The last year has been quite a violent ride. Most can succeed in a bull market, but it's the opportunists that survive during the bear. Bull markets are built on selling a vision, how big of a TAM you can draw, what consumer sentiment is, how big of an impact you can have on the “culture.” But once interest backs off, so does the noise. Dreamers suddenly become realists, and users become consumers.
It broke my heart when sentiment on web3 shifted. Investors, partners, and friends were all asking the same questions. The worst part was the straw that broke the camel's back had nothing to do with the failure of decentralized technology. Ultimately, it showcased what the bulk of our industry had overlooked: consumer preference.
Once the honeymoon had ended, people realized they didn’t want to interact with switching wallets based on L1s, browser extensions, gas fees, or simply the reality that the only thing separating them from losing all their assets was a 12-word wallet phrase. Like for Venmo, Zelle or ACH, most people don’t care what technology powers money transfers, they do about convenience. That’s why centralized exchanges thrived during the bull market; and they still thrive today.
Strip away the FOMO, influencers, and overnight success stories, and we finally have peace in this space. Noise is a tremendously valuable tool for growth but relinquish the noise, and the opportunists can truly be honest with themselves and build the champions of the next bull run. ** **
I think back to a paper I wrote in college more than I’d like to admit, in that paper, I aimed to answer why particular technologies are chosen (reach mass adoption) over others. In web3, we can look at it as why a majority of consumers ultimately chose centralized exchanges instead of an alternative solution, especially considering the self-sovereign nature of this industry. I concluded that consumers choose particular innovations based on how desperate they are for a solution. It explains how Germans, living in a country plagued with economic depression, corruption, and political instability in the 1930s, gradually became more willing to support radical and violent solutions. It explained the disparity between the invention of renewable energy (hydroelectric & wind generators) in the late 1880s and their mass implementation almost a century later when the climate became a more pressing concern. And in web3, showed the lack of trust in centralized organizations wasn’t sufficient to outweigh the inconvenience of using a self-custodial solution.
The tangible real-world value of decentralization hasn’t been fully defined (I’m sure we’ll look back in a few years and exclaim how clear the answer to that question is). But when we look for examples of decentralization outside of web3, two heavily overlooked use cases are analogous to the past and future of this emerging technology: the development of the ARPANET and political reform outside of first-world countries.
The U.S. government initially developed the ARPANET during the Cold War. This network, developed by ARPA (later renamed DARPA in 1972), operated as a decentralized computer system that couldn’t be destroyed from a centralized location, securing the military and domestic researchers’ communication channels even after a Soviet nuclear attack. In 1983, a new communication protocol was established on the ARPANET known as the TCP/IP standard, leading to the birth of the internet.
The inception of the internet builds upon the concept that innovation follows desperation. When a centralized computer network functioned precisely as needed, the government and its researchers didn’t need a decentralized net. However, a decentralized protocol was adopted because of the national security risk of a Soviet nuclear attack. During this period, desperation for self-preservation as an individual and nation was objectively high; consequently, a more dire solution was proposed and implemented. However, applying this perspective to web3, it’s essential to recognize that desperation is low from a macro perspective, and sentiment is generally high. In the last bull run (2021), we've seen that consumers don’t need a new solution to an existing and polished infrastructure in these environments. Simply put, the lack of trust in private companies or government organizations isn’t sufficient for consumers to demand decentralized solutions to existing products. In this case, their motivations shift to monetary incentives and convenience. This perspective is most prevalent in the case of why consumers ultimately flooded to centralized exchanges in an industry whose core value is built upon decentralization.
Alternatively, in politics, “decentralization [can be defined as] the transfer of part of the powers of the central government to regional or local authorities.” In 2003, the Crisis States Research Center published a working paper titled “Decentralization and Local Government in Bolivia: An Overview from the Bottom Up.” This paper analyzed the impact of decentralized government programs on various policies and goals within Bolivia. Specifically, it compared the impact on two drastically different cities within the country. The author defines decentralization “as the devolution by central (i.e., national) government of specific functions with all of the administrative, political and economic attributes…to democratic local (i.e., municipal) governments.” This decentralization policy consisted of four major points: resource allocation (doubling distribution of tax revenue), redistribution of public service responsibility (education, health, irrigation, roads, sports, and culture), a new oversight committee (oversee municipal expenditure), and finally expansion of municipals (from 113 to 311).
The report highlights the impact of Bolivia’s decentralization program (1994) between Viacha, an industry-dominated city close to the capital, and Charagua, a smaller, rural agricultural town. The outcome of this program within these two towns emphasizes that decentralization is a new organizational structure more than a solution. In Viacha, the impact was minuscule, the capital effectiveness of businesses operating in the city allowed existing political leaders to absorb the newly distributed power leading to minimal impact. And for Charagua, it became the catalyst for a new and healthy competitive ecosystem through capital reallocation, creating a balanced government with higher social participation.
It’s very much the unpredictable nature of a decentralized solution that threatens its adoption and long-term feasibility. In the context of decentralization in Bolivia, a restructuring (or decoupling) of power led to two drastically different outcomes. Decentralization requires redistributing power from a centralized source to a new party (assuming any centralized organization will willingly surrender power or IP in the first place). However, this new party's capabilities threaten the predictability of the risks and benefits of said solution. If we look at this from a technological perspective, it’s unfeasible to assume a general populous carries the capabilities to outmaneuver or innovate against a centralized, technocratic organization. If implemented at an operational level, the unpredictable nature of decentralization makes it challenging for web3 companies to perform consistently.
This is where the impact of decentralization digresses into sentiment-based and outcome-based objectives. In the case of businesses with an outcome-based objective, it’s monumentally challenging to commit to a single-minded goal through frequent democratized voting. We see this in the U.S. political system, plagued with polarization, lack of accountability, ineffective policies, and distribution of resources. On the contrary, decentralization may be perfect for sentiment-based objectives such as art. I argue that today's art does not represent “the culture,” or the interests of “the people” of a particular time. Before the popularity of NFTs, the only people capable of engaging with mainstream art have been the uber-elite, one percenters. Consequently, mainstream art has been gatekept amongst the upper echelon out of reach from the general populous. The 2021 NFT bull run represents a paradigm shift where a larger than-ever proportion of our society could engage with art, a shift where the people chose pixelated caricatures and funky apes, and investors and celebrities followed in.
For many, the excitement surrounding web3 originated from a fantasy of an interconnected world without the control of governments and centralized organizations. It highlighted a stunning vision where consumers controlled their power and individuality, choosing what they wanted á la carte instead of being locked into one citizenship, tax bracket, or economy. And though components of this vision will play out in the not-too-distant future, it’s pivotal for the industry to recognize that, in many cases, decentralization without centralization is chaos. The Lindy principle states that the longer a non-perishable item has been around, the longer it will likely persist. It explains how Shakespeare, Van Gogh, Monet, and Da Vinci will most likely stick around for future generations. The Lindy principle also explains how the resilience of the web3 community means it’s most likely here to stay. As I continue to build upon the fundamentals of decentralization, I’m optimistic about a future for this industry that involves a balance of components that bring diversity into our world without compromising the significance of our innovation.
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