Author | David S Bennahum Compiler | Huo Huo Producer | Vernacular Blockchain (ID: hellobtc)
In 2022, the crypto industry is full of turmoil. Following the collapse of Terra and Three Arrows Capital, the collapse of FTX and its secondary crisis have made the crypto winter even more severe. The sluggish market, the halved coin prices and the tough regulatory situation are in parallel. The crypto industry seems to be ushering in the darkest period in history. Recently, a phrase has been circulating in the currency circle, Winter is coming. In contrast, more and more developers and participants regard the crisis as an opportunity and are actively developing and building. Today, Vernacular Blockchain brings you an article on how to lay out in the winter. The following is the text: "The stage has been called off." In June this year, the New York Times said: "A global industry worth hundreds of billions of dollars has seen it rise and fall. This is web3. But within a few weeks, at least 65% of the market value of this industry has been wiped out." For builders: "collapse" is the best time to build. Similarly, in web3, this moment is also marked as the "Ice Age". This is not the first ice age of speculative technology, nor will it be the last. On the contrary, such wintery times provide unusually fertile soil and a beneficial climate for new ventures.
01 Historical Cycles: Market Crash & Dawn of a New Era
In mid-April 2000, the tech-heavy Nasdaq fell 25%. It marked the end of an era that some called web1. By October 2002, the Nasdaq had hit its low: tech stocks had lost $5 trillion, or 78% of its value, from its peak. It was the "dot-com crash." Yet the soil of the dot-com era was fertile, with more than $100 billion in venture money funding the commercialization of the internet. Lessons were learned, some of them confusing, like the 1990s mantra: "Information wants to be free." A number of young companies survived the crash, including Amazon, Netflix, and Google. New companies were founded, too, like YouTube and Facebook, and MySpace. By 2006, a new business model had emerged, as the Los Angeles Times explained to its readers at the time: "Now, the focus is more on free services supported by online advertising, which has been growing dramatically." VCs who stuck around through the crash embraced the controversial new model. If “information wants to be free”, then perhaps the business model is really a media model, using advanced technology to build compelling consumer products, allowing them to be used for free, and using rich behavioral data to efficiently match advertisers and consumers. Users would pay for services, not with money, but indirectly with their data. This became the cornerstone of what we now call web2, and the economic engine behind a dizzying array of tech companies, most notably Facebook and Google. Beneath this free technology-as-media model lies a simple insight: people will pay for services if the incentives are right. This insight extended to the second wave of web2 innovation and the so-called “gig economy”. Companies like Uber emerged. Both drivers and passengers embraced this innovation, after all, along the way, Uber was just a “marketplace” and a “matchmaker between drivers and passengers”. This model counts as another kind of success. However, there is only one through line to winning in web2. Whether it is a gig platform, an e-commerce platform, a social network or a search engine, they cannot become the owner of the network.They can be customers or “partner drivers,” but in no case does their work translate into ownership of the platform. Hourly wage? Maybe. Commission? Yes. But “vested interest in the business”? Absolutely not. This scarce position is limited to the “founding team,” “participants,” and perhaps a group of employees with relatively hard-to-exercise stock options. But in any case, it makes sense for the platform to take this stance. The founders built the data systems, the algorithms, the brand, and the marketing. They raised the money, so why should the “users” be owners? After all, users had no role in the hard work of conception and launch. They were not even participants. Users are the end, not the means.
Web2 — Hidden Costs
In 2015, this seeming fairness began to go haywire. There was a sense that the exchange had become unbalanced. Seemingly innocuous, friendly platforms like Facebook, Insta, or YouTube began to take on a darker tone. People talked about “social media addiction,” “privacy breaches,” and later, “the rise of disinformation,” among other things. Using a climate analogy, climate scientists might call these the “externalities” of the web2 business model. The market capitalizations of these companies were so dizzyingly large, some breaking the trillion-dollar mark, more than the GDP of some countries, that there was a sense of being out of control. Are we doomed to live forever in the grip of unaccountable, unelected, ungovernable tech companies? Accountable to no one except the supposed participants in the open market? Is there anything new that can surpass Google or Facebook at this point?
02 Decentralization — A solution to web2’s shortcomings
In 2009, a project called "Bitcoin" was launched. It sounds like a silly, weird idea that would not interest 99% of people. Some kind of "digital currency"? Like coins in a game? But behind Bitcoin is an innovation that hits at the heart of how web2 companies are built, at least in theory. The designers of Bitcoin wanted to solve a core problem: how can trustworthy transactions be allowed without a trusted central authority in the middle? It's an interesting question with far-reaching implications if the answer can be found. Bitcoin started out as a game. The designers made several promises:
The number of bitcoins will not exceed 21 million
Each Bitcoin is unique and cannot be copied, which means it cannot be counterfeited.
The creation of new bitcoins will be tied to "work" done by the community - they must be "mined". Mining will become more difficult over time, with early workers effectively being rewarded more than later workers.
All of this would be controlled by a distributed network, with no central authority to be trusted to make the right decisions. The crazy thing is, these promises could be fulfilled. People tried to prove that these three promises could be broken. And failed. Some people persisted, and so extraordinary stories emerged. The price of Bitcoin began to rise. Early buyers who bought Bitcoin for fun and games (and maybe pizza) now found that they were worth thousands, then millions of dollars. To those who didn't understand, all this talk of trustless technology, ledgers, and smart contracts seemed like bullshit, after all it was inherently complex in terms of basic math and science. The complexity coupled with the millions of dollars of lost USB sticks created a speculative frenzy. What later became known as a "get rich quick" opportunity jungle. Maybe I can be a bin picker, but don't throw my coins in the bin! Then a whole set of jargon emerged: "Diamond Hands!", "HODL", FOMO... Then the public and the media noticed, and so did the technologists, and then it got to the point where it was impossible to ignore, these stories were too cool, weren't they? In 2013, another interesting "coin" was launched, called Ethereum. It wasn't like Bitcoin. It was not just "money". It has another set of properties — aspects that its creators describe using words like “utility” and “governance.” Ethereum is a protocol that lets people build tech products and services using the same software principles that power Bitcoin. It comes with phrases that feel important: “trustless transactions,” “decentralization,” “proof of work,” “ledger,” and, most importantly, “blockchain.” One of the founders of the Ethereum project tried to explain why this technology was so different from what had come before, and in 2014 he came up with a new term to describe it: “web3,” which didn’t get much attention at first. But these, if you think about it, seem to hit at the heart of the business model of the “winner-takes-all” web2 companies (and their participants). After all, what is the core asset that Google, Facebook, or Uber offer? It’s the databases and software they create and manage.As long as someone "trusts" these companies, their services work. If people "trust" that their friends on Facebook are their friends, they are happy to communicate with them. If a retailer selling baby clothes believes that "Jennifer" is a mother who recently lived in California and is interested in baby clothes, then Facebook gets the retailer's advertising revenue. You may "hate" Facebook, or just not hate or dislike it, but either way, the key is to "trust" that it gives you what you want, whether it's from your friends or from a viral post. Trust and hatred can sometimes coexist, although perhaps unpleasantly. But what if one could build a trusted database and software system, but without a central authority in the middle? In other words, what would happen if you could build a Facebook without the Meta company? Is it really possible to build that? A trustless network that is trustworthy? The Bitcoiners did it.
03 Get rid of central authority - user-owned network
Answering this question with a definite yes becomes a very exciting proposition. It could arguably have revolutionary implications, at least in the context of capitalism. If centralized authority is not needed, then how about:
Coordinate work to build a product or service?
How do people get paid for their work?
Is strategy developed and decided collectively?
How is ownership distributed?
These are not just engineering questions, they are "social contract" questions. These questions are reminiscent of the Enlightenment of the 18th century. These social contract questions need to be answered and then incorporated into algorithms, which are called "smart contracts". In effect, what used to be the constitution of a company, its rules and bylaws and the commercial agreements between the company and its counterparties, will need to exist as "trustless" entities on the blockchain. These questions and the way to use blockchain innovation to build new products and services in a decentralized way are under the shadow of huge external costs, which some people call "casino". The vast majority of crypto projects that have emerged after 2018 are dominated by the casino mentality. The equation is simple: launch a "coin" and convince people to buy it. Then quickly exit. Indeed, it's disgusting. For "builders", that is, people interested in the hard creative work of innovation, the casino comes at a cost: it tarnishes "web3" as a scam; on the other hand, the casino brings a lot of attention and capital, some of which is useful to builders. But the casino exploded. In the first half of May, Bitcoin fell by about 25%. Just like the bursting of the Internet bubble in 2000, it was also accompanied by a continuous downward trend of Ethereum and more projects.
04 Insight into the 2022 market crash
At the time of writing this in June, the total value of all crypto assets has fallen 73% from $3 trillion to $800 billion. In 2002, about 18 months after the dot-com crash, all tech companies lost more than 76% of their value. Yet the carnage of 2000-2002 was far greater in real dollars than it is in 2022. At the time, the Los Angeles Times estimated the peak public value of these web1 companies at $6.7 trillion, the equivalent of $11.4 trillion today. This was an ecosystem with a peak market cap nearly four times that of web3, when the total “internet population” was a fraction of today’s: about 415 million, versus 3.4 billion now. On a “per capita” basis, the cost of a web3 crash per “internet citizen” (to use the defunct web1 terminology) would have been about $65 per person (3.4 billion people sharing a $2.2 trillion loss). In a web1 crash, it would have been a whopping $2,089 per person (415 million people sharing an $8.7 trillion inflation-adjusted loss). This needs a chart!
To use an analogy, at this scale, the collapse of web1 is like the asteroid that collided with the earth 65 million years ago, wiping out the dinosaurs, while web3 is like the last great ice age. This is a fundamental difference in scale.
So what happens next?
05 Web3 Ice Age — Perfect Climate for Participants
Unlike the web1 apocalypse, participants in 2022 have short-term speculative capital, i.e. committed capital to participating funds looking to fund private companies. This capital is either deployed over time or returned to fund participants according to contractual terms. How much cash flow is there? It depends on how one measures it, but for a better understanding, using PitchBook, the ultimate database of participants, a search query for “VC” participants looking to participate in “blockchain” (not just per se) yields $47 billion in potential unallocated capital. There are 122 funds worldwide that meet this criteria. So in PitchBook, if one expands the search to any type of entity that explicitly has a “blockchain” participation mandate, the number spirals to $76 billion in unallocated cash flow. This larger number includes participants who are more likely to be “spooked” by the web3 ice age, such as hedge funds and “corporate VCs”. This is why the “VC” tag is so important in the scheme. VC funds are designed for long-term participation. The recent Andreesen web3 fund that attracted a lot of attention in May had a 12-year time horizon. This means that if you are an LP in the fund, you are being told that an investment made in 2022 may not mature until 2034. Don't expect to get your money back before then! In this case, do VCs "care" about an ice age hitting web3? Yes, but not in the way you think! If you are on a 12 year time horizon, you might be happy to participate in this icy climate. Icy climates are perfect for non-speculative VCs, or arguably the best time to participate. Much better than the tropical days of a thriving ecosystem. Ice ages are good for participants because:
Weak teams and projects die in the cold, leaving behind stronger candidates worthy of funding consideration
Competition from “tourists” — that is, hedge funds, corporate VCs, and family offices — tends to disappear. These sunbirds hate the cold! As a result, venture funds gain choice, early-stage valuations fall, and competition for deals decreases
VCs set expectations correctly with participants. This is a long-term value investing fund. So there is no pressure to rush to a public sale (Casinos are closed! Be patient. If you want short-term returns, go to a hedge fund.)
Ice age market conditions are best for early participation, and then you can exit in the glory of the bull market, so that the climate is favorable from beginning to end. Of course, casino people are very unhappy. They are the opposite of venture capitalists. They need hot tropical climates, i.e. bull markets, to thrive. But for builders, it is a good thing to be able to work on difficult but rewarding things. Today, if you want to start a new web3 project, the funding threshold has changed. In the casino model, the equation for launching a project follows these steps:
Set a big price for the project and get funding
Generate interest from prices and money
Use that price/interest equation to prove your web3 idea (attract a team)
Create a project
In their web3 deck, Andreesen presents it like this:
That was before the Ice Age. As it got colder, the order got reversed. Now it looks like this:
Create the project before funding (gather a team, do some work)
Present new ideas (show, don’t tell)
Generate interest from participants/partners from the results of initial work
Set a data-backed price to fund and scale projects
This order is essentially the traditional 1990s VC backed approach to startups. Here are some signs of promising web3 projects:
Does the project create meaningful long-term incentives for participants in the ecosystem to contribute valuable work in exchange for community ownership?
Will the project be able to displace existing web2 incumbents by attacking the same market, but in a fundamentally more scalable, sustainable, and competitive way?
Is there a self-sustaining economic model using web3 token economics that is absolutely impossible to replicate in web2 without token economics?
Is there a large sustainable market where the utility of the token eliminates the need for a public sale to create liquidity for token holders?
Each of these questions is profound. Some, especially the last, explicitly contradict the casino model.
06 Collective ownership in the tokenized economy
In a world where the next Facebook is a web3 entity, the network is decentralized and participants earn fractional ownership through productive contributions to the network. Tokens in that network are therefore both assets and ownership shares. It works a lot like a security, with the key difference being that you can’t issue more securities — the total issuance is capped from the start (which means there is no risk of diluting early token holders in the future). Tokens are earned through work that the community deems valuable — the self-governing portion. Communities that define useful ways of doing work will thrive when these incentives produce the desired outcome (“good work” on the product). Communities that incentivize dumb work or reward “bad work” will fail. As with web2, this will also be a “winner takes all” dynamic. One day, there will be a web3 winner who takes the title of “We dethroned Facebook.” But unlike Facebook, the winners of web3 will be owned by the participants of the network. In this case, allowing non-contributors to earn tokens just for the money is harmful to the ecosystem. This is a key distinction, and arguably a long-term consideration for the future of web3, public sales will inherently contradict the growth and health of a project, potentially enticing speculators and short-term traders, and creating a path to extract value without contributing work. This could end up being a very powerful signal, inherently attractive to projects that “don’t need a public listing” to succeed at scale. This is a clear signal of “adverse selection” from those who need a public sale, who somehow lack the depth of community, utility, and scale, and therefore are vulnerable. Markets are good at solving these hard problems: there is some innovation waiting to be done in how web3 projects can self-sustain and finance themselves over the long term. In this sense, this is not unlike the paradoxical moment of the early 2000s, when it became clear that if “information wanted to be free”, tech companies would have to become media companies backed by advertising. It sounded crazy at the time, but it worked. In web3, “work wants to be rewarded with ownership”, it sounds crazy now, but it will work. Ice ages are great times to build.Are you ready? Let’s wait and see and build together!
Original link: https://entrepreneurshandbook.co/the-web3-ice-age-2fe40b1732e6 Original title: The Web3 Ice Age Original author: David S. Bennahum Translator: Huo Huo
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