Amol Kapoor

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Web3: A Neutral Take

Written and Published March, 2022.

Note: I wrote almost all of this in a single shot while on a 103 fever from COVID. I split it up into three parts for ease of reading, but most of the cursing is still in place. YMMV.

Web3 is the new polarizing thing. Everyone has opinions about it — it feels like everyone has to have opinions about it — and so lots of people are saying lots of things and most of it is noise.

I'm not a Web3 enthusiast. Full disclosure, I have about 10-15k invested in eth, most of that coming from an investment I made back in 2017. I tend to swing back and forth between bearish and bullish on the overall idea. I have some very smart friends who I respect deeply on both sides of Web3, so I guess it makes sense that I would end up being more or less neutral.

But man. People on every side of this thing are just spouting insane bullshit! Enough that I wanted to write down my own opinions, so that I can keep some sense of what's real and what isn't.

One caveat before diving in: I don't think any of the takes below are straw men, but I'm happy to be proven wrong and will update/issue corrections as needed.

This is Part 1. See also: Part 2 (let's talk about the haters), and Part 3 (what I think)

Part 1: let's talk about the hype men.

Web3 is being touted as a financial technology. I think it is more than that, but certainly the initial use case of Web3 — crypto currencies — is finance. As a result, the crypto space has drawn a massive population of…let's call them financial professionals. These are people whose job description is, to a first order approximation, "professional gambler". There is great value in market making and providing liquidity for complex assets — in fact, these two roles of the financial system allow everything else to function — but the people that make these markets work are not inherently interested in anything beyond 'will the line go up'.

Crypto is undoubtedly in the middle of a massive speculative bubble. A ton of people who are talking about Web3 don't know what it is or how it works. This has led to some pretty bizarre claims, some of which I want to tackle here.

No, Web3 will not "solve" centralization.

A lot of crypto enthusiasts hear 'crypto is decentralized' and extrapolate to 'a web3 future will be decentralized'. This is wrong.

First: centralization is really fucking useful! Centralization allows for economies of scale, which in turn reduces global costs. There are entire areas of technological and infrastructural development that are so costly, they are completely out of reach without centralization (see: most government projects).

Second: centralization is a social phenomenon, driven by the above. If Amazon is offering cheaper prices than Barnes and Noble, everyone is locally incentivized to shop at Amazon, and everyone is locally incentivized to sell on Amazon. Similarly, if OpenSea has all the buyers and sellers, it will continue to gain all of the buyers and sellers until something more disruptive comes along. This is the entire point of building moats. Protip: most VC backed tech companies would not exist if there was no moat to build.

A lot of people have written about this, but it bears repeating: centralization is already endemic in web3. If OpenSea unilaterally decides that you shouldn't have access to an NFT, good luck buying or selling the thing.

No, Web3 will not "solve" how companies are organized. (Or: DAOs are [mostly] stupid)

DAO stands for "decentralized autonomous organization" — the basic idea behind a DAO is that people can buy tokens that correspond to voting rights, which in turn can be used to do…something. It varies per DAO.

A certain kind of crypto enthusiast loves DAOs. Their discords are filled with DAO servers. And some popular DAOs have managed to raise obscene amounts of money (eg). The promise of DAOs is that the average person can have some say in how an organization is run, allowing them to influence larger amounts of capital than they might individually have access to.

DAOs were invented in the 1600s by the Dutch East India Company. They used different terminology — shares, instead of tokens, but the idea is the same. If you own shares in a company, you have voting rights that allow you to directly impact how that company does business.

Modern web3 DAOs are strictly worse than shares.

DAOs lose all protections that have been developed over the last 400 years. Many DAOs are scams. They are obscure — if you put your money in, you do not have any guarantee about what happens to it.

DAOs are exposed to the worst parts of financial misbehavior and all of the worst parts of technical misbehavior. Many DAOs are structured as a pot of money, which means there are massive 'bounties' in place that incentivize hackers or scammers.

Many DAOs require some real world action to be taken — assets or labor to be bought or sold, like buying a constitution or paying for animators. This means that someone, a single person, is responsible for transferring the funds from the DAO out of the crypto space. If that person fucks up, or worse just walks away, there is no enforcement mechanism to get the funds back. In the real world, shareholders have rights that are backed by the courts, which in turn are backed by guns. DAOs are backed by memes.

If Web3 won't 'solve' centralization, DAOs definitely won't solve centralization. Rich people can always buy more tokens in a DAO than you can. That means that rich people will have more control, much like how shares work in public companies.

Finally, let's imagine a hypothetical ideal case where DAO token-holders are somehow actually able to enforce some kind of democratic will on some company or organization. This sucks. In the existing financial system, shareholders have the power to elect board members; simplifying a bit, the board has exactly one power, which is to fire the CEO/executive team. There are two layers of indirection between the public and the operators of the company. This is a good thing — the executive team almost tautologically understands the inner workings of a company better than everyone else, and so can make maximally efficient decisions for the sake of the company. For many companies, the members of the executive team are also the majority shareholders. By removing these layers of indirection, DAOs end up exposing companies to a lot more risk of hostile takeover, or just incompetant management by share token-holders who lack knowledge.

Overall, I actually do think DAOs do have interesting uses — for example, creating a hedge fund without a hedge fund manager, operated entirely through smart contracts. It's not clear to me that such a hedge fund would perform better than a normal hedge fund, but it's an interesting idea!

But most DAOs are being presented by crypto hype men as a way for the 'masses' to take 'decentralized control'. That's smoke and mirrors. These guys are selling bridges, they want control.

We absolutely should NOT move all data to a block chain. (Or: Web2 is amazing)

Every now and then, you'll hear someone say something like 'it would be great if medical records were on the block chain!'

No. It wouldn't be great. It would be awful.

There are ongoing, massive movements to protect user privacy, from both legislative and technological angles. These movements are in direct response to the collection and publicization of huge amounts of user data, which in turn has contributed to an increase in identity theft and fraud at every level. So when I say that PII should not go on public ledgers, it is hopefully obvious why.

There are a lot of good reasons to keep data off a block chain. Privacy is a big one. Another big one is speed. Block chains have more complex read/write protocols that necessarily make them slower than other databases. If you are building a system that requires some kind of internal memory (most systems!) you should stick to web2 technology. If you have to use decentralization, git solves 99% of the Web3 use cases I've heard of. If you can't explain why git is insufficient for your problem, you haven't thought deeply enough.

In general, almost everything you can do with web3 can be done more easily with web2 (there are a few exceptions that I cover at the end). But because many people in crypto don't understand how crypto actually works, I think that they are stuck rehashing web2. For every popular web3 application, I try to think about how it could be done in web2. Most of the time, it's strictly better to implement in web2.

A few other hot takes

  • Web3 is not meaningfully anonymous. Because of centralization, most people will be interacting with Web3 in a de-anonymized way from the beginning. But even if you were running your own wallet (no metamask, no central exchanges) every single transaction is tied to a single wallet or set of wallets, and is publicly available. Unmasking any wallet therefore allows one to reverse engineer an entire transaction chain. Eventually, the crypto needs to turn into real money, which is a very tricky point of failure (1, 2). My personal hunch is that the three letter agencies invented bitcoin for exactly this reason.
  • Trustless is not inherently better. Trusted entities (up to and including the government) make life easier. If you are doing something that actually requires trustlessness, it's either illegal or you live in a failed state. (Goes along with 'centralization is not inherently worse')
  • Nothing about Web3 is beneficial to the 'little guy'. Most crypto currency implementations are deflationary, meaning rich early adopters get all the say — just like the status quo. (EDIT: A good friend called me out on this and pointed to airdrops as a means of giving users stake in a company. He compared this to getting shares for supporting early startups like Google, Uber, Spotify. In the status quo, you need to be an accredited investor to do this, because the SEC regulates who gets shares how; in Web3 world, those regulations dont exist, so more people can get shares for a wider variety of reasons. So, MOST things about Web3 CURRENTLY are not beneficial to the little guy, but some things are definitely better.)
  • Stop conflating 'the metaverse' with web3. What the fuck do these things even have to do with each other? The connection is tenuous at best, nonexistent if we're being honest.

Closing Thoughts

Critical takes on crypto hype men is becoming its own genre, and as a result there are more articulate people than I writing about the subject. I recommend Line Goes Up, which makes a very strong case against the current state of Web3. I also recommend Matt Levine, who often talks about Web3 in his Bloomberg column. Finally, I recommend Moxie Marlinspike's (founder of Signal) take from earlier this year that deservedly went pseudo-viral.

This is Part 1. See also: Part 2 (let's talk about the haters), and Part 3 (what I think)