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The idea of handing over personal information and access to our browsing habits to access online services is something we’ve gotten so used to that we don’t even question it anymore. However, the advent of Web3 ushers in a new paradigm of data ownership, where we own our personal data and control who accesses it and how it is used. But what does this mean for the vast global economy that exists around data on Web2?
How big is the data economy?
Quantifying the extent of the global data economy is a gigantic task. Statista estimates that the value of the data economy in the UK and EU was around US$440 billion in 2020 and estimates that it could grow to as much as US$1 trillion within the next three years. But how do you define the boundaries of the data economy? Statista’s definition is the value derived from “the creation, collection, storage, processing, distribution, analysis, elaboration, delivery and exploitation of data made possible by digital technologies”.
But as has been pointed out in the past, every company is a data company as the Web2 model evolved around the idea of intermediate platforms that really only exist to collect data. It’s a model that has become ubiquitous, taking over entire industries and damaging almost everywhere.
Marketplaces like Amazon and Etsy have taken over e-commerce, much to the chagrin of small sellers who see their profits eaten away by ever-rising fees. Uber has taken over passenger transportation and now grocery delivery services, increasing the cost of a takeout meal by more than 40% in some cases.
Either way, it’s the same pattern – the platform moves in, creates a virtual monopoly, and then starts increasing fees, knowing that people are paying for the convenience and sellers have no choice because they’re not in can compete on a large scale. But these companies not only spin the fees, they also make a roaring trade in the vast amounts of user data they collect.
Rethink data protection
Given how this model has evolved, the idea of privacy seems a bit ridiculous. When we enter our details into an online form, we generally have no idea where that data is going to end up and eagerly click through terms and conditions or cookie banners to access what we need. The laws that supposedly exist to protect our personal information are woefully fragile in the face of the tidal wave of companies clamoring for our data.
Web3 introduces a different way of handling data between parties that could effectively address the challenges of the current Web2 model. Web3 applications are based on blockchains and enable peer-to-peer interactions between individuals, witnessed and verified by a decentralized network of nodes. On the one hand, blockchain transactions are transparent and visible to everyone. On the other hand, blockchain allows a certain level of pseudonymity since names are not linked to a wallet address.
However, technology has evolved significantly in recent years to allow for tradeoffs that provide greater levels of transactional privacy. Conversely, off-chain measures can be taken to ensure that companies can perform compliance checks such as know-your-customer if required.
But the peer-to-peer capabilities of blockchain and Web3 applications represent a fundamental game changer for the Web2 data model. For example, the DeFi ecosystem allows users to start earning tokenized rewards by lending their crypto. They can provide liquidity to DeFi applications, generate fees and pay them out as rewards to users, enabling various currency swaps. Transactions are visible on the blockchain and can be analyzed in aggregate. Limited user data may still be involved as most blockchains are public ledgers. The on-chain data is open and available to everyone.
A thriving ecosystem
DeFi is just one discipline, but more will become apparent as Web3 and now the metaverse begin to embed and take shape. In a Metaverse app like Decentraland, you can already connect your wallet and buy digital goods in the form of NFTs without going through a sign-up process.
Innovators are already building decentralized marketplaces that allow users to trade a whole range of digital and physical goods, while developments like zero-knowledge proofs offer enhanced privacy while allowing for an additional layer of verification.
For example, zero-knowledge proof could allow a seller to verify that someone is over the age of 18 without the buyer having to provide the seller with a copy of their identification documents for safekeeping.
A long way ahead
While Web3 offers the opportunity to transform and streamline the Web2 data model, there is still work to be done before it offers a viable alternative. Investments in Web3 startups surged 2,400% to $500 million in 2021, pointing to a bright future, but the space is unfortunately still in its infancy. Since there is no centralized authority responsible for a blockchain, there is no one to be held accountable if something goes wrong.
In the current landscape, it is very important for buyers to pay attention. Users are tasked with keeping their wallet credentials safe, or anything inside — cryptocurrencies, NFTs, or personal information — can be stolen. Therefore, hackers and scammers congregate wherever Web3 users congregate, leaving platforms like Twitter, Telegram, and Discord ripe for scams. Even if a user manages to keep their wallet safe, there is still a risk that the underlying applications can be hacked, or that the project itself is a carpet of founders tossing and executing tokens on the market.
User experience is another issue. Ethereum remains the most popular public blockchain platform, but the fees for executing a transaction are high, making it unsuitable for low-value transactions. User interfaces also lag behind their centralized counterparts, as it’s still relatively common for blockchain developers to focus on the backend of an application, while the frontend can be an afterthought.
Many of these problems are teething problems, however, and shouldn’t hide the fact that Web3 represents the first real opportunity to tackle the many-headed hydra of Web2 data mode. If Web3 innovators can create a secure environment with an optimal balance between privacy and security, it will establish a new paradigm where users and data collectors both benefit from data, but where users increasingly control the experience.
Michiel Van Roey is co-founder and general counsel of Profila.
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