Unpacking the Web3 Sausage

🚀 Looking for a Corporate Crypto Course? Give your team a hands-on introduction to Blockchains, Decentralized Finance, and Web3 with our private corporate cohorts. Learn more here.

🧠 The February cohort of Hype-Free Crypto is filling up. Join us for a fun and impartial exploration of crypto's good, bad, ugly, and hilarious — and access to a growing community of alumni across the globe.

👀 In Praise of Ponzis was quoted in the Financial Times, in Matt Levine's Bloomberg column, in the Wall Street Journal's Chris Mims' tweet, in Morgan Housel & Michael Batnick's podcast, in Scott Alexander's newsletter, and beyond. If you haven't read it yet, check it out and read carefully. It might be the most profound thing I've written all year. It's not fully developed, but it captures something important about the time we live in — and where we're headed.

Portable Sausages

"Jews, Germans, and oil are our best export commodities," the dictator Nicolae Ceaușescu boasted in the 1970s. He was talking about my grandmother, my father, and my uncle.

Some people loved living in the Socialist Republic of Romania. My grandmother didn't. After surviving Auschwitz, she wanted to give her children something better than Communism and anti-semitism. But she couldn't just pack up and leave. Someone had to buy her.

From 1945 onwards, Romania collected more than $100 million in cash and other commodities in exchange for Jews. As Zahra Tara recounts in The Great Departure:

"The exchange of Romanian Jews for money and agricultural products had begun covertly after the Second World War. A Jewish businessman in London named Henry Jacober served as the middleman between private individuals in the West and the Romanian secret service. Jacober traded briefcases full of cash, typically $4,000 to $6,000 per emigrant (depending on the individual’s age and educational status), for exit permits to the West.

When Israeli intelligence officials got wind of the deals, they decided to get in on the scheme, with the approval of Prime Minister David Ben-Gurion. At Khrushchev’s insistence, the Romanians began to demand agricultural products instead of cash. Soon Romanian Jews were traded for everything from cattle and pigs to chicken farms and cornflake factories... The price of exit could go up to $50,000, depending on the migrant’s age, education, profession, family status, and political importance."

In 1962, my grandmother, father, and uncle managed to get their exit visas and boarded a plane to Rome. They were only allowed to take their clothes, bed linen, and food for the trip. Everything else — property, appliances, jewelry, books, even photos — had to stay in Romania.

To kickstart the family's fortunes in the new world, my father and uncle took a few Hungarian sausages with them. They heard a rumor that Italians pay generously for such rare delicacies. But the rumor was wrong. And after running around the streets of Napoli for a few days in search of generous customers, my father and uncle threw the sausages away and boarded a boat to Israel.

Being able to pack up your stuff and leave is not something that matters to most people most of the time. But when it does, it matters a lot.

A recent discussion on the promises and limitations of crypto/Web3 made me think of those Hungarian sausages. Our current dilemmas seem farcical in light of historical tragedies. But they might ultimately matter a lot.

In 2022, the world's brightest minds are arguing about digital tokens, JPEGs of monkeys, and SuperBowl ads. Last week, the Financial Times recently quoted me in a takedown of a shoddy ad starring Matt Damon, and The Guardian ran a piece on why NFTs of bored apes are actually worthless.

A more substantial contribution to the debate about the future of the internet came from Moxie Marlinspike, founder of Signal, a private messaging app. Moxie shared his "first impressions of web3" in a blog post. He was not impressed. But before we get to his point, let's clarify what we (and Moxie) mean by "web3".

Web3 in a Nutshell  (skip if you already know)

"Web3" is used to describe a new approach to how the internet should run. In our current era (web2 or Web 2.0), a handful of giant companies own most of the data and govern most communication and transactions. This creates two main problems:

1. Users cannot easily leave a platform they don't like (because all their data, relationships, and digital assets are not "portable");
2. This also works in reverse: Users can lose their data, relationship, and digital assets overnight when a platform like Twitter, Facebook, or YouTube decides to shut down their account; and
3. Even in the best of times, users are not compensated for the value they contribute to the platforms they use (e.g., Facebook makes billions off of people posting content for free and clicking on ads, but Facebook users don't get compensated for their contribution).

In other words, the web we have is too centralized, leaving too much power and profits at the hands of a handful of giant companies. Web3 is an umbrella term for various efforts to reshape the web and address these issues. Specifically, these efforts include developing decentralized computing infrastructure that is difficult to censor or shut down and developing protocols that allow users to easily port their "accounts" (identity, data, digital assets) across different apps.

Decentralized Bottlenecks

The vision for web3 is admirable. But Moxie set out to understand how the decentralized sausage is made in practice. He was not impressed.

Moxie's first concern was that Web3 is not as decentralized as it claims. In this case, access to the basic infrastructure of web3 (the Ethereum blockchain) ends up being routed through a couple of popular API providers. So, even though the blockchain itself is decentralized, most apps that depend on it still go through bottlenecks that are centralized and operated by private, for-profit entities.

To use an analogy, consider a person who buys a piece of gold and stores it in a keyed vault, under a mountain, maintained by a Swiss bank. When the person logs into the bank's app to check his gold balance, the app doesn't send a person into the vault to check how much gold is there or whether someone tampered with the vault's key. Instead, it simply shows data from a third-party database that records the inflow and outflow of gold bars from the whole mountain. So, the customer gets the latest information, but it does not get direct, indisputably true information.

The imaginary bank does this because it's much easier to maintain a central database of all deposits and remittances from the mountain rather than send someone in person each time a client logs into the app. Ethereum-based apps use API providers for the same reason: it's easier and simpler for them to do so rather than verify every query on the blockchain itself.

This choice of expedience over decentralization is bad in some use cases and harmless in others. The issue Moxie raised is known, and Ethereum developers have spoken and written about them publicly and are working on ways to mitigate them. And I have also written about how each wave of decentralization creates a concurrent wave of centralization.

Still, Moxie missed (or failed to mention) an essential difference between those issues and what's currently happening in Web 2.0. We'll get to that in a minute. But first, let's look at Moxie's second concern.

Good for no-things

After trying to build a decentralized app and encountering centralized APIs, Moxy created an NFT and listed it on OpenSea, the most popular NFT marketplace.

For those of you not familiar with the term, an NFT is a digital token used to track the ownership of a specific thing. NFTs are most commonly used to sell and trade digital art. A creator can upload an artwork (an image, video, song, text) to a marketplace like OpenSea, and her fans (or speculators) can buy a token that confers ownership and usage rights of said artwork. The buyers can then use the token to sell their rights to other people.

NFTs are a key example of web3's promise to liberate users from powerful platforms. Even though NFTs can be created and listed on platforms like OpenSea, they are not stored on these platforms. When you create or buy an NFT, that action is recorded on the blockchain itself. This means that you can buy an NFT on one platform and then "take it with you" to a different platform or sell it to someone else without anyone else's permission. You can use a crypto wallet like Metamask or Rainbow to access all your funds and assets on the blockchain without having to log into any specific platform.  

This might sound like nonsense. Why would anyone want to buy and sell tokens that confer ownership of digital goods? But when you consider the fact that humans spent more than $60 billion on in-game purchases in 2021, or $13 billion on digital music streaming, or $22 billion on digital artworks — you begin to see the value of a digitally-native ownership system.

In Web 2.0, you can buy a movie on Amazon Prime or a song on Apple Music, but you lose access to these assets if you decide to leave the platform (or get kicked off). The goal of NFTs is to enable users to own their stuff outright, take it with them, and shift power away from platforms and corporations.

But this was not Moxie's experience.

Who moved my JPEG?

Moxie created an NFT on OpenSea. He intentionally programmed the listing to look different on different platforms (by loading a different image depending on the IP of the requesting site). Initially, he could see the NFT in his crypto wallet, which meant his ownership of it was documented on the Ethereum blockchain. However, a few days later, OpenSea decided to remove his NFT from their marketplace, claiming Moxie violated their terms of services (due to the code that changes what users see).

Technically, the fact that OpenSea decided to remove the NFT from their marketplace should not matter. Moxie still owned it, and this ownership was recorded independently of OpenSea, on the blockchain itself. But when Moxie checked his crypto wallet app, he noticed the NFT had disappeared. How could this be?

Moxie dug deeper and found out that the wallet app he was using (Metamask) did not really show what was in his account on the Ethereum blockchain. Instead, his wallet app relied on an API — the OpenSea API! — to check which NFTs were associated with which blockchain account. And since Moxie's NFT was removed from OpenSea, the API showed it no longer existed.

This felt like Web 2.0 all over again. A powerful platform managed to confiscate/delete a user's data and assets from his account without his consent.

But there's an essential distinction between what happened to Moxie and what happens when a Web 2.0 platform decides to delete a user's file or listing.

The Invisible Sausage

Moxie dove into how Web3 apps interact with one another and discovered a few key limitations. The most alarming among them was the disappearance of his hard-earned digital goods from his crypto wallet.

But even though Moxie's NFT did not appear in his wallet app, it still existed, and Moxie was still its owner. The failure to see the NFT was a problem with the wallet app's architecture and the API it relied on.

The wallet app relied on an API instead of verifying information directly on the blockchain, and the API provider did not include NFTs that were not listed on OpenSea.

If Moxie had used a different app that checks the status of his NFT directly on the blockchain, he could have seen that the NFT is still there. Indeed, you can see that NFT on Rarible, an OpenSea competitor. To return to our earlier analogy, the gold bar is still inside the vault, inside the mountain, even though the bank's app doesn't show it.

Of course, the fact that popular wallet apps don't display stuff in people's accounts even though that stuff is still there is a problem. But the good news is that even though OpenSea removed Moxie's NFT, that NFT "survived" and remains in his possession. I'm also pretty sure he'll end up making a lot of money when someone buys it as a souvenir of the whole ordeal. I already put a bid.

Epilog

Unlike my dad, if I ever need to move, I can take most of my assets and cash-generating business with me. If America decides to kick me out (or sell me back to Romania!), I can continue to make money as long as I have access to my Twitter, Gmail, Maven, and Stripe accounts. The biggest threat to my livelihood is not losing citizenship; it is losing access to my accounts on multiple platforms.

Crypto and web3 promise to increase my freedom to switch between the platforms I rely on and my likelihood to survive a hostile action by one of them. This promise is only partly fulfilled at this point, and it might never materialize in full.

Unlike some, I do not believe that web3 will be more just or equitable or even more free by default. But I do believe it offers the possibility of increasing our freedom and agency. And, in light of general and personal history, this possibility is enough to pique my curiosity and garner my support.

To most users, the freedom to pack up and move your digital assets and identity does not matter. But it might matter one day, and when it does, it will matter a lot.

There's plenty of work to do. It's great to have you onboard, Moxie.

Have a great week. 🙏 If you enjoyed this piece, subscribe to my newsletter and follow me on Twitter. If you'd like to dive deeper into the promise and limitations of blockchain technology, check out my Hype-Free Crypto course.