A Web 3.0 World Requires New Governance Thinking

Human society is at a pivotal moment of change. By 2025, according to predictions from nearly a decade ago, up to one-third of all human jobs will be replaced by machines. Today, robots are already cheaper than human labor in China, the rapid rise of artificial intelligence (AI) is endangering some white-collar occupations traditionally considered irreplaceable such as doctors and lawyers, and many claim that generative AI tools such as ChatGPT could soon make much knowledge work obsolete. The trend is only accelerating.

The industrial revolution empowered producer-survivors also to become consumers. The current technological revolution may take away their producer role because it is no longer needed. Under the current economic model, people trade their labor and intelligence for goods and services. In a world where machines outperform and outsmart humans, what will be our means of consumption? How will we make a living?

Compared to Web 2.0, which is based on the logic of data access (companies host data and grant users access, which is limited to that platform), the Web 3.0 protocol is centered on the concept of identity – each user has a single identity which all data from different platforms are linked with, and users grant companies data access when they access services. This change gives data ownership back to the user, together with the value that goes with it. Meanwhile, distributed computing and data storage enables data to be stored on public infrastructure rather than corporate servers, removing control from companies.

This changes everything. When users own their data and are entitled to its value, every consumer behavior – information, goods or services – also creates value. In 1980, American futurist Alvin Toffler coined the word “prosumer”, which refers to an individual who both produces and consumes. Web 3.0 gives the term a new connotation – that consumption and production can become the same process. A new social class of prosumers, who make their livelihood simply by being online, is emerging.

The Web 3.0 evolution exacerbates the gap between the worlds of technology and governance. In recent years, the tech domain has been moving at an increasingly rapid pace, shifting realities in ways that people struggle to comprehend. Often problems are not realized until they are already in front of us. On the other hand, the evolvement of global governance has been slow and with little regard for emerging challenges. Furthermore, its institutions largely behave according to old geopolitical logic and lack the proper instruments to tackle effectively these new challenges. With the increasing complexity of issues, the misalignment between the tech reality and the governing framework must be addressed.

A parallel universe

Web 3.0 essentially entails a world split into a dual economy, with both segments running in parallel: the physical reality where classical economic principles still prevail, and a digital reality governed by a completely different set of logic and – not norms – but practices or ways of behavior, many of which have yet to emerge.

New economic structures also lead to new forms of organizations. It requires no registration, leadership or management to operate a Decentralized Autonomous Organization (DAO). Rules and needs are agreed upon via Proof-of-Stake (PoS), and any user can become a stakeholder by providing a service or purchasing stock and can partake in decision-making. DAOs are flourishing today with[AR1] neither regulation nor oversight other than themselves.

Venture DAOs, such as BitDAO and Syndicate, allow for capital pooling to “democratize” investing. Grant DAOs such as Aave Grants direct crowd-sourced funds to support individual or communal causes. Service DAOs such as MetaverseDAO gather people on a professional basis to enable collaboration and service provision. In November 2021, ConstitutionDAO pooled together US$47 million to purchase an original copy of the US Constitution. As of June 2022, BitDAO held US$1.1 billion in its coffers.

The decentralized nature of DAOs rejects the existing institutional governance framework for companies or financial entities. In most countries today, DAOs do not have proper legal status or clearly defined liabilities. They operate in a regulatory no man’s land.

The parallel existence of the physical and digital worlds creates profound complications. Many people will need to survive in the physical reality with the means generated in the digital realm. As the two worlds follow drastically different economic logics, how they can be compatible with each other and how wealth and assets be transferred between them are critical questions.

Re-leveling the geopolitical playing field

Web 3.0 also has a direct impact on the physical world. The rise of cryptocurrency is challenging the monetary sovereignty of states and has inspiring the development of central bank digital currencies (CBDCs), which will transform the global trade and settlement system. China launched a digital renminbi (e-yuan) pilot in 2020, while both the US Federal Reserve and the European Central Bank (ECB) are working on their own versions of CBDCs. Before, banks in different countries needed an intermediary to communicate and execute transactions, the most dominant being the SWIFT financial messaging system. Countries such as the US could control global trade and capital flows by managing the network. CBDCs make this mechanism obsolete. International transactions will no longer require any third party. This would mean that imposing unilateral financial and economic sanctions such as freezing assets or excluding a country from SWIFT would become ineffective.

The uses of stablecoin in cross-border asset trading have multiplied in recent years, and central banks and international institutions such as the International Monetary Fund (IMF) and the Bank for International Settlements (BIS) have taken them into consideration. The SDCs are not grounded on existing currency-issuing logic or international settlement regulations. SDCs could potentially become a common medium of trade and even part of national reserves, which would lead to a major disruption of the international trading system and the current single-currency-dominated financial order.

New governance thinking for the Web 3.0 world

Web 3.0 overturns the world order in many aspects. Not only will it alter the current global economic architecture, credit relations, and the formation of organizations, it will also change the meaning, validity and extent of sovereignty, borders, social contracts, and the roles and jurisdictions of states. It poses an unconventional set of challenges to both global and domestic governance which will have profound social, economic and geopolitical implications. Few existing mechanisms, norms, policies, institutions and governing frameworks are sufficient to address them.

What is needed is a fundamental paradigm shift in governance thinking on several levels to tackle these challenges:

First, rethink the key actors. Traditionally states are the main actors in governance issues. What each state can do, however, will be limited in a decentralized digital world that transcends national borders. Most international organizations today do not typically have jurisdiction over national issues. (The European Union is one example of a supranational entity that has legal authority in sovereign states.) In the Web 3.0 world, digital sovereignty is yet to be defined.

Second, rethink the structure. The current world order rests on the logic of a centralized power hierarchy. This will change in the new decentralized reality. The shapes and forms of processes or solutions for economic and social transactions will be very different from anything that exists today. These will inspire new ideas to tackle the existing problems in the anarchical world without global government in which we live – from climate change to poverty.

Third, rethink the mechanism. With the change in basic logic and forms of structure, so will the operating mechanism have to be recast. Much of our existing governing instruments will prove obsolete and many new ones will be required. They will have to be very different. For example, SDC payments will enable embargoed states to bypass the global interbank clearing system, making economic sanctions invalid. CBDCs and SDCs may cause countries of weak currency credibility to lose monetary sovereignty and diminish the effect of their monetary policy. The current governing institutions and regulatory framework are not compatible with such new realities. The rules must be rewritten.

Fourth, rethink the intellectual framework. Current academic structure segments and fragments the universe of knowledge, creating “experts” in specific disciplines. Already, many governance issues do not so neatly come under one area or silo. Training people to think about systems, about how all the dots connect, will require radical changes in education.

The responsibility, therefore, falls upon the next generation of global leaders and thinkers to hone the intellectual capacity to provide the new thinking and approaches needed. They must dare to be provocative, ask critical questions, not be guided by conventional wisdom, and transcend disciplinary barriers to harness the talent required to face challenges that today are unimaginable.