NAB
“The future is already here — it’s just not very evenly
distributed,” wrote sci-fi sage and cyberpunk godfather William Gibson in 1993,
a quote that neatly sums up the current status of Web3.
article here
The consensus is that what we are witnessing is an industry
still trying to figure how the next-generation internet, and specifically a new
economic model, might pan out.
All while Web3 ventures attracted $30 billion of investment
last year, according to Forbes, with a total market cap exceeding $3
trillion.
For a deeper dive into the current state of web economics,
including cryptocurrencies, decentralized finance, tokens, blockchain, and
more, Hessie Jones, a partner at MATR Venture, has assembled the opinions
of a number of experts, Web3 advocates and critics alike.
She starts with some definitions of Web3, which are worth
restating:
Web3 (as opposed to Web1 and Web2) is succinctly defined as:
Read + Write + Owned, with the “owned” part being the newest bit.
According to Chris Dixon, co-founder of venture capital
firm a16z, “Web3 is the internet owned by the builders and users, orchestrated
with tokens.”
Web 3 is also a response to Web2, which is considered by
some to have failed. In particular in Web2 (i.e., today’s paradigm),
advertising and platforms profit from personal information, whereas in Web3,
equity, access and accountability will occur within a shared governance and a
self-organizing ecosystem.
“[Web3 is] where creators can truly own what they produce
and enable and control new value creation,” says Jones. “And where a currency
for the Web truly revolutionizes access for everyone.”
That’s the utopia. So how is that shaping up?
1. Web3’s Centralization of Wealth
However alluring the promise of democratized participation
is, what we’re really witnessing is a concentration of wealth once again among
the hands of a very few.
Jones lists Peter Thiel, Chris Dixon, Andreeson Horowitz as
the “whales” within the system.
Whales are indeed profiting. Since the start of 2022, the
global market capitalization of cryptocurrency has fallen (per AOL), but
that volatility has yet to affect the fortunes of crypto companies seeking
venture capital.
In a recent article, a JP Morgan strategist attributed
this market volatility as a byproduct of the “Bitcoin concentration where 2% of
bitcoin holders own 72% of its value.” Others have noted that the top 9%
of accounts hold 80% of the $40 billion market value of NFTs on the
Ethereum blockchain.
“The biggest issue with the system is it’s like capitalism
with all the breaks and all of the controls basically just removed in this kind
of complete anarchic system in which everybody has to be their own bank,” says
software engineer and crypto skeptic Stephen Diehl on the Tech
Won’t Save Us podcast. “By today’s standards, it’s not only difficult,
it’s unrealistic.”
If Web3 is not yet democratizing participation, there still
hope that improvements can be made.
Val Bercovici, CEO of click2nft.com, does not dispute
the early concentration of wealth, but tells Jones, “Wealth (measured by price)
is independent of ownership ratios, and Crypto indeed suffers from a
concentration of ownership in this early phase. However, the pace of new
protocols, DeFi protocols, GameFi (Play to Earn) and NFT projects is
accelerating the breadth of both ownership and new wealth creation to a more
diverse population on a daily basis.”
2. Bringing Accountability to Decentralized Structures
The promise of decentralization is really about disrupting
existing centralized financial and trade structures.
Jones writes, “It’s known that every single transaction will
consume vast amounts of computational power to confirm its validity because
that’s part of the consensus algorithm — in essence, math puzzles compete for
tokens. To what extent can DAOs (decentralized autonomous organization) scale
given the cost of power required to maintain the infrastructure?”
In other words, the sheer cost in financial terms of mining
new coin to get onto the crypto ladder is already too high for most people.
Those wealthy individuals in at the beginning and able to speculate are the
ones who will reap rewards and end up centralizing Web3 economy just like in
Web2.
Roxana Nasoi, MD of Launchpool Labs, tells Jones the
volatility in the variable cost of transaction fees is “proof that the
technology behind Ethereum is yet to mature, and that the consensus is broken.
“The high transaction fees turn Ethereum into a gated
product, affordable only to a select few.”
Accountability also means responsibility to the planet as
much as democratization. Early days mining of Bitcoin using so called Proof of
Work methods are deemed highly inefficient in terms of energy consumption and
continues to make the industry look bad, according to Mete Gultekin, analyst at
Analyst Bayshore Capital Advisors.
“The shift to Proof of Stake (PoS) models should help
eliminate the energy discussions… alternative smart contract platforms [to
Ethereum] like Avalanche, Solana, Polygon, Fantom, Immutable, Terra — all using
PoS.”
Val Bercovici, CEO at Chainkit concurs that PoW will be
replaced by PoS. He says more than two-thirds of all crypto transactions no
longer use energy-intensive Proof of Work.
“That will further improve as Ethereum itself moves to Proof
of Stake later this year…Bitcoin is very sustainable, proving to be a net
positive for energy grid stability and investment in renewables.”
3. Crypto: The Market of Artificial Scarcity
This is the crux of current Crypto activity. Artificial
scarcity is the “purposeful imitation of an item’s supply” in order to promote
demand for a product.
Increased demand = higher value on things that are deemed
limited or exclusive.
Jones says, “This pervasive FOMO is what has driven massive
activity in the NFT market. Bitcoin, for example, will only ever have 21
million coins mined, which means that as long as demand increases, the price
will rise because supply is fixed.”
Web3 can be read as a marketing scheme (or con) to create
this illusion of demand masked through pre-ICO private sales, token burning,
airdrops, and wash-trading.
These tactics in more detail:
Pre-ICO Private Sales: investors and VCs with early access
will pay a premium with the belief that later investors will come in at higher
investments, more often than not mean that early investors can capitalize much
sooner than traditional VC.
Token Burning: the destroying of remaining tokens not sold
to raise the price by reducing the supply.
Airdrops: campaigns that give away tokens for free for the
purpose of awareness building. Holders can receive bonus coins in proportion to
the amount they hold, further incentivizing people to purchase more coins to
get the larger portion of free coins.
Washtrading: investors can buy and sell the coins
simultaneously to artificially inflate the value of the coins
Mark Xue of Kaiju Capital Management tells Jones he agrees
that these are massive problems plaguing the industry, and are the reason why
fraud is prevalent:
“Most people do not have a deep technical understanding of
how these distribution and incentive schedules work (Tokenomics). They are
trying to either hit the lottery, or are investing with minimal research,
relying on influencers or social media for suggestions, chasing the next pump
and hoping they don’t get dumped on.”
Xue also adds: “Most mainstream media also barely spend any
time learning or objectively representing the crypto space. Lack of education
and the newness of crypto really poses issues in understanding and perception.
What will be reported and read will be the most salacious, eye-catching, and
easy to understand news about crypto like hacks and NFTs.”
Vitalik Buterin, the Canadian programmer who is one of the
founders of Ethereum, has also voiced concern that Eth’s potential
transformative power is at risk of being overtaken by greed.
“If we don’t exercise our voice, the only things that get
built are the things that are immediately profitable… And those are often far
from what’s actually the best for the world.”
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