The move to web3 may be a ruthless baptism (1)

It seems to be felt that the whole world is rejoicing in cryptocurrencies and NFTs. Yet many in the industry worry that the gold rush, akin to “collective Theranos”, is distorting economy, benefiting professional investors.

Sometimes there is an illusion that the whole world is turning to Web3, and the question is, why is this happening? Suddenly there were Web3 Media, Web3 Advertising, Web3 Studios, Web3 Marketing Strategies, and Web3 Publishing Networks. LimeWire and MoviePass have come back to life, and as one of their CEOs put it, “the new impetus comes from Web3 technology”. Clearly, Web3 not only “changed the game” and “redesigned the real estate industry,” but also changed the future of the Internet, and perhaps the entire global economy.

It doesn’t matter, few people make it clear to others what Web3 is (or isn’t). What matters to investors is that Web3 is the hot new thing, and entrepreneurs are piling in. One venture capitalist, Hadley Harris, told me that about half of the Web3 investments he’s seen recently have come from founders who hadn’t entered the space six months ago.

Alchemy also supports this claim, which sees itself as the equivalent of Amazon Web Services in terms of Web3 infrastructure. It said in February that “hundreds of established Web2 companies” were using its platform to move to Web3. Even new pharma companies are now taking a “crypto-first approach” to Web3, with one company raising the possibility of issuing “crypto tokens” to its clinical trial participants.

“It’s like a siege, a lot of people outside the city want to rush in, and a lot of people are more afraid of missing it.”

The pace of the transition to Web3 can almost be insane. An Ottawa-based entrepreneur worried that the world will slip away from him surprised his employees by saying on the company’s Zoom conference call that he is moving his entire company to Web3. I said, ‘Guys, this is the future, this is where everything is going,’ he said. “‘If we miss the ship, I don’t think we’ll ever get back on board. (The company used to be a print-on-demand platform and now helps creators build 3D NFTs to sell to fans in the Metaverse) .

Like many of his fellow entrepreneurs, Nick Gerard, CEO and co-founder of Norby, a startup focused on the maker economy, noticed last year that his competitors were diving headfirst into cryptocurrencies and Web3. world. Potential investors in Norby are also pushing him toward Web3, Gerard said. But Gerard can’t help but be puzzled by the whole thing, and few of his clients, who he thinks are most important, are showing much interest in Web3 technology. ‘ He told me: ‘I can count on one hand the number of times I’ve actually heard ‘NFT’ come out of these people’s mouths. Even so, he and the rest of the team are still considering whether to make the switch, fearing they’ll miss out on well-known opportunities.

“Nobody wants to be Paul Krugman,” Gerald said, referring to a notorious 1998 quote in which the Nobel laureate in economics predicted that the Internet would eventually be no better than faxing Machines are more influential. (He is also a well-known anti-Bitcoin and cryptist).

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The Web3 hysteria has continued this year, even as the broader tech industry has struggled with rising interest rates and plummeting stock prices. “It’s gotten pretty ridiculous in the last six months,” said a partner at a cryptocurrency-focused investment firm. In the first three months of the year, the top 15 venture capital firms invested more in Web3 and DeFi early and seed rounds than any other space, according to research firm Pitchbook, marking the third consecutive quarter they have done so . The early- and seed-stage Web3 space received $2 billion in funding from top companies last quarter, more than double that of the second-ranked biotech space and three times that of traditional fintech. These figures underestimate the overall level of interest and funding in the field. After raising $18 billion in 2021, blockchain companies have raised at least $9.5 billion this year, and more firepower is on the way, according to figures provided to Motherboard by research firm CrunchBase.

In late May, one of Web3’s biggest institutional backers, venture capital firm A16Z (Andreessen Horowitz), announced that it had raised $45 after a series of high-profile investments in the Web3 project. billion-dollar cryptocurrency funds such as P2E game Axie Infinity and the parent company of the Boring Ape Yacht Club (BAYC).

“It was definitely a gold rush,” said Branch co-founder and CEO Dayton Mills. Mills’ company was a struggling remote work startup before transforming into a Web3 gaming platform. Investor interest skyrocketed when he started talking about his Web3 vision. “It’s a huge difference,” he said. “Some people I didn’t even meet, they just pledged via email and didn’t even talk to me.” He had planned to raise $2 million, but received $20 million in pledges within two weeks. “We stopped because it was unbelievable.” “Something big is happening,” Mills added. “A lot of people want to be involved, and a lot of people are more afraid of not being able to. What the hell are they involved in,” Mills added, “It’s like a siege, a lot of people outside the city want to rush in, and a lot of people are more afraid of missing it. . “It’s hard to say exactly what they were involved in.

The term “Web3” is sometimes attributed to Gavin Wood, one of the co-founders of the Ethereum blockchain, who in 2014 described an idealized version of the web in which the system trusts the blockchain almost entirely instead of trusting the organization. technology. But it didn’t enter the mainstream cultural context until last year, when it began as an umbrella term (coincidentally, a venture-led rebranding) to encapsulate controversial fintech products, including cryptocurrencies, blockchain , NFTs, Decentralized Autonomous Organizations (or “DAOs”), Metaverse and Decentralized Finance (or DeFi) products.

“It’s like a collective Theranos, an unproven product with no one at the helm,” said one venture capitalist.

In the view of some institutions, such as A16Z, what ties these innovations together is that they collectively provide a theoretical vision that people “have the ability to own a part of the Internet” — for example, through the use of NFTs that are inherently tradable Proof of – Ownership Receipt. In such a world, people can use and even monetize their NFTs on multiple platforms, not just on Instagram. Such a system, promoters believe — or at least claim to believe — will lead to a fairer, more public version of the web, one that will take back control from tech giants that profit from people’s data and creativity, creating A world where community is above all else.

So much of the ideological rhetoric involves using Web3 to “truly empower financial inclusion” (again, A16Z’s original words) by bringing into it those who have been marginalized by traditional financial structures. Such arguments are undoubtedly tempting. Few feel that the financial and internet structures that underpin society cannot be greatly improved. But they also obscure the fact that professional investors aren’t just pushing their money to the middle of the table to improve the world. As Hilary J. Allen, a professor of law at American University, put it succinctly, “the reason venture capitalists push all this is to make money.”

And in the Web3 world, the venture capital class and other professional investors have found a uniquely appealing set of circumstances where they believe they can make a fortune without relying on virtual reality or giant leaps in haptic technology — sometimes By accomplishing impressive regulatory arbitrage and sometimes exploiting entirely new internet markets. “If there’s any innovation in cryptoassets, it’s not in software engineering, but financial engineering,” writes London-based software engineer and cryptocurrency critic Stephen Diehl. Allen, who studies financial regulation, argues that around empowerment and The rhetoric of inclusion is nothing more than a “cynic” ploy. She and others argue that it masks some of the features of the Web3 system that make it attractive to venture capitalists, billionaires and other institutional players — despite the The industry is clearly prone to fraud, but they still act aggressively to stand their ground against the tendencies of fraud and regulatory scrutiny.

Here, we have a largely unregulated market that has matured and is full of unclear valuation metrics, controversial unregistered securities, special financial products, cash-out methods, and public-facing ideological mission statements. What’s particularly appealing is the key role tokens play in the Web3 ecosystem, a new type of financial product that regulators are still trying to get their hands on, but venture capitalists have realized that even if a company never goes public, they can Cash out quickly and generously (double if they go public). 

At least for now, it’s a near-perfect playing field for the professional money-making class, with pressure to transition or die, regardless of its utility. One entrepreneur described with great dismay that he was recently at a venture portfolio meeting talking to a founder who was building a “decentralized” dinner reservation system. When he asked why a reservation system was needed on the blockchain, the founder simply said, “This is the future.” At the very least, Web3 has the potential to lead to a better, more fulfilled version of the internet. Yet it is equally likely to prove to be what the harshest critics fear: a “hyper-capitalist” reimagining of the web that “contains the seeds of a dystopian nightmare.”

“It’s like a collective Theranos,” says one venture capitalist, “an unproven product with no one at the helm.” Many Web3 entrepreneurs and investors seem to have a passion for their mission to create a better Internet Sincere enthusiasm. For many of them, Web3 is not an idyllic possibility, but an all-out necessity, talked about with an almost religious fervor. Phil Libin, the former co-founder and CEO of Evernote, said, “It’s really an ideology to me, which is weird because VCs tend not to invest in ideology.” Shortly after a series of crypto controversies, including the sharp collapse of $Luna and its sister “stablecoin” $UST in May, A16Z still says that Web3 is just entering its “golden age.” That same week, it announced an investment in the Web3 climate venture capital firm of former WeWork CEO Adam Neumann, selling “Goddess Nature Tokens.”

Another such believer, Benjamin Cohen, who recently started a Web3-focused investment fund, told a cryptocurrency website in March that “blockchain technology and smart contract technology will inevitably be used in every aspect of our lives.” This is not an isolated point of view. Alexander Taub, co-founder of Miami-based DAO creation tool Upstream, told Motherboard in a Zoom interview, “Every existing company, in some form or another, will exist on Web3 in the future.” (Taub, who wears a “Just DAO It” hat, adds, “The potential market for DAOs is in the trillions.”) Jason Henrichs, CEO of Alloy Labs Alliance, said that many of the believers are “fanatics” and have no problem with Those who questioned them were dismissive.

Technology columnist and researcher Evgeny Morozov even compares them to “annoying vulgar Marxists” who, despite all evidence to the contrary, have (and continue to) insist that objective developments within capitalism are conducive to the inevitable transition to socialism. On the surface, their confidence levels do seem a little odd, or at least premature. A January survey by strategy firm National Research Group found that only 13 percent of U.S. adults surveyed knew what Web3 meant, and more than half had never heard of the term. Another survey conducted around the same time said that less than two-fifths of Gen Z members believed that “metaspace is the next big thing and will be part of our lives over the next decade”.

According to a recent survey by Electric Capita, A16Z claims that there will be 22,400 Web3 creators by the end of 2021 and only 18,000 developers will be working on encryption or Web3, which is a paltry amount compared to the more than 27 million developers worldwide. Some people wonder if the Web3 hype is justified. Libin was initially drawn to Web3’s concepts of “beauty” and “elegance,” he said. As CEO of startup studio All Turtles and virtual camera app mmhmm, and a former venture capitalist at General Catalyst, Libin has spent his career finding companies that solve real problems with a clear business model.But as he started hearing about more and more Web3 companies, he found himself unable to understandthe benefits of developing certain projects on the blockchain, and why not using an internal database.When he started questioning some of the investment proposals he received, he didn’t like the answers he got. Using such techniques is often unnecessarily expensive and easily exploited by hackers and scammers.

“The Web3 proponents are trying to solve real problems that need to be solved, and I just don’t think Web3 will be the solution,” he said. “As a programmer, this doesn’t make any sense to me.” The common pro-Web3 counterargument, often repeated by venture capital firms, argues that proponents are just one step ahead, like the internet in the 1990s . Martin Kenney, a professor at the University of California, Davis, who studies the industry, argues that this wild optimism is not new to Web3 and is itself at the heart of the risk and technology industry model. Investors, whose goal is always to sell a company, are motivated to target hot industries and then help increase interest in those industries.

Whatever the new thing is, it’s definitely in the VC’s interest to hype it up, and if you don’t, you’re a fool, Kenny said. So you’re going to give it to the press, you’re going to tell people it’s going to change the world, it’s the best thing since sliced ​​bread, whatever it is, convince investors that they need to own it. “This may be convincing, as it was during the dotcom boom of the late 1990s, during which companies that added “.com” to their names, according to a study of the so-called “dot-com bubble” effect , experienced a “dramatic” and “permanent” rise in valuations immediately after the rebrand, “regardless of the company’s level of engagement with the Internet.” The researchers believe this so-called “network” effect is due to people’s desire to” Connect with the Internet at all costs”, even if these companies “even if connected, are loosely connected to the Internet at best.” Eventually, the boom turned into a bust, but that was only after many venture capitalists cashed in.

“The proponents of Web3 are trying to solve real problems that need to be solved, I just don’t think Web3 will be the solution”.

Needless to say, the hype cycle has begun again. Kyle Samani, managing partner of a crypto-focused investment firm, told me that while most of his LPs don’t always fully understand the technology behind Web3, they want to be exposed to “everything.” A Citibank research report estimates that the “Metaverse”, a component of Web3 alone, could have a total addressable market of $13 trillion and as many as 5 billion users within eight years. (By comparison, the current value of housing across California is $9.2 trillion; Citi basically claims to believe that by the time high school students graduate from college by now, the Metaverse will likely be a bigger market than all but three or four industries in the U.S. industry.)

Slava Rubin, an early investor who founded Indiegogo and an alternative-asset investment search engine, said the enthusiasm reminded him of the e-commerce boom of the 1990s. “Whenever there’s a change, there’s an opportunity to displace traditional players and potentially make big bucks on investments,” he said. This time, however, the world’s best-known brands are also pouring in to avoid being left behind.Starbucks, ESPN, Spotify, and GameStop are working on NFT plans; Fidelity Investments, the largest 401(k) provider in the U.S., is allowing people to put retirement savings into Bitcoin; Goldman Sachs is offering cryptocurrency-backed loans; JPMorgan, Gucci, and Miller Lite Are buried in the virtual world; Google has a dedicated Web3 team, Facebook becomes Meta.

Venture capitalist-backed industries have changed the world and created millions of jobs over the past century, most notably in the early days of the internet. Josh Lerner, a professor at Harvard Business School who has also studied the venture capital industry, said what is rarely talked about is that the venture capital class has also made mistakes. Citing the venture-funded cleantech boom and bust of the late 2000s as a recent example, Lerner said: “Not only has the technology turned out to be a lot harder than they thought, but many businesses were operating extremely poorly, and some of the best Businesses have also been blinded by their enthusiasm, burning through a lot of investor money.”

The move to web3 may be a ruthless baptism (1)

Tomasz Tunguz is not interested in Web3 because of its ideological basis. Like many investors, he saw an opportunity to make big money because of the economic peculiarities of the Web3 ecosystem. Tunguz is a venture capitalist at Redpoint Ventures, who writes a popular blog about the industry, and became active in the Web3 marketplace Tomasz and Tomasz in the first half of last year after he noticed that the Web3 marketplace was both capital efficient and could scale to massive scale. Many others, like many others, watched in amazement as blockchain platform Solana’s token price rose from $40 in August to $190 in mid-September, briefly reaching a market cap of nearly $80 billion in November. “

It really made a lot of people see the scale potential of these companies,” Tunguz said, “and scale forces you to figure out what’s going on. “The more he looked at it, the bigger the investment opportunity seemed to be. First, these businesses had no clear metrics to value them. Over the past 20 years, investors and entrepreneurs have come together to develop fairly reliable, Standardized financial models allow them to confidently value traditional software businesses after comparing them to similar older businesses. Tunguz said: “Most software businesses really understand that a startup goes Coming in, venture capitalists and private market investors alike have a clear idea of ​​how much it should be worth. 

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