Visions of Web 3Crypto / Blockchain
I’ve been noodling on this post for a few months now, trying to find the best way to explain why a decentralized Internet is important and how we might get from here to there. I had outlined a few reasons why it mattered and might eventually go mainstream:
- More creative and economic opportunity for developers and entrepreneurs
- More inclusive models of stakeholder capitalism
- Important but intellectual arguments for freedom of speech and mind
- And, of course, a lifeboat for people living under authoritarian regimes
Then, almost overnight, the idea became part of the zeitgeist. First, Facebook updated their Whatsapp terms of service, causing a wave of confusion over how much data will be newly shared with the parent company. Then, Silicon Valley collectively deplatformed Trump (a scary precedent even if you vehemently dislike the guy). Then Robinhood halted trading of stocks popular with retail users of Wallstreetbets (and Discord temporarily shut down their server prompting the community to search for uncensorable alternatives).
All this and we’re barely one month into 2021! It certainly seems that the use case and demand for a decentralized Internet has never been stronger. But how close are we to offering credible Web 3 solutions for average users? And how might such a Web 3 world look? In this post, I’ll attempt to answer these questions.
In my mind, there are five key Web 3 primitives: Identity, Compute, Communication, Storage, and Value
Together, these infrastructure layers (many of which overlap) promise to deliver a world of protocols over platforms. Let’s explore the status and implications of each vertical.
For any sort of decentralized communication, commerce, or collaboration of any type, we need reliable, persistent identity. There are a number of ways to deliver decentralized, unique IDs, many of which may not look like identity services at first glance. The most basic approach is to tie identity to an address or public/private key pair on top of an open, well-secured blockchain like Bitcoin or Ethereum. These addresses could optionally be appended with additional information (e.g. an image) and are frequently referred to as NFTs or non-fungible tokens. There are two main challenges with this approach: 1) these addresses are long strings meant to be read by machines and 2) the identities, while secure, exist on blockchains where data transfer is becoming prohibitively expensive (a topic we’ll soon discuss in more detail), diminishing their ultimately utility for real world colloaboration.
Projects like ENS and Handshake aim to solve the first problem with their own databases tying a BTC or ETH address to a human legible name, something like a decentralized DNS. Meanwhile, developers in the Lightning Network ecosystem are working to tie identity to nodes in layer 2s built on top of more secure blockchains like Bitcoin. Projects like Sphinx already make it easy for end users to do so without ever knowing about Lightning.
While it’s unclear exactly how identity shakes out, one likely outcome is that entry to various networks will be intermediated by holding a specific digital bearer asset/ NFT / private key. This shift from Big Tech to NFT as an authenticator will have all kinds of interesting consequences for user experiences. You can imagine, for example, needing a specific token to enter an exclusive chat room or receive electrons from a decentralized EV charging network.
Another interesting social consequence of such decentralized identity services is that they’ll allow for more human experimentation with the notion of a “self.” Our conventional mapping of “who we are” relies on a family name and government ID, but these are quite arbitrary identifiers that pre-date the Internet. Just as we as beings are in constant flux, now our selective identities can be as well. As Balaji Srinivasan explains, many people will choose to operate under different pseudonyms for different intellectual and economic pursuits (the rise of Finstas and pseudonyms like Pierre Delecto aka Mitt Romney in the legacy world are further evidence of this trend).
Next, generalized computation or the ability to execute arbitrary smart contracts will be protocolized as well. The leading candidate for such a decentralized world computer is Ethereum, which boasts massive developer network effects. Major questions remain, however, about its scalability leading to a wave of layer 2s (rollups, Loopring, etc.) and new competitive smart contract platforms. And still others like Stacks are experimenting with novel techniques to anchor to an even more secure blockchain like Bitcoin.
You can imagine a wide range of use cases for such decentralized smart contracts. The first major product market fit is in building an open, permissionless financial system (commonly referred to as DeFi). I’m guessing the next wave will center around creating other sorts of open, permissionless businesses and human organizations, more commonly referred to as DAOs or Distributed Autonomous Organizations. Such DAOs may look like more open corporate structures with elected managers, boards, and reporting (e.g. see Yearn Finance’s recent Quarterly Report on Github). Or they may end up looking more like proto-states experimenting with new forms of Democracy like futarchy, liquid democracy, quadratic voting, and more. Ralph Merkle summarized many possible developments here.
Another more radical approach to decentralized compute comes from projects looking to rebuild the entire computing stack. The most interesting that I’ve seen to date is Urbit, a combination of: 1) your own personal server that you can host locally or in the cloud and 2) a completely re-written operating system that is meant to radically simplify current code bloat and exist for centuries. The project has sparked its fair share of confusion and controversy due to a controversial founder, uber-nerd technical specs, and a naming convention that seems borrowed from Magic: The Gathering. But the community’s goals and determination (it’s almost 2 decades old now) are quite impressive.
As mentioned above, there will be quite a bit of overlap among Web 3 primitives. E.g. Urbit is attempting to build an entirely new type of computer and networked communication protocol. Other projects are focused just on the p2p communication side to facilitate core applications like messaging and social media. The most well known at this point is probably Mastodon (using the Activity Pub protocol) which boasts >2 million users and seems to have recently attracted a large swath of Bitcoin Twitter. Mastodon has a user friendly interface, but is not decentralized in the same way that many other protocols are. It uses a federated model where different network participants are either server or client, but not both. As such, a server can run whatever version of Mastodon it pleases, but the clients who tie into that server are still at the behest of whomever controls it. And manual migration is non-trivial for most users.
Another competing model is Scuttlebutt, which utilizes a p2p gossip protocol that mirrors something closer to BitTorrent or Bitcoin. Here, every computer in the network is both client and server and can thus relay information to other trusted nodes without pinging any centralized entity. This architecture is intuitively more exciting to me, but questions remain about scalability. The end user interfaces and user counts are much earlier here, but I’m seeing more promising projects like Planetary (founded by an early Twitter engineer) emerge.
Meanwhile projects like Maskbook are taking somewhat of a Trojan Horse approach. Instead of building a brand new social network from scratch, they allow users to augment their experience on existing social networks like Twitter and Facebook. With the simple download of a browser extension, users can selectively encrypt messages and link posts to other web3 apps like Uniswap or SuperRare for in-post cryptocurrency or NFT trading.
The dark horse here is that a lot of this communication will end up happening over the Lightning network on top of Bitcoin as I detail here.
Decentralized identity, computation, and communication are great, but we also need a way to store all of that data that we’re creating and sharing. As far as I can tell, there are four exciting projects here: Filecoin/IPFS, Sia, Storj, and Arweave. Let’s examine the first three together as they’re trying to accomplish something similar.
Filecoin, Sia, and Storj are like AirBnB for storage. They aim to network and incentivize hard drive owners from around the world (from hobbyists to professionals) to grant access to their excess storage capacity with as much uptime as possible. They use a similar time bounded payment model as traditional cloud storage providers like AWS, GCP, or Azure. Their biggest differentiators are 1) censorship resistance and 2) (theoretically) lower costs. While I buy the resistance piece, I’m a bit more skeptical on the long-term cost benefits. Sites like this show that Filecoin currently offers storage options for >5x cheaper than AWS. But as the projects start to gain more adoption, I have a hard time believing it won’t be a race to the bottom where companies like Amazon and Google have much larger warchests to build more and better data centers and even subsidize the cost of their product. But time will tell.
Arweave, on the other hand, seems to occupy a different lane entirely. Its promise is “permanent storage” – pay once and access forever. The project aims to accomplish this goal with a new mechanism design known as Proof of Access (PoA) which utilizes elements of Random X Proof of Work and Proof of Storage that incentivizes every node in the network to store as much of the entire collective database as possible. The upfront payment – while much steeper than an initial Filecoin or Sia payment – effectively serves as an endowment which covers the cost of storage infinitely (or long as the cost of hard drive space continues to decline). Arweave is already working with organizations like The Internet Archive to back up all of their data and is also storing copies of other blockchains like Solana. If permanent storage works, then you can imagine an endless number of applications for developers who want to permanently store pointers and data for their apps.
I won’t rehash the reams of digital ink that have been spilled over cryptocurrencies and the storing of digital value other than to say that I believe that Bitcoin will end up capturing the lion’s share of this market (at least 80% of a pareto distribution) for reasons I detail here. Other forms of digital scarcity will likely persist and never die (as long as some nodes operate in their networks), but in a world where bits can be instantly swapped for other bits, it makes too much sense that the chain with dominant security, monetary policy, and liquidity will be the big winner here. A few other projects that I do think are worth watching include:
- Ethereum: ETH will likely retain some meaningful value based on the developer and application network effects on top (i.e. a version of the fat protocol thesis)
- Monero: in addition to privacy, Monero made some other really smart design decisions (e.g. infinite tail emissions, slowly adjustable block size) that make it the best hedge bet if Bitcoin dies due to some black swan event
- Decred: the hybrid PoW/PoS model means that the project is >10x more secure than Bitcoin with the same amount of mining hashrate. Unlikely this ever happens, but it’s another interesting black swan hedge.
So, given the state of the 5 above primitives, how close are we close to building a truly decentralized Internet? On the cryptocurrency/value side, I’d say we’re already there. For communication, identity, storage, and compute, it appears that we’re getting close, but not quite ready for mainstream adoption yet. But the good news is that the increased attention should lead to a meaningful surge in alpha/beta users and a new wave of entrepreneurs and venture investment. The biggest risk here, of course, is that we’re at the start of a Web3 bubble that lays the groundwork for some mainstream adoption in 5-10 years. While that’s certainly possible, it also feels like all technological trends are accelerating (thanks in large part to our existing Internet), so I could easily see some big winners coming in the next 1-3 years as well.
And in that spirit, we at Version One plan to invest heavily against this theme. A few of the areas that we’re most excited to explore include:
- New types of “crypto-native” social networks that allow users to enjoy true ownership and engage in previously impossible activity (e.g. Maskbook, Uniswap)
- Tools to help artists and creatives better monetize their work (e.g. Super Rare, Sphinx, Mirror)
- Private key management solutions that allow individuals to easily access crypto protocols (e.g. Unchained Capital, Casa)
- Tools to allow 100x more developers to participate in the building of these new protocols (e.g. Radicle, Gitcoin, Gitopia)
- Protocol layers that help all of the above protocols interoperate (e.g. Lightning Network)
- Ambitious open source operating systems/app store alternatives (e.g. Graphene OS, Foundation Devices)
- Software that helps drive decentralization of physical infrastructure backing the Internet and the grid that powers it (e.g. Camus, goTenna)
If you’re working on any of the above or adjacent areas, please don’t hesitate to reach out! Investing in Web3 is a top priority at Version One this year.
Just a heads up that I or Version One hold positions in many of the projects listed above.