By Suhani Gandhi
In the past two decades of Web2 growth, Big Tech corporations like Google and Apple have concentrated their power and amassed extreme levels of wealth and control over the digital market. Now, as we enter the era of Web3 development, many leading voices believe that Web3’s decentralized ownership and control will loosen the grips of these corporations and extract billions of dollars in value for a far broader group of participants. This is a common ethos among Web3 entrepreneurs: The new era of web development is all about unlocking value for the everyday user. But, as compelling as the motive sounds, how realistic are Web3’s aspirations?
CNBC’s Kelly Evans portends, “Web3 offers the biggest possible wealth transfer we’ve ever witnessed in history. [Users] can finally earn the big bucks. [Thus]the rise of Web3 can even look Marxist by comparison to FANG [Facebook, Amazon, Netflix, Google].” She goes on to say the Internet’s “next iteration may help undo much of the damage its first couple generations have made.” As idyllic as this future sounds, there are reasons to modulate expectations and tread with care.
Taking a step back, blockchain technology underpins cryptocurrencies, tokens (both fungible and non-fungible—NFTs), and all other innovations contributing to the Web’s 3rd iteration. Blockchain is, in essence, a digitally distributed, decentralized ledger of transactions and other data that’s shared publicly across all computer systems in a given network. Cornell Professor James Grimmelmann, who has written extensively on modern software regulation, highlights the inherent contradiction between Web3 technology’s functionality and its intended use.. “If part of the impetus [for Web3] is to resist giving up personal data to Big Tech companies, then blockchain isn’t the solution, since that will make even more data public,” Grimmelmann decries.
The Internet’s “next iteration may help undo much of the damage its first couple generations have made.” As idyllic as this future sounds, there are reasons to modulate expectations and tread with care.
Software developer Stephen Diehl lists three other technical issues that will likely prevent blockchain from fully updating the Web3 vision. Namely, blockchain networks can’t efficiently scale to requisite levels without becoming centralized. Even if they were somehow able to stay decentralized at scale, logistical issues facing social networks and other sites built on the decentralized blockchain would abound. For example, without centralization, there won’t be much impeding users from building even more hateful, abusive, or illicit groups than the ones existing today. Who will fund the lawyers for compliance needs that arise on these new platforms? Who will furnish tech support for forgotten passwords? Storage will also become a limitation, given the append-only and delete-nothing immutability of blockchain.
Synthesizing his thoughts in a scathing repudiation, Diehl writes, “At its core Web3 is a vapid marketing campaign that attempts to reframe the public’s negative associations of crypto assets into a false narrative about disruption of legacy tech company hegemony. It’s a distraction in the pursuit of selling more coins and continuing the gravy train of evading securities regulation.”
Even if they were somehow able to stay decentralized at scale, logistical issues facing social networks and other sites built on the decentralized blockchain would abound.
A key tenet of Web3 involves returning ownership and control to Internet users. Theoretically, this could be achieved by building new social networks, search engines, and marketplaces on the decentralized blockchain so that they’re operated and controlled collectively by the users rather than by today’s centralized Big Tech firms. Deploying tokens (both fungible and non-fungible), which are also built on blockchain, further bolsters users’ power since tokens, in effect, grant digital ownership/property rights over pieces of the Internet.
Desirable as this outlook appears, its implicit assumptions are tenuous. For one, Big Tech companies are unlikely to readily abandon the massive power and privilege they’ve accrued over the past two decades of increasing centralization under Web2. Even ardently pro-Web3 technology scholars, like NYU’s Mat Dryhurst, predict that even as “blockchain-based social networks, transactions, and businesses grow and thrive in the coming years… Web2 companies will be folding Web3 ideas into their services to stay relevant.” We’re already seeing examples of this adaptation: Facebook repositioning to ‘Meta’, legacy video game developer Ubisoft launching in-game NFTs, Twitter building a decentralized standard for social media (‘Bluesky’ initiative).
Regardless of this likely outcome, suppose legacy firms were somehow successfully disintermediated and supplanted. What would stop other companies from booting the intended successors (users) and filling the power vacuum themselves?
Big Tech companies are unlikely to readily abandon the massive power and privilege they’ve accrued over the past two decades of increasing centralization under Web2.
Venture capital appears to be gearing up for this very power play. In 2021 alone, VCs poured a record $32.8 billion – a higher amount than all previous years combined – into cryptocurrency and blockchain-related companies across more than 2,000 deals (an all-time-high deal count that clocks in at twice as many deals as the previous year). Having already raised and invested over $3 billion into 50+ crypto startups across previous years, Silicon Valley VC Andreessen Horowitz (‘A16Z’) announced plans in early 2022 to raise and invest another $4.5 billion in new dedicated funds this year to solidify their position as the biggest backer of crypto, blockchain, and other Web3 startups.
But A16Z isn’t stopping at just owning large swaths of emerging Web3 technologies. They’ve also been leading aggressive lobbying/influence campaigns in Washington, DC to shape future regulations such that their outsized Web3 investments pay off. To this end, A16Z hired several well-connected Washington insiders in recent years to push the firm’s agenda, including Jai Ramaswamy (former crypto prosecutor at the US Department of Justice—DOJ), Bill Hinman (former Corporation Finance Division Director at the US Securities & Exchange Commission—SEC), and Brian Quintenz (former Commissioner of the US Commodity Futures Trading Commission—CFTC). Although framed in terms of decentralization for public benefit, the regulatory proposals and draft legislations the firm has been writing and disseminating to lawmakers are primarily focused on expanding A16Z’s own power and wealth by exempting their invested crypto and related startups from existing tax reporting, anti- money-laundering, and consumer protection legal requirements.
In a sign of these and other such intensive lobbying pressures already yielding fruit, a December 2021 congressional hearing on regulating digital assets/financial innovation trended exceedingly industry-positive—the industry’s rosy perspective dominated at the hearing since no counter-perspectives were present. Each witness invited to testify was a CEO of a cryptocurrency, blockchain, or other Web3-related firm. Willamette Law Professor Rohan Gray sums up this type of push to self-regulate by the crypto industry as “a classic case of asking the fox to design the henhouse.” Gray adds, “These [firms] say things in a way that sounds reasonable, but it involves them essentially giving up very little in the public interest.” A spokesperson for A16Z countered, “We’re making big bets on founders and ideas with the potential to shape the [digital] future in the hope they’ll topple the gatekeepers and middlemen of the past.”
A December 2021 congressional hearing on regulating digital assets/financial innovation trended exceedingly industry-positive—the industry’s rosy perspective dominated at the hearing since no counter-perspectives were present.
The Web3 movement and its associated technologies, processes, and companies may indeed be well-intentioned. But a combination of technical limitations, the nature of business and the massive available profit/power potential render the promised golden future of greater egalitarianism, privacy, and user control more pyrite than aurum. Caveat emptor.
Suhani Gandhi (’23) is an MBA Candidate at Columbia Business School, where she focuses her studies and extracurricular involvement on media and social impact. Prior to business school, she worked in management consulting. Outside of school, she is an avid cruciverbalist and also enjoys writing poetry and engaging in civic discourse. Suhani graduated summa cum laude from Kansas State University in 2015 with a BS in Economics & a BS in Finance. You can connect with her on LinkedIn.