Web3 for B2B: Hype Versus Reality

The latest rebranding of cryptocurrency into “Web3” is a concept of what the future web may look like assuming large scale adoption of public blockchain based networks that allow users to communicate without having to worry about centralized data control by incumbent tech companies. In a nutshell, it's touted as an advanced form of the internet, maturing far beyond what we know as the internet today.

With each iteration of the world wide web, new promises emerge. Central to the promise of next-gen Web3, is its use of cryptocurrency in the form of tokens to enable search results, marketplaces, social networking sites and other services to be created with blockchain and enabled by user-owned tokens to allow for developments such as more inclusive payment systems and uncensored content. 

Web3 claims benefits in many business to consumer (B2C) use cases – like remaining in control of individual data, increased digital trust and better data security – but its value in business to business relationships (B2B) is much less certain. While there is reason to believe that smart contracts and distributed ledgers will ultimately become the primary mechanism of B2B transactions, cryptocurrency and public ledger-based approaches are highly problematic.

Weighing Value Propositions 

Web3’s proponents list several potential benefits which can be examined through the lens of how enterprises today are using smart contracts and distributed ledgers. Supposed benefits include: anonymity, decentralized finance, decentralized governance, the use of tokens rather than fiat currency, and the portability of data.

  • The Value of Anonymity
    Web3 trumpets the value of anonymity. However, even in B2C applications, there are many cases where “anonymity is bad by default” a la the dark web and hackers, drug and weapons trafficking, etc. In B2B use cases, companies demand complete transparency rather than anonymity. In fact, they want bank-level KYC (know your customer)/AML (anti-money laundering) measures for every counterparty in place. Imagine telling your auditors that your procurement managers have no idea who is delivering your chemical feedstocks or rental equipment, where the invoices are coming from or whether the correct vendor ever got paid.

    When transacting millions of dollars, businesses must know exactly who that money is going to and ensure solid, auditable financial protections exist against foul play. In enterprise B2B smart contracts, the parties want the exact opposite of anonymity; they require complete transparency and will only do business with known counterparties.

  • Decentralized Finance
    Decentralized Finance (DeFi) advocates argue that moving companies’ financial transactions off of legacy systems and onto public, permissionless Ethereum blockchains will provide increased transparency and allow companies to go around banks (and governments) and transact with non-fiat currency. However, enterprise customers have no need or desire to do this. Companies absolutely want the transparency provided by blockchains, but only between their chosen counterparties and stakeholders, not with the entire internet.

    Additionally, companies require a certain minimum set of features in their financial systems such as finality of payments, certainty around who was paid, the ability to adjust or reverse mistakes, and the ability to audit all transactions. Public DeFi projects don’t currently meet these basic requirements

  • Distributed Governance
    In contrast to Web2’s tyrannical governance with centralized systems reaping both power and profit, Web3 glorifies distributed governance in a move that will reshape global operations and require new principles of ostracism, juxtaposition, accessibility and candor from its stakeholders. A DAO (decentralized autonomous organization) that must vote, maintain the network and distributes governance creates many perverse incentives for the participants. Why would company A let rivals B and C vote on or decide who they can do business with? Enterprises instead require the ability to onboard any chosen counterparty, be it vendor or customer, onto a neutral third-party smart contract network without the interference of peers or rivals.

    Furthermore, companies require the certainty of contract law to operate their businesses. A smart contract network that enables participants to vote on rule changes that affect contract execution on the fly is antithetical to the needs of real business.  Imagine if a DAO for capital projects voted to change the timeline of payment waterfalls while some of its members were mid-project – the financial fallout would be catastrophic to those members - which is why the concept is DOA: dead on arrival.

  • Tokens
    Web3 pumps up the use of non-fiat currency (aka tokens) as a value to run the network, but variable transaction pricing (like changing gas fees) is not something B2B users want. Real business users want their smart contracts to deliver near instant finality of transactions, with predictable fees paid in legal tender. Businesses must pay their external expenses in fiat currency and adding additional steps to convert tokens to currency adds value to no one but the crypto exchanges and token purveyors. In fact, companies already have to deal with hedging various fiat currencies and are not generally interested in adding wildly volatile cryptocurrencies either to their pricing or payment systems.

    Finally, the phenomenal risk of placing millions or billions of dollars worth of tokens in the hands of employees that might make mistakes or even commit fraud with no way to get the tokens back is a risk few legal departments are prepared to sign-off on. As the daily litany of crypto hacks and thefts shows, tokens and their infrastructure are nowhere near the maturity required for enterprises to embrace them.

  • Data Portability
    Another benefit Web3 promoters espouse is that by using a distributed infrastructure, individuals will be able to “own” their data since it is verified and held by a distributed network rather than by a single company such as Google or Facebook. This, however, falls apart quickly under examination. Web3 is an outgrowth of Ethereum, which in general stores very little data on chain and instead relies on various distributed file systems schemes that require tokens to operate. Because it is so expensive to put any data on a public chain, Web3 applications instead store a link to a file. The second something about the server holding that file changes, the link is broken and data is lost.

    Businesses today are rapidly embracing securing data with distributed ledgers, however they require the data to be accessible and auditable for years. That’s why they either host their own private ledgers or rely on third party smart contract networks to store it in company-specific cloud instances. 

Hype Versus Reality

For B2B use cases, reality wins. Web3 projects are taking a huge share of the hype and venture capital investment currently, but are focused on B2C projects of questionable long-term utility. Until basic features around security, transparency, KYC/AML, records retention and transaction management are required, enterprise leaders will be unlikely to risk their assets on token-based solutions. In the meanwhile, adoption of private, permissioned ledgers and industrial smart contracts will continue to grow across industries and geographies and these technologies offer real, tangible value.


This article was authored by William Fox and was originally published at Toolbox Tech

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