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📉 HBR: what is web3 *really*?
and excitement around the crypto crash of 2022
This is based on my latest piece with Scott Kominers in Harvard Business Review. Read the full piece here.
Bye DeFi 🤮
I’m excited(?) the crypto bubble is bursting. Yes, you read that right. Why? Because the money grabs suck and DeFi is exploitative and unsustainable. It taints the whole space. Culling the hyper-financialized projects - including most the NFT art projects -that aren’t solving core needs is AMAZING for the space. So I welcome it with open arms.
Weyl et al said it well:
DeFi was a decreasing returns private property paradigm retrofitted onto increasing returns networks. Built on the premise of trustlessness, DeFi is inherently limited to the realm of wholly transferable private property (e.g., transferable tokens) that mostly bundles rights of use (“usus”), rights to consume or destroy (“abusus”), and rights of profit (“fructus”).
It’s also why I really don’t believe in all the X-to-earn models that pre-suppose the utility of X. It bears repeating, but a play-to-earn game that focuses its efforts on enabling users to profit but that doesn’t get the “play” element right misses the point.
At best, DeFi risks throttling network growth by rent extraction and at worst risks ushering in dystopian surveillance monopolies dominated by “whales'' who harvest and hoover up data in a race-to-the-bottom—much like web2.
So, with all of this, what is “web3” really?
The term “web3” has become the standard label for the next generation of the internet and, more than anything, is a mental model that many developers have agreed to. "Web3" in part represents a shift in consumer demand towards more transparency and consumer control over data. "Code is law" represents a real shift from trust in companies and legal systems to trust in verifiable code, as well as decoupling the individual from the apps they use and centering them in their experience online. This shifts us into “a network of individuals and communities that come together, as emergent properties of each other, co-determining our future…opening this possibility space is a marked improvement over web2’s authoritarianism and DeFi’s anarcho-capitalism”.
Today's authoritarian internet platforms are built on aggregating users (and their data!) to harness network effects – a key source of competitive advantage. BUT how does competitive advantage work in the more open, user-focused ethos of web3 – where, for instance, users can own their digital assets, which are typically created according to interoperable standards on public blockchains (instead of on a company's private servers) - or on non-blockchain based frameworks, such as Spritely, ACDC and Backchannel that rely on data stores tied to local machines rather than global ledgers?
Because a web3 platform's users own their digital assets, they can take them with them when they leave an incumbent platform in favor of a competitor. This introduces new competitive pressures. In web3, new entrants can incentivize power users to move over to them through a strategy called a "vampire attack" that uses an incentive to "suck" users out of another platform (more on how this works, and views of whether it has worked or not here).
Plus web3 platforms run on shared infrastructure layers – typically, public blockchains – which again makes it easier for new entrants to start out: they can innovate on top of existing software, and plug into existing content networks. So while portability of digital assets increases the potential for competition, it also makes the overall dynamics of Web3 less zero-sum – and that means a platform's value creation opportunity can be bigger for all.
The ability to integrate pre-existing digital assets can help resolve the classic "cold-start problem" for new platforms; help existing platforms bootstrap off existing assets (vs. uploading directly) and help source content even for established platforms.
Sharing infrastructure means that web3 apps can focus on building great experiences – driving towards a greater emphasis on platform design as a source of competitive advantage. Even in Web3, design and user insight will continue to differentiate apps and marketplaces. All of this suggests an exciting new era of business strategy is being born, even while drawing on classic strategy frameworks.