The Breakdown - The Future of Web3 is Functionality

Episode Date: June 17, 2024

A reading and discussion inspired by https://blockworks.co/news/crypto-needs-proof-of-reserves and https://blockworks.co/news/web3-flashy-functional-infrastructure Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

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. What's going on, guys? It is Sunday, June 16th, and that means it's time for Long Read Sunday. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Hello friends, this weekend for our long read, we have a set of pieces. I'm going to share an AI version of myself reading each one, and then I will have a little bit of commentary. And the first that we're

going to do is called Stop Burning Investors, Crypto Needs Proof of Reserves. It's by Noah Buxton, and it goes like this. If you were holding crypto in November 2022, you likely remember the chaos of November 2nd and the days that followed. Even casual observers were captivated by the unfolding drama of a massive bankruptcy and one of the largest financial frauds in history. The collapse of FTX was a pivotal moment in a year already marked by significant turmoil for crypto investors. The liquidity crisis that began in June 2022 toppled many exchanges, lenders and crypto investment funds that investors had believed were built on solid foundations. Publicly traded companies like Voyager Digital and well-funded ventures like BlockFi and Celsius Network seemed secure but ultimately failed,

revealing deep-seated vulnerabilities and leading to widespread contagion affecting millions of investors globally. The industry did have a potential safeguard, proof of reserves, but it wasn't widely adopted or mandated, leaving the door open for such failures. Moving forward, how can we prevent similar crises? In late 2021 and early 2022, leading industry players projected trustworthiness, yet their balance sheets and regulatory statuses were misleading. The critical measure, whether these companies could prove their reserves matched their liabilities, was lost amidst the noise. Proponents of reserves transparency have long advocated for self-regulation through proof of reserves reporting. However, industry skepticism and a lack of standardized practices undermine these efforts. Despite its limitations, proof of reserves could

have offered frequent, accessible, and verifiable insights into a company's reserve practices, potentially preventing such catastrophic failures. The FTX collapse re-ignited the PR debate, with policymakers acknowledging the need for robust reserve requirements. Texas led the way with swift legislative action, and federal efforts like the Proof Act followed. Yet, comprehensive regulatory solutions remain elusive as the industry grapples with broader issues. The risk of future crises looms as market conditions shift. Proof of reserves remains underutilized, and it's more likely than not that a hot ember smolders somewhere in the market while regulatory focus diverges. It's imperative for digital asset service providers and policymakers to recognize the value of this tool to prevent that

hot coal from flaming up and burning investors again. By adopting proof of reserves, we can provide consumers with transparent, quantitative assurance, and protect against future financial disasters. It's time to break the glass and implement effective principles-based reserve transparency to restore trust in the crypto industry. All right. And now we are back to the real non-11 labs NLW again. And man, on this one, I don't even really have that much to comment other than why, oh, why, is this still even a debate or a discussion? One of the great capabilities of crypto is exactly this sort of proof of reserves at a station. It is crazy that we don't demand this yet, and we just simply should. Hello, friends. Before we get back to the rest of the show, I want you

to join me at Permissionless. Permissionless is a conference for Cryptonatives by Cryptonatives. And the reason it's so important this year is that despite regulators' best attempts to push industry founders, devs and executives out of the U.S., the U.S. remains the beating heart of crypto. Today, the tide is turning. Policymakers have pivoted from fighting crypto to embracing it, which will lead to the creation of new financial products, new applications, and ultimately new adoption. Permissionless is a conference for those using and building on-chain products. It's home to the power users, the devs, and the builders. And what's more, I'm going to be there. The location is Salt Lake City. The dates are October 9th to the 11th, and right now, tickets are just $199.

Towards the end of the month, they are going up to $499, and if you want 10% off, use code breakdown 10 when you check out. If you go to the Blockworks website, blockworks.com, there will be lots of information about how to register, and again, use code breakdown 10 to get 10% off. Next up, we have a piece called Web3 doesn't need flashy, it needs functional. It's by Dermato Riordan, and it argues that in the world of decentralized infrastructure, it's time to put much-needed tools into the right hands and create a healthier open internet. The original vision of Web3 was a digital future that could be built and owned by the many,

made possible by the power of blockchain protocols and their unique ability to solve age-old coordination problems. The early internet was born on similar ideologies to Web 3, an open space for the unrestricted flow of ideas and knowledge without physical, social, or political barriers. Today, however, a small handful of corporations dominate. They cast their net widely to harvest the data of end users and developers alike, while limiting control and governance to a small, unelected few. This subversion of the vision of the early internet came about because ideology lost out to convenience and the lure of delightful interfaces. In a world of digital abundance, the power to curate made kings and queens of the new global internet infrastructure dynasties.

While we can understand why people will trade their values for beautiful U.X, a flashy exterior can hide an ugly sclerotic core, similar to Dorian Gray and how his beauty had been to him but a mask. And building beautiful interfaces on top of data networks created powerful moats that grew stronger over time, stifling competition and innovation. While many entrepreneurs believe they could build even better end-user-facing experiences for Facebook, Google, Microsoft, Amazon, and many of the other digital giants, today's Davids don't stand a chance without the ability to tap into their global data and backends. But in the world of decentralized infrastructure, also known as the least flashy corner of crypto, we have the chance to arm the rebels and put the needed

tools into the hands of the entrepreneur's best place to create a healthier open internet. The answer is emerging within OG and for protocols. We can use blockchain as a single source of truth to coordinate and incentivize otherwise untrusting actors, making it unnecessary to have to choose between utilitarian infrastructure and flashy products. Ideology versus convenience. Open architecture is a much richer environment for ecosystems to improve performance and extend functionality. Entrepreneurs don't need to reinvent the infrastructure stack or pay a tax to those who currently dominate. With With open architecture, the end customers can enjoy the optimizations they are used to, as flashly as they wish, without having to give up their data. We can all have our cake and eat it, too.

As per Dennis Nazarov, open services powered by crypto networks will present unprecedented opportunity for a new generation of developers and entrepreneurs to innovate. This vision is just starting to be rolled out within decentralized physical infrastructure networks, D-pins, often simply described as community-powered infrastructure networks. The vision was never to just build a new AWS with a token on top. It is to enable an even bigger infrastructure network than AWS could ever build on its own. And this infrastructure layer will be kept open for entrepreneurs to build thousands of AWS's on top for every region, language, customer type, and market segment you can imagine. Fantastic U.X provided by thousands, if not millions of businesses,

competing to best serve their target markets rather than a handful of global behemoths, will prove to be the narrative break with the past. In Joel Mnagro's words from his Fat Protocol's thesis in 2016, the end result of value flowing to open protocols away from vertically integrated applications is a vibrant and competitive ecosystem of applications and the bulk value distributed to a widespread pool of shareholders. As the data follows through to prove out the thesis, we'll see a growing appreciation for these functional projects powering real businesses

without compromising the Internet's original ideals. Convenience and globally scalable infrastructure will no longer be synonymous with a handful of Internet giants controlled by a small group of people in the northwest of the USA. Developing new ways to create picks and shovels for the internet that all entrepreneurs can leverage without compromise may come without the fanfare of flashier projects. However, this will be the way that crypto becomes the dominant force we all hope it will become. Permissionless open infrastructure networks will continue to be more reliable, performant, and cost-effective. As per Albert Wenger, much like the PC was a platform for innovation that never happened on mainframes or mini-computers,

Web3 will be a platform for innovation that would never come from Facebook, Amazon, Google, etc. All right, we are back again from the AI NLW. And I think the thing that's interesting about this piece is the idea that what's really needed is underlying infrastructure that other great entrepreneurs can build on top of. I think there's something very compelling about this argument. We have seen time and time again when companies try to be Web3 versions of existing social networks or existing types of network platforms, it just never works. Web3 incentives aren't enough to overcome the lack of network effects at the beginning of a new type of network

because the only thing that Ken tends to be totally new experiences that consumers don't know that they want until they actually have them. In other words, Snapchat never could have become a thing just by being Instagram, but with a token, it had to have a new content format that people really liked. Same with TikTok. TikTok didn't become the fastest growing application in the world at the time because it was Snapchat with a token. it became that because it turns out that short-form video with viral music and sound was a format that we didn't know we loved, but we loved. So the idea then of having a Web3-style infrastructure for when the next great entrepreneur has an idea for the next great type of social network

or content network or whatever your preferred term is at this point, it'll be the combination of whatever it is that they build that is extremely compelling to consumers, plus the Web 3 infrastructure that they decide to build it on that will really vault these ideas into the mainstream. Anyway, super interesting thoughts, big appreciation to both of the authors of this week's posts, and of course, big appreciation for you guys.

That's going to do it for today's breakdown. Until next time, be safe and take care of each other. Peace.