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Web 3’s impact on institutions

Do Institutions Have a Place in Web 3?

The tools of Web 3 could create significant pressure on some institutions and even make others obsolete. What challenges do institutions face in Web 3?

As our earliest human ancestors began to go forth and multiply, human society grew more complex. People started to form societies and alliances. Since human evolution didn’t include mind-reading powers or the ability for one person to be in many places simultaneously, humans came up with proxies for trust, representation, social identity, and control.

Over many millennia, these proxies developed into formal institutions to oversee the provision of goods and services, regulate behavior, and exercise power. Institutions today are the glue for human society, including government, religion, education, finance, and legal systems. Some of them have not changed for decades, if not hundreds of years.

Enter Web 3. As we’ll see in this post, the tools of Web 3 could make many institutions obsolete and create significant pressure on others to change. Is Web 3 the end of institutions? Or do institutions still have a place in a Web 3-powered world? Let’s take a look.

Institutions 1.0 – 2.0

A primary role of institutions is to be (in theory) a trusted source of centralized information about the different roles humans play in society. Governments keep citizen records, schools keep grades, financial systems track the money, legal systems keep the law, and religions keep the faith.

The critical point to remember is that transactions are the lifeblood of institutions.

In what we could think of as Institutions 1.0, the number of transactions one human could scratch out onto clay tablets, papyrus, and paper created the upper limit for record-keeping efficiency. To record more transactions, you had to add more humans.

In the 19th and 20th centuries, technology like typewriters, computer terminals, and scannable codes helped speed up the rate of human input, ushering in the era of Institutions 2.0. The number of transactions and data continued to scale.

What had not changed until recently is the nature of the data container, which remained much the same as when clay tablets were locked up in a stone chamber. No matter the data format, most institutions store data in a centralized location with limited access.

Today’s traditional databases simply allow organizations to create larger data pools under fewer owners. The rise of Web 2.0 user data harvesting by major tech and social platforms is a controversial example.

Global Crisis of Confidence in Institutions

The challenge institutions face is that while they solve some problems, they tend to magnify others. Large institutions can foster bloated bureaucracies where corruption may flourish. Bureaucracies may take on a life of their own, stifling innovation while becoming increasingly entrenched and inefficient.

Institutions fail for various reasons. Incompetence, external pressures, resistance to change, and lack of public support are some of the most common factors. Institutional corruption thrives on a lack of transparency and centralization of power. Where there is centralization of power, there is a temptation to abuse that power.

The internet provides the ability to share information globally. That is one reason we see a crisis of confidence in our traditional institutions. The Edelman Company is a global PR and communications firm publishing a Trust Barometer for 23 years. In the 2023 edition they reported:

“A lack of faith in societal institutions triggered by economic anxiety, disinformation, mass-class divide, and a failure of leadership has brought us to where we are today – deeply and dangerously polarized.”

Enter Web 3.0 and Blockchain

Blockchain is one of the key innovations in Web 3. The founder of Bitcoin developed blockchain technology as a “permissionless” ledger for transactions.

Blockchain does not require an intermediary (like an institution) because of 3 unique qualities – decentralization, transparency, and smart contracts. Below is a general description of why blockchain is disruptive for many institutions. You can also read a deeper dive into blockchain and how it relates to cryptocurrency in this post. 

Decentralization

On a blockchain, data is recorded on a ledger which is decentralized across a network of nodes, each of which keeps a duplicate copy of the ledger. This is why blockchain is sometimes called “distributed ledger technology” (DLT).

When data is added to the blockchain, it creates a transaction that is verified by a consensus mechanism (agreement) among all the nodes. This is one reason it’s virtually impossible to modify the blockchain without notifying the entire network.

Smart Contracts

In the mid-1990s, Nick Sbazo, working with the Ethereum blockchain, invented smart contracts. Smart contracts enable parties to automate agreement execution when predetermined criteria are met. Smart contracts enable automating many transactions that currently require an intermediary, like a bank or title company. Smart contracts also store information about digital assets like tokens and NFTs.

Transparency

There are two broad types of blockchain. An open blockchain is open to the public – anyone can transact on an open blockchain, like Bitcoin or Ethereum. Private blockchains use the same distributed design, but someone (a company or institution) controls access to the blockchain. Walmart’s supply chain blockchain is an example of a private blockchain.

The point to remember is that blockchain has the potential to provide transparency about transactions, but the level of transparency and access depends upon who controls the blockchain.

Institutions 3.0

Blockchain, smart contracts, tokens, and NFTs are tools. Like all tools, people can deploy them in different ways. For instance, a government could use a public blockchain to provide more efficiency and transparency regarding how public funds are deployed, or it could use a restricted access government-controlled blockchain to collect massive amounts of surveillance data from its citizens. Same technology, two very different outcomes.

Entrenched institutions like governments provide paychecks to millions worldwide. The US government alone employs more than 2 million people, making it the largest employer in the country.

Web 3’s impact on institutions
Source: OECD

Institutions also hide significant pockets of corruption. In other words, there are real-world reasons why some institutional stakeholders will resist change. We will likely see many roadblocks on the road to institutional reform.

In democratic societies, politics and public sentiment will dictate how much insider interests water down blockchain’s innate transparency as society integrates blockchain into existing institutions.

Below are some possible scenarios for existing institutions adopting Web 3 tools:

  • Governments: Some governments are exploring using blockchain technology for various purposes, such as voting, land registry, supply chain management, central bank digital currency, and tax reporting and collection.
  • Financial institutions: The financial sector was the first product/market fit for Web 3 applications. Traditional banks and other financial institutions are already exploring blockchain technology and cryptocurrencies. In July 2023, the US Fed is launching its real-time payments system, the FedNow Service. The system will operate 24/7 and provide immediate access to funds.
    The challenge for corporate TradFi (banks and securities firms) is that their profits primarily rely on charging fees for services. Disintermediation via decentralized finance (DeFi) threatens that fee-based business model.
  • Non-profit organizations (NPOs): Web 3 is creating new governance and social impact models, and non-profit organizations could play a role in driving this development. Blockchain can simplify NPO transparency and accountability to donors.
    The Edelman trust barometer referenced above also reported, “Business is the only institution seen as competent and ethical. 53% of respondents globally say that their countries are more divided today than in the past. CEOs are obligated to improve economic optimism and hold divisive forces accountable.”
    Consumers are demanding more social and environmental accountability from businesses. NPOs can leverage blockchain to function as the impact partner for business, simplifying tracking and reporting results.
  • Universities and research institutions: The traditional four-year college / advanced degree model is changing rapidly. Web3 can help universities and research institutions create flexible learning options and more collaborative faculty departments. Blockchain can automate progress markers such as conferring degrees, tracking grant distribution, and automating registrar recordkeeping.
  • Decentralized Autonomous Organizations (DAOs): A DAO is a new type of organization governed by its members and operates entirely on the blockchain. DAOs could replace traditional institutions in some areas, such as governance and decision-making, without intermediaries.

Moving Ahead

Web 3’s impact on the financial sector is an example of major institutional change we are seeing play out in real time. If you are an individual with crypto assets, you are part of the transition!

ZenLedger can help you aggregate transactions across exchanges, compute your capital gain or loss, and auto-fill the IRS forms you need yearly. You can even use our tax loss harvesting tool to identify ways to save throughout the year.

Get started with ZenLedger for free today!

Cryptocurrency businesses and stakeholders should regularly consult with legal and compliance experts in the countries and states where they operate to ensure they comply with all applicable regulations.

The above is for general info purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.

Kala Philo

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