NFT flaw! Web 3.0 just had its 'Emperor's New Clothes' moment; what Signal founder said

Signal founder made an NFT and posted it to a popular NFT marketplace. Within days his NFT was taken down and it disappeared from his crypto wallet.

Visitors in front of an immersive art installation - "Machine Hallucinations - Space: Metaverse" by Refik Anadol, which will be converted into NFT and auctioned online. (REUTERS)

A respected cryptographer pointed to a critical flaw in NFTs and other ‘distributed' tech, in a devastating critique.

Web3 or Web 3.0 has become the latest craze for investors who fear missing out. Hotter than bitcoin, harder to understand than artificial intelligence and also painfully abstract, Web 3.0 points to a more transparent, decentralized and equitable web, which in principle is better than an Internet controlled by a handful of mega corporations.  This idea for the next iteration of the web is a terrific concept, but one which, like communism, can't really work in its current form.

The problem is Web 3.0 is not all that distributed nor is it particularly equitable or transparent. It is highly centralized, despite being touted as a decentralized alternative to the web. That was the indictment from Moxie Marlinspike, a highly respected cryptographer and founder of encrypted messaging app Signal, who published a damning blog post about Web 3.0 over the weekend. On Monday, Marlinspike also announced he was stepping down from Signal after a decade of running the company. 

To be sure, bigger names have already taken a shot at Web 3.0:

But Marlinspike's post caused waves in the tech industry for its clear-eyed and technical breakdown of why Web3 wasn't working as promised. 

Web 3.0 broadly refers to a next chapter of the Internet where the apps and services people use are radically restructured to run on blockchain technology, as opposed to company-owned platforms, meaning their inner workings are made more transparent and content creators have opportunities to take a slice of proceeds. It has been pushed hard by venture capital firm Andreessen Horowitz, which has invested in several Web 3.0-building companies because the “digital status quo is broken.”

If Web 1.0 was the beginning of the Internet with read-only websites, Web 2.0 ushered in the Internet platforms on which users read and published, while the platforms consolidated power and proceeds. Web 3.0 is supposed to disrupt the power of those gatekeepers. In actuality, it doesn't.

Marlinspike created his own apps for investing in NFTs to poke around the current system, and he found a small group of companies that users had to trust in order to access data stored on the blockchain. In today's Web 3.0, access to the blockchain is still concentrated among just a few firms. That is something many people who use decentralized apps already knew but didn't recognize for what it was: a bug in the system's mechanics and principles.

Marlinspike made an NFT of a geometric drawing of lines. He posted it to OpenSea, a popular NFT marketplace that recently raised $300 million, minting its two founders as billionaires. Within a few days his NFT was taken down and, more concerningly, it disappeared from his crypto wallet. The reason: End-users like Marlinspike don't have direct access to the blockchain, and some Web 3.0 companies, such as his crypto wallet provider, had to go through a few, bigger companies to access it too.

To see a piece of art on the blockchain, even one that he owned, his crypto wallet provider had to access the necessary data via OpenSea, which had taken it down “without warning or explanation.” It wasn't that his NFT didn't exist anymore — his wallet just couldn't show it to him. A spokeswoman for OpenSea said it was against the company's policy to sell NFTs using “plagiarized content,” which appears to have become an issue when Marlinspike allowed people to mint a token for his NFT.

Marlinspike provided a few other examples in his post to illustrate the point that blockchain services were actually centralizing the flow of data. In other words, the very first applications of Web 3.0 technology are already gravitating toward structures that underpinned the current web.

A quick view on the mechanics and why this is so: Blockchain technology works by creating trust-distributing connections between servers, a.k.a. powerful computers, not between people with mobile phones like us. “People don't want to run their own servers,” Marlinspike wrote. That is why companies have begun selling access to servers connected to the blockchain, becoming not unlike the companies that built the infrastructure of Web 2.0. Ozone Networks Inc., the owner of OpenSea, is one company doing this, as are Infura Inc. and Alchemy Insights Inc. Many so-called distributed apps, or dApps, link to these firms to access the blockchain.

These companies are not bad. They are simply seizing a business opportunity that exists within the limits of blockchain. While it's technically possible to restructure the rules of blockchain to make it less reliant on a few firms, that would require getting the consensus of thousands of developers over the course of years. That is a big, human problem, not a technical one, which makes solving it look all the more unfeasible in the near future. The difficulty of tinkering with software and getting many other people to agree to changes is why one of the world's most popular protocols, underpinning e-mail, looks no different to how it did a decade ago.

For his part, Marlinspike does not speak about the investment premise of Web 3.0, other than to say that it won't be a “blip” and there is enough money in the space to keep it going for some time. His bigger concern is privacy — not surprising given his work helping to build the protocol that underpins end-to-end encryption on WhatsApp, as well as his own messaging app, Signal. In acting as gatekeepers of data, Web 3.0 companies have even more insights into what users are doing than companies like Alphabet Inc.'s Google and Meta Platform Inc.'s Facebook.

That could become a bigger problem if Web 3.0 companies reach the scale of Big Tech today. Given the strangeness of their mechanics though, it is hard to see that growth happening anytime soon, if ever.

Parmy Olson is a Bloomberg Opinion columnist covering technology. She previously reported for the Wall Street Journal and Forbes and is the author of 'We Are Anonymous.'