Tim O’Reilly: Why is it too early to get excited about Web3?

Compilation: Metaverse Wormhole

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Editor’s note: There is no doubt about O’Reilly’s personal brand influence in the world. “Wired” magazine said he is a trend watcher, “Inc.” said he is a Silicon Valley prophet, “Huffington Post” for many years. Named a thought leader, he ranked 17th on the “Top 100 Most Influential People in the Global IT Industry” by eWeek. Former Google CEO Eric Schmidt said he could spawn an industry. As the definer of Web2.0, he has some unique views on the current popular technology concept Web3.0, the following is his point of view.

There’s been a lot of talk about Web3 lately, and as someone who defined “Web2.0” 17 years ago, I’m often asked to comment. I usually avoid doing this because most predictions about the future are wrong. What we can do, though, is to ask ourselves questions that help us see more deeply into the soil of the present, and of the future. As William Gibson famously said: “The future is already here. It’s just not evenly distributed “. We can also look at economic and social patterns and cycles, using Mark Twain’s observation: “History doesn’t repeat itself, but it always resembles strikingly.”

Next, we use a few subheadings to explore what comments can be made about Web3.

Decentralization and Centralization

In 2006, the creator of the World Wide Web, Tim Berners-Lee, used the term Web 3.0 as a vision for the next phase of the web after Web 2.0. He believes that the “semantic web” will be at the heart of this evolution. But it turned out not to be the case. The rationale now being made is that the next generation of networks will be based on encryption.

What we think of today as “Web3″ was proposed in 2014 by Gavin Wood, one of the co-creators of Ethereum. Wood’s compact definition of Web3, as he put it in a recent Wired interview, is simple. ” Less Trust, More Truth “.

In making this assertion, Wood contrasted Web3 with the original Internet protocol, whose spirit may perhaps be summed up in Jon Postel’s “Principle of Robustness.” “TCP implementations should follow a general robustness principle: be conservative in what you do, and be liberal in what you accept from others”. This ethos became the basis for a globally decentralized computer network, in which no one is held accountable as long as everyone tries their best to follow the same protocol and is tolerant of deviations. This system quickly surpassed all proprietary networks and changed the world. Unfortunately, time has proven that the creators of this system were too idealistic, failed to account for bad actors and, perhaps more importantly, failed to foresee that big data would enable a great concentration of power, even in a decentralized over the network.

Wood’s point is that blockchain replaces trust in the good intentions of others with transparency and irrevocability in the technology . As explained on Ethereum.org:

The encryption mechanism ensures that once transactions are verified as valid and added to the blockchain, they cannot be tampered with later. The same mechanism also ensures that all transactions are signed and executed with the appropriate “permissions” (no one can send Crypto assets from Alice’s account except Alice herself).

The documentation for Ethereum.org goes on to say:

Web2 refers to the version of the internet that most of us know today. An internet dominated by companies offering services in exchange for your personal data. Web3, in the context of Ethereum, refers to decentralized applications running on the blockchain. These apps allow anyone to participate without monetizing their personal data.

Crypto enthusiast Sal Delle Palme put it more daringly:

We are witnessing the birth of a new economic system. Its features and creeds are only now being transparently designed and refined by millions of people around the world. All are welcome to participate.

I like the idealism of the Web3 vision, but we’ve been through this before. In my career, we have gone through several cycles of decentralization and recentralization. Personal computers decentralize computing by providing a commodity PC architecture that anyone can build and no one controls. But Microsoft figured out how to refocus the industry around a proprietary operating system. Open source software, the Internet, and the World Wide Web broke the shackles of proprietary software with free software and open protocols, but within decades Google, Amazon, and others have built huge new monopolies on big data.

Clayton Christensen generalized this pattern as the law of attractive conservation of profit. “When attractive margins disappear at one stage of the value chain as products become modular and commoditized, opportunities to make attractive margins with proprietary products often arise at an adjacent stage.”

Blockchain developers believe that this time they have found the structural answer to recentralization, but I tend to doubt it. An interesting question is what might be the next location for centralization and control. By lowering the energy cost of computation, Bitcoin mining is rapidly consolidating into the hands of a few, indicating a re-centralization. There will be others.

Hype Cycle

Early articles by the Ethereum community on this topic provided measured assessments of Web3’s trade-offs and future challenges, but most of the popular narrative today is full of hype and financial speculation. A recent New York Times article provides an example.

Venture capitalists are betting billions to create an alternative world of finance, commerce, communications and entertainment that is actually on the web, which could be a major element in fundamentally changing the global economy — all building on On the blockchain technology popularized by Bitcoin.

What followed was a string of investments by cryptocurrency proponent Andreessen Horowitz in areas including gaming, decentralized finance, NFTs and decentralized social networks. None of the examples in the article focus on the utility of the things created, only on the likelihood that they will make investors and creators rich.

It’s not just the mainstream media hyping up the money that can be made, as if the actual value creation doesn’t matter. The stories of those who have gone down the “crypto rabbit hole” speak volumes about attaining wealth.

One of the great things about cryptocurrency is how it democratizes investment opportunities. For example, 95 vetted crypto assets are already readily available through Kraken. If you’re tech-savvy enough, you can invest directly in over 1,150 crypto-assets around the world, each with a market cap above $10M (at the time of writing). …

In order to secure investment deals in early-stage startups in the tech space, you traditionally need to be recognized and connected in Silicon Valley. In theory, the only real barrier to entry into cryptocurrencies should be awareness. …

Repeat with me: Neither venture capital investments nor easy access to risky, highly inflated assets can predict the lasting success and impact of a company or technology. Remember the dotcom boom and subsequent bankruptcy? Charlie Munger, the legendary Berkshire Hathaway investor, recently noted that we are in a  “crazy age than the age of the Internet . 

Cryptocurrencies could very well be the future of finance, but it’s hard to see what’s actually working right now because there’s a lot of smoke being blown out. Yes, exchanges like Coinbase are making big bucks, but unlike traditional financial exchanges, it’s not common currencies that are being traded, but speculative asset classes that may be grossly overvalued. Blockchain is also not replacing trust as Gavin Wood hopes. Binance, the world’s largest cryptocurrency exchange by trading volume, is under investigation for tax fraud and money laundering. A recent headline noted that ” a small group of insiders are reaping the majority of NFT gains “. The interface between cryptocurrencies and the existing financial system is ripe for abuse.

If Web3 is to become a universal financial system, or a universal system of decentralized trust, it needs to develop strong interfaces with the real world, its legal systems, and the economy of operations. The ConstitutionDAO story illustrates how difficult it is to build bridges between the self-referential world of cryptoassets purchased with cryptocurrencies and the functioning economic systems of the Web3 economy linked to actual ownership or utility of non-Web3 assets. If the DAO (Decentralized Autonomous Organization) succeeds in buying a rare copy of the U.S. Constitution at auction, its members won’t have legal title to the actual item, or even a clear sense of what might happen to it management rights. It will be owned by a limited liability company set up by the person who started the project. And when the DAO failed to win the bid, the LLC struggled to even return the money to its backers.

The failure to think about and create interfaces with existing legal and commercial mechanisms is in stark contrast to previous generations of the web, which quickly became the Crypto shadow of everything in the physical world – people, things, places, businesses , whose interconnections make it easy to create new services of economic value in existing economies. The easy money-making hype of crypto assets seems to distract developers and investors from the hard work of building useful real-world services.

That’s not to say that Web3 doesn’t have real opportunities outside of financial speculation. Cryptocurrencies are great for Crypto assets that can be valued and used in a separate world, such as computer games or the metaverse that everyone expects. There may be opportunities in the Crypto art market and sports highlights. As Sal delle Palme put it: “New applications of cryptocurrencies, such as NFT marketplaces, DAOs, DeFi and DEXs, CeFi, charities, GameFi, DeSo, etc., are being invented, funded (often crowdfunded), Build and deliver.” But we’re nowhere near the birth of a whole new economy.

Of course, cryptocurrencies and Web3 are only a small part of today’s speculative glut . The valuations of startups today are also ridiculously high, and it’s not at all clear that those valuations are an accurate measure of the actual value being created. They are likely just a scam that benefits a few insiders, just like the financial instruments that made many Wall Streeters rich before the world economy nearly collapsed in 2009. So, as Matt Stoller recently wrote: “Web3 is a bunch of shit. The question is, compared to what?” The current economic system is riddled with fraud and manipulated in favor of internal people! “. Those Web3 visionaries like the Celo project are right. We do need a new economic system.

two kinds of foam

The Dutch tulip mania of 1634-1637 is a classic example of the large discrepancy between the nominal financial value of an asset class and its intrinsic value. After the bubble burst, tulips returned to flower status, beautiful but no longer valuable, and had no lasting impact on the thriving Dutch economy. There have been many speculative bubbles since then, most of which have faded into the background noise of history.

There is, however, another kind of bubble, which economist Carlota Perez points out in her book Technological Revolutions and Financial Capital. She points out that nearly all major industrial transformations of the past—the first industrial revolution; the age of steam power; the age of steel, electricity, and heavy machinery; the age of automobiles, oil, and mass production; and the Internet—were accompanied by a financial bubble.

Perez pointed out that in this 50-60 year innovation cycle, there are four stages in each. In the first phase, there are fundamental investments in new technologies. This gave way to a speculative frenzy, with financial capital seeking consistent excess returns in a rapidly evolving market that was beginning to consolidate. After the speculative bubble burst, there was a more sustained period of consolidation and market correction (including regulation of excess market forces), followed by a mature “golden age” of new technologies integrating into society. Eventually, the technology matures enough that capital moves elsewhere to fund the next nascent technological revolution, and the cycle goes on and on.

An important conclusion of Perez’s analysis is that a true technological revolution must be accompanied by the development of a large number of new infrastructures. In the first industrial revolution, this included canals and road networks; in the second industrial revolution, railways, ports, and postal services; in the third industrial revolution, including electricity, water, and distribution networks; in the oil age , including interstate highways, airports, refining and distribution capacity, and hotels and motels; in the information age, including chip factories, ubiquitous telecommunications, and data centers.

Much of the construction of this infrastructure was funded during the bubble phase. As Perez said.

Perhaps the key role of financial bubbles is to promote the inevitable overinvestment in new infrastructure. The nature of these networks is such that they cannot provide enough services to be profitable unless they achieve sufficient coverage for widespread use. Bubbles provide investors with the necessary asset inflation to expect capital gains, even if there are no profits or dividends yet.

So there was a canal bubble, a railroad bubble, and of course the dot-com bubble, which ended just as Perez was finishing her book. A frenzy of inefficient investments has left behind dark fiber, empty data centers, and a trove of talent and technology ready to be repurposed during the consolidation phase.

In Perez’s narrative, many small technological cycles are rolled into one. Consider the history of modern Crypto computing. It has several phases, each dominated by a new generation of technology: mainframes, personal computers, the Internet and the World Wide Web, smartphones, and now, perhaps, cryptocurrencies and the metaverse. Each technology has its own cycle of innovation, speculation, depression and maturity.

So, is what we mean by Web3 a base investment period of a new sub-cycle, or a bubble period of the previous cycle? In my opinion, one of the ways to judge is the nature of the investment . Has the abundance of financial capital created useful infrastructure as we have seen in previous cycles?

It’s not clear to me whether NFTs meet this requirement. There is no doubt, though, that the disruption of finance, just as the internet has disrupted media and commerce, will represent an important next phase in the current cycle of technological revolution. In particular, it would be a fundamental advance if it were possible to distribute capital efficiently without the trust and authority of a large centralized provider of capital (“Wall Street”, so to speak). In this regard, what I am looking for is evidence of the allocation of capital to productive investments in an operating economy through cryptocurrencies, rather than allocation of capital to hypothetical assets. If you hear any good examples please let me know.

To make it clearer what I’m talking about, let me pull away from cryptocurrencies and Web3 and look at another technological revolution: the green energy revolution. There, it’s entirely clear that bubble valuations are already funding the development of durable infrastructure. Elon Musk is a master at taking the hyper-speculative price of Tesla stock (a year or two ago, Tesla stock was valued at the company’s 1,500 year profit!) and turning it into a national A revolutionary electric vehicle charging network, battery gigafactory and self-driving car capabilities, while catalyzing an entire industry to follow him into the future. Jeff Bezos also used Amazon’s excess valuation to build a new just-in-time commerce infrastructure. Both of them are investing in infrastructure for the commercial space industry.

As I evaluate Web3’s progress, I’ll also use cryptocurrencies for other functions of the financial system—purchases, remittances, etc.—not only with traditional banking networks, but with other emerging technologies as well. For example, are Ripple and Stellar more successful platforms than bank transfers, credit cards, or Paypal when it comes to cross-border money transfers, in the same way that Google Maps is better than first-generation GPS pioneers like Rand McNally or Garmin? There is some evidence that cryptocurrencies are emerging as a meaningful player in this market, even as regulatory hurdles are slowing adoption. Don’t forget to send money, though, what about payments more generally? How does its growth compare to non-crypto payment startups like Melio? Given the interest in cryptocurrencies by companies like Square (now Block) and Stripe, they are well positioned to tell us how cryptocurrencies are progressing relative to more traditional payment mechanisms.

Likewise, if Web3 is going to be the future of identity or social media, we need to ask ourselves what evidence is there that it’s being adopted – it’s really a better mousetrap, as previous generations of internet technology have attested like that? I blame the almost complete lack of coverage of this kind of information in reporting on the field.

Where are we in this cycle?

One might ask, is the current phase of Web3 more equivalent to 1995 or 1999 – the early stages of the bubble or its end? Given the current valuations of crypto assets (and tech startups in general), it’s hard to argue for an earlier date.

I like to remind people that I wrote What Is Web 2.0 five years after the dot-coms went bust, with the explicit goal of explaining why some companies survive and others don’t. So I suspect it won’t be until after the next bust that we really understand what Web3 includes, if anything.

From the last bubble, I can offer some pragmatic observations in addition to the changes in technology and business models that I tried to capture in “What is Web 2.0?”

  1. All the companies that survived are making money — lots of money. (In the case of Amazon, it’s free cash flow, not profit, but the numbers are huge, as are the business and economic insights behind it). Their valuations, while high, are backed by credible future earnings and cash flow models.
  2. By today’s standards, none of them needed to raise huge sums of money. (Yahoo’s total pre-IPO investment was $6.8 million, Google’s $36 million, and Amazon’s $108 million). When you see companies turning to investors for funding time and time again and never reaching profitability, they’re probably not really businesses; they’re probably best thought of as financial instruments.
  3. They all have millions, then tens of millions, then hundreds of millions (and finally billions) of daily active users for new services that change the world.
  4. They have all built unique, sizeable and enduring assets in the form of data, infrastructure and differentiated business models.
  5. The companies that dominate the next generation of tech are not all rising stars. Apple and Microsoft transitioned to the next generation with ease, and in Apple’s case, they even led the next generation.

Remember, it was early when the dot-com bubble burst. Google Maps hasn’t been invented yet, and neither have the iPhone or Android. Online payments are still in their infancy. No Twitter or Facebook. No AWS and cloud computing. Most of the things we rely on today don’t exist yet.

I suspect the same will be true for cryptocurrencies. There are a lot of things that haven’t been created yet. Let’s focus on the parts of the Web3 vision that have nothing to do with get-rich-quick, tackling the hard problems of trust, identity, and decentralized finance. Most importantly, let’s focus on the interface between cryptocurrencies and the real world in which people live, as Matthew Yglesias said of housing inequality, “a society through Gradually become rich by accumulating long-term inventories of capital goods.” If Web3 heralds the birth of a new economic system, as Sal Delle Palme says , then let’s make it one that increases real wealth — not only Just paper wealth for those lucky enough to get in early, but actual life-changing goods and services that make life better for everyone.

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