The Emperor Has No Clothes

wagmi

June 25, 2022

None of this is financial or investment advice. For entertainment purposes only. I don't actually know what I'm talking about.

In 2013, Chris Dixon wrote:

What the smartest people do on the weekend is what everyone else will do during the week in ten years

Ten years ago, some of the smartest people in tech were venturing into digital currencies. Today, they are working on blockchain technology.

Recently, I've been diving into web3—something with a huge amount of hype in tech and VC circles. Here are some of what VCs and web3 bulls are saying web3 can do:

  • A decentralized web that is trustless and permissionless

    • Anyone can create, lower take rates, censorship-resistant

  • Digital assets and ownership

    • NFTs, digital art, and new ways to monetize content

  • Tokens

    • Establish communities with built-in governance mechanisms, focus on user-centric decision making

  • Open source and composable

    • Anyone can create, run, and compose dApps

  • Defi

    • Digital currencies, new financial derivatives and instruments

    • Bank the unbanked, unbank the banked

But even after spending too much time on crypto Twitter, listening to web3 podcasts, and reading up on smart contracts, I still think most of the value props of web3 don't hold up under scrutiny. It's difficult to reconcile the lack of clarity in web3 with the tremendous hype—especially because it seems like every smart person is investing and building in the space.

The way I see it, there are three views on the state and future of web3:

Cynical

There are fundamental, irresolvable problems with the concept and tech behind web3. All the hype is generated by VCs trying to make money. This view is pretty understandable. Many crypto protocols seem like pump and dump scams run by VC firms. Bulls haven't made web3 compelling and understandable to the average user.

Optimistic

All the smart people with skin in the game have to mean something. The hype is legit, and web3 will be revolutionary—on par with the commercialization of the internet, mobile, and social networks. New tech always gets hate, just like people hated on web1 and web2.

The emperor has no clothes

Web3, as it is right now, isn't remotely close to fulfilling its promises. FOMO and signaling drive the hype. People want to be on the bleeding edge but don't know if web3 is it. All the VC money pouring in is reminiscent of the dot com boom. Most projects are BS; maybe a few will survive and change how we use the internet.

Problems with web3

The more I learn, the more I think web3 is having its emperor has no clothes moment. The rhetoric is mostly fluff, and many of web3's purported benefits aren't actually benefits. Many people are trying to solve problems that either don't exist or could be solved more easily in web2.

Here are some of the problems I see:

It's not sufficiently decentralized

A fundamental problem with the current state of web3 is that users can't interact with the blockchain. The underlying protocol is "decentralized" in the sense that it is running on a bunch of servers. But your laptop cannot be a part of the blockchain. Individuals like you and me can't run servers—we can only interact with the blockchain through an intermediary.

The same goes for dApps. Most dApps don't directly interact with the blockchain either. Instead, they use APIs to access information on the blockchain. Even worse, API access is provided almost exclusively by two companies, Infura and Alchemy. Sound familiar? If you have to purchase API access from a centralized company to read data from the blockchain, is it really trustless and permissionless? What if Infura or Alchemy stops providing API access to certain developers? Or block read access to parts of the blockchain?

The problem of centralized entities can also be seen in OpenSea, the largest NFT marketplace. Even though the underlying protocol behind an NFT you purchase is decentralized, OpenSea can control what NFTs to list and display on its marketplace. Now you might think if the data is stored on the blockchain, why can't I just go to a different marketplace?

You could, but remember, wallet apps like MetaMask don't read directly from the blockchain. To display your NFTs, MetaMask uses the OpenSea API. Good luck finding a wallet app that doesn't rely on some API to display financial information. See the problem? It doesn't matter if the protocol is open and decentralized if the data can only be accessed through closed APIs. This is the situation with web3 today.

Participation is voluntary

While researching web3, I found some writing by Liron Shapira, a big web3 bear. An interesting argument Liron made was that participation in the blockchain is voluntary, making the system susceptible to bribery attacks.

The situation is analogous to podcasts in web2. Podcasts operate on an open protocol. When someone publishes a podcast, they publish an XML feed that is readable by anyone. Podcast players like Overcast or Apple Podcasts fetch episodes from XML feeds and play them on your device.

The blockchain is similar—it's an open protocol for recording data. However, participation is optional. A company can pay a podcaster not to publish episodes onto the open protocol and only publish them on a closed app or ecosystem. This is basically what Spotify did with Joe Rogan, and the same thing can happen in web3.

What do I think about the future of web3

"Web3" is too broad of a term to make a single judgment on. I'm more bullish on come features/concepts than others. I also think that what we consider to be web3 today will be very different in 10 years.

That said, I think moving interactions on-chain could be a real game-changer. By interactions, I mean social networks/graphs, messages, posts, and possibly even content algorithms. Basically, if you mapped all of your Twitter followers, tweets, etc and put them on-chain. Now, everything that makes Twitter valuable, the essence of a social platform, is accessible by anyone.

The main value proposition of this is 1) it makes our social networks resistant to censorship and de-platforming, and 2) it gives users more control because they can choose to move from one social network client to another.

Users might still have to read data from the blockchain using APIs, but I think it's easier to build (and more demand for) a variety of social network clients.

I'm also pretty bullish on digital assets and ownership. Yes, I mean NFTs. I’m not sure to what extent NFTs will change the world, but they offer new ways for artists/creators to monetize their work. It also makes a lot of sense at the conceptual level. People will spend outrageous amounts of money on physical art. Digital art is a logical next step.

I think NFTs get some unfounded hate. You've probably seen memes about right-clicking and saving jpegs, but that misunderstands what an NFT is and where it derives its value. Unlike physical art, when you purchase an NFT, you aren't buying the actual art. Instead, you are buying the equivalent of a certificate of authenticity saying you own the art. This is possible because the artist can cryptographically sign your token, and the record is on-chain, available for anyone to see. But, similar to physical art, you aren't buying the copyright to the art. Other people can still copy/forge/parody/mimic the art you own.

However, there is still value in being able to say you own the real thing. To illustrate, I have two examples that were helpful for my understanding.

  1. Imagine you are standing in front of two online rooms. In both rooms, everyone has a Bored Ape as their profile picture, but in Room 1, you can verify that the Bored Apes are real, while in Room 2, you can verify they are just right-click-saved jpegs. Which room would you rather be in? Who would you want to hang out with? Certificates of authenticity can function as status symbols, which people happily pay for in various forms (think Fortnite skins, designer clothes, or Instagram followers).

  2. This example is a real-world example from Cleo Abram. Someone bought an Andy Warhol drawing for $20,000. Then, using a robot drawing arm, they made 999 copies of the original, mixed the original with the fakes, and sold each for $250. Would you pay extra for the original if you could verify it (say, with a certificate of authenticity)? What if there were 9,999 copies? What about an infinite number of copies? How is a screenshot different from one of the infinite copies created by the robotic drawing arm?

Things that probably won't work

DAOs and governance come to mind. For starters, I don't think governance on the internet was much of a problem in web2, and I struggle to see the value proposition of DAOs or even an example of when one would be useful.

A use case I hear a lot is that people can create a movie DAO, where members can buy tokens to fund the creation of the movie. In turn, tokens provide voting power for DAO members to decide on aspects of the movie. For example, a Star Wars DAO where community members write the story.

To be honest, this sounds like a mess. I wouldn't want my favorite franchises to be coopted by a DAO. I think creative projects work best when they are led by a small group or a single person with good taste. Outsourcing creative decisions to the community doesn't seem like it would lead to a good final product.

Another feature of web3 I don't think will take off is decentralizing non-social network aspects of the web—especially centralized curation/distribution platforms like Spotify and YouTube.

This might be surprising given that a ton of web3 arguments center around decentralizing "middleman" platforms with high take rates. If you look at a16z's State of Crypto deck, they talk a lot about how web2 giants take up huge chunks of profits that could be going to creators.

But this ignores the value companies like Spotify and YouTube provide to creators. They allow artists to distribute their work easily and to a scale far greater than an artist could do individually. YouTube has PMs and engineers making design decisions and coding features that make it easier and more enjoyable for people to watch videos. The crux of the decentralization argument is that centralization is more of a natural consumer propensity than something evil that big companies do to make more money.

Things I'm uncertain about

Digital currencies and defi stand out as the big ones. On the business/institutional side, I'm fairly confident that we will see widespread adoption of crypto-based financial derivatives and instruments because the finance industry always seems to find a way to make money off this kind of stuff.

On the consumer side, I'm not sure if defi products will actually benefit users. Staking and yield protocols are looking more and more like Ponzi schemes. It's possible we'll see some new products and concepts, but how they turn out will probably depend on regulations.

Also, gaming. I literally have no idea how gaming works in web3.

Resources for learning about web3