Crypto has surely had its problems recently, even major problems. Meta has been under pressure too, and there are signs that the Web3 hype wave has already crested. Is there a connection between these events, either in the sense that there’s a common underlying issue, or in the sense that one problem area might feed concerns in other areas? Maybe, but there are both technical factors and other factors linking these market pieces.
Let’s start with crypto, which IMHO is a kind of do-it-yourself bubble. In the world of investments, nearly everything that’s commonly traded is both regulated and has some “intrinsic” value. If you buy a share of stock, you are buying a piece of the ownership of the company the stock represents. If you buy a bond, you’re buying a promise to pay back, plus interest, from a specific player. Currency is backed by the country that issues it. The fact that there is real underlying value to an investment means that there’s a brake on just how much it can be hyped; the relationship between the underlying value and the price can limit enthusiasm. Not so with crypto.
A crypto-coin is intrinsically worth nothing; pegging crypto to a real asset doesn’t guarantee convertibility. Nobody stands behind some underlying asset with crypto. It’s worth whatever the market is willing to pay, and that means that enthusiasm can bid the price of crypto up without setting off the same kind of alarm bells that would be set off if a stock were similarly bid up. Yes, you can have stock bubbles (the so-called meme stocks were a recent example), but they don’t last long, and there are objective metrics you can use (price/earnings ratio, for example) that lets you spot trouble…spot a bubble.
I say “do-it-yourself bubble” because with crypto, not only do you have an asset with no intrinsic value, you have an uncontrollable quantity of it. Crypto mining is a bit like any other kind of mining in that it generates more of something. In the past, both silver and gold were somewhat scarce, but over time silver was mined more successfully and the quantity of silver increased. As that happened, the ratio of gold-to-silver pricing altered sharply, which demonstrates that the value of something is related to its scarcity. More crypto-coins being mined has that same effect. The higher crypto goes, the smarter it is to mine some, which means that the demand for crypto is influenced by more being produced.
There are also persistent questions about blockchain as a means of ensuring authenticity. A recent DARPA study says that blockchain is subject to tamper risks, which of course has always been known. The essential truth of blockchain authentication is that it relies on more “honest” nodes processing chains than “dishonest” nodes trying to create a fraud. It’s hard to know when that’s true, especially if nation-states are among the bad actors. But while this risk exists, I’ve not seen credible indications that it’s impacted crypto or created any issues with authentication.
My point here is that the problem with cryptocurrency hasn’t been the technology per se, it’s been the fact that there’s nothing behind it. Yes, blockchain underpins crypto, Web3 and most metaverse strategies, but the current problems with crypto aren’t directly linked to issues with blockchain, so they wouldn’t directly impact other blockchain-based concepts.
Not directly linked, but does everyone who’s looking at these three technical developments see it that way? Crypto is worth what the collective market believes it is, which means that it’s almost a social phenomena. What happens when it’s negatively socialized?
Venture capitalists are bubble-makers too. They pick a concept, capitalize a bunch of companies to support it, use that stable of companies to generate a lot of media hype, ride that hype to an exit of a few of their companies at a very high multiple. Web3 is an example of that, and so is the metaverse. Every investor wants in on the Next Big Thing, every Valley technical worker wants to work for the Next Big Startup, and every publication wants to capitalize on the Next Big Story. You can see how this turns into “The Emperor’s New Clothes” very quickly.
There are basic problems with crypto, as I’ve already noted above. There are basic issues with Web3 too, relating to whether any form of validation-by-consensus offers any meaningful validation, because you have no recourse against the masses if there’s something wrong. The metaverse has issues of both scale and value, and also some compelling business challenges that arise out of trying to solve the value problem. My view is that these issues are more than enough to call these technologies into question, to give us not only a right but an obligation to demand some proof of value. The suitability of the underlying technology is a consideration only if what that technology underlies is meaningful. If it’s not, no amount of technology is going to change things.
There is a kernel of real value in cryptocurrency, as a concept. There’s a kernel of real value in distributed validation and authentication as Web3 proposes, and there’s a kernel of real value in the metaverse concept. The problem is that realizing that real value is going to be expensive and time-consuming, just as building a real business would be. It’s a lot easier to figure out a way to create a hype wave, a bubble, and make money off that. Greed and lack of negative social or regulatory pressure almost guarantee that bubble-making will win over value realization.
The question is whether, given the bubble-state of our three technologies, there’s any hope that efforts to realize the real value will continue once the bubble bursts.
We’ve had real challenges in computing and networking over the last couple decades. Some have been addressed, and others never really got much attention, and some could be addressed by technology developments related to crypto, Web3, and the metaverse. I would contend that part of the problem is that when Bubble A bursts, those who made money promoting it are more likely to move on to Bubble B than to go back and invest in realizing the real benefits of that first bubble-creating technology.
The metaverse is a poster child for this issue. It’s pretty obvious from stories like THIS that “Meta says its ultimate goal with its VR hardware is to make a comfortable, compact headset with visual finality that’s ‘indistinguishable from reality’.” Why? Because that’s what the metaverse needs, and that’s a daunting challenge in itself, but it’s not the end.
The metaverse needs edge computing. It needs very low-latency connections between edge points, creating low-latency global reach. Anything less means that users will run up against barriers to immersion more often, and more often easily becomes too often. That’s bad news, but there’s also a touch of good news. With the metaverse, there is a player (Meta, obviously) who could actually drive the changes needed. It would be a bold move on their part, but if it paid off it would pay off big.
Web3 also has issues, but while its issues may be simpler, there is no big player dedicated to resolving them. In fact, the whole technology is anti-big-player. Ben Franklin once griped about the challenges of getting thirteen clocks to chime at the same time. Try getting thirteen hundred startups to collectively support a complex vision. One problem with decentralization is that you decentralize benefits.
Our problem here isn’t blockchain technology or even the business/technical challenges of creating the kind of ecosystem that Web3 or the metaverse need to truly succeed. It’s bubbles. What separates us from the age of tech innovation isn’t that the founders of the Internet or the personal computer or the smartphone were smarter, but that in that time, success required actually doing something, not just claiming you would and then taking the first exit ramp. There are plenty of opportunities to recreate that old model of tech success, and maybe some smart VC will follow one.