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Crypto, Web3, And The Big Nothing
When I wrote my piece earlier this week about Web3 and Alexis Ohanian’s quest to turn gaming into a job, I got into a few spirited discussions about why he wants to do so. This isn’t just about money - Ohanian is worth hundreds of millions of dollars, as are many of the people investing in Web3 - and the answer isn’t as simple as “it’s a quick and easy way to extract money from people.”
Sidenote: I feel like sometimes I use terms like Web3, crypto, NFT, etc. a bit flippantly - I’d genuinely love to hear if I need to start explaining these things a little before going into one of my newsletters. Email (firstname.lastname@example.org) or comment below!
Okay, let me backtrack - yes, raw greed will always be a common thread. Web3 and crypto, in general are a quick way for venture capitalists to create quick liquidity from investments. A piece by Fais Khan showed that Coinbase Ventures-backed coins tend to underperform Bitcoin after an initial pop on crypto exchange Coinbase (IE: when the VCs cash out), and that VCs are taking advantage of retail investors:
Rather, I think this is a microcosm of how bad the incentives are in crypto - VCs and private investors that used to have to wait ten years for liquidity can now get it within one. The last time that happened was 1999, and we know how that ended. It’s a recipe for risk taking that is then quickly passed on to the public.
This isn’t illegal, it’s just a system through which venture capital can quickly see ridiculous returns while promising (and letting down!) those who are simply buying a token because they believe it’ll be worth more because of its presence on Coinbase.
To put this in real-world terms, imagine if NASDAQ Ventures also meant that you would be all-but-guaranteed listing on the NASDAQ, and there were no regulatory requirements on the part of the stock that the NASDAQ was listing - in fact, the NASDAQ ventures product might get a preferential listing. NASDAQ could then sell the stock at the moment the stock went live, while also setting the price. All of their fellow investors could also all cash out before anyone else knew, and there was no requirement to warn retail investors of the time a thing would go on sale. And they also had no regulatory body that would make sure they weren’t listing something with little value, with no warning about the risks - say, that investors were going to dump a bunch of the stock immediately, or how unlikely the project was to succeed. A pump-and-dump stock is illegal - but to do so in crypto? That’s just doing business.
Now, I’m sure there’s some nuance here - not every single Coinbase Ventures token goes on Coinbase, perhaps - but it is a system that is absolutely built to create as fast a cashout for investors as possible, at the risk of retail investors.
Hopefully, this will eventually come to an end for very obvious reasons - there will be regulation, and it will crush the life out of the venture capital going into crypto.
However, there is something more here, and that’s the reasoning behind wanting users to be attached to the things they’re using on a fiscal level. Reddit co-founder and crypto-apologist Ohanian made the following point that many NFT/crypto people do:
As usual, Ohanian uses the same manipulative language as all Web3 zealots - that you deserve “a part” of the things you’re “investing” in. He specifically cites a video game funded on Kickstarter, a crowdfunding platform that exchanges your money for some sort of reward based on the level of your “backing” of the platform. It is very clearly not an investment, otherwise it would be investing in a company - which is philosophically and literally different.
When someone backs something on Kickstarter, it’s because they want to see it happen - not because they want to invest in the company - and it’s also worth remembering that the majority of Kickstarter projects fail, but at a lower rate than startups fail at. In Ohanian’s example, the only way that people would have “invested” and “been early and right” would be to buy stock in the company.
Ohanian’s idea is that early backers “would have seen their early support pay off” is an interestingly manipulative gesture. It suggests that the assets on a platform - because you are not, to be clear, purchasing shares of the company - would be worth more after an acquisition. Whether or not this is true, it’s an incredibly cruel thing to do that, much like play-to-earn games, naturally attracts a player base that isn’t interested in the game so much as the return they could get from its success. It’s actually very similar to the lie that NFTs are “good for artists” - whether or not it was your intention, it attracts the kind of investor and “fans” that don’t really care about the product itself other than whether it will be “valuable.”
If no investor-focused gamers joined the game in question, the assumption then is that the assets - you are not buying the stock - of the game would be worth more if the game was acquired. There is no real logic behind this, because in-game economies tend to reduce the value of in-game items over time based on the progression and growth of the game. He cites people buying things in EverQuest - a brief and boring newscycle - but fails to acknowledge how Rubicite Greaves or a Cloak of Flames were basically worthless after a few years as the game grew, adding higher levels and better items. It also doesn’t make sense because a single item in a game is never going to be unique unless you randomly generate the loot, at which point it’s very likely a randomly-generated piece of loot could pop up that was better.
Yes, there’s an argument for cosmetic items being worth something, and being unique - that’s a potential economy, a potential way that someone could be “early and right.” I guess they could create some sort of “early player” cosmetic that could sell for money…but would it? What’s the likelihood that these economies actually grow?
“Very low” is the answer. The NFT items sold on gaming company Ubisoft’s Ghost Recon Breakpoint are…not really selling, and this is a scenario where people were being “rewarded” or “being early.” Is it because the game was bad? That doesn’t seem to be a problem with Axie Infinity, Alexis’ favorite game.
The Venture Vampire
I am of course humoring the generally loathsome position that Alexis is coming from because there is no way to reward gamers for being “early and right” in a way that makes them money other than making them investors. The reason that Alexis is likely not hyping the idea of community-led rounds - like the ones he’s participated in - is because he (like many Web3 investors) stands to benefit more from systems where the actual ability to invest in the company are guarded.
The perspective that “only the rich get to benefit from investing early” is something you’ll hear a lot from Web3 people, because it is meant to convince you that this is a situation created by “the rich,” which they are not part of. It also suggests that the forces keeping people “out” of investing are evil and must be stopped, ideally by crypto - by the way, the forces in question are the SEC and the law. It also, hilariously, suggests that those involved in these systems do not represent or get funded by the rich.
The important word to focus on is “early,” because let me be clear, if there is an opportunity for something to generate revenue, the average person or retail investor is going to be the last to know. It’s also important to know that the reason that you get a huge return on an investment in a company early on is most startups fail to reach any kind of liquidity event (going public or being sold), or fail entirely. The average person is protected from these investments because they are inherently risky, which means that you’re also less exposed to the rewards.
This is a good thing because, as I’ve discussed, most startups fail. Exposing the average person to an early-stage startup is exposing them to an extremely high likelihood they’ll lose money. The reason that they are not rewarded for being early is that they haven’t risked anything for being early other than their time.
All of this does make sense if you look at it through the lens of companies looking for a way to monetize their users as the viability of “free users with monetizable data” models fall apart.
At present, when a company makes money off of a customer they’re selling a service - a one-off purchase, a monthly subscription, and so on. The user is valued in many ways, such as their spend on the platform over time, but the company needs to find ways to target and retarget and offer stuff to get more money out of them. The other way to make money is taking their data and finding a way to sell it to someone, or using the data for marketing purposes to attract more customers.
All of this is just so annoying. You have to create a product, then keep building it to keep customers paying for it and get new customers. And what’s worse, those users also won’t just sit around and use it forever - you need to give them a reason to keep doing so. Unfair, right?
So you’ve got these users that want a reason to use your platform that’s based on its utility, and want even more reasons as to why they should pay you.
On top of this - which is already deeply unfair - you can’t just sell your stock without either selling the company or taking it public, which is all sorts of work! To sell it, you need to prove it’s worth something, and if you want to take it public, you have to tell everyone everything. And all of this takes years? Then you’ve got to raise money from rich people, because you can’t just take money from anyone off the street. What? That’s so unfair!
What Web3 allows founders to do is create companies that might do something and immediately capitalize on those promises. Instead of having to provide a service to users, you incentivize them by involving some sort of token - fungible or otherwise - that will theoretically increase in value as the company grows and does the thing it theoretically might do.
On top of that, your user is quite literally bought into the system. They are now investors - even if they never actually gave you any money but accrued tokens via the system, they now have a financial incentive to evangelize the product in question. Better yet, they’re not going to be particularly demanding of the product itself - they just want it to increase in value, which (if you’ve ever spent any time in a crypto Telegram) they will perceive as “literally any partnership you’ve made.”
Web3 founders get the benefit of users that they can directly, repeatedly monetize, users that are also investors that are also a guerilla marketing team, without providing any real value. These users are compensated for being on the platform, which means the team is not incentivized to make a better product, but a better way to compensate users, ideally in the dream of unspeakable wealth. They may promise features of the token - votes on product features, a dividend, and so on - but these features exist to distract from the lack of depth in the product itself.
Web3 creates the mirage of a product, a vague resemblance to something you might consider “software” with users that participate with the intention of getting more compensation. It’s partly due to the limits of the blockchain, but also because there’s very little incentive to build a fully-functional product - and why would they?
All of this exists to give you the sense that you’re early. If you’re early, you’re going to be more willing to tolerate product or company issues, but also more likely to invest more - either through playing with the system they built to enrich themselves or through literally buying the token in question. They want you to believe you and all your friends are accessing the seed stage of startup investing that the cruel fat cats have been guarding when those fat cats have already invested and you are the mechanism they are using to realize their returns.
I write this as crypto is crashing - Bitcoin hovering around $36000 or so (down from around $40,000 when I started writing this yesterday) - which, as always, may or may not be “the big one.” This is particularly relevant as this is the time when the real human suffering begins - the people that were “early” and “right” have already sold, leaving the majority waiting for the supposed next big price movement that will catapult them out of mediocrity.
There is, of course, the argument that you could simply not spend any money on these products. Except you can’t avoid it. You must pay money into Ethereum or whatever native token there is to interact with the blockchain that the product is on, then spend said tokens - all of which have a clear dollar value - to do anything. You are aware not only of the money you’re spending to interact with the software but on the software itself - say, buying an NFT related to it - giving you the nasty, seething feeling that you’re constantly losing money…because you are.
At this point, you will see the rich kids of crypto telling you to “HODL” or “buy the dip,” because these are people insulated from the actual harms that they’re causing. Alexis Ohanian or Anthony Pompliano are simply different versions of the rich people they claim to be helping you escape, except they’re able to hype and push people towards questionable investments and claim that it’s “about building a community.”
It isn’t, though. None of this is. Whatever community you build on or around crypto could be built outside of it, but having a community that can be sold into is crucial for the scam to work. And those people will be the ones that suffer, not simply because they were sold something spurious, but because they are the acolytes that will hold the longest, convinced that they are “going to make it” by the people that had already done so.
And I worry. I worry for all of these people. I worry for them the same way that I worried when the last crash happened. This time is different, because there’s so much more surface area for suffering - and so many more suckers to be wiped out.