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This year’s buzz word is web3, which together with NFTs and
DAOs liberally sprinkled with crypto and a dose of wishful thinking, are
combining to set the stage for every transaction we make online – business,
personal, financial, entertainment, political.
The technologies are highly technical but the concepts
behind them, and their potential application, are less so. There are
evangelists and critics lining up on either side but there’s agreement at least
that each will play a role in the future of the internet. It’s important, then,
to get a first base grounding on what it all actually means.
If you already know, then this primer is not for you. If you
are less sure, this quick walk through the current state of web3, DAOs and
NFTs, should cement knowledge or enlighten.
We lean exclusively on an excellent trio of Guides written
by Kevin Loose for the New York Times.
Web3: A
Primer
Web3 is the name some technologists have given to the idea of a new kind of internet service that is built using decentralized blockchains — the shared ledger systems used by cryptocurrencies like Bitcoin and Ethereum.
Packy McCormick, an investor who helped popularize web3, has
defined it as “the internet owned by the builders and users, orchestrated with
tokens.”
Proponents envision web3 taking many forms, including
decentralized social networks, “play-to- earn” video games that reward players
with crypto tokens, and NFT platforms that allow people to buy and sell
fragments of digital culture. The more idealistic ones say that web3 will
transform the internet as we know it, upending traditional gatekeepers and
ushering in a new, middleman-free digital economy.
But some critics believe that web3 is little more than a
rebranding effort for crypto, with the aim of shedding some of the industry’s
cultural and political baggage and convincing people that blockchains are the
natural next phase of computing. Others believe it’s a dystopian vision of a
pay-to-play internet, in which every activity and social interaction becomes a
financial instrument to be bought and sold.
Back to basics Web1 and Web2
Web1 refers to the internet of the 1990s and early 2000s. It
was the internet of blogs, message boards, and early portals like AOL and
CompuServe. Most of what people did on web1 was passively read static web
pages, and much of it was built using “open protocols” like HTTP, SMTP and FTP.
Web2 was the next phase of the internet, from 2005 or so —
characterized by social media and user generated content. People began actively
participating in the internet rather than passively reading it. But most of
that activity ended up being distributed and monetized by big companies, which
kept most, if not all, of the money and control for themselves.
Web3, the story goes, will replace these centralized,
corporate platforms with decentralized, community-run networks, combining the
open infrastructure of web1 with the public participation of web2.
The crypto investor Li Jin and the writer Katie Parrott
sketched the web3 vision this way: “If the pre-internet/web1 era favored
publishers, and web2 favored the platforms, then web3 is all about tilting the
scales of power and ownership back toward creators and users.”
Power to the people
Web3 proponents argue that a blockchain-based internet would
give creators and users a way to monetize their activity and contributions in a
way that today’s mega-platforms really don’t.
Today, for example, Facebook makes money by aggregating user
data and selling targeted ads. “A web3 version of Facebook could allow users to
monetize their own data, or even earn crypto ‘tips’ from other users for
posting interesting content. A web3 Spotify could allow fans to buy ‘stakes’ in
up-and-coming artists, effectively becoming their patrons in exchange for a
percentage of their streaming royalties. A web3 Uber could be owned by the
drivers on the network.”
Web3 is seen as an essential part of the metaverse, because
it would allow for the creation of metaverses that aren’t controlled by a
single company or governed by a single set of rules.
“It is envisioned that your metaverse avatar might be an
NFT. Your metaverse house might come with governance tokens or qualify you to
join a neighborhood DAO. The mortgage on that house might even be packaged into
a mortgage-backed security token and sold on a decentralized exchange.”
Further, web3 platforms could be democratically governed in
a way that web2 platforms aren’t.
“Internet behemoths like Facebook and Twitter are
essentially autocracies. They can unilaterally seize usernames, ban accounts or
change their rules on a whim. A blockchain-based social network could delegate
those decisions to users, who could vote on how to handle them.”
Then there’s the idea that web3 would be less reliant on
advertising-based business models than web2, and people would have more privacy
as a result, with fewer trackers and targeted ads following them around and
fewer giant companies vacuuming up their personal data.
Of course, all of this is a highly idealistic version of
web3, “sketched mostly by people who have a financial stake in making it
happen.” The reality could be much different.
Or even sinister.
Web3 project resistance
For instance, there is an idea – seen as a positive one by
web3 fans – that the technology will usher in a “decentralized identity”. This
is the notion that, in future, we could all have a kind of ‘reputation score’
that consists of a blockchain-based tally of the jobs we’ve done, events we’ve
attended and projects we’ve contributed to. These records would essentially
become permanent records of our online lives, and other people could look them
up to decide whether to hire us, trust us with some task or even date us.
It's an extrapolation from our current obsession with social
media presence (such as the number of followers we have) and was satirized in
the Black Mirror episode ‘Nosedive’.
The writer and technologist Robin Sloan, for example, wrote
that the ability to delete things — “an operation basically antithetical to
Web3,” was actually a desirable quality of current internet services.
Stephen Diehl, an outspoken crypto detractor, went even
further, calling web3 “the hyperfinancialization of all human existence.”
Others attack web3 from a technical perspective, arguing
that blockchains are significantly slower and less capable than standard
databases, and that today’s most popular blockchains couldn’t even begin to
handle the amount of data that Uber, Facebook or YouTube use on a daily basis.
To make web3 services perform as well as consumers demand,
they argue, you have to build
centralized services on top of them — which would defeat the whole
purpose.
There are also those including former Twitter CEO Jack
Dorsey who believe that web3 is an attempt by wealthy investors to pay lip service
to decentralization while building new, centralized services that they control
— making themselves, in effect, the new middlemen.
NFT: A
Primer
We all probably know that NFT stands for nonfungible token
but what does that actually mean?
Let’s nail the basics.
$1 is fungible, because you and a friend can trade $1 bills,
and each of you will still have the exact same spending power. Most
cryptocurrencies are fungible, too — a Bitcoin is a Bitcoin, and it doesn’t
really matter which Bitcoin you have.
But most objects in the physical world, such as cars and houses, are nonfungible — meaning they have unique qualities, and you can’t just exchange them for others of the same type.
Until recently, nonfungible goods didn’t really exist on the
internet. As described by Roose, the internet essentially works like a giant
copy machine — any digital file can be duplicated an infinite number of times,
and every copy is exactly the same as the original.
The value of scarcity
The infinite copy-making quality of the internet was great
for making digital objects abundant. But it was horrible for making them
scarce.
Then, people realized that blockchains (the shared,
decentralized databases that power Bitcoin and other cryptocurrencies) could be
used to create unique, uncopyable digital files. And because these files were
simply entries on a public database, anyone could verify who owned them, or
track them as they changed hands.
That realization prompted the creation of the first NFTs.
So, NFTs are basically a way to claim ownership of a digital file; a
certificate of authenticity. It is scarcity that gives a lot of objects in the
offline world their value, so bringing this quality to the internet through
NFTs will unlock a whole new market for scarce digital goods.
Once they’re released or ‘minted,’ NFTs become a kind of
digital collectible as well as a membership card to an exclusive club. Many NFT
groups have their own chat rooms on the Discord messaging app, where owners
hang out and talk among themselves. Some community NFT projects even organize
offline events and parties, which you can only get into by proving that you own
one of their NFTs.
“These community NFTs signal a kind of in-group status, and
it’s become customary for owners to display them as their Twitter profile
picture, marking themselves as a Bored Ape or a Cool Cat, or whatever. And
everyone in crypto world knows that NFTs from the most valuable collections
sell for millions of dollars apiece, which is why you see celebrities like
Jay-Z and Snoop Dogg showing off theirs on Twitter.”
Do NFTs actually include ownership or usage rights?
Not necessarily. In many NFT sales, what the buyer gets is
simply the unique entry in the blockchain database that identifies them as the
owner of the digital good — the token, rather than the thing the token
represents.
NFT creators can choose to include additional rights in an
NFT sale. But they don’t have to. And there have already been high-profile
copyright disputes over NFTs, such as the lawsuit filed by Miramax against
Quentin Tarantino last year, after Tarantino announced he would be auctioning
off unpublished excerpts from the ‘Pulp Fiction’ screenplay as NFTs.
NFTs help decentralize the internet and that’s a good
thing
Right now, most people who make media on the internet
(artists, musicians, video game streamers, etc.) put their work on platforms
like Spotify, YouTube, Facebook. Those platforms are great for building an
audience, but they’re not great for making money. NFTs, proponent’s argue, make
it possible for creators to sell unique digital objects directly to their fans,
keeping a much bigger chunk of the revenue for themselves.
Why? Well, per Roose, there are some structural forces that
could make it harder for big companies to seize control of the NFT market.
For starters, NFTs are personal property, in a way most
other digital goods aren’t. When you upload a video to YouTube, YouTube hosts
that video on its servers and effectively makes all of the decisions related to
that video — whether it violates community guidelines, whether it’s eligible to
run ads, whether it gets recommended by the algorithm, and so on.
But NFTs live in their owners’ crypto wallets, which aren’t
chained to any particular platform, and they can use them any way they choose.
There’s also the idea of interoperability. One feature of
NFTs is that they can be made interoperable — that is, unlike buying a skin in
Fortnite that can only be used inside Fortnite, you can theoretically take NFTs
with you from one virtual environment to another. Or if you get mad at OpenSea,
you can easily take your NFTs (which live in your crypto wallet, not on
OpenSea’s servers) and trade them on a different platform.
That kind of thing doesn’t happen in social media. If you
have a YouTube channel, you can’t simply port your subscribers over to TikTok
when you feel like it.
The negatives of NFT
It’s possible that the people buying NFTs will one day find
their investments as valuable as original Picassos and Monets. But the NFT
market appears to be cooling off these days. Even NFT mogul Gary Vaynerchuk,
recently predicted that 98 percent of NFTs would lose money.”
In response there’s now an increasing focus on “utility” —
basically, bundling other things with an NFT purchase (like concert tickets,
signed memorabilia or early access to future releases) to ensure there’s
something of value included, even if the value of the NFT itself goes to zero.
It’s also true that NFT ownership is relatively centralized,
in the sense that a small number of people appear to control the majority of
high-value NFTs.
The biggest issue however are the scammers.
Criminals follow the money and NFTs are attracting a lot of
investment preying on the naïve and loopholes in the system. Common risks
include ‘Rug pulls’ — when a crypto developer abruptly abandons a project and
runs away with buyers’ money.
“Money laundering and wash trading — a scheme that involves
selling something to yourself in order to inflate its perceived value — and
other shady practices are almost certainly happening in the NFT market, too.”
This isn’t unique to NFT – but crypto might just make it
easier.
NFT thefts (by stealing passwords) are increasingly common.
Hackers recently stole $1.7 million worth of NFTs from users of OpenSea, the
largest NFT trading platform.
Another practice called ‘Whitelisting’ invites well
connected (rich) folk to buy new NFTs before they’re available to the general
public. It’s not illegal but it’s a form of insider trading in which certain
individuals get their NFTs at a discount and can sell them for more once
they’re released publicly. A study by Chainalysis found that whitelisted users
who resold their NFTs made a profit 75 percent of the time, versus 20 percent
of the time for non-whitelisted users.
“Ultimately, the big selling point for NFTs isn’t that they
make trading digital goods easy and cheap (they don’t), or that they’re
permanent and indestructible (the tokens may be, but the digital files they
link to typically aren’t), or even that they represent the future of
intellectual property (we’ll still need lawyers to hash out copyright disputes).
It’s that they allow people to create and trade scarce digital objects — for
better or worse.”
DAO: A Primer
DAO stands for decentralized autonomous organization: a new
kind of organizational structure, built with blockchain technology. In its most basic form, a DAO is a new way
for a group of people to aim a large amount of money and organizing energy at a
project — whether it’s buying the Constitution, building a new social network,
or influencing an election (yes, more on that below).
That’s a big, transformative idea, and it would be wise to
pay attention while it’s taking shape.
DAOs are still in the dial-up phase – there aren’t a lot of
successes to point to. The recent DAO boom has raised eyebrows among regulators
and law enforcement agencies, concerned that some DAOs may simply be fronts for
fraud and amount to pyramid selling or Ponzi schemes.
But proponents believe that DAOs are capable of doing a few
things better than traditionally run organizations:
In theory, DAOs can be more transparent than traditional
organizations, because the group’s important decisions get made “on-chain,”
using governance tokens and votes that appear on the permanent blockchain
ledger.
DAOs might be more democratic than traditional organizations
because every participant can vote on group decisions, not just boards or
executives.
Another potent idea is that DAOs can be more nimble and
fast-moving than traditional companies, because they’re often project-specific and
you can set them up and wind them down quickly, with significantly less red
tape than forming a traditional start-up.
There’s a lot of skepticism that DAOs can in fact make more
complex business decisions.
The more evangelic advocates of web3, believe DAO can
underpin a new form of collective ownership for the next phase of the internet.
DAOs, they argue, could allow us to build a new set of
organizations and platforms that are owned by their users, governed in fair and
transparent ways, and native to the internet.
“You could have, for example, have a DAO-governed social
network, where users could vote to take down certain types of inflammatory
posts, or award tokens to people who posted lots of valuable or enlightening
content. Or a DAO-ified version of Amazon Web Services that was run like a
co-op, with members pitching in to build new features and keep the network
running.”
Some people have even predicted that DAOs could become a
force in politics, enabling a kind of loose, unregulated crypto PAC that could
swarm campaigns and lobbying efforts with money and organizing support.
Chris Dixon, a venture capitalist and crypto investor,
recently argued that DAOs “can help course correct the internet back to its
original, idealistic vision: power and money pushed to the edges, networks
growing and flourishing together, a level playing field for talent anywhere in
the world, a thriving creative middle class, and a generally diverse and
interesting place.”
It’s fair to say that DAOs have attracted people for all
kinds of reasons: speculative gambling, trend-chasing and utopian true belief
among them.
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