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Raphael ThysWhat blockchain and metaverse enthusiasts need to know so that resistant institutions and forces don’t close the window on their innovations.
Rob Juárez for Noema Magazine
During every major technology revolution, enthusiasts come to believe their innovations will not only generate material wealth, but fundamentally restructure human relations by transcending the old rules of society and politics. The Industrial Revolution, for example, begat a range of ideologies from Marxism to laissez-faire capitalism that predicted traditional politics would inexorably be replaced either by a perfectly functioning market or a fully empowered and enlightened proletariat.
The early internet age saw equally radical visionaries proclaim that digital networks would usher in a politics-free era. The Bay Area utopians building Web 1 (the first generation of web technology and businesses, culminating in the dot-com era) imagined that eliminating transaction costs would help build a global economic and sociopolitical order around marketizing literally every possible societal interaction. The logic of the time was captured in the slogan “the ultimate commoditization of everything.” This meant that things would be traded around fully liberated markets until each resource landed in the hands of the owner who could put it to optimal use. (This narrative was derived from the Coase theorem, after the Nobel Prize-winning economist Ronald Coase.)
This “best of all possible worlds” vision had no more room for traditional politics than the Marxism or free-market fundamentalism of earlier times. And it also crashed. Network effects led to self-reinforcing corporate power; early leaders secured persistent advantages in markets and then translated economic power into durable business moats by locking in advantageous technology standards and regulatory frameworks. The Coasian utopia devolved into something more like a plutocracy. And this brought us the 2020s techlash — a global anti-tech movement led by many of the political actors the internet era was supposed to consign to irrelevancy.
This story would sound familiar to Karl Polanyi, the Viennese economic sociologist who created the concept of a “double movement,” where efforts to detach economy and markets from society were bound to fail. Polanyi captured the dynamic of technology-driven disruptions carrying the seeds of backlash as society reasserts its interests over those of the market.
Today, we may be standing on the precipice of another technological revolution, one powered by the cryptography protocols of Web 3. The term Web 3 is being used at present to refer to a broad mix of technologies and businesses, but its essence is to undermine the entrenched power of incumbent financial, governance and corporate institutions by enabling cryptocurrencies and decentralized decision-making — and for some, doing so in a three-dimensional immersive environment that has come to be known as the metaverse. As before, the greatest enthusiasts speak of Web 3 as the force that will — finally — break the iron grip of politics and incumbent social structures through radical digitization, decentralization and democratization, replacing governance with consensus and formal organizations with decentralized autonomous organizations (DAOs).
If anything, the visionaries of Web 3 are more focused on political and social disruption than their predecessors were. The radical marketizers of Web 1 didn’t spend much time thinking about what representations of value (that is, money) would serve to denominate and settle transactions in their Coasian paradise. Web 3 struck first and directly at one of the most central elements of what it means to be a sovereign political entity: control over money.
It’s no coincidence that DAOs, metaverses and other Web 3 concepts rest on the use of cryptocurrencies. But not because crypto is inherently essential — fiat currency in digital form could function just as well as crypto in an immersive 3D computing environment. It’s because Web 3 isn’t just a new set of technologies or business models, or that blockchain-based finance is more efficient or convenient. (Quite the opposite, in fact.) Crypto and the blockchain are central because they represent an explicit agenda to get around and undermine centralized authority, whether it be formal governance institutions, traditional corporations or central banks.
Web 3 champions have a point when they say that these legacy institutions have become calcified, inefficient, expensive, inadequate in representing diverse human interests and sometimes simply corrupt. But it’s one thing to compete with legacy institutions in the marketplace, quite another to try to ignore them and ultimately drive them into irrelevance.
That is where much of the Web 3 discourse is pointed. And it will just as surely get caught in Polanyi’s double movement as the technology revolutions that came before.
There are two inescapable reasons why.
First, it’s a simple political reality that social movements, including those based on revolutionary technologies, don’t start with a clean slate. Cars had to navigate roads and abide by laws designed for horses. Infrastructure and regulations had to evolve, but they did so gradually and through negotiation, not instantaneously by virtue of the unassailable superiority of the new.
Banks, corporations and bureaucracies aren’t going to simply step back and let themselves be overtaken by distributed ledger technologies and DAOs. Incumbents resist and ultimately negotiate a patchwork quilt that mixes new and old.
Web 3 poses an existential threat to a category of incumbents that are purely middle-people collecting rents and causing friction in markets without adding meaningful value. Everybody encounters these incumbents and wonders why they exist. Think of title insurance companies and escrow services when you buy a house, for example, or the requirement in some U.S. states that manufacturers can only sell cars through physical dealerships. Web 3 enthusiasts see the potential to replace these middle-people with self-enforcing “smart” contracts, which execute software code when a set of precisely defined parameters are fulfilled, and secure distributed ledgers that keep unassailable records. And while the incumbents will put up a nasty fight, Web 3 can reasonably expect to win. A blockchain-based smart contract can assure you that the person selling you a house actually has clear title to that house and transfer the title to you at essentially zero cost.
A second category of incumbents does provide real value but is inefficient, takes excessive rents and is more expensive than they should be. Many governing and legislative bodies fall in this category. Consider the U.S. Congress and major regulatory agencies in Washington D.C. Making and enforcing laws is a critical enabling function for society — but Web 3 proponents tap directly into a deeply held sense that surely this can be done more efficiently and fairly. And shouldn’t it be possible to support creative negotiation among contending interest groups to find common ground for agreement in a less tortured and painful manner than we see playing out every day in the national capitals of democracies?
Web 3 can drive these kinds of institutions to become more efficient by constraining rent-seeking behaviors and reducing unreasonable costs and profits. Smart contracts, again, can implement agreements efficiently and without ambiguity. Future iterations might even advance to be able to identify areas of potential agreement that the parties themselves are unable to see clearly in the midst of heated argument, as is sometimes the case in labor-management disputes that deteriorate into strikes. Even more ambitious would be the ability to suggest to participants in a negotiation ways to articulate a common and collective interest that’s greater than simply a trade-off between the immediate interests of contending parties. For example, consider forward-looking tax policies that support social cohesion — or investment in future generations or high-risk innovation policy that will benefit yet-to-be created companies. We can’t yet build systems that fully model futures like these, but the evolving ability to do so in detailed and immersive ways holds real potential to make meaningful progress on one of the greatest challenges that democracies face — long-term planning.
What is certain is that it will be a robust competition as Web 3 develops and these institutions consider how to adapt. That’s a good thing for society, and the simplest everyday example is sitting right now in most of our wallets. Whether or not blockchain-based payment systems replace credit card networks, for example, they will almost certainly drive down the large fees that the networks have been charging (and defending) for decades.
There is a third category of essential institutions that are conceptually impossible to replace even with the most advanced decentralized, consensus-driven alternatives. Courts are an obvious example. DAO enthusiasts will dispute that claim, but they have yet to explain how smart contracts can solve for the unexpected contingencies that emerge in the course of executing a complex agreement. Incomplete contracting — the idea that it is categorically impossible to foresee all potential events and interdependencies that will complicate the original terms of a contract — is an existential problem, one made worse by the human characteristics that Oliver Williamson called “opportunism with guile.”
It’s not just that contracts can’t take account of unforeseen contingencies; it’s that human beings find ways to exploit that uncertainty to their unilateral advantage. A tragic and highly visible example is 9/11. There was a multibillion-dollar insurance disagreement over whether it constituted one event or two. The failure to define that contingency (and others like it) in advance is not simply a failure of imagination that could have been solved if the insurers and their clients were smarter. How would a smart contract have dealt with the problem? Self-executing agreements undergo the equivalent of a software crash when the world moves outside of the parameters for which the code is designed to run.
As a result, these institutions will almost certainly endure. Their continued presence and influence will require Web 3 organizations and advocates to engage with them constructively to realize their goals.
The second fundamental reason why the “double movement” will shape the deployment of Web 3 is that every technological revolution runs into crises that break public trust. This could be a market panic, a major security breach of a critical blockchain protocol or even a wild-card event like a catastrophic crypto-funded terrorist attack.
Markets alone cannot provide an adequate response to a trust crisis. Only institutions that sit outside markets and have a larger purpose than to profit — a central bank and finance ministry for example — can intervene to halt a true market collapse, just as only government-sanctioned law enforcement and security services can combat certain foreign or domestic actors. Practically speaking, to rely on some version of the wisdom of crowds here is really no more than a euphemism for vigilante justice.
Trust is an inherently non-market (or a pre-market) phenomenon. It is inevitable that trust will be severely tested in multiple crises as we transition to a new internet architecture. At those moments, it is non-market actors — elected officials, authorized regulators, with galvanized public opinion serving as legitimation — that take the required extraordinary actions to restore a semblance of order and begin the hard work of rebuilding market participants’ trust.
There’s one more political reality that is distinctive to this moment in history, but still critically important. Cryptocurrency enthusiasts point out that many ills of the modern U.S. financial system are a function of corporate concentration in the financial sector, with a few very large institutions controlling the majority of total assets. But the financial sector is not nearly as concentrated at the top as tech is. If Web 3 becomes associated with Big Tech — rightly or wrongly — in the public’s and regulators’ minds, then the argument for Web 3 as a decentralizing and democratizing force in the digital world will collapse.
Web 3 deserves opportunities to explore its potential. We are trying to describe important issues that could short-circuit those opportunities, and to develop an approach to strategy that enables broad experimentation. In that spirit, here is a mindset and a practical to-do list for the near term.
The mindset combines two forms of radical acceptance. The first is that Polanyi’s double movement is ground truth. Non-market forces shape markets; they can do so well or poorly, but they won’t be ignored. Web 3 enthusiasts should own this and deploy non-market influence to aim for a playing field that is competitive and experimental. The greatest risk to Web 3 isn’t really governments and regulators; it is incumbents that use governments and regulators to avoid competition from competitors that don’t look or act like them.
The second is the proposition that trust is always and everywhere a social-psychological phenomenon, not purely a material one. And the social-psychology component of trust is most needed at moments of maximum material economic and market stress, which occur repeatedly and inevitably. Aggressive narratives that proclaim revolution and “this changes everything” don’t really serve the goals of Web 3. The most effective revolutionaries don’t need to talk that way. And it isn’t a good means to build the broader foundation of trust that Web 3 will need when things get ugly.
The point of radical acceptance is not passivity but courageous action. The first action to take is simple: Drop the tired meme that regulators are dumb, can’t keep up and need to stay out of the way. Instead, respect their risk assessment and mitigation mission for what it is, and make sincere efforts to educate them and their public constituencies. Regulators should be thought of like directors on boards of publicly traded firms — not charged with technology decisions per se, but with the equivalent of enterprise risk oversight regarding those decisions. Washington D.C. wasn’t filled with computer scientists when it passed the laws that enabled Web 1, and it didn’t have to be. Today’s blockchain and crypto sector isn’t categorically different in that respect.
This means the Web 3 community should assist and support the non-specialist community with tools for high-quality risk assessment, which in turn means full transparency about risks that are known and unknown. For example, it is true (and very important) that crypto’s ability to reduce transaction costs in cross-border payments has many upsides. But it also has foreseeable macroeconomic downside risks, particularly for emerging markets that could experience even more severe whiplash capital flows, which bring real macroeconomic pain.
It’s rare today to find anyone inside the crypto or decentralized finance community talking openly about this risk and how it could be mitigated. It’s an essential part of non-market strategy to look these risks straight in the face and grapple with them. Don’t wait for someone else to build the risk assessment dashboard that boards and regulators want — build it yourself.
And don’t assume that more education and understanding of crypto and Web 3 will automatically lead to more positive attitudes about it. Hiring lobbyists and running ads touting the inherent promise of crypto and Web 3 will not alone change the underlying equation. What is needed is a complementary effort that leads to more thoughtful and sophisticated ideas about risk and about policies designed to mitigate risk without stifling innovation.
The second courageous action Web 3 can take on is an intensified effort to reduce the negative externalities with which it is already associated. Crypto enthusiasts argue that the climate impact of mining coins is less than generally perceived. The fact remains that institutions of all types are making non-economic decisions to reject or limit their exposure to Bitcoin due to concerns about its impact (real, exaggerated or possibly underestimated) on climate change. This same dynamic will present itself as high-profile examples of cybercrime proliferate.
There may not be perfect solutions to negative externalities, but that’s no excuse to ignore them or imagine them away. Societies routinely tolerate technologies with worse externalities than those connected with Web 3, and that tolerance tends to increase as people grow more confident that the industry is serious about finding ways to address them. Automotive companies bought themselves decades of runway to develop electric vehicles on their own timetable rather than one imposed upon them by governments through consistent demonstrations of their commitment to eventually transition to all-EV fleets, along with persistent efforts to educate policymakers about the inherent challenges involved.
A third critical action is for Web 3 organizations to take the lead on data protection and safety issues in a way that today’s large tech platform companies have not. A rule of thumb for Web 3 might be to treat regulation here as a floor, not a ceiling. The logic is straightforward: The things that went wrong on data protection and safety in Web 2 social media could be multiplied many times over in a Web 3 immersive environment. More important, regulators and many consumers have every reason to believe that this will happen, or to unquestioningly accept the arguments of digital skeptics who proclaim it will inevitably happen. It’s easy to imagine how the rhetoric of “surveillance capitalism” gets supercharged in the metaverse, and it’s already in progress.
Consider Section 230 of the 1996 Communications Decency Act, an increasingly controversial backbone enabler for the digital economy that sets limits on platform liability for user-posted and user-generated content. Right now, it is struggling to maintain a tenuous hold, even for today’s platform companies. The architecture of Web 3 constrains the choices available for how to evolve regulation of this sort: How can a central authority be held responsible in any way for user-generated content if there is no central authority, legally, only a codebase built and maintained by open-source developers?
DAO proponents see this as a net positive, but they can’t ignore the real issues that arise with horrific and harmful content living on that codebase. No one right now has the right mix of tools — including machine learning systems for content moderation, social norms, outright rules and others — to manage this dilemma, which is the best argument for broad, radical and deep experimentation. Ignore or postpone attention to this, and non-market forces are going to close the window on Web 3 sooner not later.
Fourth, Web 3 organizations need to be focused and intentional about applying their technologies to tangible, high-profile social problems. These issues are routinely name-checked in public statements of leading crypto actors — expanding financial services access, reducing transaction fees for the most vulnerable populations (like those relying on remittances), creating tools for secure digital voting, etc. But hinting at social value is different than proving it. What’s required are sustained, robust investments to pilot and scale such efforts.
A final item for the to-do list is more general but crucially strategic. Every non-market move that a Web 3 champion takes under consideration should be put through this simple decision filter: Does it make it easier or harder for policymakers and regulators to grant license to experiment? This is where communications matter a great deal. If you proclaim your mission is to undermine the power of the U.S. government, the Federal Reserve, Citibank and Goldman Sachs, Meta and Google, you should fully expect those institutions to overcome their differences just enough to work together to oppose you. If you proclaim your mission is to build alternatives that bring needed competition to bear on legacy institutions, you’re more likely to get a chance to prove you can do it.
Here’s one example: stablecoins (cryptocurrency tokens that are designed to maintain a fixed value in fiat) backed by U.S. dollars certainly don’t have to undermine the power of the dollar in international finance — so why would anyone talk about it like that? In fact, the impact on the dollar is more likely to be positive. For example, dollar-linked stablecoins would make it easier to gain access to dollar-denominated assets in parts of the world where demand for those assets is high, such as many emerging markets that suffer from deficient governance and low confidence in their national currencies. So talk about it that way instead.
It sounds less revolutionary and less thrilling. But if Web 3 is the true technological and social revolution its advocates claim, then stoking more excitement isn’t what’s needed now. The excitement will come from the innovations themselves, which will be coaxed into being through the incentives of the marketplace. What’s needed is the parallel non-market effort to build relationships, understanding and confidence with actors whose behaviors fall outside the laws of economics.
Regulators, policymakers and the publics to whom they answer will inevitably shape Web 3’s evolution. That’s the double movement. Those who believe in Web 3’s potential will serve their revolution best if they embrace that truth and then act upon it with the urgency this effort deserves.
