Eric Hanselman

Welcome to Next In Tech, an S&P Global Market Intelligence podcast where the world of emerging tech lives. I'm your host, Eric Hanselman, the principal research analyst for the 451 Research arm of S&P Global Market Intelligence. And today, we will be discussing Web3, a singularly buzzy topic with our guests Jackie McGuire; and Jordan McKee. Jackie, welcome to the podcast and Jordan, welcome back.

Jacqueline McGuire

Thank you.

Jordan McKee

Thanks, Eric.

Eric Hanselman

So Web3 is many things. And across the analyst team, there's a range of understandings and a set of different technologies that are behind it. It's a whole set of both approaches to new levels of managing finance, new ways of actually conducting transactions and then some technologies as well. I wanted to dig into really sort of what makes up Web3 and maybe let me start off with some of the ideas more broadly and philosophies that are behind it.

And we've talked about decentralized finance and Jordan when you were on last, we were talking about cryptocurrencies and some of the things that are there. And this is really taking this up to an additional level.

Jacqueline McGuire

So yes, I think when we think about Web3, one of the main themes is decentralization. So for those of us brave enough to disclose our age by admitting that we were on the Internet in the '90s, the web was kind of the Wild West. And over the course of the last several decades, what we've seen is increasing consolidation and centralization of services to just a handful of very large companies.

So Web3 is kind of this idea that we can use open source code and artificial intelligence and various other technologies built on top of primarily blockchain to decentralize that and to kind of give the power back to the people. So when we think about things like search, instead of being dominated by Google and Microsoft, we think about that being run in a decentralized fashion using artificial intelligence. And then when it comes to source code, for example, there's been a big push towards open source code for a multitude of different applications.

And then today's topic that I think we're going to focus on is blockchain, and on top of blockchain, decentralized finance. So we're all pretty dependent on, be it the Federal Reserve or a large number of very large banks to conduct transactions. And I think this idea of decentralization has started to really take hold in the last year or 2 when it comes to finance.

Jordan McKee

And Jackie, maybe just to chime in and kind of piggyback on that. I think you're right. I mean to me Web3 is really a reaction to the gatekeepers of the Internet that have emerged. And as you pointed out, as we think about how we engage with the Internet and interface with it, it's largely through platforms like Facebook and Google, which control our data, they control the interface. They control the exchanges that we're having.

And to me, Web3 is really about democratizing the Internet. It's about putting ownership, it's about putting control back into the hands of the users of the Internet and really empowering them to have the interactions that they want in a way that's more tailored to their own individual needs and requirements.

Eric Hanselman

Well, to Jackie's point, being able to do that in ways that don't depend on a lot of the established intermediaries. We're back into how many times have we cycled in technology through disintermediation? We're right back into it, right?

Jacqueline McGuire

Yes. I think one of the interesting things is it takes -- it costs a lot of money to run the Internet. And so we've built this whole kind of business model on the Internet, where I don't think a lot of people realize that if you are using a platform for free, you are not the customer you or the product, most of the time and the product is your information.

So Web3, I think, to me is also about kind of fundamentally changing that business model so that we can look at alternative ways to fund the Internet in general, that don't necessarily always involve selling your personal information.

Eric Hanselman

Well, that's a really great point. And it also speaks to some of the technologies that underpin the ideas of Web3. When you talk about being able to distribute not only -- and decentralize a lot of the actual transactions, the technology itself actually has the ability to now start to break apart what are a lot of those traditional paths. And the core of that is blockchain. And we see blockchain, the cryptocurrencies. We see blockchain in a number of different uses.

But fundamentally, we're getting to a world in which the actual content can be encoded in ways that are viewable through a whole range of different access methods and don't depend on the access infrastructure to be part of that exchange mechanism that we've typically built and Jackie, at your point about the way in which we build and access the Internet today.

Blockchain presents some interesting opportunities. And when we start thinking about Web3, we're really starting to look at some greater sophistication in the way in which we're actually managing what's taking place on the various options for blockchains. And it's probably worth diving a little bit into some of the mechanics that sit underneath this. And some of the important distinctions between what actually exists and how you actually leverage that to build Web3 or to build the technologies that are supporting Web3 ideas.

Most of our listeners are familiar with Bitcoin and cryptocurrency and the idea that you have a transaction that's recorded on the blockchain, which quite a fact is a bunch of different blockchains. But when we start thinking about adapting that use to new and different ways, we start to move beyond the idea of coin specifically and actually start expanding that to be able to record a whole range of different things on blockchain.

We think about non-fungible tokens, again, yet another very buzzy topic, all sorts of different ways in which to actually encode those on blockchains themselves. And Jackie, you want to give us a little bit of background in terms of those approaches, the differences and how they really shake out in terms of how users interact in a decentralized environment.

Jacqueline McGuire

Yes. So I think one of the challenges for the history of humanity has been how do we establish and guarantee trust and whether that be in transactions and identity in a number of different areas, personal relationships. But in this case, with blockchain, we have a number of different terms, which are sometimes used interchangeably when they really shouldn't be. So I think it's kind of very high level to find them.

So on top of blockchain, you can have cryptocurrency. So when we talk about cryptocurrency, we typically talk about coins. So we have individual coins, which are the things you hear about like Bitcoin and Ethereum. And those all typically run on their own blockchain protocol. So there isn't just one "the blockchain", as you alluded to, there's a number of different blockchains.

And these are all kind of these networks of distributed processing that verify transactions by performing calculations and solving kind of problems. And if you need a blockchain 101, how it's actually facilitated is somewhat complex. But at the end of the day, things like Ethereum and Ripple and Bitcoin, those are coins. Then when you get to the next level, you talk about tokens.

Now a token is more specific than a coin. So -- and I think when we talk about tokens, the most common thing we hear is non-fungible tokens. So fungible, for those of you who don't play a lot of crosswords, fungible is something that can be exchanged for something else. So non-fungible inversely means that something is unique to a specific transaction or a set of transactions.

And so non-fungible tokens have been used for a number of different things, be it managing music rights, verifying the authenticity of artwork or even just executing specific transactions. So they don't operate on their own blockchain. They operate on top of an existing blockchain. And Ethereum right now seems to be the most popular for facilitating NFT transactions and tokens.

And then another level of that above the token are smart contracts. So smart contracts are really interesting in that much like you or I could be users on a blockchain, and I could transfer money from my account to your account, a smart contract actually acts like a third user on that blockchain.

So rather than transferring money from my account to your account, I transfer it to a smart contract and that smart contract is preprogrammed with what would typically be contained within a legal contract to only execute and transfer the funds wherever they need to go, when a set of predefined circumstances are met within the smart contract.

So one of the examples we'd like to use is titling. So anything from vehicles to real estate purchases. Right now, we pay fairly high prices to by title insurance to ensure that a title is transferred from one person to another when a sale of an asset occurs. Smart contracts facilitate that with far less human involvement and because everything is predefined ahead of time, there's far less risk of lawsuits or fraud or things like that. So I think that's a very high level...

Eric Hanselman

It's the hope at any rate.

Jacqueline McGuire

Yes, that's the hope, anyway. And obviously, we've seen -- there's a lot of concerns when it comes to blockchain technology because when you don't have a third party facilitating that, you also don't necessarily have a third-party arbitrating disputes. So there's definitely still a lot of kinks to be worked out in that.

But in theory, this is a much less expensive in theory, again, less expensive, less error-prone way to execute transactions. And with NFTs, I think there's been a lot of kind of cynical buzz around them and how can you issue an NFT of a digital picture, if you can just copy and paste.

But there, I think the best thing I can -- I can compare that to as we were talking the other day, I can walk into IKEA, and I can buy a print of a Van Gogh or a Rembrandt that doesn't make the original any less valuable. So with NFTs, I think that's also verifying authenticity of an asset.

Music rights is another good example of ways that, that could be used. So it's this whole universe of issues involving trust, right? And I think that that's kind of -- the concept is with this big decentralized ledger where you can't alter the single source of truth by hacking 1, 2 or 3 servers, we can more easily establish trust.

Eric Hanselman

Well, and you point out what I think is one of the more interesting aspects of this is the evolution of concepts of ownership. And why that's been important and why -- how that starts to adapt, mentioning things like media rights. Here's something where we've had this model that has evolved, if you think about music, it evolved from physical possession of an item to, I think, most would say not particularly optimized means of distributing digital media that's based on some level of cryptographic protections.

But all of these transactions actually take place through a whole set of big established intermediate chunks of infrastructure. You've got distribution houses, you've got streaming services. You've got all these other odds and ends that are in between the end consumer and the actual producer of the content.

And now you've got an opportunity with transactions that are more directly relatable to actually be able to identify when that transaction takes place, that you're actually transacting with the real content producer and start to maybe get a better perspective about the fact that they are actually getting paid. I don't want to dive into a whole discussion about royalty rights and what gets paid to performers today. But this is maybe an angle in which there could be some improvement there. So certainly possibilities.

Jacqueline McGuire

For sure. I mean I worked in music for a while that I don't think people realize how complex that web is to navigate. And interestingly, we see this in a lot of technology where there's a difference between paying for the right, for example, to play a song as a DJ in a club and then paying for the right for what's called a sync license, where if you add video on top of that song, it's a completely different right, handled by a completely different organization or set of organizations.

And the number -- the more complex that has become interestingly, I think the less revenue is captured because when you make it more difficult to go through the proper channels, more people will skirt those channels and things are being lost, and again, the people who pay the price are the actual producers of that content. So the prospect of having a more direct and easy-to-manage way to pay people for the things that are -- whatever their creations are that they're producing is pretty valuable to me.

Eric Hanselman

Well, and that paying for part is the critical underpinning of all of this. And Jordan, you've got some data coming out on expectations about cryptocurrency and attitudes about it. What's that data starting to show?

Jordan McKee

It's an interesting story, Eric. And we took a look at this as part of our disruptive technologies consumer survey earlier this quarter. And the key message is when it comes to cryptocurrency adoption, it's still somewhat early days on the consumer front. What we saw in our research was roughly 1 in 5 respondents overall have participated in the cryptocurrency economy, they've either bought or traded or received cryptocurrencies.

And as you'd expect, a lot of that activity is occurring with younger generation. So if you were to double-click on Gen Z, it's about 1/3 of Gen Z consumers that have engaged in cryptocurrency. It rises to 35% of millennials. But when we went in and double-clicked on the specific activities that these cryptocurrency participants are engaging in, really, the headline is that while most of them are buying cryptocurrencies, a much smaller percentage are selling them an even smaller percentage are using crypto as a payment method.

So most are really treating cryptocurrency as an asset. And I would say one of the key reasons for that is cryptocurrency wallet still have a pretty significant user experience problem. They aren't really designed for the average consumer. And if you think about the typical consumer, this generally isn't somebody that knows how to manage a private key or how to secure their seed phrases. It's very different than a wallet like PayPal or like Google Pay.

If you lose or misplace your private key, right, you're locked out of that wallet, you're locked out of your cryptocurrency for good. There isn't any recourse, any mechanism to gain entry. And in some ways, this has actually created an opportunity for the card networks. And what was interesting to see from Visa is how they've really leaned in towards partnerships here where they've actually established partnerships with somewhere to the tune of about 65 different cryptocurrency exchanges.

And those exchanges actually issue Visa credentials to allow their users to draw on their crypto balance to make purchases so they can go and draw on that bitcoin balance or that theory in balance to go out and purchase goods and services at traditional retailers, and they've enabled something like $2.5 billion in volume in the last quarter with that strategy.

So general message is, yes, cryptocurrency adoption is happening, but still largely treated as an asset, still somewhat early when it comes to actually using this as a payment method and a lot of that, I think, comes down to the user experience and the usability of cryptocurrency today.

Eric Hanselman

Well, wait a minute. I mean we've gone from this ideal of decentralized finance to suddenly Visa is going to be your gateway crypto usage. What's -- are we doomed to be tied to some level of intermediary here?

Jordan McKee

Well, I don't think centralization is always a bad thing. And if you think about sort of the general trend of the web, right, to make it more usable for the average consumer, it tends to become centralized. Google and Facebook have figured out how to centralize the web. This is a trend that we've seen play out for some time. That's not to say that Web3 is going to become centralized. But thinking about an intermediary like a Visa and Mastercard they have a decent value proposition, right?

They set very clear operating rules for all participants in the transaction, the issuing banks and by association, the cardholders on one side and the acquiring banks and by association, the merchants on another side, they are all engaged in this network. And Visa and Mastercard play the role of managing disputes, dictating who is liable for fraud, putting in place significant consumer protections, very clear guidelines around branding and acceptance to drive consumer recognition. So again, not to say that something like this is required in Web3, but it certainly does make commerce in the active exchanging much more user-friendly.

Eric Hanselman

Well, I wonder if it gets back to some of the fundamental issues we've been identifying, which is the maturity of this ecosystem right now. And right now, there are user experience and user skill levels that are required to be able to transact in these marketplaces. But presumably, hopefully, over time, we get to a point at which we're able to actually integrate capabilities that mere mortals can use, exactly you were talking about Internet connectivity. I had a UUCP address back at the time that had all a whole bunch of -- a whole bunch of apostrophes in it or exclamation point, excuse me, that was happening back when I was in elementary school.

But the chance to maybe mature this capability, and more importantly, Jackie, I think getting back to a point that you made early on, which is getting to a point at which we actually start to distribute some of the processing that's necessary because right now, all of the cryptographic work, all of the actual exchange work is done by this relatively small set of intermediaries because it's really complex for an end user to actually have a functioning node on a blockchain. But yet, there may be there are options that we could actually bring together resources that might help with that.

Jacqueline McGuire

Yes. I think one of the things that we had discussed off-line that I think is pretty valuable to consider here is oftentimes people who are unfamiliar with blockchain kind of throw their hands up as soon as you bring it up because they do very closely associated with cryptocurrency, but...

Eric Hanselman

And Jordan's data is actually showing a lot of that.

Jacqueline McGuire

Yes. Yes. Some people are willfully ignorant to it because they see it as a fad, but I mean, we now are seeing central banks pursue the idea of Central Bank Digital Currency because they want to be able to have some type of control over the money supply that is now moving into cryptocurrency.

But to take a step way back, I think a lot of people don't think about what happens to a picture when you upload it to Instagram or Facebook. What happens to a video when you upload it to TikTok. The answer is that those things all go into a data center somewhere or actually multiple data centers for redundancy. And we've built a massive number of data centers over the last decade.

And interestingly, a lot of companies now have also transitioned to process -- storing things in the cloud. And the cloud is data centers. AI and machine learning require a massive amount of computational power that's all done in data centers. And so we can only build so many data centers. That's just the reality of limited land, limited resources.

And when I think about blockchain from a very high level, I think that we have a surplus, we have this supply and demand. So there's a great demand for computational power. And then there is a surplus of computational power in strange places we don't think about. So think about how many old laptops you have sitting around, think about how many old cell phones you have sitting around. All of your TVs are now connected to the Internet and they are "smart devices".

So we have computational power that is some slack in the supply and demand push and pull. And I always liken it to -- when I remember being at South by Southwest when Lyft launched. And people were looking around like, this is insane, who would ever get in a stranger's car. When Airbnb first launched, people were like, this is insane, who would go sleep at a stranger's house.

But the reality is that efficient markets will manifest from an excess supply and excess demand that's going to balance out. And so I kind of like to think of blockchain in that way in that if we can manage to make these transactions easier for these connected devices and the Internet of Things to process, we have the ability to really kind of meet that exponentially increasing computational demand in a pretty smart way.

I mean this kind of -- I don't want to get too far off on a tangent, but then we have to start thinking about things like resource usage, right? So one of the really big things that we need to start thinking about when it comes to blockchain and cryptocurrency transactions, and that is how much energy is required to process these.

And I think that's starting to come up significantly more frequently in the market and that we now have carbon offset coins and things like that, that actually do take into account the energy required to process the transaction. But yes, I mean I think that it's logical that kind of this distributed computational power will eventually be used to compensate for all of the data centers we're not going to be able to build to meet this demand.

Eric Hanselman

Hey, decentralized compute. One more aspect of decentralization.

Jacqueline McGuire

Yes. So I guess instead of the cloud, it becomes the fog. I don't know.

Eric Hanselman

We'll see. Dispersed computing in some former fashion. Well, so how should enterprises be thinking about Web3 concepts and how they work with them? Is this something where there are aspects that the organization should be working on now? Is this primarily making those steps so that you can actually transact in crypto, where should they be headed?

Jacqueline McGuire

I think that's a really good question and for a number of reasons. I remember, I worked at Silicon Valley Bank, and I primarily dealt with how companies handle all of the cash that they have on hand because with venture and start-up -- venture and private equity backed startups, you end up with these big influxes of cash.

But another thing that we also dealt with quite a bit was currency risk and exchange risk. And so a lot of companies now buy hedges so that when they have to move from whatever it may be, Canadian dollars to U.S. dollars, U.S. dollars to yuan, whatever those currencies are, there's inherent risk even just in that and a 1% or 2% fluctuation in exchange rate can have a significant impact on your balance sheet. So goodness when you start thinking about that risk to a company's balance sheet, when you introduce cryptocurrency, where one tweet by someone not to be named.

Eric Hanselman

[ Whichever name ] in a better interest of this podcast.

Jacqueline McGuire

Yes, I'm -- someone -- he who shall not be named, one tweet by any significant influencer in the cryptocurrency market can send any number of coin soaring or falling, that is significant risk to balance sheet. So on the other hand, though, I think a lot of large enterprises are looking at the amount of value that's being created and the amount of adoption that's occurring, especially in younger generations. It's almost like you can't stand back and not investigate this.

So I think what we're going to start seeing is a number of financial derivative instruments that spring up to kind of help hedge this risk. Just not sure what those are going to look like yet. And then, of course, there's another layer of regulatory risk that we haven't even started to look at in that.

If any of that kind of Tweet-related rise or fall that's happened in cryptocurrency had happened within regulated stock exchanges, there would be massive SEC investigations and prosecutions. So we definitely -- there are a lot of risks associated with this technology. I think there's a lot of promise, but as an enterprise, I would be primarily concerned with how do I hedge my balance sheet if I'm going to put any of this on it? And then how do I think about the regulatory risks associated with all of these different things that may be introduced and could cause significant fluctuation in these markets.

Eric Hanselman

Jordan, how do you see that on the payment side, you spent a lot of time working with organizations looking at next generations of payments. Where are they around thinking around crypto?

Jordan McKee

It's interesting. We've actually seen a lot of the risk and a lot of the volatility associated with cryptocurrency acceptance lead to the generation of new startups. So these are startups like RocketFuel and BitPay that effectively are cryptocurrency gateways. And they offer merchants a number of services to limit some of the risk associated with accepting cryptocurrency. So some of these services include covering the volatility of crypto. So if I pay a business.

Eric Hanselman

To Jackie's point, basically managing some of that risk?

Jordan McKee

That's exactly it, right? So if I pay a merchant $100 worth of Bitcoin, whether that Bitcoin rises or falls that merchant will receive $100 worth of Bitcoin and the merchant will pay a small fee for that benefit. Some of these gateways will automatically exchange the cryptocurrency into Fiat, so the merchant never has cryptocurrency on their books, right? They only have the currency that they want to receive, whether that's euro or U.S. dollar or what have you.

So in a lot of ways, this is creating opportunity in the start-up ecosystem within payments to manage a lot of the inherent risk of cryptocurrency, which at the end of the day, that's what the payment business is. It's all about risk management and really easing access to financial services.

Eric Hanselman

Where there is risk, there is opportunity, right?

Jordan McKee

Exactly.

Eric Hanselman

Or should that be the other way around? Well, thank you both. This has been a great discussion. And clearly, there is a lot more that we could dig into. So we're going to have to come back and revisit this, I think, in a number of iterations to really dig into all the bits and pieces. But thank you to you both.

Jordan McKee

Thanks, Eric.

Jacqueline McGuire

Thanks for having me.

Eric Hanselman

And that is it for this episode of Next in Tech. Thanks to our audience for staying with us, and I hope you will join us for our next episode where we're going to be discussing the Metaverse with Ian Hughes. Ian is coming back to talk with us to continue a discussion started in terms of some of those things that we've been looking at. Again, another interesting and buzzy aspect. I hope you'll join us then because there is always something Next in Tech.