Everyone wants to be on the ride for the next big technology sea change, and what could be bigger than the next Internet?
Over the last 5 years, it seems like a lot of galaxy-brained folks have had time, thanks in part to a pandemic, to dream big about just that question after catching some inspirational podcasts and YouTube gurus. Or maybe watching Gilfoyle pitch a “new internet” on the last season of Silicon Valley. And out of all this hypothetical thinking was born Web3.
What was so appealing about Web3 anyway? Since nobody could really agree on exactly what it was, other than it being one better than Web2, it could literally be whatever any aspiring entrepreneur imagined it to be.
Sure, there were common threads that appeared: Decentralization of organizations, hardware, software and data. Freedom from the control of tech giants and nation states. A level playing field for anyone to participate. Self-sovereignty. Inalienable ownership. Privacy. Opportunity.
All the kinds of ideals that generate charismatic personalities. Any event would want to feature Web3 to attract attendees, and any media outlet stood ready to jump on the incredibly compelling results some winners were promoting. The rest of the technology business world with its EBITDA figures seems so, I don’t know, boring to talk about.
Who cares about maturing cloud adoption or better integration standards, when you can explore a whole new economy based on blockchain, cryptocurrency and NFTs? Why wouldn’t tech talent leave standard Silicon Valley-funded confines to live this Web3 dream?
When you have a space that is overhyped and undefined, it encourages the rise of the worst kinds of actors. Web3 never had a chance, with its uncertain crypto-economic roots and the use of blockchain technology which hasn’t proved adequate for enterprise-class business.
Crypto-Schadenfreude for Sham, Bankrun, Fraud
Nobody has enjoyed more of a media darling status in the Web3 world than Sam Bankman-Fried, founder of the FTX exchange, who famously played video games on investor calls and shuffled around the tradeshow and media circuit in shorts, as he donated millions to “effective altruism” charities and crypto-friendly politicians.
Now Sam’s been arrested and set for extradition from the Bahamas to face charges in the USA. Shame this happens right before the Forbes cover star can testify before Congress, or present at the New York Times’ Pitchbook Summit of real industry leaders and thinkers.
It’s kind of fun to make fun of celebrity shill ads, but it’s really not funny when true believers in his leading crypto-exchange FTX watched nearly $2 billion in investor deposits that were converted into their own FTT coin disappear instantly into the ether. Today it’s hard to calculate how much ‘investment’ has been lost since a lot of VC whales, other DeFi companies and individual accounts were in on the game and parked some or all of their funds there too.
Sam himself went from a self-promoted net worth of nearly $40B to negative dollars within a week. He used his own back door to FTX to funnel money out to his own investment firm Alameda Research, where perhaps he was attempting to win big on some new bets to cover his recent market losses.
A century ago in the US, banks didn’t hold enough currency in reserve to weather a bank run – which culminated in the Great Depression and new FDIC regulations.
There’s no such account insurance in place for crypto, so when buyer confidence erodes, buyers turn into sellers in a hurry, and market makers are usually first to sell, accelerating the ‘rug pull’ effect. The basis of most other cryptos and stablecoins with some exposure to FTX started to fail faster, collapsing as much as $183B or more from the total market cap of cryptocurrencies.
Turned out, there’s nothing new about yet another Ponzi scheme, a repeating Bernie Madoff-like phenomenon my analyst colleague Jason Bloomberg has commented on ad infinitum, even appearing as a gadfly at crypto conferences to say it has little use except for criminal enterprises like money laundering and ransomware, to audience hecklers.
Blockchains looking for solutions
Besides cryptocurrency, the most common term we hear in Web3 discussions is blockchain, which is a distributed ledger technology (or DLT) underpinning Bitcoin, Ether, Dogecoin, and numerous other shitcoins such as #SHIB which has the picture of the same dog as Dogecoin.
Now, there’s nothing wrong with blockchain per se – if cloud is really just ‘a computer somewhere else’ then blockchain is more like ‘a database everywhere else’ due to its uniquely decentralized consensus mechanism and cryptographically secured data record access. Even the first Bitcoin blockchain itself has proven resilient to hacking unless someone finds a way to steal user account keys through other means.
Now I must admit, I was a maven of the blockchain space a few years ago, but my interest in it was really about the idea of having multi-party consensus mechanisms for global supply chain networks, more than token economics.
Even as an analyst, I was still thinking there was some sleeper value in blockchain, if a few properly governed projects came along, perhaps with the right kind of funding and shared understanding between technocrats, plutocrats and bureaucrats to create safer, smoother rails to legal adoption of such technologies.
We’ve seen vendors with very nice use cases for distributed ledgers, particularly in multi-party transactions, IP protection and media rights, legal agreements and auditable documents, and identity management, where a blockchain can use a combination of transparency and immutability to provide a decentralized, shared system of record – whether nodes are exposed publicly or among permissioned parties.
That still doesn’t make blockchain a valid replacement for most use cases of modern databases and data warehouses, which already offer enterprises far more scalable and high-performance back ends for applications, with security and governance controls.
If there’s no business scenario where a blockchain would work and scale better than a modern database with its own security and governance controls, it’s a hard lift to trust it as a backend.
Whether using the brute force energy consumption of Proof of Work, or the more sophisticated Proof of Stake mechanism, the process of mining, recording and storing parallel blockchains or blocks among dozens or thousands of nodes, with gas fees, etc. just isn’t sustainable for a lot of business use cases besides tracking a limited number of heads of lettuce moving through a Walmart.
The Intellyx Take
Nobody remembers Windows 3.0, do they? I remember my first real PC, a 386SX that ran on Windows 3.1. Maybe we should change Web3 to Web3.1?
The reason Web3 will have a hard time isn’t about the branding, or the technology itself. It’s really about incentives and the inevitable association of Web3 with crypto and NFT market madness.
Unfortunately a Web3 project organization could startup in any friendly jurisdiction, get audit statements from unknown parties, and receive funding without board oversight or clear regulation. This created an open invitation for the least ethical players to rise to the top of the food chain, because they could move ever-faster toward top-line growth, attracting continued fundraising investments without worrying about the inevitable crash.
I’ve met many great people who were early participants in the blockchain space whose intentions for a better world with unique computing models and applications particularly well-enabled by decentralization were noble. They weren’t building mansions on islands, parking Lambos in front of shows and taking crypto-bros out on yachts.
Who knows? Once the air clears in a Web 3.1 world, and the incentives and risks of easy money are washed out of the market for good, maybe the dream of better actors for global access to a new, decentralized Internet of applications and value could someday be realized.
©2022 Intellyx LLC. Intellyx retains editorial control over the content of this column. Image source credits: craiyon.ai “lego jesus and moneylenders.”
