Decentralized perpetual applications are cool. The idea of a decentralized perpetual payments network is even cooler. And with each new project, Web3 improves upon whatever the prior iteration was lacking. Faster, cheaper, more interoperable, cooler. The problem is, cool doesn't translate to useful.
Let's look at a popular Web3 DeFi project - PancakeSwap:
"On PancakeSwap you can stake cake tokens in syrup pools, provide liquidity and lend on Automated Market Maker (AMM), IFO (Initial Farm Offering), trade NFTs on its own NFT Marketplace, and exchange BEP-20 tokens. You can also win big on the PancakeSwap Prediction Market and Lottery. Is regular staking not enough? Try Pottery - a combination of CAKE lock-staking and lottery!"
There's $4.2 billion of value locked in on this exchange at the time of writing. I can feel the FOMO creeping in that maybe I'm wrong about the current state of Web3 DeFi, and should go all-in. Look at all that $$$ - not to mention all the things you can do with it!
The problem is that Web3 projects like PancakeSwap, and almost every other Web3 project, solve no real-world mass-market problem. Sure, once you're super deep in Web3 DeFi and trying to trade your 9th-order synthetic GME derivative with someone on a different blockchain, you need [coool!!!111] DeFi tools, but can you explain to your average person why you need this in under a minute? (Make sure to go outside of your bubble for this exercise).
The premise for almost every Web3 project boils down to solving either:
Neither is scalable. #1 has a baked-in cap on market size. While some companies sell great Web3 tools, they're selling shovels to dig sand, not gold. The problem is the folks buying the shovels have yet to figure out what they're digging. For #2, become too successful, and the regulators shut you down. It's not "bad" for a project to solve a niche use case. It's just not worth trillions of dollars.
We're still searching for a viable use case that generates incrementality for the masses, but we're seeing investment volumes as if Web3's the future of currency. However, the current state of Web3 is certainly not the future of money.
Why is there still so much money pouring into Web3 projects, then?
It's because we see small groups generating billions of dollars worth of perceived value through starting a new Web3 project. What other field today has the number of "successful" companies Web3 does? Nothing can compare. Everyone wants in, and since there are billions of dollars in thousands of Web3 companies, it "has to be legit". In turn, this causes more money and more bright minds to join in the chase. Mr. Wonderful's Web3 investment thesis summarizes why so many people are pouring money into Web3 (himself included): "You go where the intellectual capital is going".
While this is a nice rule of thumb, Web3 isn't a new technology; it's a new ideology. If Web3 was a fundamental new technology, all the intellectual capital fleeing here would signal mass potential. But it's not. It's a mental model shift. We didn't invent a new type of transistor or way for computers to communicate.
Think of Web3 as the open-source movement. How would you "get rich" from the open-source movement? Sure, selling tools might be one way. But what are the tools being used for in Web3? The significant movement here is from centralized to decentralized (the blockchain). Fundamentally, the shift from centralized data to blockchain data doesn't enable addressing a problem we couldn't crack before Web3. It's a shift in trust.
The most recent disruptive technology wave was the DotCom era, aka Web1. Tons of bright minds, tons of money, and a lot of crap. The main problem with Web1 wasn't the lack of use cases generating value. The problem was that valuations were out of control, similar to Railway Mania of the 1840s. A new disrupting technological innovation, a valid use case, real revenue, but invalid valuations. Where is the Web3 revenue outside of companies selling shovels? The most valuable companies in Web3 today are merely exchanges for trading tulips. If you need to describe the value a Web3 company creates as "something that can't be measured by revenue," what you have is a cult, not a company.
Let's look at Helium, an exciting IoT company working on the blockchain.
Helium started in 2013, as a purely IoT decentralized internet play. It was missing a critical piece to the "success" it sees today, though, when it launched. It wasn't on the blockchain and didn't have a Web3 coin. It handled payments in USD. And it failed to get traction. In a final act to save their flailing company, the executives at Helium thought that instead of paying participants in a real currency, let's invent our own HNT token and pay participants in that. We can say we're on the blockchain and ride the Web3 craze. They recently raised $200M on a $1.2B valuation. Instant success. And very cool. How about their actual revenue? $1,151.07 from selling wireless network data for September of 2022. Not to mention, they are piggybacking on real ISPs, which, if Helium ever grew large enough, would banhammer them out of existence. But sure, a pinnacle of success and innovation in the Web3 space. Again, "you can't measure their value in revenue" today. Ask yourself, if Helium was a failed company before Web3, was it really because they didn't have an effective way to buy and sell their network traffic? This isn't a problem for Verizon, AT&T, or any other ISP. Why was Web3 the catalyst that would enable Helium to "find success" selling wireless data?
There is no other explanation than mass mania and greed.
Despite my sentiment towards Web3 DeFi, I believe there are use cases for Web3 where a centralized-to-decentralized paradigm shift can create tremendous value, similar to the open-source movement. These solutions won't be cool, though, and the problems are quite boring. They most likely will look a lot like a normal startup, where it's going to be difficult to "buy into" other than purchasing stock.
We don't have a payments problem in first-world countries. High credit card fees have nothing to do with needing to replace FedACH (or your local L1 payment layer) with the blockchain. When was the last time someone went to the grocery store and thought wow, this is so difficult; there's no easy way to exchange an agreed-upon medium of value for my cart of bananas? Never. This literally has never happened in modern society.
Credit cards have high fees because of the consumer benefits, the cost of fraud, and the cost of managing these traditional "L2" networks. Consumers love credit cards and love their credit lines even more. They won't part with this just because you invented a way to swap CAKE tokens with Bitcoin for free through your refrigerator's WiFi connection. If consumers don't need it, merchants don't want it. The blockchain doesn't eliminate network costs, nor does it eliminate bad actors.
In the US, FedACH is relatively cheap at $0.0002 per transaction (yes, cheaper than Solana!), and the FedNow℠ Service is launching instant 24x7x365 payments next year. No, it won't be perfect, and yes, it will take time for participants to adopt, but it's coming. And it's sponsored by Uncle Sam. Web3 can't compete on cost and speed in the long run. Does being cheaper than $0.0002 or faster than a few seconds really mean anything to your average consumer, especially when you have to take on extreme volatility?
There was a time when a Web3 currency would have made sense before good ol' Uncle Sam invented the Greenback in the early 1860s. Yes, our beloved (loathed?) US Dollar didn't exist just a few generations ago. Instead, almost every bank issued its own paper currency. And your Bank of America mega-chains didn't exist. It was the Bank of [City]. Talk about making travel a nightmare. Currency exchange via candlelight because you traveled from Boston to Philadelphia. That's a real problem Web3 currency would have been perfect for. Only 150 years too late.
While there is a compelling use case for Web3 in cross-border transactions for illiquid currencies and as a replacement for corrupt and failing governments' currencies, these are niche use cases compared to the total payments space. Very rarely do technologies solving only the problems of developing countries change how the developed world operates.
Think about all the incredible life-changing inventions, from providing clean drinking water through a straw to self-composting toilets, drastically improving the world overnight for millions. Have these changed how our first world operates or created trillion-dollar companies? No, because they solve problems we don't have.
Web3 currencies (not owned by a government) will only ever live on the fringe because as soon as they threaten a significant power's native currency, they will be outlawed (see: China). Major powers are constantly battling to become the world's reserve currency. Web3 doesn't have the strength required to compete in this arena. We aren't one people of the world living united. We would need all of the corresponding governments of the world to buy into Web3 as well.
I've worked on various projects in the traditional payments space, from helping banks integrate with Zelle to building an ACH marketplace payments network at a startup. I know firsthand that the current system has many shortcomings and needs improvement.
Unfortunately, it's regulatory burden and bureaucracy that make innovation painstakingly slow. Fraud and money laundering are challenging and expensive to address. Throw in the fact that companies building payment networks generally want to make a profit, and you have today's state of affairs. Contrast that with Web3 DeFi participants: everyone is participating for the good of the community, there is no fraud or scams, and no one wants to get rich, all in the name of democratization </sarcasm>.
Web3 treats neither fraud nor money laundering as first-class problems. It's much easier to get away with financial crimes with Crypto than USD. Anyone who tells you otherwise is delusional. Some exchanges enforce AML/KYC, but many don't. Yes, authorities recently caught some high-profile bad actors that stole billions in bitcoin, but that was because of their own mistakes. They likely wouldn't have made these mistakes if it was possible to spend Crypto directly on anything with real-world value.
When Satoshi announced Bitcoin for the first time, one core property was that "participants can be anonymous". This has stuck with the community ever since. Web3 is still fighting KYC/AML adoption instead of embracing it as the vision for the tech's future. Why not?
Imagine trying to rent an apartment or vacation home out of town and needing to send money to a landlord you haven't met in person. It would be great if you could send them the deposit and know it wasn't a scam. Or if you receive a phone call from a number you aren't familiar with, wouldn't it be nice if there was a system to tell you that the person cold calling you wasn't actually a wealthy Nigerian Prince?
Instead of Web3 being synonymous with anonymous, let's make senders, receivers, phone callers, and every other trust-based interaction something verifiable on the blockchain. Satoshi was on to something highlighting trust issues with cash today; he just went after the wrong actor. Instead of making the bank the bad guy, we need to fix trust at the point where value trades hands. In the ever-increasing world of digital transactions, where you often don't see, speak with, or know the person you're dealing with, this is the problem we should solve. The exchange of value is asynchronous today, and escrow is impractical for small transactions. Our current solution relies on mega-companies to bridge this trust gap for the consumer (think of your Ebay, Etsy, or App Store rating). But it doesn't have to be that way.
A blockchain-based trust verification system has the potential to be immensely transformative. This wouldn't enable you to mate two NFTs together and mint a new ultra-rare holographic king Charizard virtual shoe, we don't need a new cryptocurrency for this, and it likely won't be cool. But it would solve a significant problem today for almost every transaction space and directly enable new P2P marketplaces.
Thanks for reading. Did I get something wrong, or have another viewpoint? This is an early draft, and would love your feedback.