Will the crypto crash derail the next web revolution?

Advocates argue that the blockchain technology that underpins digital assets will withstand the recent fall in values

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Risky, flawed and unproven’

That is not a universally held belief. Exactly what that “something” is — or what uses it could be put to that are not already possible with today’s technology — is not absolutely clear. So far, crypto tech has been used mainly for financial speculation, criminal activity, decentralised finance or DeFi (which exists outside regulation) and the creation and trading of unique digital tokens called NFTs, which have been through their own boom and bust.

“A lot of the language [about decentralisation] is an almost exact replica of what we talked about in the 1990s,” says Martha Bennett, who at the time was head of advanced technology at UK insurance group Prudential. But she points to a fundamental difference between the early days of the world wide web and Web3 now: “We already had lots of utility by 1995 — we had email, we had lots of information online. With Web3, we have none of that.”

Bennett, who now analyses new technologies at Forrester Research, says it is probably still too early to judge whether anything lasting or useful will survive. But a growing chorus of critics in the tech world argue that — unlike with the dotcoms — the tech underlying crypto has no redeeming features at all.

Ethereum

The enthusiasm for crypto in the tech world rests on a belief that blockchains — open, distributed databases that can in theory be updated by anyone — represent a new foundation for online activity. Public blockchains use specially designed “consensus mechanisms” so that participants can agree updates are accurate. Fans claim these blockchains — and the cryptocurrencies used to validate the updates — will be the foundation for a new set of online services in which users, rather than corporations or governments, are in control.

Yet even Web3 advocates admit that existing blockchain technology is woefully inadequate when it comes to supporting mass online services. The Ethereum network, which is at the centre of much Web3 activity, can handle a maximum of only 30 transactions a second, while newer, faster networks such as Solana have yet to prove themselves. The technology is difficult to use for non-experts and is beset by unresolved privacy, security and legal questions.

Supporters say this is the result of technological immaturity rather than any fundamental flaw. Juan Benet, chief executive of Protocol Labs, whose Filecoin network acts as a decentralised marketplace for computer storage, compares today’s blockchains to the early days of cloud computing. The cloud was already the subject of widespread interest in the tech industry in the 1990s, he says, but it “took 20 years to build” before it was seen as a serious alternative. A similar technological “maturation” lies ahead for crypto, he predicts.

Proof of work vs proof of stake

The company does not really need to use a blockchain for this idea, says Kasriel. At a technical level it could achieve the same result in other ways. But giving up control through a blockchain would help to assuage those who don’t trust Meta to look after their interests, he adds.

Even so, critics such as Schneier argue that the shortcomings of the technology are so great that it has little practical use. And if the promise of a decentralised online world turns out to be largely illusory, then there is nothing left to recommend the technology

Creating an Amazon for Web3

At the heart of the mania are the cryptocurrencies and digital tokens that are embedded in blockchain networks. The willingness of people to ascribe value to these — either because, like bitcoin, they are believed to have some of the characteristics of money, or because they are central to online networks that may one day support new, decentralised digital economies — has propelled the boom in the cryptocurrency market.

The soaring value of these digital assets provided a way to finance blockchain projects such as Cosmos and to attract talent to the industry. It has also drawn internet users to the first consumer services that are being built on blockchains. These include so-called “play to earn” games where participants have the chance to earn tokens that they can later sell on.

These new financial incentives could solve a perennial problem faced by online consumer start-ups, says Vinod Khosla, a Silicon Valley venture capitalist: how to attract enough people to get a new service off the ground, triggering the network effects that make online services more valuable as more people start to use them.

Critics argue that using tokens to spark online interaction gives users a financial motivation to take actions that were previously freed of commercial incentives. This could lead to a “financialisation” of online services that turns every interaction into a chance to profit.

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