Web3’s Great Gambit: Incentives for the Almost Impossible

Jarrod Dicker
Jarrod Dicker
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Brian Flynn
Brian Flynn
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Matt Stephenson
Matt Stephenson
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Jack Butcher
Jack Butcher
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Jonathanglick
Jonathanglick
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October 4th, 2021
by Javier Grixo
by Javier Grixo

“When you’re young, you look at television and think, There’s a conspiracy. The networks have conspired to dumb us down. But when you get a little older, you realize that’s not true. The networks are in business to give people exactly what they want. That’s a far more depressing thought. Conspiracy is optimistic! You can shoot the bastards! We can have a revolution! But the networks are really in business to give people what they want. It’s the truth.” - Steve Jobs

We do these things…

“…not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win.” - John F. Kennedy

Let’s begin with some facts.

‘Centralization’ isn’t failing or fatally flawed. Centralized products and platforms are popular and successful. Centralization provides users with convenience, incredibly low prices, comprehensive directories and marketplaces, and just about everything else we associate with compelling innovations. Netflix, Spotify, Amazon, Apple, and Twitter are all examples of fantastically successful centralization that provides value every single day.

But centralization absolutely does limit the number of big ‘winners.’ The omnipresent power law skews value relentlessly to the top. We see this across top companies, investors, creators, influencers and beyond. The more centralized the platform or business, the more this tendency proves true.

So the real argument for crypto, and more broadly decentralization, is not that centralized systems are broken. Or that the current business models of the internet are not working. Because, in fact, they are for most consumers and many tens of thousands of creators. It’s that they are so functional that only a radical redistribution of control and ownership could wedge new opportunities to create more equity. It’s an attempt to counterbalance the massive ‘power law effects’ of these centralized systems.

Here’s how it works, at least in theory:

“Hey, Ms. or Mr. Developer or Creator or User, we are really worried about centralized systems. We’d like you to help us build alternatives. But we also know that you not using or working on those super-successful centralized things is a cost to you, and that developing these decentralized alternatives is going to be hard to pull off, so we’re going to make you an amazing once-in-a-lifetime offer. We will architect this whole new alternative system such that you will actually earn and/or buy inexpensive ‘shares’ and get a meaningful voice in what might just maybe be the next biggest thing. Maybe the biggest thing ever. And so, if and when all this does actually happen, you’ll be one of the big winners. We promise. And we don’t just promise. We’ll put it in a (smart) contract.”

Crypto is a direct, maybe even desperate, financial and emotional appeal to shift your ass from passive consumption to active collaboration.

Now, a gambit this great only makes sense if you believe in the massive self-perpetuating appeal of centralization. The competitive disadvantages of decentralization are so immense that it only works if the offered incentives (economic, cultural) outweigh those disadvantages. Which is why the incentives are a historically unprecedented amount of money and status. Think of it like the biggest XPRIZE in history, being offered to everyone on the planet.

But it should be noted, this incentive system does lead to a signaling problem. To keep people motivated to believe, work hard and spread these decentralized environments, it’s very helpful that the prices of the shares (ie., tokens, etc) and that triumphant vibe within the culture — all plausible evidence of the potential size of the prize and our progress towards it — continue to grow. And when we engineer the incentives correctly (tokenomics, ftw!), they do. The problem is that we have this natural mental association that assumes that when prices go up, when people get famous, and when huge sums of money are raised that means that the new thing is already working.

But in this case, that’s only partially true. It’s true that the incentive system is working, that people are flocking, that we’re getting artists and developers paid, that there’s a great feeling of community and commitment, and that there’s a growing awareness and interest from folks on the outside. But it’s not necessarily true that decentralized technology is working particularly well as a feasible replacement for those centralized competitors. At least not yet or any time soon. After all, as we know, the problem is incredibly hard. We wouldn’t be attacking centralization in this insane way if it wasn’t.

And one of the specific consequences of the signaling problem is that it leads some people to underestimate the ability of the centralized systems to adjust. There's a natural assumption that successful systems get fat and lazy and that their processes become calcified and resistant to new information regarding threats. And after all, why would everything on the decentralized side be going up in value, if the competitor wasn't ripe for the killing?

But that assumption, that centralized systems don’t know what they’re doing, is delusional. These tech companies are fucking smart. They are led by nimble (and paranoid) leaders, with a ton of money and other treats to hand out, who have no problem understanding the importance of disrupting themselves (see Facebook). If their ‘number of winners’ problem gets too noticeable and acute, there’s a lot of tuning they can do, both symbolic and real, to adjust and make the situation look a lot better. And, here’s the kicker: it’s especially easy for them to co opt the user-friendliest features of decentralized culture to make themselves more popular. Not only that, but the incentive-seeking folks on the decentralized side will be overjoyed that they are being embraced by the big centralized companies (see Twitter verifying NFTs!). Because it increases the value of their ‘shares.’

So, given how daunting the challenge actually is, let’s ask ourselves again: Is centralization really as dangerous as those of us on the Web3 side believe? Does it lead inexorably to oligopoly, censorship, and the constraint of innovation? And if so, do those risks outweigh the difficulties and disadvantages posed by the blockchain gambit? On this, reasonable people can disagree.

But any reasonable person would also admit that the competent and popular centralization of our current moment puts massive, historic, practically God-like powers in the hands of a few dozen men (basically, all men) and a few thousand of their execs. That’s a few thousand ‘big winners’ among billions of people. They are for the most part not subject to boards or shareholders. While one or two may stumble, it's hardly far-fetched that the current pantheon will remain more or less unchanged for decades to come. Our devices will get cheaper, our networks more powerful, and our online experiences more engrossing. The number of lives influenced by this small group will continue to increase. So will the power and subtlety of their influence.

And any reasonable person would again agree that it is not some panicky conjecture that these few leaders will acquiesce to, even collaborate with, authoritarian governments and anti-democratic movements when they think it unavoidable, when it protects or extends their corporate power. Despite how rich all these folks already are, this is happening today, as a matter of normal business. If the realistic prospect of a technology like the Metaverse, deployed in partnership with dictators and demagogues doesn’t qualify as a danger, then there’s probably not much that concerns you.

Will the ‘Hail Mary’ of crypto, with all of its chaos and con jobs, do a better job with these threats? Come on. Nobody knows. As much as the wild incentive system doesn’t necessarily mean it will work, it’s equally wrong to say that it can’t. The underlying structure of the Internet is decentralized. Open Source projects are decentralized. They work. But they also imperfect, and have left massive openings for centralized systems to address their gaps and limitations.

Based on everything we know, the most likely outcome is one of partial success. Some additional and important functions of the communications, media and financial system will be taken over by reasonably decentralized protocols and governance. This will be accompanied by the spread of platforms that enable groups of creators and inventors to fund their growth without as much dependency on the centralized networks. And this will lead some of the centralized systems to adopt and co-opt the features and culture of the blockchain which in turn creates new opportunities and openings. A different group of people, hopefully many more of them, hopefully not mostly men or Western, and with different (perhaps not objectively better but fresh) aspirations, ascend to the echelons of hyper-influence. In other words, a somewhat more dynamic and democratic system.

We think it’s worth trying.

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