Watching a new winter befalls the cryptocurrency markets, there is no way I could prevent myself from giving my word about this giant scale, worldwide investment operation around cryptocurrencies that I honestly can consider nothing else than harmful.
But, harmful to whom? And why?
To answer these questions we need some context. Crypto is far more than a Ponzi scheme and that unfortunate first attempt of a cryptocurrency called Bitcoin. Unfortunately, it happens that this massive destruction of (pretended) value started just months before the most crucial event in cryptocurrency history, the Ethereum Merge, an event that, if it succeeds, will change crypto entirely.
Do cryptocurrencies deserve all this attention? Is it even harmful, as I said above? Let’s see it.
Enter the Web3
In the beginning, it was the Web, later renamed Web 1.0. This first iteration of the Web started with users navigating through static pages, although it soon got clear that Web 1.0 was all about implementing e-commerce. The first item sold via the Internet ever was, no surprise, a pizza. It was 1994.
Web 1.0 collapsed around 2000. Relics like eBay and the first Amazon stayed, but almost everything else passed away.
Then it was Web 2.0. Web 2.0 is all about social media and mobile. Some say this second iteration of the Web is doomed due to the “winner-takes-all” effect, whose outcome is an ecosystem wherein very few companies control everything.
Web 2.0 is the one we are still living in.
The outrageous centralisation of power on a handful of big companies that characterises Web 2.0 may explain why Web3 is all about decentralisation.
Web3 proponents seek a new organisational model for human societies. Under this new model, social interactions would not be managed by centralised institutions like governments and their agents (big corporations, banks, and so on). On the contrary, the underpinning platform for social interactions would be a network of peers (or, more precisely, a network of networks), an architecture that would make centralised institutions obsolete.
Stated this way, decentralisation is a political proposition. And as such, decentralisation is a goal, not a technology.
With a population of billions of human beings on Earth, some sort of technology seems mandatory for any realistic implementation of a decentralised human organisation. For example, Web3 implements decentralisation using blockchain-based technology and cryptocurrencies to set up the mechanics of reaching a consensus on what is a fact and its future verification if needed.
In our current societies, we say some fact is veritable because institutions say so. That makes human societies gravitate around those institutions, institutions that hence become society’s centre. In a decentralised human organisation (they call them DAOs), there is no centre. On the contrary, DAOs consider facts genuine after a minimum number of peers agreed upon them.
However, as readers of my blog already know, given a context and a set of requirements (here, DAOs), many implementations can exist. Fortunately for its practitioners, software architecture is a pretty undogmatic undertaking, a constant dancing of alternatives that are all valid (i.e., they work) and different at once.
In a Web3 society, peers’ agreement requires paying them a fee in some cryptocurrency. Fee value fluctuates, so some fact you are interested in might not be validated (and therefore not become a fact at all) because the fee you offered to pay was not high enough. Once an agreement is reached, proof of truth is saved in the blockchain forever.
Allow me to repeat myself: Web3 is one of many implementations possible for decentralisation. I will try to answer the intriguing question of why we don’t see those alternative implementations competing with Web3 in the public scene below.
For now, just keep in mind that decentralisation does not require cryptocurrencies.
The roots of cryptocurrencies
Decentralisation is introduced in Web3 applications via blockchain technology. Although blockchain-based applications can work without cryptocurrencies, they came in anyway. How did this happen?
Cryptocurrencies are, in fact, the unexpected consequence of studies about building systems that would allow strangers to transact safely on the Internet.
As soon as 1993, Denial of Service Attacks and Email Spamming had already become a problem. In this context, scientists Cynthia Dwork and Moni Naor came up with the idea of algorithms that were hard to compute but feasible if executed just once.
For example, we would need to prove that our computer calculated something before being allowed to send an email. Running this expensive computation once would be achievable for any legitimate email sender. For spammers, it would be a deterrent, for they would need to spend that computational power for every email they wanted to send, which would become unscalable and throw them out of business.
The interesting point here is that the expense of the calculation is not enough. Clients willing to send an email would also need to prove that they had completed it. To do so, the computation has to produce some kind of collateral proof (a token) that email senders would share through the Internet with the email service provider so that the latter could verify that proof and allow the email to be sent.
By 1999 it had been demonstrated that these tokens are reusable, and in 2004 the first article on how this reusability enabled them to become currency was published. This article awarded its writer, Hal Finney, the honour of being awarded the first ten bitcoins ever created. This happened on the 12th of January 2009.
Bitcoin introduced several new elements to the scene. It started by decentralising the task of token verification among a network of peers. It also stored the outcome of that verification in a ledger. Here enters the blockchain. (Note that I did not call the blockchain a database, for it is not. A ledger stores data that cannot be updated once written, besides other structural features that set them apart from regular databases).
Finally, Bitcoin made use of the reusability of the tokens to compensate the nodes in the network for verifying incoming transactions, which requires computing power, and for keeping the blockchain and the network operational, which requires storage and running machines.
Since hardware and power have a cost we pay in FIAT currencies like the USD dollar, the Euro, or the Renminbi, among others, it seems reasonable enough to make the cryptocurrency used in the Web3 application convertible.
Notice also that this convertibility is needed because users of any Web3 app must pay for the service this app provides in the cryptocurrency the app uses. For that, those users must have got it somehow. There are many mechanisms in the cryptocurrency world to acquire some cryptocurrency tokens. However, unless you are one of the nodes in this network of networks and are therefore paid for it, you must buy those tokens using FIAT money first.
Their convertibility sets a FIAT value for every cryptocurrency.
Trouble comes in when the real-world economic value of the crypto tokens surpasses their operational cost. If you read news about big cryptocurrency farms out there and always wondered why anyone would settle them, here you have the answer.
Incidentally, the GPU prices drop that has been going on these last months would be a secondary indicator of how many farms were settled just to mine cryptos and how these endeavours stopped (I guess temporarily) because of the recent crypto apocalypse.
This all results in more centralisation, not less:
- At the moment of publishing this post, there were 7860 nodes in the whole Bitcoin network, but only 5 big mining pools in this network concentrated 73% of all mining power.
- A bit longer than 1 year ago, it was calculated that 71% of all bitcoins were under the control of 2% of owners.
- Similar centralisation has been reported in the Ethereum network.
Regarding centralisation, I do not see much difference between the FIAT and the crypto monetary systems, except that we know the FIAT agents and their actions are regulated. Indeed DAOs based on crypto exist and work, but they do it in a wider context where FIAT currencies exist to act as an ultimate convertible value repository. Are DAOs scalable to the level of Web3’s promise? Nobody knows.
There is debate among those who say the Web3 proponents are far more against regulation than in favour of decentralisation, and those who defend regulators just want to keep profits within their inner circle.
In my opinion, when money enters the equation, nobody is innocent. And, in crypto, that original sin happened when they made cryptocurrencies FIAT convertible.
You may have realised that I did not mention some severe technical issues spotted in the ecosystem of blockchain-based technologies, like their energy consumption or being such a loved platform for scammers.
I ignored these criticisms because the developers and architects working on them are so wise that I am convinced they will eventually find ways to circumvent them.
In fact, I believe that the cryptocurrency ecosystem is tolerated because it is nothing more than a giant research lab whose technical achievements would eventually be transported to the core financial system.
Here is the story so far. I started this post by stating that I consider cryptocurrencies harmful. I believe that by surrendering to greed, Web3 proponents simply wasted its promise.
But, harmful to whom?
First, harmful to decentralisation itself, for the concentration of funding on Web3 by investors who only care about how much FIAT money they can get out of cryptocurrencies prevents other technologies from being explored.
A striking example of no advances due to biased, and ultimately wrong, funding can be seen in Science. Overfunding String Theory has left the field of Theoretical Physics with no real breakthrough in 40 years. If interested, read Lee Smolin’s “The Trouble with Physics” (2006) or Sabine Hossenfelder’s “Lost in Math” (2018) for more insights on how harmful bad decisions on funding can become.
As String Theory was, Web3 is an overcomplicated technology that has not produced any unquestionable result after 15 years of development. For comparison, just look at the Internet itself, or the Linux kernel, to see how powerful super humble new ideas in technology can be.
Most importantly, I find the investment fever around Web3 harmful to everyone because, if it succeeded, its foreseeable consequence would be societies with a monetised citizenship.
With fair consideration of the differences, just check out the China social credit system to get an idea.
When inspected thoroughly, some Web3 details are disturbing.
For starters, the for-charge nature of facts and the fluctuating essence of those charges. They look a lot like taxes. Although, do you imagine ignoring how much taxes you will pay until the last second?
Facts are accounted for true because there is proof of it in the blockchain. Therefore, one may expect Web3 to offer plenty of tools to navigate through them. The case is quite the contrary right now, and no one without deep technical knowledge (and much effort) would be capable of it.
Apart from technical knowledge, I am sure anyone following the massive online literature around cryptocurrencies must find it all pretty inextricable. I guess this is a side effect of people from Finance taking over technology: clarity as the enemy of collateral revenues.
Overall I find cryptocurrencies technically overstated. I believe their promise of achieving decentralisation was lost when their proponents linked Web3 to FIAT currencies. A link that makes them socially dangerous too.
That all said, is there nothing positive to say about Web3 at all? Actually, there is! Let’s explore those aspects in the specular image of this first post: “Cryptocurrencies considered beneficial“. See you then!
Note: The title of this post homages to the seminal work “Go To statement considered harmful”, published by Edgar Dijkstra in 1968. Mine is not the first, and it will not be the last.
Copyright: the artwork at the top is taken from Disney’s Uncle Scrooge series without permission.