Bridging the Data Divide in Web3

A Multi-trillion-Dollar Divide

The data divide in web3 represents more than a mere technical hurdle; it's a fundamental barrier to realizing the full economic potential of decentralized technologies. This chasm between on-chain and off-chain data ecosystems is effectively isolating trillions of dollars in value, creating a paradox of data abundance and scarcity that has thus far relegated web3 innovations to a niche technological experiment rather than a global conglomerate of economic protocols and technology ecosystems.

Despite the support from academic and scientific authorities, and even the gradual acceptance of web3 assets like Bitcoin and Ethereum by Wall Street and the SEC, web3 technologies have not been adopted at user growth rates akin to OpenAI's ChatGPT, which set records for user growth in a single month. This raises a critical question: why isn't web3 being adopted at scale yet?

Consider this projection: while the global data economy was valued at $3 trillion in 2017, it is estimated to reach approximately $30 trillion by 2025, aligning with the tenfold increase in global data volume forecasted for the same period; meanwhile, the Total Value Locked (TVL) in DeFi protocols hovers at around $46 billion as of August 2024. This stark disparity isn't merely a reflection of market immaturity; it's a direct consequence of this data divide. The inability to seamlessly integrate real-world financial data with on-chain systems is crippling DeFi's capacity to compete with traditional financial services. This disconnect is effectively wasting (“burning”) multi-trillion dollar opportunities. The traditional financial services market, valued at over $22 trillion, remains largely untapped by DeFi innovations due to this data disconnect. By bridging this data divide, we could unlock hundreds of billions, if not trillions, in value, transforming the global financial landscape and accelerating the adoption of decentralized technologies, but a few fundamental failures remain neglected – and must be addressed.

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Centralization in Web3

Centralization within the web3 ecosystem presents a paradox that undermines the foundational promise of decentralization. This centralization occurs when control and influence are concentrated among a few entities, creating choke points within the technology stack that lead to censorship, security vulnerabilities, and inefficiencies. Despite the decentralized ethos of blockchain, the reliance on centralized infrastructure, such as cloud services like AWS for hosting blockchain nodes, introduces single points of failure that can disrupt entire networks.

How Centralization is Happening

1. Infrastructure Dependence: Many blockchain networks and decentralized applications (dApps) rely on centralized cloud providers for hosting and scalability. This dependence creates vulnerabilities where outages or policy changes by these providers can severely impact the functioning of web3 applications.
2. Oracles and Data Providers: Centralized oracles, which provide essential off-chain data to smart contracts, introduce risks of data manipulation and single points of failure. These oracles can act as gatekeepers, controlling the flow of information and potentially compromising the security and reliability of smart contracts.
3. Liquidity Concentration: In decentralized finance (DeFi), liquidity is often concentrated in a few major platforms or chains, such as Ethereum, which accounts for a significant portion of the Total Value Locked (TVL) in DeFi protocols. This concentration limits capital efficiency and creates barriers for new entrants, echoing the centralized financial systems web3 aims to disrupt.

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The Cost of Data Silos

While blockchain networks process millions of transactions daily, creating a wealth of financial data, this information exists in isolation from the traditional financial world. Credit scores, a cornerstone of modern lending, remain a distant vision in the web3 space. This disconnect isn't merely an inconvenience; it's a massive missed opportunity. The integration of on-chain and off-chain financial data could unlock trillions in value, bridging the gap between the $46 billion locked in DeFi protocols and the $22 trillion traditional financial services market.

But the implications extend far beyond finance. Take the gaming industry, for instance. The promise of true ownership and interoperability in blockchain gaming remains unfulfilled, largely due to the inability to seamlessly integrate off-chain gaming data and assets with on-chain systems. This data divide stifles innovation and limits the potential for creating immersive, interconnected gaming universes.

Most tellingly, the vision of decentralized commerce remains unrealized. Major brands like Nestle, with their vast troves of consumer data and global supply chain information, stand on the sidelines of web3. Without a bridge between their existing data assets and blockchain networks, these brands cannot participate in creating the personalized, decentralized experiences that web3 promises. This absence of brand participation represents a significant loss for the ecosystem, depriving it of the real-world data and consumer relationships that could drive mainstream adoption.

Economic Costs to Web3 Participants and the Global Economy

1. Missed Market Opportunities: The centralization of liquidity and data silos limits the scalability and innovation potential of DeFi and other web3 applications. This results in significant missed opportunities, as the integration of on-chain and off-chain data could unlock trillions in value by bridging the gap between DeFi protocols and the traditional $22 trillion financial services market.
2. Increased Transaction Costs: Centralization leads to inefficiencies, such as high cross-chain bridge fees, which were estimated at $3.5 billion in 2023 alone. These costs represent friction points that deter user adoption and hinder seamless interactions across the decentralized web.
3. Stifled Innovation: The concentration of power and resources in a few entities stifles innovation by creating barriers to entry for smaller projects and developers. This economic concentration can lead to a lack of diverse solutions and slow the overall growth of the web3 ecosystem.
4. Global Economic Impact: The inability to fully realize the potential of web3 technologies due to centralization risks not only impacts web3 participants but also the global economy. The promise of decentralized finance, supply chain transparency, and digital identity systems remains unfulfilled, limiting the transformative impact these technologies could have on global commerce, governance, and societal structures.

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Web3 and Walmart: Innovation Without Integration

Walmart, the largest private employer in the United States, has been a pioneer in integrating blockchain technology into its supply chain operations. The company has partnered with IBM to develop a blockchain-based food traceability system, enhancing transparency and safety by allowing consumers to track the origin and journey of food products. This demonstrates Walmart's proactive approach to leveraging blockchain for specific applications, particularly in food safety and supply chain efficiency. However, despite these advancements, the data divide still creates a paradoxical situation: innovations like these still don't fully integrate with the sophisticated supply chain, DeFi, and data integrity solutions being developed in the broader Ethereum and web3 ecosystem.

Isolated Innovation

While blockchain projects on networks like Optimism and the broader Ethereum ecosystem have developed sophisticated solutions for supply chain management, decentralized finance, and data integrity, these innovations remain largely inaccessible to Walmart's existing systems. For example, Walmart's use of blockchain for food traceability is a significant step forward, but it doesn't fully integrate with broader web3 applications, limiting its potential impact.

Stakeholder Commitment and Collaboration Culture

Integrating blockchain often requires a significant shift in an organization's collaboration culture towards more decentralization, which not all stakeholders may be ready for. Getting buy-in and commitment from all parties in the supply chain to adopt blockchain recordkeeping can be difficult, as Walmart has experienced with onboarding farmers in its food traceability initiative. Overcoming resistance to change is a major hurdle.

Focus on Internal Optimization vs External Integration

Walmart's blockchain efforts have primarily focused on optimizing its own internal supply chain operations and resolving specific pain points like invoice disputes with freight carriers. While this has led to significant efficiency gains, it has not necessarily prioritized integration with the broader blockchain ecosystem. The inward focus can perpetuate the isolation of these blockchain innovations.

Balancing Short-Term Goals and Long-Term Innovation

Companies often struggle to balance short-term financial objectives with long-term investments in transformative innovations like blockchain integration. The pressure to demonstrate immediate ROI can lead to a narrower scope of blockchain projects that can be implemented in isolation, rather than a more comprehensive integration strategy that may take longer to yield results but offers greater potential in the long run.

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Unrealized Potential

Walmart's extensive data on consumer behavior, inventory management, and global supply chains could provide invaluable real-world inputs to web3 applications, enhancing their functionality and relevance. Yet, the data divide prevents this synergy. Consider the potential benefits of integrating Walmart's data with decentralized finance (DeFi) protocols. This could enable more efficient supply chain financing, reduce costs, and improve cash flow management. However, the lack of seamless integration between on-chain and off-chain data hinders this potential.

Data Silos and Lack of Interoperability

1. Walmart's supply chain data currently resides in centralized, siloed systems that were not built to easily integrate with external blockchains
2. Blockchain networks and enterprise systems often lack interoperability, making it difficult to feed off-chain data into on-chain applications

Technical Complexity and Immaturity of Solutions

1. Integrating large-scale enterprise data with blockchain is technically complex, requiring significant investment in new infrastructure and expertise
2. Many of the middleware solutions for connecting off-chain data with blockchains are still immature and not battle-tested at scale

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Maersk-IBM Blockchain Platform: TradeLens

Another example of a company trying to address the data divide in web3 is Maersk, the world's largest container shipping company. Maersk partnered with IBM to develop a blockchain-based platform for tracking shipping containers. This platform, TradeLens, aimed to reduce paperwork, increase efficiency, and improve supply chain transparency. By integrating on-chain data from the blockchain with off-chain data from Maersk's existing systems, the company would have created a more comprehensive and efficient supply chain management system. However, TradeLens ultimately failed.

• In November 2022, IBM and Maersk announced they would be withdrawing TradeLens offerings and discontinuing the platform by the end of Q1 2023. The platform failed to attract enough users to be commercially viable.
• Maersk stated that "the need for full global industry collaboration has not been achieved" and "TradeLens has not reached the level of commercial viability necessary to continue work and meet the financial expectations as an independent business".
• During its operation from 2018-2022, TradeLens had built up a network of over 300 members including carriers, terminals, ports, customs authorities, and more. However, this was not enough to sustain the platform long-term.
• The failure of TradeLens, despite the involvement of major players IBM and Maersk, highlights challenges in driving widespread blockchain adoption and collaboration across the shipping industry.
• While TradeLens showed early potential to digitize and streamline global supply chains using blockchain, the platform ultimately could not overcome barriers to industry-wide participation that was needed for long-term viability and success.

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Emerging Solutions: Cross-chain Protocols

Cross-chain protocols aim to facilitate communication and asset transfer between different blockchain networks, enabling a more interconnected ecosystem. These protocols, such as atomic swaps and sidechains, have the potential to unlock new use cases and liquidity across chains. However, cross-chain protocols face significant inefficiencies that limit their adoption:

• High Transaction Costs: Users spent an estimated $3.5 billion on cross-chain bridge fees in 2023 alone. These high costs deter users from engaging in cross-chain transactions, limiting the potential for interoperability.
• Slow Transaction Times: Average bridge transaction times range from 10-30 minutes, creating friction for users accustomed to near-instant transactions within a single blockchain. These delays hinder the seamless flow of assets and information across chains.
• Opportunity Costs: The inefficiencies in cross-chain protocols likely deter millions of potential transactions, with an estimated opportunity cost of $10-15 billion annually. This represents a significant loss of value and hinders the growth of the blockchain ecosystem.

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Opportunity Costs and Cross-Chain Inefficiencies

The inefficiencies of cross-chain bridges result in significant opportunity costs for the blockchain ecosystem as a whole. It is estimated that these inefficiencies deter millions of potential transactions, with an annual opportunity cost of $10-15 billion. This opportunity cost manifests in several ways:

• Reduced User Adoption: High fees and slow transaction times deter many potential users from engaging with cross-chain applications and services. This limits the overall growth and adoption of the blockchain ecosystem.
• Hindered DeFi Growth: Cross-chain inefficiencies particularly impact the decentralized finance (DeFi) space, where the ability to seamlessly move assets between chains is crucial. High fees and slow transfers limit the capital efficiency and composability of DeFi protocols, stunting the sector's growth.
• Fragmented Liquidity: The friction associated with cross-chain transfers leads to fragmented liquidity across different blockchain networks. This fragmentation reduces overall market efficiency and limits the potential for cross-chain trading and arbitrage opportunities.

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Trillion-Dollar Brands on the Sidelines

To date, major brands like P&G, Nestle, Kraft, etc. – they all have a major presence in over 200 countries, with over 2,000 global brands–, with vast troves of consumer data and global supply chain information, remain largely absent from the web3 ecosystem. Without a bridge between their existing data assets and blockchain networks, these trillion-dollar corporations cannot participate in creating the personalized, decentralized experiences that web3 promises. This absence of brand participation represents a significant loss for the ecosystem, depriving it of the real-world data and consumer relationships that could drive mainstream adoption.

The failure of TradeLens reveals that there is demand for web3 solutions from major enterprises, but points to the inability of web3 to adequately bridge the data divide that isolates itself away from the rest of the global economy. By some estimates, up to 75% of the $2.6-4.4 trillion in value generated by frontier technologies like those in web3 and AI, may accrue to the US and China alone, due to their data dominance: web3 risks exacerbating this imbalance if it cannot find ways to integrate itself with the rest of the global data economy.

The vision of decentralized commerce also remains largely unfulfilled due to this data divide. The integration of on-chain and off-chain data could enable would new economic models, such as decentralized marketplaces that empower creators by allowing them to directly monetize their work without relying on centralized intermediaries – but won’t, unless true bridges that close web3’s data divide are built first.