Many crypto enthusiasts trying to build a more decentralized Internet (Web3) feel some cognitive dissonance when considering the current state of the ecosystem. For example, OpenSea is the most popular platform for minting, buying, and selling non-fungible tokens (NFTs) – but it’s also a centralized platform run by a for-profit company.
Let’s take a closer look at Web3, how it’s becoming centralized, and the path toward decentralization in the future.
What is Web3?
Web3 represents an evolution from a handful of Web2 social media giants controlling data and user interactions to a fully-decentralized Internet where users own their data. Under the hood, that means moving data off corporate server farms and onto distributed blockchains and networks that no single entity owns or controls.
At the core, blockchains deliver on the promise of decentralization. Rather than storing data on a social network or other centralized service, users can keep their data on a blockchain that doesn’t rely on any single corporation or user. At the same time, the immutable nature of blockchain data means that nobody can alter data.
Of course, you cannot cost-effectively store large amounts of data on a blockchain. For example, if you want to share an image or video (e.g., an NFT), you typically point data on the blockchain to an external resource. Fortunately, distributed hosting technologies, like IPFS, store data across millions of nodes rather than a single centralized server.
And finally, smart contracts are another core component of Web3. Rather than trusting an intermediary, smart contracts enable two parties to transact without implicitly trusting each other. For example, a decentralized finance (DeFi) dApp might help one person loan money to another while handling the interest and other back office services.
Centralization of Web3
Every dApp must interact with the blockchain to modify or render state. But unfortunately, smartphones and browsers aren’t well-equipped to natively run blockchain nodes. As a result, these clients often interact with blockchain nodes on a remote server. And these servers are only run by a handful of entities – resulting in centralization.
Most dApps use Alchemy and Infura to access the Ethereum blockchain under the hood. These companies run an Ethereum node and provide convenient APIs to access blockchain data and helpful metadata (e.g., analytics). As a result, most dApps don’t connect directly to the blockchain – they rely on API endpoints from these two companies!
These companies are funded and at least partly owned by a handful of venture capital firms. For instance, ConsenSys, owner of the MetaMask wallet and Infura, recently raised a $450 million Series D round valuing the business at about $7 billion. Meanwhile, Alchemy raised $200 million last February, valuing the business at $10.2 billion.
Non-fungible tokens (NFTs) offer another example of centralization. While NFTs live on the blockchain, they contain a URL that points to external data (e.g., an image or text). If an IP address changes or a domain drops, the NFT’s artwork can quickly disappear. The only exception would be artwork hosted on decentralized networks, like IPFS.
Matthew Rosenfeld, popularly known as Moxie Marlinspike, documented these problems in a famous essay. In an experiment that drove his point home, he minted an NFT on OpenSea, pointing to an image that changed based on the viewer. OpenSea removed the NFT from its website and his MetaMask wallet (which, it turns out, uses OpenSea APIs).
By default, every MetaMask transaction runs through Infura and Consensys’ servers. These servers could maintain logs containing everything from your IP address to your ETH address. As a result, there’s little to no privacy or resilience benefits to using dApp versus conventional centralized apps when it comes to these use cases.
A Decentralized Future
Marlinspike points out in his essay that the centralization of Web3 reflects the same problems facing the early Internet (Web1). In particular, people want to avoid the hassle and expense of running their own web server and prefer the fast innovation of private companies over the slow evolution of open-source protocols.
According to Marlinspike, overcoming these hurdles will require systems that distribute trust without having to distribute infrastructure and protocols that make it easier to build blockchain software without centralized platforms. However, he points out that having a bit of centralization in the meantime is okay.
Meanwhile, Ethereum Co-Founder Vitalik Buterin believes it will become easier and cheaper to build and run applications directly on the Ethereum blockchain. In addition, he notes that developers are working on building lightweight clients that verify signatures on block headers or talk to multiple API endpoints across different companies.
Ultimately, dApp developers and consumers usually choose the easiest and most feature-full option. While centralized platforms offer these features now, blockchain protocols are quickly evolving to fill the void. That said, centralized platforms will likely be one step ahead due to the slow nature of protocol development.
The Bottom Line
Web3 represents an evolution away from today’s social media giants to a decentralized Internet where users control their data with blockchain technologies. Unfortunately, many of today’s Web3 dApps leverage centralized platforms providing easy access to the blockchain but undermining the tenets of decentralization.
While blockchain developers are trying to address these problems by making it easier to run nodes on any device, centralized platforms may always be more convenient for users and developers. As a result, the future will likely be a combination of the two. And, according to some, that’s not necessarily a bad thing.
If you trade crypto assets like NFTs, ZenLedger can help you aggregate transactions across wallets and exchanges and access the data you need to complete your taxes each year. Get started for free today!