A primer on Web3 adoption for enterprise

Let’s now turn to consider some of the key business challenges.

Regulatory requirements

The lack of regulatory clarity could make some end users and enterprises wary of adopting Web3, especially at scale. And that hesitation can be compounded by the fact that digital assets are often embedded in the Web3 solutions. In the United States alone, a host of regulatory bodies have weighed in on Web3. They include the Securities and Exchange Commission (SEC),¹¹ Commodities and Futures Trading Commission (CFTC),¹² Financial Crimes Enforcement Network (FinCEN),¹³ Internal Revenue Service (IRS),¹⁴ Federal Trade Commission (FTC),¹⁵ Office of Foreign Assets Control (OFAC),¹⁶ Financial Accounting Standards Board (FASB),¹⁷and Public Company Accounting Oversight Board (PCAOB),¹⁸ as well as many state regulators.

Despite the guidance they have provided, the clarity necessary to promote the wider adoption of Web3 remains elusive. Momentum is nevertheless building. Beyond the 2022 Executive Order referenced above, the recent issuance of crypto regulations by the European Union’s Markets in Crypto Assets Regulation (MiCA)¹⁹ may prompt US regulators to provide further and more definitive guidance. Given current conditions, one course for US enterprises could be to undertake small projects to learn and test systems and processes so they can be ready to scale up when there is greater regulatory clarity.

Lack of skilled talent

The absence of skilled talent is another challenge to Web3 adoption. According to data released by Block Research,²⁰ between 2019 and 2020, the number of blockchain-related jobs increased by 351%—from 18,200 to 82,000. That was followed by an increase of 118% between 2020 and 2021. The demand for blockchain capabilities and talent is undeniable. In response, some universities²¹ and colleges have introduced curricula tailored to blockchain. Enterprises are increasingly upskilling employees through blockchain training. According to Deloitte’s 2023 Global Human Capital Trends Report,²² “74% of respondents believe that the development of new skills and capabilities is strategically important in their organization.” Bearing in mind the ongoing talent shortage and the pace of digital disruption, enterprises should consider investing in the training and development of in-house talent. That could provide them with a competitive advantage in deriving current and future value from Web3 applications.

Changes in operations and revenue models

As Deloitte’s 2023 Global Human Capital Trends Report²³ indicates, the workplace of the future relies on a “co-create relationship” in which the organization and employees work to achieve mutual benefits. That differs substantially from the traditional model whereby the corporation owns the assets and workers have limited autonomy. Web3 is helping to alter the traditional model. Its decentralized nature is important to creating new solutions—for example, governance tools that provide employees with a larger say in the direction of the enterprise; or feedback solutions that capitalize on the collective wisdom of the group in helping to formulate and meet a business’s goals.

Web3 can also serve to introduce innovative revenue models. They can include raising funds through token offerings, selling “utility bearing” digital assets such as non-fungible tokens (NFTs),²⁴ earning revenue through secondary sales of NFTs, real-time revenue sharing through smart contracts and programmable funds, and/or the lending and borrowing of “on-chain” digital assets. These revenue models could disrupt current frameworks. But they can also present the enterprise with additional and ever-evolving tax and accounting considerations. All that may give enterprises reason to pause.

Furthermore, these new models may be affecting the way enterprises attract, cultivate, and engage their customers. Thanks to the open nature of Web3 applications, customers can have increased control over their data, and the switching cost for customers to a company providing those blockchain-based protections is often very low.

For their part, to attract new customers and reward loyal ones, enterprises should provide token incentives, find ways of partnering with other projects to maximize network effects, and commit to continuous improvement to keep providing value to their customers. In the same vein, Web3 can allow businesses to build relationship-based business models with customers whereby customers can have a voice, as well as a share of revenue in projects, by owning tokens. And while enabling customers to benefit from some type of revenue sharing and/or ownership through tokens may represent compelling new business opportunities, these arrangements could also carry several implications—notably in terms of tax, compliance with financial crime laws, and possibly securities law.

Over the past several years, blockchain, the technology supporting Web3, has benefitted from significant technological advancements²⁵ and enhancements thanks to innovation and evolutionary change, as well as greater adoption. As enterprises entertain the idea of adopting Web3, they should evaluate blockchain technologies in terms of both their business and technical requirements. Here are some of those considerations:

Scalability

Blockchains have the ability to process many transactions per second but currently process at a rate slower than most conventional systems. This reality has been a deterrent for enterprises dealing with large numbers of users and large volumes of transactions. Several scalability solutions, such as Layer 2s (see more in the section “Interoperability”) and higher performant blockchains, have been developed as potential solutions. Some of these still face challenges such as the potential of future congestion, reduced decentralization, or limited adoption by developers and projects.

Nevertheless, these solutions are rapidly improving and making scalable Web3 enterprise performance a reality. In this context, enterprises should carefully evaluate various protocols/platforms to identify the one that could best meet their current and future scaling needs.

Security

There are several potential security concerns facing Web3 technology. Applications deployed on blockchains as “smart contracts” are “immutable” once implemented. That can make vulnerabilities discovered in usage more difficult to patch or update, and potentially easier to exploit. Furthermore, depending on the access rights of the network, all data and transactions may be visible to the entire network. In the case of poorly designed data models or in the event of data leaks, users’ privacy and data might be exposed to malicious actors. It may be no surprise then that the Web3 ecosystem has been subjected to numerous phishing attacks²⁶ as well as asset thefts, many receiving media coverage. Fortunately, there are secure coding practices²⁷ for blockchain that can help mitigate many of these risks. As enterprises develop their blockchain-based applications, they should adopt robust security measures. That could include the engagement of independent parties to conduct smart contract audits that can minimize the chances of security incidents.

Interoperability

Currently, multiple Layer 1 and Layer 2 solutions are vying to be the market leader²⁸ in the blockchain space. Each chain provides a value proposition and has its advantages for certain kinds of projects.²⁹ One of the stumbling blocks to the broader adoption of blockchain is that different platforms often use distinct protocols and standards, making interaction and communication between them uncertain. For instance, it may well be impossible for users to transfer assets and data between different blockchain platforms. This risk can be mitigated, however, through the development of cross-chain bridges and protocols.³⁰ Still, new protocols could require greater experimentation so they can mature and evolve to provide the necessary utility with minimal security concerns. The choice of technology may depend on whether the enterprise will need cross-chain interactions on a regular basis or not.

User experience

A complex user experience³¹ has affected the speed of Web3’s adoption. Currently, the on-ramp to Web3 is not a one-click solution for users. For example, there is a need for a simple and intuitive Web3 wallet that minimizes the complexities of private key management and network selection, as well as asset management. Moreover, these wallets and applications should furnish simple and clear explanations of the on-chain transactions to which users are attesting (signing). That is especially needed since Web3 applications operate on the native mobile platforms. For Web3 to attain widespread adoption, the user experience should be seamless.

Regulatory compliance

While tax and accounting may not be top of mind in the design phase, these considerations can be important to assessing the feasibility of the use case and developing compliant and scalable solutions. For example, the reporting of certain information, in addition to indirect tax laws, may require that users identify themselves and their location. If a decentralized platform is not designed to collect such information, it may subsequently face noncompliance issues as well as incremental challenges to collecting the data afterward. Contracts executed without due consideration of financial reporting may also result in unexpected accounting conclusions. Enterprises should consider incorporating internal controls during the development phase rather than attempting to bolt them on later when a business is already operating.

As discussed earlier, one challenge facing blockchain is its lack of maturity in processing a large volume of transactions. At times, that results in delayed transaction processing and fees. Fortunately, there are various solutions and workarounds available to help address these shortcomings. They include:

• Technical improvements in Layer 1 blockchains, such as novel consensus mechanisms, sharding (which separates large data sets into smaller, faster, more easily managed parts), etc. that can enable higher transaction throughput on the Layer 1 chain. (“Throughput” refers to the rate/speed at which a blockchain processes transactions, often expressed in transactions per second, or TPS.)
• High-performant Layer 1s that prioritize the handling of higher transaction volumes while relinquishing on decentralization to some measure to facilitate that goal.
• Scaling solutions, such as sidechains and Layer 2s, that are built on top of current Layer 1 chains and that bundle transactions to enable higher transaction volumes.

Each of these solutions provides different value and requires certain trade-offs. But these protocols are mature enough for many projects that require speed and scale.

The blockchain ecosystem has seemed to learn from security breaches. There is evidence that industry-wide standards and security frameworks are emerging. Companies such as OpenZeppelin, Waves, CertiK and others provide standardized smart contracts for implementing common logic. Various technology foundations³² that developed Layer 1 blockchains have released industry-accepted guidelines, such as those for Ethereum Request for Comment (ERC), to help standardize on-chain applications. Others have created “bug bounty” programs to encourage researchers and white hat hackers to find and report critical bugs. Finally, multiple firms that audit smart contracts are helping enterprises vet their code before deploying their contracts on the chain. These efforts have progressively reduced security risks, and they help advance the adoption of Web3.

Web3 developer tools have made immense strides in short order. Various infrastructure providers, including all the major cloud providers, now offer blockchain infrastructure as a service. That can help make it easier for enterprises to spin up their Web3 applications. In addition, there are now several libraries, frameworks, and SDKs available³³ to speed up the development of both Web3 applications and blockchain use cases—everything from financial applications and the adoption of digital assets to enterprise transformation through blockchains. Tools like code editors and integrated development environments have have matured and become easier to use. These advancements are contributing to a pathway for enterprises to adopt Web3.

Consumers and institutions in many countries can now enjoy the ability to buy, sell, and hold cryptocurrencies. For their part, traditional financial firms are further exploring investment in digital assets thanks to improved institutional-grade custody solutions. Beyond that, Web3 has helped to improve traditional financial applications by providing access to retail investors and helping them to use digital assets to reduce settlement times and simplify global and cross-border transactions. Finally, decentralized finance (DeFi),³⁴ which facilitates peer-to-peer financial transactions, has emerged as an alternative to traditional financial industry functions, especially among under- and unbanked populations.

The adoption of digital assets, such as NFTs and other types of crypto tokens, can open new avenues to the tokenized economy. Traditional assets like art, real estate, precious metals, and even intellectual property can be tokenized and traded more readily and cheaply than the more expensive underlying assets. This can enable token creators and their owners to extend market reach by introducing features such as fractional ownership. Although tokenization precedes blockchain as a concept, blockchain technology can improve the security and transparency of ownership while also allowing for the integration of additional features into the tokens through smart contracts. That potentially includes automatic access to specific services or communities. Digital assets are also providing enterprises with incentives to attract new customers through such programs as customized rewards while also engaging with current customers through loyalty and ticketing programs powered by NFTs.

A promising use of blockchain technology takes the form of enterprise blockchains. A type of private blockchain, it operates in an ecosystem in which participants are independent actors and no one participant controls the network. Such an ecosystem provides controlled access to the network while retaining vital dimensions such as security, immutability, and the absence of any implicit trust structures. Enterprise blockchains can help resolve otherwise challenging problems such as data governance, while making it easier to identify and neutralize malicious actors who compromise data; and they can prevent parties from modifying records while creating the requisite visibility for transactions among participants. For example, enterprise blockchain solutions can help streamline supply chains by enhancing security and trust, can facilitate the protection of personal data (such as medical records), and can help governments, among others, better protect and more effectively use citizen data.

Blockchain may not be the solution to every problem. That’s why it can be essential to determine whether the use case under consideration can truly benefit from a reliance on blockchain.

The first step is to establish whether the use case aligns with the benefits of blockchain. Consider these questions:

• Are multiple “non-trusting parties” likely to be involved?
• Does the data need to be accessible to multiple parties?
• Is there a need for accountability and auditability?

If the answers to these questions are “yes,” then blockchain may be a good fit.

Second, it’s important to evaluate whether alternate technologies can better serve the company’s use case. For instance, if the use case requires the central processing of very high volumes of data at high speeds, then more conventional databases may well be a better fit.

Finally, an enterprise should ascertain how and whether the use of blockchain aligns with their overarching business goals. That includes whether the blockchain solution can be deployed in time to meet business needs; whether it, and the skills associated with it, are transferrable to other Web3/blockchain use cases in the future; what outcome or ROI can justify the investment; and finally, are the business’s leaders aware of, and ready to address, the potential legal, reporting, and security risks with Web3 adoption?

Before proceeding with any decision, it’s important that the enterprise evaluates its current skills and technology stack to determine whether it’s feasible to implement blockchain-based solutions. To enable the use case to perform most effectively, the company should have either a team skilled in blockchain development or the ability to buy from/work with other enterprises that can provide those services.

So, which blockchain protocol is the best fit? There are a multitude of Layer 1s, Layer 2s, scaling solutions, and enterprise solutions to pick from; each offers different capabilities and advantages. These next sections can help your company evaluate these protocols.

Scalability

Blockchains typically have different transaction throughputs and fees. Some protocols have improved scalability thanks to technical improvements or enhancements to the consensus mechanisms. For example, enterprise blockchains generally use a very “lightweight” consensus mechanism since members are “admitted” to the ecosystem and are subject to the authentication of their identity before accessing the system. These lightweight consensus mechanisms can process many more transactions per second since they don’t have to contend with time-consuming algorithms to ensure that the transaction is valid and written to the blockchain. When choosing a protocol, it may be essential to understand the throughput capacity and the anticipated user load of the intended application or solution.

Ecosystem adoption

Consider which protocol or platform other entities have adopted and look for any similarities between your company’s project and theirs in terms of applications, solutions, volume, etc. This approach can help for two reasons. One, frequency of adoption can serve as a measure of the general trust that the market and users place in that protocol. Second, it may allow your company’s intended application to integrate with other applications in the ecosystem thanks to the “composability” of blockchain applications (i.e., a protocol or platform is “composable” when its resources can serve as building blocks and/or be programmed into other applications).

Developer participation

Sustained developer activity on a protocol/platform is a generally good indicator of the health of a given ecosystem as well as gauge of future user adoption and technical advancements. Your company should evaluate the projects under development on the protocol, the teams building these projects, and the level of developer activity to analyze the developer mindshare that the protocol commands. (Mindshare means the level of awareness and usage of a protocol among software developers.) Large community support and mindshare often indicate that top technical talent sees merit in a protocol.

Integration readiness

Some protocols are more mature and equipped to integrate with legacy systems than others. That includes the ability to integrate with traditional financial rails such as credit cards/automated clearing house (ACH) networks, align with robust data analytics solutions, and support integration with communication channels such as email, text, etc. Your company should assess issues of integration readiness as it evaluates different protocols since blockchain solutions rarely stand in isolation from enterprise systems.