Ethical, pragmatic Web3 decision framework

As part of the research we've performed into the web3 ecosystem, we've established that there are many concerns and problems. This spurred a series of questions we wanted to answer: What are all of the problems? What is fact vs emotion vs opinion? How can we properly understand and consider these issues to make informed decisions about what we are and aren't comfortable engaging in? How can we act ethically and pragmatically in the face of these challenges?

The end result of asking ourselves these questions and answering them is a comprehensive, ethical, pragmatic decision framework for web3 that looks at the good, bad and ugly to drive fact-based engagement and decisions.

We are sharing this framework in the hope we can assist companies and individuals answer similar questions. We have comprehensively identified the issues in the web3 space and also our thoughts on how to apply an ethical, pragmatic approach to address each of them.

Consideration categories

We have split up this framework into a set of categories we believe need to be considered:

• Environment and energy
• Criminal activity
• Legals, regulation and support systems
• Diversity, inclusion and accessibility
• User experience
• Security and privacy
• Crypto speculation and pyramid schemes
• Value and technology complexity
• Decentralisation and trust
• Speed and cost
• Volatility

Environment and energy

It's undeniable that a key challenge in this space is the impact from the sheer energy use, including opportunity cost given we are under a global energy shortage. This includes the environmental impact of the carbon produced from that energy use and the impact of the e-waste generated by the amount of computing hardware that is being (ab)used and discarded. And all of this when we are already struggling to reign in carbon emissions and heading towards catastrophic global warming of over 2°C.

The amount of hardware being purchased for crypto related activities has partly contributed to a global chip shortage (particularly GPUs) and hard disk shortage that has had far reaching impacts to many other industries.

Criminal activity

A common criticism of web3 is that the anonymous and unregulated (more on that below) nature of crypto networks makes it easy for crime to occur. This has lead to many examples of criminal activity including:

• Market manipulation (including wash trading, pump and dumps): #1, #2, #3, #4, #5, #6
• Fraud (including scams, grifting, rug pulls): #1, #2, #3, #4, #5, #6, #7
• Tax avoidance: #1, #2
• Theft: #1, #2, #3, #4, #5, #6, #7, #8, #9
• Money laundering: #1, #2, #3, #4, #5
• Ransomware and rogue state funding and sanction avoidance: #1, #2, #3, #4, #5

Legals, regulation and support systems

A related challenge in the web3 space is a general lack of regulation. While sometimes that can allow for easier innovation and more simplicity, the ability to augment the technology with well-known systems that ensure people are protected and supported is of benefit to the broad adoption of this technology (and helps fight some of the criminal aspects mentioned above).

Examples of problems this causes includes:

• The global nature of crypto allows people to easily skip regulatory oversight where it does exist and exploit this to take advantage of people: #1, #2
• People have assets stolen or have disputes about the result of transactions without clear recourse or support to resolve disputes: #1, #2
• There is mixture of flagrant disregard for and lack of understanding of copyright and/or intellectual property law, particularly when it comes to NFTs: #1, #2, #3, #4, #5, #6, #7, #8, #9, #10
• It's often not made clear what someone is actually buying when purchasing an NFT; people may assume they are buying ownership of the underlying asset/artwork/etc., but in actual fact it may just be a license to use it and not the actual ownership: #1, #2
• There are a lot of misleading sales and marketing tactics being used in this space and a lack of regulatory control to prevent or address it (who regulates it if it's global in nature?)
• Governments have vague policy statements and have been slow to react, which further buoys criminal activity given crypto can be a grey area: #1

Interestingly though, while the concept of ownership is baked directly into Blockchains and decentralisation advocates will often say that what's in the Blockchain should be absolute there are examples that have occurred where ownership in the Blockchain has been overruled because it conflicted with the law. Critics of web3 often argue this proves that the "goal of decentralisation" thus isn't even possible (more on that below though).

Diversity, inclusion and accessibility

This isn't a crypto specific problem, but it's always an important factor for deliberate consideration when building any technology since it's so often something that is missed, and web3 isn't immune.

Part of the consideration here is the inclusiveness of the community/ies that you participate in. One issue cited in the web3 space is that the defensiveness from the pro web3 camp is turning people away and causing important questions to not get asked and answered.

Another important consideration is accessibility, in terms of how confusing it is for new users to participate in this space (particularly if there are technology or financial literacy gaps), and whether broad accessibility of wallets, Blockchain interfaces and dApps has been built in.

Finally, there is the broader problem of social inequity (#1, #2, #3):

Cryptocurrencies and their underlying technology hold out the promise of democratizing finance by making digital payments and other financial products and services easily accessible to the masses. But because of existing inequalities in digital access and financial literacy, they could end up worsening inequality. In particular, any financial risks arising from investing in cryptocurrencies and related products might end up falling especially heavily on naïve retail investors.
Eswar Prasad, Economist

User experience

The user experience (UX) of web3 leaves a lot to be desired (#1, #2, #3, #4, #5, #6, #7, #8). A combination of confusing new terminology, generally poor UX in wallets and web3 apps, and highly technical concepts that you need to understand (like safely storing a private key – via an 11-25 word mnemonic no less) combine to confuse even savvy users.

Security and privacy

While poor user experience is a huge problem in itself, and certainly will be a barrier to mainstream adoption there is another even more serious side-effect than reducing accessibility and increasing confusion of users: it's a security nightmare. It's very easy to either mishandle your private key, get scammed/phished (and as mentioned above there are many scams around), hacked, and/or take an accidental incorrect action and then lose things of value. Of course, once that happens, Blockchains are immutable so you can't hit undo, and there are currently a lack of support systems to get recourse. (#1, #2, #3, #4, #5, #6, #7)

The security problem with web3 extends beyond just the user experience challenges. The programmability that is being used to add more interesting functionality – smart contracts – are not that "smart". They are often very low level and complex to program against, so mistakes are easy and not obvious. Combined with a general lack of evolved smart contract software engineering practices, the fact that they are immutable (unless you take steps to combat that), and there is a global shortage of security reviewers, means that vulnerabilities in smart contracts are commonly found and exploited. Again, when this happens it's usually not possible to reverse since the Blockchains are immutable. (#1, #2, #3, #4, #5, #6, #7, #8, #9, #10, #11, #12, #13)

Another related consideration is privacy. While Blockchains are "anonymous" (a wallet address is a random string), as you start transacting that might produce signal data that allows you to be identified (everything that happens on the Blockchain is public and visible). Services exist that give you a DNS-like experience so your wallet can be identified explicitly (which, for instance, makes it easier to send money to you). While there are anonymisation and privacy coin services to protect the privacy of your wallet, that that adds yet another user experience issue – if you make one wrong mistake and perform a transaction that could identify yourself there is no way to reverse it and from that moment onwards every transaction you made in the past can then be scrutinised.

The fact that Blockchains are transparent and immutable are really great for many applications, but quite clearly there are some use cases that these properties create a real privacy problem. Immutability also faces the issue of GDPR compliance, unwanted air drops and doxing (the bad kind), revenge porn and child abuse etc. (#1, #2, #3, #4, #5, #6, #7, #8, #9, #10, #11, #12, #13, #14)

Cryptocurrency speculation and pyramid schemes

It's fair to say a lot of the focus and discussion (positive and negative) in the web3 space centres around the underlying cryptocurrencies and the significant financial gains that people have made as their price increases. That same focus is now shifting to NFTs as they become popular, and there are many stories of people making significant profits.

There are a number of key criticisms related to this:

• A lot of the popularity in crypto is put down to existing people in the space creating attention to justify (and grow the price of) the underlying cryptocurrencies so they can continue to make money (#1, #2, #3, #4)
• As people get into the space they then potentially lose out if the original people cash out (dropping the price) unless they get others in (i.e. that it's all a pyramid scheme and/or ponzi scheme) (#1, #2, #3, #4, #5, #6, #7, #8, #9)
• It's another case of the rich getting richer and the poor and underprivileged getting poorer, which is ironic given some of the hype of cryptocurrencies is about helping the unbanked get access to financial products when they otherwise would struggle to (#1, #2, #3, #4, #5, #6, #7, #8, #9, #10, #11, #12, #13, #14, #15, #16, #17, #18, #19)
• A majority of the transactions that occur for the cryptocurrencies are speculation rather than real value (#1, #2, #3, #4, #5, #6, #7)

Value and technology complexity

A logical follow-on from the discussion about speculation is a discussion about utility / value. An oft-cited criticism of web3 is that there is a lack of value being generated and it's yet another example of technology for the sake of technology. An argument that will often be thrown in is that Bitcoin has been around for 13 years and hasn't found a real world application so any argument that it's "early days" is moot. (#1, #2, #3, #4, #5, #6, #7, #8, #9, #10)

NFTs often get criticised for this, with people arguing the only reason they increase in price is through artificial scarcity rather than real value and utility. Especially, where they are a link to an image that you don't even get copyright license transferal so you don't really own anything outside of some metadata pointing to an image, which is easy to copy and may point to storage that may not exist in the future. (#1, #2, #3, #4, #5, #6, #7, #8, #9, #10, #11, #12, #13)

The "tech for the sake of tech" argument is often expanded to say that Blockchains increase the complexity for things that you can implement on existing (e.g. "web2") technology and there is nothing that can be done on web3 that couldn't be done without web3 technology. Or, that technology alone can't fix the problems that Blockchains are purported to solve. (#1, #2, #3, #4, #5, #6, #7)

Part of this technology complexity includes things like the need to run network nodes, the complexity of managing private keys, etc. as well as the fact that to expose a dApp you need web2 technology anyway such as DNS and cloud (web) servers. Then there's the complexity of cross-chain and Layer 1 vs Layer 2 etc.. (#1, #2)

Decentralisation and trust

An interesting talking point of critics centres around the interplay of decentralisation and trust.

A lot of web3 advocates talk about how web3 frees us from the need to have central intermediaries and instead we can decentralise services and value. (#1, #2, #3)

Decentralization is used as somewhat of a stand-in, or maybe more precisely a precondition, to fairness and/or equality. Centralized systems are seen as not only untrustworthy and corrupt but also as a danger to Freedom because they allow removing or blocking content for whatever reason. The Third Web (tante.cc)

Critics of web3 counter with one or more of (#1, #2, #3, #4):

• Full decentralisation doesn't make sense: we will always want to have centralised support mechanisms (e.g. for theft protection)
• The tech is almost always not fully decentralised anyway: most of the time centralised cloud and DNS providers are used for web3 solutions, let alone centralised Blockchain node providers like Infura
• The Proof-of-Stake consensus model that addresses the energy problems with Proof-of-Work can be vulnerable to centralised governance and manipulation and sybil attacks

Similarly, there is a lot of talk of web3 enabling trustless interactions and "code is law" style services that don't leave ambiguity, however (#1, #2):

• It's been shown multiple times that traditional law can and does override what's stored on the Blockchain
• Most people don't have the technology background that enables them to make informed decisions about the smart contract code they are interacting with, so they are trusting what they are told about said smart contract – this is also a user experience and security issue with Blockchain solutions
• You still need to trust the people that create and operate the smart contracts so it's not actually trustless
• Whenever the smart contract and/or token you are interacting with is not immutable (sometimes they are, sometimes they aren't) you are trusting that they stay intact
• When purchasing an NFT for its uniqueness you are trusting that someone doesn't create a duplicate of that NFT and there is thus always an element of trust with the project you are purchasing the NFT from
• Any time you need data that is off-chain to make an on-chain decision you are relying / trusting an Oracle provider to accurately reflect that data on-chain

Another key counter argument is that a fully decentralised future is not actually a good thing anyway since it results in a broad anti-democracy, casino mindset-driven society. (#1, #2)

Finally, there is the notion that technology alone will transform our world into a decentralised utopia, but the reality is that isn't possible because human behaviour and economics is always a key factor in such a change: technology is "just" the enabler. (#1, #2, #3, #4)

Speed and cost

Blockchains are often heralded as expensive, slow and inefficient. This is a fair critique of the two primary Blockchains: Bitcoin and Ethereum. (#1, #2, #3, #4, #5, #6, #7, #8)

What does slow and expensive mean? It's hard to find accurate sources for specific numbers, but lets try and compare to VISA and Paypal which are both good analogies for a global payment system: (#1, #2, #3, #4, #5, #6, #7)

This means that in general, Bitcoin and Ethereum are orders of magnitude slower than traditional payment approaches in both bandwidth and latency and for small transactions and any transaction where a traditional payment would result in a merchant charging the transaction fee back, much more expensive.

A related concept to consider is the Blockchain Trilemma (originally coined by Ethereum co-founder Vitalek Buterin), which is kind of like the CAP theorem of Blockchain. It talks about how there is a trade-off between security, decentralisation and scalability, that makes it hard to scale a Blockchain if you want to keep it secure and have real decentralisation. (#1, #2, #3, #4, #5, #6).

Volatility

Another consideration is the volatility of building applications on public blockchains. There are a number of aspects that can potentially reduce confidence in the ability to create a stable, predictable service such as:

• Unpredictable price of underlying crypto tokens/coins, which sometimes have wild fluctuations due to the speculative focus and/or market manipulation (#1, #2, #3, #4)
• The impending impact of greater regulation on the Blockchain ecosystems (#1, #2)
• The fact that liquidity markets keep getting hacked and/or have unstable implementations and present a risky platform to build financial services against (#1, #2, #3, #4, #5, #6, #7)
• The worry about how reliable the various stablecoins are, which are critical infrastructure allowing the conversation of cryptocurrency to fiat ("real") money (#1, #2, #3, #4, #5, #6, #7)

Further reading

If you're curious to explore other sources about the problems with web3 there is a reasonably comprehensive GitHub repository that is collating articles: GitHub - life-itself/web3: Making sense of web3 & crypto. It's also being transformed into a website with a well structured arrangement of terms and claims.

Disclaimer

MakerX has received a grant from Algorand Foundation to contribute towards the initial build of the Data History Museum. This article was written independently of, and not influenced by, that grant.