CONNETOME WHITEPAPER

v0.1 13/06/2022 v1.0 11/08/2022 v1.1 01/09/2022

Authors: Jakub Siwiec

Table of content

Why we do what we do and what are our views on blockchain

8. Web3 as the part of the transformation, not transformation itself

11. Summary – and what we want to do

Solution

15. Positive spillover effects

17. Case studies

Regulatory requirements for DeFi
UniSwap lawsuit
The whale of Solend

Why we do what we do and what are our views on blockchain

What blockchain and web3 really are

Blockchain

Blockchain is a database type. In this database type, the records are written in the blocks and cryptographically linked together one by one.

Blockchain enables distribution in the peer-to-peer network but it is not its embedded characteristic. Blockchain can be stored on one computer. There are private blockchains as well. They are controlled by one or some specific organizations. Technically private blockchains can be distributed. They can be even partially decentralized. But do not have to be. There could be one node stored on one computer, even if it might make no sense.

Distributed Ledger Technology is a decentralized database, synchronized across different locations shared by multiple machines.

According to Wikipedia 1, all blockchains are considered DLT but this is not true. There can be a blockchain that is not DLT. However, a blockchain that is DLT is what currently everybody means when speaking about it. Additionally not all DLTs are blockchains. They can be other types of databases that enable distribution across different machines.

Blockchain, in the version we speak about these days, promises mainly 4 values. That it is:

Public – visible for everyone, open-source, and everyone can join as a node
Permissionless – anyone can transact in the blockchain, which means adding a block to the chain as long as they stick to the protocol
Trustless – nodes do not need to trust each other. The parties of the transactions also do not need to trust each other. The middleman providing trust (e.g. financial institution) is eliminated and trust is provided by code.
Decentralized – single entity does not control the blockchain

Some of the promises from above combined with technological solutions result in the enablement of blockchain:

Being a single source of truth
Allowing for decentralized automation based on that single source of truth
Being a permanence of storage with practically no downtime
Immutability
Pseudoanonymity

Web3

When it comes to web3, it is still not 100% clear what it really is. Usually, it stands for the decentralized internet, which will be owned by the people, not the government or big corporations. Users, creators and/or employees would have the financial stakes in the parts of the internet. There are many definitions, but in the blockchain context, it is supposed to use DLT like blockchain and distributed virtual machines.

We could consider web3 more like a digital cooperative. The idea is not that new. In many countries, you can find similar kind of organizations that have existed for years. Robert Owen, one of the founders of utopian socialism, is considered to be a pioneer of this kind of institution. According to the World Cooperative Monitor 2019 around 10% of the world population actively works at cooperatives. World cooperatives mostly are involved in the industries of agriculture, insurance, wholesale and retail trade and financial services.2

Web3 community imagines the internet with many of such digital cooperatives being automatized DAO (Decentralized autonomous organizations). They could be companies, political and economic institutions.

Or perhaps, a better description of web3 projects would be a concept coined by Canadian Minister of National Defence, Anita Anand, Shareholder-driven Corporate Governance.3 This definition especially matches with the Proof-of-Stake consensus mechanism in which people sometimes stake their coins or tokens to take part in the governance.

The values of web3 are similar to that of blockchain. Transparency (being public), permissionless, decentralization and to a certain extent trustlessness.

Web 2.0 and Web 1.0 are predecessors of Web3. Have features of web 1.0 disappeared in web 2.0?

No. User-generated content is an important part of the web nowadays, but static content by centralized entities still exists. Web 1.0, and web 2.0 are not defined binarily. These are very loose terms.

Web 2.0 is about user-generated content and user contributions. Web3 looks like a tweak to web 2.0 involving a different system of incentives, build on a specific kind of infrastructure.

(Real) value propositions of blockchain

Blockchain not about the blockchain

What we will show later, is the blockchain is not about the blockchain technology even in technological terms. That is why, recently, we can observe the switch in definitions to the previously mentioned Web3/Web 3.0. term. The change is not only the rebrand previously not so welcomed by some communities crypto and blockchain, but the new term reflects the reality more. That is why, most of the time, we will be using the term Web3 what many call blockchain.

Let's think what is the key value proposition of web3 and blockchain. There are products that offer private blockchain. There are also permissioned blockchains. Sometimes there are doubts about the decentralization of blockchain when most of the nodes are controlled by some big players. So the question is – what makes blockchain blockchain how we understand it now? Technically it should be decentralization and distribution of the database. Trustlessness, permissionlessness and transparency are the features without which blockchain as a database could get away with in many projects. While without being distributed and decentralized, it is difficult to find a reason to use blockchain instead of regular databases.

Looking from the technological point of view, do distribute databases equal blockchain? No. For example, there are similar distributed databases to blockchain which also can have practical usage. For example, Gnome distributed mesh networks work well for the applications coordinating drones.4

There are more examples. You could have other DLTs that would work fine like Tangle or Hashgraphs. What is more, there could be a non-DLT database, distributed across the network that would keep the value propositions of the blockchain. Of course, someone could reasonably argue about the efficiency of such a solution. But, for example, the Ethereum chain constitutes a tiny fraction of the full node. True, everything that happened on the Ethereum blockchain can be recreated from the Ethereum chain. But the distribution of non-blockchain data is common in the current environment and no one even cares about it. Therefore, the conclusion is that the distribution, not the blockchain itself is the key value proposition.

But distribution itself is not enough to capture the value proposition of blockchain. Cloud services like AWS are also distributed across different machines and even locations.

Another mentioned characteristic of most blockchain projects is decentralization. It means that the decision-making is transferred to the distributed network. In practice, some projects can be less or more decentralized. It is difficult to binarily describe to which extent a network is decentralized when the distributed network consists of some big players or it is in the hands of a few.

Thus, it is not blockchain that is the key in the blockchain. It must be something else. There are other kinds of databases that are distributed and decentralized. The rest of the features of blockchain projects could be added to them as well. Our hypothesis is: that when talking about the innovation of blockchain or web3, we are speaking about distributed and decentralized databases. Blockchain itself is just a technicality that may but does not have to matter.

Is Bitcoin so great?

You can read about the advantages of blockchain which are simply not true or are not true for many projects. For example, videos of people paying in Bitcoin, in the context of being ultra high tech and innovative in terms of user experience. It is not true. Paying in Bitcoin is worse in terms of user experience than other kinds of payments e.g. like through OpenBanking API. It is more expensive, slower, and the settlement takes more time. Some other blockchain projects tackle some of these problems.

What is more, we can think, is that excitement about Bitcoin justified without its scalability? When it comes to the current solution, we have technically nicely solved a double-spending problem without engaging any third party. But in practice, we incur relatively high gas fees, the settlement being slow in a congested network, as well as high environmental and resource costs to process the transactions. As mentioned before – modern banking works not only fine – it has a better user experience.

Some people raise the argument that in some countries it is not that easy to transfer money electronically. We do not agree that it is a pro-Bitcoin argument. Then bringing modern banking to these countries would be a much more advanced innovation than bringing blockchain. As a currency Bitcoin is just a bad solution. Despite reaching great value through a network effect, it only brings the promise of future changes and that other blockchain products will innovate things better.

We can hear much about how blockchain potentially can be used in finance, healthcare, supply chain, IoT, voting, marketing and many more. However, when you look around, you see that the world operates off-chain. The virtual world of blockchain is a separate universe (I do not use the world metaverse on purpose). Blockchain solutions are the exceptions, not the rules.

So far blockchain has been most useful for gambling/trading and entertainment as well as illegal activities like buying drugs such as cocaine. Not only Bitcoin but also blockchain has not been that practical by now.

Is taking the usefulness of blockchain for granted and assuming that one day everybody will just switch to it, is not a rational approach?

Why web3 will not be everything

Blockchain maximalist scenario

Let's use a bit of imagination. Picture a future community supported by seamless companies, run by algorithms and its stakeholder consensus. This is a web3 maximalist scenario.

For example, a private company wins a public tender for the replacement of internet cables in city X. For now, let's assume that the work will be done by humans, not robots. The public tender was run by a smart contract written by some individuals. The public accepts it by sticking to its results and enforcement. The workers begin replacing the cabling. They are controlled by AI and non-AI algorithms. At the end of the work, the completion is verified by electronic devices which are part of IoT. They receive the money, or the rest of the money if they were paid some part in advance when the work is completed through the smart contract. Administrative work is done seamlessly and automatically.

Of course, the example from above is imperfect and assumes humans are not run completely by robots even in the physical world (and that basically, machines are building the infrastructure for themselves, not because of the human orders). What is more, a smart contract would need wide public acceptance. Legitimization of smart contracts would need to be part of the social contract, either through public administration as a principal, private companies' responsibility or law.

Trust

Bruce Schneier makes a good point that the verification is not a trust. It is true that preventing double-spending in Bitcoin helps in blocking some kind of illegal actions in bad faith. However, it is not worth much if there is no trust in the entire system. And let's be honest, we are at the stage when web3 is a wild wild west for the hackers and fraudsters. Trust is a social feature. As Schneier mentions there are four characteristics that incentivize trustworthy behavior – morals, reputation, institutions (imposing rules and executing them) and security systems. Blockchain has them covered by transferring some trust in people to trust in technology. 5

In other words, in a simple example – when making a Bitcoin transaction, you trust its blockchain code. In the case of a banking transaction, you trust the bank because the bank is responsible for its completion.

Do people trust code more than people? It is a wrong question. In the case, of blockchain, self-driving cars etc. it is not about code but non-human, automatic, machine-only systems. Potentially, in the future full reliability in the systems out of human control may happen. But nowadays, we are in the moment when people's trust is a feature of the human's interaction. A visible person on another side very often increases the trust in a product or sale. The feeling that someone is accountable and responsible for part of the project increases its acceptance.

That does not mean that we never trust machines. Autopilot in the plane is fine for the passengers but if both of the pilots would leave the cockpit it becomes more stressful. Who knows, maybe in the future we will fully trust self-driving cars or drones when they will be fully reliable. But it has not happened yet.

Someone who knows a bit about the web3 could argue that no one speaks about full automation yet. It seems to be far away. But it is leading us exactly to the point of this chapter.

Because the question also is – is it really about trusting machines? At the end of the day, humans wrote the code. They programmed the machines. So the code is human-made. Let's say that not long from now Tesla, or another car company, would manage to manufacture on a wide-scale a self-driving car that would need 0 human intervention for a secure ride in the streets with other cars. If something would go wrong, it would be Tesla, an organization of people, with Elon Musk as the face of it, accountable for what happens. In the case of many, or maybe even most, blockchain projects, there is no accountability of anyone. Because of decentralization, the people are creators, but practically they are not owners of their products. Even if there is a company which builds the technology, in any case of failure it tries to shift the responsibility to the users.

One of the flaws of the current political and financial system is the lack of accountability of some influential people who contributed to causing problems, especially if accountability is diffused. Nassim Taleb in his book Skin In The Game says that Skin In The Game keeps human hubris in check. The entire book is about accountability – bearing a risk when making a decision. He sees that in many parts of the system there is no skin in the game of the people. The example, is advisors of banks, who after bailouts during the financial crisis of 2008, were not held accountable and even earned more from the crisis. Taleb advocates that for fairness and efficiency of the system it should be changed – people should be accountable for their action. When they have a potential of upside gain, they should also share downside risk with the others instead of transferring it to others.

So when it comes to the decision-making and political system, we are not there yet. But the majority consensus at this moment would not feel very comfortable with unelected, not accountable, to some extent also anonymous, individuals from the internet making some important decisions for them. Someone could argue that blockchain creators pay with coins and tokens responsible people own and their reputation. However, it is very similar to the bad practices of the current system. People who should lose their reputation are within communities of diffused responsibility. In terms of money, they have an advantage over regular people that, first, they are financially and connection-wise privileged, but sometimes also informationally privileged. If something goes wrong, they are able to react faster before the others, potentially even gaining from the problems they caused. Current web3 is not an improvement of that.

What is more, one of the criticisms of the current legal system is that sometimes it is too complicated. Lack of simplicity does not help raise trust. For a regular person contracts and laws written in the programming language could be even more overwhelming.

Do you trust the establishment or nerds?

The assumption of the web3 community, when it comes to mass adoption, is that people do not trust governments, big corporations and institutions. Many in this group think in terms of conspiracy theories that elites want to take over web3 and use it to their own benefit. The icon, especially in some crypto groups, is Klaus Schwab, the chairman of World Economic Forum.

When the web3 community portrays Klaus Schwab as an archetype of a villain who wants to control the world, people forget that nerds and unsocial geniuses also very often not trusted by a wide public.

You can see it happening with the image of Bill Gates or Mark Zuckerberg. Elon Musk also has many opponents and is viewed through its image.

When it comes to the web3 community, Vitalik Buterin's shared opinions on synthetic human wombs, do not help. We will not take a stand on this topic. But many have an impression that visionaries from different sides of the discussion, in the name of the effectiveness and productivity, want to dump what makes human humans and change them into the combination of working machines and consumers.

For the wider public, these geniuses and visionaries may not only be seen as before mentioned villains who want to control the world, but also as archetypes of mad scientists similar to Victor Frankenstein from Mary Shelley's Frankenstein.

In our view, in the fight against the establishment, which in the eyes of the web3 community is composed of people who are not to be trusted, they forget that the wider public may not necessarily trust them. If you are changing the world, want to impose your vision on the world population, it is natural that the wide public will not trust you to some extent.

Additionally, we are the most suspicious when someone plans what we should do or have because it will be good for us. It looks like we are not alone. The lack of trust in propositions of the speakers on World Economic Forum is a good example of that. Improving parts of tools or industries making them more productive feels very innocent when it comes to the perception of trust.

That is why, we think that in most of the circumstances (excluding revolutions), the general public would prefer to choose the safety of the government rather than the new nerds utopia. Not because governments do not tell people what to do (this is exactly what it does!) but because the changes are slow and usually lead to safety rather than risk and feeling of uncertainty.

Would you really prefer a machine over a human?

For a moment let's come back to the most extreme scenario – full automation and the absolute authority of machines. It may lead to Kafkaesque situations. In the case of more advanced technologies, there is a threat of Tocqueville's soft despotism, about which we will write later.

Not even mentioned the threat of a tyranny of the machines. Our system is definitely imperfect. As species, we have a long history of injustice. It does not look that ever will be completely eliminated. But as long as it is run by humans, there are humans on both sides. Both are imperfect, and both sides can be exploited for the other side advantage.

What is more, especially big institutions, are a bit faceless, soulless entities that see a human as a number. The law and procedures are literally like algorithms.

However, in the moment of moral injustice, there is a chance for understanding and compassion on the other side. Because even these big faceless, soulless institutions consist of humans. And humans are social animals.

In the world in which code would be law executed by the machines, we can count on nothing like that. It could be like losing a private key to a crypto wallet these days. If you lost it, it is your problem. No one can help you.

We must remember – we are building technology for humans, not telling humans to adjust to the technology. That is why, in what we are building, we need to think about human nature, and not imaginary problems or assuming forcing people into doing something they do not want.

Decentralization

Is full decentralization of web3 realistic? Our hypothesis is that it is not. Let's assume that web3 and blockchain take over the world. You can already see that private organizations like Binance, Coinbase, OpenSea are very big and influential. This is the same as what happened in the early era of the internet – the uncontrolled network was taken over by big players.

Additionally, a relevant amount of decentralized infrastructure is stored on the private servers. Even some NFTs are not stored in the distributed and decentralized storage service such as IPFS, Filecoin or Arweave but on regular servers in the cloud. An example is CryptoPunks, which stores hash of the image in the smart contract to verify whether the image stored centrally has not changed. And when they are, e.g. the copies of NFT images on OpenSea are stored on Google Cloud (probably to make them load faster).

In the early days of the internet, it was also pretty decentralized and out of control of big corporations. After some time has passed a lot of it is in the hands of big tech. Why would it be different in the scenario of web3 world domination?

There is an argument that web3 would lead not to a decentralized internet but a more centralized one instead.6

Regardless you are a libertarian, Marxist or anyone between, you will probably agree that the accumulation of capital in the modern world makes bigs bigger. Capital grows faster through capital than through labour. The origins of that is the point of a heated discussion between different sides of political and economic parties.

However, perhaps it will not be that controversial if we say that typically in the young markets there are a lot of different small players and in the mature ones few big dominating the industry (when it comes to the scalable types of services). Low barriers to entry help to bring to the existence small players, even in the mature market. But it is usually innovation, technology within or outside the industry and/or government intervention that disrupts big players. What is the basis to think that web3 would be different? Especially that even in the early days we see this process happening.

What is more, the considered problem of the current state of the internet is its centralization – which means that a few corporations and governments own it. But at the same time everyone can spin a private network. Everyone can have own servers. Even people from totalitarian countries are reaching the forbidden websites through VPN.

There is a Tor network, helping in staying anonymous (not perfectly though), free from censorship that is also decentralized (similarly decentralized to some PoS blockchains; decentralized but in the hands of few). Somehow it did not go mainstream.

For some reason, most of the people prefer to use services from these few big players, which lets companies like Google or Facebook have control over the content the population sees.

Looking at web3 purely technologically then – in case of its success, would this transformation lead to the decentralized internet or rather a transfer of power or its part, to some new small groups of people? Is it really about true decentralization? Do people know how decentralization works? And do people really want the decentralization?

Is the world already not decentralized?

But how does the traditional, real world works? Is it in the hands of a few?

Looking at the companies - who does really own them? In the case of private companies, it is true that the decision-making can be centralized. It has its advantages and disadvantages. However, these decisions are bound by other stakeholders interests. These are employees, customers, governments, certain communities.

With public companies, the decision-making may be dispersed. Of course, it is CEO who is responsible for vision and decision-making. But at the end of the day, shareholders own the company. They can fire CEO. They can influence the decisions. Company's committees are also not be underrated. And of course, we should also add other stakeholders to the list, similarly as in case of private companies, employees, customers, governments, communities.

So as you can see most of the big organisations are in practice decentralized to some extent.

What is more, as mentioned before, web3 projects resemble traditional cooperatives. We wrote before about the high numbers of people involved with this kind of organisation. As you may remember, these are not only agriculture organizations which work in this way. Let's take the 10th biggest bank in the world and the biggest financial cooperative Crédit Agricole Group (this is an agriculture bank, but they are more about being the bank than agriculture today). 7 It is owned by regional banks, which in turn, are owned by local banks. These smaller banks have almost 11 million members and appoint 32000 directors.

Pascal Delheure, deputy general director of Crédit Agricole's national federation (in 2018), says Credit co-operatives are not speculative banks, they collect money. Our co-operative model ensures there is a real benefit for members who are also represented in governance structures.9

The power is dispersed at the state-level as well. There are a lot of stakeholders who have a certain level of influence - beginning from people being ruled (regardless of the system) to other states. No state is fully independent from other states these days. In the Western democratic world, there is a separation of powers, which balances different centres of power. What is more, people who are decision makers in these branches of power, are not isolated entities who can do what they want. They are backed by certain groups inside that can take them down, if they go too far. It is not the characteristic of this system, but that of human nature. There are also media institutions (traditional and new kinds) which shape power, public opinion and have a significant influence on it. Apart from that there are also other institutions that have impact such as enforcement organization (e.g. army, police), financial organizations, corporations, NGOs, public figures like artists and many more. All the elements of the state from the top to the bottom influence and balance themselves. Sometimes some of them become too strong, but usually become balanced again.

It works in the same way in non-democratic, autocratic or totalitarian states as well. Very often such states have the face of one or few persons. The general public imagines that this person – a hero or villain, makes independent decisions. It is not true. All of the leaders are constrained by many group of interests. Decision-making resembles playing chess – you are limited by the rules and other figures.

The conclusion is – the fact that we are social animals, makes in real almost everything in the world decentralized. What differs is the extent of the decentralization and balance of decision-makers within decentralized groups.

There are many web3 projects. And what we mentioned before, it is not clear whether the blockchain will lead the internet to more centralization or decentralization.

In our opinion, decentralization is just a feature that cannot be evaluated without looking at the broader context. What really counts is whose interests are represented by the decision makers. In a dispersed organizations there is a higher chance that the interests of more parties are represented more fairly there and that the decision making can be often slow. However, it does not need to be that way.

We cannot ignore how certain parties, communities and individuals are incentivized. It is not only about financial renumeration but everything that drives the behaviour and decisions of these entities.

And let's not forget about the skills of the individuals influencing the systems which means how effective they are in pursuing their agenda.

Practicality

What also makes sense is that on the internet, where a broad consensus needs to be reached, the decisions are very slow to be made. Private companies with their own servers can move quickly. 10 That creates an advantage for non-decentralized over decentralized that in turn leads to better and more useful products in the constantly changing world.

Does it make decentralized web3 non-functional? Think about hardware. It also takes time to create it. The products need to be practically perfect in order to be worth anything. And this is how we can think of services and products built on blockchain. That world builds some hardware when it comes to digitalization. It is difficult to predict what will be the result of this.

No downtime?

In the early stage of the adoption of the Bitcoin blockchain, downtimes have happened. The last one was in 2013. Since then, no outage occurred. When it comes to Ethereum, it had no downtime at all. It was close, during the DDoS attack in 2016 during Shanghai DevCon2 conference, when the network was sluggish. Hard forks of Ethereum, when there is always the potential for an outage, went pretty smoothly.

However, one of the biggest blockchains Solana, by May 2022 experienced 7 outages in total (6 in January 2022). 11 The outages required a system restart. The reception of these events is negative. Potentially someone could say that outages are another inconsistency regarding blockchain promises. But we say it is too early to say whether downtimes will be widely accepted or not for decentralized blockchain. And whether they will be really happening for big blockchains.

Threats to web3

State

For the last few hundreds of years, states have been winning against corporations. The companies come and go but states are getting stronger and stronger. They also have the power to regulate and split the companies.

The power of the state is the fact that it has enforcement authorities. They can impose penalties, cut off the internet or in the most extreme scenario send the police or army to either just stop certain activities or put people to jail.

An example is what China did with crypto.

The state can enforce the policies if they want.

If the state loses legitimization or the discontent reaches a certain critical mass, it can fall. In recent history, if the state had collapsed, another state has been raising instead.

As mentioned before, the state executes the will of the people, at least to some extent. Or in order to maintain legitimization, the state cannot cross the line. It is not about people being happy, but not being unhappy enough to do something with their discontent (like in a definition of geopolitical balance of power).

At this moment, the states can practically do almost whatever they want with web3 and things like decentralized exchanges or NFTs. You can see authorities already coming in for it, penalizing instruments that generate revenue not registered as securities.

And the state may do it for the protection of the people. This is something very tempting for a wide audience. As mentioned before, our hypothesis is that people would prefer to choose the safety provided by the government rather than the risk provided by tech-bros. If the states will want to go hard on web3, web3 may not stand a chance of surviving in the form people imagine it.

Bubble and next new thing

Everyone sees that many projects in the blockchain industry are just ridiculously useless from a business perspective. They receive a lot of attention, very often they are technically done well, but they die quickly. Some others are not dying and nobody knows why. The prices go up and down, most of the time, in an inexplicable way. Everything is just random.

People keep putting money into the projects. They receive tokens or coins and convince others to buy them. The price of tokens and coins depends on the other joining the crowd and others not withdrawing their money. The similarity to the Ponzi scheme is pretty visible.

Do Kwon's Terra Luna crash showed the fragility of the industry and that it is not proof against the systemic risks.

The bubble can burst anytime and for whatever reason or market manipulation. Or even no reason. Especially if people will stop believing in the projects to have any use and will get discouraged. Potentially people may just get bored and move to something else. At the end of the day, web3 is about entertainment now.

Perhaps, web3 will just get boring and people will move to something else. Then the bubble could burst.

Not being good enough so just being useless

It is slightly connected with the previous point. Let's say the truth – for many of the solutions it just does not work better than other web solutions. As mentioned before, the blockchain database is good only for specific applications. So far it looks like this is a tiny range of things that is being used. The rest is the promise of the future. The market will verify the applications of blockchain.

What is really going on?

A nihilistic world where nothing is real

Are NFT arts real or not? If you own the token with the link to the file, but everyone else can access this link, do you really own it (forget for a moment about NFTs with SVG code stored on the chain)? If you imagine it, yes.

In the old medieval European culture, art was considered a masterpiece of and for God. A lot of art concerned religious and spiritual topics. We do not know the authors of much of medieval art. Some argue that it is because of collective work but a very reliable view is that the real reason was dedicating the art to God, keeping individualism aside and humility as a priority.12

The world was viewed through religious lenses. The rules, events, and things around were interpreted taking into account the faith in God and his will. With that being said, such an approach is still common in some parts of the world. However, it is much more rare in Western civilization than before.

God is dead wrote Nietzsche in Thus Spoke Zarathustra speaking about the departure from the religious societies in Europe and the arrival of something new. Something new was the society, in which people could potentially still practice religious traditions and believe in the Christian God, but life would not be viewed through the prism of the religion anymore.

Nietzsche died more than 100 years ago. The painting Black Square of Kazimir Malevich was sold for 60 million dollars in 2008. Why it is worth that much? It could be the result of the interpretation and imagination. Or simply the market price - how much someone is willing to pay for it. That results in which story people willing to pay for it are being told. It applies to most of the art, perhaps with the exception of the most popular art. It is just simply a revenue generator as a regular commodity. With that being said, it is difficult to explain why e.g. one song generates billions of streams and another one few hundred of them. It is always the mix of several factors – brand of the singer, catchy rhythm or voice, resemblance of other known songs, marketing and promotion, playing the song on the loop on the radio and many more which I will not list. However, why something goes viral is difficult to explain. There are some interpretations post-factum, like e.g. Gangnam Style was funny. But there is no clear recipe for the hit. Things are random and difficult to explain.

Let's come back to the stories. We people tend to listen and create stories. Our lives are stories. They do not need to be based on the facts. There are facts, but most of our lives are just interpretations. In the past, many legends and myths were spread among the people. Some people believed in them, some did not. There is also another category – of people who did not necessarily believe in them or not – but who wanted to believe. These are us, humans. In our everyday lives, sometimes the will to believe prevails over all the other things like another powerful story or facts.

With the era of books, and later telecommunication, namely television and the internet, we are surrounded by trillion stories everywhere. Human beings are storytellers and storylisteners. Exactly as before, the stories explain events, customs and motivate our behaviour.

Everyone can write their own story. In the era of the internet, it is more scalable. Social media create a fake reality and fake personas of the people. It is like a mask that is easy to shape. You can also be anonymous easier being whoever you want. Not a surprise that the new voice of the new generation screams more and more that they can be whoever they want. If you can shape your persona online, if you can be whoever you want in the video game, then why not in the real life? Why should you be limited if you can be whoever you want?

That is naturally leading to the topic of the metaverse. The main message of Metaverse Mark Zuckerberg's first presentation was that you can be who you want (represented by an avatar), where you want.

If the person's will is to be able to choose who they are, then the question is why people would take the institutions of the financial system as given, without the option of choice? Why people cannot say what is art and what is not? Why people cannot say what ownership means and what does not?

We are not writing here about how it should be. To be honest, we would feel more comfortable in the world of absolute facts. We only speak about how it is and how some people really think.

Money is also an abstract representation of value. And we are not speaking about the currency yet. Whatever it is that represents the value is a part of the social contract. Everything is contractual.

The difference between now and then was that the things became commoditized. And they are done for a reason. They require interpretation. But in our secular era, we intuitively perceive the things and do the things as they are real. Erving Goffman in The Presentation of Self in Everyday Life compared life to the performance in the theatre with the differences of the audience (other actors are the audience) and the way we act is how we feel.

Commoditization

A commodity is what is subject to trade – can be bought, sold or exchanged. Web3 and digitalization are about the digitalization of the commoditized market but mainly commoditizing the digital market.

For example, we can see the developing commoditization of things in the game industry. Or commoditization of online fame which now goes beyond the number of followers and sponsorship contracts but includes selling access to fan clubs through NFTs.

That is why there are no limits to go further in interpretation. If we use money and it means something because we imagined it, why we cannot imagine our own money? If we all agree on it, why not? If we agreed that Black Square is worth millions because we imagined it, then why the link to the file would not be worth more than zero?

It is all about the interpretation and how the story makes sense to the people.

Hostility towards financial institutions, big tech and government

We want to build a new world

The Genesis starts with

In the beginning God created the heavens and the earth.

This is the sentence of crucial importance for many religions and Judeo-Christian civilization. Some people may not believe in (this) God, never read a Bible, but still know the opening of Genesis. It says directly that there is one God (monotheism) and God is the creator of the world. If the group of people knew only this sentence out of all religious books, they would be able to explain what these religions are about and who is their God. Supposedly no another one does it so well.

When it comes to the ideological foundation of blockchain, it is Bitcoin Whitepaper and Satoshi Nakamoto is its creator. The fact that Nakamoto created Bitcoin and disappeared is described by some people as an immaculate conception of technology. The sacrifice of over 1 million Bitcoins which are still in the original wallet is being compared to Jesus' sacrifice for his beliefs. 13

What is the opening sentence of the Bitcoin whitepaper?

Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments

Those who are in the web3 community, especially the DeFi part of it, know what is the attitude to the existing financial institutions. It is not positive. Everything that is being built in DeFi is done so to replace the banks. Mottos like Banks Are Zeros are common in the community.14

It is not only banks that the web3 community does not like. The general sentiment about government and big tech is also rather negative. The regulation of the blockchain market is not warmly welcomed.

The permissionless, trustlessness and decentralization are directly aimed against current institutions. If anyone can transact, you do not need a middleman, and the infrastructure is held by the community, then there is no reason to need a centralized authority.

Degens vs boomers

There is a feeling of hostility against the older generation in the web3 community. Do not understand us wrong. Web3 community is diverse and non-homogeneous. But you can observe its tendencies of it by the reaction to certain events. When the president of El Salvador, Nayib Bukele, who is adopting bitcoin as a legal currency, told OK boomers… You have 0 jurisdiction on a sovereign and independent nation 15, it was rather welcomed than opposed in the web3 community. Usually, the politicians know how to speak to their audience, and we bet Bukele did it intentionally, knowing that he will receive the support in the web3 community. For those who do not know, ok, boomer is a phrase mocking the generation of baby boomers not understanding the new generation that got viral on TikTok in 2019. 16

The new generation wants to build a new world. Different than that of their parents and grandparents. They do not feel understood by the older generation. And consider the older generation closed-minded, wanting to maintain the status quo, which is unfair and inefficient.

Innovation

Disruptive technology

Clayton Christensen wrote about disruptive technologies in his books. He said that disruptive technologies are about creating their own market by either pursuing the smaller ones or nonexistent markets. It is a similar view to the Blue Ocean from Mauborgne and Chan Kim's Blue Ocean Strategy, where there is no competition.

Additionally, Christiansen found that the feature of disruptive companies is providing the services or products in a new, interesting way. With all of that, our mental maps, for example about finance, its current institutions and products, might be too limiting to imagine its future. And the future can be shaped by the web3 community.

Christiansen mentioned two additional characteristics of disruptive innovators. They were driven by core values and paying attention to what customers do rather than say.

We have already written about web3 values.

When it comes to looking at what customers do rather than say - some more questions should be asked. And it is difficult to say whether web3 is so practical for users. Depends on how to look at it. So far web3 is mostly used for entertainment and investment (or gambling) purposes. Is it inherently bad? Some may say that yes, but in what entertainment and investment/gambling are worse than other industries? Maybe that is the first niche that web3 occupies and with the development of the products will expand to other industries.

In his book Innovator's Dilemma, Christensen writes that the challenge of disruptive technology is not the technological one. Looking at his case studies, it is not about how technology is improved to suit a well-known market. The challenge is rather the marketing one. It is about how to find a market where the rules would favor a disruptive technology. In military terms, it is asymmetric warfare in which new technology would win.

Schumpeter's gale

Joseph Schumpeter, the Austrian economist, coined the phrase The Creative Destruction, known also as Schumpeter's gale.

It is the concept in economics that new technology brings something new and unavoidably destroys the old one. Some new production units replace the old ones and increase productivity. This is not only the law of economics but also the law of nature.

That is why we know that the new, disruptive technology brings not only an increase in productivity but also makes some victims along the way.

Despite the fact that it may be sad, we need to accept that with new innovation, there will be some people and areas of business that will not gain from it.

Web3 – world's R&D department

Ancient Greeks a steam turbine called aeolipile, was invented probably around 3rd century BC. It was an indirect predecessor of the steam engine invented over 1000 years later. A good concept and top talent working on it do not guarantee a practical, useful application of the technology.

Web3 community is probably the world's probably biggest open-source R&D department right now. Currently, the top talent goes there and billions of dollars are poured into cryptocurrencies and projects. It does not guarantee success. But our bet is that it makes it more likely.

All the work is based on what will be done in the future. Web3 as an ecosystem is one big laboratory, R&D world, in which thousand or, perhaps millions, of builders experiment with blockchain as the new technology and its applications.

But at the end of the day, in every R&D department there are wastes. In the lean method wastes (or muda) are to be reduced.

According to the Lean Enterprise Institute 17:

Type one muda creates no value but is unavoidable with current technologies and production assets. […] Type two muda creates no value and can be eliminated immediately.

You can reduce both types of muda but you cannot get rid of them completely.

And it is completely fine that a lot of the products in the blockchain ecosystem will be a waste. Business and technology are a Darwinian world. However, we should think about, what to do, so that the entire ecosystem would not be a waste.

At the end of the day, we need to differentiate, what will be the future value proposition of web3, cloud and on-site computing and storage.

The way of Web3

NFTs and disruption in the art industry

The traditional art market is an elitist environment with high barriers to entry. Of course, in theory, you can just make a painting and try to sell it in the street. That would mean that there are low barriers to entry. While it is partly true, if you want to mean something in the industry, you would rather need to go through e.g. art galleries. And for these, in turn, you would probably need to have some connections, and relationships or get there by some other means, perhaps by captivating art.

To be completely honest, people like us - and maybe that applies to the majority of society - do not get contemporary art. When it comes to the success of old art, it looks like skills were an important factor that was deciding who wins the place in history books. If one enters Sistine Chapel and sees its ceiling or sees Sagrada Familia, anyone, even people who do not know anything about art, are impressed by the skills of the Michelangelo, Antoni Gaudí and all the others who contributed to these works. If you look at Van Gogh's impressionist paintings they give you a certain vibe and feeling of aesthetics that is difficult to describe but you know that there is something special in them. There is also a big part of the art that is valued because of its historical context, such as Jacques-Louis David's Napoleon Crossing the Alps. You see this kind of art and get interested because of historical figures, events and other things that for some reason are relevant to you.

When it comes to contemporary art, it looks like very often is just about the context. There is not much about aesthetics, at least for complete newbies like us. A regular person does not get it. Let's take the Black Square painting, mentioned before. Was it an art skill that made this piece of art so expensive? Not really. It is its interpretation and story told that makes it valuable. And the interpretation is that first, it was first exhibited abstract painting, and second, that [Black Square is meant to evoke] the experience of pure non-objectivity in the white emptiness of a liberated nothing.18

What is the difference between interpreting the high value of Black Square and that of CryptoPunks or Bored Apes? None of them were first NFTs, but the value is a matter of interpretation, which in turn, does not need to be rational. Probably both of CryptoPunks and Bored Apes were like avatars for people, something with which their owners could identify. The first auctioned NFT was the Beeple's Everydays: The First 5000 Days. Some people were considering it ridiculous that it was sold for $69 million. But it is nothing new. This is the price of the art.

We will risk the hypothesis that art was always an elitist area. With that difference that in terms of paintings, and architecture, it was more often than now (or maybe better to say less rarely) about a wide public spiritual experience for some part of art. Currently, the supply of art is huge, while the demand, is not so large. But the restrictions for buyers also exist. If you want to buy a prestigious painting, you cannot just come and pay for it. Your background check will be done. You may be declined.19

In the era of covid, it has started to change, even without blockchain (online auctions). However, the market is stilled highly permissioned.

According to the UBS report, the top 20 artists made almost 40% of total auction sales in the market of contemporary and post-war art. The top 50 artists make 72%.20

So now it is easier to understand why the NFT art market became so hot last years. First of all, it provided another sales channel, which opened the doors for new artists, who had problems getting attention otherwise. Secondly, it made it possible for buyers to buy top art in a permissionless way. Third, it finally started taking into account a new area of art – the digital one. In the past, photos became art practically equal to paintings. Digital, computer-generated graphics, also can be another part of the industry. Fourth, many NFTs started applying potentially more difficult to execute, so called droit de suite (the commission for artists from future sales) in the code. And fifth, since the art does not need to be about aesthetics anymore but context, collecting the most popular kind of NFT art was part of not only flipping strategy but also about identifying with the group, often by the people who have no clue about traditional art.

Let's not forget about another important factor which is… ethers that people accumulated during the Ethereum rally that they were spending within the web3 ecosystem.

And there are even more advantages of NFT art market over the traditional one. In the traditional art market, transparency is really lacking. Very often you do not know what was the previous price of art and who was the buyer. Another thing is that around 90% of art is not displayed, but stored in the warehouses. With NFTs art is available for everyone. 21

Supply chains and information exchange; the example of TradeLens

In an international shipping containers environment, there are many different kinds of parties involved. Examples are port and terminals, ocean carriers, freight forwarders, shippers, intermodal operators, authorities, and financial service providers. All of them are in different countries, may have different standards and be subject to different regulations.

In the traditional world what usually happens is the creation of worldwide organisations which help coordinate the processes so that it would help the collaboration between different parties and even competitors.

But in that case, In the new digital world, blockchain became the solution.

The largest container shipping company Maersk collaborated with IBM to create TradeLens - supply-chain data, document, and analytics platform. Another example of this kind of project is GSBN.

TradeLens is a source of truth for the shipment data. The information is shared in a secure way being accessible based on the permission-based policies protecting confidential data and allowing interested parties to access the data they need. The data is standardized. TradeLens says that it is also more complete than that of traditional sources. These features allow saving a lot of time on the information research. 22

The single, standardized source of data allows for streamlining and automating processes connected with shipments such as document workflows. This feature is also included in TradeLens.

Since TradeLens was created by one of the market players, at the beginning their competitors were reluctant to join the network.23 Without network effect, TradeLens would be pretty useless. Since the goal of the system would be collaboration, the competitors felt that the network controlled by the biggest player in the market would work to their disadvantage. However, later Maersk's rivals got convinced that TradeLens is a neutral and open platform. Each ocean carrier is a node operator which restricts some sharing of the data.24

So, this blockchain is permissioned, not really public (only for interested parties). However, thanks to enabling collaboration in digitalized manner, provides a lot of value to the market. IBM's head of global trade digitalization, Norbert Kouwenhoven, said that proper information-sharing may save 27 billion euros. 25

Domains

ICANN (The Internet Corporation for Assigned Names and Numbers) is a non-profit organization that coordinates the system of global internet's system of global identifiers such as IP addresses and domain names.

What ICANN is trying to do is to be stakeholder-oriented organization with multiple committees. Everything they do is walking on thin ice. They need to satisfy governments from many countries around the world, big corporations and users. What is more the internet which they coordinate needs to function well. That is why ICANN's core values are operational stability, reliability, security, global-interoperability, transparency and fairness in multiple aspects (even if this word is not used in their mission statement). 27

It is not ICANN which is a domain registrar but private for-profit companies. ICANN just coordinates the process and gives accreditation to these companies. ICANN charges the domain registrar for each domain's registration and renewal. Some companies sell the domains with the markup and some of them do not. ICANN supervises DNS root servers operated by multiple companies around the world, and, through IANA, the delegation of TLD (top-level domain) servers. The domains and their IPs are cached in DNS resolvers and on personal computers.

As you can see, the domain ecosystem is a distributed one with a top authority who sets the protocol for the system. Is it decentralized? It is a subject to discussion but once you follow the rule, the system is run by independent companies. There were domain registrars who were declining providing the services to some companies and ICANN was neutral despite the requests from some groups.

There are several well-known web3 domain registrar projects. The main examples are ENS (Ethereum Name Service), BNS (Blockchain Naming Service), Unstoppable Domains, Namecoin.

There are several differences between traditional DNS and web3 services of this kind. In the case of blockchain solutions, domain names are stored on the blockchain. They enable domain assignment to the public keys. What is more, they resolve the domain names by using the browser extension. And in the case of some (but not all) it is possible not to need to renew the domain periodically. It would be stored on the blockchain permanently.

Probably the main advantage mentioned by the proponents of it is the lack of censorship, even though it looks like this is not the biggest problem on the ICANN level currently. What is worth noticing here is Christiansen's new interesting way of doing the things. Web3 domains are not a mature, great solution yet. They are not necessarily cheaper than traditional domains and they are slow. However, a simple structure, fewer middlemen, and automation instead of committee meetings is a typical web3 style of solving problems.

Tokenomics

The world has seen countless numbers of currencies. However, cryptocurrencies and tokens are something new. There is a lot of criticism of them and arguments about whether they are an actual real store of value, as well as if they efficiently do their work and how they are better than fiat currencies.

We are not going to take part in this discussion apart from what is covered in this whitepaper.

However, even the biggest skeptics must admit that tokenomics that was created across many blockchain projects is something interesting to observe. It can be part of understanding what is going on in web3 and where it can go.

Tokens and coins are new asset classes. The way how they are distributed and people who are involved in token-based projects are incentivized is called tokenomics or token economics. These are minieconomics, which are subject to their own monetary policy, kind of that of central banks. Everyone creating their own tokens can feel like FED. But what is different is that for most of the known projects most of their monetary policy is automated and written in the code. For example, Bitcoin has a deflationary model with a supply of the currency being fixed in the future. Some other cryptocurrencies like Dogecoin are inflationary coins (no supply limits). There are also some other models (asset-backed like in the case of stablecoins or duel-token model as in the case of VeChain).

Tokenomics is not only about the supply of the token. In many cases, tokens are used for certain purposes within web3 projects. The simplest example is transaction fees. That is why they need to be distributed in some way. It can be done through ICOs, regular exchange, funding the project, airdrops, or as renumeration for some tasks like mining or contributing to the project.

That brings a completely new way of interaction with project stakeholders. The community is incentivized to crowdfund, and support the project or tokenomics can work as a marketing feature.

Web3 as the part of the transformation, not transformation itself

Our hypothesis is that web3, understood as explained before, may be and will be the part of the transformation, not the transformation itself. Additionally that it will not be a transformation as web3 maximalists understand it. At least for now.

The world has been already digitalized to a big extent. It has affected society as well. New generations are completely different from the old ones. They were shaped by the internet in a certain, different way. The growth of community-driven projects is visible. These are not only blockchain projects. We can see more and more online communities.

What we mean here is that even if the extremely decentralized internet would happen, even if it would be governed by the communities, blockchain would be part of it, but it would not be about blockchain. It would be about the mindset shift. It would be a greater change than any technology or infrastructure transformation.

We are not convinced whether this mindset shift happening is possible, mainly because of human nature. If it does, we do not know how it could possibly occur. We think that something must change, in order for it to happen.

People are driven to safety and reliability. The government, whatever we could say about it, in the current days is a safety provider. Web3 currently does not guarantee it. It is a jungle of lucky and smart outwitting naïve and misinformed.

In our opinion, web3 and blockchain are here to stay. But not in their idealistic scenario. What we will believe will stay is the commoditization of digital assets, financialization of them and further digitizalization of society with deepening globalization when it comes to individuals.

Internetization of society means that the location, an initial position of the person will continue becoming less relevant. Online status is becoming the main factor when it comes to the positioning of the people. We will see it even more vividly when the metaverse will become more important.

Another aspect is the financialization of the digital world. We can see that builders and developers in the web3 community are coming up with new ideas for financial instruments. For example, you can use NFT as collateral. The digitalization and usage of blockchain as a source of truth enables settling complex transactions without any middleman.

Internet like democracy

Web3 as a political movement

If you look at blockchain or web3 as a technology, then you see how it works and its applications. If you look at web3 as a movement then you need to look at it from the political and social perspective.

Alexis de Tocqueville is said to have written one of the best books on democracy On Democracy in America. His thoughts were based on his observations during his stay in America in the first half of 19. Century. Tocqueville brilliantly described American democracy, and investigated why it worked in America and not in some other parts of the world. He predicted some changes that happened in the future, e.g. abolishment of slavery or the creation of a new industrial aristocracy.

Tocqueville warned against, so called soft despotism. We wrote about it very early in this whitepaper. Soft despotism is the result of a network of small, complicated rules which makes people have no influence on their democratic governments but still giving them the illusion of control.

At the same time, his works were directed to help democracy to improve. Tocqueville understood the importance of the new system emerging and that instead of fighting it, it is better to join it and try shaping it for the better.

We stand on the side of web3 realism. As many of the people, including their leaders, in the web3 community, are utopianists, we are realists.

First of all, our hypothesis is that web3 will not be everything, and the transformation is rather about further digitalization of the world rather than web3 particularly. Secondly, we believe in human nature and that humans will still be humans. What it means, is that, for example, people will trust other people more than the machines or anons. We also believe that behind many inventions, there is a hidden struggle for power. Or that the same mechanisms as the maturing market will happen for the new industry. Third, despite the hostile attitude and threat to the current solutions, we believe that web3 and digitalization will be the transformation, not the revolution. That means, that the current establishment or at least part of it, will be part of this transformation by either being absorbed into it, absorbing it themselves or shaping it to some extent themselves.

We want to contribute by steering web3, as Tocqueville did with democracy in his works, towards useful and practical applications that could really transform web3 and the internet. And we want to do it in the best way – by building the use cases verifiable by the market.

DeFi

Finance has been changing constantly. It looks different now than 20 years ago and much differently than 200 years ago. There are many drivers which makes it evolve including regulations, social and market situation and politics.

But the main driver of evolution is technology. Telecommunication made banking and finance different than they used to be. Finance has been evolving with it – from the time of telegrams to the time of the internet.

Now the question is, is blockchain or web3 the new era of finance?

Our hypothesis is that yes. But it is more about the digitalization of finance. Web3 projects from Bitcoin to such projects like DEX (decentralized exchanges) have many drawbacks and often are inefficient when it comes to their purposes. But the innovations that come from it and constant experimentations in the ecosystem opened the door to rethinking finance. The bearer digital tokens may be the centre of it.

We believe that the evolution of finance has been always about innovating existing infrastructure. Now, with top talent and DeFi, we can rethink finance and build a more efficient and better version.

Why do we have capital markets? The purpose is the more efficient formation of capital helping the prosperity across the society. You may not agree that this is the case in the real world now – we would have a different opinion than you, but we understand widespread bad feelings towards some sketchy areas of the financial system. Capital markets and financial help also transfer risk from people and institutions which do not want to bear it to the people and institutions who are fine with taking it on themselves.

What is money? Certainly, it is not equivalent to a currency. Currency is a debt instrument, a proxy for money. Can we do better? Perhaps, it would be possible to directly own money instead of currency? We leave that question unanswered.

What is the purpose of banking and central banking? The fractional reserve system has been here with us for 100s of years. Banks are intermediaries between depositors and lenders. The central bank's role is to manage monetary policy, mainly to help the economic situation by stabilizing inflation, regulating the banking system and controlling the money supply. Perhaps, the same thing is possible to be done more efficiently in a different way?

As we were writing before, the web3 industry reduces the number or sometimes even eliminates middlemen. Finance is an intermediary consisting of a lot of intermediaries within in. There are sources and users of capital. The financial industry stands between them. If digitalization would reduce the number of middlemen within the financial industry then potentially also could reduce the costs and risks, as well as increase the transparency. Every intermediary bears its own risk and takes its own portion of fees.

That is why our hypothesis is that web3 will transform the financial industry. We do not say with 100% conviction how it will be done and whether it will even be done through applying blockchain technology. We believe that it will take some time and the change will not be immediate.

The fact that currently, some areas of web3 are wild wild west does not make any difference for us. In every beginning stage of the financial evolution, this area had similar characteristics before it was maturing and the regulators came in.

Summary – and what we want to do

The long description of our perspective on the current state of blockchain and web3 is the basis of what we want to do. We want to tackle the things how they are, not how we wish they would be. We also wanted to extract as much as possible non-technical aspects of web3 and blockchain. It is them that are the key to the adoption of the technology.

We believe that web3 is about the further digitalization of the world, not the blockchain itself. It may include giving life to the new, digitized versions of certain models such as cooperatives, stakeholder economy etc. However, we think that blockchain will be just one part of the internet, not everything.

We are not really convinced about the practical application of blockchain and web3 these days. It is mostly used for gambling, investments and entertainment. There are some other interesting applications such as TradeLens. However, we believe that it would be great and transformative for the entire industry if, from the creative global, decentralized R&D of new technology, some more practical applications would appear. We bet that it will happen, but we cannot take it for granted.

We want to stick to the web3/blockchain value: being public, decentralized, trustless and permissionless. However, do not mistake it with the technical specification of some solutions. We, as mentioned before, really like TradeLens, which does not fulfill all of these characteristics. We are speaking here about the general values of web3/blockchain. In other words, we want it to be transparent, with diffused power as well as dispersed failure points, automated and open for everyone to join.

We want to improve certain products and industries, increasing their productivity. Even though, if we are successful, it will impact people's lives, we are not here to say to people what they should do or fantasize about the utopian visions of their behaviours.

To picture it with the example – let's say the sandwich-fan eats a sandwich with butter and cheese at 1 PM. We do not come to this person to postpone their food to 5 PM and say that they should eat salad because it will be better for them. We just come with the second sandwich adding a tomato on the top and ask if that the sandwich-fan would like it.

We believe that technology should be for people and not people for technology. That is why we want the practicality of the solutions. We also want to give the public what they want but very often are missing in web3/blockchain – more safety. We also believe that what is greatly missing in web3 is accountability.

We want to be uncompromising and be part of the new which inevitably will destroy the old. However, we will not be hostile against anyone including the current establishment and especially the older generation. We believe that the only way to build new infrastructure is together with them. We stand on the side that say that it is not about who is doing something but what their incentives are.

Our goal is to use the biggest value propositions which are being the source of truth, streamlining processes and reducing the number of middlemen.

Solution

connetome

connectome features are:

KYC (done through one of off-chain providers) option for the users
Verified badge for public keys (multi-chain) that went through KYC
DeFi add-on to approve only verified users who meet the requirements for signin/transactions
Confidentiality and decentralization of data; anonimity
User data check in case of fraud/scam/important business case by approved institution/committees

Audience

Regular users

Connetome would build safer ecosystem with more trust, in which users will know that on the other side of the transaction, there is a party which is accountable for their actions. The users will have a full control of the data being sure that they go through KYC, staying anonymous in 99.99% cases, their data is decentralized and kept safe.

Decentralized projects

Decentralized projects such as DEX do not operate outside the law. Recently, UniSwap was sued for the losses of their users. 27 We believe that decentralized projects should be accountable for negligence and ostracised for systemic risk they cause. However, individuals should be given all the toolbox to protect themselves against criminals who should be caught and punished by appropriate authorities. We will not put the police on blockchain. So regardless how much anti-governmental you are, you would probably want to be protected by the authorities at least in the case of being a victim of the infringement of law.

Decentralized projects will use our system to outsource KYC to an interoperable service and save on the expenses related to the court cases by having the access to the data of real guilties.

Problems tackled

We are not building SSI. The implementation of universal SSI will take time. We want to hand the solution to the users quickly, so that web3 community would get a tool for building a better and more practical ecosystem.

The problems we address are:

Lack of accountability -> Accountability by secure identity on chain
Lack of trust in projects -> Confidence in web3 projects thanks to verified accounts
Regulatory requirements -> Regulatory requirements met in a web3, decentralized, innovative way

Positive spillover effects

We want to positively affect the blockchain ecosystem. As mentioned before, we do not want to tell people what they should do. We also do not want their souls or make them obliged to stick to what we say. We want to build a better ecosystem which will be more secure for a wider audience and in which people will have more confidence.

As mentioned before, we are not standing against the older generation and legacy system. We do not want a war against them. We want to collaborate with them. We believe that the transformation of the financial world by using bearer digital asset tokens will help in the risk reduction by reducing number of middlemen and making the ecosystem more transparent. This in consequence will lead to lower costs. However, we need to stop thinking in binary terms of everything in web3 or nothing in web3. Web3 is part of digitialization of the world.

Web3 with more systemic and counterparty risks will never be implemented in the real world of finance. Its role should be the reduction of risks - as in the case of the initial idea of Bitcoin. connetome is one of the steps to achieve it. By bringing accountability, more user-friendly and practical tools our goal is to reduce part of the risks for users and projects.

connectome technically

Diagram

These are different the types of data:

Personal data stored temporarily by a centralised KYC data processor (personal data, passport) who verifies the users data and identity
Encrypted personal data stored on Ceramic (possible to decrypt by the account owner and institution allowed to decrypt it)
Anonymous KYC data such as whether the user completed KYC process successfully, country, sanctions list, PEP, dob (possible to decrypt by the account owner and checked by the DeFi product when signing in with the wallet and/or before the transactions)
Log of checks of the data by the institutions

All the data is possible to be updated and removed by the investor. Some necessary conditions for the the data removal must be met (to avoid the case of deleting the data just before finding out that the user committed a crime).

In the future, we are planning to implement continuous watchdog and PEP list check feature.

How the data is stored?

The data is stored using ceramic.network.

Ceramic network is built upon IPFS, which is a distributed file storage protocol. Ceramic is a public, decentralized network for managing mutable information.

Connetome data is stored with 3ID DID method which saves a decentralized end-user document providing the way for user's decentralized identity.

Currently, ceramic works well with Ethereum but is developing the integration with Solana.

Learn more

How the data is encrypted and decrypted?

The data is encrypted and decrypted using Lit Protocol.

Lit Protocol is a decentralized access control protocol running on top of EVM chains and Solana. It encrypts and decrypts data based on on-chain conditions such as public key, the membership in DAO, or the conditions using operators (and, or) on smart contract.

For DAOs we use DAOHaus. In connetome there are two DAOs. DAO 1 is DAO in which members vote whether the case is reasonable for checking the user's data. DAO 2 consists of the members who can get the data of the user, if the first DAO voting approves it.

Therefore, Data A can be viewed by either the owner of the data or, if DAO 1 approves the case, a member of DAO 2.

In the scenario when DAO 2 member views the data, the data check is recorded on the chain as a log, to which user (data owner) has access.

Data B is used for the verification of the user and can be checked by anyone.

Learn more about LitProtocol Learn more about DAOHaus

Case studies

Regulatory requirements for DeFi

Regulators are being urged to regulate DeFi industry which was used by some criminals to launder billion of dollars.

Being ahead of the regulatory requirements put the companies in the right positions in which they can avoid receiving a penalty to pay. Bieng one step forward before the regulators helps also in tackling the problems in own (web3, decentralized way). It will help in having an impact on the regulatory approach and setting industry standard.

UniSwap lawsuit

Before mentioned UniSwap case 27 may cost UniSwap million of dollars.

Thanks to connetome, UniSwap could mitigate some of the problems. By receiving the data of the users who stole the money from other users, UniSwap would shift the responsibility from themselves to the people who are guilty of committing the crime. Victims could get the money back. UniSwap would increase their credibility and reliability with genuine investors joining the platform with the confidence that they are protected against criminals.

The whale of Solend

Solend needed to solve the problem of the whale wallet which in case of being liquidated could strain the entire Solana ecosystem. After trying to reach out to the whale wallet owner online (unanswered), after the vote Solend decided to takeover the funds from the whale account. 28 That was a scandal and the action completely against any values of blockchain as well as even moral values when for no legal reason (that whale did not commit any crime), the money of the specific person could be confiscated. In the end, the decision has been revoked and whale transferred part of the funds to another place. 29

How easier would it be with connetome! Instead of voting for taking over the account, the DAO members would be voting for the release of the data of whale wallet to Solend leadership. The leadership would not be allowed to legally share the personal data of the whale. But at least on the other side there would be a human being with whom, Solend could have proper negotiations which would lead to a great solution for both sides without reputational losses.

Roadmap

(2022Q3) Diagnosis of the business problems by conversations and discussions with web3 community ✅
(2022Q3) Choice of the technology ✅
(2022Q3) Website and whitepaper ✅
(2022Q3) Setting the values and vision with the first presentation on London Solana Hacker House ✅
(2022Q3) The first version of an app with the decentralized encryption of the personal data on decentralized network ✅
(2022Q3) Advanced decryption methods implemented in the app ✅
(2022Q3) Start of the collaboration with a KYC provider
(2022Q4/2023Q1) Building an add-on to the DeFi platforms
(2022Q4/2023Q1) Building new user dashboard and admin panel
(2023Q1) Pilot phase launch with a DeFi project
(2023Q2) Launch

References

1 Wikipedia, Distributed Ledger, Accessed 13/06/2022

2 International Cooperative Alliance and Euricse, World Cooperative Monitor 2019

3 Anand, Anita, Shareholder-Driven Corporate Governance (September 10, 2018). Shareholder-driven Corporate Governance, Oxford University Press: 2019 (Forthcoming), Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3249665

4 Slightknack, On the Practical Applications of Blockchains (April 14, 2022), Accessed 13/06/2022

5 Bruce Schneier, Blockchain and Trust (February 12, 2019), Accessed 13/06/2022

6 Wesley Aptekar-Cassels, web3 is Centralized (January 2, 2022), Accessed 13/06/2022

7 Wikipedia Crédit Agricole, Accessed 13/06/2022

8 Crédit Agricole.com Group structure, Accessed 13/06/2022

9 coop news, Anca Voinea, How does Crédit Agricole stay local while operating multinationally?, Accessed 13/06/2022

10 Moxie Marlinspike, My first impressions of web3 (January 2, 2022), Accessed 13/06/2022

11 Cointelegraph, Jesse Coghlan, Solana suffers 7 hour outage as bots invade the network (May 2, 2022), Accessed 13/06/2022

12 Aleteia, Daniel Esparza, Why didn’t medieval artists sign their work? (May 1, 2019), Accessed 13/06/2022

13 Bitcoin Magazine, Tobias Huber, The Prophecy Of Satoshi Nakamoto: Bitcoin As Religion (October 19, 2021), Accessed 13/06/2022

14 BowTiedBull, BANKS ARE ZEROS - The Clownhattan Project - April 27 (April 27, 2021), Accessed 13/06/2022

15 The Hill, El Salvador leader tells ‘boomer’ US senators to stand down over bitcoin adoption (February 16, 2022), Accessed 13/06/2022

16 Wikipedia, OK boomer, Accessed 13/06/2022

17 Lean Enterprise Institute, Waste, Accessed 13/06/2022

18 Malevich, K. (2003). Kazimir Malevich: Suprematism. Guggenheim.

19 Freakonomics, A Fascinating, Sexy, Intellectually Compelling, Unregulated Global Market (December 1, 2021), Accessed 13/06/2022

20 Art Basel and UBS, Dr. Clare McAndrew, The Art Market 2021

21 Freakonomics, The Art Market Is in Massive Disruption. (December 15, 2021), Accessed 13/06/2022

22 TradeLens, Adriele Pradi and Alexa Rios, Understanding the 5 key challenges to connect supply chain data (November 30, 2020), Accessed 13/06/2022

23 ShippingWatch, Ole Andersen and Louise Vogdrup-Schmidt, Rivals reject blockchain solution from Maersk and IBM (May 15, 2018), Accessed 13/06/2022

24 IBM, TradeLens Platform (January 20, 2021), Accessed 13/06/2022

25 ShippingWatch, Søren Pico IBM: How we can save shipping billions of euros (June 9, 2017), Accessed 13/06/2022

26 ICANN, Working Paper on ICANN Mission and Core Values (May 6, 2002), Accessed 13/06/2022

27 BlockWorks, Macauley Peterson Crypto Exchange Uniswap Hit With Class Action Lawsuit Alleging Wrongdoing (April 29, 2022), Accessed 14/06/2022

28 CoinTelegraph, Sean Moore What decentralization? Solana lender Solend approves whale wallet takeover to avoid DeFi implosion (June 19, 2022), Accessed 11/08/2022

29 CryptoPotato, Jay Zhuang Solend Whale Moves $25M to Another Platform Despite Canceled Plans to Seize Their Wallet (June 21, 2022), Accessed 11/08/2022

CONNETOME WHITEPAPER

Table of content

Why we do what we do and what are our views on blockchain

1. What blockchain and web3 really are

2. (Real) value propositions of blockchain

3. Why web3 will not be everything

4. Threats to web3

5. What is really going on?

6. Innovation

7. The way of Web3

8. Web3 as the part of the transformation, not transformation itself

9. Internet like democracy

10. DeFi

11. Summary – and what we want to do

Solution

12. connetome

13. Audience

14. Problems tackled

15. Positive spillover effects

16. connectome technically

17. Case studies

18. Roadmap

References

Why we do what we do and what are our views on blockchain

What blockchain and web3 really are

Blockchain

Web3

(Real) value propositions of blockchain

Blockchain not about the blockchain

Is Bitcoin so great?

Why web3 will not be everything

Blockchain maximalist scenario

Trust

Do you trust the establishment or nerds?

Would you really prefer a machine over a human?

Decentralization

Is the world already not decentralized?

Practicality

No downtime?

Threats to web3

State

Bubble and next new thing

Not being good enough so just being useless

What is really going on?

A nihilistic world where nothing is real

Commoditization

Hostility towards financial institutions, big tech and government

We want to build a new world

Degens vs boomers

Innovation

Disruptive technology

Schumpeter's gale

Web3 – world's R&D department

The way of Web3

NFTs and disruption in the art industry

Supply chains and information exchange; the example of TradeLens

Domains

Tokenomics

Web3 as the part of the transformation, not transformation itself

Internet like democracy

Web3 as a political movement

DeFi

Summary – and what we want to do

Solution

connetome

Audience

Regular users

Decentralized projects

Problems tackled

Positive spillover effects

connectome technically

How the data is stored?

How the data is encrypted and decrypted?

Case studies

Regulatory requirements for DeFi

UniSwap lawsuit

The whale of Solend

Roadmap

References