Web3 is a Giant Bubble Just like the Dotcom Bubble

“The current internet ecosystem is broken,” is a phrase that I often hear and while this may be true, I am not convinced that Web3, will solve the issues of today’s ecosystem. In 2021 VC’s invested over $30bn in crypto and blockchain startups, up from ~$7bn in 2022. While there are real use cases for deploying blockchain technology and for reforming the current internet system, these investments have more to do with speculation than anything else. Proponents of Web3 argue that this new model of internet is more inclusive, secure, and ultimately transfers the value created by the community to individual users instead of large corporations, yet Web3 is not likely to solve these problems. Instead, it will likely exacerbate them.

The core reason for creating a decentralized network is so that all participants share ownership and changes to the community are implemented democratically. Value created by the network accrues to the participants through appreciation of tokens. Yet, as venture capital money has poured into the space, investors are likely to own a significant portion of the tokens and thus capturing most of the value created. The governance structure will be truly democratic, but the average member of the community will not have influence over the direction of the community. Even if VC investors did not hold significant positions in the tokens, I question whether a true democratic structure works at scale.

Few successful democracies exist today in our system of international governance and these systems consist of people from the same nationality and relatively similar upbringings. Web3 is built off the premise that the web can be governed democratically, across nations, cultures, and in an environment where people are anonymous. This is a naïve assumption.

Decentralization also prevents several large companies from owning most of the internet systems. Yet, several Layer 1 protocols are likely to win and serve as the base for Web3 so how is that any different than Google and Facebook today?

I would be remiss to not mention that the culture of the Web3 community today, while preaching openness and inclusivity, does not exhibit these values. Developers and participants are notorious for acting condescending to outsiders and resisting traditional business talent from helping professionalize the industry. This attitude will be a fatal mistake as writing great code does not imply adoption will follow. As with every innovation since the industrial revolution, talent from all functions is needed and the Web3 community is ignoring the business side of this technology revolution.

Security, another tenet of Web3 has not proven as robust as advertised. Since blockchains operate independently, to connect different chains, developers must build bridges to allow different currencies to interact. These bridges have proven susceptible to hacking. Hackers recently broke into the Ronin bridge between Axie Infinity and Etherium and stole $630mm worth of Etherium. In 2022 alone $3.8bn was stolen in 122 attacks. It is fair to assume that technology will improve, but hackers will develop new methods. Part of the problem is that the governance structure of Web3 (as mentioned earlier) exacerbates security issues. In the modern financial system, a financial institution would be held liable for security breaches, yet in Web3 there is no mechanism to hold the networks accountable and so these issues are swept under the rug. Asking people to store not only all their data and information, but their money on the network faces major obstacles.

Lastly, Web3 suffers from an interoperability problem. To create sustainable value that expands beyond the current digital ecosystem, Web3 needs to be interoperable with status quo financial, legal, and operating systems. Current applications within the Web3 ecosystem, much less the real world, are not interoperable today and require bridges between different blockchains. Systems for determining how a community can collectively own real assets do not exist. Until there is infrastructure that connects the real and digital world, these Web3 investments are speculative. In addition, politics is bound to slow down the adoption process of these technologies because monetary, fiscal, and legal systems are used by the government as policy tools.

As Web3 evolves there will be successful use cases of the technology. We are already seeing early success in its deployment in the gaming industry. However, I challenge whether humans want or need an entirely different virtual world. Web3 will fail unless the industry designs systems for digital assets to interact with real assets and lower transactions costs, simplify marketplaces, build real utility into human’s everyday life. Until the community does this, VC investments are unlikely to generate real returns or value. Just like any other bubble, it will ultimately burst.

Sources:

• Bhogale, G. (2022, February 11). A VCs guide to the Web3/Crypto galaxy. Retrieved from Medium: https://medium.com/inside-pjc/a-vcs-guide-to-the-web3-crypto-galaxy-633e2af3f5f9
• Rai, R. (2022, January 2). An Overview Of Web3 Venture Capital Activity In 2021. Retrieved from Forbes: https://www.forbes.com/sites/rahulrai/2022/01/02/an-overview-of-web3-venture-capital-activity- in-2021/?sh=5b7dbbe31f16
• Segan, S. (2022, February 14). Web3 Will Fail Because You Can’t Solve Politics With Technology. Retrieved from PC Magazine: https://www.pcmag.com/opinions/web3-will-fail-because-you-cant-solve-politics-with- technology
• Solis, B. (2022, April 4). Building On The Promise Of Web3 To Deliver A Future Of Utility, Value And Empowerment That Benefits Everyone. Retrieved from Forbes: https://www.forbes.com/sites/briansolis/2022/04/04/building-on-the-promise-of-web3-to-deliver- a-future-of-utility-value-and-empowerment-that-benefits-everyone/?sh=4db50a146c50