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<\/p>\n“Web3” is an undefined marketing buzzword. It means whatever the advocate in question needs it to mean in that sentence.<\/p>\n
(The call to action always involves buying their cryptos, for some reason.)<\/p>\n
How does Web3 work? Well, it\u2019s nothing to do with any technology.<\/p>\n
The entire venture capital push for Web3 is so that Andreesen Horowitz (a16z) and friends can dump ill-regulated tokens on retail as fast as possible. This gives the VCs very fast liquidity events \u2014 the bit where they make money \u2014 and much faster than they get from investing in actual companies.<\/p>\n
The VCs try not to commit the securities fraud themselves. Their business model here is to incentivise<\/i> it.<\/p>\n
<\/p>\n
Cashing out from a startup can take years \u2014 but dumping a minor altcoin<\/i> DAO governance token on retail can be completed in just a few months.<\/p>\n
One worked example I go on about a bit is the Compound COMP dump<\/a> in June 2020. The Compound DeFi protocol is blatantly<\/em> an investment contract \u2014 you hold tokens in Compound, and get a return on them (yield) from the efforts of others:<\/p>\n Maybe the SEC will bring a case by 2024.<\/p>\n The purpose is to skim dimes from suckers, and funnel them to a16z. If you ever wonder \u201cwhy did that VC-funded DeFi protocol think X was a good idea?\u201d, that\u2019s the answer.<\/p>\n A lot of these DAO governance tokens would be unregistered securities \u2014 in fact, The DAO from 2016<\/a> was deemed an unregistered offering of securities [SEC<\/i><\/a>, PDF<\/i>] \u2014 but the SEC is very slow-moving.<\/p>\n So the other part of the business is to put so many of these schemes into play that the SEC can\u2019t keep up. There\u2019s a reason why SEC chair Gary Gensler is asking for new regulation.<\/p>\n If you look at a Web3 offering and just think of it as a pump-and-dump onto retail investors, everything using the marketing name \u201cWeb3\u201d will make much more sense. Ed Zitron summarises the area. [Substack<\/i><\/a>]<\/p>\n This is a fabulous hack on SEC rules, which protect investors against issuers. In the DeFi, DAO and NFT space, the investors drive scam offerings \u2014 and the issuers are the disposable suckers, lured in by the promise of VC cash.<\/p>\n If the SEC doesn\u2019t step in, the VCs win; if the SEC does step in, the VCs don\u2019t lose.<\/p>\n The template here was the Telegram Messenger ICO \u2014 where the SEC did come down on the VCs, because the VCs were promoting Telegram\u2019s GRAM tokens<\/a> to the extent that they would legally constitute underwriters.<\/p>\n In early 2018, Telegram got $1.8 billion \u2014 in actual dollars, not cryptos \u2014 on the promise that the investors would get GRAM tokens once the Telegram Open Network launched.<\/p>\n The investment was on the Simple Agreement for Future Tokens (SAFT) model \u2014 a way to sell securities that would allegedly transmute into non-<\/i>securities once they reached retail buyers. A lot of ICO issuers in 2017 and 2018 fervently insisted that this would totally protect them from the SEC!<\/p>\n The scheme was:<\/p>\n The SAFT didn\u2019t protect Telegram from the SEC:<\/p>\n Defendants essentially seek to obtain the benefits of a registered public offering without assuming the disclosure responsibilities and legal strictures designed to protect the investing public.<\/p><\/blockquote>\n Step two was tricky. The VC holders had enough involvement in marketing the tokens that the SEC said they\u2019d have constituted underwriters for the securities in question. An underwriter is an entity that helps a corporation raise money from investors. This is the role usually taken by an investment bank in promoting an IPO, for instance.<\/p>\n Telegram, working with the initial purchasers of Grams, set out to skin the retail buyers that securities registration is intended to protect. This sort of scam is precisely why securities registration exists.<\/p>\n Andreesen Horowitz still blatantly uses Coinbase as a channel to dump venture capital coins on retail. The coins are usually terrible investments. (As well as unregistered securities.) [Substack<\/i><\/a>]<\/p>\n In fact, Coinbase does this itself \u2014 a whole pile of coins got a listing soon after Coinbase Ventures put in money. Sometimes, Coinbase Ventures even disclosed the investment! Coinbase says that Coinbase Ventures has \u201cno influence\u201d on listing decisions, and I\u2019m sure that\u2019s very believable. [Financial Times<\/i><\/a>, paywalled<\/i>]<\/p>\n In the present examples, the VCs are stepping back from quite such an active role in token promotion as they had in Telegram’s ICO \u2014 instead, Chris Dixon from a16z just relentlessly promotes the idea<\/i> of Web3.<\/p>\n Sometimes the VCs don\u2019t step back so much \u2014 they engage support staff to work with their portfolio companies. This can look a lot like being an active partner in the business.<\/p>\n Paradigm, Andreessen Horowitz and Union Square Ventures are being sued in a class action by UniSwap investor Nessa Risley, who claims the VCs have this level of involvement. Her claim is that: [ClassAction.org<\/i><\/a>; <\/i>complaint<\/i><\/a>, PDF<\/i>]<\/p>\n \u201cThese allegations are meritless and the complaint is riddled with factual inaccuracies,\u201d said UniSwap, because of course they did. [Fortune<\/i><\/a>]<\/p>\n NFTs are unlikely to be securities \u2014 legally, they\u2019re \u201ccollectibles\u201d \u2014 so even better.<\/p>\n (Some NFT marketing looks very like a security. e.g., <\/em>Larva Labs kept 1,000 of the CryptoPunks for themselves, and actively promote the tokens.)<\/p>\n Compared to the token dumping on retail, the least<\/i> reprehensible move is venture capital pouring investment funding into OpenSea \u2014 which is pretty much the whole NFT market.<\/p>\n The NFT market was dying in April 2021. Then OpenSea was funded heavily and pushed hard \u2014 $23 million of investment in March 2021, $100 million in July 2021 and $300 million in January 2022. [Crunchbase<\/i><\/a>]<\/p>\n I\u2019m assuming the OpenSea dump will be taking the company public \u2014 an S-1 is the acceptable and legal way to dump on retail. Look at how a16z dumped Coinbase stock on retail, and how Coinbase\u2019s stock price has gone steadily down since the initial public offering \u2014 from $328 on opening day to $154 as I write this.<\/p>\n Joel Spolsky wrote in 2002 of how companies want to commoditise their complement<\/i> \u2014 they want to take the industries that are complementary to themselves, and turn them into generic commodity vendors who will fight each other to the death for ever-decreasing stakes. This is so your complements can\u2019t unite against you. His example was Microsoft making PCs into a commodity, so that Microsoft\u2019s operating system would be where the profit was. [Joel On Software<\/i><\/a>]<\/p>\n Offerings of tokens \u2014 that may or may not constitute securities \u2014 are a complement to cryptocurrency venture capitalism. Venture capitalists are commodifying their complement, to form a gig economy of token offerings, in an attempt to outsource the legal risk and take the money.<\/p>\n <\/p>\n\n
How to do securities fraud in reverse<\/h3>\n
How Telegram failed to dump on retail<\/h3>\n
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How Web3 hopes to do it<\/h3>\n
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How to NFT: buy the NFT markets<\/h3>\n
How to run a gig economy for token offerings<\/h3>\n
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