FOMO is driving people into Web3, but is the whole game rigged for VC money?
Many in the industry worry the gold rush is akin to a “collective Theranos” that is warping the economy to the benefit of professional investors, one unnamed venture capitalist tells Vice. “A wildly unproven product with nobody at the helm.”
Much of the scamming centers around tokens, which crypto critics like Stephen Diehl contend puts the financial rules of the 1920s back in play by allowing people to “insider trade, wash trade, and pump and dump” with impunity.
READ MORE: The Token Disconnect (Stephen Diehl)
Motherboard, the tech department of Vice, has done a deep dive into the financial wheeling and dealings of Web3 entrepreneurs and VC investors, and doesn’t give it a clean bill of health.
“It’s a gold rush for sure,” Dayton Mills, co-founder and CEO of remote-work startup Branch, tells reporter Maxwell Strachan at Vice.
Mills’ company had been struggling before he transformed it into a Web3 gaming platform. The moment he started talking about his Web3 vision, investor interest skyrocketed. He had planned to raise $2 million, only to receive $20 million in commitments in two weeks.
“Something big is happening,” Mills said. “A lot of people are trying to get in on it, and a lot of people are more afraid of not getting in.”
Does Web3 offer the promise of a truly decentralized internet, or is it just another way for Big Tech to maintain its stranglehold on our personal data? Hand-picked from the NAB Amplify archives, here are the expert insights you need to understand Web3’s potential and stay ahead of the curve on the information superhighway:
- The Web3 Dream vs. Digital (and Economic) Realities
- What Needs to Happen for Web3 to Go Mainstream
- Web3 and the Future of Work (Oh, Guess What? It’s Decentralized.)
- Web3, Free Will and Who Will Own the Future
- Taking Those First Steps Into Web3
Nobody, it seems, wants to be Paul Krugman — the Nobel Prize-winning economist who predicted that the internet would ultimately become no more consequential than the fax machine.
Web3 hysteria has continued even as the tech industry has struggled with rising interest rates and plummeting share prices. In the first three months of the year, the top 15 venture firms poured more money into Web3 and DeFi deals than any other area, according to research firm PitchBook.
READ MORE: Q1 2022 Emerging Tech Indicator (PitchBook)
Blockchain companies have raised at least $9.5 billion after receiving $18 billion in funding in 2021, according to CrunchBase. Last month, amid plunging crypto prices, one of Web3’s biggest institutional backers, the venture firm Andreessen Horowitz announced it had raised $4.5 billion.
READ MORE: Crypto Fund 4 (Andreessen Horowitz)
Those who have swallowed the Kool Aid espouse the idea that Web3 can be the savior of the internet and of society itself. It’s a vision, says Strachan, where people have the ability to own a piece of the internet (for example, through NFTs) and ultimately lead to a fairer, more communal version of the web, “one that will wrest control back from technological giants that have profited off people’s data and creativity, creating a world where community comes before all else.”
Is Web3 a Disaster in the Making?
By Abby Spessard
In a sense, yes. At least, Giles Crouch, a digital anthropologist blogging on Medium, believes so. Tech media, blockchain and crypto companies jockeying for position are in a rush to explain Web3 to consumers, bandying about terms like NFT, DAOs and decentralized finance (DeFi), but the earliest vision for Web3, then called Web 3.0, had nothing to do with these things. “Web3 is, as a concept, a complete and utter mess,” Crouch grouses.
Web3 has its roots in what Crouch calls “techtopian idealism,” going back to the late 1970s and the burgeoning hippie movement. “The hippies, as they came down from the outer areas of the Bay Area, got into computers and they saw this ability to interconnect as a new, ideal way, to bring humanity together,” he explains. “It was messy. The result, some twenty years later, was the mass consumerization of the internet. Now, again, nearly three decades later, the ideals of the hippies in the 70s are playing out in the ideals of Web3. Except it’s even messier.”
Originally known as the “Semantic Web” and “Decentralized Web,” Web 3.0 was all about the interconnectedness of human knowledge. “The semantic web is all about truly connecting things, it’s about evolving ontologies of vocabularies, better query languages and bringing different verticals together to improve research and enabling a richer information management environment and the information architecture behind it.”
But Web3 as it’s being promised looks much different from these lofty ideals. “Despite much talk about decentralization and empowering the people, quite the opposite has happened,” Crouch asserts. “The crypto and blockchain worlds are run by an elite cadre as much as Big Tech is.”
Even the name Web3 has been co-opted, Crouch notes. It could be traced to the co-founder of Ethereum, Gavin Wood, who formed the Web3 Foundation in 2014. Or the W3 Consortium, which was founded in 1994. Or maybe New York Times reporter John Markoff in 2006. Regardless, “even the very naming of the nomenclature is debatable. But we do love the idea of foundational myths in our cultures,” he says.
“First humans shape technology, then it shapes us. Web3 is neither right now… We may never land on a realistic explanation of Web3 as a working system, but we will see some interesting things come out of the debates and discussions.
“We can also be sure that someone is dreaming up an idea of Web4 and when that hype cycle kicks in, the ideas of Web3 may start to bear some fruit.”
Such arguments are inarguably alluring but Strachan isn’t buying. As Hilary Allen, a law professor at American University, succinctly puts it: “The reason why venture capitalists are pushing all of this is to make money.”
And, in Web3, the venture class and other professional investors have found a uniquely appealing set of circumstances they believe will allow them to make a giant pile of money that does not rely on vast leaps in virtual reality or haptics technology.
“If there is any innovation in crypto assets, it’s not in software engineering but in financial engineering,” says Diehl.
And this is a problem, reputational at best for Web3 pundits, criminal at its worst excesses. Because as it stands, Web3 — the DAOs, tokens, blockchains and cryptocurrency building blocks of the next gen internet — is a largely unregulated marketplace “ripe for exploitation and stuffed full of unclear valuation metrics, arguable unregistered securities, peculiar financial products, ways to cash out, and a public-facing ideological mission statement,” says Strachan.
It’s at least possible that Web3 could bring about a better, more fulfilling version of the internet. It’s just as likely, though, to prove to be what its harshest critics fear: a “hyper-capitalistic” reframing of the web that “contains the seeds of a dystopian nightmare.”
READ MORE: NFTs, Cryptocurrencies and Web3 Are Multilevel Marketing Schemes for a New Generation (The Wall Street Journal)
READ MORE: Web3 Promises A Better Online Future But Contains The Seeds Of A Dystopian Nightmare (Forrester)
Even those involved in Web3 are beginning to be disillusioned. One of them is Phil Libin, the CEO of the startup studio All Turtles and the virtual camera application mmhmm.
“Web3 proponents are trying to solve real problems that need solving. I just don’t think that Web3 is the solution,” he said. “It doesn’t make sense to me as a programmer.”
Another is Tomasz Tunguz — but he is ploughing on with Web3 because he’s candid enough to admit there’s money to be made. And lots of it.
Tunguz is a venture capitalist at Redpoint Ventures who became active in the Web3 market in the first half of 2021. The closer he looked, the greater the investment opportunity seemed.
As explained by Strachan, Web3 businesses had no clear metrics by which they could be valued. That’s in stark contrast to the relatively reliable and standardized financial models that allow investors to value traditional software businesses.
“In Web3, that’s not the case,” Tunguz says. “Nobody has any idea how to value these businesses. I haven’t walked into a single pitch with a Web3 company where the words ‘cost of customer acquisition’ or ‘payback period’ has been uttered. It’s so new that people aren’t worried about unit economics.”
“A venture capitalist who asked that I not use his name admitted with concern that one of his own portfolio companies did the same, and other founders and CEOs similarly said they’d noticed startups cynically bolting on Web3 elements after running out of other options and needing more funding to survive.”— Maxwell Strachan
He is describing an asymmetry of knowledge, where the edge is with the VC and not with the private investor. If you’re in the “know,” you can make money; and there is a lot of smoke and mirrors in Web3’s unregulated market.
“One of the ways of making lots of money is to have information asymmetry,” Tunguz said. “If you know something I don’t about a company and you trade on that information, you’re gonna make a bunch of money, right? In the stock market, it’s illegal. In the private markets, you can.”
The counter argument to all of this is that Web3 is still in its infancy. Of course, the way it all works seems a little opaque; it takes time for anything new to develop and mature and to be stress tested.
But in case of Web3, it is not just a new way of doing business that need getting used to it’s the suggestion that the process is being masked from scrutiny by an ideological layer that marks itself as the antithesis to the capital markets, rules and regulations that has gone before.
That creates cynics like Martin Kenney, a professor at the University of California. “Whatever the new thing is, it’s absolutely in the VC’s interest to hype it,” he says. “You feed it to the press. You tell everyone it’s going to change the world, that it is the best thing since sliced bread, whatever it is that will convince the investors that they need to have it.”
“Nobody has any idea how to value these businesses. I haven’t walked into a single pitch with a Web3 company where the words ‘cost of customer acquisition’ or ‘payback period’ has been uttered. It’s so new that people aren’t worried about unit economics”— Tomasz Tunguz
Nick Gerard, the CEO of Web3 developer Norby, is also skeptical. He tells Vice that he started to believe that tokens, rather than the ideological “future of a fully decentralized internet,” were behind a lot of the investor interest in Web3.
As he sees it, an investment firm could invest in a startup in exchange for equity and inside information and then negotiate a hoard of early tokens. “What I have now is asymmetric access to information,” Gerard said. “I have a direct line to a founder… I have access to financial information. I know if user adoption is tanking. I know if usage is skyrocketing. I know if the founder is depressed or hooked on Adderall or is spiraling out of control.”
Then, at the first internal sign of trouble, the investor can dump the token on the “quote-unquote community,” Gerard said. “Some of them are quite transparent about it, but they’re still able to couch all of this in language that revolves around ownership and the community.”
Vice reports evidence of start-up firms making the switch to Web3 simply because doing so made it easier to raise money.
“A venture capitalist who asked that I not use his name admitted with concern that one of his own portfolio companies did the same, and other founders and CEOs similarly said they’d noticed startups cynically bolting on Web3 elements after running out of other options and needing more funding to survive.”
What everyone can seem to agree on, Strachan adds, is that the boom has created a lot of vaporware and useless entrepreneurial attempts to get rich quick, even if no one wants to name names on the record.
“Tack on #Web3 and investors will throw money blindly and inflate valuations 2-3x,” one start-up founder told Strachan.
There’s even a term for companies that bolt on a Web3 element in order to raise a few more bucks. They’re called “grifters.”
The question for now is: how long will regulators remain hands-off? SEC chairman Gary Gensler has reiterated that he believes many crypto tokens should be regulated as securities.
READ MORE: “Investor Protection in a Digital Age,” Remarks Before the 2022 NASAA Spring Meeting & Public Policy Symposium (U.S. Securities and Exchange Commission)
“Let’s not risk undermining 90 years of securities laws and create some regulatory arbitrage or loopholes,” he said at the University of Pennsylvania’s April law conference.
While crypto markets may offer new ways for entrepreneurs to raise capital & for investors to trade, we all still need investor & market protections.— Gary Gensler (@GaryGensler) May 24, 2022
Let’s not risk undermining 90 years of securities laws & create some regulatory arbitrage or loopholes. pic.twitter.com/E1Z8WJnePm
Tunguz, the pro-Web3 venture capitalist, is ready for such a day, but reaping the rewards until then.
“There will be a Securities Act of 2033, whatever the year is,” said Tunguz. “Whenever the regulation comes out, we will respond to it. But I think there’s definitely an opportunity here to make money in a way that benefits everybody within the ecosystem.”