June 09, 2022 - 32 min read
Web1, which relied on phone lines and dial-up internet, saw users experiencing the first websites, search engines, and online games, as well as the broad dissemination of digital information. Web2, facilitated by higher-speed internet connections, saw the rise of social media giants like Facebook, Instagram, TikTok, and the vast collection of user information.
Web3, the third iteration of the internet, has begun. Major themes that have and will define Web3 include the emergence of blockchain, DeFi, and crypto, as well as the incorporation of machine learning, artificial intelligence, and AR/VR (augmented reality/virtual reality). Web3 may also potentially involve the melding of man and machine– via cybernetic technology– into our everyday experiences.
Web3 will potentially provide incredible benefits for users, including greater financial and career opportunities for users, allowing users increased ownership over their own data, but also offers huge risks, including furthering our addiction to the internet and social media, the use of blockchain to facilitate governments spying on their own citizens, and potential instability to our overall financial system.
In this article, we’ll take a deep dive into both the pros and cons of Web3 and the associated technologies of blockchain, crypto, DeFi, and artificial intelligence and attempt to determine how it could transform our society, either for the better– or for the worse.
It’s commonly argued that today’s major social media networks, including Facebook, Instagram, Twitter, TikTok, and Snapchat exist as giant farms for user data. Instead of users being the customers, users are effectively the product, and selling their data to advertisers represents the main source of revenue for these platforms. There is little current users can do to stop this, and, while some platforms do allow for limited data opt-outs or data exports, these require significant additional action from users and may not fully erase or transfer user data.
This business model is increasingly seen by the general public as extremely exploitative and, in layman’s terms a “pretty bad deal” for the average user. What was once seen as a way to connect people is now generally considered simply a way to exploit them while aggressively advertising things they don’t want or need. Even with extreme data harvesting and user targeting, many users feel like they are constantly bombarded with advertising that’s completely irrelevant to their personal wants and needs.
In addition to these issues, concerns about violence, bullying, political extremism, and censorship have also plagued the reputations of current social media platforms. Popular negative sentiment about social media is backed up by strong data. For example, in a 2020 study of U.S. adults, 64% of survey respondents said that social media was having a “mostly negative” impact on the country, while only 10% said they had a “mostly positive impact” on the country.
Fortunately, blockchain-based Web3 social media and social networking platforms have the chance to change all of this. Instead of platforms indiscriminately targeting and harvesting user information, new platforms will likely (and are already) offer more options about what data a user provides to the platform, and, perhaps more importantly, compensate users in cash, crypto, or native tokens for providing their personal data to advertisers. In addition, users will be able to create a more customizable advertising experience by sharing their interests and desires with the platform in question. In some cases, users may be able to opt-out of advertising entirely.
For example, one company, Datacoup, is already compensating internet users for their data in major cryptocurrencies such as Bitcoin and ETH, as well as traditional fiat dollars. While it’s unclear if the platform is partnering with major social media networks in the near future, the creation of Datacoup and similar Web3 companies certainly represents the beginning of a major shift regarding public and institutional attitudes toward user data ownership.
There are also several newer social networks that directly provide users with greater ownership over their data. For example, Sapien is a social media news platform built on Ethereum. Users have significant control over their data and can stake SPN tokens to receive token rewards for voting on posts, creating content, and even leaving comments.
In addition to the many issues with current social media mentioned in the section above, social media has a creator compensation problem. Creators on most social platforms remain fully uncompensated for their work, even if they generate a follower base that leads to thousands or millions of dollars of advertising profits for the platforms in question.
For example, platforms like Facebook, Twitter, and Instagram provide zero compensation for the content and work they create, while platforms like YouTube take 50% or more of the advertising revenue of their creators, while often throttling (slowing down) the reach or “demonetizing” content that they find distasteful or controversial. The amount of money a platform takes from creators is sometimes referred to as a “take rate,” with the aforementioned platforms Facebook and Instagram implementing a 100% take rate.
This means that users have little chance to directly monetize their work, and must turn to avenues such as advertising merchandise, gated website content, Substack subscriptions, or Patreon donations in order to fund their activities. In addition, all of these platforms can easily suspend or ban user accounts, no matter how popular, for any reason they wish, which can easily damage or even completely ruin the careers of the creators in question.
However, in addition to the aforementioned blockchain-based social media platforms, some other newer platforms are beginning to focus expressly on compensating larger creators for their content. For example, the quickly growing blockchain-based social media network Steemit automatically distributes rewards to content creators in Smart Media Tokens (SMT) based on upvotes and engagement data. Steemit has reportedly distributed $22 million of SMT rewards to users. The platform also has a reported maximum theoretical 6 million TPS (transactions per second), meaning that it’s nearly infinitely scalable, at least from a blockchain infrastructure perspective.
SocialX is another blockchain-based social media platform, which focuses on allowing users to post photos and videos. SocialX operates utilizing a decentralized blockchain network and permits users to earn rewards (also based on engagement) in its’ native cryptocurrency, SOCX.
While the centralized organizational model of the for-profit corporation certainly has its uses and has propelled our civilization into more than two centuries of incredible economic growth and opportunity, this model also has major limitations. In many cases, centralized corporate governance can often lead to poor financial and organizational management as well as ineffective and unfair compensation structures. In addition, an aggressive focus on institutional shareholder value (at least for publicly traded companies) can lead to significant ethical issues and a significant lack of innovation among most large corporations.
For example, many corporations increasingly use excess capital (both in the form of debt and equity) to engage in massive stock buy-back programs (utilized to temporarily boost shareholder value) and to increase executive compensation to unheard-of levels. This is in contrast to utilizing those funds to hire more employees in order to create new products or improve existing ones, which could lead to less shareholder value in the short-term, but greater overall economic growth. In addition, corporate acquisitions are often used simply to crush potential competitors and suppress technological innovations instead of fostering new technologies that could help solve pressing social and economic issues.
Blockchain, however, has significant potential to upend the structure of legacy corporations and non-profit organizations through the creation of blockchain-enabled DAOs (decentralized autonomous organizations). DAOs are not run by any centralized authority, and, in general, a distributed group of governance token holders determines how the DAO will operate, how funds will be used, and how objectives will be completed.
DAOs, enabled by smart contracts, may be more efficient than other organizations and could supplant or replace traditional corporations and non-profits due to their greater democratization and efficiency. While DAOs certainly have their growing pains, and the lack of a centralized authority can certainly lead to its own challenges, DAOs are already attempting to tackle major problems like banking (MakerDAO), as well as affordable housing and environmental issues such as climate change and global warming.
DAOs are also beginning to play in the venture capital and software development space. DAOs like Uniswap (the popular decentralized crypto exchange) funding a large grants program, and DAOs like TreasureDAO creating a multimillion-dollar incubator program for innovative blockchain-based games and gaming technology innovations.
While DAOs do suffer from the fact that the largest token holders, who may be either the founders or wealthy individuals, can often dominate the voting process, there are new DAO governance solutions being put in place to address these issues. For example, Optimism, a popular Ethereum Layer-2, has created a bicameral governance structure for its’ organization, in which both houses must agree before significant actions are taken. This consists of a more conventional “token house”, where one token equals one vote, and a “citizen’s house” where the organization’s members receive one “soul-bound” NFT representing one vote.
This “soul-bond” NFT is issued to those who participate in the project and is un-transferable, meaning that it will always be held by the wallet to which it was initially sent. Measures are being taken to prevent one user from receiving soul-bound NFTs to multiple wallets, meaning that this system is attempting to get as close to “one person, one vote” as possible. This system, if adopted by more protocols and DAOs, could make these organizations significantly more democratic and could solve many of the governance issues that currently plague these groups.
In addition to the potential benefits of decentralization, Web3 also involves the development of highly realistic VR/AR, which can create truly immersive worlds for users. AR/VR has a wide variety of potential benefits, both for businesses, individuals, and other types of organizations.
For one AR/VR could greatly improve career training for a variety of professions, including medical and surgical training, potentially reducing or eliminating the need to work on cadavers, and giving trainee surgeons far more experience before they treat real humans. AR/VR can also play a role in training military, police, paramedics, and other first responders in highly realistic scenarios, helping them improve their skills and potentially saving lives in real situations.
AR/VR and bring people together “physically” in the era of remote work. While remote work does have many benefits, some people do miss the human interaction of traditional workspaces. AR/VR could allow for immersive virtual meetups or office parties for companies whose workers span countries or continents.
In addition to the above uses, AR/VR could be a fantastic way to provide more social and career opportunities for disabled individuals. For example, partially or full-paralyzed people could enjoy the power of full movement in a virtual universe, utilizing these benefits to do a variety of physically-oriented jobs that they would be unable to do in a real-life setting. For instance, a paralyzed person could teach a yoga class or even work as a physical therapist in a virtual world, allowing others to benefit from their knowledge without physically moving.
While this technology is still in its infancy, it is likely to be further spurred on by the continuing development of computer-brain neural interfaces, which can interpret brain signals and translate them to computer functions. Such interfaces have long been used to allow paralyzed people to type, but are experiencing an entirely new level of advancement due to research conducted by companies such as Elon Musk’s Neuralink. Neuralink is focused on developing highly-advanced brain-computer interfaces which could, in time, allow disabled people complete freedom of movement in video games and VR/AR spaces.
The integration of AR/VR with blockchain technology also provides a new host of economic opportunities, particularly in the gaming sector, but we’ll get to that more in one of the next sections.
AI (artificial intelligence) and ML (machine learning) will also likely form the bedrock of Web3, though these innovations may come along later in Web3’s evolution. While artificial intelligence has already had an impact on many Web2 platforms behind the scenes, Web3 may begin to bring these technologies to the forefront and bring more AI-human interactions to the forefront of many experiences.
Just like interacting with other “real-life” individuals in the metaverse, AIs could provide an interesting and potentially impactful way to develop more relationships, particularly for lonely or disabled individuals. For instance, an advanced AI therapist could help lower-income individuals deal with basic mental health issues if a human therapist is too expensive.
AI, when co-mingled with human efforts, may also be able to enhance the productivity of individual workers, particularly those dealing with large amounts of data, but also those conducting more basic functions, such as writing, communicating via email, or helping doctors make medical diagnoses. In an ideal scenario, this could help increase the efficiency and growth of the overall economy.
On a broader scale, AI may also be able to solve a variety of real-world problems, particularly by using large amounts of data to refine and analyze the results of cutting-edge scientific research in a variety of areas. This may include advancing alternative energy sources such as solar and nuclear fusion, improving regenerative medicine and genetic engineering, or developing new technology for space travel. It could also involve creating new scientific solutions which could actively combat pollution and global warming. It may even be able to generate advanced economic models that could help reduce poverty or prevent coming economic crises.
In addition, the efforts of traditional AI may become exponentially more powerful when combined with quantum computing, which has the potential to process information millions of times faster than traditional computers via the use of quantum bits (qubits). Qubits, unlike traditional computer bits, due to the phenomenon of quantum superpositioning, can simultaneously exist as 1s and 0s.
It should be noted that the implementation of private blockchains deployed by corporations and other organizations may also further this data research revolution, as blockchain-secured data stripped of personally identifiable information (and combined with AI, ML, and quantum computing) could lead to massive improvements in a variety of fields. Particularly interesting areas of improvement could include conducting research to increase supply chain efficiency and the gathering and analysis of highly detailed, population-wide healthcare data, which could lead to better medical research and innovative medical treatments.
Many of these plans, created by the information accrued via AI, ML, and quantum computing, could be implemented with blockchain-enabled DAOs focused on the overall social and economic good rather than simple profit. In many cases, if the outcomes or profitable, these DAOs could still provide significant financial returns to members who have invested in their projects.
Censorship has been a major controversy in the world of Web2. Web2 platforms, which fully own all the information users contribute to them, can instantly ban any user, at any time, for any purpose, which has led to the banning of many notable personalities and celebrities from platforms like Twitter and YouTube. New social media platforms that threaten to disrupt the status quo can also be disrupted or shut down by hosting service providers like Amazon Web Services (AWS), Web3 social media platforms, built on decentralized blockchains, are already beginning to disrupt that.
For example, it’s virtually impossible to remove or delete a dApp on the Ethereum blockchain, in contrast to the ease with which Apple or Google can instantly delete an app on the Apple App Store or the Google Play Store. For instance, many NFT apps have already been kicked off Apple’s App Store, but, because there is no centralized authority, these same apps cannot be removed or altered from Ethereum.
In several countries where press freedom has been limited, journalists and activists have already turned to blockchain-based protocols in order to post information that has been blocked or deleted from the regular internet protocols. Censorship-resistant journalism is sometimes published utilizing dApps, but can also be done with the use of blockchain domains and blockchain hosting services. Domains hosted on these services cannot (or cannot easily) be removed or blocked from the internet due to the fact that they live on decentralized blockchains.
In addition to censorship resistance, the potential for increased user privacy is another major benefit of Web3 and blockchain technologies. By taking the right steps, crypto users can effectively hide their identities from the public. While public addresses are available on blockchain explorers, it’s relatively difficult for anyone other than professional hackers and governments to easily discern the identity of the wallet owner.
Plus, privacy-oriented blockchains, such as the Secret Network, as well as privacy-oriented cryptocurrencies like ZCash are already providing even more discreet payment and communications networks which make it even more difficult for governments and institutions to discern the identities of users.
In addition to many of the benefits listed above, Web3 and the associated blockchain, crypto, and DeFi industries, along with the rapid development of the “metaverse” have offered people a wide variety of new career opportunities. This is particularly the case for those willing to learn new skills– even basic ones. Whether one is a blockchain engineer, a writer, a marketer, or a UX designer, the amount of capital flooding into these rapidly growing industries has been able to provide better-paid (and potentially more satisfying) jobs for many.
In addition to traditional full-time jobs in the industry, one major example of the career opportunities that Web3 provides is the profits artists have accrued from the minting and distribution of NFTs. For professional artists and creators, including visual artists, dancers, musicians, and other creatives, monetizing their creative production is often a constant challenge.
Fortunately, NFTs have already been providing an effective method for artists–particularly smaller ones, to do just that. Instead of relying on traditional social network advertising revenue (such as revenue provided from YouTube or Spotify), artists can sell creative, collectible NFTs to fans. In many cases, this allows artists with 1,000, 5,000, or 10,000 committed fans to generate a full-time income from their work, when previously, they would have needed hundreds of thousands or millions of fans to do this.
However, traditional artists and creatives are not the only ones that have been able to generate income and new careers from blockchain technology. Blockchain gaming, spurred on by hit games like Axie Infinity, Decentraland, and The Sandbox, has created new careers for many.
For example, thousands of workers in The Philippines have been able to quit their jobs to play Axie Infinity full time, typically generating between $300-$400 in income per week, a highly-competitive salary in that country. Traditionally, gamers have only been able to generate money from two avenues, each quite challenging; esports and streaming platforms like Twitch. As blockchain technology, tokenization, and NFTs become more prevalent in the gaming industry, particularly in mainstream games, many more gamers will likely be able to generate full-time incomes doing what they love.
With inflation skyrocketing and countless people suffering from credit card, medical, and student loan debt, it’s safe to say that the current financial system isn’t working in the interests of the average individual. Central banks have continued to print money, leading to runaway inflation, which hurts the average person, yet helps the wealthy through the high growth of assets like real estate and stocks. While volatile, crypto has provided an even higher-growth investment option that has allowed many small-time investors to grow their assets and increase their economic security.
Bitcoin, with its limited supply of $21 million and the expense of mining, has the potential to create a safe commodity that millions can invest in to increase their wealth. While Bitcoin may not be a good currency due to its volatility, new, inflation-resistant stablecoins have recently been created, some of which could be far better currencies than the U.S. dollar. This could create a low-risk way for savers to hedge against inflation without placing their funds in volatile crypto assets. For example, stablecoin issuer Frax Finance recently released FPI, a stablecoin designed to track the CPI (consumer price index). As the dollar becomes less valuable, FPI will grow in value in contrast to the dollar.
In addition to the potential deflationary and investment potential of cryptocurrency, crypto, and DeFi (decentralized finance) also has the potential to disrupt or even replace the legacy banking system. Banks are incredibly difficult to start, provide incredibly low-interest rates for deposits, often charge high fees, and most are owned by publicly traded corporations, placing a large emphasis on shareholder profit rather than customer service.
In addition, banks and financial services companies have a poor ESG and ethical track record. For example, the mortgage-backed security crisis leading to the 2008 market crash and recession was potentially avoidable. However, market manipulation was utilized to create short-term profits for banks (like Goldman Sachs and JP Morgan) that were later bailed out using taxpayer money. More recently, the Wells-Fargo scandal exposed that employees, under pressure to increase profits, had created millions of fake accounts and customers millions of users of illegal account fees. In addition to corruption and ethical issues, banks also waste a significant portion of our economic growth, with banking fees estimated to represent around 2% of global GDP.
Fortunately, DeFi is already beginning to change that. dApps, some of them operating as DAOs, have already begun to offer new and innovative financial services to users, charging a fraction of the fees and providing more privacy and user autonomy than traditional financial institutions. dApps run as a series of smart contracts, meaning that they need little to no human intervention and are fully auditable, unlike the financial institutions of today. Ideally, this creates a level of “trustlessness,” meaning that even if the humans that create the dApp are imperfect, it will still provide the same service to all users without nearly any potential for abuse or corruption.
As of June 2022, there was $106 billion in DeFi TVL (total value locked) across all blockchains. This TVL represents all of the crypto assets that are staked and locked within those protocols, such as the down payments on collateralized loans, and cryptocurrencies staked within the liquidity pools of decentralized exchanges (DEXs)
For example, crypto lending giant AAVE, which offers collateralized crypto loans to users, currently has more than $8.1 billion in TVL. Users can stake their crypto and receive loans up to 98% LTV. This allows users to continue to invest in crypto assets they believe will grow fast (like Bitcoin) while taking out a low-interest loan in order to spend their money today, either to pay bills or to leverage themselves to invest in other assets.
In addition, DEXs, particularly those operating on Ethereum Layer-2s, help provide users with lower gas fees and more privacy, while allowing them to access a wider variety of assets that may not be available on centralized exchanges.
The future for DeFi may be bright, particularly as DeFi bridges to help finance real-world assets. For example, crypto lending facility and stablecoin issuer MakerDAO, through an affiliate lender, recently provided a $7.8 million loan to Tesla to build a collision repair center. As the world of DeFi begins to finance more real-world assets, it may begin to have a more powerful (and positive) impact on the economy as a whole by stirring economic growth.
In an ideal world, DeFi applications may also begin to provide traditional banking services to ordinary people at lower prices, such as lower-cost credit cards, personal loans, and smaller-scale home mortgages. While some progress has been made in this capacity, DeFi and crypto applications also have huge potential to help bank the unbanked and provide microloans to small businesses in developing countries, potentially reducing poverty and stirring economic growth in the areas that need it most.
For all the hype about crypto, DeFi, and Web3 applications, many are surprised at the difficulty of accessing these applications. With today’s multi-step processes and poor user interfaces, many crypto, DeFi, and Web3 applications may not gain major traction outside those who are already crypto native. For instance, while getting a crypto wallet is the first step most need to take before accessing Web3, even that process can be difficult, especially for older Americans, even those who are quite adept at using Web2 applications.
Even the description of how many dApps and DeFi applications work can be confusing for those not immersed in the world of crypto. For example, it may be hard for new users to understand the concept of fully-collateralized loans on platforms like AAVE since most consumer loans (with the exception of home and auto loans) are not collateralized. Other financial activities, such as regular staking on PoS networks, and staking liquidity pool (LP) tokens on exchanges for yield farming can also be confusing to non-crypto natives and are often poorly explained by the platforms themselves.
In addition to the difficulty of interfacing with dApps for non-crypto native users, transactions, particularly on the Ethereum mainnet (Layer-1) can be incredibly expensive, often costing between $35-$100 and sometimes spiking to far more. This means that those wishing to invest small amounts of money into DeFi protocols or simply hold their own assets will be paying a significant portion of their investment into gas fees. For instance, if a new user wants to send $350 of crypto from their Coinbase account to their non-custodial wallet, they will likely need to pay a fee of $35-55, which is between 10-15%+ of their total transfer amount. Despite the idea that crypto transactions reduce fees, these incredibly high fees dwarf almost anything that can be found in the world of traditional finance.
While Layer-2s have attempted to address the cost and speed problems of the Ethereum mainnet, the necessity of bridging assets over to Layer-2 blockchains is both time-consuming and expensive, also leaving this option an unlikely choice for crypto novices and those with little patience to troubleshoot a somewhat complex process.
Another major example of poor user interfaces and technological problems plaguing the blockchain industry includes the massive issues involving crypto games like Axie Infinity, Decentraland, and The Sandbox. Many of these require memory-heavy clients, have serious login and password issues, little customer service, very basic graphics, and slow speeds, leading them to freeze often.
That doesn’t even address the incredibly high entrance costs– considering that basic land NFTs in Decentraland and The Sandbox typically cost at least $5,000, meaning that they are generally only accessible to the wealthy or those willing to take extremely high risks. Much like regular DeFi, this means that, for the time being, these blockchain games will likely only be confined to DeFi and crypto “power users” and might not gain adoption from the general public, at least until (and if) they are radically improved.
While many of these problems are game-specific, they do also represent larger logistical issues related to blockchains, which are currently not particularly good at storing the large amounts of information, executing the high volume transactions, or supporting the advanced graphs necessitated to create high-quality gaming experiences. This will be a significant challenge when attempting to merge VR/AR experiences with blockchain technology, and while Layer-2s supporting off-chain computation and faster blockchains like Solana may be able to outperform Ethereum, they simply may not be enough to support the metaverse experiences people are beginning to expect in the near future.
The VR/AR aspects of the metaverse also pose a new challenge regarding VR/AR hardware such as headsets, glasses, or new gaming consoles, which could be prohibitively expensive for many people. If the metaverse boom becomes a reality, and people are increasingly expected to participate in both metaverse social and professional environments, the high entrance costs for this type of hardware could lead to a new social bifurcation of the “haves” and the “have nots.” In essence, those able to afford VR/AR or neuralink-like devices would experience a variety of new social and economic opportunities, while those unable to afford them would be left out. This could mean that Web3, instead of promoting more social and economic inclusion, actually results in more inequality.
The jury is out– and it seems that the majority of scientists and doctors agree that social media, at least when consumed in excess, can be extremely harmful to our mental health. Social media likes and attention release dopamine, which can easily turn a few minutes of social media per day into a harmful, hours-long obsession. On the other hand, negative comments on social media and social media bullying can lead to anxiety and depression, with some social media bullying cases resulting in self-harm or even suicide. Social media can often lead to unhealthy comparisons between the user and other people, leading to feelings of inadequacy, low self-esteem, negative body images, economic and social jealousy, and increased loneliness.
However, social media doesn’t just impact us mentally; it can impact us physically as well. One 2018 British study showed a strong correlation between social media use and significant sleep disruption, which itself can lead to mental health issues, memory loss, immune deficiencies, a decline in cognitive capacity, and a variety of other health problems. Some doctors even consider social media to be one of the major public health crises of our age. These problems are especially troublesome to young people, who use social media more often and may have less of a defined self-image, but they can negatively impact people of any age.
Unfortunately, the development of the metaverse, empowered by AR and VR could be even worse than social media for our mental health. The metaverse, with its magnified version of reality, could easily become even more addictive than social media and could lead to even more unrealistic life expectations and unhealthy comparisons to other users. Some regular metaverse users may even begin to prefer the metaverse to the real world. This could lead to social withdrawal, financial issues, and even paranoid ideations. On a physical level, potential metaverse addiction could also lead to increases in obesity due to a decrease in physical movement and severe eye issues due to the overuse of VR/AR headsets and similar technologies.
In addition, as the metaverse grows in popularity, some people may be required to interact with the metaverse as part of their social lives and careers, even if they find it stressful, distasteful, or damaging to their own mental health.
Despite the potential benefits, cryptocurrencies and DeFi protocols provide the potential for criminals and governments to exploit these systems for personal gain. This includes usage for traditional money laundering purposes as well as hacks exploiting weaknesses in exchanges and DeFi protocols. According to blockchain data services firm Chainalysis, criminals laundered $8.6 billion in crypto in 2021 alone, with that number expected to increase significantly in the coming years.
According to experts, North Korea has been using cryptocurrency transactions for several years to help fund various government operations, including its heavily-sanctioned nuclear weapons program. Worse, the FBI recently announced that the Lazarus Group, a hacking group working for the North Korean government, was the entity behind the $615 million hack of a blockchain bridge operated by the popular crypto game Axie Infinity.
However, North Korea is far from the only country using cryptocurrency to bypass international sanctions and fund illegal activities. Some experts believe the Russian government may already be using Bitcoin and other crypto assets to bypass international sanctions related to their invasion of Ukraine.
In addition to governments, the Palestinian terrorist group Hamas began to solicit Bitcoin donations in 2020, utilizing a site called cash4ps, perhaps inspired by the similar use of Bitcoin by a Syrian terrorist group in 2019.
While it is true that blockchain-based transactions can be traced and much info is publicly available, it’s also likely that cryptocurrency-based money laundering will only increase in the near future, particularly with the growing popularity of privacy-based cryptos like ZCash.
While it could increase efficiency exponentially, AI/ML could be economically dangerous due to the fact that it could make current jobs obsolete, leading to mass unemployment. While new jobs will certainly be created, such as AI/ML programmers, as well as new jobs in the crypto, blockchain, and metaverse sectors, there may be a limit to how many people these emerging industries can sustainably employ. It’s even feasible that metaverse AIs could fully replace human employees at a fraction of the cost.
While we are years away from the type of “thinking,” or sentient AI that could equal or beat a human in terms of intelligence and thought processing, the technology is advancing rapidly.
As often depicted in science fiction, sentient AI could potentially turn against humans, or at least make things more challenging for us as a civilization.
Unfortunately, Web3, blockchain, crypto, and the metaverse would make it even easier for malignant AIs to damage our economy or society. For instance, AIs could masquerade as humans online, acquire or trade digital assets, or even operate nodes, significantly disrupting the operation of blockchains. Furthermore, smart AIs could hack into important computing systems, such as stock exchanges, or even infrastructure like gas or power lines. Using crypto as payment, they could even hire human henchmen to conduct their dirty work. This power might only be furthered by the integration of quantum computing and AI, which could make AI hundreds or thousands of times “smarter” than humans, at least in terms of intellectual processing capacity.
While highly theoretical at this point, scientists and even tech entrepreneurs like Elon Musk have warned against the potential dangers of sentient AI. In a worst-case scenario, much like that dramatized by the popular Terminator film franchise, one or more AIs could even take control of military hardware, such as missiles or nuclear weapons, causing mass havoc or even the destruction of our civilization entirely.
Despite their potential for increased privacy, blockchains could end up being the opposite– a privacy nightmare for users. Public blockchains record every transaction. This means that, while wallet owners cannot be directly identified through their public keys, cybersecurity professionals employed by governments can often easily track down the owner of a wallet. This provides governments with a user’s financial information without the need for a warrant or any type of legal injunction.
Plus, while blockchain-based social media could give users more control over their information, the immutable nature of blockchains poses certain problems. For example, a blockchain-based social media platform could make it extremely difficult for users to delete or remove potentially embarrassing information from their past. Many commentators believe that the “right to removal” is just as essential to internet ethics as free speech. For example, social media users should not be continually haunted by foolish posts or comments they made in their younger years, which could negatively impact both their social life and their career prospects.
Traditional cryptocurrencies like Bitcoin and ETH have offered users and investors the option to utilize a more decentralized and potentially deflationary type of money. Other cryptos like ZCash have emphasized user privacy. However, central banks, traditionally the only institutions that could issue money, don’t want to get left out of the Web3, blockchain, and crypto revolution.
This fear of being left out undergirds these banks’ major push towards blockchain-based central bank digital currencies (CBDCs). Unlike traditional cryptocurrencies, CBDCs would be fully centralized and would have the same inflationary pressures as the fiat currency they represent, giving them few of the benefits of traditional cryptos. Countries representing over 90% of the world’s GDP have programs investigating CBDCs, while CBDCSs are already operating in seven countries, including Nigeria and the Bahamas. Sixteen other countries have CBDC pilot programs, including Sweden, China, South Korea, Ukraine, Singapore, and Saudi Arabia.
While CBDCs may not help users much, they have plenty of potential to hurt them. Many experts have posited that CBDCs pose a potential privacy nightmare for users, due to the fact that governments would be able to directly track every single transaction any individual makes, at any time– without the need for a warrant, court order, or any type of cybersecurity investigation.
For example, China’s digital yuan allows the Chinese government to see every transaction a person makes, in real-time. This level of control makes it incredibly easy for governments to freeze people’s digital wallets, “delete” their money, limit their spending, or prohibit them from spending on certain items. CBDCs could also be linked to blockchain-based “social credit scores,” which have also been deployed in China. These typically take information such as a person’s legal record, career history, political affiliations, and even social media presence into account to rank an individual.
For example, with “good” or “great” social credit scores are allowed access to better government services, better healthcare, jobs, and more access to credit, banking, and investment options, while those with a “mediocre” or “poor” social credit scores could find themselves restricted from basic services such as public transportation, public hospitals, and high-quality schools, and could even be banned from opening a bank account.
Even the Federal Reserve has raised concerns about the potential privacy issues of CBDCs. While it seems inevitable that CDBCS will be rolled out in most countries in the near future, it’s unclear how they will ever overcome the privacy issues inherent in the issuance of a currency undergirded by a government-operated blockchain. The only way to create a truly private CBDC would be to decentralize it so much that the central bank would have limited or no control over the currency’s issuance, which defeats the point entirely. For now, CBDCs seem to represent an incredible threat to privacy for people around the world, with little upside for users.
The intended cornerstone of Web3 is the creation of a decentralized internet– something that cannot be controlled or ruled by one or more centralized entities. However, many are worried that Web3 will only have the veneer of decentralization, and instead, will be owned by the VC firms or hedge funds that own large amounts of tokens in the blockchains that undergird Web3. In addition, these types of funds, wealthy individuals, or institutions can also potentially become “node whales” operating hundreds or thousands of nodes and reducing or eliminating a blockchain’s Sybil resistance– its ability to sustain a 51% attack.
Some would argue that Web3 is already incredibly centralized, perhaps even more so than Web2. For example, according to a Wall Street Journal report from December 2021, research shows that just 0.01% of bitcoin holders control 27% of the currency in circulation. This means that despite its scarcity and the lack of a central “bank of Bitcoin” Bitcoin holdings are actually far more centralized than a currency like the U.S. dollar. Bitcoin, unfortunately, isn’t the only major blockchain suffering from a high level of centralization, despite marketing to the contrary.
Even Ethereum, which is often lauded for its decentralization, can still suffer from collusion by node operators– plus, the high cost of running a node (currently 32 ETH, or more than $100,000) places it out of reach for all but the wealthiest people. Alternate (non-Ethereum) L1s like Algorand often suffer from even greater centralization due to their small node limits, also leading to the threat of plutocracy and node collusion.
In addition, DAOs, which hold incredible progress to disrupt the legacy corporate model, are often far more centralized than they appear. A lack of mass participation in a DAO may lead to many members failing to vote on resolutions, or even a lack of true, reasonably differentiated options when deciding on a course of action. Of course, DAOs, like blockchains themselves, also suffer from the fact that the largest token holders can vote however they wish on proposals, which could mean that many DAOs will suffer the same shareholder profit focus issues as traditional corporations.
Despite its potential to create new industries, employ millions of people, and disrupt our financial system for the better, the blockchain-based cryptocurrencies that underpin the nascent Web3 ecosystem aren’t all rainbows and sunshine. While the crypto market cap is huge, just like any other asset class, fear could lead to a major crash and serious economic disruption for the economy as a whole, particularly considering the fact that crypto is far more volatile than traditional asset classes, like stocks, bonds, and real estate. The cumulative market cap of all cryptocurrencies has experienced two major “flash crashes” in the last 12 months, a $400 billion crash in December 2021 and a $1 trillion crash in May 2022– a significantly faster and larger drop than comparable losses in equity markets.
In addition to overall volatility, the advent of stablecoins– already a $180 billion market, poses additional potential systemic risk. This is particularly the case for unbacked, algorithmic stablecoins, like TerraUSD (UST), which have regulators worried that a “run” on these coins could actually have a serious impact on the price and stability of the U.S. dollar itself.
For example, in early May 2022, UST de-pegged from the U.S. dollar, falling as low as $0.30, forcing Luna Foundation Guard (LFG), the institution behind UST, to liquidate hundreds of millions of dollars of Bitcoin in an attempt to maintain the peg. It also led to billions of dollars flooding out of DeFi lending and borrowing protocol Anchor, where investors had been staking UST for yields of up to 20% APY, which were partially subsidized by LFG in order to increase market demand for UST. Overall, the collapse of the UST and Luna ecosystem lead to more than $50 billion of investor losses.
Plus, there is always the potential that major cryptocurrencies like Bitcoin or ETH could suffer a major hack, stealing billions of investor funds– particularly with the advent of new technologies like quantum computing that could break the seemingly “ironclad” security guarantees of cryptographically protected proof-of-work or proof-of-stake consensus mechanisms.
In addition to instability and security issues, crypto and DeFi have yet to solve many of the problems of our current financial system. While it has enriched some, it has not begun to offer basic services such as credit cards, student loans, or debt consolidation. While there has been some progress in the crypto mortgage space, these types of loans are generally being offered by centralized institutions to high net-worth individuals, which does little to promote financial inclusion for the average person.
There is also the concern that assets like Bitcoin are incredibly unproductive, in addition to the strain they place on the environment and our energy infrastructure. Investing legend Warren Buffet has been one major critic of Bitcoin, considering the fact that it does not produce any goods that benefit society, and once stated that he “would not take all the Bitcoin in the world for $25.”
While blockchains like Ethereum do have arguably more usefulness, there are still many crypto assets, including meme coins like Dogecoin and Shiba Inu, that are both unstable and have little to offer the world in terms of real economic productivity. One could argue that an equal investment in stocks or bonds would, at the very least, trigger economic growth by giving companies more capital in which to potentially hire workers.
Plus, the emergence of the metaverse could lead to more money being spent on unproductive, risky assets like virtual land. For example, by spending $1 million to buy or build an apartment building, an investor provides much-needed housing, increasing the overall housing supply and potentially stabilizing, if not reducing, housing prices. In contrast, that same $1 million spent on a Decentraland mansion offers almost nothing to the outside world.
In addition to the unclear macroeconomic benefits of crypto, the instability of crypto assets and the high prevalence of “pump and dump” or “rug pull” schemes is another legitimate critique of the growing crypto economy. Wooed by the chance of fast riches, thousands, if not millions, have sustained significant losses by investing in small-cap cryptos hyped up by influencers that failed to live up to their potential. Worse, many have fallen prey to outright scams, such as the infamous Safemoon crypto scam, intended to steal investor funds. Regulation may address some of these problems, but it could also disrupt the types of innovations that could actually lead to crypto and DeFi solving real-world problems.
However, traditional crypto investor scams aren’t the only problem investors need to watch out for. Those utilizing DeFi protocols such as DEXs and providing liquidity through staking and yield farming have also lost billions due to incidents such as “flash loan” attacks. This happens when a scammer takes out a large, uncollateralized loan to purchase assets on a DEX, temporarily spiking an asset’s value, and then sells them in the same transaction, often leading to hundreds of millions in investor losses.
In addition to the high prevalence of DeFi and crypto investor losses and crypto scams, the world of virtual land and other NFTs also has faced its fair share of controversy. NFTs, like cryptocurrencies, have also faced their fair share of “rug pull” schemes, such as the notorious “Frosties” NFT scam, which led to the theft of at least $1.2 million from NFT collectors. “Wash trading”, in which an NFT creator buys their own NFT and sells it back to themselves to create an artificially high floor price is also a systemic problem.
In addition to specific scams, many would argue that the NFT market is artificially overheated– particularly evidenced by scenarios such as Bored Ape Yacht Club-related crypto Apecoin temporarily reaching a market cap of $8 billion just a few weeks after launching. All of this means that, just like the crypto market, if when the NFT bubble bursts, it could lead many to suffer serious financial losses– including many newcomers who have invested far more than they reasonably should.
As we’ve explored in this article, it’s clear that Web3 is potentially powerful beyond belief– and, just like an axe, it can be used for good (like building a home), or for evil (as a deadly weapon). In the end, it’s up to us– whether we’re blockchain developers or ordinary citizens, to determine if we will use Web3 for good, or whether it will end up controlling us even more than Web2. No matter how these technologies develop, it’s each individual’s responsibility to advocate for the positive use of technological innovation. While that may differ from individual to individual– and from society to society, a true push for greater transparency, more decentralization, better social and political systems, and increased privacy could bring us into a new golden age. Alternatively, we could become slaves to Web3– obsessed with the metaverse and get-rich-quick schemes, and allowing governments and major corporations to track every detail of our lives. In the end, how Web3 develops isn’t up to chance– it’s up to us.
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