top of page

Crypto, Web3, and DAOs, Oh My!


Computer tech and finance are two industries with incredibly complex sets of jargon used to explore convoluted digital and economic systems.

Unfortunately, when combined computer tech and finance seems to have had a multiplicative effect on jargon, leading to confusion over how these technologies are understood.

New digital tech is inherently exciting, and the application of computer tech towards the generation of future wealth is hard to overlook. 18 percent of Canadians have currently indicated interest in using cryptocurrencies to purchase daily goods and services, with interest only increasing among younger generations. Web3, cryptocurrencies, NFTs, DAOs, and blockchain technologies have only increased in mainstream newsworthiness over the past few years and there is little doubt that this trend will continue well into the future.


Are these computer-based finance technologies the revolutionary tools that will solve humanity’s greatest social challenges? Will the masses achieve collective wealth and prosperity? Or is crypto tech simply another opportunity to concentrate wealth and power into the hands of the few? Perhaps there is room in the middle somewhere between these two extremes. One thing is certain: the more informed we are about the nature of these novel digital technologies, the more capable we become in directing it away from exploitation and towards social transformation.


Web3

To begin appreciating crypto technology, it helps to first understand the larger ecosystem within which it was created - and meant to disrupt. The 1990s and early 2000s internet was defined by blogs, message boards and static web pages. Content creation on this platform was limited to a select few with the resources and access to computers, while public participation with the content and others online was limited - this era of the internet is also referred to as the “read-only web”.


It was only in the early-mid 2000s that the structure of content on the internet began to change, increasing participation and interactivity among users. These users, rather than the relatively limited pool of content creators previously, have since become empowered to create and actively engage with content and connect with each other through other sites, applications, and data. This era of the internet is ongoing, exemplified by the ubiquity of such platforms as Facebook, Amazon, Netflix and Google. This era of the internet is ‘web 2.0’, building upon and expanding the ‘web 1.0’ framework that came before.


Web 2.0 has enabled global communication and interactivity to unprecedented levels, but has also largely resulted in the monopolization of activity among the major social media platforms listed above. This has also concentrated the opportunity to profit off user data into the hands of the corporations running these platforms. Policymakers are relatively slower to keep up with enacting legislation at the same rate that technology advances, incentivizing tech companies to adopt an attitude of asking for forgiveness rather than permission. This ‘fail fast’ attitude has had direct consequences on users, reaching new heights with the Cambridge Analytica scandal in 2018 where millions of Facebook users had their personal data compromised for profit and political ends1.


Web 3.0 (hereafter stylized as ‘web3’) is the proposed next evolution of the internet, based on blockchain technology and relying on a ‘peer-to-peer’ architecture where application code and data can be hosted across distributed networks of users rather than centralized servers owned by corporations. This system could theoretically grant users more autonomy over their personal data, diluting the concentration of power in the hands of the few and eliminating intermediaries between users and the services they interact with online. Decentralized apps (dApps) created for web3 spaces have also gained in popularity, including play-to-earn (P2E) games where communities can earn shares in cryptocurrencies through gaming.


The feasibility of such a system has yet to be implemented at scale, and skeptics believe that web3 is simply a buzzword that increases risk for participating users while replicating existing power structures in the web 2.0 era. Indeed, the largest investors in web3 applications and technology - those who stand the most to gain from its growth and widespread adoption - are institutional venture capital funds and holders of existing capital 2. Japan has recently proposed the creation of a Web3 minister to address this emerging technology3, and there is no doubt that tax collection and law enforcement will only gain in complexity as a new challenge for modern states.


Cryptocurrencies & Blockchain

The rise of cryptocurrencies and blockchain technologies are better understood in reference to the economic climate from which they emerged. The 2008 Global Financial Crisis occurred as a direct result of the creation of ‘mortgage-backed securities’, financial instruments invented by banks which allowed them to package mortgages into profit-generating bonds. Banks enabled real estate developers to build upper- and middle-class housing, while advertising low down payments and teaser interest rates for the general public - and speculators - to purchase these homes. This drove a profit-generating positive feedback loop that incentivized banks, regulatory bodies, and informed investors to turn a blind eye to the problem.


When the bubble finally burst, the fallout led many people pointing at specific faults within the system which led to its collapse. The first group took issue with capitalism and its perverse profit incentives, embodied by the ‘Occupy’ movements interested in dismantling Wall Street in favour of social and economic reparations. The second group took a more libertarian approach, arguing for fewer regulations to drive greater inclusivity in the marketplace. Democratizing participation could have enabled whistleblowers to prevent the crisis as it occurred, preventing the crash from being as catastrophic as it was.


When the pseudonymous Satoshi Nakamoto released the ‘Bitcoin Whitepaper’ in 2009, members of the second group were eager to adopt this new approach to tech finance. The paper proposed the use of blockchain technology and an entirely electronic peer-to-peer currency as an alternative to the traditional banking industry and government-backed fiat currencies. A blockchain is - put simply - a digital database consisting of ‘blocks’ of data organized in an immutable, interconnected ‘chain’. Instead of transactions being mediated by banks or other centralized financial institutions, blockchains instead allow communities of users to add to a public, ‘read-only’ database. Each block of recorded transactions is verified and codified through a ‘consensus mechanism’ (e.g. ‘proof of work’ or ‘proof of stake’), ensuring that the contents of the database are trustworthy and free from manipulation by bad-faith actors. Consensus mechanisms rely on cryptography to authenticate, and as a whole sets the foundation for ‘DeFi’, or ‘deregulated finance’.


The invention of bitcoin and its unique interpretation of blockchain technology did exactly what it was designed to do - enable holders of the cryptocurrency freedom from traditional banking institutions and the regulations involved with the broader financial system. It is semi-anonymous assuming that users’ public key-private key pair are not compromised (which they oftentimes are), meaning that the previously unbanked have an alternative means of inclusion. Limited access to banks and capital has been identified as an especially relevant concern for Indigenous nations seeking economic sovereignty


Power is also decentralized in blockchains, assuming the majority of ‘miners’ with the financial and computational means don’t compromise the system’s integrity because of the consensus mechanism. Both privacy breaches and intentional blockchain ‘forks’4 have occurred in cryptocurrency’s short history, calling into question the system’s very efficacy in addressing the problems they set out to solve. Moreover, the environmental costs of cryptocurrency consensus mechanisms cannot be understated, comparable to the power draw of small nations while serving only a fraction of the population5. Regenerative, these systems are not.


NFTs

One of the primary concerns with cryptocurrencies from the outset was the lack of commonplace applications they could be used for. Most retailers did not accept cryptocurrencies in place of government-issued money, and so Bitcoin quickly became synonymous with online black markets like the Silk Road. Outside of this use case, the alternative was investing in the hope that it appreciates in value over time - when more people invest in Bitcoin or Ethereum their market value rises, allowing early investors to capitalize on their holdings at the expense of new entrants to the marketplace. A major critique of cryptocurrencies lands directly on this point: there is nothing intrinsically valuable about a Bitcoin, and it only works as a ‘store of value’ in the case of a never-ending chain of people buying into the cryptocurrency for more money than early adopters paid to get in6.


Given that cryptocurrencies have such limited use, it came as a shock to much of the online community in March 2021 when headlines emerged stating that digital artist Beeple had sold an NFT collage of his work ‘EVERYDAYS: THE FIRST 5000 DAYS’ for $69 million through auction house Christy’s7. Soon after, digital artists and copyright owners began commissioning NFTs of their own, marketing a new form of art ownership using digital files explicitly tied to cryptocurrencies. NFT sales skyrocketed in the short term although the hype has fallen dramatically since then, with the average price having dropped over 70% during the first three months of 20228.


As a blockchain technology, NFT stands for ‘nonfungible tokens’. In the world of finance, ‘fungible’ refers to anything that is mutually interchangeable; a $20 bill is fungible because it can be exchanged for another distinct $20 bill, two $10 bills, four $5 bills, etc. and still purchase the same goods as the original printed bill. Examples of nonfungible items include diamonds, baseball cards and houses - things that can vary from one another in enough ways to experience dramatic changes in how they are valued. ‘Tokens’, in crypto circles, are units of value that are stored on a blockchain. Taken together, NFTs enable the exchange of unique digital assets by assigning them a unique serial number whose ownership is publicly displayed and tracked on the blockchain.


Criticism of NFTs extends from concerns relating to blockchain technology, namely that the lack of regulation enables predatory behaviour. Numerous artists have had their artwork stolen by thieves, a common practice in a system that does not recognize copyright ownership or proof of authenticity at the source. HTTP links attached to NFTs are subject to ‘link rot’ over time, and the image files attached to the tokens sold are subject to server accessibility which is not always guaranteed. Many people also fall prey to ‘rug pulls’, where organizers scam investors out of money without following through on their promises; a common practice enabled by the very deregulated nature of the blockchain.


As carriers of ‘smart contracts’, NFTs are not limited to static JPEG images. They have been used as digital passports that owners can carry throughout the ‘metaverse’, allowing them access to exclusive spaces and communities of like-minded individuals. Proponents believe that anything and everything should be stored on the blockchain, from concert tickets to public health records. However, NFTs have also been weaponized to carry viruses and other malware, furthering concerns over regulation in a system that is intrinsically anti-regulatory. Taken together, there are serious concerns about the degree to which the commodification of everything as facilitated by NFTs can truly be considered a form of socially responsible and transformative technology.


DAOs

The last major concept we’ll cover here are DAOs, which stands for ‘decentralized autonomous organization’. DAOs are a form of collective run by its members, each of whom are granted access based on their ownership of specific crypto tokens, most commonly NFTs. These organizations are purpose-built to operate on top of blockchain technology, with software that performs basic operations and records activity permanently on a decentralized ledger. Membership token holders are afforded social privileges, treasury management rights, voting shares, and other advantages which allow them to exert greater influence within the DAO and the direction it takes. In theory, DAOs are more democratic and agile compared to traditional companies because of their hyper-specificity and the relative lack of regulation which hampers comparable start-ups.


At their best, DAOs organize and mobilize collectives by monetizing their energy and interest into action. Proponents argue that public data can and should be managed by DAOs, which reduces bureaucratic red tape around access to and control of personal information. The more insidious view looks at DAOs as funnelling greater interest and investments into the underlying NFTs and cryptocurrencies, in classic pyramid scheme fashion. Personal information stored on the blockchain is also a major concern, given the immutable nature of data blocks once recorded and the risk of de-identifying personal data based on the public nature of the chain.


Like the rest of the bunch, DAOs are mired in a history of scandal and mismanagement. One of the first was simply called ‘The DAO’, built on the Ethereum blockchain in 2016. The concept was meant to act as a decentralized venture capital fund, where anyone could pitch their idea to the community. Owners of DAO tokens would vote on those plans, and the smart contract would grant rewards to members when the projects were profitable. However, the code behind the smart contract had multiple flaws in its programming which allowed hackers to infiltrate the system and steal one third of The DAO’s total funds, valued at $50 million9.


The loss was too great for the Ethereum economy to handle, so the entire blockchain was intentionally forked into two branches: ‘Ethereum’ and ‘Ethereum Classic’. Ethereum voided the attack and returned the funds back to their original owners while ‘Ethereum Classic’ maintained the theft on its chain. The Ethereum fork remains the dominant version of the cryptocurrency used today, with the Ethereum Classic fork has fallen into relative obscurity. Despite the promise that DAOs and blockchain technology would be truly decentralized, centralized intervention proved that this experiment was just the latest example of a powerful financial institution deemed ‘too big to fail’.


In Summary

The current crypto movement is a direct reaction to corrupt finance practices enabled by the largest and most powerful civic institutions. The libertarian appeal of taking government and regulation out of the equation had a certain appeal for people looking to generate their own wealth by capturing a slice of new and emerging tech that promised investors room on a proverbial spaceship headed ‘to the moon’. In practice, the crypto community is largely dominated by the same venture capital funds and investment banks who hold the greatest capital and power in our current financial system. Blockchain technology - though immune to many attempts at manipulating data contained within its databases - has an alarming history of fraudulent behaviour and continues to struggle in managing environmental costs, consumer protection, and applicability in everyday life. These issues may change over time, but for now there is a lot of work to be done before crypto can be considered a force for positive social transformation.


Further Questions

  1. How can Canada do better in directing web3 technology applications for positive social transformation?

  2. What is the place of regulation in a space that is deregulatory by its very nature? How might we integrate consumer protection in crypto communities?

  3. What could a truly decentralized tech-based organization which accomplishes positive social transformation look like?

Author:

Curtis is a recent MRU graduate, having completed a minor in Social Innovation. He is especially interested in applying systems sight to language, culture & popular media to expand our capacity for empathy. He recently competed in MRU's Map the System campus final, exploring the Cantonese language as a complex global system. Feel free to mention 'Turning Red' or 'Everything, Everywhere, All at Once' as his favourite movies (so far!) of 2022.




Footnotes

Crabtree, Justina. (2018). Cambridge Analytica is an ‘example of what modern-day colonialism looks like,’ whistleblower says. CNBC News. Retrieved from https://www.cnbc.com/2018/03/27/cambridge-analytica-an-example-of-modern-day-colonialism-whistleblower.html

Browne, Ryan. (2022). Binance raises $500 million fund to invest in ‘Web3’ as crypto slides into bear market. CNBC News. Retrieved from https://www.cnbc.com/2022/06/01/binance-raises-500-million-fund-to-invest-in-web3-startups.html

Kshetri, N. (2022). Policy, Ethical, Social, and Environmental Considerations of Web3 and the Metaverse. IT Professional (p. 4). https://ieeexplore.ieee.org/ielx7/6294/9811419/09811499.pdf

Falkan, Samuel. (2017). The Story of the DAO - Its History and Consequences. Retrieved from https://medium.com/swlh/the-story-of-the-dao-its-history-and-consequences-71e6a8a551ee

Carter, Nic. (2021). How Much Energy Does Bitcoin Actually Consume? Retrieved from https://hbr.org/2021/05/how-much-energy-does-bitcoin-actually-consume

Diehl, Stephen. (n.d.) The Intellectual Incoherence of Cryptoassets. Retrieved from https://www.stephendiehl.com/blog/crypto-absurd.html

Christie’s. (2021). Beeple (b. 1981): EVERYDAYS: THE FIRST 5000 DAYS. Retrieved from https://onlineonly.christies.com/s/beeple-first-5000-days/beeple-b-1981-1/112924

Morris, Chris. (2022). The NFT bubble is showing clear signs of bursting. Retrieved from https://fortune.com/2022/03/04/nft-bubble-market-crash-price-value/

Folding Ideas. (2022). Line Goes Up - The Problem with NFTs. Retrieved from youtube: https://www.youtube.com/watch?v=YQ_xWvX1n9g

3 views0 comments

Comments


bottom of page