It’s About Values, But Values Don’t Always Win: Why I’m Bearish on Web 3.0

— This post is part of the Blockchain’s Trillion Dollar Futures series —

Web 3.0 (also known as “the decentralized web” or simply the emerging space of decentralized networks and applications) is the crypto category that everyone should be watching in the next few years. Thousands of founders, funds and media outlets make daily claims that cash and store-of-value were just the beginning, and that just like the unsuspecting earthlings of 1995, we’re about to witness the emergence of massive, world-changing applications powered by blockchains.

It’s too early to make outlandish predictions, but it doesn’t prevent many people from making them and defending them religiously. What I’ll try to do in this post is boil the situation down to a list of observations and key questions that I’m asking myself when thinking about the future of web 3.0.

Let’s start with some observations:

• Blockchains are not unique enablers for any app. Unique enabler is what smartphones were for Uber. Technically, 100% of the apps that could be built with blockchain could also be built with any commercially available database
• However, blockchains differ from regular apps by providing “unbreakable guarantees”: they are permissionless, censorship-resistant and out of the control of any single entity. They predefine roles and rules for all participants
• Those guarantees appeal to some people because they imply openness, competition, true ownership, technocracy, freedom and free market
• Those guarantees come at a cost for users who use blockchain products. We live in a world where many people can’t do simple foreign exchange math. As of 2018, using the decentralized web requires understanding technical concepts such as private keys, using a new set of software tools and managing an inventory of different utility tokens to consume different services. Users also have to accept the finality of disasters such as loss of private keys, and the fact that often there is no customer support phone number to call when the worst happens
• Those guarantees also come at a cost for founders, compared to traditional tech businesses. Founders who take a radical decentralized route can’t use the world’s most advanced cloud infrastructure (AWS, for example). They can’t charge dollars for their services. They put sky high barriers in front of potential users (from obtaining utility tokens to installing special software). They sacrifice governance and the ability to iterate and change their product over time, which is a fact of life in tech startups. They have to think about liquidity and choose one blockchain to live exclusively on, because blockchains aren’t interoperable yet

The internet is where it is today because it made life convenient for users and founders. But the success of the decentralized web doesn’t seem to be about convenience as much as it’s about values. I think about web 3.0 as a version of the internet that trades convenience for better values.

Do values always beat convenience? Idealists think so. I prefer to ask how appealing the values are, and how much convenience is sacrificed. That’s why I think we should watch three important variables in the coming years:

• P (pressure) = how much pressure is going to accumulate to “rebuild the internet with better values”?
• U (friction for users) = how complex is it to use blockchain products vs. centralized products?
• F (friction for founders) = how complex is it to build a blockchain company vs. centralized company?

Web 3.0 is more likely to happen if P goes up, U goes down and F goes down. At the risk of clumsily dressing up a qualitative statement as a quantitative one, you can think about it like this:

You can also use this framework to evaluate specific projects and use cases. For example, let’s see how it explains Bitcoin’s success as a store-of-value:

• High P: Bitcoin capitalized on high pressure to build a monetary system with better values after the global financial crisis
• Low U: friction for users was kept under control as wallets and exchanges became more trustworthy and simple
• Low F: friction for founders never played a role. Bitcoin is an extremely simple invention that (arguably) has never been in need for updates

People assume that the geeks will “figure things out” and drive down U and F to zero by building decentralized infrastructure for web 3.0, but it’s not a trivial statement:

• The P question: is there a real pressure (P) from users to rebuild the internet and consume this infrastructure, or is it a case of putting the cart before the horse?
• The U and F questions: as we slowly build the decentralized internet, people seem to forget that the centralized internet continues to evolve. The Amazons, Apples, Facebooks and Stripes are working relentlessly to make it easier to start, run and use centralized products. Companies like Carta could work with regulators and help startups grant equity to early adopters, tackling the marketplace chicken & egg problem that some people hope blockchains can solve. As decentralized infrastructure gets 5x better in the next 3 years, what prevents centralized infrastructure from making the same progress or even more, thereby increasing U and F?

Interestingly, there is a prisoner’s dilemma at play today: the world is better off when the internet has better values, but as a founder I would rather build a centralized company around 99.5% of my ideas, simply because I have a higher chance to win this way.

Idealists celebrate the idea of “rebuilding the internet” and creating new types of economic activities. That, of course, implies massive value creation. I think this scenario is too aggressively priced into current market prices, investor dollars and media coverage.

Here’s a less revolutionary scenario that could play out: decentralized technologies will be part of the future as opposed to what defines the future. Several big blockchains might become the “native databases” that the internet never had. Bitcoin could be the database of cash. Civic could be the database of identity. Ethereum could be a database of ownership (in AWS terms, it means Ethereum would be more like S3 than EC2). If that happens, would the market cap of Ethereum take off or take a correction down from the current 20b USD?

The tremendous amounts of over-confidence and group thinking in the crypto community can confuse the most sober of minds. It also got truly hard to know where people’s idealism ends and their greed begins. At the very least, I think it’s way too early to tell if the revolution will not be centralized, or if any revolution will happen at all.

Originally published at itai.com on November 14, 2018.