Some spicy web3 hot takes
Crypto economics are complicated (so most web3 profits are probably fake)
I’ve often observed that Silicon Valley keeps the business side simple to free up energy to focus on product and technology; web3 is proving that wisdom. Here are two simple examples. When you have a large, international company that does business in other countries it will inevitably conduct business in multiple currencies; those currencies have fluctuating exchange rates (usually modestly) concerning that company’s reporting currencies. Companies adjust and disclose this, but not in crypto even though most transactions are conducted in cryptocurrency but reported in dollars. According to Dune Analytics, OpenSea, for example, did $5 billion in January 2022, which is 625x its volume in January 2021. That’s great, but during that time the price of ETH increased 4x (6x by November!), and Solana is even more extreme, increasing over 100x in 2021. One wonders, how many web3 companies reported financial results in dollars that grew less than the price of their native cryptocurrency? Similarly, accountants argue a lot over whether a particular money flow is a revenue or a cost (like with payment processors). Web3 has not grappled with this at all because tokens are built directly into the operating model. The Decentralized Wireless Alliance, for example, found that Helium, which raised over $300 million from a16z and claims to have over 10,000 base stations, has “real” revenue of just over $6000. One wonders, how many companies report usage fees needed to operate a network as revenue when it is really a cost? Ethereum’s gas is often described as revenue, but is that right?
So far, blockchain’s brightest future looks like a developer technology, not a consumer product
The strongest of evidence that web3 is here to say is, as Marc Andreessen mentioned, talent flows. A ton of super smart people are throwing themselves into web3. Some of this is the intense flow of money, and some of it is just that the blockchain is an interesting technology. But it seems to me that the “deep” reason is that every developer has had to deal with the pain of closed data. They’ve had to deal with legacy APIs and a datasets that a gatekeeper won’t expose. The idea of an ability to have software and data live on the Internet with no gatekeepers or centralized authority is very appealing to developers. It solves a real pain point for them. Combine that with technically interesting work and you have something worth being excited about.
A lot of the coolest things about web3 have absolutely nothing to do with web3
One of the most exciting things about web3 is the number of companies that are rethinking ownership, incentives, and things like profit-sharing. But you don’t need web3 for that at all. You don’t need tokens or decentralization to accomplish ownership. It’s awesome that web3 has caused people to think differently, but it is frankly unconvincing as a selling point for blockchain. Companies have already accomplished incentivization in a centralized fashion with things like stock options and creator funds. In fact, it’s instructive that the CeFi exchanges have been way more successful than the DeFi ones (and Moxxie’s awesome art project was banned by centralized services!). And the idea that you need blockchain for community, which is older in human history than civilization itself, is a joke not worth further discussion. Maybe web3 can change what community means, which is a real and tantalizing possibility; however, there needs to be more innovation here to accept that.
Tokenomics are completely backwards, signal-wiping, and distracting
Tokenomics are an essential part of blockchains not because they do something for users but because they compensate the parties that secure the blockchain. It exists because of the computing cost and the need to incentivize the expense of that compute (that’s not to say tokenization hasn’t been used innovatively when used thoughtfully). Building a startup is hard enough. So now you have to build a product, solve technical problems, and attract users, and design an economy just to get started? Yeah, sure. Web3 needs to get back to its roots with tokens: use them to pay miners/validators/whatever to keep the service free and then just build a compelling service that only a decentralized service can provide. Because tokens are a way to get rich quick, companies now make tokens a big part of the user experience, like play to earn. But as Aaron Levie eloquently put it, all that’s done is obfuscate whether you have product-market fit. Joe Weisenthal pointed out that during the Dotcom Crash, eBay and eTrade both saw growth in their usage even as their stock crashed because they provided real usage. In web3, so far this has not been the case — OpenSea and Axie Infinity have lost more than half their users in the past few months.
Bitcoin’s failure as a currency is underdiscussed and actually important
Bitcoin has failed as a currency, as has its progeny like Ripple. There are attempts to fix it with things like the Lightning Network (which could work — Lightning is brilliant!) and Web 5 (which is a serious effort), but so far Bitcoin is still traded more than it is used. In the meantime, people have pivoted to describing Bitcoin as both a store of value and a volatile way to make money, somehow. While the hopium may one day turn into something tangible, the fact that Bitcoin has failed at its originally intended purpose is actually really important and underdiscussed. Usually, a pivot is unimportant. Companies pivot all the time. But Bitcoin has birthed a trillion-dollar asset class without finding its use case yet. That is unusual, and Bitcoin’s failure is underdiscussed because the notional value has gone up anyways. The normal explanations of being slow and volatile are both proximate causes of failure, not deeper ones. Criticism in web3 is often met with derision and outright hostility —even Kelsey Hightower, a Kubernetes creator (as good a distributed systems expert as it gets) was pilloried for his analysis. This is particularly important because Bitcoin has sometimes been used as a currency for large or critical purchases in failing government environments, like buying medicine in Venezuela. In fact, currency remains the most compelling use case for blockchain (even a decade and a half later!). A deeper analysis is needed to find the right pivot or maybe realize the initial vision.
On-chain data is necessary for web3’s long term success
Blockchains are not yet able to meaningfully store data on-chain. That means that they are fancy certificates, essentially, pointing to an AWS instance somewhere. That’s just as centralized as before and will eventually be replaced by an on-cloud solution. That’s not high-value enough to abandon things like government custody or trusted auction houses. Similarly, for things like digital art (where NFTs make complete sense and might be revolutionary for digital artists like Refik Anadol), the important qualities (scarcity and object permanence) are only meaningful if they apply to the art itself, not the certificate, which requires on-chain data. Otherwise, the art is just centralized in the cloud and they will custody the certificates too, obviating the blockchain.
So far only the science DAOs are interesting
Decentralized Autonomous Organizations, or DAOs, are rather interesting, and the most interesting use case so far is science because it is the only example that needs both decentralization and incentivization. The centralization of science, from government funding agencies to large universities to large journal conglomerates, has clearly corrupted science, prompting the creation of decentralized solutions like PLoS. But science requires coordination and incentivizing because of the need for many parties to effect certain behavior, like journal refereeing or grant writing, so decentralization efforts in science have been successful but not lived up to their full potential. Therefore, having money and incentives baked in for Science DAOs may be a positive to achieve much-needed decentralization, as opposed to many of the above examples where those qualities were distractions or even harmful. In contrast, ConstitutionDAO was funny and raised a surprising amount of money, but it was always doomed and the aftermath was really messy because no one involved had ever really thought about it.
Sorry, it’s not still early
You can only say “it’s still early” for so long. If you think blockchain is a generational technology and compare its uptake to the historical progression of other huge technologies, then yes, it is clearly early over a 50 year span. But uptake is usually measured by wallets and not use. The Bitcoin white paper is 14 years old now. When ARPANET was 14 years old, it had proven its intended use case — fostering research collaboration — and the NSF funded CSNET to expand the early Internet to all universities. When the transistor was 14 years old, which was already proven as the best technology for computing and radios, it had already overcome its biggest technical problem (by switching from Germanium to Silicon), and had proven essential for a number of military and industrial applications. It’s easy to find people who have traded crypto or tried to make money off crypto through things like play-to-earn. It is hard to find people who have actually used web3 for a sustained period of time. Solana has more transactions than Ethereum, but still, where is the great, exciting application?
The market for blockchain might be really small and no one’s talking about
I saved the spiciest take for last. It is not, at all, obvious that the market for blockchain is large. At its heart, blockchain is just another type of database. When NoSQL came out it was revolutionary. It was a database that was truly optimized for the mobile era, so even though no user ever demanded MongoDB, the applications that they wanted required it, which drove its uptake. There turned out to be a huge market for NoSQL databases, but they didn’t kill SQL (turns out relational databases aren’t so bad) and the biggest money went to the cloud providers. Perhaps blockchain is actually a substitute for incentive systems, in which case it could be a subset of something bigger than any database system ever was. But it is also possible that the use cases are few, or small, in which case the juice might not be worth the squeeze. No one has done more to think about potential use cases than Vitalik, but many of them are still unproven and seem small.