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Will web3 reinvent the internet business?

LIKE SEEMINGLY everyone these days, Moxie Marlinspike has created a non-fungible token (NFT). These digital chits use clever cryptography to prove, without the need for a central authenticator, that a buyer owns a unique piece of digital property. Alongside cryptocurrencies such as bitcoin, NFTs are the most visible instantiation of “web3”—an idea whose advocates and their venture-capital (VC) backers hail as a better, more decentralised version of the internet, built atop distributed ledgers known as blockchains. Digital artists, celebrities and even the occasional newspaper have issued and sold them to collectors, often for hefty sums (the immaterial version of The Economist’s cover image fetched over $400,000).

Although it looked cryptographically sound like any other NFT, however, Mr Marlinspike’s token could shift shape depending on who accessed it. If you bought it and viewed it on a computer, it transformed into a poop emoji. After a few days the NFT was taken down by OpenSea, a marketplace for digital artefacts. This played into Mr Marlinspike’s hands. For his aim was not to raise cash but to raise awareness. His token showed that NFTs are not as non-fungible as advertised. And OpenSea’s reaction illustrated that the supposedly decentralised web3 has its own gatekeepers.

The Marlinspike caper was the latest turn in perhaps the biggest controversy to erupt in tech world for several years. On one side sit techno-Utopians, firms offering assorted web3 services and their VC backers. They claim that web3 is the next big thing in cyberspace, that it is truly decentralised—and that it promises juicy returns to boot. Globally, the value of VC deals in the crypto-sphere reached $25bn last year, up from less than $5bn in 2020 (see chart). Last week Andreessen Horowitz (a16z for short), one of Silicon Valley’s most illustrious VC firms and its biggest web3 champion, was reported to be raising a $4.5bn web3-related fund, to add to three existing ones worth a total of $3bn. A senior partner left a16z this month to set up her own firm focused on web3.

Pitted against them are the sceptics. They range from Mr Marlinspike, highly respected even among the techno-Utopians for creating the secure-messaging app Signal, to Jack Dorsey, who founded two platforms of the sort that web3 promises to supersede (Twitter in social media and Square in payments). They argue that a truly decentralised internet is a pipe dream—“You don’t own ‘web3’. VCs and their [limited partners] do,” Mr Dorsey warned last month. And a dangerous one at that for the unwary investor: since November some $1trn of the value of cryptocurrencies, the most mature province of web3, has gone up in flames.

The feud may seem abstruse. But the stakes are big. It could change the trajectory of the internet—and the multitrillion-dollar business models that it has enabled.

The centre cannot hold
The history of modern computing is a constant struggle between decentralisers and recentralisers. In the 1980s the shift from mainframes to personal computers gave more power to individual users. Then Microsoft clawed back some of that power around its proprietary operating system. More recently, open-source software, which users can download for nothing and adapt to their needs, took over from proprietary programs in parts of the industry—only to be reappropriated by giant technology firms to run their mobile operating systems (as Google does with Android) or cloud-computing data centres (including those operated by Amazon, Microsoft and Google).

The web3 movement is a reaction to perhaps the greatest centralisation of all: that of the internet. As Chris Dixon, who oversees web3 investments at a16z, explains it, the original, decentralised web lasted from 1990 to about 2005. This web1, call it, was populated by flat web pages and governed by open technical rules put together by standards bodies. The next iteration, web2, brought the rise of tech giants such as Alphabet and Meta, which managed to amass huge centralised databases of user information. Web3, in Mr Dixon’s telling, “combines the decentralised, community-governed ethos of web1 with the advanced, modern functionality of web2”.

This is possible thanks to blockchains, which turn the centralised databases to which big tech owes it power into a common good that can be used by anybody without permission. Blockchains are a special type of ledger that is not maintained centrally by a single entity (as a bank controls all its customers accounts) but collectively by its power users. Blockchains have outgrown cryptocurrencies, their earliest application, and spread into NFTs and other sorts of “decentralised finance” (DeFi). Now they are increasingly underpinning non-financial services.

The portfolio of a16z offers a glimpse of this wild new world. It already includes more than 60 startups, at least a dozen of which are valued at more than $1bn. Many are developing the infrastructure for web3. Alchemy offers tools for other firms to build blockchain applications, much as cloud-computing provides a platform for developers of web-based services. Nym has built something called “mixnet”, a decentralised network to mix up messages in a way that means literally no one else can tell who is sending what to whom.

Other a16z investments are serving end users. Dapper Labs creates NFT applications such as NBA Top Shot, a website where sports fans can buy and sell digital collectables such as key moments in basketball games. Syndicate helps investment clubs to organise themselves into “decentralised autonomous organisations” (DAOs) governed by “smart contracts”, which are rules encoded in software and baked into a blockchain. And Sound.xyz allows musicians to mint NFTs to make money.

What all these companies have in common, explains Mr Dixon, is that it is hard for them to lock in customers. Unlike Google and Meta they do not control their users’ data. OpenSea, in which a16z also has a stake, and Alchemy are just pipes to the blockchain. If their customers are unhappy, they can move to a competing service. Even if he wanted, he could not keep them from leaving, says Nikil Viswanathan, Alchemy’s boss. “As a business, I would love to have proprietary choke points. But there aren’t any. We tried to find them.”

The idea is that this makes web3 companies try harder to satisfy customers and keep innovating. Whether they can do this while also making pots of money is another matter. It is not clear how much demand exists for truly decentralised projects. That was the problem of early web3 offerings (then called “peer-to-peer” or “the decentralised web”). Services such as Diaspora and Mastodon, two social networks, never really took off. Their successors could face the same problem. A service like OpenSea would be much faster, cheaper and easier to use “with all the web3 parts gone,” says Mr Marlinspike.

Or can it?
A more fundamental problem is that even if web3 worked as smoothly as its immediate predecessor, it may nevertheless lend itself to centralisation. Lock-in, reckons Mr Marlinspike, tends to emerge almost automatically. The history of the internet has shown that collectively developed technical protocols evolve more slowly than technology developed by a single firm. “If something is truly decentralised, it becomes very difficult to change, and often remains stuck in time,” he writes. That creates opportunities: “A sure recipe for success has been to take a 1990’s protocol that was stuck in time, centralise it, and iterate quickly.”

Centralisation and lock-in have been incredibly lucrative. In fact, a16z has made billions from Meta, in which it was an early investor; one of a16z’s founders, Marc Andreessen, sits on Meta’s board to this day. Web3’s VC boosters may be counting on something like this happening again. And to a degree, it already is. Despite being a relatively recent phenomenon, web3 already exhibits signs of centralisation. Because of the complexity of the technology, most people cannot interact directly with blockchains—or find it too tedious. Rather they rely on intermediaries such as OpenSea for consumers and Alchemy for developers.

Albert Wenger of Union Square Ventures, a VC firm that started investing in web3 firms a few years ago, points to other potential “points of recentralisation”. One is that the ownership of the computing power that keeps many blockchains up to date is often very concentrated, which gives these “miners”, as they are called, undue influence. It could even allow them to take over a blockchain. In other systems the ownership of tokens is heavily skewed: at recently launched web3 projects, between 30% and 40% is owned by the people who launched them.

These dynamics, combined with the latest crypto crash that may cool enthusiasm for the sector among investors, suggest that web3 is unlikely to displace web2 altogether. Instead, the future will probably belong to a mix of the two approaches, with web3 occupying certain niches. Whether or not people keep splurging on NFTs, for example, such tokens make a lot of sense in the metaverse, where they could be used to track ownership of digital objects and to move them from one virtual world to another. Web3 may also play an important role in the creator economy, another buzzy concept. Li Jin of Atelier, a VC firm, points out that NFTs make it much easier for creators of online content to make money from their wares. In this limited way, at least, even the masters of web2 see the writing on the wall: on January 20th both Meta and Twitter integrated NFTs into their platforms.

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