By Sandy Kaul, SVP, Digital Assets and Industry Advisory Services, Franklin Templeton

INTRODUCTION

The underlying technologies that enterprises use to build and deliver their goods and services have undergone profound changes over the past 50 years.

The commercialization of computing in the 1960s through to the 1970s allowed for automation of manufacturing process—payrolls, billing, procurement, accounting, inventory management, and factory production lines.

The emergence of personal computers, private networks and then the internet in in the 1980s to mid-2000s led to a transformation of white-collar work outputs driven by commercial off-the-shelf systems including document and content management, office automation networks, email, intranets, and enterprise resource management.

The emergence of distributed processing and cloud-based development platforms by the mid-2000s turned technology into a service and allowed enterprises to pay-as-they-go in terms of infrastructure and application development, supported by a growing set of artificial intelligence tools and big data processing abilities that shifted business delivery to platform-based ecosystems driven by powerful network effects and behavioral algorithms.

Realizing how profoundly each period of technology innovation has changed commerce and the way that businesses deliver their goods and services is crucial as we stand on the verge of a new wave of tech innovation that has the potential to be perhaps the most disruptive yet.

THE SHIFT FROM WEB2 TO WEB3

Web2 is the hallmark of the current age. It represents an important progression from the initial generation of web offerings in the late 1990s and early 2000s. Web2 moved away from static websites that offered a hierarchical set of pages connected by a menu and page links to dynamic platforms able to align their delivery around the individual user and enable participants to arrange their own services, post and engage with content, build their own networks, and participate in communities. Web2 embedded society and the way that we live into the tech-driven networks that we use every day for a growing number of personal and business tasks.

Yet, the ecosystems that drive today’s engagement are commercial enterprises that are constantly weighing the benefits that their network can deliver to their users against the potential profits that they can extract for their organization and shareholders. Creating such profit has led them to utilize their user’s data in ways that raise concerns about privacy, collect substantial payments for the services they facilitate—often sharing only a fraction of such profit with the supplier or creator of the services—and develop algorithms to create platform stickiness that can sometimes result in negative crowd behaviors.

Web3 offers a completely different approach. Web3 creates the potential for commercial protocols that can deliver goods and services in a peer-to-peer manner that can be directly accessed by any user via an internet connection. These protocols use smart contracts to enable transactions—self-executing code that is designed to perform a certain task when a pre-determined trigger is activated. A smart contract can be used to buy, sell, or issue an asset, to borrow or lend money, play a game, participate in an exclusive community, buy virtual or physical land rights, and more.

To enable this new type of peer-to-peer ecosystem, Web3 takes a unique approach to facilitating transactions. In Web2, a payment is made in a fiat currency that is processed by a third-party using government-sponsored banking rails which add cost and time to every interaction. In Web3, payment is made in a native coin, a share of which is awarded to independent verifiers that use consensus mechanisms to validate transactions that get instantly recorded and enacted on a blockchain—a shared ledger that is distributed across all nodes that choose to participate in verification and open to any participant via a blockchain browser.

Participation in Web2 platforms is typically recognized via ratings or loyalty points that carry with them only marginal benefit and no rights. In Web3, participation is recognized as a valuable resource and individuals can both directly buy and earn tokens that provide them an ownership interest in the commercial protocols that they use most frequently, incentivizing them to help govern those networks and vote on matters of strategic and financial importance. Web3 allows the network user to be the network owner, lessening potential conflicts of interest.

IMPLICATIONS FOR THE FUTURE OF ASSET AND WEALTH MANAGEMENT

Smart contracts used to drive engagement in Web3 commercial protocols allow for more than just the execution of a transaction. They can administer copyright-related protections that authorize the use of protected materials and related payments or royalties; they can enforce and transfer property rights; they can be used to establish and exchange digital identity and its related data elements; and they can create opportunities for exclusive access, offer and administer special rights for owners or provide them with unique products or services. Most importantly, a smart contract can be inextricably linked to an asset and embedded into a digital token. The contract moves with the token. If the token is sold, the rights associated with the asset get automatically transferred to the new owner.

This creates the potential for portfolios in the future to deliver not just risk-adjusted returns, but actual utility in the investor’s life. We have already as an industry moved toward greater tailoring of portfolios. This shift to add utility will represent a new dimension for investor returns. It will allow an investor’s portfolio to bring in new types of cash flows—including an ability to manage and earn income from the sale of their own data. It will provide them access to communities, events, and services that resonate with their personal interests and goals. Determining the assets to be selected for an investor’s portfolio and managing the assets earned by the investor through the commercial protocols they participate in most frequently will require a highly personalized collaboration between the asset manager, wealth advisor and client. This portends a degree of stickiness and engagement that can hardly be imagined, but may ultimately result in a more powerful re-imagining of what constitutes active management.

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