The rule of thumb that people never willingly cede power of their own tends to hold true, even in crypto. If anyone tells you that the system is centralized "for now" but they promise that they'll decentralize "later on", run far, far away. Oldest trick in the book, really.

A while ago I guest-wrote an article titled “The Design of Crash-Only Societies” for Ribbonfarm, a blog that was previously created and maintained by the thought leader, Venkatesh Rao. It’s a pretty old article (from 2014) but I do think that a lot of concepts there could still be applied to many crypto projects, especially regarding DAOs and rules of governance, which have become emerging fields of studies right now.

The basic argument is this: democracies run on the idea that power expires after a certain time period, unlike monarchies or dictatorships where power is allocated per lifespan. This is the basis of which all modern societies run on, therefore this should also be reflected in the way digital communities are run as well. It’s not really the act of good governance itself that maintains the peace, in other words -- it’s more that the expectation that there’s an opportunity for seats to switch out every few years that keeps people from going into outright revolt. (Something that most people would like to avoid, I’m assuming.)

Right now, digital “communities” are organized more like autocracies or monarchies, which makes its governance structures archaic, static, and incompatible with how modern societies really work. Web 2 solidified these social models through its highly centralized/monopolistic business practices -- Web3 emerged as a reaction against that, with “decentralization” having become a major theme in the movement as it attempted to get away from the former. Currently we’re in a transitory phase where the two models are fighting over which direction Web3 will go. The final outcome of these battles are still TBD.

VCs will often claim that their investment strategies are “objective”, but the reality is that the industry as a whole has earned its success by being pro-Web2 and many are still very much vested in that world right now. It’s more than just the money, however, it’s the culture that these firms are a part of: when people aspire to be participants in the public flogging/hazing rituals of “Shark Tank” as some sort of ideal, “decentralization” isn’t the first thing that comes to mind, to say the least. Nor does it inspire much confidence that people who are good at this sort of thing would be able to organize -- or even conceptualize, really -- what a self-sustaining, self-funded model really looks like.

This is one of the reasons why I tend to be skeptical of VC-backed models in the crypto space right now, which starts with a single-point of control and assumes some sort of succession of power will happen later on. A pretty generous outlook on human nature, to say the least. There’s a case to be made that most -- if not all -- VC-backed projects in Web 3 will fail due to its inherent cultural incompatibility between the top-down approaches of Web 2 and the DAO/decentralized approaches of Web 3.

I won’t name any names, but I’m looking at some founders/VCs who basically have had total control (majority share) of their companies for pretty much their whole careers all of a sudden talking about decentralization and “empowering” the users on their platform in ways they’ve never done before. Ever. 😂 Many of them throw hissy-fits (sometimes in public, too) when things don’t go their way and are very fragile when it comes to talking about political or cultural matters. It’s almost comical to think that they’re going to be able to adapt into the negotiation and compromise-based worlds of Web 3, where diplomats and functional adults will reign supreme. (In theory, anyway. That part is also TBD.)

Happy to be proven wrong, of course, but my money is not on VC-backed projects when it comes to Web 3 stuff as a whole. They can stand in line with everyone else, in the publicly available ICOs that are now available everywhere. The whole idea of “accredited investing” was kind of a contradiction in terms, anyway.

I could potentially see a “crash-only” VC model working where the ownership of the platform itself is forcibly removed after a certain period of time, but going back to the original point of people not willingly ceding power and control, that doesn’t seem very likely to happen with the way the institutions are set up right now.

For the average crypto enthusiast, though, this may not necessarily be a bad thing. Web 2 companies and VCs pouring money into Web 3 (then losing that money over time in the usual sawtooth-shaped downward slope) may just be what the ecosystem needs to fuel the more serious projects out there in the future. Thus, the script has been flipped -- the new “dumb money” in crypto will come from the folks who previously were picking the winners themselves. That’s the type of disruption people can get behind, really.

Just as a reminder, none of the Layer 1 protocols that are currently in production in the crypto space became successful due to VC funding. We still don’t know where Bitcoin really came from, Ethereum (and many other coins of its time) were done through public ICOs, and Dogecoin’s treasury grew organically out of the sheer energy of the community itself. If this pattern continues to hold, the VC industry -- as a whole -- may be in big trouble.

Merry Christmas and Happy Holidays! 2022 will be a crazy year either way, no doubt. 😎