The False Promise of Web3
The advertised decentralization of power out of the hands of a few has, in fact, been a re-centralization of power into the hands of fewer
I didn’t anticipate how much I’d appreciate a @Jack of fewer trades. Key to progress is class traitors: Generals warning of a military-industrial complex, product managers who narc on mendacious management, and tech leaders who violate the Silicon Valley code of the white guy — never criticize each other or your noble missions to save the world. Jack Dorsey has drawn his sword and taken aim at colleagues attempting to centralize control and gain from the promise of decentralization. Specifically, “web3.”
What is web3? It’s a hazy/vague term describing a crypto-powered internet, and a font of yogababble. Its promoters would say something akin to:
Web3 is a decentralized version of the internet where platforms and apps are built and owned by users. Unlike web2 (the current web), which is dominated by centralized platforms such as Google, Apple, and Facebook, web3 will use blockchain, crypto, and NFTs to transfer power back to the internet community.
Sounds good. Most of us buy the down-with-Facebook-and-Google narrative. Cut out the middleman, and we all win — especially the little guys. The dispersion of theaters, doctors offices, and bank branches to our homes, smart speakers, and phones offers enormous potential to provide elemental services with reduced friction. Smart contracts could, among other things, reduce agency costs and iron systemic biases out of the process. That’s the promise of decentralization. But does the music match the words?
The advertised decentralization of power out of the hands of a few has, in fact, been a re-centralization of power into the hands of fewer. The top 9% of accounts hold 80% of the $41B market value of NFTs on the Ethereum blockchain. The practice of “whitelisting” keeps the bulk of NFT profits within a tight circle of insiders. Bitcoin is even more centralized: The top 2% of accounts own 95% of the $800 billion supply of Bitcoin, and 0.1% of Bitcoin miners are responsible for half of all mining output. If it were a country, Bitcoin would have the greatest inequality in the world.
This is not the temporary gestalt of a recently conceived startup that’s about to be followed by a Big Bang of decentralization. On the contrary, as the crypto market evolves, it’s becoming more centralized, with insiders retaining a greater share of the tokens. When Ethereum launched seven years ago, insiders controlled 15%. But more recent web3 projects have launched with insider ownership of 30% to 40%, and some are approaching the classic 80/20 insider/public ratio of a tech company at IPO. What other $1T+ asset class has wild swings in valuation centralized to the errant comments of one man in an SNL skit?
The new guard also looks older and more, well, guardian than the old guard. Specifically, dudes from Stanford/Harvard who conflate luck with talent and serve under the delusion of a mandate to save us while accidentally making billions. Every member of Forbes’s 2021 cryptobillionaires list is a man. A third of them attended Stanford or Harvard. Out of the 12 listed, only one isn’t white. The web3 narrative feels like a Ted-X talk given to a survivalist group.
The potential to establish monopoly power, to own the rails (i.e., to centralize), is increasingly what VCs fund, and that’s the true protocol for web3. OpenSea, the world’s largest NFT marketplace, is eerily similar to any other exchange platform: In return for making transactions easier and (modestly) safer, the company takes a 2.5% cut of every transaction. The largest crypto company, Coinbase, operates the same way — it has industry-high fees (based on an opaque fee structure) and a CEO who’s granted himself and his VC investors dual-class shares with 20 times the voting power of regular ones. Dual-class shareholder structures are weapons of mass entrenchment and a synonym for centralization via corporate autocracy. But yeah, liberate us Brian.
The infrastructure of web3 is predicated on the existence of middlemen. Many of the most popular “decentralized” apps rely on an application called Infura that provides “ETH nodes as a service.” There are many more of these services, such as Alchemy (“powering blockchain developers globally”) and Moralis (“build, host, and scale killer dApps”). The truth is, people don’t want to run their own servers, and they don’t want to have to write code every time they buy a loaf of bread, so “centralized” services will inevitably arise to make web3 actually work for regular people.
Wild Wild West
Using the word “decentralized” is a corporate sleight of hand that boxes detractors into a position of bad faith. Like “pro-life,” or “tort reform,” it defines the terms before the debate begins. Who wants centralization? That sounds bureaucratic, stifling, and corrupt.
The Wild West was decentralized. And we soon discovered that towns need sheriffs and central protocols (i.e., laws). Theft runs rampant on web3. Losses from crypto scams and thefts totaled $14 billion in 2021. Decentralization promised to replace the middleman (the bank) with blockchain technology, but instead it’s created a Coachella for fraud, where anonymity, yogababble, and complexity protect the fraudsters from oversight or accountability. I just reread the last sentence, and it’s clear I’m so desperate to be in a crowd of fellow humans (who aren’t my family), I’ve incorporated music festivals into my metaphors. Anyway.
The DAO of Pooh
Web3 acolytes claim DAOs (decentralized autonomous organizations) are superior to traditionally organized corporations, but many early efforts have fallen short. It’s not clear that most of these enterprises are even decentralized in practice. ConstitutionDAO, which made news when it lost out in a $43 million bidding war for an original copy of the U.S. Constitution, hadn’t even established a governance model before it shut down, because the founders hadn’t figured out how to prevent a few large holders, or “whales,” from taking control. Index Coop, a DAO that creates index investing funds, decided it had to anoint some members with leadership responsibilities. (They call them “wise owls,” or what we boomers labeled directors/advisors pre-web3. No, really, what’s with the animal terms?)
The DAO movement claims to be democratizing corporate governance: With a DAO, all investors can vote on the organization’s decisions. But there’s a reason entities of any size, from school districts to shoe companies, adopt a representative model instead of attempting pure democracy. Leadership, expertise, and accountability improve outcomes, vs. shallow decisions on long-term issues, subject to the biases and heuristics of what Kahneman describes as our System 1 thinking. What’s been positioned as a bug (the friction of centralization) is the feature — it forces us to present evidence and argument to other fiduciaries, grind away, and craft better solutions. It’s frustrating, expensive, and (mostly) works less poorly than any system of its kind.
Representative democracy already exists in the corporate space — it’s called a public company. For now, token-based organizations are operating in a pseudo-unregulated space, where their securities tokens are immediately liquid and purport to be immune from disclosure requirements. It’s likely, and overdue, that the SEC and the courts will soon bring crypto the same “boomer” regulation that’s created the most robust exchanges and platforms for value creation in history. The key to these markets is they provide investors the confidence, via rule of law, to participate. Crypto is bringing previously excluded communities to investing, and that’s a good thing. But what happens when those communities get hit the hardest by hacks and fraud? Do they ever return to the market?
Many of our greatest achievements were born from “centralization.” This includes the U.S. itself. Pre-revolution, our nation was a scattered collection of mininations that had distinct currencies, foreign policies, and navies. Only after we centralized under the Constitution were we able to bind those nations into a cohesive and prosperous union: the United States of America. (Sounds better than the Centralized States of America.)
Centralized systems have inspired formidable tech innovation as well. Last week NASA deployed the Webb Space Telescope. BTW, so much of this is branding — shouldn’t telescopes be named Solana, and not a blockchain platform that achieves consensus using a proof-of-stake mechanism? Solana (fuck it, I’m renaming the telescope) is a “protocol” that enables us to see into the past. This extraordinary human achievement took the centralization (i.e., collaboration) of multiple space agencies and private enterprises to come to fruition. And they did not use tokens to make decisions.
The same is true in private enterprise. My skepticism of our idolatry of innovators is public record, but I recognize the power of the individual and their ability to dent the universe. Teams need leaders, visions require visionaries. However, the central organization creates the context in which leaders get the best from their teams and remain accountable for outcomes. This is difficult to replicate with software.
None of this is the technology’s fault. There is likely great potential in blockchain technology, tokens, and smart contracts, and much of this innovation will be enduring. DAOs offer the potential to modernize organizational and corporate governance, a cornerstone of American capitalism that is still largely misunderstood by the public. NFTs offer the potential for creators to be better compensated for their work. There are also positive signs that firms will continue to innovate and invest in hardware and services that should reduce fees and increase security. However, like most “revolutionary” technologies, they will ultimately prove evolutionary, changing lives in ways that are meaningful, but likely less dramatic than envisioned. This is the great truth of technological progress: It’s always more boring than we expect. The externalities of these innovations have scaled at a similar pace, and they’ll present the same risks if we continue to let our idolatry of innovators overrun our slow-thinking government.
Preaching liberation while sequestering into gated communities is endemic to tech. The “personal” computer was going to free us from the grip of IBM’s dominance in mainframes, but it fell under the even greater control of Microsoft. Apple claimed to be a revolutionary fighting Big Brother, but it erected the greatest tollbooth for creativity in history (the App Store). “Information wants to be free” was the rallying cry of earlier web company managements trying to convince fawning, idiotic content companies to exchange their content for pennies on the dollar.
The wheel turns once again, and the loudest barker at the carnival is venture capital firm Andreessen Horowitz, which has raised a $2.2 billion crypto fund and is deploying its general partners across the internet as missionaries. One partner preaches decentralization to his nearly 800,000 Twitter followers, and Marc Andreessen (the founder) blocks people who speak ill of web3 (including Jack) — he makes cool memes about it. BTW, I don’t think there’s anything wrong w/blocking people … it’s your feed.
As @Jack would say: “Words.” Andreessen Horowitz is putting its actual dollars into companies that build centralized, toll-taking platforms (OpenSea and Coinbase are both Andreessen Horowitz portfolio companies) with the middlemen needed to fix all the user-experience issues and trust issues that come with a decentralized system. Meet the new boss … he’s your old boss.
As word spreads, pressure will build for regulators to start putting preventive measures in place so that 27 million Americans aren’t left holding a bag of dog(e)shit. But they need to act. SEC Chair Gary Gensler has been vocal about the problem, but his Commission has offered only a passive response. The entire space holds enormous promise, but, like every other emerging asset class or sector, it will require thoughtful oversight, regulation, and security.
The three steps to tyranny typically involve gaining control of 1) the media; 2) the economy; and 3) the military. The Valley has checked box 1. How’s that working for us? The decentralization narrative is cloud cover for a move to Step 2. It is a false god evangelized by high priests who pass collection plates the size of Mars and admonish regulation as heresy.
Web3 has different-colored hair, but the same DNA as earlier web paradigms, which decentralized services at an unprecedented scale to centralize wealth and influence at an unprecedented scale. Ninety-three percent of intentions and two thirds of decisions are influenced by two firms. Is that a good thing? Pro tip: Ask someone with teen girls. So far, web3 is web2.01.
Life is so rich,
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