ITEM: VCs are throwing lots of money at Web3 startups, but Web3’s crypto aspect makes this era’s ‘internet gold rush’ potentially more dangerous than the dotcom boom of the 90s – so much so that when the bubble bursts, it might take the global economy down with it.
That’s according to this article from Maxwell Strachan of Vice who interviewed a number of entrepreneurs and venture capitalists, some of whom are very keen on Web3, others not so much.
Web3 has become so hyped that VCs are backing almost anyone who has a Web3 component like crypto, blockchain, DeFi, NFTs etc, That includes startups who were doing Web3 on Day 1 and companies that pivoted to Web3 in order to hitch themselves onto that gravy train – even if the pivot involves simply bolting on some Web3 element.
The selling point driving the hype is that Web3 is a game-changer that will transform the internet into the fairer community-based system it was intended to be all along (as opposed to an oligopoly controlled by a handful of Big Tech behemoths). Whether that’s true or not is almost beside the point – the truth is that VCs are not investing in Web3 to bring that vision to fruition. They are investing in Web3 to make money.
Which is of course the way VCs (and investors in general) have always worked. The difference, Strachan writes, is that the crypto component of Web3 – particularly tokens – enables investors to make a ton of money even if the start-up fails. Why wait years to see a return on your investment and risk a flop when you can cash out before you even get to the IPO?
This reportedly happened in the case of Terraform Labs, whose stablecoin Luna collapsed last month. According to media reports, one of its earliest major investors, Pantera Capital, quietly cashed out most of its investment ahead of the collapse, turning its $1.7 million investment into a $170 million windfall.
This highlights a serious problem with Web3: investors have an incentive to hype the project, fatten the evaluation and cash out their tokens – a process that would possibly be illegal under existing securities laws prohibiting pump-and-dump schemes if they applied to tokens.
Vice sums up the problem thusly:
Here we have a largely unregulated marketplace ripe for exploitation and stuffed full of unclear valuation metrics, arguable unregistered securities, peculiar financial products, ways to cash out, and a public-facing ideological mission statement.
It’s at least possible that Web3 could bring about a better, more fulfilling version of the internet. It’s just as likely, though, to prove to be what its harshest critics fear: a “hyper-capitalistic” reframing of the web that “contains the seeds of a dystopian nightmare.”
To be clear, this is not to say that all Web3 investors are just interested in an exploitative cash grab – many see all of this investment activity as ultimately beneficial to Web3 in the long run and do want to see their clients succeed. The point is that the temptation is there, and invites technically unethical (if not illegal) behavior with little to no legal liability.
The other big worry is that when the Web3 bubble bursts – as bubbles inevitably do – the result won’t just be a lot of startups crashing back to Earth in a ball of fire and VCs suffering a loss in their investments, but a major market collapse similar to the Great Recession in 2008:
Hilary J. Allen, the law professor who studies financial regulation, has spent much of her time recently studying the similarities between financial products that make up Web3 and the collection of instruments that led to the Great Recession. In tokens, Allen sees an innovation that is at its core comparable to the credit default swap. The two are different—credit default swaps allow numerous people to make a bet on a bond’s future performance—but at the end of the day, both help greatly increase potential leverage in the financial system, she said.
The obvious concern is that history will repeat itself unless regulators step in, although it’s worth adding that the subprime mortgage crisis was the result of a lot of complex internal and external factors that took several years to unfold. On the other hand, some people knew even then that the credit default swaps scheme was a disaster waiting to happen.
Maybe it’s worth listening to the Web3 skeptics now?
Full article is here.