Dialogue with a16z partner Chris Dixon: Deeply reflecting on Web2, thinking hard about Web3

Original Author: Nilay Patel, reckless

Original Title: 《CHRIS DIXON THINKS WEB3 IS THE FUTURE OF THE INTERNET --- IS IT?》

Translation: Dong Yiming, Chain Catcher

Recently, Forbes magazine in the United States released its list of the world's best venture capitalists for 2022, with a16z partner Chris Dixon topping the list for investing in Coinbase across eight rounds.

Now, Chris Dixon holds about $3 billion targeting the Web3 direction and is regarded as one of the most successful investors in the Web3 field, as well as one of its biggest advocates. On April 12, Chris Dixon participated in The Verge's podcast "Decoder," where he detailed his reflections on Web2 and his research thoughts on Web3. Below is the translation by Chain Catcher, with some parts omitted.

The main text is as follows:

Decoder: I really want to talk to you about Web3, but first, let’s do some quick Q&A. What is the structure of the a16z fund?

Chris Dixon (hereinafter referred to as Chris): In recent years, a16z has actually changed a lot. When I joined the company in 2013, it was just a traditional venture capital firm with a group of partners we call general partners, but the difference is that we have an operations team whose job is to support the companies in our portfolio. This was a new idea from the company's founders, Ben (Ben Horowitz) and Marc (Marc Andreessen).

In the past, the two of them were entrepreneurs, so they wanted their investments to do more than just provide capital and advice; they wanted to provide a whole network of resources and services, including recruitment, legal support, and more.

In the past few years, we have split investment themes including biomedical and Web3, so while I am part of the company, I am actually also part of an independently operating department.

Our Web3 team now has about 60 people and has expanded rapidly over the past few years. Of these 60 people, about 15 are on the investment team, and I am one of four general partners leading investments. We have 10 junior partners supporting our work. The other 45 are in our operations team, and their job is to help the companies we have invested in with everything from talent recruitment to business development to research and technology development.

Additionally, we have a team that provides help when we encounter special issues, as well as a marketing communications team, and a security team of five people responsible for auditing smart contracts. With these teams in place, our core job is to find great entrepreneurs and then participate in the development of these companies.

Decoder: What is the scale of the funds you are currently managing?

Chris: Last time it was $2.2 billion, and now it's about $3 billion.

Decoder: How do you make decisions internally?

Chris: That's a great question. Decision-making can easily go wrong, and I have made mistakes. In my experience, the essence of venture capital is that they often have something amazing alongside a bunch of messy things.

So entrepreneurship is very difficult, there are many things to do, and mistakes are often made, but good companies have some magical superpowers; they can achieve incredible breakthroughs technically or have some amazing market insights. In short, they can ultimately create a product that the market loves.

Our way of operating is that we have a separate decision-maker model. If a general partner wants to push an investment, we will have intense discussions internally about the investment project because we want to get to the truth, not self-deception, but I also think it’s important to let the individual decision-maker who knows the project best make the judgment, rather than having a committee make the decision collectively.

Decoder: Currently, you mainly focus on Web3. Let’s talk about Web3. I want to know your definition of Web3.

Chris: I think the history of the web can be divided into three periods. The first, which we call Web1, I think was from about 1990 to 2005. The key characteristic of Web1 is that what you built was things like email. In fact, before 1990, the government and academia designed open protocols, but due to a series of historical reasons, they did not develop as expected.

Web2 was roughly from 2005 to 2020, and I was involved in some of the projects during that time, like early RSS, social networks, and so on. This was a very exciting period because I think from this time on, people began to realize that websites were not just for consumption; you could build them.

Now you can create a website like Facebook, Blogger, Twitter, or Tumblr, and anyone can become their own publisher, not just read The New York Times. I think this is a very positive thing; it has a democratizing effect and has brought truly powerful services to billions of people.

With the popularity of smartphones, now billions of people can read Wikipedia and watch YouTube on their phones. While Web2 brings many positive things, I think it has a significant negative impact, which is that we have essentially handed over actual control of the internet to about five companies.

Although open protocols still exist, and you can still access websites, most of the profits and weight have flowed to Apple, Meta (Facebook), Amazon, Google, and perhaps Twitter and a few other smaller companies.

For a long time, Twitter did not have a client application, and when they decided, "Hey, we need to control," they launched a client application, an advertising model, and changed the API. This is not good for the industry, and the same thing has happened on platforms like Meta.

This has a significant personal impact on me. In the past, we built these important platform services as protocols, but now they are being built into companies. When I first saw Bitcoin, I wasn't very interested in its financial aspect, but architecturally, it was a very interesting construct.

In my view, if Web3 can develop in the right way, it will be the best choice that combines the advantages of both Web1 and Web2. We have the smooth user interface, read-write capabilities, and consumption and publishing abilities from Web2, and we also have the predictability, reliability, and neutrality of protocols from Web1, which would be fantastic! More importantly, we have the ability to let creative people connect directly with their audiences and truly build relationships with those audiences, free from the influence of large company algorithms and advertising models.

Decoder: But achieving an open network, perhaps using blockchain technology, like Mastodon, is not using blockchain technology.

Chris: Yes, but Mastodon is not that popular, and the user experience of using Mastodon is similar to using RSS, but the problem with RSS and Mastodon is that there is currently no public, universal database on the internet to store information data like attention graphs.

That's why some companies step in and say, "We will store it for you." And once it is stored, it creates monopolistic network effects. One way to look at blockchain is to see it as a community-owned database. It’s worth noting that DNS and blockchain are the only examples in internet history of databases owned by the community rather than companies. Another exception might be Wikipedia, as it is a non-profit organization.

Decoder: I agree that a database that anyone can trust is conceptually great. But if I make a video, I want people to watch it, and a large permissionless database like Ethereum doesn’t help me get more people to watch it, while YouTube can do that.

Chris: The way I view social networks is that they have a two-sided market. Platforms like YouTube or Spotify acquire users and make money through those users. In Web2, these two things are bundled together, but I think there is now an opportunity to separate these two things.

For example, music is a very interesting field, and we have made many investments in this area, so I want to mention Royal and Sound.xyz. What these two sites do is allow musicians to create NFTs and new types of digital tools. You can think of NFTs as rare digital album covers.

Sound.xyz has been online for three months, and on this platform, there are not super well-known musicians, but so far, the price for each album has been $10,000, and I believe musicians have retained at least 95% of their revenue, which is very different. In contrast, Spotify claims to have 8 million musicians on its platform, but only 14,000 musicians earn $50,000 or more per year, and most musicians earn very little.

When you talk to some musicians, they will say that streaming is not a good option unless you are a super artist, but in reality, before COVID-19, most musicians earned most of their income through offline merchandise and tours. Given that, why would you let huge Web2 platforms stand between you and your audience?

I’m not saying NFTs are a magical new thing that changes human behavior, but they are a way for creative people to connect directly with audiences, bypassing algorithm-driven advertising. So far, the results have been really promising, and I think we will see many creative people finding new ways to make money.

Decoder: Yes, I know many people like that. Steve Aoki (editor's note: a famous American DJ and electronic music producer) just appeared on our show. The reason he is doing NFTs now is exactly what you described. Steve is a celebrity; he can say on Twitter, "I made an NFT," and then people will buy it. But unsigned musicians who haven't made money on Spotify might not make money if they release NFTs on your platform either.

Chris: It’s still early stages, and I can’t prove what I just said, but I would definitely bet on them. I think this is an opportunity to realize the vision of "1,000 true fans." Kevin Kelly published a famous blog post around 2002 where he talked about the great thing about the internet. For someone like me who entered the internet at its inception, this has always been a dream. Now there can be some people engaged in niche activities that most people in the world don’t like, but as long as there are 1,000 people who really like it and are willing to support it, that’s enough.

In the past, due to the nature of the business model, this never happened in Web2. They would deliberately make you build something you think can have a significant impact, and then through algorithms, they would reduce your impact and make you pay to restore it to its original state. You could say this is an extremely complex ATM logic, and that’s also the secret to their profitability and success.

Decoder: I understand your criticism of companies like Meta, but if I am a musician making NFTs and putting them on Royal, what guarantees can I sell anything there? After all, technology alone cannot guarantee that.

Chris: You need to have an audience. We are investors in OpenSea, but they only have about 400,000 trading users, and their sales last month were between $3 billion and $4 billion.

If you look at websites like Sound.xyz, they issue album NFTs at a unit price of $10,000, and they only sell 30 or 40 NFTs each time. This is similar to what you see in video games; they are always attracting the most loyal players. I’m not saying you can’t have more fans, but I think you can have more loyal fans.

For example, I spent too much money on Clash Royale because I love the game. I think I might be one of the "suckers" who pays in Clash Royale because 99% of players don’t pay anything, and only 1% like it and pay a lot.

We invested in a project called Foundation, and I encourage you to check it out. It’s more like an NFT site focused on artists, and I’ve bought some NFTs from artists myself. When I saw Sparth's work, I thought it looked cool and familiar. It turns out he was the artist for Halo and did a lot of graphic design for that video game, but his name never appeared on the game packaging. There are many people like him, so he decided to sell NFTs on Foundation.

I am very confident that this year, NFT sales will exceed the total rewards given to all creators in Web2's history.

Decoder: I also know that Meta is not good.

Chris: I think we will soon prove that musicians earn more through these means than on Spotify. When they see this and see its scale, I think there will be a wave of services moving out of Web2. They may still use Web2 products for distribution, just as I don’t think Web3 will quickly replace TikTok, but I think there will be significant changes in monetization methods.

Decoder: I want to know what the legal difference is between buying an NFT and copying an image or music. I think this is a very vague concept for many people. Why do I need this technology to buy a copy of a song? I don’t quite understand.

Chris: Think of it this way: if you buy a painting, but you don’t buy its copyright, just like some of the tech services you are using, the service provider can take it away at will, and the terms of service are very clear about that. Even if you purchase items in video games, the video game may disappear in a few years.

Decoder: Looking at it now, the copyright of NFTs may be somewhat ambiguous.

Chris: In fact, some NFTs do express copyright.

Decoder: I’m not sure that’s true. To express copyright, you need a signed written document.

Chris: Oh, that is absolutely true. We have done a lot of legal work in this area, and it is definitely true, but I do think there is work to be done in copyright. One project we are discussing is to improve knowledge sharing, such as eliminating ambiguities in many contracts and proposing standards.

Let me clarify: any emerging field has its problems, but I don’t think we are talking about problems that cannot be changed.

Decoder: Why do we think NFTs will be more successful and profitable than music services that directly connect people with artists?

Chris: I think there are two things related to NFTs. First, I do think it is architecturally very different from other objects on the internet because most objects are controlled by applications, while NFTs are controlled by users.

Additionally, NFT culture is very common in the real world. For example, don’t just say you are a fan of a certain musician; now you can prove your identity and taste by purchasing his NFT. This way may be wrong, but we bet that people will value it, just as people value their identity or taste in the real world.

For me, there are two aspects that make NFTs different. First, you truly own its architecture, just like you own a domain name. If you don’t like how others treat your NFT, you can migrate it at any time, but that’s not the case on today’s internet, as all content is contained within applications or websites. Second, when you own something, people can see that you have different social currency value from it.

Decoder: You and I have experienced many early beautiful things, and when the scale expands, the community and culture undergo significant changes that we cannot predict. If I were you, I wouldn’t bet other people's money on whether the current community or culture can adapt to the results of scaling.

Chris: I see today’s internet as millions of sub-communities, and I think NFTs are a way for sub-communities to own cultural products and create small economies within them. Many very interesting things will emerge from this.

The music community is a very interesting example. Musicians are no longer just selling through streaming and algorithms; they now have a new way to sell products and connect with fans.

Decoder: You say Web3 is becoming open, yet entities like OpenSea are becoming dominant in the market. What do you think about that?

Chris: The key difference is that users can switch. Even if I am currently dissatisfied with Twitter, I still cannot switch because I have built up a group of followers there, and I cannot take them with me.

I do not deny that centralized service providers can create a better user experience. The key is whether they have gained a dominant network effect that users cannot switch from and abuse their position. Just like email, users have the ability to exit and switch, so the power of email service providers is limited.

I think we need to think about whether network effects are generated by companies or by protocols? In Web1, they belonged to protocols; in Web2, they belonged to companies; in Web3, we are trying to return them to protocols.

We are investors in OpenSea, and we believe we will make money, but note that OpenSea only charges a 2.5% fee, and you can also switch to other selling platforms at any time. In the Web2 world, if you have built a large audience on TikTok or Twitter, you are essentially locked in forever.

Decoder: But I still believe that issues like copyright and taxation are hindering the development of Web3.

Chris: I think that is indeed a problem. If you look at the history of technology, the way to solve these problems often involves killer products. Entrepreneurs create great products and persuade people through these great products.

One encouraging thing is that until recently, Web3 was still dominated by some super hardcore tech enthusiasts, but we have also seen a huge change in the types of entrepreneurs entering this field.

If you relate the current development of Web3 to the development of mobile internet, the iPhone was released in 2007, and the App Store was released in 2008. Usually, there is a year where people are thinking about what to do, and then another two or three years when truly great entrepreneurs enter, leading to products like Snapchat, Uber, and Instagram. Nowadays, aside from TikTok, most popular applications were developed during that golden period from 2009 to 2011.

So compared to venture capital firms, what is really needed is a new influx of entrepreneurs. I am very excited that the level of entrepreneurs entering the Web3 field is significantly improving, and perhaps they can truly show people the potential of this technology and change people's minds.

Decoder: Last question, will some of the Tokens issued by current Web3 projects be equivalent to securities/stocks, leading to future regulatory issues?

Chris: We have a six-person legal team that has done a lot of work thinking about these topics. Fortunately, we believe that securities law and the concept of Web3 align perfectly; both want highly decentralized networks and aim to eliminate asymmetric information.

We are trying to encourage people to build things like Bitcoin and Ethereum in this field in the right way, which are truly owned and operated by the community, rather than owned by the original creators of the system.

Ideally, everyone should reach consensus by holding Tokens and voting 100%. Ultimately, many such projects shouldn’t even have companies; they should exist like Linux.