Why we should not be overly enthusiastic about Web3?

Author: Tim O'Reilly

Translation: ScaSte, Shawn, Long Jijiao, The SeeDAO

Abstract Tim O'Reilly, who once defined Web 2.0, reflects on various occurrences in Web 2, such as the repeated tug-of-war between decentralization and centralization, leaving him uncertain whether this Web 3 is just another iteration. He also points out that the current Web 3 is filled with hype and financial bubbles, but mentions that bubbles can also lead to the development of infrastructure for innovation. Ultimately, he believes we should focus on how to create real value rather than just seeking speculative wealth.

Recently, there has been a lot of discussion about Web 3. As the man who defined "Web 2.0" 17 years ago, I am often asked to say something about it. Generally, I avoid doing so because most predictions about the future ultimately prove to be wrong. What we can do more is to deepen our understanding of the present by continually asking ourselves questions, understanding this moment that is nurturing the future. As William Gibson famously said, "The future is already here — it's just not very evenly distributed." We can also observe economic and social patterns and cycles, learning from history, as Mark Twain once said, "History doesn't repeat itself, but it often rhymes."

So, after filtering information using the above methods, how should we view Web 3? 01 Decentralization vs Centralization

The term Web 3.0 was introduced by Tim Berners-Lee, the creator of the World Wide Web, in 2006, with the aim of prospectively describing the next phase of Web 2.0. He once believed that the semantic web would be the key to that evolution, but reality did not develop in that direction. The current situation is that the next generation of the web will be based on cryptographic technology.

The Web 3 we understand today was introduced in 2014 by Gavin Wood, one of the co-creators of Ethereum. In a recent Wired interview, Wood provided a concise definition of Web 3: "Less subjective trust, more objective facts."

In making this assertion, Wood compared Web 3 to the protocols of the original internet, with Jon Postel's "Robustness Principle" being perhaps the best summary of the original internet spirit: "Be conservative in what you do, be liberal in what you accept from others." This spirit laid the foundational basis for a global decentralized computing network, so that as long as everyone adheres to the protocol and can tolerate some minor deviations, there is no need for anyone to take responsibility for control and management. This system quickly surpassed all proprietary networks and changed the world. Unfortunately, time has proven that the creators of this system were overly idealistic, underestimating the disruptors, and more importantly, failing to foresee the significant concentration of power that could arise from big data, even within decentralized networks.

Wood's view is that blockchain replaces trust in others with transparency and irreversibility achieved through technology. As explained on the Ethereum website:

"Cryptographic mechanisms ensure that once a transaction is confirmed and added to the blockchain, it cannot be modified. This mechanism also ensures that all transactions are signed and executed under appropriate 'permissions' (e.g., no one can send digital assets from Alice's account except Alice herself)."

The Ethereum website's documentation also states:

"Web 2 represents the internet as most of us know it today. An internet controlled by companies that exchange services for your personal data. In Ethereum, Web 3 refers to decentralized applications that run on the blockchain. These applications allow anyone to use them without selling their personal data."

Crypto enthusiast Sal Delle Palme even expressed a bolder view:

"We are witnessing a new type of economic system, whose functions and purposes are being collaboratively designed and modified in a transparent manner by millions of people around the world, and this process welcomes anyone to join."

I appreciate the idealistic vision of Web 3, but we have had lessons in the past. In my career, we have experienced several cycles of decentralization and centralization. Personal computers once decentralized computing by providing a commodity PC architecture that anyone could build and that no one controlled, then Microsoft figured out how to centralize it around a proprietary operating system. Open-source software, the internet, and the World Wide Web broke the shackles of proprietary software with free software and open-source protocols, but just a few decades later, Google, Amazon, and other companies established massive new monopolies based on big data.

Clayton Christensen summarized this pattern as the law of attractive profit conservation: "When attractive profits disappear at some stage of the value chain due to product modularization and commoditization, the opportunity to earn attractive profits through proprietary products typically emerges at adjacent stages."

Blockchain developers believe they have found a structural answer to centralization, but I remain skeptical. An interesting question is what the next trajectory of centralization and control might be. The rapid consolidation of Bitcoin mining into the hands of a few due to reduced energy costs for computational consumption is one manifestation of centralization. There will be other ways. 02 Hype Cycles

Early articles from the Ethereum community provided quantitative analyses of the transactions and challenges facing Web 3, but today, most popular reports are filled with the flavor of hype and financial speculation. A recent article in The New York Times provides a good example:

"Venture capitalists are betting billions to create an alternative world of finance, business, communication, and entertainment on the web that could fundamentally change the major elements of the global economy—all built on the blockchain technology popularized by Bitcoin."

Subsequently, cryptocurrency supporters like a16z have made a series of investments in areas such as gaming, decentralized finance, NFTs, and decentralized social networks. These cases have not focused on the utility of what is being created, but rather on the potential for making their investors and creators wealthy.

Moreover, it is not just mainstream media that continues to suffocate the narrative of the money made in the crypto industry, as if creating actual value is irrelevant; stories of those who have fallen into the "crypto rabbit hole" also continually promote the theme of wealth acquisition:

"One major advantage of cryptocurrency is how it democratizes investment opportunities. For example, people can easily access 95 vetted crypto assets through Kraken. If you are tech-savvy enough, you can directly invest in over 1,150 crypto assets globally, each with a market cap exceeding $10 million (as of this writing)……

To get early-stage venture capital deals in the tech sector, the traditional path is to gain recognition and connections in Silicon Valley. Theoretically, the only real barrier to entering the crypto market should be awareness…"

Repeat after me: Whether through venture capital investment or easy access to high-risk, highly inflated assets, one cannot predict the lasting success and impact of specific companies or technologies. Remember the boom and subsequent bust of the dot-com bubble? Legendary investor Charlie Munger of Berkshire Hathaway recently pointed out that we are in a "crazier time than the internet era."

Cryptocurrency is likely the future of finance, but given the current smoke and mirrors, it is difficult to see what is truly effective. Yes, exchanges like Coinbase have made a lot of money, but unlike traditional financial exchanges, what is being traded is not a universal currency but a class of speculative assets that may be severely overvalued. Blockchain has not replaced trust as Gavin Wood hoped. Binance, the world's largest cryptocurrency exchange by trading volume, is under investigation for tax fraud and money laundering. A recent headline noted, "A small group of insiders is reaping most of the profits from NFTs." The interface between cryptocurrency and the existing financial system has matured to the point of being exploitable.

If Web 3 is to become a universal financial system or a universal system of decentralized trust, it needs to develop strong interfaces with the real world, its legal systems, and operating economies. The story of ConstitutionDAO illustrates how difficult it is to build a bridge between the self-referential world of using cryptocurrency to purchase crypto assets and an effective economic system that relates the Web 3 economy to the actual ownership or utility of non-Web 3 assets. If a DAO (Decentralized Autonomous Organization) successfully purchases a rare copy of the U.S. Constitution at auction, its members do not need to have legal ownership of the physical copy, nor do they need to have clear governance rights over what may happen. It will be owned by a limited liability company set up by the people who initiated the project. And when the DAO fails to win the bid, that limited liability company cannot even refund its supporters.

In Web 3, there has been no clear understanding of how to connect with existing legal and business mechanisms, which sharply contrasts with previous generations of the web that quickly became digital representations of everything in the physical world, including people, objects, locations, and businesses, with their interactions making it easy for the web to create new services with economic value in the existing economy. Speculating on crypto assets may be easy money, but it seems to distract developers and investors from the hard work of building useful real-world services.

This is not to say that there are no real opportunities in Web 3 beyond financial speculation. Cryptocurrencies are well-suited for purely digital assets that can be valued and used within their self-contained worlds, such as computer games or the long-anticipated virtual worlds. The digital art market and highlights from sports events may also have opportunities. As Sal Delle Palme said, "New crypto applications, such as NFT markets, DAOs, DeFi, DEX, CeFi, charities, GameFi, DeSo, etc., are being invented, funded (often through crowdfunding), built, and launched at an astonishing pace." But we are still a long way from the birth of a completely new economic system.

Of course, cryptocurrencies and Web 3 are just a small part of today's excess speculation. Startup valuations are also very high today, and it is not clear whether those valuations accurately reflect the actual value being created. They are likely just a scam that benefits a few insiders, much like the financial instruments that made many Wall Street people wealthy just before the world economy nearly collapsed in 2009. So, as Matt Stoller recently wrote, "Web 3 is a pile of shit. But the question is, is anything else any good?" The current economic system is rife with fraud and manipulated by insiders for personal gain! The ideas of the Web 3 dreamers in the Celo project are correct; we do need a new economic system. 03 Two Bubbles

The Dutch tulip bubble from 1634 to 1637 is a classic example of the vast disparity between the nominal value of an asset and its intrinsic actual value. When the bubble burst, tulips reverted to being flowers—beautiful but no longer valuable—having no lasting impact on the prosperous Dutch economy. Since then, many speculative bubbles have emerged, most of which have become insignificant blips in the vast historical backdrop.

However, economist Carlota Perez defined another type of bubble in her book "Technological Revolutions and Financial Capital." She pointed out that nearly every major industrial transformation in the past—first industrial revolution; steam age; age of steel, electricity, and heavy machinery; age of automobiles, oil, and mass production; internet—has been accompanied by financial bubbles.

Perez divided each 50-60 year innovation cycle into four stages. In the first stage, foundational investments are made in new technologies. This creates opportunities for speculative waves, as financial capital seeks sustained excess returns in rapidly developing markets that have already begun to consolidate. After the speculative bubble bursts, there is a period of more sustained consolidation and market adjustment (including regulation of excessive market power), followed by a mature "golden age" where new technologies are integrated into society. Eventually, when technology matures sufficiently, capital will shift elsewhere to fund the next emerging technological revolution, and the cycle will repeat.

An important conclusion from Perez's analysis is that a true technological revolution must be accompanied by the development of substantial new infrastructure. For the first industrial revolution, this included canals and road networks; for the second, railroads, ports, and postal services; for the third, electricity, water, and distribution networks; for the oil age, interstate highways, airports, refining and distribution capabilities, as well as motels and hotels; for the information age, chip factories, ubiquitous telecommunications, and data centers.

Much of the infrastructure construction is funded during the bubble phase. As Perez stated:

"The key role of financial bubbles may be to promote the inevitable over-investment in new infrastructure. The nature of these networks is that unless their applications are sufficiently widespread, they cannot provide enough services to be profitable. Bubbles provide the necessary asset inflation for investors to expect capital gains, even if they are not yet generating profits or dividends." Thus, we have seen the canal bubble, the railroad bubble, and of course the internet bubble, and by the time Perez completed her book, the internet bubble had ended. The frenzy of inefficient investment left behind dim fiber optics, empty data centers, and a wealth of talent and expertise ready to be reused in the consolidation phase.

So, is what we call Web 3 the foundational investment phase of a new sub-cycle, or the bubble phase of the previous sub-cycle? In my view, one way to judge is to look at the nature of the investments. Is abundant financial capital being used to build useful infrastructure in the way we saw in previous cycles?

I am unclear whether NFTs meet that requirement. However, there is no doubt that the disruption of finance—just as the internet has disrupted media and commerce—will represent an important next stage in the current technological revolution cycle. Particularly, if capital can be effectively allocated without large centralized capital providers (what could be called "Wall Street") providing trust and authorization, that would be a fundamental advancement. What I am looking for in this regard is evidence of productive investments in the operating economy through cryptocurrencies rather than capital being allocated to fictitious assets. If you have heard of any good examples, please let me know.

To clarify what I am saying, let me set aside cryptocurrencies and Web 3 to look at another technological revolution: the green energy revolution. There, it is clear that bubble-inflated valuations have funded the development of lasting infrastructure. Elon Musk has excelled at driving Tesla's stock to extremely high speculative prices (at some point a year or two ago, its valuation was equivalent to 1,500 years of the company's profits!) and turning it into a nationwide electric vehicle charging network, battery super factories, and autonomous driving capabilities, catalyzing the entire industry to catch up with his vision of the future. Jeff Bezos has also leveraged Amazon's high valuation to build a new infrastructure for instant commerce. They are both investing in the infrastructure of the commercial space industry.

When assessing the touted progress of Web 3, I will also compare the role of cryptocurrencies in other functions of the financial system (purchasing, remittances, etc.) not only with traditional banking networks but also with other emerging technology sectors. For example, are Ripple and Stellar's cross-border remittance platforms more successful than bank transfers, credit cards, or PayPal, just as Google Maps is superior to Rand McNally or the first-generation GPS pioneer Garmin? There is some evidence that, despite regulatory hurdles slowing its adoption, crypto is becoming an influential player in this market. However, let's not worry about remittances for now; let's look at the more general application of payments. How does growth compare to non-crypto payment startups like Melio that focus on building small business use cases? Given the interest of companies like Square (now Block) and Stripe in cryptocurrencies, they could tell us a lot about the progress of cryptocurrencies relative to more traditional payment mechanisms.

Similarly, if Web 3 is to become the future of identity or social media, we need to ask ourselves what it is based on?—Is it really a better mousetrap like previous generations of internet technology? I do not recognize the reporting on this field, as it almost entirely lacks coverage of such information.

04 What Stage Are We in the Cycle?

One might ask whether the current stage of Web 3 is more akin to 1995 or 1999—early stages of the bubble or the end stage? Given the current valuations of crypto assets (and tech startups in general), it is hard not to think of the earlier date.

I want to remind people that I wrote "What is Web 2.0?" five years after the dot-com bubble burst, and my goal was clear: to explain why some companies survived while others did not. Similarly, I suspect we will not truly understand the components of Web 3 until after the next downturn (if there are any that survive).

Since the last bubble, in addition to the technological and business model changes I attempted to clarify in "What is Web 2.0?", I can also provide some pragmatic observations.

1. All surviving companies are making money—lots of it. (In Amazon's case, it is free cash flow, not profit, but the numbers are huge, and so are the business and economic insights behind them.) Their valuations, while high, are supported by reasonable models of future earnings and cash flow.

2. By today's standards, they do not need to raise massive amounts of capital. (Yahoo's total investment before its IPO was $6.8 million, Google's was $36 million, and Amazon's was $108 million.) When you see companies repeatedly seeking funding from investors without ever achieving profitability, they may not be real businesses and are best viewed as financial instruments.

3. They all have millions, tens of millions, or even hundreds of millions (eventually reaching billions) of daily active users engaging with new services that change the world.

4. They have all built unique, substantial, and lasting assets in the form of data, infrastructure, and differentiated business models.

5. The companies that dominate the next generation of technology fields are not all newcomers. Apple and Microsoft easily transitioned to the next generation, with Apple even leading the change.

Remember, the internet bubble burst very early. At that time, Google Maps had not yet been invented, the iPhone and Android did not exist, online payments were in their infancy, and there was no Twitter or Facebook, no AWS or cloud computing—most of what we rely on today did not exist.

I suspect cryptocurrencies are the same; there is so much left for us to create. Let us focus on the parts of the Web 3 vision that are not related to instant wealth, focusing on solving the challenges of trust, identity, and decentralized finance. Most importantly, let us focus on the interface between cryptocurrencies and the real world of people's lives, just as Matthew Yglesias said when discussing housing inequality, "Over time, society becomes wealthy by accumulating a stock of long-term capital goods." If, as Sal Delle Palme said, Web 3 heralds the birth of a new economic system, then let us make it a system that can create real wealth—not just the paper wealth of those fortunate enough to gain wealth early, but goods and services that truly change lives for the better for everyone.