In a first of its kind series for the region, Aquanow, a leading digital asset platform, and DFDF, Dubai’s evergreen VC firm focused on investing in the future of finance, will be publishing joint insights on the Web3 and digital assets space. Our hope with this series is to provide investors, peers and the market at large with a better understanding of the regional landscape and broader industry.
A Prolonged Transition to Web3
While Generative AI and Large Language Models (LLMs) dominate the headlines today, blockchains maintain their gradual pace of disruption — a phenomenon often called Web3.
Consider the earliest consumer internet (Web1), primarily serving as a global information repository, which featured static, read-only web pages and limited interactivity. Web2 introduced dynamic, user-generated content and interactive platforms, giving rise to social media, e-commerce, and a more connected web experience. Now, Web3 is pushing the boundaries further by leveraging blockchain technology to create a decentralized internet. This new era emphasizes digital ownership, enhanced privacy, and trustless transactions, transforming the way we interact online and empowering users with more control over their data and online identities.
However, this transition cannot be instantaneous; it requires patience, iteration, and adaptation. The length of time necessary and the significance of obstacles to be surmounted will result in a hybrid phase we’re calling Web2.5. This article explores why we believe that this period will be prolonged, as well as how the changes that are ahead pose unique challenges for enterprises.
Complex Transition
Integrating digital assets and blockchains represents a monumental shift that involves rethinking and restructuring everything from infrastructure to organizational culture. Enterprises have long built their operations around centralized models, relying on hierarchical decision-making, centralized data storage, and consolidated control mechanisms. Because of this legacy way of working, transitioning these systems is not a straightforward process. Rather, it’s akin to trying to change the wheels on a moving car!
Existing workflows, software architectures, and security protocols must be overhauled to accommodate new frameworks like blockchain. This shift requires deep integration of new technologies into existing systems without disrupting ongoing operations, making it a complex and likely slow process. Enterprises must also develop new skill sets within their workforce, as managing these advanced systems demands a different approach compared to traditional IT environments.
Given the degree of change required, incumbents would be well-served to partner with Web3 native firms that have already developed deep knowledge of the new systems. Such a collaborative approach would allow for the preservation of the enterprises’ cultures of success while leveraging a Web3-native perspective.
While many enterprises are cautious in adopting blockchain technology, some front-runners are leading the way with innovative applications. IBM has been a pioneer with its IBM Blockchain platform, enabling businesses to create more transparent and efficient supply chains. For instance, IBM has collaborated with Walmart to enhance food traceability, significantly reducing the time required to trace produce origins from seven days to just 2.2 seconds. In the financial sector, JPMorgan Chase has developed Onyx, a blockchain platform that facilitates secure and efficient transactions, along with launching the JPM Coin for instantaneous payments. Maersk in partnership with IBM, has introduced TradeLens, a blockchain-based shipping solution that has onboarded over 150 members, revolutionizing global trade logistics. These trailblazers highlight the transformative potential of blockchain, setting benchmarks for other enterprises to follow.
Regulatory Challenges
The environment for the oversight of new systems is still catching up, and enterprises must navigate this evolving landscape. Traditional regulatory frameworks were designed with centralized models in mind, and applying these rules to emerging systems often results in legal and compliance ambiguities. Enterprises must ensure compliance with current regulations while anticipating future changes, requiring significant effort and resources.
Regulatory bodies are also grappling with understanding and crafting appropriate guidelines for new systems like blockchain, cryptocurrencies, and decentralized finance (DeFi). This uncertainty adds a layer of complexity to the transition, as businesses must remain agile and adaptable to changing compliance requirements. Navigating this regulatory minefield is a key reason why the shift to Web3 is more gradual, as enterprises cautiously move forward to avoid potential legal pitfalls. The pace of change in oversight models will significantly impact the transition to Web3 and is an important part of our thesis for why Web2.5 will be a prolonged period of transition.
The Virtual Assets Regulatory Authority (VARA), the Abu Dhabi Global Market (ADGM) and the Dubai Financial Services Authority (DFSA) in the UAE are at the forefront of global blockchain regulation, setting high standards for the industry. All three regulatory bodies regulate the blockchain industry by implementing robust frameworks that encompass licensing, consumer/ investor protection, and AML (anti-money laundering) measures. They are leading globally by fostering innovation while ensuring regulatory compliance, attracting blockchain businesses through clear legal frameworks and supportive environments conducive to growth and development in the digital assets sector. Together, these bodies are positioning the UAE as a leading hub for blockchain technology, balancing innovation with stringent regulatory oversight.
Technological Maturity
Emerging blockchain solutions are still maturing, and enterprises are understandably cautious. While blockchain promises enhanced security, transparency, and efficiency, it also comes with challenges related to scalability, interoperability, and energy consumption.
Many blockchain networks are still in the experimental stage, and their long-term viability and performance under large-scale enterprise use are yet to be fully proven. However, recent advancements in consensus mechanisms like proof-of-stake (PoS) to address energy efficiency concerns, and the rise of enterprise-grade blockchain platforms offering enhanced privacy features and smart contract capabilities, as well as reduced transaction cost through layer 2 chains (L2), signal a promising trajectory. For now it seems like most enterprises are still waiting for these solutions to become more robust and secure before fully committing to them.
This wait-and-see approach is driven by the need to mitigate risks associated with early adoption, such as technical failures, security vulnerabilities, and integration issues with existing systems. As a result, the prolonged Web2.5 phase allows for the gradual adoption of decentralized systems, providing time for these innovations to evolve and mature.
Again, we believe that incumbent institutions can accelerate their pace of learning through partnerships with specialized providers who can create solutions that seamlessly integrate with their existing architecture.
Cultural Shifts
Transitioning to Web3 isn’t just about embracing new technology; it entails a significant cultural shift within organizations. Web3 challenges traditional approaches to governance and decision-making, requiring more collaborative and participatory models. This shift involves major changes in data management, decision-making processes, and stakeholder interactions within the enterprise.
Employees need to be trained to understand and work with new Web3 technologies, which often requires a change in mindset and working habits. Additionally, Web3 emphasizes principles like transparency and community involvement, which can be at odds with established corporate cultures that prioritize confidentiality and control.
These cultural adjustments take time, as organizations must create an environment that supports new values and practices. This gradual cultural transformation is a key factor extending the Web2.5 period, as enterprises slowly adapt to the ethos of Web3 while maintaining their operational integrity.
Additionally, businesses that rely on established hierarchical structures for strategic decision-making and streamlined operations may find the decentralized approach incompatible with their core processes and objectives. Thus, while decentralization can drive innovation, its application must be carefully assessed against the specific needs and constraints of each business and industry.
Web2.5 and DFDF’s Future of Finance Thesis
We believe that the models incubated during this transitional period will be particularly disruptive in the FinTech sector. As incumbents and startups navigate the complexities of moving towards Web3, they are laying the foundation for a reimagined economy.
With a focus on developing and integrating new financial solutions that cater to evolving market demands and regulatory landscapes, DFDF’s Future of Finance thesis embraces this disruption. For our specific ideas on how Web3 will impact the SaaS model, take a look at our previous blog post on the future of DAOs as an open source business model.
Hybrid Business Models
The idea of a lengthy Web2.5 phase supports the development of hybrid FinTech solutions that combine the stability and user familiarity of traditional models with the innovation and efficiency of decentralized technologies. By maintaining familiar interfaces and structures, businesses can ensure a smoother user experience while gradually introducing decentralized features. Web3 solutions bring innovative possibilities to the table, such as blockchain for immutable accounts and smart contracts for automation. These innovations can significantly enhance efficiency and reduce operational costs.
The hybrid model allows businesses to cater to new market demands that require both centralized and decentralized capabilities. For example, a FinTech company might offer a traditional savings account with the added feature of earning interest through decentralized finance (DeFi) protocols. Further, such integrated solutions provide a balanced approach to compliance. While centralized systems adhere to existing regulations, decentralized components can gradually adapt as the regulatory environment evolves.
API-ification and Infrastructure
A move towards more open and composable architecture, Web2.5 should be accompanied by greater codification of financial primitives. The resulting APIs are expected to enable interactions between traditional financial systems and decentralized services, creating a seamless user experience. For instance, a banking app could use compliant APIs to access blockchain-based payment networks, enabling faster and cheaper cross-border transactions.
This is particularly important in regions with hard-to-navigate regulations and fragmented markets. By leveraging codified financial primitives, FinTechs can offer services to underserved populations. For example, APIs could connect a decentralized lending platform to traditional banking services through a single user interface, providing access to credit and transaction accounts for individuals who lack a conventional credit history. This API-ification is a key aspect of DFDF’s Future of Finance thesis and is aligned with Aquanow’s approach to integrating crypto into financial services.
Personalizing Consumer Finance
Blockchains ensure reliable and transparent transactions. This not only reduces fraud but also increases consumer confidence in digital financial services. Further, using decentralized identity solutions, consumers could control their personal data, enhancing privacy and security. Trust is a cornerstone of financial systems and these new solutions have the potential to reinforce it, especially in regions lacking modern infrastructure and regulations.
However, the sensitive nature of the information and services provided means that developments here are likely to be quite slow. The notion of a hybrid phase supports the customization of services for niche markets while enabling platform accessibility.
Charting the Path Forward
As enterprises move towards Web3, they face complexities in infrastructure, regulation, maturity, and culture. These challenges intertwine with the development of hybrid business models, API-ification, and personalized finance solutions.
Hybrid models blend centralized stability with decentralized innovation, ensuring compliance and readiness for future changes. APIs enhance regulatory compliance by facilitating transparent and auditable interactions between systems.
Caution surrounds immature systems, but the Web2.5 phase allows these innovations to mature while delivering immediate benefits. Incremental adoption ensures businesses can leverage new advancements without compromising security or reliability.
Cultural shifts are essential, and hybrid models gradually introduce new concepts, helping organizations align governance and operations with decentralized principles.
Web2.5 will be a critical and prolonged transitional period for integrating decentralized elements into existing frameworks. This phase supports incremental adoption, hybrid models, and gradual cultural and infrastructural changes. By leveraging partnerships with groups that have developed specialized knowledge in these emerging fields, institutions can navigate this period effectively, fostering innovation, sustainability, and growth. This approach ensures a balanced ecosystem and paves the way for a digital economy.