Is the Bottom In for Bitcoin? Market Sell Off Poised to Continue, Analysts Say

Web 3 has stunned the world by forging a parallel system of finance of unprecedented flexibility and creativity in less than a decade. 

Cryptographic and economic primitives, or building blocks, such as public key cryptography, smart contracts, proof-of-work and proof-of-stake have led to a sophisticated and open ecosystem for expressing financial transactions.

Yet, the economic value finance trades on is generated by humans and their relationships. Because Web 3 lacks primitives to represent such social identity, it has become fundamentally dependent on the very centralized Web 2 structures it aims to transcend, replicating their limitations.

Glen Weyl is a researcher in the chief technology officer’s office at Microsoft and co-author of “Radical Markets.” 

This article is adapted from “Decentralized Society: Finding Web 3’s Soul,” a paper he co-wrote with Puja Ahluwalia Ohlhaver, a strategist at Flashbots, and Vitalik Buterin, the co-creator of Ethereum

For example, the lack of Web 3-native identity and reputation forces non-fungible token (NFT) artists to often rely on centralized platforms like OpenSea and Twitter (TWTR) to commit to scarcity and initial provenance, and prevents less than fully collateralized forms of lending. 

Distributed autonomous organizations (DAO) that try to move beyond simple coin voting often rely on Web 2 infrastructure, such as social media profiles, for resistance to Sybil attacks (one or a few entities pretending to be many more entities). 

And many Web 3 participants rely on custodial wallets managed by centralized outfits like Coinbase (COIN). No wonder: Decentralized key management systems are not user-friendly for any but the most sophisticated.

In our paper, we illustrate how even small and incremental steps toward representing social identity with Web 3 primitives could solve these issues and bring the ecosystem far closer to regenerating markets and their underpinning human relationships in native Web 3 context.

Even more promising, we highlight how native Web 3 social identity, with rich social composability, could yield great progress on broader, long-standing problems in Web 3 around wealth concentration and vulnerability of governance to financial attacks

Our key primitive is accounts that hold publicly visible, non-transferable (but possibly revocable by the issuer) tokens. 

We have chosen this set of properties not because they are clearly the most desirable collection of characteristics, but because they are easy to implement in the current environment and permit significant functionality.

We refer to the accounts as “Souls” and tokens held by the accounts as “Soulbound Tokens” (SBT).

Despite our deep interest in privacy, we initially assume these will be publicly visible because it is technically simpler to validate as a proof-of-concept, even if limited by the subset of tokens users are willing to publicly share. Programmably private SBTs are a next step we discuss below.

Imagine a world where most participants have Souls that store SBTs corresponding to a series of affiliations, memberships and credentials. 

For example, an individual might have a Soul that stores SBTs representing educational credentials, companies they’ve worked for, hashes of works of art or books they’ve written, etc.

In their simplest form, these SBTs can be “self-certified,” similar to how we share information about ourselves in our resumes.

But the true power of this mechanism emerges when SBTs held by one Soul can be issued by other Souls, who are counterparties to these relationships. These counterparty Souls could be individuals, companies or institutions.

For example, a university could be a Soul that issues SBTs to graduates. A stadium could be a Soul that issues SBTs to longtime Dodgers baseball fans.

Note that there is no requirement for a Soul to be linked to a legal name, or for there to be any protocol-level attempt to ensure “one Soul per human.” 

A Soul could be a persistent pseudonym with a range of SBTs that cannot easily be linked. We also do not assume non-transferability of Souls across humans. Instead, we try to illustrate how these properties, where needed, can naturally emerge from the design itself.

Currently, the Web 3 ecosystem cannot replicate even the most primitive forms of uncollateralized lending, because all assets are transferable and saleable – thus simply forms of collateral. 

The traditional financial ecosystem supports many forms of uncollateralized lending, but these are often mediated by centralized credit scoring mechanisms – the rationale being that less-creditworthy borrowers have little incentive to share information about their creditworthiness.

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