The Pivot to Web3 Is Going to Get People Hurt

It can feel at times as if the entire world is pivoting into Web3, and the question is why. There are, suddenly, Web3 media companies, Web3 advertising firms, Web3 studios, Web3 marketing tactics, and Web3 publishing networks. LimeWire and MoviePass have risen from the dead, newly “powered”—as one of their CEOs put it—“by Web3 technology.” Web3 apparently is not only “transforming gaming” and “re-engineering real estate,” but also the future of the internet, and maybe the entire global economy as well. 

Never mind that very few people can agree on exactly what Web3 is (and isn’t). What matters to investors is that Web3 is the hot new thing and the entrepreneurs are piling in. One venture capitalist, Hadley Harris, told me that roughly half the Web3 pitches he’d recently looked over came from founders who weren’t even in the space half a year ago. That’s a claim backed up by Alchemy, a company that considers itself the Web3 infrastructural equivalent of Amazon Web Services; it said in February that “hundreds of established Web2 companies” are pivoting into Web3 using its platform. Even new pharmaceutical companies are now taking a Web3 “crypto-first approach,” with one raising the possibility of issuing a “cryptocurrency token to participants in its clinical trials.”

The pace of the pivots can feel almost frenetic. One Ottawa-based entrepreneur, worried the world was passing him by, surprised his employees on a company Zoom call by saying he was pivoting the entire company into Web3. “I said, ‘Guys, this is the future and this is where everything is going,’” he said. “‘If we miss this boat, I don't think we can ever get back on.’” (The company, which had been a print-on-demand platform, now helps creators build 3D NFTs to sell to fans in the metaverse.)

Like a lot of his fellow entrepreneurs, Nick Gerard, the CEO and co- founder of Norby, a startup focused on the creator economy,  started to notice last year that one by one, his competitors were also diving headfirst into the world of crypto and Web3. Gerard said potential investors in Norby were pushing him to take the Web3 leap as well. 

But Gerard couldn’t help but feel confused by the whole thing. His customers, the people he thought mattered most, rarely showed much interest in Web3 technologies at all. “I can count on one hand the number of times I have actually heard ‘NFTs’ come out of one of these people's mouths,” he told me. Even still, he and the rest of his team mulled over whether to make the switch, fearful that they were missing something everyone else could see. 

“Nobody wants to be Paul Krugman,” Gerard said, referring to an infamous 1998 quote in which the Nobel Prize–winning economist predicted that the internet would ultimately become no more consequential than the fax machine. (He's also famously anti-Bitcoin and crypto.)

The Web3 hysteria has continued this year even as the tech industry more broadly has struggled with rising interest rates and plummeting share prices. “In the last six months, it's gotten fairly ridiculous,” said one partner at a crypto-focused investment firm. In the first three months of the year, the top 15 venture firms poured more money into Web3 and DeFi early- and seed-stage deals than any other area, the third straight quarter they have done so, according to the research firm Pitchbook. In total, the early- and seed-stage Web3 world nabbed $2 billion from top firms last quarter, more than double what the next-highest sector, biotechnology, received, and triple what traditional fintech got. Those figures understate the total level of interest—and money—in the space. Blockchain companies have raised at least $9.5 billion after receiving $18 billion in funding in 2021, according to numbers the research firm CrunchBase provided to Motherboard. And more firepower is on the way. In late May, amid plunging crypto prices, one of Web3’s biggest institutional backers, the venture firm Andreessen Horowitz, announced it had raised a monstrous $4.5 billion crypto fund following a series of high-profile investments into Web3 projects like play-to-earn game Axie Infinity and the parent company of the Bored Ape Yacht Club.

“It’s a gold rush for sure,” said Dayton Mills, the co-founder and CEO of Branch. Mills’ company had been a struggling remote-work startup before he transformed it into a Web3 gaming platform. The moment he started talking about his Web3 vision, investor interest skyrocketed. “It was a tremendous difference,” he said.  “There were people who I didn't even meet with who were just committing over email without ever even talking to me.” He had planned to raise $2 million, only to receive $20 million in commitments in two weeks. “We stopped because it just was incredibly overwhelming.”

“Something big is happening,” Mills added. “A lot of people are trying to get in on it, and a lot of people are more afraid of not getting in.” 

What exactly they are getting in on is harder to pin down. The term “Web3” is sometimes attributed to Gavin Wood, one of the co-founders of the Ethereum blockchain, who, in 2014, described an idealized version of the web in which the system placed no trust in organizations but near-complete trust in blockchain technology. But it didn’t enter the mainstream cultural vernacular until last year, when it started to serve as a catchall (and, coincidentally, a venture-led rebranding) for the collection of controversial  financial-technology products that include cryptocurrencies, blockchains, non-fungible tokens, decentralized autonomous organizations (or “DAOs”), the metaverse, and decentralized financial (or DeFi) products. 

To some, like Andreessen Horowitz, what ties these innovations together is that they collectively offer a theoretical vision where people have “the ability to own a piece of the internet”—for example, through the use of NFTs, which are essentially tradable proof-of-ownership receipts. In such a world, people could use and even monetize their NFTs on multiple platforms, rather than just on, say, Instagram. Such a system, boosters believe—or, at least, claim to believe—will lead to a fairer, more communal version of the web, one that will wrest control back from technological giants that have profited off people’s data and creativity, creating a world where community comes before all else. Much of the ideological rhetoric hence involves talk of using Web3 “to truly empower financial inclusion” (again, Andreessen Horowitz’s words) by bringing people into the fold who have been marginalized by the traditional financial structure. 

Such arguments are inarguably alluring. Very few people feel the financial and internet structures that underpin society could not be vastly improved. But they also belie the fact that professional investors do not push their money into the middle of the craps table solely in order to better the world. As Hilary J. Allen, a law professor at American University, succinctly put it: “The reason why venture capitalists are pushing all of this is to make money.”  

And in Web3, the venture class and other professional investors have found a uniquely appealing set of circumstances they believe will allow them to make a giant pile of money that does not rely on vast leaps in virtual reality or haptics technology—sometimes by pulling off an impressive degree of regulatory arbitrage, other times by taking advantage of a wholly new kind of internet marketplace. 

“If there is any innovation in crypto assets, it’s not in software engineering but in financial engineering,” the London-based software engineer and crypto critic Stephen Diehl has written. 

Allen, who studies financial regulation, sees the rhetoric around empowerment and inclusion as little more than a  “cynical” ploy. She and others believe it masks the aspects of the Web3 apparatus that have made it appetizing to venture capitalists, billionaires, and other institutional players—so much so that they have moved aggressively to plant a foothold in spite of the industry’s unmistakable propensity for scams, fraud, and regulatory scrutiny. 

Here we have a largely unregulated marketplace ripe for exploitation and stuffed full of unclear valuation metrics, arguable unregistered securities, peculiar financial products, ways to cash out, and a public-facing ideological mission statement.

Of particular fascination has been the critical role in the Web3 ecosystem of the token, a new type of financial product that regulators are still struggling to get a handle on but that venture capitalists have realized allows them to cash out quickly and handsomely even if the company never goes public (and twice over if they do).  

It is, at least for now, close to a perfect playing field for the professional money-making class, one that is leading to pressures to pivot or die, whatever the utility.  One entrepreneur described with great frustration that he had recently spoken to a founder at a VC mixer who was building a “decentralized” dinner reservation system. When he asked why a reservation system needed to be on the blockchain, the founder simply said: “It’s the future.” 

It’s at least possible that Web3 could bring about a better, more fulfilling version of the internet. It’s just as likely, though, to prove to be what its harshest critics fear: a “hyper-capitalistic” reframing of the web that “contains the seeds of a dystopian nightmare.” 

“It’s like a collective Theranos,” one venture capitalist said. “A wildly unproven product with nobody at the helm.”

Another such believer, Benjamin Cohen, who recently started a Web3-focused investment fund, told a crypto site in March that it was “inevitable that blockchain technology and smart contract technology will become implemented in every single facet of our life.” That is not an isolated opinion. “Every single company that exists is going to exist in some form of Web3,” Alexander Taub, the Miami-based co-founder of the DAO-creation tool Upstream, told Motherboard in a Zoom interview. (Taub, who wore a “Just DAO It” hat, added that “the potential market size for DAOs is, like, trillions.”)

A lot of the believer class come across as “zealots” who are dismissive of those who question them, according to Jason Henrichs, the CEO of Alloy Labs Alliance, who has spoken to Web3 projects about potential investment (and moved forward with some). The technology writer and researcher Evgeny Morozov has gone so far as to compare them to “annoying vulgar Marxists who, for all the evidence to the contrary, kept [and keep] insisting that the objective developments within capitalism favor the inevitable transition to socialism.” 

On its face, their level of confidence does indeed appear odd, or at least premature.  One January survey by the strategy firm National Research Group found that only 13 percent of surveyed American adults knew what Web3 meant, and that more than half have never heard the term. A separate poll from around the same time said less than two in five members of Generation Z believed “the metaverse is the next big thing and will become part of our lives in the next decade.” 

Andreessen Horowitz claims there are 22,400 Web3 creators, and only 18,000 developers were working in crypto or Web3 by the end of 2021, according to one recent survey by Electric Capita, nothing compared to the more than 27 million developers in the world. 

Some wonder if the Web3 hype is justified at all. Libin had been initially drawn to the “beautiful” and “elegant” concepts of Web3, he said. The CEO of the startup studio All Turtles and the virtual camera application mmhmm, as well as a former VC at General Catalyst, Libin has made a career out of searching out companies that solve real problems with clear business models. But as he started hearing from more and more Web3 companies, he found himself unable to understand what benefit came from developing certain projects on the blockchain as opposed to, for example, using an internal database. When he started to challenge some of the pitches he received, he didn’t like the answers he got. Using such technologies often seemed needlessly expensive and prone to exploitation by hackers and scammers.

“Web3 proponents are trying to solve real problems that need solving. I just don't think that Web3 is the solution,” he said. “It doesn't make sense to me as a programmer.” 

The common pro-Web3 counterargument—often repeated by VCs—is that proponents are simply early, like with the internet of the 1990s. Such unbridled optimism is not novel to Web3, but instead core to the venture and technology industries’ model, according to Martin Kenney, a professor at the University of California, Davis who studies the industry. The investors’ goal is always to sell the company, and they have an incentive to target hot sectors and then aid in raising interest in them. 

“Whatever the new thing is, it’s absolutely in the VC’s interest to hype it. You’d be a fool not to,” said Kenney. “So you feed it to the press. You tell everyone it's going to change the world, that it is the best thing since sliced bread, whatever it is that will convince the investors that they need to have it.”

It can be convincing, and was famously so in the dot-com boom of the late 1990s, during which time companies that added a “.com” to their name experienced a “dramatic” and “permanent” rise in valuation immediately after the rebrand, “regardless of the firm's level of involvement with the Internet,” according to a study on the so-called “dotcom” effect. The researchers determined this so-called “dotcom” effect was attributable to a desire to be “associated with the Internet at all costs” even if the companies were “at best, only loosely, if at all, connected” to it. Eventually, the boom turned to a bust, but not before many venture capitalists cashed out.

Inarguably, the hype cycle is back in full force. Kyle Samani, a managing partner at a crypto-focused investment firm, told me that although most of his limited partners don’t always fully understand the technologies behind Web3, they want exposure to “all of it.” A research report out of Citi estimated that one component of Web3, “the metaverse,” alone could have a total addressable market of $13 trillion within eight years and as many as 5 billion users. (For comparison, the entire California housing stock is currently worth $9.2 trillion; Citi is essentially claiming to believe that the metaverse will, or could, be bigger than all but three or four entire U.S. industries by the time current middle-schoolers graduate college.)

Slava Rubin, an early-stage investor who founded Indiegogo and an alternative asset investing search engine, said the enthusiasm reminded him of the e-commerce boom of the 1990s. “Whenever there's change, there's opportunity to displace the legacy players and potentially make a lot of money on investments,” he said. 

This time, however, the world’s most well-known brands are diving in too, in order to avoid falling behind. Starbucks, ESPN, Spotify, and GameStop are developing NFT plans; Fidelity Investment, the nation’s largest 401(k) provider, is allowing people to shove their retirement savings into Bitcoin. Goldman Sachs is offering crypto-backed loans. JPMorgan Chase, Gucci, and Miller Lite are hunkering down in the metaverse. Google has a dedicated Web3 team. Facebook is Meta.

Over the last century, venture capitalists have backed industries that have changed the world and created millions of jobs, most famously during those early years of the internet. Less talked about is the fact that the venture class has gotten it wrong as well, said Harvard Business School professor Josh Lerner, who also studies the venture industry. As an example, Lerner cited the VC-funded cleantech boom and bust at the end of the 2000s as a recent example. 

“It turned out that not only was the technology a lot harder than they thought, but many of the businesses were just extremely poorly run, and some of the best firms in the business were just blinded by their enthusiasm into burning huge amounts of investor money,” Lerner said. 

Tunguz, a venture capitalist at Redpoint Ventures who writes a popular blog about the industry, became active in the Web3 market in the first half of last year after he noticed the businesses were both capital efficient and could scale to enormous size. In August, Tomasz like many others watched in amazement as the price of the blockchain platform Solana’s token rose from $40 to $190 by mid-September, briefly reaching a market cap of almost $80 billion by November.

“That really opened up a lot of people's eyes to the size of these companies,” Tunguz said. “The scale compels you to figure out what's going on.”

The closer he looked, the greater the investment opportunity seemed. For one thing, the businesses did not have clear metrics by which they could be valued. Over the last 20 years, investors and entrepreneurs have together developed fairly reliable, standardized financial models that allow them to confidently place values on traditional software businesses after comparing them to similar older ones. “Most software businesses are really well understood. A startup walks in, and the venture capitalist just as much as the private market investors know exactly what it ought to be worth,” said Tunguz.  

“In Web3, that's not the case,” he added. “Nobody has any idea how to value these businesses.” He doesn’t see that as a bad thing but rather as indicative that the Web3 industry is in a period of “broad invention as opposed to optimization.”

 “I haven't walked into a single pitch with a Web3 company where the words ‘cost of customer acquisition’ or ‘payback period’ has been uttered. It's so new that people aren't worried about unit economics,” Tunguz said. (Raghavendra Rau, a Cambridge finance professor who helped discover the “dotcom” effect, agreed the Web3 industry’s underlying fundamentals were “tough to decipher,” as did others.)

Tunguz knows that lack of focus on economic fundamentals will sound “crazy” to some people, and he does believe that a “significantly higher” percentage of Web3 ventures will fail than the typical crop of startups found in a venture fund’s portfolio. But he also sees Web3’s unclear valuation metrics as a financial opportunity compared to the world of Web 2.0, which has become so well understood that it has proven harder for investors to gain an edge. 

“One of the ways of making lots of money is to have information asymmetry,” Tunguz said. “If you know something I don't about a company and you trade on that information, you're gonna make a bunch of money, right? In the stock market, it's illegal. It's called MNPI—material nonpublic information. You can't do that. In the private markets, you can.”

There was one more reason Tunguz got drawn to the Web3 market: He started to see the financial potential of one of crypto’s central innovations, the token. The term “token” can mean many things in the crypto sphere, which makes it difficult to define in any way that is simultaneously all-encompassing and useful. Most simply, it is a tradable unit on any blockchain, but it has come to take numerous forms and functions: Tokens can be currencies, as they are with Bitcoin; they can represent voting shares, as with DAO governance tokens; they can be digital collectibles, as with an NFT of a Bored Ape; and they can be earned through online work, as they are with the “play-to-earn” game Axie Infinity.

But professional investors have also started to view them as tradable shares of crypto projects. One such firm is Multicoin Capital, an Austin-based investment firm that “primarily” invests in tokens rather than traditional equity in startups, according to Kyle Samani, its co-founder and managing partner. Multicoin’s recent returns have been nothing short of astonishing; its hedge fund assets reportedly shot up 20,200 percent between October 2017 and December 2021, and its venture fund secured a 28x return. Samani said he’s figured out how to approach investment in “crypto assets”—he believes the term “cryptocurrency” to be a misnomer—similarly to how a traditional investor might approach the analysis of a stock. 

“You can think of the mechanisms by which these tokens capture value to be comparable to the equity of a startup,” Samani told Motherboard. “Many of these assets capture revenue directly in the same way that a startup would have revenue. And if an asset captured revenue, then you can model the valuation using a discounted cash-flow model.” Such descriptions are the reason many believe tokens should be regulated like an investment contract, or a security, since people invest in them “with a reasonable expectation of profits to be derived from the efforts of others”—the legal criteria for qualifying as a security. 

“The entirety of most web3 epiphanies is ‘what if instead of selling products we sold shares instead?’” Meta product manager and frequent crypto cynic Dare Obasanjo has written. 

Tunguz has himself referred to token-based reward systems as “paying customers in ‘equity,’” writing that as “the network becomes more valuable, so does the user’s stake in the company.” Doing so provides a reason for initial users to be invested in the company’s success, sometimes even before the company knows what product it’s going to make. This is why venture capitalists have taken to saying things like “Web2 companies start with product. Web3 companies start with community.” The tokens bring the people. Inspired by Axie Infinity, for example, Alex Kehr adopted a token-based approach with his startup, Superlocal, a version of Foursquare for the 2020s where people earn “crypto when you go places.” The token, he said, would give people “something to do in our app when nobody's there yet.” (He considers play-to-earn tokens, in particular, less likely to be deemed securities in the future.) 

Andreessen Horowitz, in its recent “State of Crypto” report, argued that the token-focused structure of Web3 companies aligned the incentives of users, creators, builders, and investors in a way untokenized companies could not. “Web3 aligns network participants to work together toward a common goal—the growth of the network,” the report stated. Together, so the line of thinking goes, they all can theoretically make it.

But Tunguz (and others) saw opportunities for professional Web3 investors that those stuck in the earlier iteration of the web could not access. He realized the sector was broadly well suited for “regulatory arbitrage,” a practice in which businesses move to jurisdictions with more favorable laws or position themselves as one type of company rather than another in order avoid regulatory oversight (say, a ride-sharing company that positions itself as an app startup instead of a cab company). As Tunguz put it, the “the regulation doesn’t exist” yet in Web3, which allows the companies to access funds not available to more-traditional companies. 

Traditionally, venture capitalists have had to wait years before they can receive a payout for their investments, usually during an initial public offering. Since tokens could be sold at any time, Tunguz realized Web3 investors in them had access to an asset with “immediate liquidity” instead, which can lead to a return even if the company never goes public. If they do, all the better: the equity investor can then cash out twice.

One other token-related process—known as “staking”—proved particularly enticing to Tunguz. To him, it seemed as sure of a thing as they come in finance. With staking, the owner of the token hands them over for a project to use as liquidity—for crypto loans, to take one example—and in exchange earns “a percentage-rate reward over time,” as the crypto exchange Coinbase puts it. This, Tunguz realized, meant he could make money from a token regardless of whether its price went up or down. Soon enough, he was actively staking tokens in order to generate what he viewed as a remarkably high “interest rate.” ("Tokens can generate somewhere between like 15 to, let's say, 100 percent in fixed income,” Tunguz said.)

The discovery of such enormous fixed income in the Web3 space proved of financial interest to VCs, but Tunguz expects it will prove exceedingly exciting to institutional investors who have been focused on the bond market—“the people who buy mortgage-backed securities, CDOs, collateralized debt obligations, basically the stuff that caused the 2008 financial crisis,” he told me. “Those are the big institutional pools of capital that really want to get into DeFi because they can generate those yields.”

“These big institutions are looking at these crypto tokens and saying if I can isolate myself from whether or not the price of the token goes up or down, but if I can capture the yield on a consistent basis, then I can generate maybe 10 times what I could on a bond,” he continued. 

The risk inherent in such a system became clear, though, soon after we spoke. In May, the $40 billion Terra-Luna ecosystem collapsed. A major factor had been that an affiliated lending protocol, Anchor, had promised a 20 percent staking yield. Once people started to lose confidence in the sustainability of that yield, they rushed to pull their money out, leading to Terra’s algorithmic stablecoin, UST, losing its peg to the U.S. dollar and a dramatic crash in its sister cryptocurrency, Luna. 

Within days, it was reported that one of Terraform Labs’ early and biggest investors, the crypto-focused hedge fund Pantera Capital, had quietly cashed out “roughly” four-fifths of its investment ahead of UST’s collapse, a little under $170 million on a $1.7 million investment. The news infuriated many retail investors, who saw it as proof of what many in crypto suspected: professional investors gaining an early edge, loudly pumping up the project, quietly cashing out—the dump—and then moving on to the next token. 

A video clip of the investors and podcasters Jason Calacanis and Chamath Palihapitiya seemingly joking about dumping their Solana tokens drew similar ire last year, as the blockchain was heavily supported by professional investors early on. “One way an impatient VC could manipulate a project is by insisting that a startup offer tokens as part of their project, and require that a certain amount of tokens be set aside for the VC,” the technology journalist Casey Newton recently wrote. “That way, once the tokens become available for trading on public crypto exchanges, VCs can cash out part of their investment years ahead of schedule. Or, if the project fails before it can sell or go public, the VC can earn a profit on an investment that would have otherwise been a loss.”

Newton made the comments following the release of ApeCoin token, all but officially associated with Yuga Labs, the company behind the Bored Ape Yacht Club, or BAYC. ApeCoin’s organizing body, ApeCoin DAO, had dedicated nearly a fourth of all tokens to BAYC’s co-founders and "the companies and people that helped make this project a reality," which reportedly included venture capitalists. 

This sort of insidery dealmaking is why many in the crypto sphere have become suspicious of the professional investor class. Web3 projects have started requiring VCs to lock up their holding to avoid a professional pump-and-dump, and VCs have been reduced to writing about why people should take their money. (“There are many alternatives to venture capital these days, particularly in web3, but there are few, if any, alternatives that stick with you, when times are tough,” the investor Fred Wilson wrote in December.) 

And yet, the VCs’ influence over the startup system remains unquestionable. A “VC friend”  recently told Newton “they are hearing about startups being pressured to offer tokens.”  Gerard, the Norby CEO, similarly started to hear of companies getting pressure to mint tokens. 

But the more he learned about them, the more skeptical he became. He started to believe that tokens, rather than the ideological “future of a fully decentralized internet,” were behind a lot of the investor interest in Web3, he told me. As he sees it, an investment firm could invest in a startup in exchange for equity and inside information and then negotiate a hoard of early tokens. “What I have now is asymmetric access to information,” Gerard said. “I have a direct line to a founder that every single person in the Discord doesn't have. I have access to financial information. I know if user adoption is tanking. I know if usage is skyrocketing. I know if the founder is depressed or hooked on Adderall or is spiraling out of control.” 

Then, at the first internal sign of trouble, the investor can dump the token on the “quote-unquote community,” Gerard said.

“That is a radical change in the way this industry works,” he said. “Some of them are quite transparent about it, but they're still able to couch all of this in language that revolves around ownership and the community.”

Last summer, as Gerard weighed his own pivot, he kept hearing about founders who were making the switch simply because doing so made it easier to raise money. 

A venture capitalist who asked that I not use his name so he could speak freely about his firm’s investments, admitted with concern that one of his own portfolio companies did the same, and other founders and CEOs similarly said they’d noticed startups cynically bolting on Web3 elements after running out of other options and needing more funding to survive. 

“They've failed to find incentives in their Web2 companies,” said Mills, the CEO who himself pivoted to start a Web3 gaming platform, said of such companies. “So building something in Web3, it's almost like a cop-out for some people. They're like, ‘Oh, we're just gonna ping a token on top of it.’” 

“We see so many of these,” agreed Jeff Clavier, the founder of the venture firm Uncork Capital. “Web3 is the new trend, and a lot of entrepreneurs add that as an afterthought.” Tiny Rebel Games CEO Susan Cummings said attempting to superficially “jerry-rig” an element to raise money can be a dangerous bet for a startup. Who is doing that in Web3 is difficult to decipher. An investor accused Cummings herself of bolting on an unnecessary Web3 element when she pitched him on the Petaverse Network, a Web3 project in which people build digital pets that can then live with them in various metaverses. “He turned us down, saying I don't see why you need blockchain,” she said. “That's true. You could store it in a database.” She contended that the potential interoperability and ownership of the Web3-based idea “made it better” and went on to raise $7 million, double what she set out to raise.

What everyone can seem to agree on is that the boom has created a lot of vaporware and useless entrepreneurial attempts to get rich quick, even if no one wants to name names on the record. 

Entrepreneurs and venture capitalists alike described companies that bolt on a Web3 element in order to raise a few more bucks as “grifters.” Venture capitalists say such companies are easy to spot. Even if that’s true for the most part, a founder told me he’s noticed bolting on a Web3 element adds investor interest, whatever its relevance.  “Tack on Web3,” the founder said, “and investors will throw money blindly and inflate valuations 2-3x.”

Gerard, the Norby CEO, dealt with real periods of “self-doubt” as he decided whether to pivot into Web3. Sometimes, he worried he was being stupid. But ultimately, he decided, if his customers weren’t clamoring for it, he didn’t see a reason to pivot.

“If that's something that we start to hear from our customers, then it's absolutely something that we are going to take a look at and figure out what version of it makes sense for us,” he told me. But for now, he added, “We can't force people to want something that they don't want.”

The rise of tokenization in particular has frustrated Web3 critics. Meta’s Obasanjo has said it’s a “mind-blowing” and “tremendous hack” that “it’s legal to effectively sell stock without regulation if you say it grants voting rights but not ownership.” Martha Bennett, a vice president at Forrester Research who studies blockchain technology and digital assets, described them as an “abuse of the system.” The English crypto critic Stephen Diehl has contended that the “crypto-token-as-equity-proxy scheme” put the financial rules of the 1920s back in play by allowing people to “insider trade, wash trade, and pump and dump” with impunity. 

Hilary J. Allen, the law professor who studies financial regulation, has spent much of her time recently studying the similarities between financial products that make up Web3 and the collection of instruments that led to the Great Recession. In tokens, Allen sees an innovation that is at its core comparable to the credit default swap. The two are different—credit default swaps allow numerous people to make a bet on a bond’s future performance—but at the end of the day, both help greatly increase potential leverage in the financial system, she said.

“Leverage is great in good times, because it allows you to multiply your profits. But it means that the system is very much more fragile, because even small amounts of losses on your investments will wipe you out,” she said. “What we have with tokens is another way of creating leverage. But now, it's not about lots of contracts referencing the bonds; now, it's the asset itself that is synthetic—there's no limit on the number of tokens that we can create.”

Allen doesn’t mince words when she discusses her worst-case future scenario: “major systemic implosion.” Treasury Secretary Janet Yellen has said the crypto industry is not yet at the scale to pose “financial stability concerns," and President Joe Biden has expressed support for “responsible” crypto innovation, but the rhetoric of financial democratization nevertheless reminds Allen of before the subprime housing bubble burst, when a collection of complex financial innovations like mortgage-backed securities and collateralized debt obligations were seen as avenues through which new swaths of people could have access to wealth. And now, Allen and others hope the Web3 system will be placed under regulatory control before history repeats itself. 

Tunguz, the pro-Web3 venture capitalist, is ready for such a day, but reaping the rewards until then.

“There will be a Securities Act of 2033, whatever the year is,” said Tunguz. “Whenever the regulation comes out, we will respond to it. But I think there's definitely an opportunity here to make money in a way that benefits everybody within the ecosystem.”