“Web3” is no longer just make believe. Are crypto-idealists ready to defend it?
“Web3” is no longer just make believe. Are crypto-idealists ready to defend it?
Reflections on ETH Denver
Happy Friday! The Glitch cat has traveled to the belly of the ETH Denver beast and lived to tell the tale. This feline is determined not to let curiosity kill it—a good thing, since crypto keeps getting curiouser and curiouser.
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What I learned at America’s signature Ethereum conference
Exuberant predictions are a given at crypto conferences, especially when the number is going up. I’ve learned to filter out most of the happy-sounding noise. But when Tess Rinearson proclaimed from the main stage at ETH Denver last week that “this is the year” crypto will finally deliver on the promise that it is more than a casino, that struck me as a signal.
Rinearson, a blockchain engineer and head of product at OP Labs, is a crypto OG—but not in the typical hyperactive investor/shitposter/influencer kind of way. She has been quietly working on blockchain systems since even before Ethereum launched. She’s lived all the marketing narratives and has survived multiple winters. She’s even spent some time working on crypto stuff at Twitter. Rinearson understands as well as anyone how blockchains work, what they are capable of—and why they have been so hard to use in consumer apps. And she gets why others have given up on crypto.
“I’ve been working in crypto for nine years, which is kind of unbelievable when I say that aloud,” she said during a mainstage panel discussion last Thursday. “And for a long time, every year or two I’d be like, ‘Maybe someone will actually, like, build something with this stuff at some point,’” she said. She kept telling herself to give it “one more year.”
“This has really been the year for the first time where I’m not saying it’s one more year. I’m like, this is the year,” said Rinearson. “It’s happening.”
Fellow panelist Jesse Pollak, the creator of the Ethereum “Layer 2” network Base, seemed genuinely taken aback. “That’s bullish, everyone, if Tess is saying that.”
It would be great for Rinearson if this is the year. She has a top job at one of the most important companies in the Ethereum ecosystem right now—OP Labs is poised to make a lot of money if her prediction comes true. But what she said isn’t a stretch. There’s a legitimate argument that consumer crypto, “web3,” or whatever you want to call it is already here; it’s just unevenly distributed.
Exhibit A is Farcaster. We’ve seen plenty of Twitter clones—including more than one calling itself “decentralized”—but Farcaster has already demonstrated genuine social media innovation. A feature called frames lets people embed interactivity—mint an NFT, subscribe to a newsletter, read an article, or play a game—all inside a post. Farcaster stores content “off-chain,” but it uses Ethereum smart contracts to manage accounts, identities, and interactions with third-party apps, and to facilitate payment by users for content data storage. Specifically, it uses the Optimism (OP) Mainnet, another Ethereum Layer 2 network developed by OP Labs.
If you don’t understand what those words mean, don’t worry, I’ll explain them later. For now, all you need to know is that Farcaster was one of the stars of the ETH Denver show. Crypto folks are freaking out about it. They are ecstatic.
It’s bizarre to sit in that room, to understand what everyone’s saying, and to be able to see how this emerging technology could have a huge impact on the world—and then realize that almost no one outside the crypto bubble has even heard of Farcaster.
But there’s a good reason for that.
A decade-long “dalliance”
From my perch as a journalist, I’ve been paying attention to this crypto stuff for about as long as Rinearson has. For both of us, the show started before Ethereum was born: Bitcoin was and is a genuine breakthrough, a robot bank controlled by no one. Back then many smart people told me there was much more to it: the underlying blockchain made a whole new internet possible.
The 2015 launch of Ethereum, whose creators envisioned it as a general-purpose computing platform, made the idea more concrete. Smart contracts are computer programs that live and run on a public network instead of a corporate cloud. Cool! But in practice it left much to be desired. Transactions were expensive, slow, and carbon dioxide-intensive. A rush to “breed” cartoon cat NFTs in 2018 crashed the network. The “world computer” envisioned by its creators and early advocates began to seem a much longer way off than originally thought—if it wasn’t just a fantasy.
There was another problem: as long as there was easy money to be made, much of the crowd building “crypto” projects on Ethereum seemed rather uninterested in building a world computer. Sure, Ethereum might be the basis of the future internet, but it could also be used to create new digital currencies overnight. The boom and subsequent bust of the “initial coin offering” (ICO) market in 2017 and 2018 revealed a dark underbelly crawling with disingenuous actors. Crypto began to solidify its enduring image as a seedy casino. Much of the mainstream turned away in disgust.
So when an innovative blockchain smart contract-based trading tool called an automated market maker emerged a few years later—catalyzing a new field called decentralized finance, or DeFi—hardly anyone outside of crypto cared. Mainstream audiences finally checked back in briefly, but only after the “DeFi Summer” of 2020 and 2021 morphed into the NFT boom of 2022. This time, people were getting rich off of Dogecoin and Bored Ape JPEGs. Then, the implosion that followed, ignited by the collapse of Sam Bankman-Fried’s crypto exchange, FTX, revealed to everyone—crypto enthusiasts included—that something had gone deeply wrong.
Somewhere along the line, crypto lost its way, said Peter Van Valkenburgh, director of research at the Washington, DC-based blockchain policy think tank Coin Center.
Speaking from ETH Denver’s main stage, Van Valkenburgh reminded the crowd that cryptocurrency advocates had been expected to take the baton from the cypherpunks, early internet freedom fighters who in the 1990s resisted the US government’s attempt to ban encryption. Though the cypherpunks managed to protect part of the internet from government censorship, the first decade of the 2000s saw the web monopolized by big tech companies, and then Edward Snowden revealed how US government spies had turned it into a surveillance apparatus. Blockchains were supposed to fix that.
“We grabbed the baton knowing that our tech stack could fix these problems,” said Van Valkenburgh. “It was the only stack that could.” Ethereum, he said, is a “public decentralized shared hard drive,” referring to co-creator Vitalik Buterin’s metaphor. But crypto hasn’t fixed much, if anything, yet. “We took the baton and we ran like hell straight to…Las Vegas,” said Van Valkenburgh. “We cashed it in for an Ape picture, an ICO boom, and gleefully called ourselves ‘degenerates.’”
“In these 10 years we’ve seen explosive price growth but little actual good accomplished by the tech,” he continued. “Did we decentralize the web? Not yet. Did we replace banks and Wall Street? No. What did we do? We built a massive casino in the clouds.”
Glass half full, glass half empty
Tough to argue with that. But why did this happen? It’s complicated, but we can start here: it’s still expensive to use a blockchain network.
Many crypto projects have managed to make this work for them by catering to users willing to spend lots of money to participate. “If fees are high and are paid in a frothy native token, then your main users are going to be gamblers and speculators,” Van Valkenburgh said. “There’s not a lot of profit in making public goods like encrypted messaging, so without cheap transactions you won’t see growth there.”
There is reason to be optimistic that transactions will get cheaper, Van Valkenburgh said. So-called “Layer 2” technologies are showing promise. Layer 2 refers to a general technical approach that entails processing batches in a separate environment from the main blockchain (“off-chain”) and then providing cryptographic proof to the main chain that the transactions were processed according to its rules.
This is what Tess Rinearson is working on. OP Labs has developed one of the most popular Layer 2 technologies, called an Optimistic Rollup. The company describes it as a second blockchain that “piggy-backs off of the security of another ‘parent’ blockchain.”
The technology, known as the “OP stack,” is open source, and now more than a handful of other crypto projects have used it to build their own rollups. Even Coinbase, the publicly traded (read: very centralized) US cryptocurrency exchange, is using the OP stack to build Base—the rollup created by Rinearson’s fellow ETH Denver panelist Jesse Pollak. The main topic of the panel discussion was the “superchain”—a network of chains all using the OP stack.
Just off the main stage, the exhibition hall in Denver’s National Western Complex—which also hosts one of the nation’s largest annual livestock auctions—was overflowing with companies hawking various flavors of rollup technology and infrastructure. “Modularity” was the buzzword of the event. The idea is that decentralized applications, or “dapps,” could be more efficient if instead of relying on a single blockchain they use multiple chains built for specific purposes—separate systems for processing and settling transactions, for making sure all the necessary data is available, and for achieving network consensus.
How will all these entities be governed? How decentralized are they, really? Who will be accountable if something goes wrong? Generally speaking, the answers to these questions are a work in progress. Most have their own so-called governance token, which holders can use to vote on changes to the software. Optimism’s superchain uses a governance token called OP. Beyond that, the plan is for a “security council” to maintain control of the actual keys needed to make upgrades and other changes to the various rollups in the network. The first iteration, a council comprised of 13 representatives from prominent projects in the Ethereum ecosystem, officially launched last month. It’s the first of many steps in a plan to increase decentralization over time.
Logical. But on a certain level it’s still make-believe. No shit has hit the fan yet. There hasn’t been any reason to blame anyone for anything or point fingers. It’s true that there are real, mainstream-ready consumer apps using the OP stack. Besides Farcaster, which uses OP Mainnet, a restaurant loyalty app called Blackbird is using Base. (Curiously, a recent New York Times writeup of the app didn’t mention “crypto” or “blockchain” once.) But it doesn’t seem like much is at stake yet.
That’s far from the case for the Ethereum-based privacy dapp Tornado Cash, however. Alarmed that Kim Jong Un’s North Korean regime was using Tornado Cash to launder hundreds of millions of dollars worth of stolen cryptocurrency, the US government sanctioned the blockchain software and criminally indicted two of its developers. Builders of rollups and other Layer 2s would be wise to view the crackdown on Tornado Cash as a dire warning, Van Valkenburgh argued. “They have actually, mostly successfully banned Americans from using that privacy tool.”
Crypto’s “political enemies” are stronger and more emboldened than ever, he said. “Now they are not just coming for casinos. They are coming for censorship-resistance and privacy itself.”
Meanwhile, the industry has left itself vulnerable. During its “10-year dalliance,” it frayed its alliances with the larger internet freedom movement and eroded its political capital in DC, Van Valkenburgh said.
The problem for crypto-idealists is that fewer and fewer policymakers see a distinction between the “centralized” part of crypto and the genuinely novel decentralized applications, he said. They conflate the pursuit of decentralization with the debacle at FTX, and the morass of buzzwords reminds them of something they’ve seen before. “Many in Congress confuse us with Big Tech,” he said. “Can you blame them?”
The fight for “web3”
More to the point: “Many in Congress know that DeFi is rarely as decentralized as it lets on,” Van Valkenburgh said. In many cases, a “DeFi” application isn’t just software running on a blockchain.
In the case of Tornado Cash, yes, software is running on blockchain that can’t be controlled or shut down by any person. But the software’s developers also created a “decentralized autonomous organization” (DAO) to govern it. And in typical crypto fashion they created a tradeable governance token that people could use to vote on the DAO’s decisions.
Coin Center is suing the US Treasury, arguing blockchain software that no one can control or shut down is protected speech under the First Amendment. The hardest part of that suit, said Van Valkenburgh, is convincing a judge that there’s a difference between the DAO—which is made of people—and the Tornado Cash software itself, which resides on the blockchain and which no person controls.
Given this sort of confusion, can you blame policymakers in DC for thinking Tornado Cash is a centralized entity? “I think you can blame them when criminal liability is on the line,” Van Valkenburgh said. “But I think you can understand why they are making these mistakes.”
Today, many Layer 2 systems are implementing governance structures that look all too similar to what Tornado Cash did, forming DAOs and issuing tokens that holders can use to influence decisions about how the networks evolve. The Tornado Cash DAO didn’t control the app’s funds, and the actual privacy tool—a set of smart contracts—is “immutable,” said Van Valkenburgh. But two developers are now awaiting trial, accused of facilitating money laundering. “So if you are a developer in this space, is your dapp immutable? Are you a member of a DAO that holds keys to upgrade a contract?” he said. “Do you have a lawyer?”
The Tornado Cash saga shows that when developers go beyond just creating immutable smart contracts, they open themselves up to the risk of arrest and imprisonment if someone uses their smart contracts to break the law.
It also shows that web3 is no longer just make believe. Rinearson is right: it is happening. Are crypto-idealists ready to defend it? —Mike Orcutt
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