Bankless Founder: Jack Dorsey Has Not Grasped Web3

Author: David Hoffman, Founder of Bankless

Compiled by: The Way of the Metaverse

If you followed crypto Twitter during the holidays, you might have noticed how 2021 ended in a perfect crypto way, with intense debates.

This time it wasn't about Alt L1 vs Ethereum L2, but about the legitimacy of Web3. And it wasn't a confrontation between two factions in the crypto industry, but rather a standoff between Jack Dorsey and venture capital (VC) firms.

The Cause

The issue arose when Jack Dorsey retweeted a meme about how Web3 is funneling all its value into the mouths of Silicon Valley venture capitalists, leaving retail investors with just a few drops.

I've seen this viewpoint elsewhere, so it's not just Jack's issue. For some, "Web3" is a marketing term, and VCs are using it for short-term investments. They invest in hype—rather than substance—and then turn around and sell that hype to retail investors who can't access Web3 investments.

This makes some sense. (Because) the hype around Web3 is significant.

A16z even sponsored a public opinion poll to gauge people's views on the term "Web3."

And the results showed: people like it.

So, are venture capital firms taking advantage of this, bringing retail investors into seed rounds early? Will the future of Web3 be forever denied because of this?

Or will something entirely different happen?

Let's analyze.

Shifting the "Overton Window"

Uniswap

On September 16, 2020, Uniswap minted the UNI token and airdropped 60% of the supply to the community (through a combination of retroactive airdrops and community treasury). For reference, the retroactive airdrop involved over 250,000 unique addresses on Ethereum.

Uniswap kicked off the retroactive airdrop movement, which has since seen hundreds of retroactive airdrops distributing billions of dollars to hundreds of thousands of individuals who interacted with certain crypto applications in some capacity.

Uniswap's seed round raised $11 million, led by a16z, with other venture capital firms participating in the round.

Ask yourself: Did the Uniswap airdrop increase or decrease the value of these venture capital firms' seed investments in Uniswap? I believe that increasing distribution and significant retail ownership on Uniswap added an order of magnitude of value to the venture capital investments.

Value comes from aligned incentives, and Uniswap's case illustrates how VCs can economically rationally participate and allocate capital to retail investors. The Uniswap airdrop provided free capital to 250,000 unique Ethereum addresses while also creating a liquidity event for early venture capital firms.

However, not all Web3 investments have had the same positive outcome as Uniswap. But some have had even better results.

ENS

Ethereum Name Service airdropped 50% of the total supply of ENS to its users, with the other 50% allocated to about 500 early contributors and ecosystem participants.

(Note that) ENS has never raised a dime from venture capital. If any fund wants to acquire ENS, they would have to buy it from ENS users.

Coinbase

Web3 has effectively shifted the Overton Window of capital allocation to the extent that it has influenced traditional stock markets.

Note: The Overton Window is a theory regarding the range of policies that are acceptable to the majority of people at a given time. The Overton Window is named after its discoverer, Joseph Overton. The original idea was that the political feasibility of a policy primarily depends on whether it falls within this range, rather than on the personal preferences of politicians. Overton believed this window constitutes the approximate range of policies that politicians can pursue without being considered extreme and while taking public opinion into account.

When Coinbase directly listed its COIN on the public market, it airdropped 100 shares to each of its 1,700 employees. With COIN opening at $250 per share, this amounted to a $25,000 "gift" for each Coinbase employee.

When was the last time a traditional company gifted equity to its employees? This is the culture that cryptocurrency is exporting to other realms of the world.

Web3: An Ongoing Work

The examples above may be some of the best that Web3 has to offer. There are many other examples that are not as favorable, and even more that are detrimental to retail investors. Of course, there are many that don't even consider retail investors at all.

However, we must remember what the pattern was before Web3 emerged.

Retail investors had no opportunity, anywhere. And Crypto has been dedicated to giving everyone equal standing in all matters. A major driving force behind the 2017 frenzy was that retail investors could "get in" before any institution. Bitcoin in 2010, Ethereum in 2015, and many of the Web3 platforms being built today still hold true to this.

Before Crypto, retail investors had to wait for companies like Twitter to go public on NASDAQ or the NYSE. Only then could retail investors purchase shares of these companies from the venture capital funds that led the now-public companies A, B, C, D, E…

Crypto is several orders of magnitude better than what came before, and Jack's complaint about retail investors not being adequately included in Web3 platforms completely ignores where we came from and where we are going.

Following Incentives

Jack's subsequent tweets discussed how the incentives of venture capital will erode Web3.

"You don't own 'web3.' VCs and their LPs do. It will never escape their incentives."

All the largest airdrops that have occurred have disproportionately rewarded users on the cap table. I believe Jack does not understand the consistency between venture capital and retail investors that Web3 brings.

Web3 platforms that hand ownership to the community will succeed. Web3 platforms rely on community ownership. Without community ownership and participation, it simply isn't Web3.

If you believe what I've said above, then bringing retail investors in large numbers through airdrops or other means is something that venture capital firms need to consider economically. Web3 platforms that empower ownership will succeed compared to those that do not. Therefore, venture capital firms need to consider including retail investors when making investments.

The issue isn't with the motives of VCs; Jack is simply stuck in the Web2 paradigm.

Raising funds and liquidity through the community is a new paradigm, and Crypto has yet to figure out the best practices. Uniswap initiated it, but how to "continue" evolving remains to be seen.

Additionally, I couldn't help but Photoshop his meme into two versions that I think more accurately reflect reality.

Following Incentives Part 2

What are Jack's motives? Why is he so vocally mourning Web3?

It's no secret that the only thing Jack cares about in cryptocurrency is Bitcoin. He often disparages any cryptocurrency that isn't Bitcoin, and now it's Web3's turn, I suppose.

I think Jack has an opinion on Web3 because he, like many Bitcoin enthusiasts, believes that the only truly decentralized thing is Bitcoin, and everything else is decentralized theater. He tries to portray this false, distorted version by amplifying Web3's flaws and ignoring its merits.

He attempts to turn this decayed version of Web3 into reality so he can dance on its grave.

I see Jack both denying the reality of Web3 and projecting his Web2 thinking onto the entire industry. Sadly, there is a fundamental anti-crypto sentiment at any given time in the world, and leaders like Jack can stir enough vitriol to legitimize the criticism.

The Impact of Accredited Investor Regulations in the U.S.

Jack Dorsey did not mention the dreadful accredited investor regulations while criticizing Web3, which speaks volumes.

This is not to say that Web3 startups want to take money from venture capital firms. They are forced to, because the SEC does not allow unaccredited investors to invest in private securities. This is why it is difficult to find ways to include retail investors, even when Web3 platforms are very eager to do so.

Web3 should be owned and operated by its users. It is the SEC that has prevented this reality from manifesting, not venture capital firms. Jack has not mentioned this anywhere.

I believe this is evidence that Jack has a bias against Web3. Jack is spreading misinformation and falsehoods to create a narrative that answers his cognitive bias of becoming a Bitcoin maximalist.

¯\(ツ)/¯

• David

P.S. Don't forget the starting point of the Web3 movement: