Web3, NFTs and DeFi are a sham without a blockchain scalable at L1

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This post originally appeared on the ZeMing M. Gao’s website, and we republished with permission from the author. Read the full piece here.

I recommend a reading of “My first impressions of web3” written by Signal app creator Moxie Marlinspike, as well as “Signal app creator Moxie Marlinspike proves NFT signal-to-noise ratio is low,” a commentary written by Jerry Chan.

Moxie describes the current status of Ethereum on which almost everything relies on L2 solutions, and thus have become re-centralized, as almost all dApps use either Infura or Alchemy in order to interact with the blockchain. This is not only a security problem but also a privacy problem.

All this of course was not a mere accidental design mistake made by developers but was all a natural and unavoidable result of a blockchain (Ethereum in this case) that has failed on L1 (layer-1 on-chain).

Although I disagree with Moxie’s outlook of the future, I find his analysis and insight of why the current so-called Web3 and NFTs are a sham brilliant. This is someone who truly understands what’s going on from a technical point of view and is, at the same time, also honest and not corrupted by a get-rich-quick scheme. His outlook of the future is inaccurate, not because his analysis is incorrect, but because he’s not aware of a genuinely decentralized blockchain scalable at L1 level actually does exist but is only buried under the noise, see below.

On a related but broader subject, I also recommend a reading of Why it’s too early to get excited about Web3, by Tim O’Reilly. This is one of the very rare articles written on Web3 that are truly insightful and honest without being blinded by crypto market frenzy and misleading narratives.

In that regard, what I’d be looking for is evidence of capital allocation via cryptocurrencies toward productive investment in the operating economy rather than capital allocation toward imaginary assets. — Tim O’Reilly

A sad state in the crypto, DeFi, NFT and Web3 world

It all started from the blockchain technology going off the track from the original Satoshi Nakamoto’s design and started to build upon a wrong foundation around 2013/2014 with Ethereum, while Bitcoin was stolen from its original inventor Craig S. Wright (aka Satoshi Nakamoto) to build a non-scalable “digital gold” Ponzi scheme with no productive utility, instead of the scalable peer-to-peer transaction system as Satoshi envisioned which was all for productivity and utility.

Since then, all other “improvements” that came out of those movements have been just market reactions and technical reactions to a wrong system in order to solve the problems emanating from a wrong foundation, much like pain relief drugs to symptoms of a terminal disease. These problems should not have existed in the first place.

With a wrong foundation, however, it is not going to last. It is just a trillion-dollar distraction from the real technology development.

If the current crypto developments do a good job, the best they could achieve is to ostensibly solve the scalability problem using extra layers and multiple intermediaries, but alas! only to find that the whole thing has gone back to the centralized Web2, and worse yet, that it would have worked even better without the so-called Web3 components in the first place.

It is inevitable, because they are the epicyclic orbits built on the earth-centric theory.

It is not that Web3 itself is a sham. It is just that people are building a sham Web3, driven by a gold rush mentality.

Users are deceived. Even the developers themselves are deceived.

So are the professional analysts, who would conduct extensive research and write lengthy reports such as OECD-OCDE report “Why Decentralised Finance (#DeFi) Matters and the Policy Implications,” not knowing that it really doesn’t matter how deep, elaborate and comprehensive the theories and analyses concerning the designs and mechanisms of these DeFi applications are, as the whole thing is being built on something that has no economic foundation nor solid technological foundation.

As to the economic foundation, the truth is that DeFi in its present forms is based on one simple reality (versus a theory or analysis): Those that collateralize their assets in DeFi are doing it because “the number go up,” and those who are borrowing do it also because “the number go up.”

And they all ignore or tolerate ridiculously high transaction fees and the lack of any guarantee of real legal ownership of properties and protection of privacy because “the number go up.”

Furthermore, they don’t care to notice that all transactions are speculative trading for the sake of speculations with little to nothing based on any utility that is independent from the speculations themselves.

The entire thing therefore has no economic foundation whatsoever.

As to the technological foundation, the issues that are associated with NFTs are also associated with DeFi because both are based on the same foundations, and they all require transactions that go through the same ecosystem.

More fundamentally, anything that is not based on a secure public blockchain intrinsically scalable at L1 (layer 1 on chain) is like a house built on sinking sand. This includes all applications based on Ethereum.

But there is hope.

The real hope of NFT is in Bitcoin SV

A blockchain that has an intrinsic L1 capability to scale and to create a genuinely decentralized public ledger (while allowing customer selectable encryption for privacy) is the only answer.

L1 scalability matters, because it is the only effective way to avoid re-centralization by reintroducing intermediaries out of necessity.

The problems of L2 solutions are fundamental: they are not blockchain. They just pretend to be blockchain. Having started with a blockchain that has failed to provide a real solution, L2 creates an off-chain solution but associates itself with blockchain in name, in order to ride on the market tide created by the blockchain hype.

This is not to say that L2 is completely useless in principle. But the truth is that other than high-frequency data or content streaming applications, one can hardly think of any L2 applications that are necessary when a public blockchain that can provide truly scalable Layer-1 (L1) solutions already exists.

L2 is always a compromise. People who don’t see this should ask themselves a very simple question: why inventing blockchain in the first place at all? If L2 could be a good solution, the existing non-blockchain technologies such as distributed databases would have all the answers that are not only just as good but in fact also enjoy a far more mature and established ecosystem, so there would be absolutely no need for blockchain.

To put it simply, any transaction that needs to be, or should be, atomic, or potentially needs to be distinctively identified (for accounting or auditing purposes for example), should be on chain, otherwise there would be no need of blockchain technology in the first place. Placing these types of transactions on L2 is dishonesty.

And transactions involved with NFTs and DeFi are certainly this type of transactions.

High-frequency data or content streaming applications are the only exceptions that would justify L2 solutions such as payment channels.

(Note, I’m talking about transactions, not tokens themselves here, as they are different things. There can be a strong case made for L2 tokens with on-chain data, messaging, records and verifications for many enterprise applications, as in what Tokenized.com is doing, but that’s a whole different subject.)

From this perspective, you see how elegant and promising the solutions offered by Bitcoin SV (BSV) are.

Metanet protocol proposed by nChain will be the real Web3. nChain’s products and services, such as Kensei, are going to constitute the true foundation of Web3 based on Metanet, even though Kensei presently focuses on enterprise data integrity and auditability and does not even use the word Web3. Not only more secure enterprise data systems, but also useful NFT systems with real legal property ownership rights, and much more, can be built on Metanet.

The NFT implementations today lack real property ownership control and management. These products exist only because of people’s ignorance and greed—ignorance because they don’t understand purchasing a NFT does not mean the NFT holder has full rights of property ownership, and greed because they believe the price is going to go up soon, so they don’t care.

But all these problems also find their roots in the inadequacy of the underlying blockchain. Most blockchains including Ethereum don’t even have the potential, let alone the reality, for full property rights ownership and management.

What is required is full Digital Rights Management (DRM)

DRM is a familiar concept. Many existing DRM techniques and systems may be used, but BSV blockchain has a unique advantage.

Using BSV can make the payload of the NFT (e.g., an artwork) displayable or operative under pre-defined conditions, e.g., a certain authorized person or device. As Craig Wright himself recently pointed out, using various compression and reduction techniques, thumbnails and images of various levels of resolution may be displayed according to the access authorization.

Furthermore, combined with the single source of truth (SSoT) and secure data services, BSV blockchain can offer superior DRM than the traditional methods. In an extreme case, not only hashes, but also the metadata and the full content data (for example, a high-resolution image itself that is being tokenized) may be stored on the chain, thus decentralizing not only the user access control, but also the very existence (storage) of the NFT’s underlying files themselves (on-chain storage of the content data being an option, not a requirement).

The BSV blockchain with nChain’s enterprise data solutions will also guarantee uniqueness of a digital asset, copycat protection, reliable availability, traceability, proof of authenticity, cost reduction etc. All these allow the owner of the digital right to not only view it but also sell, transfer, stream, license, rent, and display the NFT in a controlled manner.

And that is only about NFT. The BSV blockchain supports a broad range of Web3 applications.

Be prepared for irony though:

The only blockchain that focuses on real legal property rights, productivity and utility happens to be the one that is most hated and most ignored.

Sure, it is still small, and is just burgeoning measured by the actual development of applications and adoption. But it is painfully focused on productivity and utility.

The total number of transactions per day is only about 10 times that of BTC, and 2 times that of Ethereum. But over 95% of these transactions are NOT trading of the tokens themselves but rather actual user applications, in contrast to the reverse percentages on other chains. And those numbers will increase another 10 times within a year based on the current trajectory. The Bitcoin SV infrastructure already has the scalability to handle a thousand times the current numbers and can be horizontally scaled to handle essentially unlimited number of transactions at a cost lower than one hundredths of a cent.

But equally important, the developers in BSV are focused on actual utility. It is a fact. And it is not only because they are a group of people who tend to philosophically value utility more than coin alchemy, but also because they have not suffered the curse of the distraction of getting rich quick or having got rich quick without Proof-of-Work. They persevere and fight for something good. The future looks upon them with gentleness.

Watch: CoinGeek New York panel, The New World of NFTs