Welcome to ‘Web3.’ What’s That?
The DealBook newsletter delves into a single topic or theme every weekend, providing reporting and analysis that offers a better understanding of an important issue in the news. If you don’t already receive the daily newsletter, sign up here.
At the start of 2020, a Bitcoin was worth just over $7,000. Today, it’s trading at about $50,000, and the value of all cryptocurrencies, of which Bitcoin is one among many, is some $2.3 trillion. This rise has led many to envision a radically different future for finance and to question long-held beliefs about value.
Bitcoin, the original established cryptocurrency, was devised as electronic money for direct exchange between people who need not trust each other, or anyone else, and instead put their faith in the blockchain — a public ledger maintained by decentralized, open-source networks of computers. There are now thousands of different blockchain-based tokens, circulating continuously on venues with varying degrees of regulation and oversight. This is what is known as “web3,” the name adopted for a decentralized internet run on crypto tokens. Supporters say it will democratize everything, reshaping art, commerce and technology; displacing intermediaries; and putting people more directly in control of their destinies.
If that sounds far-fetched, consider that venture capitalists have invested more than $27 billion in crypto and related projects this year, more than the previous 10 years combined, according to PitchBook. The biggest investors and industry players are also lobbying in Washington to influence rules that would favor their futuristic view of tokenomics, which can already be seen in some burgeoning communities where web3 is not some abstract concept but a feature of daily life.
Inside the NFT economy
Take nonfungible tokens, or NFTs, which are unique bits of code on a blockchain associated with an image, a video, audio or some other thing. In October, Cam Rackam, an artist, sold 10,000 NFTs linked to images based on memes from Reddit’s Wall Street Bets message board, making $2.5 million.
As a “relatively successful” painter over an 18-year career, Mr. Rackam was “never welcomed” at the Art Basel fair in Miami Beach, he said. But this past week he was there, saying NFTs created a lot of buzz and traditional artists were “feeling a little left out.”
So far in 2021, about $27 billion worth of crypto has been spent on major NFT platforms, according to Chainalysis. That’s up from $114 million in all of last year.
What are people getting? The NFT confers public proof of ownership and authenticity of an item, which may or may not include copyright — just as in the physical world an artist may sell a work but retain the intellectual property, said Frank Gerratana of Mintz, a law firm.
Last month, Miramax sued the director Quentin Tarantino over his proposed auction of “Pulp Fiction” NFTs, which were linked to high-resolution scans from his original handwritten script. The company said using the film’s branding and imagery violated its rights.
This is one of the first cases associated with NFTs, Mr. Gerratana said, and how it plays out may prove significant. He said his corporate clients were still trying to figure out what an NFT was and why people were buying them: “They are wondering, ‘Is this the future? Are we going to have to do this?’”
For Mr. Rackam, the revolution has already arrived. “The joke is always on the boomers who don’t get it,” he said, referring not to the older generation but a dated mind-set that rejects new ideas about art and value. He noted that people had struggled with Andy Warhol’s prints of common commercial imagery like Campbell’s Soup cans, too.
Speaking out on decentralized social media
Another web3 concept that challenges conventions is decentralized social media, where users earn and trade crypto.
On DeSo, a network for blockchain-based apps, users are paid for popularity, participation, posts and work. Its founder, Nader Al-Naji, a former Google engineer, believes that internet users will want to bypass the likes of Twitter and TikTok, which make money by serving them ads, and capture this worth directly for themselves instead.
Mr. Al-Naji’s first crypto project was Basis, a “decentralized Bitcoin” endeavor that he halted on regulatory concerns, returning funds it had raised from major venture capital firms like Andreessen Horowitz and Sequoia Capital.
Mr. Al-Naji’s next project, BitClout, is an app where people trade personalized tokens linked to likenesses of one another and pop culture figures, whose values rise and fall based on use. It generated controversy when it was launched in March, with some calling it a “dystopian social network.”
But the developer of the app, and the wider network it belongs to, said there was a “renaissance” in money afoot. Any users can be rewarded for their musings, music or mere presence via tokens or “frictionless tipping,” with a diamond button that allows others to send a bit of crypto their way in appreciation of whatever they do or say.
“The vast majority of the benefits go to the smaller creators who people have always wanted to support,” Mr. Al-Naji said. “Here you just throw them some diamonds, you know, or buy their coin, which is an investment.”
Is this allowed?
At the Securities and Exchange Commission, it’s Gary Gensler’s job is to ensure that crypto companies operate within a regulatory framework. To the chagrin of many web3 supporters, Mr. Gensler, who is the chair of the agency, believes that the old rules still apply to new tools. That implies that many, if not most, crypto assets are securities and must be registered with the S.E.C. to ensure adequate disclosures and investor protections, with all the costs and scrutiny this entails.
And regardless of their legal status, the utility of some blockchain-based systems is up for debate. “Usually there’s a reason people want to have a central ledger,” Mr. Gensler told DealBook in an interview, noting that distributed ledgers maintained by thousands of computers have “costs.”
On currency, generally, “I associate myself more with Plato’s view of money than Aristotle’s,” he told DealBook. Aristotle, he said, believed money had four features — portability, durability, divisibility and intrinsic value. Plato accepted the first three, Mr. Gensler said, but thought it had no inherent worth and was “just a symbol.”
When he taught courses on crypto finance at the Massachusetts Institute of Technology just before leading the S.E.C., Mr. Gensler told his students to ask, “Where is the value proposition?” Are all of the crypto tokens that are competing with the dollar, or forming the basis of an app, valuable?
“The answer might be maybe,” he said. “But is there room for 6,000 of them? Highly unlikely.”
What do you think? Let us know: [email protected].