The Economist: Will Web3 reshape connected commerce?

In some ways, yes. But probably not like those now preached.

Moxie-MarlinSpike has created an Unforgeable Token (NFT). These digital tokens use clever cryptography to prove that without the need for a central authenticator, the buyer owns a unique piece of digital property. Along with cryptocurrencies such as Bitcoin, NFTs are the most obvious instance of “web3”. Its advocates and its venture capital (VC) backers hailed it as a better, more decentralized version of the internet, built on a distributed ledger known as a blockchain. Digital artists, celebrities, and even the occasional newspaper report that there are many collectors of NFTs, and NFTs tend to be expensive (over $400,000 was sold for the cover image of The Economist’s immaterial edition).

While it cryptographically looks the same as any other NFT, Mr. Marlin Spike’s token can change shape depending on who accesses it. If you buy it and watch it on your computer, it turns into a poop emoji. A few days later, NFTs were taken over by OpenSea, a marketplace for digital art. This is exactly what Mr. Mullinspike has in mind. Because his purpose is not to raise cash, but to raise awareness. His token shows that NFTs are not as easily damaged as advertised. And OpenSea’s response suggests that the so-called decentralized Web3 has its own new rules.

The Economist: Will Web3 reshape connected commerce?

The Marlin Spike affair is the latest twist in the biggest controversy that has erupted in the tech world in years. On one side are technocrats, companies offering various web3 services and their VC backers. They claim that web3 is the next big thing in the internet world, that it is truly decentralized, and that it has unlimited potential. Globally, VC deals in the crypto space were worth $25 billion last year, compared to less than $5 billion in 2020 (see chart). Last week, Andreessen Horowitz (a16z), one of Silicon Valley’s most prominent venture capital firms and biggest web3 backer, was reported to be raising $4.5 billion in web3-related funds, adding to three existing funds with a combined $3 billion value . A senior partner left a16z this month to set up his own firm focused on the web3 space.

Opposing them are people with negative attitudes. They include Mr. Marlin Spike, who is even in tech and respected among utopians for creating the secure messaging app Signal, and Jack Dorsey, who founded the two platforms that web3 promises to replace (social Twitter for media and Square for payments). A truly decentralized internet, they argue, is an illusion, “You don’t own ‘web3’. VCs and their [limited partners] own web3,” Mr Dorsey warned last month.It’s a dangerous question for the uninitiated investor: Cryptocurrency is worth about $10 trillion since November, the web3’s most mature field, and his popularity may have faded.

The fight may seem cryptic. But the stakes are high. It could change the trajectory of the Internet, and the multi-million dollar business models it has enabled.

The history of modern computing is an ongoing struggle for decentralization and recentralization. In the 1980s, the transition from mainframes to laptops gave individual users more power. Then, Microsoft took back some power around its proprietary operating system. More recently, open-source software that users can download for free and adapt to their needs has replaced proprietary programs in some industries — but has been re-used by giant tech companies to run their mobile operating systems (like Google’s Android) or Cloud computing data centers (including those operated by Amazon, Microsoft, and Google).

The web3 movement is a reaction to perhaps the greatest centralization yet: the centralization of the Internet. The original, decentralized web lasted from 1990 until around 2005, as Chris Dixon, who oversees web3 investments at a16z, explained. This web1 consists of flat web pages and is governed by open technical rules established by standards bodies.The next iteration, web2, brought the rise of tech giants like Alphabet and Meta, which managed to amass huge centralized databases of user information. Web3 “combines the decentralization, community-governed spirit of web1 with the advanced, modern features of web2,” said Mr Dixon.

That’s thanks to blockchain, which turned the centralized database that Big Tech lives on into a public good that anyone can use without permission. A blockchain is a special type of ledger that is not centrally maintained by a single entity (like a bank controls the accounts of all its customers), but is maintained collectively by its users of power. Blockchain has surpassed its earliest application, cryptocurrencies, and spread to NFTs and other kinds of “decentralized finance” (DeFi).Now, they are increasingly becoming the basis for non-financial services.

a16z’s portfolio offers a glimpse into this wild new world. It already includes more than 60 startups, at least a dozen of which are valued at more than $1 billion. They provide tools for other companies to build blockchain applications, just as cloud computing provides a platform for developers of web-based services. Nym has built something called a “mixnet”, which is a decentralized network that mixes information in a way that means no one can actually know who is sending what to whom.

Other a16z investments are for end users. Dapper Labs creates NFT applications like NBA Top Shot, a website where sports fans can buy and sell digital collectibles like key moments from basketball games. Syndicate helps investment clubs organize themselves into “decentralized autonomous organizations” (DAOs) governed by “smart contracts” that are encoded in software and embedded in the blockchain. And allows musicians to mint NFTs to make money.

What all these companies have in common, Mr Dixon explained, is that they have a hard time targeting customers. Unlike Google and Meta, they do not control users’ data. OpenSea (a16z also has stake) and Alchemy are just pipelines for the blockchain. If their customers are dissatisfied, they can move to a competing service. Alchemy boss Nikil Viswanathan said he couldn’t stop them from leaving even if he wanted to. “As a business, I would like to have proprietary choke points. But there aren’t any. We try to find them.”

The idea is that this makes Network 3 work harder to satisfy customers and keep innovating. Whether they can do that while still earning a lot of money is another matter. It is unclear how much demand there is for truly decentralized projects. This was the problem with early web3 products (then called “peer-to-peer” or “decentralized web”). The services of two social networks like Diaspora and Mastodon never really took off. Their successors may also face the same problem. Services like OpenSea would be faster, cheaper and easier to use “because all the web3 parts are gone”, Mr. Mullinspark said.

Or can it? A more fundamental problem is that even if web3 works as smoothly as its predecessors, it may be centralized. Mr Marlinspike believes the lock-in is almost automatic. The history of the Internet shows that technology protocols developed collectively evolve more slowly than technologies developed by a single company. “If something is truly decentralized, it is difficult to change and often stays in time,” he wrote. This creates opportunity. “A sure recipe for success is to take the 1990 protocol, centralize it, and iterate quickly,” he wrote.

Centralization and lock-in have been incredibly profitable. In fact, a16z has made billions of dollars from Meta, and it was an early investor in the company; one of a16z’s founders, Marc Andreessen, is still a director of Meta today.Web3’s VC booster may be counting on something like this to happen again. And to some extent, it’s already happening. Despite being a relatively new phenomenon, Web3 is already showing signs of centralization. Due to the complexity of the technology, most people cannot directly interact with the blockchain or think it is too tedious. Instead, they rely on intermediaries such as OpenSea for consumers and Alchemy for developers.

Albert Wenger of Union Square Ventures, the venture capital firm that started investing in web3 companies a few years ago, pointed to other potential “points of recentralization.” One of them is that the ownership of the computing power that keeps many blockchains up to date is often very centralized, giving these “miners” (as they are called) undue influence. It could even allow them to take over a blockchain. In other systems, token ownership is heavily skewed: 30% to 40% of recently launched web3 projects are owned by the people who launched them.

These dynamics, combined with the recent cryptocurrency slump, could cool investor enthusiasm for the industry, suggesting that web3 is unlikely to completely replace web2. Instead, the future may belong to a fusion of the two approaches, with web3 taking over certain markets. For example, whether or not people continue to spend money on NFTs, such tokens have great significance in the Metaverse, where they can be used to track ownership of digital objects and transfer them from one virtual world to another. Web3 could also play an important role in the creator economy, another hot concept. Li Jin of venture capital firm Atelier pointed out that NFTs make it easier for creators of online content to make money from their wares.

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