99.95% once it fully adopts proof-of-stake. But as we have seen, proof-of-stake is a trade-off that further increases the centralization and barriers-to-entry of the Ethereum network.
web3 is built on technologies that are saturated with scams and fraud.
In 2021, non-fungible tokens emerged as the keystone in a series of unfortunate events. A mechanism intended to somehow introduce scarcity to digital objects, NFTs bewilder any rational attempt to decipher their purpose. Non-fungible essentially means “non-substitutable” or “non-replicable”, and in this case means stamping unique serial numbers onto tokens hosted on the Ethereum blockchain.
But this sense of uniqueness is completely lost upon the implementation of NFTs, which are little more than URLs pointing to an image file. If the URLs eventually no longer point to the artwork, then the NFT becomes an empty carcass since the blockchain can’t be retroactively edited. This implication of perpetual storage is a daunting responsibility to maintain, but we have already seen centralized services like NFT.STORAGE gladly advertise perpetual storage with no warning asterisks.
The NFTs themselves are stored on “Filecoin storage providers,” which are basically just organizations with lots of hard drive server space who are hosting NFTs so long as they receive an appropriate return on investment. Becoming a Filecoin storage provider isn’t a trivial matter of installing some ordinary open-source software, it requires getting in touch with a sales team and building a power-hungry server, which again is antithetical to the whole “democratization of art” part of the NFT verbiage. From the Filecoin provider documentation, you’ll need:
The CPU, RAM, GPU, and drives each cost more than a PlayStation 5.5 And this doesn’t begin to consider the cost of powering a +400 watt server6 that probably demands a faster internet connection than the one in a typical home.
Those who can realistically afford and operate this kind of hardware belong to a technical minority, and their only incentive to hold your NFTs safely is their estimated return on investment.
So now that we’ve addressed the worrying infrastructure of NFTs, let’s get back to the user side of things. Though the interface and user experience of NFT auction houses like OpenSea resemble that of an art auction, they are even more unscrupulous. Since cryptocurrency wallets are largely anonymous and at least pseudonymous,7 let’s see how we can synthesize some demand for a masterpiece in seven steps.
The big problem here is that both Alice and Bob need to spend their legitimate money to conduct this whole seven-act tragedy. The cost of minting the NFT is a volatile figure, but there are artists who have incurred net losses of several hundred dollars in various fees9 from minting their NFTs (which sometimes are merely stolen or lightly edited artwork). Meanwhile, they have provided upward pressure on the ETH:USD exchange rate and liquidity to cryptocurrency traders by having to buy Ethereum.
A bank offers many protections for its customers. If somebody steals your credit card, you can contact your bank’s fraud department to scrub the charges and you won’t have to pay anything. If your bank fails and you live in the United States, the federal government guarantees your savings are secure.
“But wait! Consumer protections that guard against bank failure are an irrelevant counterargument against cryptocurrency’s safety, because cryptocurrencies operate without any need for banks! Why would you need to be protected from a bank robbery, if bank robbery can’t happen with crypto?”
But in the cryptocurrency world, you are your own bank. There is nothing protecting you from poor memory, scammers, hackers, or people who are willing to beat you with a rubber hose and coerce you into revealing your wallet’s key.
In fact, it is this complete lack of protection that forms the basis of why people created banks in the first place — so that their money could be safely kept away from them in a more secure location.
If you put your account’s seed phrase on a flash drive and then forgot where that flash drive was, you’re SOL. There are horror stories of people who bought Bitcoin ten years ago, became millionaires unexpectedly, but are locked out of their newfound wealth because they can’t remember the decryption key to their hard drive, or they lost the storage device containing their wallet.
Cryptocurrency transactions are not reversible. There isn’t any mechanism to revert a charge that you were misled into approving. This is one of the largest reasons why so many scams are conducted with cryptocurrency, because there is no law enforcement agency that can effectively halt a transaction or reverse it.
At best, web3 developers have noble, if grandiose, motivations to improve financial equity or the freedom of the internet. At worst, it seems that web3 is nothing more than trying to lure normal people to buy cryptocurrency. This is the catch: by entering the web3 space, you provide liquidity to the Bitcoin and Ethereum market. As a striking figure, consider that users spent about $100 million in Ethereum gas fees to buy $200m in Bored Ape NFTs.10
The incentives in the web3 space are far removed from actually improving the quality of life issues we’ve seen with web2.0. As the price of Bitcoin and Ethereum has shot up by orders of magnitude in the last five years, we have seen countless news stories of random people who have become billionaires when considering their crypto net worth. The issue is that there are not enough buyers for these individuals to actually liquidate their holdings into a usable state of, say, US dollars.11
And this newfound wealth is tied to a highly speculative price. A price that is entirely contrived, and is tied to a currency that you cannot really use in a purposeful day-to-day manner.
As such, the “whales” need somebody to buy into the crypto-hype, so they can wind their position down.
a whale is a large holder of cryptocurrency who can manipulate a coin’s valuation through their sheer size
This has been historically termed the “greater fool theory.” To stimulate demand for cryptocurrency, these bagholders need to create means for ordinary people to get involved. If you are particularly cynical, you can interpret the goals of NFTs in such a way.
The greater fool theory posits that an already inflated asset can be resold at an even higher price, and generate profits for the original holder of said asset
Remember the January 2021 GameStop fiasco? If you peer into the r/wallstreetbets threads, you’ll find countless users exhorting their fellow witless GME shareholders to “hold the line” and not sell their shares. All the while, those same users were quietly exiting their position and selling their shares to the next fool on the chopping block, such as the founder of University of web3.
The issue with web3, NFTs, or cryptocurrencies is that they fall way short of achieving their stated objectives. Cryptocurrencies are unable to solve the problems of the banking industry, web3 is unable to solve the problems of the tech industry, NFTs are unable to solve the problems of the art industry. This is because each of these industries suffers from dark patterns of human behavior, and web3 is not immune to such behavior. web3 does not prevent bad actors from exploiting and misleading others.
The technologies surrounding web3 are instruments of human naivete and opportunism. Because of wild speculation and FOMO on behalf of venture capitalists eager to take a measured bet on such audacious claims, we have seen web3 startups explode in valuation despite delivering little value. Browse some of the technologies listed on this page and their landing pages, and try to convince yourself that you — as the potential user — are the intended audience rather than an investor.
But there are still conceivable ways to dig us out of this mess. For instance, we can pin down the terrible externalities of crypto by instituting carbon taxes that will, among other things, disincentivize mining activity since its profitability is inextricably tied to the cost of electricity.
But won’t this just cause miners to relocate to some country that doesn’t have a carbon tax?
Sure, but the cost of shifting mining infrastructure is not cheap, and the margins of crypto mining are not particularly lucrative nowadays. This won’t outright halt emissions from cryptocurrency, but it may cause its inefficiencies to become so apparent that its users reconsider its utility, or at the very least hasten its transition to less polluting mechanisms.
There is a direction that the internet is heading in, which unlike web3, does not need venture backing to sustainably grow or a minority of technocrat zealots to buy into. For better or worse, the actual web3 might be a network of tightening walled gardens and federations. Much of the internet has congealed into pools of user-produced content that are becoming increasingly inaccessible and myopic.
Think of Reddit, Facebook, or Discord communities of thousands of people, whose activities are impossible to index on a search engine. Think of how the web became less navigable with artificial moats like login pages and paywalls, and is now being further entrenched with ideological barriers like echo chambers and content algorithms.
An analogy we can use to express this trend is how our known universe is composed of galaxies that are drifting ever farther from each other, while each galaxy is crunching inward into a more compact form — the internet has created ever-tightening ingroups while separating people at large from each other. I myself know of two big ‘galaxies’ in the form of the Western internet and the Chinese internet, and we are seeing the schism of the alt-right internet taking hideous shape today.
But I digress. At no point of this tectonic shift will a web3 of cryptocurrencies and NFTs have a naturally relevant seat. It will remain tomorrow as it lives on today: a messy dream.
Presented by Eric Cheng for 80-445 at Carnegie Mellon University. Opinions expressed are my own and do not necessarily reflect views of any affiliated people or organizations.
No matter if you found reading this enjoyable, or feel as though I got something seriously wrong, I would be glad to talk further.
Thank you to Simon Cullen for reading drafts of this.
According to researchers from the Cambridge Centre for Alternative Finance
According to the Federal Reserve’s Survey of Consumer Finances, American households had a median savings of $5,300 in 2019.
Moxie Marlinspike wrote a good blog post about this topic.
An interesting visualizer on Ethereum’s energy consumption
$499 in the United States as of May 2022
Using the official supported GPU list and their average TDP, we can extrapolate the power requirements of the system at large.
See this Stack Exchange thread on the difference between anonymity and pseudonymity.
“Wash trading, meaning executing a transaction in which the seller is on both sides of the trade in order to paint a misleading picture of an asset’s value and liquidity, is another area of concern for NFTs.”
Data from this tweet by Will Papper