Since officially leaving Twitter, now full-time Block (formerly Square) CEO Jack Dorsey 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 as 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. Web 3 is about blockchain, somehow, right? And Bitcoin is a blockchain – so why are Mom and Dad fighting?
Well, young ‘un, therein lies the long tale of a great feud. Think Capulets versus Montagues. Hatfields versus McCoys. Harkonnen versus Atreides.
Add to the list of history’s most intransigent clan-on-clan grudges: Bitcoin versus crypto.
Bitcoin vs. Web 3
We’ll get to the question of why Dorsey thinks VCs control Web 3, but first we have to back up quite a bit. The Dorsey blowup 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 “Ethereans” – not because they all use or build on Ethereum specifically, but because basically all of these systems broadly mimic or parallel what Ethereum does. These are the folks behind the recent explosion in innovations like decentralized finance (DeFi), non-fungible tokens (NFTs), play-to-earn gaming, decentralized autonomous organizations (DAOs) – 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 unique token to use, and these make up a large portion of the crypto market on exchanges like Coinbase. “Web 3″ is, very roughly, the idea that the web should integrate more smart contract applications, and their various tokens. NFTs aren’t inherently reliant on smart contracts, but they’ve become deeply enmeshed in this ecosystem, and they’re now a large part of the pitch for both Web 3 and the metaverse.
And yes, Web 3 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 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 thickskulled as a company claiming to build “the blockchain.” I mean, 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 to the metaverse, and what Facebook is building will be at best be 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 greasepaint to hustle the rubes.)
Bitcoin bites back
On the other side of this Stalin versus Trotsky barroom 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 Bitcoiners 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.
Maximalists (though not all Bitcoiners) also believe that other cryptos are a threat to that 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 Bitcoiners being tarred 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 “Web 3,” 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 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 (though 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 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 wildest 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 or machines would they have to compromise to do it?
Bitcoiners look at Ethereum-style “crypto” and smart contracts and see tradeoffs in 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 and other alternative consensus mechanisms, but even Ethereum itself, in its current 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 2015-2017, 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 Bitcoiners reject this critique, though, arguing that so-called “altcoins” can be useful test beds 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 administrators, Tether and Circle respectively, have the power to block any blacklisted user, or seize their funds. (You can see for yourself on the blockchain, here and here.)
Dorsey’s critique of VCs’ role in Web 3 is focused on the financial implications of VC-backed blockchains, arguing that they inevitably siphon money away from users and basically wind up as landlords on their own systems. But that argument is somewhat downstream from the centralization critique.
Who actually needs Web 3?
So on the one side, you have a complex, experimental, and arguably fragile Etherean ecosystem that provides the exciting new features that advocates want to see democratized through Web 3. On the other side, you have Dorsey and the Bitcoiners saying 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 Web 3 is either impossible or very difficult to do with Bitcoin. Bitcoin’s decentralization and bombproof security come at the expense of storage space, features and, most of all, transaction speed. If you’re playing a metaverse or Web 3 game, you don’t want to wait ten minutes or more for a confirmation that your new sword has arrived.
To be fair, some Web 3 features appear possible through layers built on top of Bitcoin. Hiro, formerly Blockstack PBC, is building smart contracts using Bitcoin, and the potential for rough functional equivalents to NFTs and Ethereum’s ERC-20 tokens (sort of) has existed on Bitcoin in the form of “colored coins” since around 2012.
But it seems unlikely that Bitcoin itself could support these applications at the scale and speed Web 3 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 (ICOs) starting in 2018.
So Dorsey’s knock on VCs’ role in Web 3 would seem to back him into a corner: It’s unclear that there are alternative routes to funding and building the Web 3 vision. The unspoken implication of Dorsey’s attacks seems to be that the Web 3 vision being bandied about should be either entirely rejected, or scaled back to something that can be accomplished on Bitcoin. Which, again, is a bit strange coming from a man who has 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 presale 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 Bitcoiner ferocity, Dorsey may have missed the subtler compromise position that is relatively common in the crypto industry. Everyone who’s really 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 real applications and benefits, too. Do you really need an entirely censorship-resistant blockchain to manage profile pic NFTs or your multiverse robe and wizard hat? Do purpose-built blockchains like Flow really threaten Bitcoin?
Those are genuine questions. This 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 anyone trying to sell you a hot new token – or an entire new buzzword whose meaning nobody can quite agree on.
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.