Last week, Paul Krugman published the latest in a series of articles sounding the bell against crypto. After the collapse of FTX and its far-reaching repercussions on the ecosystem, analysts are questioning the first principles value proposition of web3. Is there real value behind the buzzword? Does the hype match the fundamentals? Perhaps we are witnessing not just a crypto “winter” but a prelude to the end of web3 as an idea – or so Krugman argues.
Against this deluge of criticism, I want to return to crypto’s essential value proposition. I argue that, despite the structural failures from which the crypto ecosystem suffers, the technology platform offers something for the internet of tomorrow. To the chagrin of many, the underlying value proposition has nothing to do with the libertarian utopia (no government) that many were seeking. But it could represent a new frontier of human coordination, access, and equality.
The Pillars of Digital Governance
The web2 internet represented a new mode of coordination that has weakened borders and states, empowered companies, and concentrated power in an ever-shrinking set of hands. As venture capitalist Chris Dixon argues in his well-known primer on decentralization, the history of the internet can be divided into three phases. During the first phase, from the 1980s to the early 2000s, “internet services were built on open protocols controlled by the internet community.” During the second phase, from the mid-2000s to the present, “for-profit tech companies — most notably Google, Apple, Facebook, and Amazon (GAFA) — built software and services that rapidly outpaced the capabilities of open protocols.” These massive platforms allowed billions of people to access cutting-edge technologies for free. Still, centralized power in the process was (and is) capable of changing the rules at will, using huge network effects to put pressure on users and creators.
In this context, web3 – or the decentralized internet that blockchain enthusiasts defend – represents an opportunity to give power back to users. For example, small businesses using crypto might avoid pressing credit fees, or those users previously considered “unbankable” could become bankable by utilizing their metaverse wallet as their bank. The web2 metaverse, despite its advantages, remains fundamentally undemocratic by design. While blockchain ecosystems need not be decentralized (and often aren’t), they offer the potential to build digital architectures where bottom-up contributions coalesce and decisions can be made at scale. If able to overcome the dominance of incumbents, crypto could turn the internet into a mosaic of decentralized communities – each capable of defining its norms.
Web3 also offers a chance to achieve both unparalleled transparency and unparalleled privacy. Traditionally, these two values do not go together. But “on-chain” or in a Decentralized Autonomous Organization, everything we do – from items we buy to votes we place to NFTs we sell – is recorded and made public for all to see. In an instant, we can look at someone’s track record and decide for ourselves whether said person is trustworthy, competent, or dangerous. In real life, this kind of data collection would result in a dystopian social credit system; if we were to store and make public everything about everyone, the very idea of privacy would vanish. On-chain, however, all we see are people’s Ethereum addresses – digital coordinates verified and secure but distinct from people’s real-life identities. In other words, crypto allows us to get immensely more data to build more meritocratic systems without compromising privacy. If anything, the web3 world is one in which pseudonyms and virtual identities become as important as their real-life counterparts, freeing participants from biases and promoting free speech.
Together, these three pillars – decentralization, data abundance, and privacy – form the core value proposition of crypto. None of these imply the disappearance of conventional currencies, the rise of autonomous crypto-states, or the fall of nation-states. But they represent a new vision for the internet: a new layer of human coordination, access, and equality. Perhaps this value proposition does not justify the billions of dollars in Venture Capital funding that crypto start-ups received at inflated valuations for the past several years. Yet it cannot be dismissed as a fad devoid of deeper content either.
Giving Critics Their Due
Critics like Krugman do point to real problems with web3. As an innovative industry driven by 20-year-olds with no management experience, funded by 50-year-old financiers with little technical understanding of the underlying code, and promoted by a variety of grifters on social media, crypto remains extraordinarily volatile and unpredictable. In fact, FTX and its ecosystem were just some of the first to collapse. At first, DeFi companies proved too complex and cumbersome and began to collapse, so financial intermediaries, like FTX, were created. These intermediaries undercut one of crypto's primary benefits– not needing third parties that depend on trust to facilitate transactions. The hype, which has accelerated the rise of the industry and the rapid cutting of corners, may also have played into its downfall. In this context, the criticism should force genuine believers to go back to the drawing board, separate the value from the hype, and rediscover the fundamentals that drew them to the space in the first place. By recognizing both the issues and the potential, we may be able to make what web3 and crypto have to offer all the more possible.