Web3, a scam or a technical revolution?

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A basic premise of Web3 is that every product is simultaneously an investment opportunity. If you sign up for a Web3 social network or chat room or trading venue or let’s-buy-the-Constitution lark, you will get some of that project’s tokens, which will entitle you to use the project’s app or exchange or Constitution, and which will give you some notional say in the decentralized governance of the project. Also the tokens will appreciate in value if the project takes off and more people want to use it. It’s as if being an early user of Facebook or Uber also automatically made you a shareholder of Facebook or Uber, and when those services got huge you got rich.

At the Wall Street Journal this weekend, Christoper Mims wrote about “Jack Dorsey and the Unlikely Revolutionaries Who Want to Reboot the Internet”:

What if, to take but one example, users of social networks collectively owned them, or at least could vote on how they were run and what kind of speech they allowed? And what if similar questions could be asked of just about any tech company whose primary product is software and services—whether financial, cloud computing, or even entertainment-related? …

The answers are taking the form of services and apps that are the first outlines of what their creators hope will someday eat the internet completely: a distributed, democratically ruled “Web 3.0” or “Web3” that will rise like a phoenix of 1990s-era Web 1.0-idealism from out of the ashes of the corporation-controlled Web 2.0 that all of us currently inhabit.

For instance:

DeSo—which, confusingly, is simultaneously a not-for-profit foundation, a blockchain and a cryptocurrency token, but explicitly not a traditional for-profit corporation—is in many ways typical of the form. The idea behind DeSo is that everyone should be able to create their own social media service, but also that they could be interconnected in ways that, say, Facebook and Twitter would never be—including shared accounts and other shared data.

“The thesis behind DeSo is that if you can mix money and social, you can create new ways for creators to monetize,” says Nader Al-Naji, founder and head of the DeSo foundation. “Instead of creators monetizing from ads, they can monetize from DeSo coins.”

DeSo has created a new cryptocurrency (named DeSo) that, for example, could be used to “tip” other users for their posts, replacing likes with actual money—or at least DeSo tokens that can be traded for dollars on the usual cryptocurrency exchanges. Like other next-generation cryptocurrencies, inspired by Ethereum, these tokens also can store the data that actually makes up a social network, such as the text of posts …. This dual function illustrates the inspired weirdness that is Web3: If money can become code, then money can be way more than a means of exchange; it can also do anything that other software can do.

This core insight, a sort of E = mc² equivalence between money and software, is why true believers in Web3 think it could have such a huge impact. Suddenly every activity humans engage in, from buying and selling a house to liking a post on social media, can be made part of a token-based financial system of a scale and complexity that makes today’s look like an antique.

I feel like the really interesting financial innovation of Web3 is its pyramid-scheme-like nature. All sorts of things — social networks, financial exchanges, ride-sharing apps, decentralized file storage — benefit from network effects. You log into Facebook because your friends are there, and they’re there because you’re there. You call an Uber because lots of drivers are on Uber, and the drivers use Uber because the passengers do too. You might prefer the user interface of some niche social network or ride-sharing app, but if no one else uses it you won’t either. Some niche social networks might say “hey use our network and you can, like, vote on our content moderation policies or whatever,” and you might find that attractive (why?), but it’s not as attractive as Facebook’s promise that your friends are there.

This network-effect dynamic favors big incumbents: The big existing networks have better networks than small upstarts. If you are looking for a social network you will probably end up on a big popular one, not a small new one. Not always — Uber and Facebook are pretty new companies, in the scheme of things; disruption is possible — but the incumbents have advantages.

But in Web3 the economics are almost reversed. If you were an early user of Bitcoin now you’re a billionaire. If you’re an early user of some Web3 social network, you will probably accumulate some of its tokens, and if it takes off you’ll get rich. This gives you an incentive to join the next thing, because being early to the next thing will make you rich, while joining the existing popular thing won’t.

When corporations fund projects, they hope to make money, so they fund projects that they think people will like. When users fund projects, hoping to get rich, the incentive to use the project is not just “this is a useful thing for me” but also “if I use it I’ll get rich.” It turns, like, file-storage systems into also Ponzi schemes: The community of users is also a community of speculators. 

People who like Web3 mostly think this is good. Here is a tweet from law professor Aaron Wright that summarizes the effect:

And here is a tweetstorm from Index Ventures investor Rex Woodbury about the possibilities for creator tokens:

Tokens also let early fans share in the upside they help create. Say Lil Nas X launched $NAS back before Old Town Road. His token was worth $100 then. Today, it might be worth $10,000. 

An early supporter might earn a 100x return. …

Tokens translate social capital into economic capital. This financialization of everything has its downsides (there should be protections when investing in a person’s token) but tokens can also bootstrap liquidity for a creator & deliver that creator’s community economic upside.

And here is an intemperate blog post from Dror Poleg titled “In Praise of Ponzis”:

What if there was a way to pay millions of people to watch a specific video at a specific moment in order to ensure that video goes viral and makes enough money to cover the cost of paying all these people — and then some?

In the old world, this would be too complicated. Just getting everyone’s bank details would take forever. But in our world, it is possible. It takes about five minutes to set up a smart contract that sends tokens to an unlimited number of people. The contract can be programmed to pay these people automatically once they complete a certain action online — and to pay them again when their actions bear fruit and drive up the value of a song/product/stock/anything.

This is, essentially, a pyramid scheme. A Ponzi. But it makes sense. It will be the dominant marketing method of the next decade and beyond.

It feels sometimes like it is the dominant marketing method of 2021, anyway.

People who dislike Web3 mostly think this is bad. At least, they think — like Stephen Diehl — that “if there is any innovation in crypto assets it’s not in software engineering, but in financial engineering,” that Web3 is not about building good products in a good way but about the promise of riches. Here is Robin Sloan:

A large fraction of Web3’s magnetism comes from the value of the underlying cryptocurrencies. Therefore, a good diagnostic question to ask might be: would you still be curious about Web3 if those currencies were worthless, in dollar terms? For some people, the answer is “yes, absolutely”, because they would still find the foundational puzzles compelling. For others, if they’re honest, the answer is “not really”.

I sympathize with the “this is bad” camp, but to be fair I don’t own any wildly appreciated tokens and might just be jealous. I do want to talk about incentives though. Think about traditional “Web2” social networks. If you are a user, and someone shows you a new social network, you will probably use it if you find it good and not use it if you don’t. “Good” here means some combination of (1) you like its features and design and (2) network effects (your friends are on it). And maybe there is some interaction between those things where you are more likely to use a network if you think other people will like its features and design, so that you think it will build a large network.

Meanwhile traditional social networks were funded by venture capitalists. If you are a VC, and someone shows you a social network, you will probably fund it if you think that other people will like its features and design and it will build a large network. Investors, like users, will evaluate the project based on the intrinsic quality and desirability of its product.

But what about a Web3 social network? If someone shows you a Web3 social network, your decision about whether to use it will depend on (1) its goodness, (2) its usefulness as a network and (3) your odds of getting rich. Point (3) is the new one, and it seems to dominate: If you are the sort of person who chooses to use a new social network that promises to pay people for posting, it’s probably because you like money more than you like posting.

As you evaluate a new Web3 social network, how do you calculate your odds of getting rich? Well, you get rich if the network becomes popular, so you are — like a Web2 VC — evaluating the network’s odds of taking off and becoming huge. You are trying to figure out if other people will like the network and want to use it.

But notice that your decision was in large part about the money. So everyone else’s probably will be too, recursively. Your decision to join a Web3 project depends mostly on your expectation of getting rich, which depends on your expectation about other people joining, which depends on your expectation about their expectation of getting rich, which depends on your expectation about their expectation about other people joining, which depends on your expectation about their expectation about their expectation of getting rich, which etc. Only mostly! The intrinsic desirability of the project matters too. But the money seems pretty important. “Crypto projects tend to rely on some form of momentum, where one cohort of participants gets involved because the previous cohort got rich,” writes Byrne Hobart, but the reverse is also true: Each cohort gets rich because a new cohort gets involved. If the product itself is good and enjoyable to use that is probably a plus, but I am not sure it’s essential.

What sort of incentives does this create to spend your time making good products? Not none! But … attenuated, no? If you could spend a day optimizing the color scheme and messaging mechanics of your social network, or instead optimizing the payoff structure of the tokens, which one creates more value? If every product is also an investment, will the product engineers be mostly financial engineers?

We’ll see.


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