The Breakdown - Breaking Down the Fight Between Bitcoin and Web 3

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, Abra, and FTX, and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, January 9th, and that means it's time for long reads Sunday. And we are back with a fun one to kick things off. First, though, if you are enjoying this show, please go give it a rating, a review. It's super, super important for helping grow the thing as crazy as that sounds. And if you want to get deeper in conversation with other breakdown listeners, check out the Breakers Discord.

Starting point is 00:00:51 The link is in the show notes, or you can find it at bit.ly slash breakdown pod. And last up, a disclosure. In addition to them being a sponsor, I also work with FTX. So today, for the first true Longreed Sunday of 2022, we are going back to the end of 2021 in a big, big kerfuffle that started with Jack Dorsey and Chris Dixon, Jack Dorsey of course, being the now former CEO of Twitter and the current CEO of Square, and Chris Dixon being a managing partner focused on cryptocurrency at A16Z. To use the internet parlance, Jack woke up and chose violence over and over again. And the question at heart is really this idea of Web 3 and the incentives

Starting point is 00:01:41 that underpin it and whether it can actually make the change that it promises. David Morris wrote a piece called What Jack Dorsey's Beef with Web 3 is really about, and I think it's a pretty awesome primer for this conversation. Now, David's subtitle kind of gives you a sense of the flavor of his take, and that's the Bitcoin-loving CEOs feud with VCs, is just the latest round of a fight that has been raging for nearly a decade. Bitcoiners versus quote-unquote crypto. Since officially leaving Twitter, now full-time Block, formerly square, CEO Jack Dorsey,

Starting point is 00:02:16 has become immensely more vocal and opinionated about blockchain and cryptocurrency debates. That's a really great way to get entangled in extremely heated online fights. And wouldn't you know it? Dorsey's aggressive dismissal of Web 3 is nothing more than a venture capitalist VC enrichment scheme has turned into a vicious airing of grievances just in time for Festivus. But many new entrants who have become interested in crypto over the past two years are left scratching their heads. Web3 is about blockchain somehow, right? And Bitcoin is a blockchain, so why are mom and dad fighting? Well, young Inherent, therein lies the long tale of a great feud.

Starting point is 00:02:53 Think Capulets versus Montague's, Hatfields versus McCoys, Harkinen versus Atreides. Add to the list of history's most in transit clan-on-clan grudges, Bitcoin versus Web3. get to the question of why Dorsey thinks VCs control Web 3, but first, we have to pack up quite a bit. The Dorsey blow-up is a high-profile eruption of a fight that has been raging pretty much constantly since 2013, if not earlier, and has really heated up since the 2014 unveiling of Ethereum. On one side of this debate is a loose alliance sometimes confusingly referred to by insiders like Dorsey as crypto, but which might be more accurately dubbed Ethereum. Not because they all use or build on Ethereum specifically, but because basically all of these systems broadly mimic or parallel what

Starting point is 00:03:32 Ethereum does. These are the folks behind the recent explosion in innovations like decentralized finance, non-fungible tokens, play-to-earn gaming, decentralized autonomous organizations, and very notably decentralized social media, which Twitter began working on when Dorsey was CEO. These applications largely rely on smart contracts, lines of code that live on blockchains and set the terms for transparent, irreversible, and open-access transactions. As part of these structures, smart contract-based projects often require their own token to use. And these make up a large portion of the crypto market on exchanges like Coinbase. Web3 is, very roughly, the idea that the web should integrate more smart contract applications and their various

Starting point is 00:04:11 tokens. NFTs aren't inherently reliant on smart contracts, but they've become deeply enmeshed in this ecosystem. And they're now a part of the pitch for both Web3 and the Metaverse. And yes, Web3 and the Metaverse are structurally synonymous. Both at their core are about building front-end interfaces and systems that use blockchain assets, which can be shared across a variety of these front ends. That includes things like having NFT-based game assets usable in a variety of games, or tokens that unlock a variety of services. This is what makes Facebook's rebranding itself meta and claiming to build the Metaverse such terminal drooling idiocy, if not an act of outright malice. It's just as comically thick skull as a company claiming to build the blockchain. I mean,

Starting point is 00:04:53 it's right there in the name, meta. Derived from Greek means beyond or transcending. In this case, as in transcending any single iteration of a virtual world. Interoperability is inherent in the Metaverse, and what Facebook is building will be at best a shard of something much larger. Though knowing Facebook, it will much more likely be a walled garden that smears on just enough Metaverse-colored grease paint to hustle the roobes. Nexo is a trusted and easy-to-use crypto platform, where you can buy cryptocurrencies at the touch of a button, and start earning up to 17% annual interest that is paid out daily. They support all of the major assets on the market, and even allow you to swap one asset for another, or borrow cash. against your crypto without selling it.

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Starting point is 00:06:54 Today, that's FtX.us. Bitcoin bites back. On the other side of this, Stalin versus Trotsky Bar-Ram brawl are Bitcoiners like Dorsey. This loose but passionate faction believes that the original cryptocurrency is also the best cryptocurrency, or maybe even the only legitimate one. The most extreme bitcoins are known as Bitcoin maximalists, and they essentially believe that Bitcoin's sturdiness and universality will make it a shared global currency, with democratized access benefiting humanity as a whole. Maximilists, though not all bitcoins, also believe that other cryptos are a threat to that

Starting point is 00:07:29 vision, an attack on Bitcoin, as they often put it, primarily because of their compromises on decentralization. Some maximalists feel that opposing other cryptos justifies, let's say, a wide diversity of rhetorical tactics. Their willingness to go for the figurative throat has often led to Bitcoins being tard as toxic. Probably one reason the backlash to Dorsey's comments has itself been so heated. While advocates are still working to define the precise benefits of Web3, Bitcoiners have concise bullet points for the benefits of truly decentralized cryptocurrencies. Extreme data security. You can't hack the Bitcoin network. Censorship resistance. Anyone can use Bitcoin and nobody can stop any transaction by technical means, privacy, though not necessarily

Starting point is 00:08:10 secrecy, and trustlessness. Trustlessness means that the system abides by reliable and transparent rules that no individual, entity, or small consortium can change unilaterally. With Bitcoin, any changes require genuine mass consensus among developers, miners, and nodes. The Bitcoin holders basically have no say apart from selling if they don't like the way things are going. The prerequisite for all those nice things is the core feature that Bitcoiners argue defines a real blockchain. True and full decentralization. This is a crucial distinction. Decentralization isn't in and of itself a virtue or a goal. It's a thing you must have to get the features unique to public blockchains. That also means, somewhat confusingly, that there are a handful of other

Starting point is 00:08:51 truly decentralized cryptos that even the most hardened maximalists can, at the very least, tolerate. One example is Monero, a privacy token that has one of the widest community-driven origin stories ever. The test case for the importance of decentralization is pretty simple. If a very powerful government wanted to shut down or interfere with a particular blockchain, how many people are machines would they have to compromise to do it? Bitcoiners look at Ethereum-style crypto and smart contracts and see tradeoffs and decentralization and security for the sake of throughput or features, what is sometimes derided as decentralization theater. This is largely targeted at proof-of-stake or other alternative consensus mechanisms. But even Ethereum itself and its current

Starting point is 00:09:27 proof-of-work iteration gets knocked on this point. Bitcoiners argue that its structure makes independent nodes onerous to create and maintain increasing centralization and fragility. Though it didn't directly involve smart contracts, the same argument was central to the block size war of 2015-to-2017, when a faction seeking faster transactions proposed making Bitcoin nodes similarly hefty. That battle also cemented another major Bitcoiner argument that a diversity of cryptocurrencies, even those that are technologically similar to Bitcoin itself, threatens the growth of the crypto ecosystem because it splinters interest into a variety of factions. Some moderate bitcoins reject this critique, though, arguing that so-called altcoins

Starting point is 00:10:06 can be useful testbeds for future Bitcoin features. But basically all Bitcoiners are extremely skeptical of the involvement of for-profit entities in creating new tokens, arguing in part that such a role inherently compromises the decentralization of systems, because there's either a centralized entity able to make their own changes to the system, or a clear target for government pressure to censor a system. See, for example, the stablecoins USDT and USDC, whose administration Tether and Circle, respectively, have the power to block any blacklisted user or seize their funds. Dorsey's critique of VC's role in Web3 is focused on the financial implications of VC-backed blockchains, arguing that they inevitably siphon away money from users and basically

Starting point is 00:10:47 wind up as landlords on their own systems. But that argument is somewhat downstream from the centralization critique. Who actually needs Web3? So, on the one side, you have a complex, experimental and arguably fragile Ethereum ecosystem that provides the exciting new features that advocates want to see democratized through Web3. On the other side, you have Dorsey and the Bitcoiners saying that those cool applications rely on systems that are inadequately decentralized to gain the fundamental benefits of a blockchain, in part because those compromises help make the systems backers rich. But the excluded middle here is that a lot of what's touted as the promise of Web3 is

Starting point is 00:11:22 either impossible or very difficult to do with Bitcoin. Bitcoin's decentralization and bomb-proof security come at the experience. storage space, features, and most of all, transaction speed. If you're playing a Metaverse or Web3 game, you don't want to wait 10 minutes or more for a confirmation that your new sword has arrived. To be fair, some Web3 features appear possible through layers built on top of Bitcoin. Hero formerly Blockzac PVC is building smart contracts using Bitcoin and the potential for rough functional equivalence to NFTs, an Ethereum's ERC 20 tokens, sort of, has existed on Bitcoin in the form of colored coin since around 2012. But it seems unlikely that Bitcoin itself

Starting point is 00:11:59 could support these applications at the scale and speed Web3 advocates have in mind, even using layer 2s. At the same time, Bitcoin's robust decentralization was achieved under a set of circumstances that is unlikely to ever be reproduced, especially after the regulatory crackdown on initial coin offerings starting in 2018. So, Dorsey's knock on VC's role in Web 3 would seem to back him into a corner. It's unclear that there are alternative routes to funding in building the Web3 Vision. The unspoken implication of Dorsey's attack seemed to be that the Web3 Vision being bandied about should be either rejected entirely or scaled back to something that can be accomplished on Bitcoin, which again is a bit strange coming from a man who has

Starting point is 00:12:37 sold NFTs and invested in decentralized social media. That's not to discount specific critiques of how VCs invest in new crypto tokens. There are some serious problems with pre-sale discounts and short lockup periods for token launches, which really do often amount to VCs dumping their bags on retail investors, without a care in the world for whether the idea or technology behind the token are any good. Those issues desperately need to be addressed, though it's also worth noting that they aren't entirely crypto-specific. VCs have been getting preferential insider terms for decades. But in his Bitcoin or ferocity, Dorsey may have missed the subtler compromised position that is relatively common in the crypto industry. Everyone who's really

Starting point is 00:13:14 paying attention recognizes that Bitcoin is a rock-solid and transformative technology. But many also keep their minds open to the idea that less cosmically robust systems may have have real applications and benefits too. Do you really need an entirely censorship-resistant blockchain to manage profile-pick NFTs or your multiverse robe and wizard hat? Do purpose-built blockchains like Flow really threatened Bitcoin? Those are genuine questions. The entire sector is still very, very new. Ethereum only launched six years ago. So a lot of people are suspending judgment and letting the chips fall where they may. Wherever you land, though, it may be healthy to nurture, a little Bitcoin maximalist to live on your right shoulder. Let it be your voice of skepticism towards

Starting point is 00:13:52 anyone trying to sell you a hot new token, or an entire new buzzword whose meaning nobody can quite agree on. All right, guys, back to NLW. I've read a lot of David's pieces. I've been following him before he got to Coin Desk, and this might be my favorite. What happened in December between Jack Dorsey and Chris Dixon sets the tone for what will be an incredibly important conversation in the months and years to come. It has to do with incentives.

Starting point is 00:14:19 The incentives of VC backers who own big swaths of these new. tokens. On the other hand, a comparison of that to the incentives of people whose primary asset is Bitcoin. There are incentives there as well. And of course, there's the incentive question when it comes to Web2 companies and the extraction imperative that they face where at some point they have to get more out of each user because there are no more incremental users for them to go get. Incentives are an incredibly important thing to discuss, debate, and do so in public and loudly. There are foundations, the question of what the foundation of any new system is. Is it worth doing if it's built on a foundation too similar to the old?

Starting point is 00:14:59 To me, that's the question that Dorsey is bringing up. And then, of course, there's practicalities. What is possible on what time span with what technology? How do those practicalities come into battle and challenge with beliefs around the importance of those fundamentals? To David's point, these questions have been being debated in this space for going on a decade now, but the stakes are going to continue to raise. This is something that I'm sure that we're going to cover a lot. I will just end on this. I'm glad that Jack is out there

Starting point is 00:15:30 kicking up this dust. I like him unleashed a little bit, and I like there being a voice who has full experience and credibility with Web 2, who's making the arguments he's making. And if you are heavily invested in Web 3 and what the future might be, I would only say that being able to understand, intellectualize, rationalize, explore, and sit with Jack's critique and the critique of people like him, and still come out with high conviction in the way that you are building, and the way that the systems that you're investing in are being built makes for a stronger system. And ultimately, anti-fragility, as much as Talib sucks now, is unbelievably important for anything that's actually trying to change the world. So Jack, Chris, keep it up. You're both

Starting point is 00:16:16 always welcome on this show, and I'm excited to explore more of these really thorny important issues. But for now, I want to say thanks to my sponsors, nexo.io, Abra, and FTX for supporting the show, and thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Breaking Down the Fight Between Bitcoin and Web 3

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