The Ethos of Web3
Our passion is delivering Web3.0, a decentralized and fair internet where users control their own data, identity and destiny
-Web3 Foundation
Introduction: What is Web3?
The term Web3 was originally coined in 2014 by Gavin Wood, one of the founders of Ethereum. While there is no official definition for it, it is best understood by contrasting it with its predecessors, Web1 and Web2. Web1 typically refers to the period from 1991 to 2004 during which we were introduced to web browsing and email. Relatively simple and static content was sent from centralized servers to a universal client (the browser), and email opened a new communication channel that remains primary to this day. Web2 began with the founding of Facebook in 2004, and ushered in the era of social media. As we are all aware now, it also brought about the monetization of human attention through advertising and a host of negative externalities captured in documentaries like The Social Dilemma that we continue to deal with as a society. The term Web3 term became commonplace in 2021 with the launching of the Bored Ape Yacht Club NFT collection, but the key principles underneath it- the blockchain, decentralization, smart-contracting have been present since as early as 2008 when bitcoin entered the public consciousness. If Web1 was relatively decentralized, Web2 became quite centralized, and Web3 is an attempt to swing back in the other direction.
Here is a graphic which summarizes the above:
While the above provides a clinical description of web3, the objective here is to opine on the ethos underlying web3. While economic factors are always important in driving a community forward, what I’m after here are attributes of the web3 community that give it a distinct identity and feel. I would draw your attention to the terms decentralized and fair in the opening quote from the web3 foundation, which suggests that the current versions of the web are too centralized and unfair. There are three examples I’ll present that all echo a common theme: a distributed group of smaller guys going up against a more powerful centralized incumbent. The first is Artists + NFTs versus Web2 Platforms, the second is the Wall Street Bets subreddit versus billion-dollar hedge funds, and the third is Bitcoin maximalists versus the US Government and Federal Reserve. Each of these examples is comparable to the Rebel Alliance against the Galactic Empire, David versus Goliath, or whatever allegory you prefer. As I’ll argue below, the spirit of web3 is born out of what I believe is the primary source of angst in our society today: income and wealth inequality.
Example 1: Artists and NFTs versus Web2 platforms
During the most recent NFT NYC trade show, I attended several events hosted by Consensys, a provider of enabling technologies in the blockchain space best known as makers of the MetaMask digital wallet. The participants at the various forums and breakout sessions all echoed a consistent theme around developing products and solutions that counter the dominance of the Web2 platform players like Facebook/IG, Google, Spotify, etc. As entrepreneur/VC Chris Dixon stated in his interview with The Verge earlier this year, so much power and de facto control over the Internet was given to a handful of companies, and thus much of the hope for web3 is centered on mitigating the power of platforms and allowing content creators to go direct to their audience. There was an article written over a decade ago by Kevin Kelly of Wired magazine titled 1,000 True Fans, and Dixon believes that Web3 is better set up to enable this vision since the blockchain is a public ledger that cannot be owned by a private entity. Anyone who builds an audience using NFTs built on Ethereum ERC-721 has a measure of control that does not exist for an artist who builds an audience on Twitter or Instagram. And this concept is validated because in 2022– which is really just year 2 for the NFT economy– payouts to artists just from NFT sales in the primary and secondary market will surpass total payments to artists from Web2 platforms like Facebook, Spotify, etc.
Furthermore, NFTs allow an audience to go from a “follower” as they are in traditional social media to an owner in the project. Similarly, other projects leverage tokenomics to give participants in an ecosystem ownership over the enterprise, which stands in stark contrast to the approach adopted by web2 companies. The most important participants in network based platforms like Facebook and Twitter were the first 10,000 or 100,000 or 1 million users. But rarely if ever were these initial daily active users (DAU) rewarded with ownership in the enterprise. Contrast this with projects like LooksRare– an exchange where NFT buyers and sellers can meet and trade with one another– who’s tokenomics can be seen here. We see that the majority of the economics goes to participants who trade NFTs on their platform and stake their existing tokens. As stated in a tweet on August 11, 2022, “$530 milion in fees generated by LooksRare have gone back to those who staked their tokens, and these same tokens are earned by trading and listing NFTS… That’s Web3”. In contrast, when traditional web2 companies went public- the main beneficiaries were the founders, a relatively small group of employees, and the venture capitalist.
Example 2: Wall Street Bets versus Billion-Dollar-Hedge-Funds
One of the most fascinating recent developments in the financial markets was the battle between the Wall Street Bets (WSB) subreddit and multi-billion dollar hedge fund Melvin Capital that took place in early 2021 over the fate of GameStop (ticker: GME). While the details around short selling, margin calls, order flow between retail brokerages and liquidity pools are important, they are not relevant for the current discussion. What is important is that an army of retail traders numbering several million strong decided to buy shares in GME at any cost because they knew that pushing up the price of the stock was inflicting huge amounts of financial pain on Melvin Capital who had a short position in GME. Perceived to be on the side of Melvin were two additional parties: The first is a firm called Citadel, run by billionaire Ken Griffin and the second is Point72- the family office of billionaire Steve Cohen who also moonlights as owner of the NY Mets franchise. Together, these two firms threw Melvin a $2.75 billion lifeline when Melvin was about to go under in early 2021.
A casual glance at the WSB subreddit in early 2021 showed that for the self-proclaimed “degens” participating in this exercise, this was as much personal more than economic. There was a desire to inflict pain on people and institutions that they felt had profiteered in a system that left them on the outside looking in. Personal stories were shared about how they or their loved ones operating small businesses suffered financial ruin while large financial institutions were bailed out in 2008 and the federal government allowed the largest firms to continue to grow larger through mergers and unchecked monopoly power. When it was discussed how Point72 owner Steve Cohen had paid nearly $2 billion in fines to settle insider trading allegations, it affirmed that there was a criminal justice system for the ultra wealthy, and an entirely different system for the rest of us. And when Robinhood securities, the company that most WSB subscribers used to trade stocks began to restrict buy orders for GME, it only further added fuel to the theory that Citadel (a major player downstream from Robinhood order flow) played a big role in effectuating that policy. Whether or not it was totally true, these degens had located a community that understood one another’s angst, and they were mobilized, convicted, and felt empowered to do something about it. And while that $2.75 billion lifeline propped up Melvin Capital in early 2021, they continued to struggle in early 2022 and formally shut down their enterprise on May 19, 2022. And the degens rejoiced.
Example 3: Bitcoin versus the US Government and Federal Reserve
We close with the instrument that introduced the blockchain and distributed ledger into our lexicon: Bitcoin. Bitcoin was invented in 2008 with the publishing of a paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System”. At the same time it was being founded, the congress and executive branches of the US government began to collaborate with the Federal Reserve to initiate the most egregious bailout in the history of our nation. It began as a tax-payer funded bailout of the largest banks (remember TARP?) who were effectively insolvent after recklessly lending to fuel a housing bubble which ultimately ended in a housing crisis. It continued with the Fed effectively allowing banks to borrow at zero percent interest rates thus aiding in the process of rebuilding their balance sheets. The expansion of the Fed’s balance sheet continued throughout the ensuing decades, and in the midst of the CV-19 pandemic, they made the heretofore unprecedented move of bailing out junk bonds funds who, like the banks 12 years earlier, should have received their just reward for their incompetence by losing all of their savings.
While politicians uttered phrases like “too big to fail”, and “extraordinary measures to save our financial system”, a large portion of ordinary Americans saw through the rhetoric and witnessed a system where the US government was picking winners and losers. People who owned Enron or MCI Worldcom stock in the early 2000s weren’t bailed out when accounting fraud was exposed at those companies. The auto industry workers’ pensions weren’t sacred when the debt of these companies was restructured in the midst of the financial crisis. And to this day student loans remain extremely difficult to forgive.
The US Dollar is one of the greatest innovations the world has ever seen. Most of us take it for granted, but the idea that a piece of paper (or entries in a Federal Reserve regulated computer ledger) will be accepted anywhere in the world as a reliable tender for goods and services is a stunning testimony to trust and human coordination. It is predicated on the US’ hegemony, our economic prowess, our military might, and overall faith in our political system. Thus, when dollars are printed and distributed to those with direct access to a central authority like the Federal Reserve and US Government, the social contract starts to break down. Organizing economic transactions around a currency that is not similarly controlled becomes very attractive to those on the outside. The overall disgust with the behavior of central banks around the world helped catalyze the emergence of bitcoin, and while I don’t believe it will ever live up to the hype the bitcoin maximalists dream about, the other innovations centered around the distributed ledger will more than pick up the slack.
Conclusion
Using the examples of NFTs and Artists versus Web2 Platforms, Wall Street Bets Subreddit versus billion dollar hedge funds, and Bitcoin maximalists versus US Government and the Federal Reserve, I attempt to show that these seemingly unrelated instances are tied together with an underlying ethos that defines the spirit of Web3. It’s essentially a tale of a bunch of little guys coming together to attack the platforms and institutions that appear to have gotten too big and powerful- from the social media companies that dominate our lives, to the hedge funds that make billions of dollars without really contributing much to the economy, to the banking and financial services industry overall that seems to exert greater and greater tax on the real economy.
How this will evolve over time is obviously an open and complex question. A fellow by the name of Moxie Marlinspike (btw, what a name) wrote an excellent piece earlier this year that made sound arguments for why web3 will likely follow a similar path as its predecessor. The crux of his argument is that open protocols are great, but economic forces inevitably lead to companies building services on top of open protocols, and those who are the best at this will continue to enjoy outsized gains and disproportionate power. I’ll address these concerns in a future post, but my objective is certainly to build and empower in a way that is faithful to the principles and ethos that is animating this movement in our current moment.
