Following a recent wave of criticism directed against Crypto and Web3, I felt compelled to write this piece. Of course, harsh criticism of this space is nothing new, but what is different this time is that the criticism comes from individuals I deeply respect, that it is largely true, and that in my view their criticism misses the point.
Technology and I have a love-hate relationship. I’ve been learning and applying innovation for most of my professional career. For the past five years, I have taken a critical view of the impact digital tech has on our quality of life and, as a result, have founded a nonprofit focused on digital rights. Web3 is the one place where I see some hope for salvation, but not for obvious reasons.
Cory Doctorow, a science fiction writer and digital rights activist, has recently covered the shortcomings of Crypto in depth (also here). Bruce Schneier, a leading cryptographer and digital rights activist, recently noted in a blog post that:
“It is insane to me that cryptocurrencies are still a thing.”
Moxie Marlinspike, a cryptographer, privacy activist, and the creator of the messaging app Signal, wrote the most balanced critique of Web3 I have read so far. Although he sees it as a creative space for nerds, his overall conclusion is:
“I don’t think it’s on a trajectory to deliver us from centralized platforms; I don’t think it will fundamentally change our relationship to technology.”
I’ve heard similar criticism come from every corner of the tech space, and if you share this viewpoint then this post is for you. The criticism roughly breaks down into the following categories:
- Drugs, CP, and Terrorists – Crypto is primarily utilized for illegal activities, is the key enabler of ransomware, and does more harm than good.
- Ponzi Schemes – From hacks to ragpulls, Crypto is plagued with fraudulent activities; the fact that it is hard, if not impossible, to regulate ensures that these issues will persist.
- High Volatility – The daily price swings of Bitcoin, perhaps the most conservative of cryptocurrencies, make it, and even more so other Crypto assets, a lousy medium of exchange. In addition, it encourages speculation, which is what fuels Crypto’s astronomical $
2.5 trillion$1.2 trillion market cap.
- Energy Consumption – Given the climate emergency, blockchain has no right to exist with energy consumption comparable to that of Argentina.
- Wealth Inequality – While Crypto may be redistributing wealth to some degree, it anoints a new upper class that is predominantly white, western, and male, or even worse, bankers.
- Tech Not Fit for Purpose – It’s not scalable, has a tendency to centralize, and is in practically every way inferior to alternative, more proven, less expensive technologies such as relational databases.
I’m not going to go into detail about the criticism, first because I believe it has a lot of truth to it, and second because I believe there is a larger, more important picture to focus on. In other words, I believe there is a potential benefit that outweighs everything else. As a result, I ask that you suspend judgment and bear with me.
As I explained at the outset of this piece, I have some experience with innovation in tech. I’ve founded, advised, and invested in startup companies. I’ve helped create tech accelerators, both within big organizations as well as independent ones. I have never seen anything like the rate of innovation in the Web3 space.
The current environment reminds me of the early days of mobile app development after the iPhone was released and when the Google Play Store (Android Market back then) was the new wild west. As hackers experimented with what the new technology could achieve and which business models might drive it, there was an incredible rate of innovation. Anything you wanted, there was an app for it.
That rate of innovation pales in comparison to what’s happening around Web3; it’s nowhere near it. There are about 18.5K cryptocurrencies in existence (12K with a whitepaper), out of which about 10K are active in 2022, and the rate is increasing exponentially (about 50% of all cryptocurrencies on Coinmarketcap were listed in the last year). That is particularly impressive considering that a lot more effort has to be invested, and a lot more has to go right for a Web3 project to succeed compared to a mobile app.
The combined brainpower working on Web3 is unprecedented. This may be difficult to appreciate because it is mostly individuals forming self-organizing communities to work on a project that is quickly disbanded upon failure, only to regroup and start new projects. Many of these communities are not organized as corporations but as DAOs (Distributed Autonomous Organizations), of which there are thousands, with billions of dollars under management. Crypto is akin to several Apollo projects all happening at the same time. It is innovation on a global scale attempting to redefine several fundamental aspects of our society, all at the same time. Zooming in on any one of these aspects will reveal a fully functioning ecosystem, which most people never knew existed.
Over the past half a century, we have created and refined a mental model for innovation, the Silicon Valley Startup, and its surrounding ecosystem. Along the way, we have learned that the road to successful innovation is paved with many failures. As a result, we started to think in terms of making incremental bets, conducting controlled experiments, and failing fast.
The number of experiments that are running in parallel in Web3 at any given moment is mind-boggling, and this number is increasing. This, in my view, is the key indicator that something interesting is happening in this space. When analyzing Web3 projects, the biggest mistake most people make is criticizing the current state rather than the potential future direction. Despite the appearance of an immutable blockchain, all of these projects are moving targets. All of them are experiments. The obvious conclusion of this argument is that Web3 is not a mature space; thus, any investments made are likely to disappear. The success odds of traditional high growth ventures are conservative in comparison.
This hyper-innovative environment is a unique point in history, and this in and of itself is noteworthy. It’s what gives me confidence that we have a chance to work out many of the shortcomings of current-generation Crypto. Innovation on this scale is made possible by a unique set of conditions:
- There is a huge amount of funding available
- No regulation
- Blockchain enables coordination at scale
I imagine that these points have mostly negative connotations for a lot of individuals. The money used to fund Web3 innovation is the result of speculation rather than intentional investment. Lack of regulation breeds fraud and other illicit activity, and for many technologists, the link between blockchain and innovation is sketchy at best. There are two reasons for this apparent dissonance and for why it’s hard to call the chaos, which is Wev3 innovation.
The first is all the noise that dominates the space, which is caused by the many different parties trying to make a quick buck. The second reason is that we are shifting away from the Startup mental model of innovation and toward something new. From what I can see, this new model attempts to improve the traditional model in at least three different areas.
First, it seeks to create better mechanisms to reward the original creators and early adopters. This was the original intention behind the infamous ICOs and has evolved into how DAOs are funded. I won’t go into detail about this because it has already been discussed extensively. It is also, in my opinion, the least interesting aspect.
Second, unlike VC funding, Web3 funding allows for very large bets, bets which were traditionally reserved for government-funded Apollo projects but have now been democratized. It becomes much better because we can now afford to have an experiment the size of an Apollo project fail and still get on our feet and try again. It may sound crazy, but I think we should celebrate all of these failures.
Did I just suggest that wasting tens of billions of dollars should be celebrated? This obviously does not make sense if what we’re building is another app or a b2b service. One can be forgiven for thinking that this is what Web3 is all about, as even insiders use the term DApps (Distributed Apps) to describe what they are building. It’s a terrible name.
It is true that some people are developing apps, but the interesting part of Web3, and where most of the attention is concentrated, is not on building yet another business. The worthwhile part of Web3 is more akin to building a public utility or a common good. Actually, it is akin to building a set of basic building blocks that can come together to form different types of common goods. In this context, I believe that the progress made is well worth the cost.
The term cryptocurrency is another misnomer. The standard analogies of “programmable money” and “a bank in your pocket,” while true to some degree, significantly under-represent Crypto’s key strength. I prefer the more recent term Crypto-economics. Think about Crypto as a programmable Economic System:
An economic system, or economic order, is a system of production, resource allocation and distribution of goods and services within a society or a given geographic area. It includes the combination of the various institutions, agencies, entities, decision-making processes and patterns of consumption that comprise the economic structure of a given community.
Your frame of reference is incorrect if you’re thinking about Web3 in terms of Wall Street. Web3 is the alternative. We have structured our economy to incentivize growth and individual wealth. Accumulating wealth is by no means easy, but we have aligned every aspect of our society with that one end goal. Our institutions, including law, government, education, business, entertainment, and our values are all aligned to it. This has come at the expense of, and in direct opposition to, the creation of common value. As a result, our environment, culture, public health, equality, and human rights have all suffered as a consequence.
Web3 allows us to experiment with alternative economic systems in a controlled fashion, and our imagination is the only limit in this realm. We can describe an economic system’s exact properties for the first time and then let the experiment run, learn, and adapt. Want a censorship-resistant, permissionless deflationary currency? There’s a Crypto for that. Cut out the financial middlemen? There’s Crypto for that. How about in art? There’s Crypto for that. Want to incentivize farmers to adopt better practices in order to regenerate the soil by packaging up the carbon saved so that it can be sold for profit? There’s a Crypto for that.
Coordination is the third and most interesting aspect of how Web3 permits new forms of innovation. There are some rather big problems that the world is facing at the moment that we must address in the near future if we wish to maintain anything resembling our current way of life. What is preventing us from solving these big problems is, to a large extent, coordination. Remember all the negative externalities that our existing economic system produces, such as climate change, poverty, and inequality?
We could have made significant progress on all of those fronts a long time ago, we have the resources. We’ve struggled to make progress because current incentives are misaligned, and we’ve failed to create stronger incentive structures because these issues affect practically everyone, and we lack systems that can bring all of those voices together. The systems we have are so opaque, complex, and distorted that almost nobody can reason about them, so they do not evolve. Web3, with all of its complexity, is entirely possible to reason about, hence the rapid evolution. Does anyone still have any real hope that the governments of the world will step up in order to act on climate change in time? What if we could bake sustainability into our economy? How about positive externalities? You guessed it; there’s Crypto for that too.
How exactly is Web3 facilitating better coordination? It’s actually quite simple. DAOs provide transparent, trustless decision-making, first and foremost in terms of how funds are allocated and how members join and leave. There have been other attempts to expand on this, but these are the basics. This might not sound like much, but it’s a significant part of what traditional companies do. Anyone who has worked at a large corporation has had first-hand experience of the high cost we pay today for coordination. These expenses include monetary costs, management with its explicit and implicit hierarchies, discrimination, countless meetings, regulations and regulators, legal contracts, salary disparities, and many other factors.
I’m not suggesting that DAOs can do away with all of these costs, but since DAOs are governed by smart contracts, many of these costs diminish significantly. If you meet the entry requirements, you can join any of these organizations. It makes no difference who you are or where you live; you have the precise rights outlined in the contract. Yes, there have been several hacks and instances of fraud; however, DAOs are pretty straightforward (in comparison to some of the more sophisticated stuff going on in DeFi), and I have a high level of confidence that we are reaching maturity.
Regenerative Finance (ReFi) is perhaps the best example of how Web3 can help us solve big problems that we haven’t managed to solve in any other way. It is a growing movement attempting to create economic systems where the incentives are aligned in a way that regenerates resources rather than depletes them (here is a collection of 215 projects). There is a lot that needs to be proven for these aspirations to become a reality and for them to have a real impact.
All of the criticisms I made at the outset remain valid. We don’t need a perfect system; all we need is a better alternative to the one we have now. I believe we’ll end up with a range of economic systems that balance various tradeoffs between how a regular economy and hard-line Crypto like Bitcoin function. Smart contracts backed by legal contracts—data gathered off-chain but recorded on-chain with incentives in place to keep (mostly) everyone honest. There should be some regulation in place to keep dishonesty from ruining it for the rest of us—better energy consumption at the cost of more centralization, security, or both.
What is incredible to me is that there are rigorous experiments playing with all of these variables and many more that I haven’t listed or that I am unaware of, all running in parallel right now. As I previously stated, there is a great deal of noise in this space, and many projects are busy making worse versions of what we already have. I also don’t believe that any of the current players have nailed any of the big problems just yet. So, what’s the point? Considering the magnitude of the challenges, that’s Ok. There is no other viable option. Even in terms of power consumption, the costs we are paying are justified.
To sum up my take on Web3, there’s a lot of smoke, but there’s some fire. As they say, the devil is in the details, and I can’t possibly provide all of those here. So, if you’re still not convinced, I hope I’ve at least given you a reason to dig deeper. Please conduct your own research.