dr. Xinxin Fan is the head of cryptography at IoTeXa startup that strengthens the future machine economy with blockchain and IoT.
The use of Internet of Things (IoT) devices in business and our daily lives is growing at a dizzying pace. Despite chip shortages and supply chain problems, the number of global IoT connections is expected to grow to 27 billion by 2025. Like other dominant Web2 platforms, today’s IoT businesses are primarily built on centralized infrastructures run entirely by organizations, with user and data locks as the primary goals. Organizations have made extensive use of data collected by IoT devices to maximize business impact and value creation.
The emergence of Web3, i.e. the third iteration of the Internet, represents a major paradigm shift that could fundamentally changing how IoT companies work. A typical Web3-based application offers two key promises, namely ownership and decentralization. By running applications on decentralized, community-driven networks, Web3 aims to return ownership of data to users. Such a paradigm shift opens up new opportunities for Internet-based IoT companies to redefine their value propositions and customer engagement strategies.
While Web3 is becoming more mainstream and has attracted a lot of attention from players of the IoT industry, it remains a challenge for IoT business leaders to create an effective Web3 transformation plan due to the current IoT business models and system architectures. When Web2-based IoT companies decide to join the Web3 revolution, they need to start with the following four steps.
1. Understand the key features of web3-based IoT applications
Conventional Web2-based IoT applications are generally built and owned by organizations to achieve specific business goals. Organizations have complete control over IoT platforms and data collected from smart devices. As a result, even though they pay for IoT devices and services, customers don’t actually own their devices and the data collected. Unlike their web-based counterparts, web-based IoT applications are mainly characterized by customer-owned IoT devices, community-driven and decentralized IoT infrastructure, and token-incentivized machine operations.
In a web-based IoT application, each smart device connects to its owner’s blockchain wallet and only device owners can decide how to share the data collected by their smart devices. In addition, the entire IoT infrastructure will be managed in a decentralized manner by community members, and each stakeholder will be compensated for providing certain utilities such as connectivity, storage, computation, etc. Moreover, Internet-based IoT applications are often based on well- Designed token economy models and used digital assets to encourage community participation.
2. Adapting to web3-based IoT business models
Most internet-based IoT companies attract customers by building smart devices and services with outstanding features and functionalities and by running extensive marketing campaigns. Emerging Web3 technologies such as DeFi (Decentralized Finance), NFTs (Non-Fungible Tokens), and DAOs (Decentralized Autonomous Organizations) provide additional powerful tools for developing new IoT business models and customer engagement strategies that are expected to further drive network effects, social impact and increase sales.
Depending on the nature of the internet-based IoT business, organizations looking to adapt may consider issuing NFTs that represent their IoT products on the blockchain and specific rights (e.g. early access to future products) to NFT holders to provide. Organizations can also incentivize customers to share their IoT data and earn passive income through DeFi platforms. Last but not least, organizations can allow customers to form a DAO to jointly own a machine and decide how to use it through a consensus-based governance process. The choices of different Web3 technologies or combinations must align well with the business objectives of organizations.
3. Try out Web3-oriented digital transformations
A typical Web2-based IoT application often relies on a centralized, cloud-based infrastructure or a hybrid architecture of cloud and edge computing. Web3-based applications, on the other hand, are built on a decentralized blockchain network and instrumented by crypto tokens. Therefore, a digital transformation is necessary to meet the demands of various Web3-based IoT business models. Web2 IoT companies should consider adopting a multi-stage Web3-oriented digital transformation strategy to minimize changes in business models and systems architecture risks. Here is a model for such a transformation.
• Define a customer engagement approach. In the first phase, an internet-based IoT company needs to use the most suitable Web3 technology (e.g. DeFi, NFT, DAO, etc.) business logic as a decentralized app (dApp) on a blockchain.
• Run a first hybrid integration. In the second phase, the organization must connect its Web2-based IoT system to the dApp through a decentralized blockchain oracle network and relay the required information to the dApp. Such integration leads to a hybrid system, a way to convert an existing Web2-based IoT business into a Web3 business without significant architecture changes and digital transformation overhead.
• Evaluate the new business model. In the third phase, the organization needs to add Web3-related functionalities to the user interface as an experimental feature and use the hybrid Web2/Web3 IoT system for a period of time. The customer feedback collected during this period is critical to evaluating the effectiveness of the new business model and web3-oriented digital transformation.
• Make a go/no-go decision. In the fourth phase, the organization should continue the web3-oriented digital transformation journey by gradually decentralizing the Internet-based IoT system infrastructure and returning control of IoT devices and data to customers, provided that the Web3-based approach in capable of achieving its objectives. business goals efficiently. Otherwise, the organization can stick to its Web2-based IoT business model and closely monitor Web3 technology development and marketing trends.
4. Taking on the Challenges
Web3 has great potential to reshape IoT businesses by empowering people to own their smart devices and data and enabling organizations to create internet communities around their products and brands through incentive-based approaches. While transforming existing Web2-based IoT businesses to Web3 comes with its own challenges, organizations that take the plunge will ultimately reap the benefits of Web3.
Let’s build a decentralized IoT future together!