states.

Like most disruptors, the space definitely has a ton of problems today – such as high fees, rampant fraud and theft and a relatively poor user experience. But it also offers one advantage that traditional nation-states simply cannot match – true autonomy. A nation driven by Web3 could maximize personal freedom while minimizing the risk of bureaucracy, exploitation and corruption that often arises from centralized entities such as corporations, banks, governments and courts.

While the thought of Web3 forming something akin to a new nation may seem ridiculous at first glance, it’s important to remember that nation-states – at least in the form we know them today – are themselves a relatively recent phenomenon, having existed for only ~200 years.

At their core, they are just one way of organizing people and coordinating their economic output. Prior to the nation-state, we had empires, tribes, feudal kingdoms, etc…. The nation-state ultimately prevailed as the dominant form of governance because people demanded (often by force) more individual sovereignty and personal freedom.

Digital Nations Could be the Next Logical Step in Governance

So is it unrealistic to think that another paradigm shift is possible? After all, we now have the technology to replicate most, if not all of the core features of a nation state. The internet allows for real-time global communication, a sense of shared culture and purpose and instant transactions, and Web3 gives us all the building blocks we need – a native currency, financial system, native goods and laws – for a fully functioning economy.

Perhaps more importantly, a decentralized state seems to offer several benefits over what we have now, including:

• Fast and Efficient: Web3 operates almost entirely via computer programs which automate the execution of all transactions. As such, there’s no need for intermediaries such as bankers, regulators, lawyers, accountants, executives or government bureaucrats – making the system much faster and cheaper

• Sovereign: Web3 users have complete ownership and control of their assets, meaning no government, bank or corporation can seize them

• Borderless: Web3 has no borders. There are no citizenship requirements and anyone with an internet connection can join a digital nation and participate in markets that are open 24 hours a day, 7 days a week and 365 days a year

• Transparent: Every transaction in Web3 is broadcast to the public allowing for real-time monitoring and maximum transparency. In addition, protocols are built with open-source code allowing any user to audit them, greatly reducing the threat of corruption and serving as a safeguard against negligence

• Permanence: As a digital nation, Web3 is immune to traditional methods of coercion – it can’t be bombed or occupied by an enemy army. And because it is hosted on thousands of devices across the world, it’s very resistant to failures and almost impossible to shut down

Personally, I think it’s very possible – if not inevitable – that we will see digital states within our lifetime.

What is the Economic Potential of a Digital Nation?

If digital nations do prove to be superior model of organization, it’s not completely unrealistic to think that they may grow to rival existing, geographically-based ones in terms of economic value. After all, over 5 billion people use the internet and they are spending more and more of their time on it.

Furthermore, this encroachment of the digital world into the “real” one is not without precedent as:

• Digital entertainment makes up 72% of all entertainment revenue

• Online advertising makes up 2/3rds of total advertising

• Global eCommerce sales are approximately 20% of total retail sales and expected to grow to nearly 25% by 2025 (and in some countries, such as China, online sales make up almost half of all purchases)

Indeed, as Web3 matures, it too will likely begin to take share. While how much is still up for debate, the fact that the value of all crypto assets is less than 0.1% (1 / 1,000th) of the financial and physical asset market means that there’s a lot of room to grow!

Crypto Assets Still Make Up a Very Small Percentage of Global Assets

As such, Web3 could grow 10x from here (to $10T) and be roughly equivalent to the top 10 tech stocks…

…it could grow 100x from here (to $100T) and be roughly equivalent to the global stock market…

…and while I’d admit that 1,000x growth is a bit of a stretch ($1,000T) that would put it at roughly 66% of the world’s total financial and physical asset market.

And keep in mind this analysis is for the “crypto space” as a whole. While cryptocurrencies themselves have appreciated significantly, and now account for roughly 1% of the global stock market value, verticals such as DeFi and NFTs are still relatively small, accounting for 0.006% and 0.008% of financial and real assets respectively.

Wherever this thing ends up, it’s important to watch as it has the potential to be both an existential threat to incumbent systems and a road to almost unlimited potential for investors.