Crypto, not web3

Crypto, not web3

In the last crypto bull market (~2019-21), "Web3" became a new marketing term for the crypto industry. This term was originally coined by the Web3 Foundation in the early days of Ethereum. Back then, web3 was not defined as a category and was less hyped. It did not fully catch on in the mainstream until around 2019/20. The Ethereum community began using it more, and it was then heavily promoted by VCs who participated in various token sales across 2018/19 (as launches and unlocks were on the horizon).

As the ZIRP mania period began peaking, traditional VCs began flooding the crypto space into the more mature bull market and further pushed the term to categorize the 'older' crypto ethos as updated, 'evolved' and technology-first. This helped position it to their LPs as something more fitting with their other investments (e.g. many 'crypto SaaS' companies launched, raised at very high valuations, and have failed or pivoted, because those 'traditional' business models generally don't align). Being fully candid, we too fell into the trap of using this term at times, but the term crypto still always felt right. We now reject the "Web 2/Web3" dichotomy.

"Web3" to explain the crypto industry is/was an attempt to make crypto less about money and finance, and sound more like a pure technology play, positioning blockchains as a replacement for broad infrastructure and virtually any use-case across the web. It ended up being nothing more than a marketing term in reality. In the bear market, the use of web3 seemed to mostly disappear and as we enter the bull market, is now back in full force. Without the financial, economic, incentive, and market components that are the things unlocked by cryptography, the technology itself would be worthless. "Enterprise blockchain" never panned out for a reason. It is almost as if the term 'web3' wants to hide the fact this industry is primarily about money, finance and value transfer.

Blockchains are not a replacement for cloud infrastructure or data storage across the web, nor are they the logical progression to the web2 cloud computing and big data era. The industry is instead, much more reactionary to the current state – to decentralize and 'take the web back' to a more original state of data. In that sense, it is the opposite of where cloud computing has gone and is largely headed.

On the institutional front, crypto is supposed to challenge the idea of trusted third parties (which is now ironically less of a crusade given the ETF approval) and intermediaries running the system. There are certainly areas where crypto can automate and improve upon in the financial services and payments sector. On the 'big tech' and social front, the ideals of improving privacy and data ownership are primary goals. Even if these are warranted goals, these systems are more parallel and alternative in nature. Areas like social integrations with crypto wallets can continue occurring, but no kind of infrastructure replacement will occur.

If anything, institutions have done a better job at capturing crypto, than crypto has at capturing institutions.

Outside of Bitcoin's scarcity and hardened supply as digital gold, stablecoins are the most interesting use-case in crypto but are also not a replacement for existing payment and messaging systems (Fedwire, CHIPS, SWIFT, etc), especially after the global ISO 20022 roll out. There will still be a need for less open, more surveilled systems, even if stablecoins continue gaining adoption as an alternative. As stablecoins grow, particularly USDC, there is also a heightened chance they will be regulated into the existing system and lose some of the once-promised sovereignty and freedom (Tether may remain as this alternative ideal and we hope so). There is a certain naïveté in crypto that ignores this, or pretends these systems can be entirely deconstructed by blockchains.

The question of governments and the realities of geopolitics matter. There will still be a large carve out for more open and interoperable systems and regulatory arbitrage/gray area, but they will not be a replacement because nation states, the real 'layer zero', are not going anywhere (sorry 'Network State'). Real-time payments are also becoming more common and widely adopted within fintech (Zelle, Venmo FedNow, etc). On the tech side, big tech companies continue capturing AI and growing at an exponential pace. This doesn't mean crypto rails won't play a substantial role, they are just not a replacement either on the finance or technology side.

Across all types of other "web3" use-cases, incentives and speculation play a main role in the adoption or product usage (e.g. buy X token, or use X product, participate in the network, and reap rewards). The stickiness of this type of product-market fit often does not go well when things dry up. On the app level, where we see actual stickiness is on trading, speculating, and collecting liquid assets (i.e. financialization).

Outside of Bitcoin mining, exchanges/custody, and node/staking products, there has not been a renaissance of broader use-case, high growth crypto businesses in terms of revenue, profitability, and sustainability. Everything else in the space falls on trading, speculating, and token mechanics, which are financialized and built upon incentives. Even the demand for infrastructure use-cases, nodes, compute, storage, etc are built upon and require inherent financialization, incentives, and speculation in the broader market.

This is not about being less bullish on crypto, it's about being honest about what the industry is and where the value is – which is something many in the space have had a hard time defining outside of asset price accrual. Web3 is a fallback answer, to claim a new web is being built on blockchains, but it is a false one. However, we believe as a parallel system building an internet-native market, it can still represent a giant addressable market cap of $10T+ (with Bitcoin continuing to represent 40-50%+ dominance). As prices go up, we see the delusions grow again and calls for blockchain utopianism and feel the need to call it out.

The value of things being onchain is ultimately about payments, liquidity, and/or speculation.

The word "speculation" should not have a negative connotation to it. Everyone speculates on things and makes predictions or bets on the future and their worldviews. Every day we speculate on 'what-ifs' and see if we are correct or not, whether in the market or our personal lives. Crypto has unlocked a way to make this widely applicable and opens up new liquidity avenues for more markets and more speculation. That should not be shamed or look down upon, rather celebrated. We welcome all these experiments even if most will fail in the long run. Without the market and financial side of crypto, the technology itself is not valuable.

The Real 'Web3'

We are much more involved in crypto on a day to day basis than AI but what's happening in AI is obviously the real 'web3' by every metric and analogy. Except people in AI don’t need to hide behind these kinds of marketing terms because very clear enterprise / business value is being created. Crypto is a much different movement and harder to pinpoint — reactionary by nature, questioning authority, with retail roots and open-source grassroots. As it grew out of obscurity, many felt the need to VC’ify the space.

The real web3 is ultimately about anyone being able to communicate with machines in new ways, in the cloud. The framing of "Read (web1) -> Write (web2) -> Own (web3)" is a flawed progression, where "Own" is a non sequitur, even if it's a great ideal. While things like data ownership are good goals, they are the complete opposite of where the majority of AI, data, and social apps are headed, along with how we will communicate with machines and how that data will be stored. As data continues going exponential in the AI age, bringing this data onto blockchains does not make sense in the majority of cases (exceptions: where value, liquidity, financialization exists) and believing so completely ignores the massive strides in compute and data storage across enterprise public companies that would never think for a moment to incorporate blockchains into their core AI strategies.

AI is the natural evolution and progression of the web2 cloud computing/big data era, not blockchain technology. The question is how crypto can be utilized in that world and improve upon it.

Even with investments in Bittensor and Render, which we believe can become premiere alternatives to centralized AI services, we acknowledge the reality that AI will largely be a centralized and concentrated space out of both technological necessity and because of human nature/coordination. Our investments into these ecosystems is more about the ability to capture value on growing open-source AI networks in a liquid manner, not because they are replacements to big tech AI. The utility crypto adds to AI is around incentives, transparency/provenance, and liquidity, not so much core technology efficiencies or breakthroughs – outside of a more ideological desire to decentralize.

The good news is, open-source AI traction is very promising and within AI, there are plenty of use-cases for crypto. Much of 'Crypto x AI' seeks to piggyback off massive strides in the AI market and pump up token prices, but there are a few projects building in this area that will actually have substantial impacts. Crypto may end up as a native currency in many AI applications, along with helping humans verify identity. Tracking provenance, stopping fraud, sybil resistance, and 'proof of humanhood' are all important and legitimate use-cases that crypto can play a role in for AI. With that said, these use-cases will still predominantly fall within an existing AI stack (whether centralized or decentralized, proprietary or open-source), not underneath. The largest open-source and open-core AI systems will not be blockchain-based, even if blockchain applications or crypto wallets can be incorporated.

Outside of these specific AI-adjacent use-cases, the value that crypto adds will continue to be in areas that are financialized or where incentives and speculation exist, which is the most honest interpretation of the market.

The term crypto can kind of mean both cryptocurrency and cryptography interchangeably. It's sort of a perfect breakdown of the situation, covering both financial and technology and truer to the roots. Web3 is an abomination of a term and we hope to see the façade end by the end of this cycle.

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