Web3: More of Web2?

In 1996, American poet John Perry Barlow set out an ambitious manifesto for Cyberspace, the worldwide web’s first iteration. As Barlow envisioned it, cyberspace was a place unsullied by commercial transactions, legal jargon, and government interference. The manifesto’s idea was grand and the language simple.

How times have changed.

The advent of Web3, the worldwide web’s third iteration, is marked by confusion and mild debate. No one can pinpoint the definitions or characteristics of Web3. There has been no grandstanding or announcements of staking independent territory.

There are plenty of buzzwords – trustless, leaderless, consensus, blockchain – but the chatter is mainly about business models. It seems as if maturity and commercialization have circumscribed the unbounded possibilities that lay before the under-construction information highway back in 1996.

About the only mildly interesting exchange about Web3 occurred between Andreessen Horowitz, the biggest venture capital firm investing in startups focused on Web3, and Jack Dorsey, co-founder of Twitter and Square.

Dorsey says Web3 is currently owned by venture capitalists and their partners. “It will never escape their incentives. It’s ultimately a centralized entity with a different label,” he wrote on Twitter, taking a shot at the decentralized ethos promised by Andreessen’s venture capitalists. There is a strong whiff of truth in Dorsey’s tweets. But they should be taken with a grain of salt. He co-founded two companies, one of which received an investment from Marc Andreessen himself, with VC money.

The Promise of Web3

In its early days, the worldwide web was a free-wheeling ecosystem of open-source protocols and static web pages. These protocols, such as TCP/IP for communication between two routers and SMTP for email, are the basis for many of the services available on the Internet.

Initially these services were completely free of commercial interests. Business seeped into the web’s networks through banner ads on sites at first. Then it became rampant with unchecked consumer data collection practices. Big tech firms are currently embroiled in a messy regulatory tangle that might change their very business model.

For its enthusiasts, Web3 is an evolution of the current situation. It is a decentralized version of the current web, one in which users, and not corporate entities, control data and become responsible for governing a service or product. [The decentralized Web3 differs from the Web’s original avatar because it occurs in a different context commercially].

Then the Web evolved to accommodate products and services at the endpoint of these protocols. E-mail companies, social media networks, online banking, money transfer, and video platforms became popular. Many of these services are run by large tech firms, who govern interactions and provisioning through company policies.

In practical terms, the Web3 business model is the solution to a mashup of current complaints against big tech corporations. So, Web3 will enable users to gain control of their identities and data with a single sign-on to various services. It will enable them to become providers or co-providers of services that are generally provided by big tech firms. Community-based governance of products and services will ensure that users of the service are not at the mercy of corporate policy.   

Philosophically, Gavin Wood, co-inventor of Ethereum, says Web3 is about “less trust, more truth”, meaning users place less trust in third-party providers of services or gatekeepers. That philosophy is almost similar to the argument made for cryptocurrencies: less reliance on government institutions and greater economic freedom through cryptocurrencies. [Except, we all know how that argument is playing out].

Not surprisingly, blockchain – the buzzword du jour – undergirds the supposed benefits of Web3. The distributed databases of blockchain will change the client/server architecture – in which client systems access services at servers owned and operated by large tech firms – that comprises the backbone for an overwhelming majority of the web’s architecture. The centralized server will give way to a ‘leaderless’ peer-to-peer network of systems responsible for provisioning and maintenance of products and services. Governance will be free of human bias; smart contracts and algorithms will implement rules for Web3 systems. That, at least, is the promise.

The Problems with ‘Web3’

The idea of a cooperative-owned business is not new. Many brick-and-mortar businesses are already owned by their members. Adventure goods retailer REI is an example. In fashioning a decentralized system as a panacea to the current problems plaguing the worldwide web, its enthusiasts often fail to point out its many shortcomings and problems.

For starters, implementing a decentralized setup is expensive. Previous experience has shown that implementing a blockchain for financial services is more expensive as compared to centralized setups. Even if the costs come down, there is no guarantee that consumers will be interested in sharing responsibility for a product or service. The mining ecosystem for cryptocurrencies, which started with individual miners but has coagulated into a few big firms, is an example.

In many cases, only large corporations and tech firms may have the necessary resources or funds to pursue decentralization of the sort promised by Web3. Dorsey’s Twitter is one such company. But its decentralization initiative is still nascent and there are fears that it could end up giving voice to fringe elements and far-right groups. Then there’s the fact that, while the prospect of participating in running a product or service is attractive, not everyone might be interested in it. Again, the world of mining cryptocurrencies is an example.

The emerging leaders of cryptocurrency markets, an important component of Web3, are far from decentralized. Coinbase, North America’s biggest cryptocurrency exchange, and Binance, the world’s biggest exchange by trading volume, function just like any other centralized exchange, routing trades between participants and making decisions on which tokens to list or not. Binance attempted an initial decentralized exchange offering (IDO) back in 2019. There’s been no news since.

More trenchant criticism of the decentralization paradigm in Web3 comes from Moxie Marlinspike, a well-known cryptographer. Marlinspike created two decentralized apps or, dApps as they are known, and connected them to Ethereum’s blockchain to ensure that their transaction records remain immutable. But the only way to connect to Ethereum is through a node, one of the many systems that contain a full copy of its blockchain.

Alchemy, a startup, sells node access as a service. It has ambitions to become the Amazon Web Services (AWS), the cloud service of retail behemoth Amazon. AWS is a leader in the cloud computing industry and powers the backend operations of many Fortune 500 companies.  

Marlinspike discovered that all requests for information and output of smart contracts from Ethereum’s blockchain are routed through only three companies, one of which is Alchemy, that provide this service. Not only does this mean that decentralized apps’ access to Ethereum’s blockchain is an oligopoly but also that the two companies can access client data for third-party decentralized apps.

Alchemy is, in effect, an intermediary of interaction between the ‘world computer’ that is supposed to be Ethereum and all decentralized apps. “…virtually all clients that wish to access it (a distributed consensus mechanism) do so by simply trusting the outputs from those two companies without any further verification,” writes Marlinspike.

There’s more. Marlinspike created an NFT whose look changes depending on the platform and posted it on OpenSea, the world’s biggest token marketplace. But when it is transferred to a crypto wallet after purchase, the token becomes a poop emoji. In other words, you don’t get the image that you purchased.

OpenSea, a supposedly decentralized marketplace, took down the listing. The token also became unavailable on MetaMask, Marlinspike’s crypto wallet. What happened?

“…MetaMask needs to interact with the blockchain, but the blockchain has been built such that clients like MetaMask can’t interact with it. So, like my dApp, Metamask accomplishes this by making API calls to three companies that have consolidated in this space,” writes Marlinspike.     

There’s Money in Web3

Meanwhile, there’s money to be made on Web3.

Venture funding in Web3 startups has shot up to almost $25 billion in the last year. San Francisco-based Andreessen Horowitz is the biggest investor in Web3 and has plowed money into more than 60 Web3 startups. Some of these control basic services and plumbing of the new web. For example, Alchemy sells access to the Ethereum blockchain, the biggest smart contract platform. Chris Dixon, general partner with a16z, told the Economist that it is hard for their venture companies to lock in users because they do not collect user data and are just ‘pipes to the blockchain.’

And what lucrative pipes they are! According to some accounts, Alchemy is one among only three firms that provide API (Application Programming Access) access to the Ethereum blockchain, the world’s biggest smart contract platform. APIs are used by startups to create new applications or services and write them onto Ethereum’s immutable blockchain. “As a business, I would love to have proprietary choke points. But there aren’t any. We tried to find them,” Nikil Viswanathan, Alchemy’s CEO, told the magazine.

As it happens, the company itself has become a choke point for most startups that work with it. The 2021 craze for non-fungible tokens went gangbusters for Alchemy. The company booked $25 billion worth of transaction volume and powers all major NFT platforms. “If we were to turn off, all these products wouldn’t work,” boasted Viswanathan to Bloomberg. Alchemy is valued at $3.5 billion in private markets. About a dozen startups in the Andreessen Horowitz’s portfolio are valued at more than a billion dollars.

Coinbase, another company that was funded by Andreessen Horowitz, has already made public its ambitions of creating a Google-like ecosystem of startup bets and moonshots that will enable it to carve out a leadership position in the fledgling cryptocurrency industry.  

What’s old becomes new again. In other words, Web3 is on track to become similar to the web’s current iteration.