We are on the verge of a new phase of the web, or so the story goes. Its proponents have labeled it web3. While last week’s implosion of systemically important crypto exchange FTX showed that the tech industry is far from realizing that vision in terms of execution, the concept of web3 has been a fundamental driver for startups and venture capital over the past few years.
If we are truly in the midst of a third wave, it’s important to understand the history of the web, how it evolved and how this new phase — if it is actually one — fits in this chronology. Is the so-called web3 the next logical step for the internet, one that will have a lasting effect on its evolution or something else altogether?
It’s clear that one of the primary motivations for identifying a new phase of the web is the incredible wealth creation that accompanied the first two phases. Venture capitalists, entrepreneurs and operators in web3 continuously repeat the adage that web3’s current state resembles the early days of the internet. It follows logically, then, that early adopters and builders in the web3 space believe there is likely to be a significant financial reward for being one of the first in, just as there was with the earliest days of the web itself.
As we wade through the history of the internet (yes, really!), consider how the web developed and grew, and whether you see a similar dynamic at play in crypto right now. In this tumultuous moment for the web3 vision, it’s worth examining whether the FTX collapse shows this new wave was a house of cards all along or whether the string of bankruptcies among web3 companies this year was simply a setback in the adoption of the inevitable future of the internet.
The first wave
In 1989, while working at CERN, a young scientist named Tim Berners-Lee invented the notion of the web, primarily as a way to share and link scholarly works, publishing them using a language called HTML. He very likely had no sense at the time that it would be a world-changing idea, but once he did, he continued to try and keep the web thriving, open and free.
In the nascent days of the early ’90s, the web was a lot less populated than it is now, and it was mostly text-based. Few realized it at that moment, but it was a pivotal time; simplicity and opportunity were about to collide, creating a wave of innovation. But first, the web required some basic tooling to push it along.
The first central piece that catapulted us toward what we know as the web today came in 1993, when Marc Andreessen and his colleagues released the first version of the Mosaic web browser. There wasn’t much to browse at that point, but it wouldn’t be long before some wild-eyed entrepreneurs saw the potential of the technology. (Andreessen, of course, is now best known as the co-founder of venture capital firm Andreessen Horowitz, which has been a key player in the cast of characters funding and advocating for web3. Do keep that in mind.)
Another key moment came with the rise of search engines, which helped internet users navigate the growing number of websites. Names like Excite, Lycos and AltaVista all came (and eventually went). Yahoo made its debut in 1994 (TechCrunch, it should be noted, is part of a recently reconstituted Yahoo). In its initial guise, it was essentially a directory of topics with a list of websites associated with each one rather than a search tool in the way we think about it today. There were so few websites in 1994 that you could basically find them by topic in a list.
By 1995, the first commercial pioneers took a stab at an online business with the launch of Amazon, eBay and Craigslist, among others. In those early days, sites were built with basic HTML, meaning they were generally nothing fancy, just static websites, more like online brochures with links. The inclusion of pictures was kind of a big deal due to bandwidth limitations at the time. Programmability developed throughout the ’90s.
Google came along in 1998 with a new search model. Using keywords and algorithms to sift through the growing number of websites to find the right one, Google rendered a directory format like Yahoo’s obsolete. The company also made the internet more immediate: You could find seemingly anything, instantly.
Throughout the ’90s, many people and companies simply tried to understand what the web was, much less whether it was something they should pay attention to (much like web3 right now). It was, however, a simpler time; HTML wasn’t all that complicated as languages go, which meant that taking part in the internet was pretty easy.
The first phase of the web advanced through the ’90s into the dot-com boom and the introduction of professionalization. That meant that, if you needed a website, you usually went to a web design expert rather than DIY-ing it. By the end of that decade, it was clear that being on the web was important, even if the C-suite didn’t yet completely understand why.
Over time, web designers became more like programmers, and sites became much more complex, requiring someone who could actually code. This era began with the first release of JavaScript in 1995 and the now-defunct Adobe Flash in 1996. The former gave web developers the ability to code more complex functionality than simple HTML allowed, and the latter permitted designers to add multimedia and animated elements to websites, greatly increasing the design possibilities beyond basic HTML tags.
As those tools and others began to proliferate, they enabled richer websites. As a consequence, the internet also moved from something fairly trivial to something much more complex that required a deeper understanding of coding and graphics. And this transformation pushed website building from the realm of hobbyists to something that required an expert.
The rise of Web 2.0
That expert class is what really defined the difference between Web 1.0 and what came next. In this new phase, a fresh generation of startups developed around what became known as Web 2.0, a term credited to Tim O’Reilly to define this new class of easy-to-use web tools. Now, mere mortals, regardless of their expertise, could create content for websites. At the same time, perhaps paradoxically, websites also became more complex in terms of what they could do and how they appeared.
The second phase of the web ushered in the earliest social media startups with companies like MySpace and Friendster. Other content creation tools like wikis came along, the most famous being Wikipedia, which launched in 2001. Blogging platforms like LiveJournal and Blogger debuted in the late 1990s. By 2003, WordPress and Typepad joined the mix. Flickr came along in 2004 for sharing photos online, followed by YouTube a year later for sharing videos. Facebook launched in 2004 and grew increasingly powerful in subsequent years.
Web 2.0 tools also made building websites easy (or at least easier) again. In theory, anyone could get WordPress or Typepad and build a site of sorts, but in practice, people often still hired professionals to do it. While Web 1.0 professionalization didn’t disappear — we still needed (and continue to need) experts to build and maintain professional websites — we no longer required them to add content to those sites. Web 2.0 tools put that capability in everyone’s hands, and social media enabled us to share that content with the world.
Today, with Instagram, YouTube, TikTok and other social sites, that capability has evolved; just about anyone can have an online presence with little or no technical skill, which in turn gave rise to an influencer class.
It’s impossible to have this discussion, especially the evolution of Web 2.0, without talking about the rise of the smartphone, which put a computer and a camera in everyone’s pocket. It changed everything, allowing us to create and share, without a thought, (maybe too much) content.
One other key thing that propelled Web 2.0 forward was that broadband began to take hold, giving increasing numbers of people access to more bandwidth. This enabled web designers to create more sophisticated designs with richer graphical elements that weren’t possible in the first phase of the web because of bandwidth constraints, pushing those particulars back into the hands of professional designers.
Web 2.0 innovation was soon followed by consolidation as first-generation players like Yahoo and Google, now growing bigger and richer, started scooping up some of the smaller Web 2.0 startups. Consequently, Yahoo bought Flickr, social bookmarking site De.lic.ous and Tumblr, among others, as it expanded into a variety of services; Google bought Blogger and YouTube; and Facebook snapped up Instagram. As more Web 2.0 companies were acquired, it marked the end of that era’s innovation phase and a new shift to centralization as large web-scale companies attempted to impose their will on the internet at large.
It’s worth noting that the early pioneers like Jeff Bezos (Amazon), Jerry Yang and David Filo (Yahoo), Marc Andreessen and Jim Clark (Netscape), and Pierre Omidyar (eBay) all became billionaires as a result of getting in early. Other early pioneers like Google founders Larry Page and Sergey Brin also saw incredible wealth, as did Web 2.0 founders, with Facebook’s Mark Zuckerberg leading the way.
Conversely, Berners-Lee never made a penny off of his invention and spent his career working to maintain a free and open web, not one controlled by the largest technology entities of the moment.
Along the way, wild stock market swings were sometimes driven by the web, as with the dot-com bust in 1999. The 2008 crash had a different root cause, but it had a big negative impact on tech stock prices for some time, something that’s easy to forget now (although the current market may be reminding us). It also had a chilling impact on startup investment, even though you wouldn’t know it today.
What’s next?
The first two phases of the web followed a similar arc: They started off with a green field and a simple set of tools for building companies. Pioneers spotted an early wave of innovation and built companies by getting in first. Over time, those companies grew so big and rich that we then saw a period of consolidation and an end of innovation.
It’s not hard to see why people tried to get in early on what they speculated could be a new phase. As we saw with the first parts of the web, being early paid off big time. The rise of web3 has been fueled, in large part, by similar thinking and the hope that early adopters can take advantage of the innovation cycle by getting in as soon as possible.
But with the downfall of FTX, we may already be seeing the web3 wave crash, perhaps prematurely in comparison to the previous two cycles. Investors have poured capital into companies like FTX and Solana over the last several years, hoping to ride the wave of web3 investing to the spectacular wealth created in the first two waves.
But despite the capital infusion into web3 companies over the past couple of years, and contrary to what crypto VCs will have you believe, it’s not “early days” anymore. The fact that we are now seeing major crypto companies fail, over a decade after bitcoin was created, means the web3 trend has not matured into being useful or profitable, unlike the technology behind the prior two waves of the internet.
One of the biggest VCs behind the crypto funding boom is Marc Andreessen’s firm, Andreessen Horowitz, which has been heavily involved in investing in web3 companies over the last several years, presumably because he saw the value of being an early pioneer in the first phase of the web — though it’s worth noting that a16z did not invest in FTX. Sequoia, on the other hand, was an early investor in FTX, helping it achieve a $32 billion valuation. It is now being widely ridiculed for its lack of foresight and due diligence.
Still, it’s easy to see why these VCs thought they could follow the same playbook — it’s just that the end of this era may well have come at them much faster than they had expected (or there was never anything there but smoke and mirrors). While the common refrain from investors after the Terra fiasco earlier this year seemed to be that a bear market is a great time to build and an insistence that they were in web3 for the long term, the fall of FTX was considerably more material. These very same investors were notably silent as they licked their wounds last week.
This time around, the negative impacts of centralization seem to have been particularly acute — not only are exchanges like FTX inherently centralized because of their corporate governance structure, but centralized entities in web3 all seem to be intertwined. The collapses of Celsius, Terra and other crypto projects all stemmed, in some way, from the downfall of the overleveraged crypto hedge fund 3AC.
Now we’re seeing how one major ecosystem player, FTX, can bring other firms tumbling down with it, from crypto financial firm Galaxy Digital, which had over $76 million of exposure to the exchange, to crypto lender BlockFi, which paused withdrawals recently while it unravels the extent of the damage FTX’s fall wreaked on its own business, to former rising star Solana, which has seen its token price approximately cut in half over the past month, in part due to its close ties to FTX.
Aside from the obvious financial fallout of the past week, it’s also important to look at what got us here in the first place. To do this, we need to place what we call web3 in proper historical context and judge whether its rise truly marked an innovation cycle or is just a simple repackaging of existing tech to make it more palatable to an investor ecosystem hungry for the next big thing.
Importantly, this phase of the web lacks many of the most important qualities of the first phases that led to new companies and wealth creation. In fact, its main components — cryptocurrency and blockchain — are neither new nor particularly simple; the technologies in the first two phases of the web were. Developer interest in blockchain has remained somewhat resilient throughout this year, but the tooling in this space is still so nascent and the technology so complex that enthusiasm alone may not be enough to sustain innovation.
Much ink will be spilled analyzing whether FTX’s fall marks the end of web3, but an equally pertinent question to address is whether web3 was truly a legitimate new phase of the internet in the first place. Some proponents will argue that this week’s fiasco is the death knell for centralized companies operating in crypto, but that truly decentralized entities like Uniswap can continue to usher in the next era of the internet. Even if that’s true, decentralized exchanges still face the prospect of a regulatory crackdown that could very well kill the vision of web3 once and for all.
Understanding what came before and how those phases evolved can help us make sense of the aftermath of the FTX drama and judge whether the rise of web3 has marked a true wave of innovation, leading to a new way of thinking about the web, or just an old one with some fancy window-dressing propped up by a whole lot of cash.
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