Decentralizing Trust Harder Than Initially Thought
One of the main goals of web3 has always been to create a decentralized internet, free from control by large entities. However, with the rise of web2, we saw a shift towards centralization, with platforms like Google and Facebook dominating the landscape. Web3 aims to change that by introducing tokenized incentives as a mechanism for internet protocols.
The idea is that these tokens will incentivize users to participate in the network and avoid the centralization pitfalls of web2. However, achieving this idyllic outcome may be more challenging than initially thought due to human weakness, specifically greed.
While utility tokens, governance tokens, and security tokens are the three main types of tokens in web3 projects, their original intentions to decentralize trust have been overshadowed by speculators and bad actors.
Utility tokens, which provide holders with utility on a specific blockchain network, were meant to be used as a means of payment for decentralized services. However, during the initial coin offering (ICO) bubble, many of these tokens were marketed as a way to make quick profits. This skewed the incentives between projects and investors, leading to retail investors being taken advantage of.
Governance tokens, on the other hand, were intended to give holders the right to participate in the governance process of a network or protocol. However, their value has become distorted, and the governance process often falls into the hands of a few powerful holders rather than being a truly decentralized decision-making process.
Security tokens, which represent investor shareholdings in a project, have the potential to yield dividends and their value tied to the underlying project’s valuation. However, due to regulatory complexities, security tokens have yet to become prominent in web3.
The main issue lies in the fact that many web3 projects lack functional economic models. The price of their tokens doesn’t reflect the revenues generated by the project but rather the valuation that web3 investors are willing to trade at. This creates a broken economic model where the price of the token becomes detached from the actual services provided by the project.
For example, imagine a decentralized car-sharing platform called Duber. Users pay for rides using a token called DUB. Initially, the token is sold to investors at a low price, but as the platform gains traction, the token price increases, making the service more expensive for users. This benefits investors but creates a challenge for users.
To overcome this, there should be a separation between the investment aspect and the payment aspect. Services should be paid for using stablecoins or widely used cryptocurrencies instead of the project’s token. This would ensure that the economic model is sustainable and doesn’t rely solely on speculative trading.
In conclusion, decentralizing trust in web3 is harder than initially thought. The challenges of greed, speculation, and distorted incentives have made it difficult to achieve the intended goals of decentralization. Projects should focus on creating functional economic models and utilize stablecoins or widely used cryptocurrencies for payment instead of relying solely on their own tokens. Only then can we truly achieve a decentralized internet that is not controlled by incumbents.