Web3.0: Anti-Rent-seeking Internet Platform Economy
By MiX, Organized and created based on @Louis Liu speech content
Louis believes that Web3.0 is a rent-resistant internet platform economy, which replaces company-owned centralized platforms with community-owned decentralized encrypted protocol networks. Decentralization is just a means, and resistance to rent-seeking is the goal. However, whether encrypted protocol networks can serve as platforms in more fields remains to be proven.
Part1: Conceptual Issues of Web3.0
Hello everyone, today I want to share with you my understanding of Web3, specifically the conceptual issues surrounding Web3.0.
As the Chinese saying goes, “if the name is not correct, the words will not be in order.” In modern language, this means that without a clear concept, it is difficult to apply logic and form valuable conclusions. I believe that the value of a concept depends on the value of its conclusions. The value of a conclusion does not lie in its perfect explanation of the past or its conformity to a certain tradition, but in its predictability, which can guide our work.
There are few widely recognized concepts (even among thousands of people who make it their profession) that are as controversial and varied as Web3.0. My understanding of the concept of Web3.0 is just one perspective, and I welcome corrections and feedback from everyone. Many friends have their own concept systems for Web3.0 that they propose or accept, but in this sharing and subsequent discussion, I will not evaluate other systems.
Some conceptual frameworks are not self-consistent. I only realized in my middle age that it is impolite to point out someone else’s logical errors unless they are close friends. Moreover, it is almost impossible to determine which of two logically consistent theories is more valuable. Only when the future becomes the past can we prove which theory’s predictions were more accurate. In fact, even if a theory predicts commonly accepted facts (which is also difficult to achieve consensus on), the value of the theoretical framework remains questionable. The cause of any fact has infinite complexity, and predictions often succeed due to good luck.
This is just some idle talk about epistemology, which is a preemptive defense: today’s discussion does not involve other systems, not because of narrow-mindedness or arrogance, but solely for my own benefit. Since Mr. Xu Dao Bin has given me this opportunity, I hope to occupy everyone’s limited time to verify my own views and improve my understanding. If we were to discuss multiple systems, time would definitely not be sufficient, and the information bandwidth of online text communication would inevitably limit us. On the other hand, I believe that if you carefully understand my perspective, you will gain some insight. I have been involved in cryptocurrency investment for over 10 years and Web3 entrepreneurship for nearly 5 years. Even fools have a thousand thoughts, and there must be some gain in the end.
Okay, enough with the introduction, let me start with the conclusion: Web3.0 is a rent-seeking resistant Internet platform economy.
Web3.0 utilizes blockchain technology derived from cryptocurrencies to achieve decentralization of Internet platforms. However, Web3.0 is not simply a renaming or direct descendant or advanced stage of cryptocurrencies such as Bitcoin. Cryptocurrencies, led by Bitcoin, are still moving towards “better money,” and Web3.0 is a parallel movement that shares some technologies.
From its literal meaning, Web3.0 is the next stage of the Internet after Web2.0. Some researchers and practitioners recognize that Web2.0 is an Internet platform economy that, although it does not conform to the earlier definition, better reflects the economic essence of Web2.0.
In economics, a platform is an economic system that creates value through matching transactions and interactions. Commercial banks, investment banks, telecommunications, and real estate intermediaries are all platforms, and all Internet giants are platforms without exception. Look at the apps on our phones that we rely on for our daily needs — Web2.0 platforms have penetrated into most corners of the socio-economic system, significantly reducing various transaction costs, improving economic efficiency, and creating vast amounts of economic value.
Web2.0 platforms are all owned and operated by companies. The company’s duty is to maximize shareholder interests. When the network effects of Web2.0 platforms reach a level sufficient to sustain themselves, their owners will engage in rent-seeking. This is a natural strategic choice and has nothing to do with morality. Rent-seeking means that, without increasing their contribution to economic value, they use their special status or rights to gain more income distribution.
Why is platform rent-seeking “bad”? Because the goal of good institutional design is only twofold: efficiency and fairness. Platform rent-seeking undermines fairness without improving efficiency. The beneficiaries of rent-seeking are a few Internet giants, while the victims are millions of online merchants, ride-hailing drivers, delivery workers, and billions of users.
Web3.0 replaces company-owned centralized platforms with community-owned decentralized encrypted protocol networks. Decentralization is also a concept without consensus, so I intentionally avoid defining Web3.0 as a decentralized Internet platform economy and use “rent-seeking resistant” instead, which is a more precise modifier in meaning. Decentralization is a means, and rent-seeking resistance is the goal. In addition, if “fair Internet platform economy” is used, it becomes too broad.
In my view, decentralization is a set of attributes that encrypted protocol networks should have: trustlessness, permissionlessness, censorship resistance, verifiability, and forkability. Community-owned encrypted protocol networks serve protocol participants (who are also community members) and have no inherent incentive for rent-seeking. Moreover, blockchain-based decentralized encrypted protocol networks are difficult to be controlled by a few individuals or institutions. Even if they are controlled, rent-seeking behavior is transparent on the chain, and the community can break free from control through forks. Therefore, the decentralized network attributes bring about rent-seeking resistant platform attributes.
After discussing the concept of Web3.0, I would like to introduce a development bottleneck of Web3.0 that is often overlooked. Other bottlenecks, such as inadequate scalability, poor user experience, and unclear regulation, are well known. Encrypted protocol networks have proven that they can serve as platforms in specific areas, such as cryptocurrency payments, where the cryptocurrency network coordinates transactions between payers and recipients without relying on institutionally operated platforms as trusted third parties.
Whether encrypted protocol networks can serve as platforms in more areas remains to be proven. Therefore, Web3.0 is still a concept and far from reality. If one day, most of the Internet services we rely on in our daily lives are mediated by encrypted protocols, it means that the Web3.0 era has arrived.
Some people in the industry believe that blockchain is just a ledger, and encrypted protocol networks are only suitable for financial transactions. This argument has its merits and is also a possible future. If blockchain technology brings a more open, efficient, and low system risk financial system to human society, and there are no other uses, its significance may not be inferior to Web3.0. However, such a movement or revolution is not a new stage of the Internet, and it may be more appropriate to call it “Open Finance.”
Encrypted protocol networks use token incentives to build network effects. At the same time, tokens are proof of ownership (mainly revenue and governance rights) and a means of achieving community ownership. The evaluation and reward of protocol participants can only be achieved through on-chain logic. If relying on governance, it returns to the mode of outsourcing and crowdsourcing, and cannot achieve decentralization. Moreover, the practical experience of DAO is far from the mature institutional form with hundreds or thousands of years of history, and there are currently no successful cases.
However, it is extremely difficult to quantify the contribution of protocol participants to the network fairly and comprehensively through on-chain logic. Consider the evaluation and incentive systems for service providers, users, employees, and partners of typical Internet platforms, as well as their ability to iterate quickly; and then look at the many restrictions and governance (upgrade) dilemmas of on-chain computing. The complexity that the two systems can cope with is far from being the same.
Of course, discussing the development bottleneck of Web3.0 is not to pour cold water. As a self-proclaimed Web3.0 researcher and practitioner, I believe in Web3.0, but I want to draw attention to the core issues among peers. At the same time, investors should not blindly optimistic, thinking that Web3.0 will cure all diseases and be invincible.
It has been proven that encrypted protocol networks can serve as platforms in only a few areas. The first is the public chain itself: a decentralized computing platform. Miners or validators are computing service providers, and the core quality indicator is the security level, which is determined by computing power or collateral value. PoW and PoS quantify the contribution of miners or validators and provide corresponding token rewards, giving birth to Bitcoin, Ethereum, and other public chains.
The second area is DeFi, and the core contribution is liquidity provision. Because LP is native on-chain, the certification process is relatively simple, commonly known as liquidity mining, which can be called Proof of Liquidity Providing (PoLP), which launched DeFi Summer.
There are many areas that have not been proven but are undergoing extensive experimentation. I am particularly interested in DePIN, which is decentralized physical infrastructure, including decentralized storage, computing, communication, sensor networks, and other tracks. The core difficulty (and innovation point) of this field is various storage proofs, coverage proofs, relay proofs, and so on. I eagerly hope that DePIN can achieve mass adoption, proving that encrypted protocol networks are also applicable to platform economies beyond value storage/transfer (payments) and financial transactions.
Part2: Q&A
1. Web2 and Web3
Q: Will Web2 + Web3 be the key point of the next stage? Is it necessary to separate Web2 and Web3 too much?
Louis: I haven’t thought about the separation and integration of the concepts of Web2.0 and Web3.0. The relationship between the two is very clear, and 3.0 is the next stage of 2.0.
Q: Does Web3.0 target existing Internet platforms?
Louis: I hope that Web3.0 can eventually replace at least some of the Internet platforms, because these platforms are too important to society, and there are significant issues with them being controlled by enterprises.
Q: How do you view the issue of Web3 starting over with Web2?
Louis: I cannot respond to the issue of “starting over.” Almost all of the technologies used in Web3.0 come from Web1.0, with only a few new ones. Does that count as starting over?
2. Infrastructure and Applications
Q: Are infrastructure technologies more important, or are application technologies more important?
Louis: Currently, infrastructure technologies are more important. Most practitioners would agree that Web3.0 infrastructure is not yet complete.
Q: Should Web3 infrastructure be changed?
Louis: This is almost purely a technical issue, with many paths and many projects trying different approaches.
Q: Does this mean that most paths will fail, or even all of them, and the correct one is still on the way or hasn’t started yet?
Louis: Yes, totally.
Q: Can we understand it as the fact that infrastructure technologies serve application technologies, and the development of application technologies drives the evolution and iteration of infrastructure technologies? If Web3.0 infrastructure is not yet complete, it may be because the application scenarios and user needs have not been fundamentally resolved.
Louis: Infrastructure and applications must promote each other, like the left and right feet of walking, they cannot be neglected. However, from a technical perspective, there are more pressing issues to be addressed at the infrastructure level of Web3.0.
Q: Should Web3 mainly start with specific (existing) platform-level applications?
Louis: Yes. There are some platform economy areas that Web2.0 has not yet solved, such as finance. There are also some areas that have already been monopolized by Web2.0, and the platform commission is extremely high, such as creator economics, where the platform commission approaches 100%. These are all fertile ground for Web3.0.
3. Decentralization and Not Being Evil
Q: What is the difference between community-owned governance and profit-sharing based on tokens and shareholder-owned governance and profit-sharing based on equity?
Louis: Token holders can’t be evil. Community-owned encrypted protocol networks cannot be evil.
Q: How can we ensure that they cannot be evil?
Louis: Mainly because encrypted protocol networks can be forked, while platforms operated by companies cannot be forked. The value of forkability can be seen in my work (https://blog.goodaudience.com/the-cornerstone-of-crypto-protocol-governance-is-forkability-not-decentralization-50dcde2c5061). ↗.)
Q: So, the community cannot guarantee that they will not be evil?
Louis: No, but if some members of the community are evil, other members can choose to leave. Forkability ensures that the side with more economic activity, whether staying in place or leaving, inherits more value.
Q: If the majority of decentralized entities run away, isn’t that still being evil?
Louis: The projects that have run away have not yet reached the stage of community ownership.
Q: Is “anti-censorship” a necessary attribute of decentralization? I personally think that decentralization is just a technical means to achieve “trustlessness.”
Louis: Anti-censorship is a necessary attribute, and it is the most difficult attribute to achieve in a decentralized network. For example, PBS technology discussed in the Ethereum community is tirelessly pursuing better anti-censorship guarantees.
4. Risks and Recommendations for Economic Models
Q: Taking decentralized storage as an example, is there an opportunity for a project that has implemented infrastructure capabilities but has not considered economic models (mainly policy risks) in the current environment? Do you have any good advice for such projects?
Louis: I think that an encrypted protocol network must have a token, otherwise how can it be decentralized and community-owned? Cutting leeks is another issue, and it is not an innovation of Web3.0.
Q: Currently, tokens face certain policy risks due to policy influences. Should we wait for policies or launch first? Are there any better options?
Louis: This depends on the case. Generally speaking, users should not be the main group rewarded by tokens. They should receive better services. In a double-sided market, service providers should be the incentivized side, eventually becoming the owner of the encrypted protocol network.
Q: In the DePIN (Decentralized Public Infrastructure Network) field, which is more important, the economic model or the basic technical architecture? Which side do you lean more towards?
Louis: I hope that most DePIN projects adopt the same token economic model, namely the BME model. This way, there is no need for each project to design one, and network participants can easily understand it, while investors can do valuation. However, the core proof technology cannot be unified.
Disclaimer: This article is for reference only and should not be used as legal, tax, investment, financial or any other advice.
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