Is web3 a fad? 5 reasons blockchain is a real innovation.
Updated: Jan 5
1. Bank buildings look nice, but operating them is expensive
Try setting up a new business bank account and sending an overseas wire transfer. Then do the same thing with crypto. One will take several days; one will take several seconds.
One requires a lot of bookkeeping, oversight, and regulation to keep running correctly. The other requires almost no upkeep.
One charges you a bunch of fees to cover its massive overhead. The other only has minuscule fees to keep running.
One requires massive energy-hungry office buildings and transportation for the staff and the other runs on laptops worldwide.
One charges foreign exchange fees; the other doesn’t.
One doesn’t work on weekends, and the other does.
One charges you for going below a certain balance, and the other doesn’t.
Need I go on?
The difference in cost efficiency between blockchain and traditional banks is akin to the comparison of a horse-drawn carriage and a modern electric car. There is simply no way the older method can meaningfully compete.
By 2022 standards, the comparative inefficiency of banking is silly.
2. Tracking asset ownership tracking is costly.
If you purchase a house, your realtor will strongly encourage you to buy title insurance -- for a good reason. The title is kept track of manually, and sometimes mistakes can happen. You might end up purchasing the house from someone who doesn’t legally own it. The way we currently track property, and asset ownership in general, is error-prone and low-tech. But this is a very natural use case for blockchain. There isn’t any ambiguity about which wallet owns what asset and who holds it at what point.
Even if regulations disallow home ownership tracking to be decentralized, and they include some regulatory overrides, these overrides are intrinsically transparent, which reduces the need for said title insurance. Rather than keeping deeds in a building that needs to be secured against fire, flood, and fraud, the deeds can be kept digitally on the blockchain to save storage costs.
Also, dislike your stockbroker? Try moving your equities between them. This process will take weeks. Considering stock brokers are digital, this seems strange -- computers should be able to update their data instantaneously. However, getting disparate parties to agree on how their data should be stored is still a human and organizational problem that requires much overhead. Blockchain eliminates this overhead and frees humans from tedious bookkeeping so they can pursue more worthwhile goals.
Coordinating inter-institutional bookkeeping is shockingly expensive and slow
A common theme between points 1 and 2 is that bookkeeping between independent institutions is surprisingly slow and inefficient. This costs a lot of human resources in bookkeeping, auditing, regulatory compliance, and regulatory enforcement. These human resources are not dedicated to innovative things; they are spent on preventing things from going wrong.
3. Breaking the credit card monopolies/duopolies will put more money in the public’s pocket.
Retailers must pay a “convenience fee” to take debit and especially credit transactions. Some of these fees are simple corporate greed, but the network has a cost associated with running it, too, as noted above. These costs are passed on to the consumer through higher prices. Is it a good use of money for 1-3% of all retail revenue to go to a card processor simply for being a card processor coasting on a monopoly or duopoly enforced with a network effect?
When card payments were a new thing, this cost was probably justified in the day. People generally don’t want to walk around with thousands of dollars of cash, and installing a card payment network undoubtedly was expensive. So charging for it was fair.
But now that we have an even better solution that has a considerably cheaper running cost, it’s time to move over to the new thing.
Some may object that credit card processors benefit retailers by increasing consumers’ spending power and protecting consumers by offering chargebacks. I don’t doubt that credit cards will continue to have their use case, but giving a consumer a choice between paying a slightly higher price with some benefits and a lower price without them can only be a good thing.
That’s what we do here at RareSkills. Everyone who pays with crypto gets a 2% discount. But when it comes to dissatisfied customers wanting a refund, it turns out web3 smart contracts can do a better job at refunds than payment processors. When a customer requests a refund, it takes a week to get their money back in traditional banking.
On the other hand, RareSkills uses a smart contract to hold the payment, so if a customer requests a refund within the refund window, they get the money back instantly with no questions asked.
In a later version, we may give people the option to stake their stablecoins during the waiting period in low-risk pools and collect interest payments -- even more consumer friendly!
We understand this model works for the coaching and advisory industry we operate in and may not be as appropriate for physical goods. But this still shows there are millions, if not billions, of dollars that could be collectively saved with the aid of web3.
Wouldn’t you like to have more money in your pocket, or would you prefer to keep giving 1-3% of it to a few big companies?
Web3 = more money in the consumer’s pocket.
4. Financial transparency by default.
People tend to behave better when they know they are being watched. So social pressure can do cheaply what regulation does expensively.
When we pay a nonprofit or government money, we have every right to know how it is being used in most cases. Blockchain makes that knowledge easy and cheap to acquire. In addition, nonprofits won’t have to pay for audits because the software will be able to scan the blockchain and produce the audit automatically. Maybe some human intervention may still be needed, but considerably less than what we need now.
But more importantly, investigative journalists can easily see where the money is going and sniff out misdeeds.
Web3 is often accused of being ridden with scams. I argue that web3 is not more scammy than other domains. We are still bombarded with advertisements about magical weight loss and get-rich-quick schemes outside of web3. These are promises that the seller must know they cannot deliver on.
What web3 does is make the bad actors stand out more. For example, just recently, a regular citizen tracked down scammers and played a crucial role in their arrest:
https://beincrypto.com/french-nft-thieves-exposed-by-crypto-sleuth-zachxbt
How often do stories like this happen outside of web3? Blockchain empowers us to catch bad actors.
5. Digital luxury goods and digital artwork are valid and innovative forms of human expression.
Some may consider Omega watches and Louis Vuitton bags as dumb consumerism. Still, any cynic must have enough self-awareness to know that luxury consumption is a fundamental part of human nature and is here to stay.
So rather than having the Swatch Group or LVHM receive the lion’s share of the profits from this enduring part of human nature, why not give rising artists and luxury producers a meaningful chance to share in the benefits?
Brands like Bored Ape Yacht Club and Cool Cats (disclosure: holder) were borne out of ordinary citizens who otherwise would not have been able to create multimillion-dollar global brands so quickly.
Physical luxury goods require capital expenditures and economies of scale that entrench big players. Digital luxury goods remove that barrier to entry and enable the seller to focus on the story and messaging that resonates with the buyer.
Conclusion
Having a trustworthy, shared database that takes very few resources to maintain is a win.
Just storing information on a computer doesn't automatically make it "cheap" as we have seen above. However, storing it on a blockchain removes a lot of human and regulatory overhead.
Innovation is fundamentally about extracting more goods and services from a limited, finite set of resources. By freeing humans, regulators, auditors, and regulatory enforcers from doing bookkeeping, they can work on higher-value problems they find more fulfilling and do more good for society.
Web3 is not a fad.
Instead, it can address real and fundamental problems that we experience today.
Overhyped?
Sometimes.
But not a fad.