Typology of Web3 Technologies and Potential Applications to Local Government Revenues.

• Position: SPECIAL SECTION: WEB3 AND BLOCKCHAIN

There are many concepts and technologies under the umbrella term of Web3. Exhibit 1 breaks down how these relate to one another. Exhibit 1 breaks down Web3 into a series of nested concepts, each based on the one above it in some way. For example, "blockchain technology" sits below "Web3" because Web3 is based on blockchain technology. Alternatively, "cryptocurrency" sits below "crypto asset" because it is a subcategory of this general concept.

Crypto assets appear to be the most relevant technologies in the context oflocalgovernmentrevenue, so this section will focus on them for detailed explanation.

Blockchain platform

A blockchain platform is a particular instantiation [creating a real instance or realization of an abstraction or template] of ablockchain-based distributed ledger. There are many distinct blockchain platforms, which can also be called blockchain networks because of their distributed nature.

Platforms are the base layer on which other objects and technologies are built. By analogy, blockchain platforms are like computer operating systems such as MS Windows or Mac OS. Operating systems use base technologies [for example, programming languages] to build environments where programs [such as word processors, Internet browsers, and more] are run to perform different activities. Similarly, blockchain platforms act as environments where users can undertake activities. (1) The difference is that an operating system is a piece of software stored on a single computer, while a blockchain platform is a distributed network of actors [nodes] comprising many machines.

The two largest and best-known platforms are Bitcoin and Ethereum. Bitcoin was the first blockchain platform. Its standalone functionality--the things you can do on the platform--has historically been limited, and it is now primarily associated with its native cryptocurrency [bitcoin].

Ethereum is more advanced as it has a built-in, fully fledged, Turing-complete programming language, which allows the platform to run programs in the same way that a computer operating system does. This means that Ethereum can run "smart contracts," or computer programs that execute actions as programmed [for example, when certain predefined conditions are met]. Smart contracts form the basis for a whole host of more complex programs, known as "decentralized applications" [dapps]. These encompass everything from decentralized finance [DeFi] applications to play-to-earn games.

While the Bitcoin platform's scripting language has critical limitations, particularly the lack of Turing-completeness, some applications have since been created on top of it to provide additional functions.

Crypto assets

Crypto assets are the most prominent class of "objects" built on top of blockchain platforms. The concept is an umbrella for digital representations of value or contractual rights built on a blockchain. These are analogous to other assets, such as financial products or even physical assets such as paintings. Crypto assets can be broadly split into cryptocurrencies and crypto tokens.

Cryptocurrency

Cryptocurrencies are the best-known type of crypto asset. They are digital assets that are "native" to a particular platform. For example, the Bitcoin platform has bitcoin cryptocurrency, the Ethereum platform has ether cryptocurrency, and so on. All public blockchains have native cryptocurrencies. These function as rewards for miners/validators to create incentives for them to validate transactions.

The first cryptocurrency, and with that crypto asset, was bitcoin. Bitcoin was initially intended to function as a digital currency, designed to act as a medium of exchange through a decentralized, blockchain-based network--giving rise to the term "cryptocurrency." As Bitcoin was the first cryptocurrency, it has become a foundational concept against which all others are compared. Cryptocurrencies today are generally divided into bitcoin and the umbrella term "altcoins," which references all non-bitcoin cryptocurrencies. Prominent altcoins include Ethereum's ether, (2) Litecoin, XRP, and Dogecoin.

Despite their name, cryptocurrencies are far from challenging legal tender status. In fact, as an asset class, cryptocurrencies may not meet the criteria for currency at all [for example, functioning as a unit of account, a store of value, and a medium of exchange]. Cryptocurrencies are divisible and so can be a unit of account, but they seem less suited to acting as a store of value due to their generally high price volatility. (3) Finally, even the latest technologies have yet to show they can reliably process transaction volumes at a similar level to traditional payment rails, which undermines their ability to function as an effective medium of exchange. (4)

The conclusions that can be drawn from on-the-ground activity regarding the adoption of cryptocurrency as a medium of exchange are mixed. Let's start with bitcoin as an example. In 2021 the number of payments (5) on the bitcoin network was estimated to have peaked at around 770,000 per day. (6) This was also the three-year peak across 2020 to 2022. In the same year, the Visa network alone processed 164.7 billion transactions, equating to an average of 451,232,877 transactions per day. (7) So, Bitcoin's share of total financial activity still appears incredibly low. It is also not the case that daily payments have been rising dramatically over time. The 2021 peak was approximately 100.000 daily transactions more than the 2019 peak, and just short of

200.000 transactions more than the 2018 peak (8)--hardly an exponential growth rate. Since a significant drop at the end of 2 0 21, daily payments also appear to be plateauing. The daily transaction data for the Ethereum blockchain shows a similar trend of moderate growth giving way to plateau. (9)

On the other hand, the number of vendors now accepting or intending to accept cryptocurrency has increased. As we discuss below, some US cities and even states are also starting to accept cryptocurrencies for tax and utility payments, albeit via third party conversion services. These developments persist despite a relatively small proportion of Americans--just shy of 13 percent of the population--owning...