YBB Capital Research Report: Freedom, Utopia, Bearing

Author: Solaire, YBB Capital

Introduction

In 2014, Ethereum co-founder Gavin Wood proposed a concept, starting from the perspective of decentralization and democratization of the existing internet. Is there a new possibility where the services we use are no longer provided and controlled by a single company, but are instead jointly maintained and contributed by global users through blockchain technology? This approach grants equal power to every participant, which he referred to as the next generation of the internet, known as Web3.

In 2021, the blockchain craze reignited the concept of Web3, but at that time, the market's definition of Web3 was very vague, much like the emperor's new clothes; everyone was talking about Web3, but no one knew where it was. As of today in 2023, Web3 is still in its early exploratory stages, but its definition has become clearer, aiming to disrupt the data monopoly of traditional internet giants through the characteristics of blockchain. However, there are still significant divergences in the development categories and forms within the industry.

The true form of Web3 has yet to fully emerge; it may undergo many stages and evolutionary processes. The journey toward a new form of the internet is quite bumpy, and this article discusses, from my subjective perspective based on the current industry situation, what Web3 truly means and how it should develop.

Born from Freedom: Web3

Historically, humanity's pursuit of freedom began with civic rights and political participation in classical times, evolved through the exploration of individual rights and religious freedom during the Enlightenment, and developed into modern liberalism's concepts of free markets and property rights, as well as socialism's ideas of public ownership and classless society. The ideological differences arising from the exploration of freedom in different eras and cultural backgrounds continue to profoundly influence us. Today, in the face of centralization in certain industries or systems, new paths are emerging to explore freedom and generate different ideologies.

Today, traditional internet giants like Google, Facebook, and Amazon largely control personal data as part of their business models. They collect, store, and analyze users' personal information to provide more personalized services and generate revenue through advertising and other commercial activities. However, this control over personal data has raised a series of issues, including privacy, data security, and data ownership.

Against this backdrop, Gavin Wood's vision of the next generation of the internet provided blockchain entrepreneurs with ideas to combine traditional internet with blockchain to create the next generation of the internet, where personal information is free, democratic, and decentralized, co-created and maintained by all participants. This also shifts the relationship from traditional internet companies providing services to users, who in turn provide information to generate profits, to a model where participants co-create and distribute benefits to all participants.

This new internet model is called Web3, and its key features are:

1. Decentralization: Web3 uses blockchain technology and decentralized protocols to eliminate single centralized authorities, achieving more reliable and secure data exchange and storage through distributed networks.
2. User control and data ownership: Web3 grants users direct control over their personal data, allowing them to choose when to share, store, and manage their data, thus protecting personal privacy and data security.
3. Trustlessness and transparency: By utilizing blockchain technology, Web3 enables trustless transactions and contract execution, providing higher transparency and verifiability.
4. Asset rights and exchange: Web3 supports cryptocurrencies and digital assets, allowing users to engage in decentralized value exchange and asset management.

Overall, Web3 aims to establish a more open, free, fair, and democratic internet, enabling individuals to better control their digital identities and data, and achieve more secure, private, and trustworthy online interactions.

The grand vision of Web3 seems no less than Bitcoin's vision of transforming traditional finance, but ironically, in non-financial applications, most Web3 projects currently perform poorly, leading to questions such as whether using blockchain in non-financial applications makes sense, and how we should integrate with the traditional internet industry. Should blockchain continue to emphasize its financial attributes? Quoting Vitalik Buterin's viewpoint in "Where to use a blockchain in non-financial applications?", we should steer clear of blockchain universalism "blockchain everywhere" and also avoid blockchain minimalism "blockchain minimalist." I personally interpret this as questioning whether a project truly necessitates the use of blockchain technology. This article will further explore this perspective through some mainstream use cases in non-financial fields.

The Framework Dilemma of Web3 Applications

The question of whether to pursue freedom or start from practical realities is complex. Blockchain was initially designed to address financial centralization, and its distributed architecture, consensus mechanisms, and data structures inevitably render the entire network highly inefficient. Unlike Web2's centralized server model, blockchain requires transaction verification and ensures that every node in the network is updated before a result can be established. Although later blockchain practitioners have made countless efforts to enhance blockchain's potential—such as establishing Ethereum, building the Ethereum Virtual Machine (EVM) to enable smart contracts to run on it, and achieving application functionality—there are still challenges regarding scalability, with innovations like layer-2 solutions, sidechains, sharding, or changing consensus mechanisms to create new public chains. All public chain practitioners are striving to solve the blockchain trilemma of Decentralization, Security, and Scalability.

I do not deny that these efforts are futile; on the contrary, promoting the scalability of blockchain is indeed meaningful. However, we must acknowledge a fact: we have been developing within the framework established by Satoshi Nakamoto and have not yet reached the level of Web2 applications. The decentralization and security of blockchain always take precedence over scalability. Even if the trilemma is broken, the essence of blockchain architecture remains a giant linear table. This design's significance is to eliminate counterparty risk between peers and reduce reconciliation friction costs. Today, building applications on blockchain for Web3 is akin to constructing an app in Excel—limited and inefficient. Straying from the framework contradicts the very essence of Web3, while adhering to the framework necessitates accepting some unavoidable inefficiencies and complexities.

Currently, the approach to app development projects is to reconstruct a specific type of Web2 app, such as social or video applications, by partially integrating on-chain elements or separating assets and user data to put them on-chain, ultimately resulting in some rudimentary, inefficient, and empty Web3 products.

For most people, the social platforms they need should have sufficient resources for browsing and interaction, rather than being a complicated task platform. The video platforms they desire should feature user-generated content and a rich library of films and shows. Existing Web3 video platforms often prefer to bind users through token models rather than focusing on content. These products operate on the underlying logic of "blockchain everywhere," prioritizing Gavin Wood's vision of Web3 over user value and efficient production. This behavior places ideals above reality.

Throughout the history of human industrial product development, it has always been a process of seeking balance. All products that are either overly advanced or misplaced in their priorities have ended in failure, even if they meet the needs of a small group. Only products with a sufficiently large user base can gain market favor, and with enough funding and strong user demand, industries can develop rapidly. This is a positive relationship and a simple truth.

Currently, application projects are somewhat ambiguous, lacking clear purpose, merely aiming to go on-chain for the sake of going on-chain. I personally believe that at this stage, we should focus more on helping or guiding traditional gaming companies and Web2 companies to go on-chain, transforming the current state of these products through their high-quality services and content. Blockchain can provide them with greater economic benefits and possibilities, while the strength of Web2 will bring more users and developers to advance the construction of Web3 applications, creating a win-win model.

Utopian SSI

Self-Sovereign Identity (SSI) is a concept that advocates for individuals or entities to have complete control and management over their digital identities. Its core idea is that everyone should own their identity just as they own their personal belongings, rather than relying on governments, companies, or any centralized third-party entities to verify or manage their identities.

In this model, individuals can directly own and control their identity data and decide when, how, and with whom to share this data. This data may include various identity information such as name, address, date of birth, passport number, as well as more complex data like educational records, banking records, or medical records.

The concept of self-sovereign identity has come close to realization with the application of blockchain technology. In blockchain, we refer to SSI as Decentralized Identifiers (DIDs), which are a new type of identifier used to provide persistent, verifiable, and decentralized identity verification in the digital space. The main goal of DIDs is to provide entities (such as people, organizations, devices, etc.) with a way to control their online identities without relying on any centralized registration authority.

Technically, a DID is a string with a specific format, usually associated with blockchain or other distributed ledger technologies (DLT). DIDs allow entities to make identity claims directly on the network without needing verification through intermediaries (such as social media platforms or email providers).

A key feature of DIDs is that they are controlled by the entities themselves, rather than being issued by third parties. Entities can create, update, and revoke their own DIDs without going through any centralized registration authority.

DIDs are a crucial tool for realizing the self-sovereign identity (SSI) model, enabling entities to own and control their identities rather than relying on centralized identity providers.

For example, a DID might look like this: "did:example:123456789abcdefghi." In this example, "did" is a fixed identifier element indicating that this is a DID. "Example" is the so-called DID method, which explains how this DID is created and managed on a specific blockchain or DLT. "123456789abcdefghi" is the specific identifier part of the DID, which is unique within the associated blockchain or DLT.

Self-sovereign identity is a core concept in Web3, and it carries a strong utopian connotation. The term "utopia" originates from Greek, combining "ου" (no) and "τόπος" (place), meaning "a place that does not exist." This term first appeared in Thomas More's work "Utopia," describing an ideal, perfect society or community. I believe "utopia" and "DID" are well-matched terms; it is both the hammer that breaks the barrier from Web2 to Web3 and a hammer that does not exist. As mentioned earlier, "the concept of self-sovereign identity has come close to realization with the application of blockchain technology." Why use the term "close to realization"?

Because DIDs, like the blockchain trilemma, also have their own trilemma: "privacy," "decentralization," and "Sybil resistance." For instance, Bitcoin, Ethereum, and many other cryptocurrency systems do not centralize the process of recording user identities, and users do not need to provide any personal information when creating their digital wallet addresses. However, this practice leads to a problem: projects that view these addresses as unique identity identifiers are highly susceptible to Sybil attacks.

To avoid such attacks, some crypto projects require users to undergo additional Know Your Customer (KYC) procedures, such as submitting government-issued identification. While this effectively prevents Sybil attacks, it also means users must sacrifice some privacy, and this verification method does not align with the decentralized spirit of blockchain, as it relies on other non-decentralized identity verification methods.

Proving that a person is unique within a network while ensuring privacy and decentralization is challenging. The mainstream methods currently involve confirming through social graphs or relationship networks, or through Orb's iris scanning. However, both methods have logical issues; for example, social graphs can simply update a new identity by updating the relationship network, while Worldcoin's Orb iris scanning claims to only store the hash data of the iris, but this centralized method cannot guarantee that no malicious actions occur within multiple steps. Reality often carries some dystopian shades, but I believe the application of blockchain technology in DIDs is necessary, and DIDs can be achieved through balancing the trilemma. Perhaps introducing Soulbound Tokens (SBTs) or using local biometric recognition on mobile devices can find a suitable balance among the three aspects.

Web3's Foundation: Decentralized Storage

Currently, the main characteristics of decentralized storage include:

1. Distributed: In decentralized storage systems, data is split into multiple parts and distributed across many different nodes worldwide (usually personal computers), rather than being stored on a single central server.
2. Security: Because data is distributed across multiple nodes, decentralized storage systems are more secure and less susceptible to single-point attacks. Additionally, many decentralized storage systems utilize encryption technology to protect data security.
3. Fault tolerance: Since data is replicated and stored on multiple nodes, even if one node fails, copies on other nodes can still provide data, thereby improving system availability.
4. Transparency: Many decentralized storage systems are based on blockchain technology, meaning all transactions are public and can be viewed by anyone, increasing transparency.
5. Censorship resistance: Due to the distributed nature of data storage and often encryption protection, decentralized storage systems exhibit strong censorship resistance, allowing data to be accessed and retrieved even when faced with attempts by governments or other entities to block or censor it.
6. Persistence: Because data is replicated and stored across many nodes globally, decentralized storage has high persistence; even if some nodes fail or disappear, data can still be retrieved from other nodes.

Decentralized storage is one of the earlier development tracks for non-financial applications of blockchain. As a key container for data in Web3, decentralized storage has always faced two critical pain points: high barriers to entry and weak performance, which somewhat contradicts user value. However, I believe decentralized storage aligns with the necessity of using blockchain technology. Currently, some projects are continuing to elevate its limits, such as ETH Storage and Arweave.

Whether for Web3 apps or the future Metaverse, a sufficiently decentralized container is needed to carry data and the frontend. I remain optimistic about the future of this technology. The current direction is relatively straightforward: continue to increase speed and reduce gas fees, upgrading storage space and the content that can be stored to meet user value. I believe the characteristics of decentralized storage will be more attractive than traditional centralized storage.

Bitcoin

In summary, I have proposed three key non-financial use cases for Web3, which illustrate that the entire concept of Web3 is still in its early stages. They are limited by certain issues and inevitably need to undergo some detours.

When Gavin Wood proposed the concept of the next generation of the internet, he did not consider the inefficiencies of blockchain and its contradiction to business principles, leading to a phenomenon where practitioners build the roof before constructing the house. I share Vitalik Buterin's view that blockchain is not a panacea and should not be used in an overly simplistic manner. Every technological application should consider the current situation and have a clear purpose; a restless mindset will only lead to faster failure. If Web3 were to have a spiritual benchmark, Bitcoin might fit the bill. Every line of code designed by Satoshi Nakamoto, though not complex, has its clear purpose. Bitcoin belongs to no one yet belongs to everyone; its disruption of traditional industries and inspiration for subsequent practitioners continue to profoundly influence us even 15 years later.

"Why buy bitcoin" is YBB's slogan, and the above is my answer. I hope that one day when someone asks me why I am all in on Web3, I will also have my answer. My expectation for it is to disrupt tradition, break monopolies, and be a technology that belongs to the people, unstoppable by any force. I hope all practitioners can strive together.