Vitalik's endorsement of Railgun reflects the limitations of Web3 fundamentalism and the future direction of Web3 development

Author: @Web3Mario

Introduction: Yesterday, Vitalik indirectly contributed to Railgun's traffic, causing its token price to rise by over 190% through participation and commentary. To add some basic information, Railgun can be considered one of Tornado's competitors, providing privacy protection for on-chain activities through cryptographic algorithms like zero-knowledge proofs. Compared to Tornado, it offers stronger composability and better nesting for DeFi products. At a time when Tornado is facing significant scrutiny, supporting an alternative competitor seems to be the intention behind Vitalik's actions. This makes me once again marvel at his immense influence, but at the same time, it has sparked some thoughts. In this "crypto emperor's" ideology, the preference for resisting censorship and protecting privacy is quite evident. However, is this crucial for Web3? Or will this ideological guidance truly make Web3 better? I am not entirely convinced, so I hope to discuss this event and explore where the future development direction of Web3 might lie. To get to the root of the issue, I believe it is necessary to start with what exactly Web3 is.

What is Web3

To clarify the future of Web3, we must have a clear and precise understanding of the current definition of Web3. Explaining this issue is not a simple task; in fact, the criticism of Web3 often stems from its vague concept. While this gives it seemingly infinite room for defense when facing doubts, it also greatly restricts its further development, as a loose and ambiguous definition or vision lacks persuasive power and cannot fully stimulate group cohesion and enthusiasm.

After reading some materials, I believe an article published in the Harvard Business Review provides a detailed and objective explanation of the definition and development context of Web3, seemingly offering us an answer. In fact, this concept is not unfamiliar to practitioners:

Web3 uses a range of blockchain-related technologies, offers a read/write/own version of the web, in which users have a financial stake in and more control over the web communities they belong to.

A key feature emerges here: in the world of Web3, the ownership of digital assets will be returned to users. Taking the classic Web2 company Twitter as an example, since the data generated by users is owned by the platform, the platform can profit from this data through an advertising-driven revenue model. However, strictly speaking, this data is generated by users and should belong to them; thus, the benefits derived from it should naturally be obtained by users. This is also a common narrative among Web3 practitioners criticizing Web2.

In this narrative logic, a consensus on the current design principles of Web3 has gradually formed, which is recorded on Ethereum's official website and seems to have become the bible for practitioners:

• Web3 is decentralized: instead of large swathes of the internet controlled and owned by centralized entities, ownership gets distributed amongst its builders and users.
• Web3 is permissionless: everyone has equal access to participate in Web3, and no one gets excluded.
• Web3 has native payments: it uses cryptocurrency for spending and sending money online instead of relying on the outdated infrastructure of banks and payment processors.
• Web3 is trustless: it operates using incentives and economic mechanisms instead of relying on trusted third-parties.

However, considering the current market situation of Web3, I believe some interpretations of these principles have actually constrained the further development of Web3, so it is time to reassess our beloved cause.

Current Issues with Web3

Although Web3 has not been around for long, it has achieved rapid development, with increasing financing and significant growth in market capitalization. Everything seems so promising, but there are also considerable doubts. To summarize, the current criticisms of Web3 mainly include the following points:

(1) It is a dangerous experimental ground filled with fraud and opaque operations: A large number of negative reports support this view, with an endless stream of rug pulls and hacking incidents, false trading around tokens, and numerous phishing websites, putting ordinary users' asset security at great risk. According to the FTC, since early 2021, crypto scams have caused over 46,000 people to lose more than $1 billion. Behind this heartbreaking number are many once-happy families now burdened with debt. However, any attempt to regulate Web3 enterprises will be met with resistance from the community, and the decentralization and anonymity also technically increase the difficulty of regulation.

(2) The business models are highly volatile and unsustainable, with most enterprises having short lifecycles: It is undeniable that token-based business models are key to Web3's success and have become standard for Web3 enterprises. Unlike traditional business models, the most intuitive source of revenue for Web3 enterprises is often based on the appreciation of token value. However, in practice, this profit model is usually unsustainable.

(3) The blockchain technology underlying Web3 is expensive and causes environmental pollution due to power waste: Critics argue that public blockchain technology is costly, and users typically have to pay significant transaction fees (Gas) to use it, which seems to contradict any technological evolution. Moreover, since the security of Proof of Work consensus is based on brute-force solving of a mathematical problem, it is usually a high-energy-consuming scenario. The electricity wasted due to Bitcoin mining has already exceeded the annual electricity consumption of the Netherlands.

It must be acknowledged that the above criticisms are objectively existing phenomena. So where does the problem lie that leads to such negative evaluations of Web3?

(1) The excessive pursuit of permissionlessness has turned Web3 into a secret base for children:

A permissionless peer-to-peer electronic currency trading system is the beginning of all stories. Decentralization and anonymity give blockchain-based Web3 projects the characteristic of being permissionless, resulting in two direct effects: any business can be conducted without relying on third-party permission, and any user's participation also does not require third-party permission. This seems very appealing, as for the first time in human history, we have relied on the power of technology to overcome authority, providing protection for the majority and achieving "absolute fairness" through technology. However, the reality may not align with our expectations, as this characteristic also brings significant risks to most people.

Why is there such a large deviation from our original intention? The key issue lies in our excessive pursuit of permissionlessness, which has made "resisting censorship" the political correctness of Web3. Any regulatory body becomes an object of our resistance, and our pursuit of absolute fairness is turning this great cause into a secret base for children, as "resisting censorship" allows us to avoid taking responsibility for our actions.

In fact, the establishment of absolute fairness based on blockchain technology is conditional. It requires that the relevant participants have a consistent level of understanding of this technology and the associated business models. This condition may have been valid during the early "tech forum" phase, but as Web3 has developed and more ordinary users have entered, this condition has effectively been broken. A significant information gap has emerged between experts and ordinary users, and due to the resistance and fear of any regulation, Web3 lacks sufficient protective measures for ordinary users and effective restrictions on malicious behavior. This greatly constrains the industry's development, as the interests of most people cannot receive even the most basic effective protection.

(2) Overemphasis on incentives and economic models while neglecting product experience optimization has left Web3 enterprises lacking the motivation to build sustainable and stable profit models, greatly affecting their ability to withstand market risks:

In the narratives of all Web3 projects, it is not difficult to find a heavy emphasis on their economic models. Most Web3 projects' profit models are usually built on complex economic models established through token incentives. The continuous emergence of wealth myths has led people to view this innovation as a reshaping of the current internet business model. However, as the global asset market cools, the volatile market performance, and the continuous emergence of Web3 project failures are greatly challenging this view.

The reason, I believe, is that this high capital efficiency profit model has led many Web3 project teams to overly emphasize the design of incentives and economic models in their business model design. We have become accustomed to creating demand for tokens through clever model designs, pushing up the market value of Web3 enterprises through continuous purchasing demand, while the specific operational business has been neglected or become just a part of our business narrative. After all, product development and optimization usually require significant time and financial investment. The most direct impact of this phenomenon is the emergence of a bubble economy, giving rise to numerous "house of cards" enterprises, and a high market value without competitive real business support is usually unsustainable, making the enterprises' risk tolerance very weak.

(3) The trust-building methods of Web3 projects overly rely on the decentralized technical characteristics of blockchain, making it impossible to provide a user experience similar to traditional Web2 projects in the short term:

Since Web3 projects are built on blockchain, the performance of blockchain technology greatly affects the technical capacity limits of Web3 projects. In fact, for a long time, constrained by the development of blockchain technology, high energy consumption, high costs, and high latency have become characteristics of Web3 projects, significantly impacting their development. Fortunately, we now see many performance-oriented solutions like POS, Layer2, and Sharding, which is a positive development. I believe that it won't be long before these stereotypes will be greatly overturned.

However, there always seems to be a voice questioning these technical solutions. The root of these doubts lies in the belief that these technical solutions sacrifice decentralization to some extent, leading to a decrease in credibility. Such criticism usually comes from "right-wing tech geeks," who believe that only Bitcoin's POW can bring ultimate trust. Although this seems to be a conservative view, it also reflects that the current trust-building methods of blockchain-based Web3 projects overly rely on technology, which inevitably affects the imagination of Web3's future. Therefore, finding more trust-building methods and breaking through the limitations of technological development is another issue we need to address.

Future Development Direction of Web3

Let us re-examine the Web3 industry from an objective and rational perspective, and the solutions to the above issues seem to become clear:

(1) Establish a clear and specific Web3 vision, extracting and promoting the most valuable characteristics of Web3

The Web3 industry is still in its early stages, like a child; the development of the industry needs meaningful and correct guidance to thrive. To provide better guidance for industry development, we need to make a more comprehensive and specific discussion of the vision for Web3.

Previously, people generally believed that the vision of Web3 was to create a better and fairer internet. However, such a vague vision does not tell us what constitutes a better and fairer internet and the specific path to achieve it, leading people to gradually equate decentralization and anonymity with fairness and goodness, which is a narrow view.

I believe Web3 should not be narrowly understood as attempting to completely replace the existing mainstream internet technology architecture with decentralization and anonymity. Decentralization and anonymity are merely the technical characteristics of blockchain widely adopted in the Web3 industry, but they should not become shackles that limit our imagination. It is time to rethink what the true value of Web3 is. I believe the following points seem more representative:

• Low-cost trust guidance: By observing some successful Web3 business directions, it is not difficult to find a characteristic: whether in currency or finance, these businesses were mostly monopolized by states or super enterprises before the emergence of Web3, as these businesses typically require strong trust backing. Web3 can quickly enter these fields and achieve good results because we leverage the power of technology to create a new paradigm for establishing trust, significantly reducing the cost of trust guidance. The most direct benefit of this characteristic is that it broadens the scope of business innovation in Web3, allowing the rights to innovate in some originally high-threshold businesses to be decentralized to a wider user base. This is the most fundamental value that Web3 brings us.

• Verifiable interaction experience: After clarifying the underlying value of Web3, we need to consider what the core competitive advantage of Web3 products is compared to other products, as this will influence our product design thinking and market promotion strategies. I believe the core competitive advantage of Web3 products is that they can provide users with a verifiable interaction experience. We know that one technical characteristic of blockchain is that all data and operations maintained within the system are immutable and publicly transparent, allowing Web3 products to prove to users, or giving users reason to believe, that all actions and results within Web3 products can be verified. Therefore, in scenarios that require "self-justification" and have high levels of skepticism, Web3 products will have a competitive advantage.

• Innovative and flexible business models: Whether based on token incentive economic models or DAO-based models, they demonstrate the strong extensibility of Web3 in business models. Based on the premise of verifiability, we have the ability to achieve orderly collaboration among various stakeholders. As A16Z partner Chris Dixon said, Web3.0 provides a new way for participants to contribute while ensuring their own interests at different times.

Returning to the initial question, after summarizing, a clear Web3 vision gradually emerges:

Web3 aims to create a business design paradigm characterized by "low-cost trust guidance, verifiable interaction experience, and innovative and flexible business models" through a range of blockchain-related technologies, supplementing existing Web applications.

(2) Explore multidimensional trust-building methods, expand business scope, and achieve a new round of growth

While reducing trust costs is the core narrative of those telling the Web3 story, the current solution that solely relies on technology as the only source of trust has, compared to traditional centralized mechanisms, resulted in higher trust costs. Ultimately, this is because the cognitive cost of this trust-building method is too high for ordinary users, who are the soil for the next phase of Web3 development. Therefore, we need to find more multidimensional trust-building methods beyond technology, expanding business scope and achieving longer-term breakthroughs by protecting the rights and interests of ordinary users.

With this conclusion in mind, we can adopt a more open and gentle attitude toward those methods that seem to contradict the principle of "decentralization." For the long-term development of Web3, it is appropriate to let go of the obsession and idealism of being a "tech geek." For example, regarding regulation, what we need to do is not to avoid it as much as possible, but to discuss how to guide the determination of regulatory boundaries to better support the development of the Web3 industry. In exploring this issue, establishing a vision becomes particularly important. I believe that as long as it is based on not violating the three basic characteristics of the Web3 industry mentioned above, any method for innovation and protection of ordinary users' rights will bring new growth momentum to Web3.

(3) Stable operational revenue may help us establish a more efficient and sustainable Web3 business model

I believe we need to acknowledge that for a long time to come, corporate organizations will still be the main unit driving the development of Web3, as the decision-making and execution efficiency of the current DAO governance model is clearly weaker than that of centralized business institutions. Therefore, we will face an unavoidable question: how to establish a more efficient and sustainable profit distribution and management model among Web3 enterprises, users, and relevant stakeholders, which will determine the upper limit of Web3's future development.

Currently, we seem to have reached a consensus that most Web3 enterprises derive their revenue from a portion of tokens that are locked and gradually unlocked over time. However, this method may have already shown its limitations. We can find the answer in the financial statements of Web3 enterprises, which typically have very high non-operating income and very little operating income. This is because we have become accustomed to transferring the operating income of enterprises to stimulate the high growth of tokens, thereby maintaining higher non-operating income.

This may be the root of the problem: the excessive reliance on non-operating income easily leads enterprises to focus solely on stimulating token prices, neglecting the optimization and iteration of the product itself, which weakens their resilience to capital market fluctuations. Moreover, as the token release process progresses, the ownership of the project gradually shifts to the community, which can easily trap the enterprise's product development planning in a short-termism trap, as it cannot provide continuous incentives to the enterprise.

In summary, I believe that Web3 enterprises, in designing their business models, still need to retain a stable and continuous cash flow from operational revenue, which may lead to longer-term and sustainable development for Web3.

Conclusion

We are at a crossroads filled with change and opportunity. Therefore, returning to calmness and re-examining the cause we love, we will find our own glory.