WTF is web3? FAB DAO Huang Dou Ni: Let's meme-ify the term Web3, understanding "The Fallacy of Decentralization"

The co-founder of the non-profit NFT autonomous organization FAB DAO, Mashbean Huang, recently discussed the fundamental meaning of "Web3." His discourse aims to help people break free from the constraints of being bound by "blockchain and cryptocurrency" and to look at "decentralization" from a more macro perspective. The following content is authorized from Mashbean Huang, with additional annotations.

WTF is web3

Last weekend at g0v Summit 2024 ("Shami"), the "WTF is web3" session in the community track was successfully concluded, despite the theme being web3, the entire event did not mention cryptocurrencies, focusing more on decentralized technology and digital governance issues.

As expected, some participants after the event expressed on Facebook that the term web3 is not favorable, questioning, "Why should they have the final say?"
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Indeed, unless discussing the essence of the internet, I have been using the term web3 less and less lately, as it often leads to misunderstandings. It might be better to use specific terminology in professional settings. Let web3 become a meme, sinking into everyone's subconscious.
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So, what exactly is web3? I agree with Tang Feng's definition - web3 is a decentralized technology trend Listen to the interview with Tang Feng by Blockbeats Xu Ming'en, and while decentralized ledger and blockchain technologies have indeed accelerated this trend, let's not forget the stateless, peer-to-peer nature, which is also the essence of the internet, reminiscent of the so-called Web 1.0, a great decentralized structure.
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In fact, the definition of web3 is not unique to Tang Feng. From the founder of the World Wide Web, Berners-Lee, to the American venture capital firm a16z, web3 has always been the "good old day" that cannot be achieved (see the last chapter of the upcoming traditional Chinese version of Read Write Own). Currently, my favorite opinion comes from Nat Sakimura, Chairman of the OpenID Foundation, a computer scientist, and also a flutist Nat Sakimura. This article is a translation of his article "Fallacy of Decentralisation" published in December last year.

Story goes like this, while traveling in Japan in March this year, I unexpectedly found a newly published book in a bookstore, titled "Unsolved Problems of Web3," of which Nat is one of the authors, writing about the history and fallacies of DID decentralized identity. This topic happened to be my current research focus, and this book is actually a sequel to the one published six years ago, "Unsolved Problems of Blockchain Technology," expanding the discussion to broader areas such as financial identity, corporate governance, digital identity, and more.
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Because it was so fascinating, I brought it back to Taiwan even though I couldn't understand Japanese, and even shared it with friends at the Japan-Taiwan Exchange Association. For the past few months, I have resisted OCR translating the chapters written by Nat. As a result, in April, at the Internet Identity Workshop 38, IIW in Silicon Valley, I met Nat in person and accidentally showed the cover of "Unsolved Problems of Web3" in my presentation, sparking his interest, and we ended up exchanging views on DID.
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In addition to serving as the Chairman of OpenID, Nat himself has developed many digital identity and privacy standards and is also one of the pioneers of Japan's digital policy. Just recently, I unexpectedly discovered his blog post on "Fallacy of Decentralisation", which is essentially the content of the book chapter, so I started translating it into Chinese with the help of machine translation, finding it to be an excellent explanation of web3. This article is based on Nat's speech at the OIX Summit 2023 Open Identity Exchange at the end of 2023.

"Fallacy of Decentralisation"

By Nat Sakimura
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When we talk about web3, it's often said that,
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web1 was decentralized; web2 was centralized, dominated by big companies like GAFAM; and web3 will decentralize again, freeing the users.
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Is this true? This myth needs to be reevaluated with facts.
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Let's look back at Web 1.0.
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Web1 started around 1991.
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Web1 was about publishing web pages that linked to other web pages. Websites people created were decentralized and interconnected by hyperlinks. This principle is similar to a spider web, hence the name "web."
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Then in 2004 came Web 2.0. The API economy was at the core of Web 2.0, allowing digital data and web services to be decentralized.
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This enabled the creation of unique applications and web services, changing the way we interact with the world.
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The main players of Web2.0 were not single systems represented by "websites," but units offering "APIs." These units provided functionalities in the form of REST APIs, much like LEGO blocks, enabling the rapid development of new services by combining these APIs.
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To some extent, this was the ultimate decentralization, as the units called "applications" were broken down/distributed into individual functional units. At the same time, we could retrieve data from each API as needed, without a centralized database.
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When this happened, giants like GAFA had not yet dominated the world.
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2004 was the year Facebook was born, followed by YouTube the next year, then Amazon Web Services, and the birth of the iPhone.

Being newly established, these companies had low revenues. Google had only $3.2 billion, Facebook had only $38 million, even smaller than my own company Nat Consulting.
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In comparison, Microsoft had $37 billion, IBM had $96 billion, indicating that the big players at the time were not the ones we see dominating today.
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From this perspective, GAFA (Google, Apple, Facebook, Amazon) were revolutionary forces, while IBM/Microsoft represented the old system.
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I remember their revolutionary enthusiasm, advocating for people to take control. Did we succeed in decentralizing power?
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Clearly not, we now live in a world dominated by GAFAM. While we may have overthrown the old regime, as depicted in that painting, "out with the old, in with the new."
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This is evident from the revenue figures, showing that GAFA, who were once on our side, have now become giant companies dominating the world.
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The old regime represented by IBM has fallen. However, it was replaced by an even greater power, and the power has not been distributed to the people.
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How did we end up in this situation? While Web 2.0 was technically decentralized to the extreme, why is the current situation so centralized? These images reveal the key.

Here, you can see Google's annual revenue growing exponentially. The same applies to Facebook, showing a significant increase in revenue.

It's because of the combination of free market competition and technology that has generated increasing profits, resulting in our current state. Any IT technology tends to reduce costs/increase return on investment. In such scenarios, it ultimately leads to a winner-takes-all situation - a monopoly/oligopoly. This is our endgame. In other words, falling into this oligopoly is an inevitable outcome.
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Will web3 make a difference?

Possibly not, as it fundamentally remains an information technology.
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As it shows increasing returns, we may end up back in the centralized position of Web 2.0.
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Now, let's delve into what centralized and decentralized mean. To do this, let's look at this image of the "degree of decentralization."

When discussing decentralization, we need to determine what decentralization means. It is fully decentralized when the subjects are evenly distributed among entities in the ecosystem. Conversely, when the subjects are concentrated in one entity, it is fully centralized. Note that "centralized" and "decentralized" are not black and white. Typically, a technology falls somewhere in between. In this image, it is represented by gray shading.
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For example, let's consider traditional ledgers and distributed ledgers.

When N entities record transactions in a ledger, there are N traditional ledgers. Therefore, it is fully decentralized. In contrast, in the case of a distributed ledger, there is only one ledger. Thus, despite being named a "distributed ledger," it is fully centralized.
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Whoever came up with the idea to call a "fully centralized ledger" a "distributed ledger" was a marketing genius!
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I clearly should learn from this.
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Now, let's further understand the degree of centralization.
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As shown by Bitinfocahts com, in the Bitcoin blockchain, 0.34% of addresses hold 82.28% of Bitcoins.
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DAO IT Right has now dissolved, calculating the lowest and highest Gini coefficients for DAO. Editors' note: The Gini coefficient is an indicator of fair distribution, the higher the number, the more unfair it is. The values are 0.761 for LimitSwap and 0.93 for LidoDAO, while the country with the highest Gini coefficient in the world, South Africa, is only 0.63.
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Under a centralized state, diverting funds is also quite simple. In Polygon's case, it used an 8-key multisig account as a vault, but it turns out that with the four co-founders and another private key holder, possibly a lawyer, they could empty Polygon's resources.
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Such centralization is quite insane.
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Now, let's examine decentralized identity and wallets.
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First, let's look at Identity Providers (IdPs) in the context of decentralized identity. If a wallet is an IdP, the number of IdPs will be greater than the number of devices N. In the context of decentralized identity, this may seem to be called "decentralization."
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On the other hand, in the wallet model, personal data accumulates in the wallet, resulting in hyper-centralization, while the "authority manages data sources" model exhibits complete decentralization.
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Note that not only data but also responsibility will accumulate on individuals.
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This centralization of personal data is very attractive to attackers. So far, they had to attack each authoritative database individually, but now they can try to exhaust all data from the target wallet. This would be very effective.
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Next, let's consider the number of IdPs.
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In Web2.0, we have tens of thousands of IdPs. Indeed, large IdPs like Google and Apple are very well known, but there are many other IdPs, such as in academia, where each academic institution has its own IdP, and I have my own IdP.
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Of course, compared to the world's population, this number is insignificant, so Web2.0 can be said to be neither fully centralized nor decentralized.
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What about in the digital wallet model?
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In the wallet model, the number of wallet providers may be much less than in the Web2 IdP model.
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Moreover, even within these wallets, "all wallets are equal, but some wallets are more equal than others." - Adapted from George Orwell's "Animal Farm"
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Ultimately, all digital identities will be centralized into platform wallets like Apple Wallet, Google Wallet, or wallet services that generate operating system-driven flows, concentrating them on major platforms.
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In such a scenario, we tend to resort to policy interventions.
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For example, some jurisdictions are mandating certain large service providers to accept any certified wallets, or even forcing the allowance of independent app stores to download these digital identity wallets (Editors' note: the examples mentioned should be the EU's eIDAS2.0 and the Digital Services Act).
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However, I am not optimistic about this.
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When the wallets of large platforms are user-friendly, why would users bother to install a separate third-party wallet? It seems unlikely.
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There is also a trust issue. People often say that large identity providers IdPs monitor you, but wallets do not. Really?
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How can you trust that the apps on your phone are not monitoring you?
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"Big Brother is watching you."
- Taken from George Orwell's "1984"
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They might say,
"Don't worry. Don't think. Ignorance is strength."
- Taken from George Orwell's "1984"
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At the 2022 Internet Identity Workshop, the "Devil's Dictionary of Linguistic Dark Patterns" defined "decentralization" as "We run programs on your machine, but it's at your own risk."
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Well, I sincerely hope it won't be like that - that the wallet providers running programs on our phones won't intentionally deceive us and won't shift responsibility onto individuals, a responsibility that was previously borne by IdP providers.
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Most stakeholders may act in good faith, but the risk we face is that we may hit rock bottom globally, much like the fallacy of composition, such as the paradox of thrift.
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In the paradox of thrift, each individual tries to increase savings, leading to a decrease in total demand, thus a decrease in total production, ultimately reducing total savings. If this behavior continues, it will lead us to the global rock bottom - zero savings.
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Similarly, in a decentralized identity environment, everyone may try to increase the degree of decentralization, but we may end up with more centralization. I call this state "Fallacy of Decentralisation."
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Is there still hope?
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Can Web 3.0 save us?
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Certainly not, as Jack Dorsey's "web3 between A and Z" cannot. Editors' note: Hinting at a16z as one of the largest investors in the crypto industry.
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But perhaps we can find opportunities in the ideal vision of crypto punks.
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One of the biggest innovations of web3 is placing running programs on the ledger, making them tamper-proof, publicly transparent, and auditable. In web2, we needed to trust the organization first to believe that the code they executed was correct. Web3 might move the trust anchor to the running programs - trusting smart contracts.
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Currently, mainstream smart contracts seem to lack the scalability needed, but they reveal the possibilities of the future.
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Let's think about it now, before it's too late. (End)