Against Web3 and Faux-Decentralization

Cryptocurrency grifts come in many shapes and sizes.

You have the “Elon Musk giveaway” scams from hacked Twitter accounts. You have people who lurk on trading platforms (e.g. LocalBitcoins) to trade from a hacked financial account (which will then issue a chargeback against you if you fall for it). You have the whole NFT craze and all of its ugly iterations. You have fly-by-night darknet marketplaces, cryptocurrency “tumblers”, and ransomware.

But sprinkled atop of these obvious scams, money laundering techniques, and outright criminal activity targeted at innocent people, the manufactured hype for cryptocurrency is deafening.

Sometimes literally; as with the BitConnect guy.

When the WallStreetBets subreddit drove thousands of retail investors to invest in GameStop to clap back at the hedge funds that overcommitted to their short-sell, there was a lot of buzz around the term DeFi floating around. (Short for “Decentralized Finance”, in case you were wondering.)

But DeFi wasn’t ambitious enough for these hype-men. In the past few weeks, they’ve been astroturfing social media to generate enough buzz and support for an idea that CloudFlare even blogged about it: Web3, the Decentralized Web.

I do not know with what tools Web III will be built, but Web IV will be built with sticks and stones.

(with apologies to a quote popularly attributed, without proof, to Albert Einstein)

So let’s talk about Web3, why it’s going to fail, and what we as an industry could do better to solve the problems that Web3 claims to solve, without ever pumping cryptocurrency.

What Does Web3 Claim to Be?

Web3 claims to be the “Decentralized Internet”, wherein user identity is backed by a token on a cryptocurrency’s blockchain, and relies on cryptographic proofs rather than a trusted third party to map identities to humans.

More specifically, Web3 invokes the use of NFTs as a sort of decentralized identity. (If you haven’t read it already, see my previous post about NFTs.)

This is a fundamentally flawed idea, but its components have some merit, as I’ll explain in detail.

In my opinion, the main flaws with Web3 are:

1. Web3 is Fake Decentralization
2. Decentralized Identity Doesn’t Require Cryptocurrency

Web3 is Fake Decentralization

Web3 is fake decentralization because cryptocurrency is fake decentralization.

If you don’t believe me, let’s look at some concrete and famous examples of the two most popular cryptocurrency projects (by market cap) being “decentralized”.

• Bitcoin: Before the Chinese government banned Bitcoin mining earlier this year, they had accounted for as high as 67% of the total Bitcoin hashrate. In the wake of China’s Bitcoin ban, the United States quickly rose to account for 35% of the Bitcoin hashrate. Remember: You only need to control just over 50% of the hashrate to control the entire network.
  
• Ethereum: When the DAO (an organization implemented via smart contracts) was successfully attacked, they instituted a hard fork to undo the damage.
  
  Ethereum’s developers claim this decision was based on feedback from the Ethereum miners representing 85% of participating Ethereum addresses. However, it’s worth noting that, because of the transaction cost inherent to cryptocurrency transactions (which underpinned their election), rich Ethereum users would have been in a position to vote “Yes” from a lot of addresses, while your average non-rich user would be less capable of doing so. Not to mention the risk of “Dark DAO” vote-buying schemes.
  
• Bonus Round — Bitcoin SV: Bitcoin SV is a fork of Bitcoin Cash, which is a fork of Bitcoin, that was successfully hit with a 51% Attack earlier this year. Oops.

At best, cryptocurrency provides the illusion of decentralization. You can apply Game Theory to the miners’ and developers’ incentives to maintain this illusion, if that’s your thing, but the second everyone is under pressure (i.e., the DAO attack threatened whale investors’ profits if the ETH price tanked), the mask will come off, and you’ll be staring centralization directly in the face.

NFT oligarchy? A study of 6.1M NFT trades finds a few folks at the center of the market
🐱 The top 10% of traders account for 85% of transactions & trade at least once 97% of all assets
🦍10% of buyer–seller pairs have the same volume as the remaining 90% https://t.co/V3vytqZZB5 pic.twitter.com/IDr67zl7TI

— Ethan Mollick (@emollick) November 30, 2021

At its core, cryptocurrency is, or becomes, centralized for a simple economic reason: Capitalism.

Centralization is Inevitable Under Capitalism

In the United States, we’re often taught the widely-debunked “Trickle Down” theory of economics. Instead of a fluid under the effect of gravity, it’s better to model wealth as the gravity itself: The more you have, the easier it becomes to pull more towards you.

If you take a somewhat egalitarian (from an optimist’s perspective anyway) approach to decentralization, and map it over everyone’s pre-existing economic conditions, you’re going to end up applying the identity function to the pre-existing system.

That is to say: Centralization in, centralization out.

Wealthy people can afford more computer hardware than you can, and they can hire people to handle the hard technical problems they don’t understand. You and I do not have this capital, and are therefore at a disadvantage.

Centralization is an inevitable result of capitalism, or any system that builds atop capitalism. Whether you love or hate capitalism, this is a systemic inevitability.

How to Decentralize?

To embrace decentralization is to dispense of Network Effects. Decentralization is to embrace anonymity and the freedom of information. The hacker ethos. The cipherpunk’s manifesto. Decentralization means the rejection of rulers–whether political or financial.

True decentralization requires adhering to the principles of cryptoanarchists, which requires an anarchist digital currency; not an anarchocapitalist one. Capitalism creates a hierarchy, which creates rulers, which is incompatible with anarchy.

Without the gravitational effects of capital driving income- and wealth-inequality, we could design a cryptocurrency that is actually decentralized, even when the world is largely governed by capitalist economic systems.

Towards A Decentralized Digital Currency Without Capitalism

What would a decentralized digital currency without capitalism look like? It’s difficult to say, because as far as I’ve been able to research, no such designs have ever been proposed.

In the absence of capitalism, we’ll need an alternative economic system to based a design atop, and whose principles we’ll need to incorporate.

As a non-expert, the only alternate economic systems I’m aware of are socialism, communism, and egalitarianism. For the purposes of this thought experiment, you can treat any ruler-less economic system as interchangeable–although the details will certainly matter for any real implementation.

Important: I’m not interested in discussing the politics of economic systems. This is an informal academic exercise to model what a decentralized digital currency would look like if you removed capitalism from its core. The removal of capitalism would help prevent the long-term centralization of a digital currency, so I think it’s a topic worth exploring, even if you dislike non-capitalist economies or stan the free market. I’m not here to judge, so let’s chill out and use our imagination a bit.

Requirements of a Non-Capitalist Digital Currency

For starters, it would necessarily be distributed and sharded like Stellar, to faciliate decentralized trade between independent communes (which will have a many-to-many relationship with humans).

Additionally, each commune would define its own local currency independently of the global state of the network. Exchange would be facilitated between communes, not individuals. However, within a community, they would be able to define their own rules for individuals to participate in inter-community trade. This would likely be enforced through a sort of smart contract.

Within a commune, all tokens would have an expiration (e.g. block height) from the moment they are mined. Upon expiration, the tokens would be recycled by evenly distributing their values across all members of the commune–as a sort of Universal Basic Income. This would create an inevitable tax on wealth that the rich wouldn’t be able to evade, without requiring the price inflation mechanism used in non-digital currencies today.

Private transactions–such as implemented in ZCash–would be enabled by default. This is necessary to preserve individual privacy. Only interchanges between communes would be sent in the clear by default.

The global state between communes would need to have its integrity maintained through a non-wasteful consensus algorithm; such as Proof-of-Stake. To this end, communes will be able to stake some of their collective assets (rewarded and optionally traded between communes that participate in mining) to authorize transactions and resolve contentions. Non-staked global tokens expire just like communal tokens, but staking prolongs the lifetime of the staked token.

Each commune will be able to define their own consensus protocol used internally, but wasteful ones (i.e. Proof of Work) are strongly discouraged. If Proof-of-Stake is used, communes can decide if their communal currency is prolonged for staked tokens.

A commune-specific percentage (which MUST BE at least 50%, up to 100%) of all incoming assets expire and disburse immediately, ensuring that the community always benefits from trade, and a wealthy nobility class doesn’t emerge via tax-evasion.

There are possible many more considerations I hadn’t yet delved into. I am not an economist; merely a cryptography-specialized security engineer. Consider this a rough draft until someone smarter has a chance to review it.

In short, if you want real decentralization, you cannot get to there from here with any capitalism-based cryptocurrency (which, unfortunately for Web3, describes all existing cryptocurrencies). However, with a few specific design choices, you can build a cryptocurrency that models a non-capitalist economic system.

Decentralized Identity Doesn’t Require Cryptocurrency

Regardless of whether or not you have True Decentralization in your favorite blockchain project, it turns out you don’t even need a digital currency at all to implement something like NFTs are supposed to be.

You can replace NFTs, and the MLM schemes backed by NFTs, with a combination of the following components:

1. Some sort of transparency log, such as Trillian (which underpins Certificate Transparency).
   • Most (if not all) cryptocurrencies qualify as a transparency log, but the existence of one doesn’t automatically make the larger system a “blockchain”.
2. A meta-protocol, like Gossamer, but for associating public keys with identities and managing the mutable ownership of assets.

All you need, then, is an unbroken chain-of-custody between the artist that created a work and the current owner of a work, to prove ownership.

Note: Having third-party attestations of the artists’ identity for a given public key is also necessary to prevent some random dude from pretending to be the artist, and then minting NFTs for works they did not create.

You don’t need cryptocurrency to accomplish an NFT-like feature. But, it should go without saying, such a system would fit elegantly in the non-capitalist digital currency I proposed in the previous section.

Closing Thoughts

Web3 may just be the next iteration in an infinite series of dumb buzzwords used by cryptocurrency peddlers, but the notion it describes does encapsulate some ideas that may be valuable.

However, these ideas do not work well with existing cryptocurrency designs, and often do not even require an actual cryptocurrency at all to be successful.

Beyond that, ditch this Web3 bullshit, and the Web2.0 bullshit that preceded it for that matter. Bring back independent blogs and personal websites.