This article first appeared in Digital Edge, The Edge Malaysia Weekly on December 26, 2022 - January 1, 2023

Web3 promises a new decentralised internet built on blockchain, which puts users in control of their content and data. So far, its usefulness has been limited to building the foundations of non-fungible tokens (NFTs) and Decentralised Finance (DeFi). Although still in the infancy stage, this technology is expected to continue growing as usage of innovative solutions such as blockchain wallets and smart contracts increases.

“We are already seeing a healthy adoption of Web3 in Malaysia, in the areas of non-fungible tokens (NFTs) and decentralised finance, but there is still room for growth. In the coming year, we will see more companies exploring opportunities in the Web3 space. We can accelerate this process with better education and support within the local ecosystem,” says Joshua Foo, regional director of Asean and Central Asia of Chainalysis.

In a report by Chainalysis titled “The 2022 Global Cryptocurrency Index”, Malaysia ranked 29th globally and eighth in Central and Southern Asia and Oceania for cryptocurrency value received from July 2021 to July 2022.

The global Web3 landscape has seen steady development in the last couple of years. There are various use cases generating significant economic activity that could serve businesses in Malaysia. For instance, NFT collectors have spent billions to own art they love. In the Web3 gaming space, users are monetising their leisure time with play-to-earn games. This has been one of the key drivers for the crypto adoption scene in countries like Vietnam and the Philippines.

News reports state MyEG Services Bhd (MyEG) has entered into a memorandum of understanding (MoU) with Mimos Technology Solutions Sdn Bhd. The MoU aims to bring next-generation Web3 applications to the government and commercial sectors.

MyEG has also signed a four-year agreement for international extension of China’s blockchain network with the Institute of Industrial Internet and Internet of Things of the China Academy of Information and Communications Technology (CAICT), according to The Edge Markets.

The agreement will enable cross-border adoption and utilisation of the latest Decentralised Identifiers or DIDs to create the Web3 of China and beyond.

As such, investors are pouring money into Web3 as it garners attention. CB Insights states that Web3 has raised US$13 billion in equity funding in the first three quarters of 2022. The Edge Markets reports that Web3 fintechs have had their investments doubling year on year. “More than 80% of venture capitalists surveyed expect to increase their focus on healthtech, software as a service (SaaS) and Web3 while enthusiasm for edtech cools,” states the news report.

Blockchain is the technology that underpins Web3. However, as things stand, not everything has to be on blockchain as companies venture into Web3, observes Chan Kin Meng, founder and CEO of Gameconomy.

If businesses insist on being hardcore Web3 companies with blockchain’s current capabilities, user experience will be lacking. The main purpose of blockchain as a whole is proof of ownership.

“The infrastructure itself is not ready for scalability because some of them are slow while others are expensive. To strike a balance between needing to pay for gas fees and concerns with speed, we use the core credibility of blockchain, which is proof of ownership [that will be on chain] and for the rest, we are using off chain,” says Chan. “We need to understand that currently, blockchain isn’t very fast. Also, for every transaction, you will need to pay for gas. I think that is the reality of the current situation and we need to compromise. We cannot say we are hardcore Web3, everything must be on chain.”

There is a need to focus on the fundamentals and the utilities presented by the technology. NFTs, for one, provide companies with a new and exciting way to engage with their customers. Businesses should address the use cases that non-crypto natives care about.

“One key way that we are seeing non-crypto brands and companies engage with Web3 is through the launch of NFTs. NFTs grew because they attracted people who, while not owning any cryptocurrency, cared about art and entertainment. Web3 operators should follow that example and build protocols that address broader market needs,” says Foo.

“Normally, you can see that a lot of the younger generation are more open and involved in blockchain and cryptocurrency. You sort of understand that the audience is relatively younger or they are wealthy, because when you have money, you invest in cryptocurrency,” adds Chan.

That provides brands a target audience, and brands can come up with a loyalty programme using NFTs to entice this particular set of consumers. This gives a sense of exclusivity.

However, NFT sales are currently seeing a downturn. Chan describes this as “winter”, with a lot of bad news in the space. Forbes reported a drop of 97% over nine months in NFT trading volumes.

“In the face of an economic slowdown, Forrester predicts a winter season for the metaverse and NFTs that will chill the market. In the medium term, this won’t be a bad development: It will allow technology vendors and enterprises alike to do the hard work of building the infrastructure and use cases that move the market forward more gradually,” states the news report.

“Previously, it was a lot of hype. Now, it’s a lot more about the fundamentals. What kind of utility do you want to provide for the holder of the NFT or cryptocurrency? So, things shift from hype to fundamentals, which is healthy in the long run,” echoes Chan.

For instance, brands will deviate from NFTs being a cool thing to own towards loyalty programmes. “Brands that launched consumer-facing NFTs once expected to look cool and innovative. Those days are gone. Consumers lack interest in NFT stunts or art. Brands will move on. The next frontier for NFTs lies in customer loyalty programmes,” states the report.

This is exemplified by Starbucks, which uses NFTs to enable exclusive customer experiences. According to the Starbucks website, the company will create a series of branded NFT collections. Ownership of the NFTs provides access to community membership with exclusive experience and perks.

“We believe NFTs have broad potential to create an expanded, shared-ownership model for loyalty, the offering of unique experiences, community building, storytelling and customer engagement,” states the Starbucks website.

There are various ways in which Web3 will change the ecosystem and the current status quo. Web3 can foster direct relationships between vendors and customers by eliminating the need for middlemen. Furthermore, Web3 brings decentralisation to the business ecosystem by enabling community ownership of companies. For instance, decentralised autonomous organisations allow anyone who buys in to guide the direction of the company through an asynchronous voting process.

“One day in the near future, all companies will become crypto companies, complete with a ‘connect wallet’ button on their homepages. And crypto is how they’ll get there. As more people enter the world of crypto, they’ll need a seamless way to use their funds for everyday financial activity without converting back into fiat currency,” says Foo.

“Web3 won’t just streamline existing financial activity, though. It’ll also unlock new use cases in finance that currently aren’t possible due to the illiquidity of traditional assets. Imagine a world where you could sell fractional ownership of physical assets like real estate or vehicles.

“Sellers would be able to access capital they can’t today, while buyers could invest in those assets more affordably via partial ownership.”

Web3 caters primarily to users who already have cryptocurrency. Although anyone can purchase crypto and start trading, it can present a challenge for new users to understand and adapt to. For Web3 to maintain the momentum it has created, it will be important to onboard new users into cryptocurrency. This will drive more people to adopt Web3 tools.

Businesses should also strive to create better user experiences for cryptocurrency and Web3 tools. “At this moment, the interfaces of many DeFi protocols can be complex and daunting to newbies. Making it more seamless, accessible and intuitive could support the onboarding,” says Foo.

“DeFi transaction volume grew more than 10 times from 2020 to 2021, reaching US$5.8 trillion. No other sector embodies transparency more than DeFi, where all transactions are visible and the code behind protocols is in the open for all to see.”

The emergence of Web3 comes alongside a terrain of sophisticated cyberattacks. Based on the Software Secured website, smart contracts contain security vulnerabilities that can be exploited by hackers. It would be close to impossible to track down and prosecute these criminals due to the pseudonymous nature of Web3 applications.

Consequently, cybersecurity solutions have entered the conversation. One of them is Merkle Science’s Compass. Based on the Daily Markup, Compass is a behaviour-based transaction monitoring and risk solution. It will provide an extra layer of protection against threats like hacks and scams.

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