The fallout from SBF and FTX continues, with Digital Currency Group owner of Coindesk, Genesis and Grayscale Investments being the latest company that could be in trouble. However, as I wrote last week, web3 continues to be built, but without many of the distractions that have plagued the industry during the bull cycles of the past couple of years.
There's still plenty of work to do
The events playing out are certainly painful for some, especially for those who have lost money or jobs due to misplaced faith in web3 projects or companies. But these market events help to flush out a lot of the dead weight that has accumulated during the past few years and leave us with much cleaner foundations for the future.
It's been over 6 years since I first immersed myself in blockchain technology, and it seems to me that while the speculative part of web3 — crypto is not in a great place, the overall ecosystem is far healthier than it has ever been.
Some of the examples that come to mind are:
- Leading DeFi exchange Uniswap has seen its trading volumes of Ether eclipse Coinbase's, making it the second-largest exchange for Ether trading
- In the past year, the Bank for International Settlements has announced over 8 different CBDC projects spanning Europe, the Middle-east and Asia
- J.P. Morgan working with the Monetary Authority of Singapore executed a DeFi trade on Polygon
- VMWare announced Ethereum support for their Blockchain platform which has over 100 beta customers
- The UK Treasury recognized Fnality’s synthetic CBDC as a GBP payment system in the UK
- DC is selling comic NFTs for $10 each using the Palm network
What sticks out about these examples is that they demonstrate:
- Tangible traction with public web3 protocols in the case of Uniswap and J.P. Morgan
- Genuine demand in enterprises and the wholesale finance markets for blockchain technology in the case of the BIS, Fnality and VMWare's platform
- Positioning NFTs as affordable digital collectables for everyone in the case of DC and Palm
There have been murmurs about the potential use cases for blockchain going all the way back to 2014, but it's only now in 2022 that much of this belief is coming to fruition, and these are all reference points that have nothing to do with price speculation but are demonstrating the true utility of the technology. However, when we look to the future growth and adoption of web3 technologies, there are still a few open questions which will need to be answered.
- The public versus private blockchain debate
- User experience
- Token governance
Public versus private blockchain
Most of the enterprise-focused blockchain initiatives are still taking place on private-permissioned blockchains. This has historically been due to the limited throughput, lack of privacy and identity solutions on public networks. There is a view that longer-term, zero-knowledge proofs (ZKP) and other privacy-focused technologies will solve this challenge, however at this point in time, I'm not aware of any approach that meets the need of the enterprise. The limited performance of public networks has also historically been a criticism, with the Ethereum networks throughput of 15 transactions per second, versus private permission networks closer to 1000 (Visa can handle 65,000 TPS).
Layer 2 rollups such as those provided by Polygon and Matter Labs do increase the throughput of these public networks. There are a number of competing layer 2 technologies on Ethereum, however, there isn't yet the equivalent of a sensible default layer 2. This is why teams need to research the various layer 2 solutions which are all in varying layers of maturity with slight differences between them. This all needs to be comprehended before a decision can be reached on the most appropriate route forward for their specific use case.
Right now, it's likely easier for projects to spin up a permissioned Ethereum network using Quorum, Hyperledger Besu or VMWare Blockchain, as all are better established in an enterprise environment than the layer 2s. Supporting the layer 2 narrative is the idea that companies or consortia could spin up either their own private layer 2 networks or what some are calling "layer 3 networks". Both utilise the decentralisation and security guarantees provided by the base Ethereum chain, or a layer 2 network depending on which type of network they are creating.
The point here is that it's certainly a view that layer 2 or 3 could be the future of enterprise blockchains, however, the landscape is currently too broad to focus on a singular approach. Over the coming years it will become clearer, but for the time being this space is evolving without a clear platform of choice to emerge yet.
On the user experience front, this is something I have written about before, but one of the items that appears to be lost on a lot of the web3 community with the FTX failure is that more people should be custodians of their own crypto — e.g. holding their crypto on a hardware wallet such as a Ledger Nano. I certainly agree that it’s a good feature of these assets that people can self-custody them. But it’s still far too tricky for your average, non-technical user to do. I believe that a lot of crypto Twitter forgets the barriers to entry that still exist to be a crypto native, and until this process becomes more friendly by using human-readable names by default instead of hexadecimal and having some sort of protection for users who are scammed or send crypto the wrong address, this technology cannot be used by the mainstream.
If these fundamental issues cannot be addressed, self-custody is not a sensible route forward for the vast majority of web3 users — there is simply too much at stake if they make a mistake. Your average person trusts a bank account to hold funds with them, and long term I envisage it likely being a similar story with your average web3 user.
Finally, on the subject of token governance, FTX provided an extreme example of what can go wrong with centrally managed tokens. Unregulated token issuance only makes sense for decentralised projects or base protocols, where one party is unable to exert undue influence on the supply of those tokens. Otherwise, we'll see the drama that played out with FTX repeat itself. Utility tokens make sense for decentralised protocols as we've seen with Ethereum, Uniswap, MakerDAO, and others. Where they don't make sense is if they're centrally issued and treated more like an investable asset.
FTT tokens did have some utility on the FTX exchange, however, issuance was controlled by FTX. There was no protocol for generating more tokens in a decentralised manner. This is contrary to decentralised protocols such as Ethereum's Ether tokens which are generated by staking and Uniswap's tokens which are generated by providing liquidity on the platform.
The ability to create tokens for projects has enabled a large number of companies to bootstrap in web3 (but also resulted in a number of scams too). Where those tokens are not issued at the protocol layer and instead rely on a central team, regulations will need to be established that can hold the project team accountable in the event of the token’s manipulation. This isn't a bad thing, but, it’s important that a distinction is drawn between when we have truly decentralised governance versus pseudo, as we don't want teams misrepresenting their tokens.
Against this backdrop, it’s a useful reminder that we are still early with respect to web3 technology. Some may consider the events of the past few weeks a setback, however, I see them as an opportunity to focus on what's important. There are still uncertainties with respect to the layer 2 landscape, user experience and token management, but if these problems were solved, this wouldn't be such an interesting space to be working in.
It was the technology that brought me into web3 all those years ago, and I'm just glad that more and more people are doubling down on what we can achieve with the technology, as opposed to the quick money that can be made, which was a huge distraction for most during this past couple of years.