Web3, NFT’s and DeFi are a sham without a blockchain scalable at L1

I recommend a reading of “My first impressions of web3” written by Signal app creator Moxie Marlinspike, as well as “Signal app creator Moxie Marlinspike proves NFT signal-to-noise ratio is low”, a commentary written by Jerry Chan.

Moxie describes the current status of Ethereum on which almost everything relies on L2 solutions, and thus have become re-centralized, as almost all dApps use either Infura or Alchemy in order to interact with the blockchain. This is not only a security problem but also a privacy problem.

All this of course was not a mere accidental design mistake made by developers but was all a natural and unavoidable result of a blockchain (Ethereum in this case) that has failed on L1 (layer-1 on-chain).

Although I disagree with Moxie’s outlook of the future, I find his analysis and insight of why the current so-called Web3 and NFT’s are a sham brilliant. This is someone who truly understands what’s going on from a technical point of view and is at the same time also honest and not corrupted by a get-rich-quick scheme. His outlook of the future is inaccurate, not because his analysis is incorrect, but because he’s not aware of a genuinely decentralized blockchain scalable at L1 level actually does exist but is only buried under the noise, see below.

On a related but broader subject, I also recommend a reading of Why it’s too early to get excited about Web3, by Tim O’Reilly. This is one of the very rare articles written on Web3 that are truly insightful and honest without being blinded by crypto market frenzy and misleading narratives.

“In that regard, what I’d be looking for is evidence of capital allocation via cryptocurrencies toward productive investment in the operating economy rather than capital allocation toward imaginary assets.” — Tim O’Reilly

A sad state in the crypto, DeFi, NFT and Web3 world.

It all started from the blockchain technology going off the track from the original Satoshi Nakamoto’s design and started to build upon a wrong foundation around 2013/2014 with Ethereum, while Bitcoin was stolen from its original inventor Craig S. Wright (a.k.a. Satoshi Nakamoto) to build a non-scalable “digital gold” Ponzi scheme with no productive utility, instead of the scalable peer-to-peer transaction system as Satoshi envisioned which was all for productivity and utility.

Since then, all other “improvements” that came out of those movements have been just market reactions and technical reactions to a wrong system in order to solve the problems emanating from a wrong foundation, much like pain relief drugs to symptoms of a terminal disease. These problems should not have existed in the first place.

With a wrong foundation, however, it is not going to last. It is just a trillion-dollar distraction from the real technology development.

If the current crypto developments do a good job, the best they could achieve is to ostensibly solve the scalability problem using extra layers and multiple intermediaries, but alas! only to find that the whole thing has gone back to the centralized Web2, and worse yet, that it would have worked even better without the so-called Web3 components in the first place.

It is inevitable, because they are the epicyclic orbits built on the earth-centric theory.

It is not that Web3 itself is a sham. It is just that people are building a sham Web3, driven by a gold rush mentality.

Users are deceived. Even the developers themselves are deceived.

So are the professional analysts, who would conduct extensive research and write lengthy reports such as OECD-OCDE report “Why Decentralised Finance (#DeFi) Matters and the Policy Implications”, not knowing that it really doesn’t matter how deep, elaborate and comprehensive the theories and analyses concerning the designs and mechanisms of these DeFi applications are, as the whole thing is being built on something that has no economic foundation nor solid technological foundation.

As to the economic foundation, the truth is that DeFi in its present forms is based on one simple reality (versus a theory or analysis): Those that collateralize their assets in DeFi are doing it because “the number go up,” and those who are borrowing do it also because “the number go up.”

And they all ignore or tolerate ridiculously high transaction fees and the lack of any guarantee of real legal ownership of properties and protection of privacy because “the number go up.”

Furthermore, they don’t care to notice that all transactions are speculative trading for the sake of speculations with little to nothing based on any utility that is independent from the speculations themselves.

The entire thing therefore has no economic foundation whatsoever.

As to the technological foundation, the issues that are associated with NFT’s are also associated with DeFi because both are based on the same foundations, and they all require transactions that go through the same ecosystem.

More fundamentally, anything that is not based on a secure public blockchain intrinsically scalable at L1 (layer 1 on chain) is like a house built on sinking sand. This includes all applications based on Ethereum.

But there is hope.

The real hope of Web3 is in Bitcoin SV

A blockchain that has an intrinsic L1 capability to scale and to create a genuinely decentralized public ledger (while allowing customer selectable encryption for privacy) is the only answer.

L1 scalability matters, because it is the only effective way to avoid re-centralization by reintroducing intermediaries out of necessity.

This is not to say that L2 is completely useless in principle. Even with a highly scalable L1 blockchain, proper L2 channels and networks can be built upon L1 to solve special problems and enable applications of a particular nature. For example, payment channels can be established on top of the bitcoin network to process party-specific high-frequency transactions (see payment channels versus Lightning Network). And overlay networks can also be formed on top of the Bitcoin network using encapsulation and virtualization. If necessary, each channel or each overlay network may establish local time stamping functions similar to Bitcoin Blockchain’s time stamping of transactions. An overlay network can even build indexes of the local transactions, and have the indexes recorded and verified on the base the global Bitcoin network (L1).

Such payment channels and overlay networks are useful L2 solutions.

The popular so-called “L2” solutions, however, have none of these characteristics.

The so-called L2 solutions are essentially separate networks based on a completely different network protocol, rather than an integral layer of a single multilayer network based on the same network infrastructure and protocol. These so-called L2 solutions are reactions to a base network that is so inadequate that a separate network has to be added to handle all kinds of transactions among unpredictable parties (rather than just party-specific transactions). As a result, unreliable intermediaries are introduced to be relied upon.

Lightning Network, for example, is not designed to handle high-frequency transactions between two particular parties only (for otherwise it would need a large number of small lightning networks similar to payment channels). It is a completely different network created using multi-hops among multi-intermediaries in order to handle almost all transactions except for the rare high-value transactions. (See Lightning Network on BTC is a dead end even if it works as claimed.)

The Lightning Network on BTC at least pretends not to be an intermediary itself (when it really is) by touting a network of intermediaries. Other L2 systems such as Infura and Alchemy themselves act straight out as an intermediary actively facilitating every transaction, and there is no hiding of that fact even.

The problems of these L2 solutions are fundamental: they are not blockchain. They just pretend to be blockchain. Having started with a blockchain that has failed to provide a real solution, L2 creates an off-chain solution but associates itself with blockchain in name, in order to ride on the market tide created by the blockchain hype.

L2 is always a compromise. People who don’t see this should ask themselves a very simple question: why inventing blockchain in the first place at all? If L2 that reintroduces all kinds of problems back could be a good solution, why even bother at all? The existing non-blockchain technologies such as distributed databases would have all the answers that are not only just as good but in fact also enjoy a far more mature and established ecosystem, so there would be absolutely no need for blockchain.

The truth is that other than high-frequency data or content streaming applications, one can hardly think of any L2 applications that are necessary when a public blockchain that can provide truly scalable Layer-1 (L1) solutions already exists.

To put it simply, any transaction that needs to be, or should be, atomic, or potentially needs to be distinctively identified and recorded (for accounting or auditing purposes for example), should be on chain, for otherwise there would be no need of blockchain technology in the first place. Placing these types of transactions on L2 is dishonesty.

Transactions involved with NFT’s and DeFi are certainly this type of transactions.

(Note, here it is about transactions, not tokens themselves, as they are different things. There can be a strong case made for tokens with off-chain business logic and administration but on-chain data, messaging, and verifications for many enterprise applications, as in what Tokenized.com is doing, but that’s a whole different subject.)

Even for transactions that are not required to be distinctively identifying and recorded, the largest acceptable compromise that can be made is to place such transactions on a payment channel or an overlay network as described above that is capable of (1) performing transactions between the parties directly without an intermediary; (2) verifying all transactions using Bitcoin scripts and protocol (see above).

High-frequency data or content streaming applications are the only exceptions that would justify L2 solutions such as payment channels. These transactions do not need to be atomic and do not require ledger-based record-keeping for individual transactions. For example, when a user streams a video and makes payments using nanopayment streaming, there may be 10,000 nano payments but only one viewing experience. The entire streaming process benefits from nanopayment because it allows the user to pay as it goes without a subscription and to terminate the process anytime without causing payment difficulties. But from a record-keeping and accounting point of view, there is no need to keep the all 10,000 nanopayments on-chain as atomic transactions. Instead, only one settlement transaction needs to be kept on-chain, without affecting any business aspects including accounting compliance.

From this perspective, you see how elegant and promising the solutions offered by Bitcoin SV (BSV) are.

Metanet protocol proposed by nChain will be the real Web3. nChain’s products and services, such as Kensei, are going to constitute the true foundation of Web3 based on Metanet, even though Kensei presently focuses on enterprise data integrity and auditability and does not even use the word Web3.

The Metanet will provide not only more secure enterprise data systems, but also useful NFT systems with real legal property ownership rights, and much more, can be built on Metanet.

The NFT implementations today lack real property ownership control and management. These products exist only because of people’s ignorance and greed — ignorance because they don’t understand purchasing a NFT does not mean the NFT holder has full rights of property ownership, and greed because they believe the price is going to go up soon, so they don’t care.

But all these problems also find their roots in the inadequacy of the underlying blockchain. Most blockchains including Ethereum don’t even have the potential, let alone the reality, for full property rights ownership and management.

What is required is full Digital Rights Management (DRM).

DRM is a familiar concept. Many existing DRM techniques and systems may be used, but BSV blockchain has a unique advantage.

Using BSV can make the payload of the NFT (e.g., an artwork) displayable or operative under pre-defined conditions, e.g., a certain authorized person or device. As Craig Wright himself recently pointed out, using various compression and reduction techniques, thumbnails and images of various levels of resolution may be displayed according to the access authorization.

Furthermore, combined with the single source of truth (SSoT) and secure data services, BSV blockchain can offer superior DRM than the traditional methods. In an extreme case, not only hashes, but also the metadata and the full content data (for example, a high-resolution image itself that is being tokenized) may be stored on the chain, thus decentralizing not only the user access control, but also the very existence (storage) of the NFT’s underlying files themselves (on-chain storage of the content data being an option, not a requirement).

The BSV blockchain with nChain’s enterprise data solutions will also guarantee uniqueness of a digital asset, copycat protection, reliable availability, traceability, proof of authenticity, cost reduction etc. All this allows the owner of the digital right to not only view it but also sell, transfer, stream, license, rent, and display the NFT in a controlled manner.

And that is only about NFT. The BSV blockchain supports a broad range of Web3 applications.

Be prepared for irony though:

The only blockchain that focuses on real legal property rights, productivity and utility happens to be the one that is most hated and most ignored.

Sure, it is still small, and is just burgeoning measured by the actual development of applications and adoption. But it is painfully focused on productivity and utility.

The total number of transactions per day is only about 10 times that of BTC, and 2 times that of Ethereum. But over 95% of these transactions are NOT trading of the tokens themselves but rather actual user applications, in contrast to the reverse percentages on other chains. And those numbers will increase another 10 times within a year based on the current trajectory. The Bitcoin SV infrastructure already has the scalability to handle a thousand times the current numbers and can be horizontally scaled to handle essentially unlimited number of transactions at a cost lower than one hundredths of a cent.

But equally important, the developers in BSV are focused on actual utility. It is a fact. And it is not only because they are a group of people who tend to philosophically value utility more than coin alchemy, but also because they have not suffered the curse of the distraction of getting rich quick or having got rich quick without Proof-of-Work. They persevere and fight for something good. The future looks upon them with gentleness.



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