Why web3 supposedly isn’t a scam
A friend and former coworker, Václav Pavlín wrote about web3 on LinkedIn. If you’re not familiar with web3, it is the polite conversation word for cryptocoins and cryptocurrency. It is, as I understand it, a rebrand of the technology to try and distance itself from the scams and problems of crypto.
Narrator: The rebrand isn’t working.
I am putting this on my blog so it doesn’t get lost in the walled garden of LinkedIn.
It’s not a scam … it’s a business
That aside, he, now a CTO at a web3 company, laid out his theory on why crypto is being seen as scammy. He suggests that we ignore the “shitcoins” problem, something I am willing to grant him. What he focuses on is two aspects he thinks distinguishes a business from a pyramid scheme (generically scam).
- How many can benefit (i.e. make money)
- How much money must flow in to stay operational
His first point argues that a traditional business is structured so that only those at the top of the organizational structure and the investors benefit. The bulk of the people involved are given salaries that are less than the value they generate. In web3 because it is set up to benefit everyone, including those at the bottom it resembles a scam.
There is a kernel of truth here, but I don’t think this is really the defining element of a scam either. Equal pay companies, B-corps and non-profits can all be set up with this kind of a structure. I believe it is arguable that when companies give stock to employees they are also doing some level of profit distribution to the “bottom of the pyramid,” assuming this stock doesn’t simply offset missing wages.
His second point is a bit more lost on me. He starts by saying that a “[t]raditional business is very expensive to run - marketing, promotions, operational cost, hiring… you need to bring in money constantly.” Web3 may (he says “might”) change this through a community effect that can optimize cash flow. He goes on to add that, “decentralized could mean less operational cost, hiring is done through discords, marketing is done by community, through their networks which then grows the community.”
This point claims that decentralization will somehow magically make cash flow better. Maybe. However, focusing exclusively on cash flow is a problem. If, for example, you are relying on your community network to market for you, even if you don’t pay cash for this effort, the effort was still expended. Cash is just for keeping score and this argument rigs the game by convincing people to either donate their effort or to keep a second set of “books” in a non-cash form that you choose to ignore.
But wait there are examples …
Václav helpfully provides 4 examples of companies he thinks are actually solving the problem. He cites, Livepeer, Rubix, Aave, and Arweave.
In my reply on LinkedIn, I make the argument that none of these companies require web3.
Livepeer seems to have a solution to video encoding that doesn’t need to rely on web3 at all. The addition of web3 complicates things in my opinion. More importantly though, it introduces a pay to earn element. In my experience, when you have to pay to get the job, that’s a scam or similar problem.
Rubix has similar challenges. Their website even says, “spend to earn.” The place this happens frequently today is with something like a cash back credit card. Those companies oversell this, but don’t pretend it’s an income source. Rubix seems to do that.
Aave is not comprehendible to me. It sounds like some sort of an investment vehicle but not one that makes sense. I can believe it performs a web3 function that matters, but that presumes web3 matters.
Arweave has an interesting problem to solve. Again, it is possible to solve it without web3. Here though it isn’t that web3 is just a scam laden complication. Here, web3 is going to magically guarantee an ever increasing value guaranteeing the endowment. This sounds like a fantasy.
Rebuttals happen
I like talking to Václav because he is wicked smart. He came back with some rebuttal that is worth considering.
For Livepeer he thinks their problem space is important. “[W]hy [s]hould streaming and VOD only be done by large companies? Why shouldn’t it be decentralized and distributed? How would you incentivize people to offer the compute power to transcode the videos?”
Should there be smaller players in streaming and VOD? I don’t know, that’s a judgement call. Can there be? Absolutely. Do I have to have web3 to incentivize people to offer compute power? No. This is critical. His argument has shifted away from the importance of web3 in the solution to arguing the importance of the problem. Here is an example of how to do this without web3.
Services like the Amazon Mechanical Turk are effectively work decentralization systems where people contribute resources to solve a problem in exchange for payment. Critically, they don’t rely on web3, don’t require pay to earn, and provide sufficient community effect that Amazon can offer reliable guranteed services.
On the payments side, Amazon has an existing money moving apparatus that can easily manage payments to large numbers of entities and people. What if a company doesn’t have that? Well, that’s what fintech companies like Revolut, Wise, and venerable old Paypal can offer. Even little old VratnePenize in the Czech Republic manages to send 64 CZK to my bank account as my “reward” for shopping through their portal. Payments are a solved problem.
While Václav doesn’t really address the other three in his reply to me, I’ll address the below.
Rubix, his company, is the one I know the least about. It appears to be creating an incentive for participants to contribute data, like map information, and to earn through loyalty, like a cash back credit card. We have seen examples of payments for things like map data from companies like Niantic used Ingress to gather map data. They sold the data, reportedly to Google amongst others. They paid their collectors in entertainment. Remember, money is just a way of keeping score. I used to play Craps (a sad name for a reasonably fun game) in the casino for entertainment value, not as a way to “win the world.” I paid my price of admission to the Casino a tiny bit at a time. Niantic paying in entertainment is no different.
Aave is apparently a collateralized lending platform. Those exist today. At the large scale they are the driving force behind “Buy. Borrow. Die.” when combined with favorable tax regimes. At the small scale we see it in the form of home loans. The key issue I have with Aave is that the collateral is not something that is universally valued. The stock market is an almost perfect example of a universally valued commodity. The housing market is the same, within a range of tolerances. Crypto is only worth what the next sucker will pay. I am not opposed to letting investors lose their money on bad choices. I am opposed to things that have no valuation outside of “scam.”
Arweave wants to keep data around forever. They want to do this by decentralizing the storage. This requires technology. We can do that today, without web3 using projects like IPFS. However, IPFS is vulnerable to an unpaid community problem where people may abandon the effort if they aren’t compensated. As I understand IPFS attempts to natively solve this by giving storage provides the right to store an equal amount of data as the data they retain for others. I’d argue that projects like Folding@Home have shown that we can keep statistics on the work people do. We can then tie that to a payment system, as noted above and incentivize people. Arweaves final need is for a way to pay people. Here Arweave seems to appeal to the “magic of crypto” as an ever appreciating asset. So the coin will somehow magically cause everyone to get paid forever in perpetuity. This is a scam version of a traditional endowment. And we 100% know how to do endowments, just look at Universities.
I may update this if there is more back and forth. See the latest by looking at Václav’s post.
Edited on 10 June 2022 to fix to grammar errors. Thank you Patrick Uiterwijk
