Another tough moment for Web3 with a long-term perspective

The events surrounding FTX have shaken the confidence of many. How did one of the largest cryptocurrency exchanges collapse so quickly? Why do crashes like this seem to keep happening?

At times like these, it’s helpful to take a long-term view of the Web3 industry, not just with a forward-looking long-term view, but also with a look at the history of the Web3 industry.

Web3 is a software-driven innovation with built-in economic systems. This is both an advantage and a disadvantage. On the one hand, tokens enable developers and users to contribute to open source protocols and participate in the economic benefits of doing so, resulting in strong developer communities. This is a positive relative to how software has been developed, monetized and managed in the past. Tokens, on the other hand, make themselves in a boom/bust cycle, and many see Web3 as just a speculative effort with no real substance behind it.

This perception is only reinforced by those companies and individuals who founded Web3 companies and projects with the sole purpose of making a lot of money quickly through leveraged trading and speculation, pump and dumps, and sometimes outright fraud.

Starting with Mt Gox, including the failures of 3AC, Celsius, and more recently Alameda/FTX, most of the notable crashes in Web3 have happened to centralized companies that operate trading, lending, and speculation. Many of the failures have occurred outside the United States, and have been largely unregulated. These companies and their actions have given Web3 a bad name. We have also seen some well-known decentralized projects, such as Terra, fail due to design flaws, but these failures happened publicly in a transparent way, which is much healthier than the way centralized companies fail.

Compare that to regulated Web3 businesses like Coinbase, Kraken, and Anchorage operating in the US, and you'll see companies that play by the rules and behave properly weather these storms. Coinbase's early innovation was to create a secure, easy-to-use, regulated bridge between fiat and cryptocurrencies, as well as a safe place to store crypto assets. Coinbase provides many important services that allow the Web3 ecosystem to grow and prosper.

Beginning with the Bitcoin white paper 14 years ago, the most important software innovations of the past decade have been the emergence of open-source software and decentralized protocols that underlie Web3. These protocols have survived the recent market volatility. The software is not controlled by a company, but by an open source community with built-in safeguards, which provides increased transparency relative to today's technical and financial systems, which gives us confidence in the future of Web3.

These Web3 protocols are being actively developed for mainstream adoption, but some key features are still missing. For example, the initial architecture of the blockchain is public by default. This is not suitable for most applications. Imagine if your email, banking and social data were public and everyone could see it on the blockchain. Also, blockchains are slow and complex networks. Improvements to performance, scalability, and privacy occur at the infrastructure level of the Web3 technology stack. Emerging technologies like zero-knowledge proofs and rollups are starting to solve these problems without compromising decentralization. These breakthroughs are still in the early stages of deployment among a small group of developers. This is an important work that goes on behind the scenes without any reporting. But it is these developments that are preparing for the mainstream adoption of Web3.

Ultimately, as the Web3 infrastructure improves, the user experience gap between self-hosting and storing assets on a centralized entity will close. More users will feel better about self-hosting their assets in software they control, and managing the keys that provide access to their assets themselves. This is how many Web3 users today interact with decentralized applications such as NFT marketplaces.

When Web3 becomes a trusted alternative to Web2 for the masses, large centralized corporations like Facebook, Apple, Amazon, and Google will have to compete for access to our data, redefining the way we use the web. Software development will be more open source and composable. Large financial institutions such as banks and brokerage firms (including FTX around the world) will no longer control our assets and lend them out without our permission.

Ironically, Web3 puts control of data and assets back in the hands of the people and takes it away from large centralized corporations. But the transition from Web2 to Web3 has been slow and messy, and many early Web3 companies are copycats of previous companies. This is where the risks of the Web3 ecosystem lie, and this is where we need to stay away.

The lesson for policymakers from these recent events should not be that Web3 is bad and must be limited. Rather, pushing innovation overseas is a bad thing. We need trusted, well-regulated centralized entities to survive and thrive, and we need decentralized Web3 protocols to thrive and provide a path to a fully decentralized web. Both possibilities exist, and the good news is that we're already on the path to both. We need to stick to this direction, provide a healthy environment for the Web3 industry in the US, and stop pushing US users into risky/shady offshore entities with unclear, unbalanced, and unfair policy actions.

This is another difficult time for Web3, and we will see negative headlines about "cryptocurrency" for a while. But it's important to remember that these headlines are all about the speculative/deal part of Web3. More important underlying software innovations continued. This is something we have been excited about, and we will continue to fund and support.