“Fortune favors the brave,” Matt Damon declared in a recent ad. Walking through computer-generated scenes of explorers and adventurers, Damon then told viewers how they could join the ranks of these brave people: by trading cryptocurrency on Crypto.com. The message from the Crypto.com ad — echoed by a slew of other crypto companies that paid up to $7 million for a 30-second ad slot during February’s Super Bowl — is simple: Crypto and blockchain are the future. Get in now or lose out.
While the concept of blockchains has been around for decades and bitcoin went live over 13 years ago, the industry seized the spotlight during the pandemic. At a moment when many people started spending more time online and some found themselves with more disposable income — because they were spending less or had received stimulus checks — crypto companies promised they could park their money in these digital assets and get rich quick. And the salesmanship worked: The price of bitcoin soared from about $9,000 in March 2020 to its peak of nearly $70,000 in November 2021.
As the cash flooded in — from regular people, wealthy early adopters, and venture-capital firms looking to capture a piece of the action — blockchain and crypto evangelists started to broaden their pitch. No longer was the world of crypto just digital tokens that were both money and speculative assets. Boosters rebranded it as “Web3”: the next evolution of the internet.
Web3 includes NFTs, or nonfungible tokens, that grant ownership of digital files; DAOs, or decentralized autonomous organizations, that replace the hierarchical corporation with a democratic alternative in which token holders vote on governance decisions; and DeFi, or decentralized finance, which aims to construct a financial system that is supposedly free of intermediaries.
The hype has gone into overdrive in the past year. The NFT marketplace OpenSea’s trading volume grew by a factor of more than 600; tech workers fled their jobs to join Web3 companies; and venture-capital money poured in. Crypto evangelists promise this new internet will be more democratic and free of corporate control, where every user will have unprecedented opportunity to make a living online and own their virtual goods.
But since the November fever pitch, the cracks in the crypto and blockchain world have become impossible to ignore. Soon after the ad featuring Damon started to air last fall, the values of major cryptocurrencies like bitcoin and ethereum began to slip, resulting in the loss of nearly half their value by late January. Bitcoin fell from more than $67,000 a coin to just over $35,000 a coin on January 22, prompting critics to become even more outspoken about their concerns with NFTs, DAOs, and the space as a whole. As Web3’s reality appears poised to fall short of its big promises, it’s important to look back and recognize other times that big claims about a revolutionary technological advancement failed to live up to the promises.
A history of big promises
Apple ran an ad in The Wall Street Journal in 1980 in which Steve Jobs framed the personal computer as an invention that “offers its power to the individual.” In contrast to computers of that time — mainframes used by governments and large corporations — Jobs made the case that the personal computer would redistribute power to the rest of us.
That idea that technology alone could bestow power on individuals was the combined product of a libertarian strand of the counterculture that was popular in Silicon Valley and the rising neoliberal belief in the supremacy of the market. Jobs packaged these ideas and attached them to Apple’s small, white box, asserting that progress could be achieved through technology and entrepreneurship.
Sal Veder/AP
But while personal computers have certainly allowed for more autonomy in some ways, Jobs’ vision of total freedom through tech has not borne out. Our computerized society has facilitated the expansion of corporate power, making it easier for companies to operate on a global scale and dominate more of the economic pie. Certain professional workers have benefited, but most workers have seen their wages stagnate since the 1980s. And instead of providing freedom from bosses, workers have seen those new technologies used by their bosses to further control them.
The same narrative of empowerment through tech was reused in the 1990s. Addressing the governments of the world in his “Declaration of the Independence of Cyberspace,” John Perry Barlow, the cofounder of the Electronic Frontier Foundation, wrote, “I declare the global social space we are building to be naturally independent of the tyrannies you seek to impose on us.” Instead, he argued, cyberspace would be a space of equality because, since it was virtual, people would enter without taking the baggage (or privilege) of the physical world with them.
But, despite Barlow’s declaration, the internet did not allow users to escape the social, political, or economic structures of existing society. A person’s social standing and identity followed them onto the internet, and while Barlow heaped scorn on governments, he had little to say about the corporations that shaped the web to serve their bottom lines.
After the initial dot-com boom went bust, internet companies sought to enclose the web so users would engage with it through a small number of large platforms that made big promises of their own. Facebook’s plan to “connect the world” was supposed to bring social benefits and enhance freedom for everyone, while Jeff Bezos talked about the need to remove gatekeepers in order to encourage innovative and creative freedom, despite building a walled-off digital kingdom of his own.
All these years later, the cyberlibertarian utopia still has not arrived. Instead of taking the future into our own hands, we operate on an internet dominated by a handful of major commercial platforms that track nearly everything we do and are constantly looking for new ways to wring profit from our interactions. But the quest isn’t over: Web3 is now here to save us from this reality and deliver on the promise of freedom through digital autonomy — to put the power of the internet back in the hands of the users. Or at least that’s what its supporters want us to believe.
What is Web3?
The idea of Web3 was outlined by Gavin Wood, the cofounder of the blockchain platform ethereum, all the way back in 2014. Wood described Web3 as an evolution of the internet in which “all interactions will be carried out pseudonymously, securely, and for many services, trustlessly.” For Wood, the concept of placing trust in other people or authorities is “actually just a bad thing all around.” He said he would prefer a society in which “smart” contracts govern our interactions without the need for human intermediaries and in which everything we do online — including our communications and our financial transactions — is added to a distributed ledger (like a massive, public spreadsheet) for all to see. But that means if you post something you regret or someone else posts your personal information, that’s just too bad because once a block is added, it can’t be removed.
In an attempt to gain credibility for Web3, its backers argue it will finally fulfill the utopian promises of earlier iterations of the internet. For example, Chris Dixon, a general partner with a16z, wrote that Web3 “combines the decentralized, community-governed ethos of web1 with the advanced, modern functionality of web2.” In short, you’ll get all the benefits of big platforms — ease of use, access to community, and creative potential — and none of the drawbacks — no one selling your personal data, no big companies taking high fees for themselves or government regulations stifling what you do.
Dixon repeated the old promises of displacing gatekeepers to empower creators, developers, and artists. But instead of Spotify and Apple taking on the music labels or Amazon taking on book publishers, Web3 evangelists now promise to take on the former “disruptors” — the dominant tech companies.
The fetishization of the early “decentralized” web is also at the core of Web3, yet there’s a fundamental difference between the two. Barlow believed “legal concepts of property” would not survive the transition to the internet and would remain in the physical world — meaning no one would own anything on the web. Thus, the early internet had an aversion to copyright and intellectual property, and was marked by the free sharing of information, which some considered piracy.
But that is not a quality prized by the capitalists behind Web3. Rather, as Dixon explained, users in Web3 can “own pieces of internet services by owning tokens,” and those tokens “give users property rights.” Instead of users owning nothing, Web3 is supposed to allow us to buy and sell every little part of the internet. But that “tokenization” of the web should provoke skepticism. As history shows, commercial pressures have a habit of getting in the way of emancipatory claims.
The real future being built
Web3 is supposedly decentralized because it’s built on peer-to-peer blockchains, but the process that facilitates transactions on the blockchain — called mining — is highly concentrated. In order to complete a transaction, or add a new block to the chain, a computer must solve complex math problems. In the case of bitcoin, only about 50 miners (0.1% of the total number) control half of the mining capacity, according to a 2021 study by the National Bureau of Economic Research. For ethereum, just two mining pools controlled more than half the computational power as recently as 2020, according to a report that year. That’s important because once a coordinated group of miners controls more than 50% of the power, they can interfere with the process of adding new blocks, stop other miners from completing them, and effectively do whatever they want with transactions on that chain.
But on top of that, despite the excitement about new Web3 startups, the space is quickly consolidating around dominant companies in various niches, such as the crypto exchange Binance, the NFT marketplace OpenSea, or services like Infura or Alchemy — in the same way that e-commerce, social media, and content platforms also consolidated into a few major players as their sectors matured. And there’s good reason to believe that consolidation will continue.
As the former Signal CEO Moxie Marlinspike detailed in an assessment of Web3, centralization tends to make services more convenient and lowers the technical barrier to entry — as Facebook, Google, and other services did with the influx of internet users over the past two decades. Since most people won’t be able to (or don’t want to) figure out the technical details of a system, there is an incentive for companies to offer new users simpler access to the same tools in exchange for doing it on their service — which is exactly the goal of the venture capitalists getting involved in the space.
Paul Ratje/For The Washington Post via Getty Images
David Rosenthal, who has been working on peer-to-peer and decentralized-web technologies for decades, argued that the blockchains underpinning Web3 are largely designed to make mining expensive, which encourages consolidation so miners can use scale to gain efficiency — and thus increase their profits. Web3 companies, and the venture capitalists backing them, are also trying to work with the traditional financial system and shape regulations to ensure their crypto-based platforms become key intermediaries, which the software developer Molly White explained creates a greater incentive for centralization to comply with financial regulations and ensure users can cash out. The mounting incentives for centralization mean that Web3 will likely end up looking much like our current internet, just with a different set of corporate megaplayers.
That brings us to one of the biggest problems with the Web3 ecosystem: It’s deeply reliant on cryptocurrencies, which are less currencies and more speculative financial assets. Bill Gates has gone so far as to call crypto assets a “kind of a pure ‘greater fool theory’ type of investment” because they produce nothing of value and are entirely reliant on bringing in more people to keep increasing their values. In that way, the programmer Stephen Diehl has argued they resemble Ponzi or pyramid schemes, which explains why people who are into crypto are so eager to persuade you to join crypto too. The entire space is plagued with practices like wash trading to artificially boost the values of NFTs and pump-and-dump schemes that inflate coin or NFT values before the creator cashes out with everyone else’s money.
While regular people are being taken advantage of, this state of affairs works well for powerful players in the industry. As Gates observed, crypto does not produce value; it just redistributes the money that enters into the system like a casino. In that way, it’s a negative-sum investment; there are a bunch of players, like the exchanges, front-running customers’ trades and taking cuts for themselves along the way. So unless you buy early or have a lot of money to begin with, you will lose every time.
Diehl argued the real innovation of crypto is getting around securities regulation — which means investors and venture capitalists don’t need to wait for an initial public offering to cash out. If they have tokens, they can sell at any time, and influential people typically get access to discounted presales for new coins and NFT collections before the general public. But the resulting speculative mania creates structural weaknesses in the economy — and it’s exactly why discussions of crypto regulation or outright bans are escalating not just in the United States but also around the world.
Don’t buy the hype
After previous versions of the web failed to follow through, Web3 advocates want the rest of us to believe that this is the real emancipatory version of the internet. But it can’t be because there’s a fundamental conflict between the lofty goals of freedom and decentralization, and the interests of venture capitalists swarming to Web3 to build companies that can monopolize their segment of the industry.
The space is also prone to scams, with scammers stealing $14 billion in crypto last year, and there’s a growing admission that crypto trading resembles gambling — resulting in a new class of addiction in which many users end up losing a lot of money. When the bigger crypto pyramid schemes do finally implode, we already know there will be serious consequences for the communities that get wrapped up in them.
Instead of falling for flashy promises, we need to look critically at what is being built — from the rampant financialization to the creation of artificial scarcity by extending property rights to digital goods to the enormous energy requirements causing blackouts in many countries — and ask ourselves whether the future Web3 companies are building really aligns with their rhetoric. And when we see that it doesn’t, we can start imagining what should be built instead.