Crypto #4 - web3 or centralization redux?
Is web3 even more centralized than web2? Arguing the other side
Hello.
It has been a while. How have you been. Have you lost your covirginity yet? I know at least two people reading this who have lost it this week. <insert joke in poor taste here1>
2022 rolled around and a third wave of Covid is now gripping the world. When a misanthrope like me starts wishing for going to some party - you know it has hit a bad level. This week also brought news of yet another covid divorce in my circle. Clearly, too much time around each-other is leading couples to part, death notwithstanding. My friend said she had had enough of her husband loafing around in yoga pants all day. I ended the call after commiserating with my friend and agreeing that her ex-husband should be castrated. The first thing I did after was to open the Asics site and point out to my wife that what I am loafing around all day in are not yoga pants but running bottoms. Yoga pants is a whole different section…..
She didn’t look very convinced.
1. The 1% are the new proles
The concept of the class traitor is a very interesting one. I quote from wikipedia:
Class traitor is a term used mostly in socialist discourse to refer to a member of the proletarian class who works directly or indirectly against their class interest, or against their economic benefit and in favor of the bourgeoisie. It applies particularly to soldiers, police officers, bounty hunters, loss prevention, workers who refuse to respect picket lines during a strike and anyone paid a wage who actively facilitates the status quo.
It seems the normal people (yes, that will be you and I) endlessly being profiled and sold by facebooks of the world are the new bourgeoisie.
Scott Galloway in a recent article wrote:
Key to progress is class traitors: Generals warning of a military-industrial complex, product managers who narc on mendacious management, and tech leaders who violate the Silicon Valley code of the white guy — never criticize each other or your noble missions to save the world.
I present to you the classiest class traitor:
This got me thinking. So far, if you have read my misplaced musings, you know that I am quite excited by the potential of the Web3 / Defi emergence. Here is a guy at the absolute summit of his profession telling you that the very premise has been corrupted. Elon is still hawking questionable NFTs and dogecoins. This guy is telling us that the emperor has no clothes.
Should we listen?
2. The lament of decentralization
Let’s look at why centralization happened on the web in the first place. The premise at the heart of the internet was that everyone would be both a publisher and consumer of content AND infrastructure. That’s how it evolved. Arpanet was a connected set of servers you could search. To my mind, there are two key reasons:
People DO NOT want to run their own servers. It is expensive and too much work. Nerds like me don’t want to run their own servers, fortune 500 companies don’t want to run their servers. The companies offering to do that for you were successful (AWS), and the companies that iterated to build new functionality those networks are even more successful.
Platforms move faster than protocols. Email was invented 30 years ago. It is still unencrypted. Whatsapp went from plaintext to end-to-end encryption in less than a year. If something is truly decentralized, there are challenges and significant inertia to changes. Like email, a truly decentralized system often remains stuck in time. So, if you aren’t moving fast enough, you WILL FAIL. When the technology itself is more conducive to stasis than movement - you have a big fat five alarm fire on your hands. A sure recipe for success has been to take a 90’s protocol that was stuck in time, centralize it, and iterate quickly. Here is a great post by Moxie Marlinspike on this topic. He knows - he created the Signal protocol.
Poke a little under the hood of something like Ethereum and you very quickly realize that what we are looking at are the same implicit weaknesses as web1. To make the core technology itself usable, the space is consolidating once more. Around - you guessed it - platforms. Cue in the WTF moment. People will run servers for you and iterate the new functionality. Arpanet led to Web Search. Enter Opensea, Coinbase, Etherscan.
Let me give you an example of platform specific iteration. People are excited about NFT royalties. They can benefit creators without any middle men. The catch - royalties aren’t specified in ERC-7212, and it’s too late to change it, so OpenSea has its own way of configuring royalties that exists in web2 space. It’s not very elegant but it works. Most importantly, it plugs the hole in the protocol itself. Iterating quickly on centralized platforms is already outpacing the distributed protocols - effectively consolidating control into platforms.
OK - that example is a bit technical. Let me try and make it a little more layman friendly. Let’s say you and I decide we want our own domain and mail server. We configure the thing for perfect privacy, control and censorship resistance. It will never achieve any of those goals to our satisfaction. Why? Because pretty much every mail I send or receive will have Gmail/Outlook at the other end. I am only going to do as well on these parameters as Gmail/Outlook, no matter how cool, elegant and fort-knox-like my own mail server is.
In effect, the distributed ecosystems are centralizing around platforms for convenience. That is making them the worst of both worlds. Centralized control, but still distributed enough to make any iterations practically impossible.
3. Following the Money
Here are a few facts about the new blockchain economy (some links are paywalled, I can only apologise):
The top 2% of accounts own 95% of the entire supply of Bitcoin (~$800bn worth).
Due to whitelisting, most of NFT profits are limited to a small circle of insiders. so much so that the top 9% of accounts hold 80% of the of NFTs on the Ethereum blockchain (~$45bn).
So, we just did the equivalent of taking out full page ads for decentralization and giving power to the people (YAY!!) only to re-centralize power in the hands of the even fewer. Another WTF moment?
Here’s another lens: When Ethereum launched, insiders controlled 15%. But more recent web3 projects have launched with insider ownership of 30% to 40% (e.g. Solana, Avax, Near, Celo), and some at as high as 60% (here’s looking at you, Flow).
As this wonderfully articulated argument sums it up:
So where do evil VCs come in? Think of the kind of investments that make sense today. Almost every single aspect of modern life is on its way to become a duopoly. In such an environment, sensible VC investments revolve around the potential to create monopoly power. Another name for it - Centralization. Effective middlemen who create the infra3 and therefore control what you do. So, Infura provides "ETH nodes as a service”; Alchemy is "powering blockchain developers globally" and Moralis is allowing you to "build, host, and scale killer dApps".
One of the biggest influencers of the web3 potential is Andreesen Horowitz. They have raised a $2.2bn crypto fund and the GPs have been evangelizing with some zeal. You are dead to them should you question the gospel of A16Z. Mark Andreesen blocked Jack Dorsey when he spoke ill of Web3. Maybe that what block-chain means for them?
I am afraid to think that this may well be the biggest pump and dump in the history of mankind. They didn’t even spare Matt Damon. NFTs are basically Pokemon cards. They just don’t print enough of the “rare” ones.
Hell, it was a bit much even for Elon….
To quote prof. Galloway again:
Decentralisation promised to replace the middleman (the bank) with blockchain technology, but instead it’s created a Coachella for fraud, where anonymity, yogababble, and complexity protect the fraudsters from oversight or accountability.
The good thing is that people are fighting back. Maybe this is the internet’s thermidorian reaction….
Obligatory Pop Culture Reference:
As always, I look forward to hearing from you. If you liked this post, pls feel free to share this or subscribe to this newsletter using the links below. While I have been tardy of late, I try to write a 1000-2000 word essay once a week.
Yes, this is intentional. You can be as offended as you want to be. You are welcome. I am thoughtful that way - whatever floats your boat.
The base tech for all NFTs. Read more here.
and enjoy no competition because of network effects