By Suhani Gandhi
Over the past two decades of Web2 Growth, big tech companies like Google and Apple have concentrated their power and amassed extreme levels of wealth and control in the digital marketplace. Today, as we enter the era of Web3 development, many leading voices believe that decentralized ownership and control of Web3 will loosen the grip of these corporations and extract billions of dollars of value for a much larger group of participants. It’s a common philosophy among Web3 entrepreneurs: the new era of web development is about unlocking value for the everyday user. But, however compelling the motive may seem, how realistic are Web3’s aspirations?
CNBC Kelly Evans hints, “Web3 offers the greatest possible transfer of wealth that we have ever seen in history. [Users] can finally earn a lot of money. [Thus]the rise of Web3 may even seem Marxist compared to FANG [Facebook, Amazon, Netflix, Google].” She goes on to say that “the next iteration of the internet could help undo much of the damage done by its first two generations.” As idyllic as that future may seem, there are reasons to modulate expectations and exercise caution.
Looking back, blockchain technology underpins cryptocurrencies, tokens (both fungible and non-fungible – NFTs), and all other innovations contributing to the 3rd iteration of the web. The blockchain is, in essence, a decentralized and digitally distributed ledger of transactions and other publicly shared data across all computer systems on a given network. Professor Cornell James Grimmelmann, who has written extensively on modern software regulation, points out the inherent contradiction between the functionality of Web3 technology and its intended use..” If part of the impulse [for Web3] is to resist giving up personal data to Big Tech companies, then blockchain is not the answer, because it will make even more data public,” Grimmelmann said.
The “next iteration of the Internet could help undo much of the damage done by its first two generations.” As idyllic as that future may seem, there are reasons to modulate expectations and exercise caution.
Software developer Stephen Diehl lists three other technical problems this will likely prevent the blockchain from fully updating the Web3 vision. Namely, blockchain networks cannot effectively scale to the required levels without becoming centralized. Even if they were somehow able to remain decentralized at scale, the logistical issues facing social networks and other sites built on the decentralized blockchain would abound. For example, without centralization, nothing will prevent users from creating groups that are even more hateful, abusive or illicit than those that exist today. Who will fund lawyers for the compliance needs that arise on these new platforms? Who will provide technical support for forgotten passwords? Storage will also become a limitation, given the immutability of the add-only, non-remove blockchain.
Synthesizing his thoughts in a scathing denial, Diehl writes, “At its core, Web3 is a vapid marketing campaign that attempts to reframe the public’s negative associations with crypto assets into a false narrative about disrupting the hegemony of legacy tech companies. It’s a distraction in the pursuit of selling more coins and chasing the gravy of evading securities regulations.
Even if they were somehow able to remain decentralized at scale, the logistical issues facing social networks and other sites built on the decentralized blockchain would abound.
A key principle of Web3 is to return ownership and control to Internet users. Theoretically, this could be achieved by building new social networks, search engines, and marketplaces on the decentralized blockchain to be collectively operated and controlled by users rather than the centralized Big Tech companies of today. The deployment of tokens (both fungible and non-fungible), which are also built on the blockchain, further empowers users since tokens, in effect, grant digital ownership/property rights in internet material.
As desirable as this perspective may seem, its implicit assumptions are tenuous. On the one hand, Big Tech companies are unlikely to easily give up the massive power and privilege they have accrued over the past two decades of increasing centralization under Web2. Even ardently pro-Web3 tech folks, like Matt Dryhurst of NYUpredict that even as “blockchain-based social networks, transactions, and businesses grow and prosper in the coming years…Web2 companies will incorporate Web3 insights into their services to stay relevant.” We already see examples of this adaptation: Facebook repositioning to ‘Meta’launch of legacy video game developer Ubisoft NFTs in gameTwitter Building a decentralized standard for social media (“Bluesky” initiative).
Regardless of this likely outcome, let’s assume that traditional firms have managed to disintermediate and be supplanted. What would prevent other companies from starting the intended successors (users) and filling the power vacuum themselves?
The big tech companies are unlikely to easily give up the massive power and privilege they have accrued over the past two decades of increasing centralization under Web2.
Venture capital seems to be preparing for this power play. In 2021 alone, VCs poured in a record $32.8 billion – a higher amount than all previous years combined – in cryptocurrency and blockchain-related businesses through more than 2,000 transactions (a record number of transactions that registers twice as many transactions as the previous year ). Having already raised and invested more than $3 billion in more than 50 crypto startups in previous years, Silicon Valley VC Andreessen Horowitz (“A16Z”) announced plans in early 2022 to raise and invest An additional $4.5 billion in new dedicated funds this year to cement their position as the biggest backer for crypto, blockchain, and other Web3 startups.
But A16Z doesn’t stop at owning large swathes of emerging Web3 technologies. They also conducted aggressive lobbying/influence campaigns in Washington, DC to shape future regulations in a way that would pay off their outsized Web3 investments. To this end, A16Z has hired several well-connected Washington insiders in recent years to advance the firm’s agenda, including Jai Ramaswamy (former Crypto Attorney at the US Department of Justice – DOJ), Bill Hinman (former Director of the Corporate Finance Division at the Securities & Exchange Commission – SEC) and Brian Quintenz (former Commissioner of the United States Commodity Futures Trading Commission (CFTC). Although designed in terms of decentralization for the public good, regulatory proposals and draft legislation that the firm written and circulated to lawmakers are primarily focused on expanding A16Z’s power and wealth by exempting their crypto investments and associated startups existing legal requirements for tax reporting, anti-money laundering and consumer protection.
In a sign that these and other intensive lobbying pressures have already paid off, a December 2021 Congressional hearing on digital asset regulation/financial innovation had a hugely positive trend for the industry – the rosy prospect of industry dominated the audience as no counter-perspectives were present. Each witness invited to testify was a CEO of a cryptocurrency, blockchain, or other Web3-related company. Willamette Law Professor Rohan Gray sums up this kind of push for self-regulation by the crypto industry as “a classic case of asking the fox to design the chicken coop.” Gray adds: “These [firms] say it in a way that seems reasonable, but it implies that they’re essentially giving up very little in the public interest. A spokesperson for A16Z replied, “We are making big bets on the founders and the ideas that could shape the [digital] future in the hope that they will overthrow the gatekeepers and middlemen of the past.
A December 2021 congressional hearing on digital asset regulation/financial innovation had an overwhelmingly positive trend for the industry – the rosy industry perspective dominated the hearing as no counter-perspectives were present .
The Web3 movement and its associated technologies, processes and companies may indeed be well-intentioned. But a combination of technical limitations, the nature of the business and the huge profit potential/power available makes the promised golden future of greater egalitarianism, greater privacy and user control more pyrite than aurum. Caveat emptor.
Suhani Gandhi (’23) is an MBA candidate at Columbia Business School, where she focuses her studies and extracurricular involvement in media and social impact. Before business school, she worked in management consulting. Outside of school, she is an avid crossword puzzler and also enjoys writing poetry and engaging in civic discourse. Suhani graduated summa cum laude from Kansas State University in 2015 with a BS in Economics and a BS in Finance. You can reach her at LinkedIn.