Decentralized VCs? Only on Web 3

Your information is all over the internet. Every time you search on Google, every ad you click on Facebook, every purchase on Amazon is recorded. Those companies own the internet … and your data.

This is the cost of Web 2.

In the most recent Weiss Crypto Sunday Special, host Chris Coney breaks down the difference Web 1, Web 2 and Web 3 and asks an important question: Since media giants and large corporations controlled most of Webs 1 and 2, who will run Web 3 ... and what new profit opportunities can come of it?

You can watch last week’s special here, or continue reading for the full transcript ...

Chris Coney:

Hi there, guys, and welcome to this week's edition of the Weiss Crypto Sunday Special with me, your host, Chris Coney.

So today, I'll be taking you through another cutting-edge topic. Today, the topic is, who is going to own Web 3. So, let's explore various answers to that question.

I'll define all the various terms as we go, but this discussion is going to explore a paradox between three things. The first one is the fact that Web 3 development needs funding. We can't expect all of this to be built by volunteers.

The second thing is that large venture capital (VC) funds create a point of centralization.

And then the third one is how can we still make money as individual investors? That's the thing that we really want to keep in mind here. That's the whole purpose of doing this. So you know by now how this works. To make sure you're understanding is thorough, we'll start general and then I'll go specific.

So let's start and lay down the very basics here. When we say Web 3, what do we mean? Well, Web 1 was known as the static web. That's more akin to a traditional broadcast media, where a major media company would just simply see it as a new way to distribute their content. It was just new media — TV, radio, internet. That's very much the way they saw it. It was still very much monologue. The major media companies created the content and then just broadcasted it to the masses, who were just the consumers.

Web 2, which is the web we're on now, is the interactive web, which consists of the somewhat co-creative process between vendor and user. We used to actually formally refer to this as “user-generated content.”

Facebook (Nasdaq: FB), for example, contains most of the user-generated content, but you can also post links to professionally-generated content from, say, an external blog or something that's created by a media company, like a video.

The comment section at the end of most news articles, would be considered user-generated content because the people writing those comments are effectively adding additional content to the same page that the article appears on. So those comments are content. And when Google indexes that page, yes, it'll index the whole article text, but it'll also index the comments and treat it as one big piece of content. So users can also actually challenge the content in the article by placing a comment which other users can then read.

So, Web 3 is all that stuff but decentralized. Web 3 is referred to as the decentralized web. And it's yet another step away from Web 1, where the web was just seen as a traditional broadcast media by large corporations. And those corporations had traditional ownership structures.

So, Web 2 is still largely powered by large corporations. But the difference is that with Web 2, two elements of their control start to slip away. The first one was the monopoly and the creation of the content since users could add and even challenge what was posted in the content by posting comments. And then the other one was that the web provided this billion-dollar infrastructure for anyone to use.

Startups and all kinds of scrappy innovators could use this billion-dollar infrastructure to do things that competed with these large corporations because it didn't require masses of funding to get off the ground. Everyone could just experiment with this billion-dollar infrastructure that was provided.

Now, the floor in the Web 2 model is that many big tech companies who run the web today became that way because they bought out a lot of scrappy startups and then just started centralizing power under one umbrella.

The holding company of Google is called Alphabet, Inc (Nasdaq: GOOGL). So that's the overarching holding company that owns Google and all the other companies in the group. Investors made money off the Web 2 model by either privately funding startups, that's the VC thing, or by investing in the company's IPOs like Google and so on. So that's just a quicker bit of backstory.

What's starting to rumble now, though, is this conversation about who's going to own Web 3. If it's going to be decentralized, how can that be? How can you have a decentralized system if you have a bunch of early investors controlling the shares and then making the decisions?

It's that old adage that I quote quite a lot, which it goes, "Whoever pays the piper calls the tune," meaning any organization is accountable to whoever pays them.

For Facebook, that would be shareholders and advertisers ... and not the users. And I'm not just talking about Facebook here. This is the same for all the big tech companies, really. And I'm not even saying there's any evil intent here either. It's simply a function of the system that exists and the incentive structure that exists right now.

The joker in the pack here seems to be Jack Dorsey, the CEO of Twitter (NYSE: TWTR), because he keeps talking about funding things like a decentralized, open-source social network. He also talks about things like building innovations on top of Bitcoin (BTC, Tech/Adoption Grade “A-”) and so on. And that's leading people to question how can a Silicon Valley CEO funnel research and development funds into a new infrastructure that makes people like him and his investors less powerful?

So VC funds have always been a big deal when it comes to tech startups, and everyone knows that, right? It's traditionally been considered a high-risk, high-reward play because, hell, you might end up with a share in the next Google. And all you have to do is put your money in a VC fund and then let the VC experts find the next unicorn company. With Web 3, though, the VC fund has been totally re-imagined using crypto and blockchain technology.

Depending on how long you've been in crypto, you may or may not have heard of a decentralized autonomous organization (DAO) called The DAO, which was the first major attempt to create a decentralized VC fund. The short version of this story is basically this: $150 million was invested using the Ethereum (ETH, Tech/Adoption Grade“A”) network. It was put into a smart contract that would act as this decentralized VC fund. And a hacker exploited a flaw in the code and started draining the money out of this smart contract. And that ultimately led to Ethereum splitting into two different networks, Ethereum and Ethereum Classic.

So Ethereum Classic is the original version of Ethereum, which has the flaw and the so-called theft intact because, in that network, the belief system is “Code is law.”

And then the Ethereum network, the major one that we have today, that's the version of Ethereum that was rolled back to before The DAO was drained, because that was the only way to recover everybody's money. But that kind of goes against the principles of blockchain technology, where every block depends on the one that came before and is immutable. I mean, it's the only time that's ever happened, but that was the history of it.

So that thing, The DAO, never even got off the ground. It was just too early, I suppose. The idea, though, was to pool everyone's money into this decentralized VC fund and then make investments and share the profits, rather than all those individual investors just doing their own thing. The concept isn't new because it's a VC fund. Also, there are investment clubs all over the world where people get together and do this.

But the innovation with The DAO was it was done with a smart contract. And this concept is now back with a vengeance and many years later, like five-odd years later. So, this is likely going to be the answer to the question of who's going to own Web 3.

The answer is “We are. you and I.”

The DAO really was a silly name for a project. The reason it's a silly name is because DAO, D-A-O, that's actually an abbreviation of “decentralized autonomous organization.” So, DAO is a term used to describe a type of organization rather than one specific organization. That's like calling your organization, The Private Company.

Anyway, DAOs have sprung up all over the crypto world now. And they're used to make ownership and governance of these networks truly democratic.

And like I said earlier, the idea here is to flatten the power structure of an organization so power is spread out among the participants, and it's done in such a way that corruption is minimized or eliminated. But really, it's about spreading power amongst a large group of people because that's decentralized vs. if you have a committee of five people, that's very centralized.

So, if a DAO ran YouTube or Facebook, it would be the community who decided on things for the network — who should be banned from the network, who shouldn't be banned from the network, what content should be allowed on the network, what content isn't allowed on the network. And the rules will all be transparent and agreed upon.

That's the beauty of blockchain technology. It creates transparency and accountability.

You may have heard of this project called Yield Guild Games (YGG, Unrated). So this is a project that's come up in the Weiss research a number of times. And it’s actually a DAO of sorts, and functions kind of like a VC fund, a decentralized one within the online gaming community.

The idea behind YGG is to pool investment capital and then invest it in things like non-fungible tokens (NFTs), virtual gaming items, new projects and even physical human players. And, as you would imagine, there is a YGG token that you can invest in that fluctuates based on the performance of the fund.

But as crowdfunding has taught us, the wisdom of the crowd is far greater than any individual or small group. So you would expect the performance of an investment in a DAO, like YGG, would perform better than you could do yourself. That's the theory, anyway. The practice is actually playing out right before our very eyes.

In last week’s Sunday Special, I spoke about the project Bumper (BUMP), and it was that project that really got me thinking about decentralized VC funds because INDX Capital was quoted as the investor in that project. And I looked into it. Turns out INDX did a security token offering on the first of June 2019, a full two years prior to Bumper being created.

Now, while that sounds like a step towards one of these Web 3 decentralized VC funds, the Bumper white paper says, "Launching on June the first, INDX is a private placement token sale aimed at qualified investors in accordance with jurisdictional laws and regulations, priced at 30 cents with a $15 million hard cap." So that's still got a flavor of the rich getting richer, I suppose.

The problem is that it's a chicken and egg problem of regulation. The reason I said that it's got a flavor of the rich getting richer is because it specifically says that the token sale is aimed at qualified investors, which cuts out the smaller investors.

So, the chicken and egg problem of regulation is: If you leave it unregulated, all the smaller investors are given the opportunity ... but then you leave it wide open to scammers because there's no quality control. But if you heavily regulate it, it pushes out smaller investors and it makes it harder for those scrappy, innovative startups to blossom.

So, evolution is never static; it always has elements of what came before blending in with what's coming next. There's very rarely a very clean line in the sand.

So as ever, the recommendation is to invest at your own risk.

And while the vehicles of investment are constantly changing — like these decentralized VC funds — the principle of risk and reward going hand in hand hasn't really changed. So take advantage of all the research that Weiss provides and just invest wisely.

So that's going to do it for this week's edition of the Weiss Crypto Sunday Special. Keep your eye on your inbox for the next week's episode. But until then, it's me, Chris Coney, saying, "Bye for now."

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