Web 3: New scams for new kids on the blockchain

Over the last 5 years, galaxy-brained folks have had time, thanks in part to a pandemic, to dream big about Web 3 after catching some inspirational podcasts and YouTube gurus. Or maybe watching Gilfoyle pitch a “new internet” on the last season of “Silicon Valley.”

What was so intriguing to so many about Web3 anyway? Since nobody could really agree on exactly what it was, it could literally be whatever aspiring entrepreneurs imagined it to be.

Common threads appeared. Blockchain. Bitcoin and Ethereum. DeFi. Decentralization of organizations, infrastructure and data. Freedom from tech giants. Self-sovereignty. Privacy. Opportunity.

All the kinds of ideals that generate charismatic personalities. 

Who cares about maturing cloud adoption or better integration standards, when you can explore a whole new economy based on blockchain, cryptocurrency and NFTs? Why wouldn’t tech talent leave standard Silicon Valley-funded confines to live this Web3 dream?

When a space is overhyped and undefined, it encourages the rise of the worst kinds of actors. Web3 never had a chance, with its uncertain crypto-economic roots and the use of blockchain technology, which hasn’t proved adequate for enterprise-class business.

Crypto-Schadenfreude: Sham, bank run & fraud

Nobody enjoyed more of a media darling status in the Web3 world than FTX founder Sam Bankman-Fried, who famously played video games on investor calls and shuffled around the tradeshow circuit in shorts, as he donated millions to “effective altruism” charities and crypto-friendly politicians.

Now Sam’s been arrested and set for extradition from the Bahamas to face charges in the United States, with FTX the most famous failure among several other falling dominoes (Lumen, Celsius, Gemini, on and on) in the crypto rug pull. 

It was fun to mock celebrity shill ads, but it’s not funny to see $2 billion in investor deposits disappear into the ether. A lot of VC whales, other DeFi companies and hapless individuals were also duped and parked their funds there too.

There’s no cash reserve regulation or FDIC account insurance in place for crypto, so when buyer confidence eroded, market makers sold, accelerating the ‘rug pull’ effect. Ripples collapsed as much as $183B or more from the total market cap of cryptocurrencies.

Turned out, there’s nothing new about this Ponzi scheme, a Madoff-like phenomenon my analyst colleague Jason Bloomberg has commented on ad infinitum, even appearing as a gadfly at crypto conferences to say it has little use except for criminal enterprises like money laundering and ransomware, to audience hecklers.

Blockchains looking for solutions

Besides cryptocurrency, the most common term we hear in Web3 discussions is blockchain, which is a distributed ledger technology (or DLT) underpinning Bitcoin, Ether, Dogecoin, and thousands more dogshitcoins.

If cloud was just ‘a computer somewhere else’ then blockchain is more like ‘an append-only database everywhere else’ due to its decentralized consensus mechanism and cryptography. Even the first Bitcoin blockchain proved resilient to hacking unless someone finds a way to steal user account keys through other means.

Though I’m a skeptical analyst, I admit thinking there was some sleeper value in blockchain, if a few properly governed projects came along that could create safer, smoother rails to adoption.

We’ve seen vendors with very nice use cases for distributed ledgers, particularly in multi-party transactions, IP and media rights, legal agreements and audits, and proof of identity, where a blockchain can use a combination of transparency and immutability to provide a decentralized, shared system of record – whether nodes are exposed publicly or among permissioned parties.

That still doesn’t make blockchain a valid replacement for modern databases and data warehouses, which already offer enterprises more scalable back-ends for applications, with better security and governance controls.

The slow, energy-sucking processes of mining, recording and storing parallel blockchains haven’t proven sustainable for business use cases besides tracking a few heads of lettuce with e.coli on them.

The Intellyx Take

The main roots of Web3’s failure weren’t about technology, they were about misaligned incentives and the inevitable association of Web3 with crypto and NFT market madness. 

Unethical players could rise to the top, confidently claiming top-line growth, and attracting continued fundraising investments without mentioning the inevitable crash.

I’ve met early participants in the blockchain space with intentions for a better world with unique computing models and applications particularly well-enabled by decentralization. They weren’t building mansions on islands and taking crypto-bros out on yachts.

Who knows? Once the incentives and risks of easy money are washed out of the market for good, maybe the dream of global access to a new, decentralized internet of applications and value could someday be realized.

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