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McKinsey: Beyond the Hype of Web3. Potential and Challenges

McKinsey & Company | Anutosh Banerjee, Robert Byrne, Ian De Bode, and Matt Higginson | Sep 26, 2022

Web3 potential - McKinsey:  Beyond the Hype of Web3.  Potential and ChallengesUndeniable Potential of Web3

  • The core distinctive feature of Web3 is the decentralization of business models. Web3, the next iteration, potentially upends that power structure with a shift back to users. Open standards and protocols could make their return.
  • The intent is that control is no longer centralized in large platforms and aggregators, but rather is widely distributed through “permissionless” decentralized blockchains and smart contracts.
  • Governance is meant to take place in the community rather than behind closed doors.
  • Revenues can be given back to creators and users with some incentives to finance user acquisition and growth.
  • Three fundamentals:
    • Blockchain that stores all data on asset ownership and the history of conducted transactions.
      • The “blocks” in blockchain are individual segments of data that are interlinked or chained together. As new data are added to the network, a new block is created and attached permanently to the chain. All nodes are then updated to reflect the change.
      • The lack of central data storage is a critical differentiator from traditional databases which means that the system is not subject to a single point of failure or a single point of control or censorship. User data are no longer fragmented across platforms, nor are they proprietary or for sale.

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  • Smart Contracts that represent application logic and can execute specific tasks independently.
    • Software programs stored on the blockchain that automatically execute a verified transaction based on predefined and agreed parameters. They require careful preparation and setup because they are often deployed as immutable programs, but once in place, they can be executed rapidly and cost-efficiently without the need for intermediaries and their extractive revenues.
    • These applications are often governed by a decentralized autonomous organization (DAO), a form of collective governance by users of the application who own governance tokens of the smart contract.
  • Digital assets that can represent anything of value and engage with smart contracts to become “programmable.”
    • Digital assets are intangible digital items with ownership rights. As such, they are supposed to represent verifiable and ownable digital values—although in many geographies, the legal framework surrounding these digital assets and their ownership rights is not sufficiently clear yet.
    • 5 types of digital assets:
      • native tokens, which are the monetary incentives used to compensate nodes for maintaining and updating the respective blockchain
      • stablecoins, which are supposed to represent cash on the blockchain and are pegged to fiat currencies like the US dollar, or central bank digital currencies (CBDCs), which are regulated by a central bank 2
      • governance tokens, which are tokens that represent voting rights on the functional parameters of smart contracts
      • non-fungible tokens (NFTs), which are a unique, indivisible digital asset with provable ownership
      • digital assets that represent claims on real-world assets such as commodities, real estate, or intellectual property, and are “tokenized” into divisible digital assets on the blockchain

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Web3 effectively enables traditional revenue streams to accrue to the users of a platform, enhancing the user value proposition relative to their Web2 equivalents.

Risks and Challenges Still to be Addressed

  • Web3 is now spreading into many other sectors, including the social sector and carbon markets, art, real estate, gaming, and more. It is also a building block for an interoperable metaverse, an entirely virtual parallel universe under construction that is attracting massive investment from consumer companies and venture capitalists, among others
  • The chief challenge is regulatory scrutiny and outlooks. Regulators in many countries are looking to issue new guidance for Web3 that balances the risks and the innovative potential, but the picture remains unsettled. For now, there is a lack of clarity—and jurisdictional consistency—about classifying these assets, services, and governance models.

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  • Governance remains a work in progress, and the integrity of decentralized autonomous organizations—the collective community mechanisms that are supposed to oversee this new decentralized world—varies widely and is often not yet rock-solid, although it is evolving.
  • User experience in this new ecosystem is not yet ready for mainstream adoption. Interfaces are often poorly designed, and the underlying technology is still too cumbersome for users to have a seamless experience.
  • Security is also a concern: until users have peace of mind, they will likely not adopt this technology en masse. Fraud continues to be a risk, with a variety of “rug pulls,” Ponzi schemes, and social-engineering scams dogging the nascent sector, while know-your-customer and anti–money laundering procedures are often lacking.
  • Data privacy in the current system is arguably lacking, and transaction cost is also a factor, making some of the technology protocols too expensive to use at present.

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