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    Web3 and Smart Contracts Enable a Scalable API Economy

    Web3 is clearly a formidable technology that will be part of most financial services and retail offerings within a decade.

    Written by

    JP Morgenthal
    Published May 8, 2023
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      Many businesses are looking to drive new revenue streams by extending their existing business into a digital platform and offering subscription and consumption-based services. But moving from providing physical goods to digital services is a complex transformation that can contain unexpected hurdles and failures.

      Web3 may offer a solution to many of these issues while completely removing the need to manage large swaths of complexity. Web3 runs on blockchain networks, a decentralized technology that enables efficient and secure methods for companies to distribute their digital goods.

      Also see: Top Digital Transformation Companies

      APIs Enable Web3

      Before exploring Web3, its important to understand what an Application Programming Interface (API) is and how it enables both Web2 and Web3. An API is a way for two computer programs to communicate with each other.

      Applications that use APIs to execute functionality in another program over a network are called distributed applications. While APIs operate transparently to the user, the results are what allow you to see your web page update dynamically with the latest stock price or new transactions.

      Bitcoin was the first cryptocurrency application to leverage a technology called blockchain. Blockchain is a distributed application that uses a network of nodes to validate and confirm the information that is being stored.

      Blockchain nodes use APIs to communicate with each other to implement the protocol that now stores billions of dollars in value. In addition to using APIs to talk to each other, Bitcoin nodes allow users to make API calls—the name given to the execution of an API—that requests changes to blocks on the chain. This is how a transaction is enacted.

      The API created by Bitcoin is rather rudimentary and had limited functionality, so other blockchain networks emerged that allowed for users to expand functionality dynamically by adding executable code directly on the blockchain. That is, when a participant asks to store data in a block it actually runs a program created by the block’s original author to complete the transaction.

      This functionality has become known as ‘smart contracts’ and has created an entire universe of new opportunities in both traditional finance and emerging transaction-based environments. Ethereum is an example of a blockchain that supports smart contracts.

      Together APIs and smart contracts are the foundational technologies that enable Web3. While the actual definition of Web3 is still ambiguous, businesses have the ability to do real work using this capability.

      For more information, also see: Digital Transformation Guide

      The API Economy Revisited

      During the rise of Web2, there was a lot of attention given to a growing business opportunity called the API Economy. The API Economy described the market that is created by offering web users data and services via API for a fee.

      Gartner describes the API Economy as an enabler for turning a business or organization into a platform. Examples include purchasing stock price data or integrating payment services to allow customers to purchase goods and services.

      As mentioned, a key limitation to the API economy is that businesses need to first establish identity and authorization before a consumer can transact and begin receiving services. That process of signup and onboarding is a limitation to scaling the API economy.

      Moreover, the requirement to address multiple methods for obtaining payments places a heavy burden on an emerging digital offering.

      Also see: How Blockchain, Autonomous Tech Help Keep ‘Fair Fashion’ in Style

      The Web3 Solution

      Web3 provides a solution to this limitation as it is designed to operate in a decentralized manner, allowing anonymous transactions to occur without first establishing trust. Web3 is based on the same mechanisms that allow two anonymous individuals to exchange cryptocurrency without first establishing a trading relationship.

      Using smart contracts, businesses have three options for providing and extending digital offerings:

      • They can exchange data and digital services while simultaneously receiving payment – the smart contract can actually satisfy the user’s request in response to the user sending funds in the form of tokens.
      • They can create an immutable record on the blockchain that a user has requested and received services – the smart contract can satisfy the user’s request and the blockchain will record the transaction, which can be used later by for purposes of billing.
      • They can use the blockchain to establish identity and authorization without having to build an entire user management and billing capacity within their platform – the user can validate who they are by providing their account information, which can then be verified by various exchanges.

      Of note, the component of the blockchain that provides access to off-chain data is called an Oracle. Hence, service providers selling data can very easily incorporate access to their information as an intrinsic part of the blockchain by providing an Oracle.

      It’s a New World

      If you’re a non-technology business that believes they have a significant value proposition to offer as a digital service alongside their non-digital products, there is much to consider.

      The traditional route will have you building out the core platform that manages and delivers the service to consumers. This may include a Web2 interface that allows the user to explore and access your service through a series of clicks and pages. This will also require that you develop out all the supporting elements, such as customer support, e-commerce, engineering, product management, operations and product marketing. This is a serious investment and one that requires considerable due diligence of the market opportunity and costs to deliver.

      Perhaps a traditional Web2 delivery model is more appropriate for your offering but would benefit from first delivering a Minimal Viable Product (MVP) to test your market assumptions. Web3 and smart contracts are a fantastic way to allow you to receive funds for your service and deliver your digital service via API without having to spend a significant amount of money up front to test your hypotheses.

      Moreover, given the nature of blockchain’s ability to scale, your MVP could very well act as the foundational technology that you use to develop your Web2 product.

      Bottom Line: A Different Mindset

      The key is developing your digital service for Web3 is a very different mindset and approach than you might take if you are to develop your digital service for Web2. It will require some expertise in blockchain technologies and considerations for using a public or private blockchain.

      Regardless, Web3 is clearly a formidable technology that will be part of most financial services and retail offerings within a decade.

      Also see: Three Steps to Enabling Better Use of Business Data

      JP Morgenthal
      JP Morgenthal
      JP guides customers to improved operational performance and reduced expenses related to software configuration, design, architecture, technology adoption, automation and operations. He is considered an expert in many areas of information technology, such as cloud, artificial intelligence, blockchain, DevOps, modernization, integration and agile software development. JP has authored four trade publications and holds a Masters in Computer Science from Hofstra University.

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