How Venture Capital Compromises Web3

Co-founder and former CEO of Twitter Jack Dorsey famously criticized Web3 by saying it won't be as decentralized as starry-eyed dreamers hope it will be. In his words, it will be owned by venture capital.

The truth is, it already is.

A post about Rumble on Hive, my favorite Web3 social blogging platform, inspired this post. Written by Hive native @Taskmaster4450, it dives into how Rumble is carving out a niche for itself by competing with Amazon's AWS. The problem is, Rumble is still centralized and still Web2. Task argues that a similar Web3 service is necessary in order to keep the internet decentralized. He's not wrong.

However, he is a bit starry-eyed. There's a reason Web2 companies like Rumble will outcompete decentralized networks like Hive and SPKNetwork, the Web3 alternative to Rumble's up-and-coming infrastructure. The answer lies in the trade-off between true freedom, or censorship-resistance, and the power of capital. In Web2, as in the real world, capital wins. Freedom loses.

The idea of liberty is as old as democracy. However, early notions of freedom did not involve individual rights as we understand them today. That's a relatively recent notion, and almost purely American. Freedom, as Greek thinkers imagined it, had more to do with opening governance to a broader slate of minds and voices (hence, democracy) as opposed to trusting it to monarchs and oppressive regimes. They obtained these ideas by paying attention to history and developed their ideas on the heels of the Medo-Persian empire.

In my mind, personal freedom today isn't necessarily the antithesis to an abusive and oppressive government. That tends to be the fear among its advocates, but oppression can just as well come by the hands of other private citizens, individual or corporate, with massive wealth.

Among Web3 advocates, centralization has become a dirty word, but I'd argue that not all centralization is bad. One must look at the features and characteristics of the centralized entity. For instance, there's a major difference between the Third Reich and a McDonald's franchise. When I want a Big Mac, I don't want to wait three hours while all the elements of the burger are gathered before production can begin. The centralized nature of the operation allows me to have my desire within minutes.

One major dynamic of centralization in the modern world is capital. In the West, we've been groomed to believe that money buys freedom. Very often, however, it inhibits it. Venture capital is one use case where that is true, and I believe that every venture capital is aware of how it happens.

In a capitalist society such as ours, there are a number of ways a company may obtain operating capital. One of those ways is to sell shares of the company. This allows the owners of the company a path to obtain capital that can be used for manufacturing, marketing, and carrying out other functions of the enterprise. However, this capital is obtained at a price. The owners must give up some control over the operation. Depending on how many shares of the company are sold, the owners may lose enough of their influence that they find themselves with no power to control the direction of their company at all.

Executives experience a shift in priorities once they acquire shareholders. After all, investors do not put up capital for an operation without expecting a return on their investment. Once shares of stock are sold, the primary focus becomes shareholder profit. As long as customer service and product quality are aligned with shareholder profit, the problems are minimal. In late-stage operations, however, once profits have been squeezed as tightly as they can be, company operators have no choice but to sacrifice product quality and customer service to ensure gains for shareholders. Old age has its problems.

The struggle for public companies, and private companies with shareholders, is to balance the concerns of consumers with those of shareholders. Of course, shareholders will always win because they are the true owners of the business. Therefore, venture capital often inhibits the ability of a business and the customer reaching a consensus on which products and services should be available in the marketplace at a fair price.

In a word, the money inhibits freedom. It inhibits the freedom of the business employees to make a product worth buying and inhibits the freedom of the consumer to receive a product worth having.

Venture Capital Is Not the Enemy of Web3

Despite the ability of venture capital to become a Genghis Khan of centralization, it's not the enemy of Web3. In a capitalist society, as I've shown, it can inhibit the thing it promises: more consumer choice and personal freedom. That's why Web3 companies that promise decentralization, censorship resistance, and enhanced personal freedom for end users are shooting themselves in the foot by taking venture capital. Still, I'll say it again: VC is not the enemy.

The struggle for creator freedom is not a fight against centralized structures, per se. Rather, the fight is against centralization funded by agenda-driven capitalists, which is a subset of centralization. Not realizing this, many so-called decentralization advocates have sold out to the promises of venture capitalists.

The promise of VC money is that it will hasten the success of the business. With money on your side, you can deliver products and services faster, gain users more quickly, and achieve your business goals with less effort. In short, give up some control and ownership of your business and the venture capital will get you to the finish line quicker. In many cases, it actually works. It's not an empty promise.

What happens is the starry-eyed Web3 advocate buys the argument and takes the money. The result is that decentralization never happens. And the reason it never happens is because venture capitalists, rightfully so, fear that pure decentralization will not lead to profits for them.

They aren't wrong.

In order for VC's to profit from their investments, there must be an element of predictability and the ability to control the direction and outcome of the enterprises in which they invest. For the most part, a decentralized technology layer does not interfere with that goal, but a decentralized human layer does. And that's why many companies claiming to be Web3 are opting for venture capital money while claiming to be decentralized. They do not want to give up control, but they build a tech layer that operates on decentralization principles while driven by centralized concerns based on financial interests. That's why Jack Dorsey's concerns are legitimate and right on target.

What makes Hive and SPKNetwork different, is true decentralization. This decentralization is not just on the technology layer, but on the human layer too. There's no CEO, no executive suite, no board of directors, and no venture capital muddying the pool. The trade-off for this structure is slower development and less effective marketing, which is why many Web3 founders have never heard of it. They're too busy trying to achieve Web3 principles with Web2 tactics.

At the end of the day, venture capital is not the enemy of Web3. What is the enemy is compromise. When Web3 founders take the money, they are giving up on decentralization and essentially admitting they aren't true believers.

Allen Taylor is the author of Web3 Social: How Creators Are Changing the World Wide Web (And You Can Too!). Learn more about me at https://authorallentaylor.com/.

Header image is a screenshot of the SKP.Network website.

Posted Using InLeo Alpha