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Disclaimer: Opinions expressed below belong solely to the author.

More than a decade ago, Satoshi Nakamoto released the initial Bitcoin whitepaper.

Out of this white paper, a dream was born — a dream where money was not tied to a sovereign government, and finance was no longer tied to bankers feeding off the hard work of the people. Money would be decentralised, trust-less, and free.

For a time, this seemed to be the direction that cryptocurrency was taking. Decentralised finance replaced banks in the crypto ecosystem, decentralised autonomous organisations replaced governments, and above all, decentralised currency replaced fiat as the currency of choice. 

The ethos of decentralisation stood at the pinnacle of crypto culture, and its proponents touted it as the ideological backbone of an ecosystem that would one day sweep away everything about the old world of fiat currencies, tyrannical governments, and theft through seigniorage.

Yet today, as the crypto ecosystem tries to rebuild itself after the Terra-Luna crash that triggered routs in the values of crypto assets, preachers of ideological decentralisation are rare, if any.

What happened to that strong ideological presence of early cryptocurrency fanatics? Have the crypto advocates abandoned this lofty dream of a world free of authority and of regulation? And what remains for the ecosystem, if not decentralisation?

The scalability problem

The Web3 world has seen much interest over the past few years. Nowadays, certain cryptocurrencies are considered safe bets — think Bitcoin, Ethereum, and other blue-chip coins.

Yet, while some may be able to make a living through trading in these cryptocurrencies, making money is not the be all and end all of an ecosystem.

While speculation in cryptocurrencies seems to have exploded, the question is also whether other aspects of crypto and Web3 infrastructure have kept pace. Game-fi for once, is an area where the Web3 world can be said to have failed spectacularly. Aside from a few games such as Axie Infinity which have made it big, games in the Web3 space have not seen the same success. 

For a quick recap, Axie Infinity announced that it had generated US$1.3 billion in revenue last year, and claimed around 2.71 million players.

While this might be comparable to titles within the Web2 space such as League of Legends’ 3 million players and US$1.63 billion, we should also recognise that Axie is one of the rare few that have succeeded in establishing themselves.

In contrast, the Web2 gaming space has far more titles that can claim such a large user base and revenue. 

Lest we forget — the figures being cited by Axie for their user base are for those who have the required three NFTs to play the game, not the number of active users. 

Number of Axie infinity players
Number of Axie Infinity players / Image Credit: BitPinas

This lack of scale is not unique to the game-fi ecosystem. While there are around 300,000 cryptocurrency transactions every day, there are around 1 billion credit card transactions every day — without including all other non-Web3 transactions such as cash, debit cards, or bank transfers.

For decentralised lending, there is an estimated US$43 billion in DeFi protocols, far less than the US$9.5 trillion that US banks alone have lent out.

Evidently, scale is an issue that the crypto ecosystem needs to overcome. Without the infrastructure, investment and utility that the Web2 world provides, how can the Web3 world hope to supplant the Web2 world? 

That being said, some aspects of the Web3 world have managed to grow in scale and attract mainstream attention. Celebrities have been buying into the NFT craze, with some of Singapore’s own artists releasing their own NFTs as well.

NFT marketplace Opensea recorded back-to-back record months last year, with volumes comparable to e-commerce sites such as eBay.

The story is, to some extent, tragic. Blockchain technology is immensely useful and holds great promise, but is being held back by the problem that has always plagued new technologies — that it is new and therefore, underdeveloped and underserved.

It should come as no surprise that at last week’s Token2049 event, several panellists identified mass adoption of blockchain tech as one of the core goals that the crypto community would need to push for.

But why should the Web2 world adopt blockchain tech, if blockchain remains ideologically bound to its ethos of decentralisation and air of superiority? 

Many have already realised the inherent paradox within this dilemma — in order for Web3 to supplant Web2, it must, at least for now, collaborate with Web2.

At the end of the day, the Web2 world is still far greater in scale, and for the Web3 world to grow, it must tap on this large market and bring value to both.

Fair-weather friends in crypto don’t last

The Web3 world that was founded as an anarchists’ dream without government or law worked well for a time. In that vein, crypto companies developed new protocols and new products — Ethereum and NFTs popped up, and other blockchains — each with their own unique functions — grew to become mainstream as well.

But an absence of government has not proven to be the same as an absence of tyranny, and the recent crypto winter has proven as much.

First came the Terra-Luna crash. While it is certainly true that Do Kwon and the Luna Foundation Guard were to blame for much of the carnage, what is interesting was the way that the company proceeded after the initial crash

Do Kwon, founder of Terraform Labs
Do Kwon, founder of Terraform Labs / Image Credit: Bloomberg

Citing a possible governance attack, the Luna Foundation Guard bought around 221 million Luna tokens, representing around 60 per cent of the voting power within the blockchain.

It was only then that the company put out a proposal for the community to vote on, which would decide the future of the Luna blockchain. The proposal for Luna 2.0 by Do Kwon passed easily, to the surprise of no one. 

Accusation of Do Kwon strong arming the Luna Vote / Credit: Twitter

Yet, this facade of decentralisation would soon prove to be generous when compared to what Celsius, under Alex Mashinsky, would do. 

On June 12, a month after the Luna crash, Celsius announced that it would pause all withdrawals from its platform — users were given no choice in the matter, and the next day, Celsius presented debtors with a choice to either top up their collateral or be liquidated

Alex Mashinsky, founder of Celsius
Alex Mashinsky, founder of Celsius / Image Credit: CNBC

In July, the company finally bowed to the inevitable and filed for bankruptcy. For those unfamiliar with the crisis, you might expect the company to liquidate, pay back any outstanding loans to the best of their ability, and release a public apology for the company’s failings. 

But not Celsius. In the company’s bankruptcy proceedings, Celsius’ legal team referred to users as unsecured creditors, and unveiled a new plan — to invest in cryptocurrency mining rigs to try and pay back the debt that the company owed. 

For reasons I have discussed in another article, this is a ridiculous and grossly irresponsible course of action. But what matters is that consumers and users were unable to stand up to Celsius, and that Celsius was able to abuse their position of power to ride roughshod over their users. Users were not given a choice to appeal the decision, partly because there were no institutions for them to appeal to. 

The most recent update? Mashinsky has resigned from the company, and the Financial Times has reported that he took US$10 million from the company before pausing all withdrawals.

The fates of so many users’ crypto, instead of being controlled by governments or banks, lay in the hands of Do Kwon and Alex Mashinsky.

And herein lies the second reason why the ideologues are no longer preaching the ideology of decentralisation — because the industry has failed spectacularly at self-regulation.

The industry has relied on self-government for so long, but has forgotten that power corrupts, and that absolute power corrupts absolutely.

While the masses might be fine to follow the companies’ ideologues and demagogues during the bull run, when the bear market arrives, the shoe will very much be on the other foot. 

The return of institutions

Once derided as unnecessary in the Web3 world and relics of the past, institutions within the Web2 world have not remained as they were while the Web3 world developed.

On the contrary, it seems that many institutions within the Web2 world are eager to participate in the Web3 world — and have been keeping a close eye on developments in the crypto ecosystem.

The onboarding of traditional investors into the Web3 world has brought far more utility and growth than the efforts of the Web2 world alone. 

Venture capital firms are investing into blockchain tech and Web3 companies, not with cryptocurrencies, but with fiat currencies. These investors are pouring huge amounts into the Web3 space.

Singapore’s state investor Temasek Holdings announced that it would lead a US$100 million funding round for Animoca Brands, and this came after Temasek had already invested in Binance and Amber Group, among others. 

Binance founder Changpeng Zhao and Animoca Brands founder Yat Siu.
Binance founder Changpeng Zhao and Animoca Brands founder Yat Siu. Temasek has invested in both of these companies / Image credit: Techcrunch, Binance

The Web3 world has also proven that many of these institutions are necessary for the smooth running of the ecosystem. The dispute over the BAYC #2162 NFT resulted in a landmark injunction for NFT owners when Singapore’s Supreme Court ruled that NFTs could be classed as digital assets, and therefore could be afforded protection under the law. 

As it seems right now, institutions — not individuals — are the significant players in the crypto ecosystem. 

When John Mearsheimer wrote “The Tragedy of Great Power Politics” and compared states to billiard balls, he was discussing politics in the international system. Yet, this analogy remains relevant to economic ecosystems as well — and chiefly, to the crypto ecosystem now. 

According to his theory, states are represented by billiard balls on a table, with the size of the ball representing the power that the state possesses. Large balls are seldom affected by other balls, and most affected by other large balls; while smaller balls are affected by all other balls — and must consider the position and movement of large balls to get to where they want. 

Individuals in the crypto system are not unlike the smaller balls on the table — lacking protection and power, and often unable to simply move as they please. Institutions, on the other hand, are large players — wielding control over capital and able to bully their way through if necessary, and only stopped by other large players. 

Rather than the free world of individualism and decentralised power and currency, the original crypto dream has morphed into something bearing a striking similarity to the Web2 world that many of the Web3 ideologues were fleeing from — a world of powerful institutions with the ability to oppress many individuals grew too large to stop.

So ends the tale of one of the greatest dreams of the Web3 ideologues — not of a heroic last stand, but an abject recognition that the new world of Web3 cannot be completely divorced from the Web2 world.

But what does this mean for the future? Is it the end of Web3 as we know it? 

Perhaps not. As investors and individuals begin to get more practical about developing blockchain technology, there is also increasing interest in Web2.5 — to function as a bridge between the Web2 and Web3 world.

This is where perhaps a new vision for the future can be built — one not based on conflict between the Web2 and Web3 worlds, but on cooperation to bring value to all players. 

Featured Image Credit: Medium

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© 2021 GRVTY Media Pte. Ltd.
(UEN 201431998C.)