a16z: Web3 applications should be regulated instead of protocols

Many of the internet’s early proponents argued that it would always remain free and open, a borderless and unregulated tool for all of humanity. Over the past two decades, as governments crack down on abuse, this vision has lost some clarity. Yet, despite this, many of the underlying technologies of the Internet – communication protocols such as HTTP (website data exchange), SMTP (e-mail) and FTP (file transfer) – remain as free and open as ever.

Governments around the world uphold the promise of the Internet by accepting that the technology relies on open source, decentralized, autonomous and standardized protocols. When the United States passed the Science and Advanced Technology Act of 1992, it paved the way for a commercial Internet boom without the need to tamper with the computer network protocol TCP/IP. When Congress passed the Telecommunications Act of 1996, it didn’t interfere with the way data passed through the web, but still provided enough clarity to enable the United States to produce Alphabet, Amazon, Apple, Facebook and other internet giants. While there is no perfect legislation, these guardrails allow for industrial and innovative development, resulting in many of the Internet services we enjoy today.

One of the main contributing factors is that the government does not have a regulatory agreement, but instead tries to regulate applications — browsers, websites, and other user-facing software, often referred to as “clients.” – Users access the network through these applications. The same guidelines that still govern the Internet should be extended to web3, an evolution of the Internet that will feature new applications or clients, such as webapps and wallets, as well as advanced decentralized protocols, including value-exchange settlement layer contracts powered by blockchain and smart contracts. The question is not whether there should be web3 regulation. The answer is clear: regulatory rules are necessary, welcome and guaranteed. More precisely, the question is which layer of the technology stack makes the most sense for web3 regulation.

Today, the typical web user experience may involve connecting through a regulated Internet service provider and then accessing information through regulated browsers, websites, and applications, many of which rely on free and open protocols. Governments can shape this online experience by imposing access restrictions on website content or requiring compliance with privacy rules and copyright removal requests. This is how the U.S. can force YouTube to delete terrorist recruitment videos while ignoring DASH (Video Streaming Protocol).

There are several reasons why protocol-level regulation is unpopular and unfeasible. First, it is technically impossible for the protocol to comply with regulations, which often requires subjective decisions that cannot be defined. Second, it is impractical for agreements to incorporate global regulations, which vary by jurisdiction and can conflict. Third, given that an application or client can further comply with regulations on the technology stack, rewriting the technical base of the network is unnecessary and counterproductive.

Let’s examine each cause in more detail.

The agreement is technically not subject to subjective regulation

No matter how well the regulation is intent, if it requires subjective assessment, then its application to the protocol will be disastrous.

Think spam. Hatred of spam is almost universal, but what would today’s network look like if the authorities had made the e-mail protocol (SMTP) illegal for facilitating the sending of spam? The answer is: not good. The composition of spam is subjective in nature and can change over time. Big companies like Google spend huge sums of money trying to eliminate spam from their email apps or clients (e.g., Gmail) — but they still can’t. In addition, even if some authorities require SMTP to filter spam by default, since the protocol is open source, malicious actors can simply reverse engineer the filter to circumvent it. Therefore, banning SMTP for facilitating spam is either ineffective or the end of email.

In web3, we can compare tokens to emails in the Decentralized Transaction Protocol (DEX). If governments wish to prohibit the use of such agreements in exchange for certain tokens that they believe may be securities or derivatives, they need technical specifications that can articulate objective compliance with such classifications. But such an objective classification criterion is impossible. The determination of whether an asset is a security or a derivative is subjective and requires an analysis of facts and law. Even the U.S. Securities and Exchange Commission is struggling with this.

Attempts to embed second-order subjective analysis into the base layer instruction set are futile. Just like SMTP, decentralized and autonomous protocols like DEX cannot be subjectively analyzed without adding human intermediaries, thus negating the decentralization and autonomy of the protocol. As a result, applying such regulations to the DEX would effectively ban such protocols, thereby banning emerging categories of technological innovation across the board and jeopardizing the viability of all web3s.

The protocol is virtually incapable of global regulation

Even though it is technically possible to build protocols that enable complex and subjective decisions, it is impractical to do so on a global scale.

Imagine the quagmire of conflict. SMTP allows us to send emails to anyone in the world, but if the United States asks SMTP to filter spam, we can assume that foreign governments will also ask for similar restrictions. In addition, since the composition of spam is subjective, we can also assume that government requirements will vary. Therefore, even if it is technically possible to build protocols capable of making complex and subjective decisions, doing so runs counter to the concept of establishing standards that are practical on a global scale. SMTP simply can’t contain the ever-changing spam filter requirements of 195 countries, and even if the protocol could, it doesn’t know where users are located and how to fairly prioritize competitive decisions.

Rules depend on the context. In web3, what securities and derivatives laws allow varies from country to country, and these laws change all the time. DEXs cannot establish global standards for such laws and, like SMTP, cannot restrict access based on geography. Ultimately, agreements are unlikely to succeed if they need to be built on changing global regulation.

These issues can be avoided by conforming the application or client

It should be clear by now why it is critical to regulate applications rather than protocols. Application-level regulation can achieve government goals without jeopardizing the underlying technology. We know this because this approach has worked.

Early network protocols are still useful more than 30 years later because they are still open source, decentralized, autonomous, and standardized. But governments can limit the information passed through these protocols by regulating apps. Or they can protect the free flow of information, as the United States did by ratifying Section 230 of the Communications Practices Act of 1996. Each country can determine its own methodology, and businesses operating browsers, websites, and applications in their respective jurisdictions have the ability to tailor products to comply with such decisions.

Since the dichotomy between protocol and application is the same in web3, the approach to regulation of web3 should remain the same. Web3 applications, such as wallets, web applications, and other applications, enable users to deposit digital assets into a liquidity pool of lending agreements, purchase NFTs through marketplace agreements, and trade assets on DEXs. These wallets, websites, and apps can be regulated in each jurisdiction where they seek to provide access, and it is reasonable to require them to comply.

The first generation of networks provided us with incredible tools in the form of networks, data exchange, e-mail and file transfer protocols, all of which made it possible to move information at internet speeds. Web3 makes it possible to transfer value at this rate, and lending and asset exchange have become native features of this new internet. This is an incredible public good that must be protected. As web3 expands from decentralized finance or “DeFi” to video games, social media, the creator economy, and the gig economy, regulation that creates a level playing field in these areas will become even more important. Weighing all the factors, the right approach becomes obvious.

Applications, not protocols, should be regulated.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/a16z-web3-applications-should-be-regulated-instead-of-protocols/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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