The political economy of web3 hype
Like many technology enthusiasts I have watched the hype surrounding web3 build with interest. I have found it particularly interesting to read often opposing takes from people I admire and trust. This short-ish essay (it clocks in at ~1,200 words) is not an attempt to convince you about web3 in either direction. I am wholly unqualified to do that. The question that I want to try and answer is, what are the forces driving the hype we are witnessing?
Chasing the Gale of Creative Destruction
Writing in the 1940’s the Austrian economist Joseph Schumpeter argued there was a force unique to an economy under capitalism that regularly destroyed the value created by existing markets. He called this creative destruction and described it as law of nature, evoking images of the destructive power of natural phenomena such as the wind and waves.
He proposed that some new innovation was the root cause of this phenomenon. An innovation that completely altered the operating logic of existing markets, and had the power to replace incumbent companies with new ones poised to take advantage of the change. There is a quote that sums this idea up nicely:
…the competition that matters arises not from additional shops of the same type, but from the department store, the chain store, the mail-order house and the supermarket.
Former British Prime Minister Tony Blair once said that you “don’t win elections by telling people things are being destroyed” which highlights how misunderstood the term creative destruction is. There is no doubt that many in the path of creative destruction will lose out, but this is just one side of the coin. Schumpeter was clear that creative destruction simultaneously creates value in the form of new customer propositions, new jobs and, of course, shareholder return.
In short, creative destruction creates new markets and redefines the leading firms. If you’re an investor searching for the next crop of trillion dollar companies and feel the gale of creative destruction on your neck, you start deploying capital accordingly.
The Science of Disruption
Creative destruction doesn’t have to spell doom for market leaders. The late Clayton Christensen re-conceptualised Schumpeter’s ideas in the form of a management doctrine called ‘disruptive innovation’ that provided companies with a framework for kickstarting revolutions from within their own ranks. It’s better to disrupt yourself than to be disrupted by someone else after-all. 1
We can see examples of Christensen’s influence in many places: “labs” or skunkworks projects inside otherwise fairly pedestrian organisations; products that are sunset before escaping ‘beta’ status; Zuckerberg’s announcement that Facebook was now a “metaverse” company was met with a lot of ridicule, but there is some degree of respect due to a founder who is willing to bet so big on a future technological landscape that could easily unseat Meta if it caught them flatfooted. 2
Few companies are better versed in the art of disruption than the GAMMA set. Each of them are living examples creative destruction’s power and acutely aware of the rapid change that can follow the deployment of some new innovation. Add a disruptive culture to the vast quantities of data and the huge networks GAMMA possess and the future looks pretty bleak for startups operating within their orbit. If you were an investor, would you want to put money into a company when the competition includes the likes of Google, Meta, Amazon etc?
Enter the Blockchain
Which brings us to the blockchain. Firstly, whether you call it disruptive innovation, or just innovation, it’s clear that the blockchain, with the important inclusion of smart contracts executed on the blockchain, satisfies the criteria. One, it’s a genuinely new invention, and two it comes with a new value exchange model – tradable crypto-tokens. More importantly, the blockchain represents an innovation that the GAMMA set cannot simply spin out of some labs project. It fundamentally alters their value creation model which relies on centralised databases that they alone have control over.
I liked how Albert Wegner from Union Square Ventures (USV) referred to this concept as ‘permissionless data’ in his well read post on the same topic. Put simply, today databases are controlled by central authorities who have the final say over read/write access. In a world of blockchain based databases everyone has read/write access. It flips GAMMA’s centralisation paradigm on its head.
Technologies of Freedom
Centralisation, or more importantly, de-centralisation is the final theme of significance in this story. Code and digital networks have a long history here. From the earliest moments of modern computing similar assertions have been made about the Promethean like powers the technology can or will unleash. Indeed, the history of technology writ large can be viewed through a lens of its emancipatory abilities. New tools provide people frustrated by the laws or diktats of some authority new ways to circumvent them.
Here the blockchain is no different. Indeed, it’s often hard to decouple the innovation that is the blockchain from the enthusiasts who argue it will catalyse a new period of societal change. But again there is history here, first in terms of the technology’s origins during the 2007/8 financial crash and the recession that followed. And second, as a continuation to the seam of techno-libertarianism that runs through engineering culture and Silicon Valley. I highly recommend Camilla Russo’s book ‘The Infinite Machine’ for an overview of this and a longer history of Ethereum.
There are also some lesser, but still relevant issues at work here. First, many venture capital firms aim to create their own media platforms in order to champion the companies they invest in and the founders building them. Part of the rationale for this is immense challenge of quickly scaling companies in a brutally competitive labour market. One crypto-investor told me recently that the combination of already high salaries in tech and the lack of people versed in the crypto stack was resulting in salaries that would even make GAMMA’s eyes water. Irrespectively, the point here is that the venture capital media machine actively contributes to the hype we are witnessing. A second contributing factor is the new-ness bias that engineers have. Engineers like to play with the shiniest stuff and there are few things shinier than the blockchain. Even if you have no idea what a cypherpunk is, interest in the new cool thing contributes to the buzz surrounding a new piece of tech. Finally, we cannot disregard the huge amounts of money that have been made speculating on crypto assets. Newly acquired wealth validates beliefs, even if there is little to link the two.
Interest Convergence
So where are we? Well, we’ve described three phenomena: creative destruction and the hunt for new markets and the companies that will lead them; the blockchain innovation and how it presents a novel way to attack the GAMMA set; and finally the passion aroused by a technology that has the potential to wrestle power away from those who have it.
I think it’s important to recognise that these forces do no overlap perfectly. Not all investors are also championing the techno-libertarian cause. Same goes for the engineers. Some are just chasing the money, some care only about stemming the power of GAMMA, some are just interested in a new way to make apps. But this doesn’t matter if there is a sufficient degree of interest convergence. Put another way, if the forces overlap enough, the hype it can generate will be pretty deafening.
As I stated in my introduction, I am not trying to justify the hype we’re witnessing. But I do believe that the forces I’ve outlined provide an effective explanation for it. As for the next era of the web? Well, we’ll have to wait and see. One thing I am pretty confident of however, is that hype is rarely sustained. Much like the markets, technology is known to go through down cycles. I wonder if the next crypto-winter is right around the corner?
1. The Harvard historian Jill Lepore first drew the parallel between Schumpter and Christensen's work in an article for The New Yorker. I think she is too dismissive of Christensen's work, however. ↵
2. To be clear I find Meta's move into the metaverse to be deeply cynical and I have written on this blog about exactly that. ↵