January 15, 2023
20 mins

I think I finally understood Blockchain / Web3 / Crypto

Originally published in June 2022 here


The first time I heard about Bitcoin and the Blockchain it must have been around 10 years ago in ~2012 when a friend of one of my co-founders from MobileBits told me how they ordered weed online. I took a brief look at it at the time and then decided for me that A) I am already late to the speculation party since it already went 100x from <1 EUR to a couple of hundred EURs and B) there is nothing really here you can build with the blockchain you can not also build with a “normal” database. Looks like I was pretty wrong in both of my assessments at the time ;)

Now 10 years later a Bitcoin is no longer worth ~200-300 EUR but another 100 times more at about ~20-30.000 EUR. And the whole crypto space is much more than Bitcoin these days. The total market capitalization of the over 19,000 tokens tracked by data aggregator CoinMarketCap is/was $1.76 trillion. For comparison, the market capitalization of global stock markets is over $100 trillion. So the whole space is already very big but it is probably still possible to do another 100x eventually. Nice. On the other hand the whole space is full of scam, pump and dump schemes and outright fraud - so it is really hard to know what is a Ponzi scheme and what makes actual sense.

So after I basically missed 10 years of opportunity, why am I claiming now that I finally understood Blockchain? To be honest I only really got into it because I was responsible for building a blockchain based play in the art world for one of our customers at BCGDV. And I finally understood why Blockchain - or Web3 (or even Web5) as they call it these days - has a real reason to exist beyond speculation & hype. This article is not a technical explanation - if you are looking for that read here for example. This article is trying to be a  “so what” on why Blockchain is important and what effect it may have with the following topics:

  • Intro to Web3 & Ownership
  • How Web3 wants to provide true digital ownership
  • Potential impact of Web3 on the digital economy and society
  • Not all is going great in Web3
  • Final words

So let’s go :)

Intro to Web3 & Ownership

I don’t know who invented this but a great starting point is this overview of the evolution of the internet:

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So according to this overview the new thing is that we allow users to “own” things in a digital way and somehow the blockchain is technically enabling this. Let’s first unpack the topic of “ownership”: Why is ownership important and what do we need to achieve it?

In the physical world ownership is one of the key prerequisites of capitalism. Capitalism as started in the 18th century had a big role in making “the West” that much more rich & powerful than the rest of the world - at least until the rest of the world started to catch up after the second world war (for more details please check out my book).  In that sense real ownership for the digital world has the potential to foster a similar growth of the digital space as capitalism was able to do for the physical world.

But I hear you say: don't we already have capitalism on the internet? Some of the biggest and profitable companies in the world are already “internet” companies! Yes and no.

Yes, people make lots of money in the digital world but also no, because currently they are mostly “just” monetizing real-word transactions. For example Meta (facebook) is making money by selling your attention so companies from the real world can sell you goods & services. Google is basically doing the same. Netflix & Spotify sell digital goods but they are not letting you own them. They are just gate-keeping the streaming access to it.

The only companies which are close to a “real” digital economy are games which manage to build micro-economies within their games. However the assets you own there stay limited within the game itself and assets in one game are not useful in another game or app. So the users don’t really own them in the sense that they can also potentially sell them and use them however they please.

This gaming example shows that it’s more complicated than originally thought to define what ownership means. Therefore let‘s ask ourselves what „ownership“ actually means in the context of capitalism. Without getting too scientific I would formulate it like this: „You need to be able to „hold“ „something“. In addition, since it is supposed to have market value, it needs to have „scarcity“ and you need to be able to „transact“ it to somebody else directly (without a middleman).

So let‘s break it down now into what you need to make that happen:

  1. You need something to own & hold an asset - e.g. the equivalent of a safe, wallet or house in the real world
  2. You need to have a legally binding representation / description of the asset you hold - since you cannot physically hold a digital thing in your hand
  3. You need a way to make digital assets unique - otherwise no digital asset should ever have a high value in the longer term since they all can be copied perfectly with basically zero costs.
  4. You need a way to do a transaction without a middleman because otherwise you never really 100% own it without the entity you are dependent on to access or transact it. For example if all your pictures are on facebook you don’t really own them - you can only do with it what facebook allows you to do with it (and you actually share the rights to it with facebook based on the terms & conditions of facebook’s service).

How Web3 wants to provide true digital ownership

Coincidentally these 4 things are exactly what has been invented in the last few years in the blockchain space. And that‘s why it is fair to now call the blockchain space Web3 and say that now “ownership” was invented for the digital realm.

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Let‘s go through them step by step:

1/ Wallets

A digital wallet allows you to control your digital assets for real. They are no longer on somebody else's server which you just (also) have access to. If done right you are actually the only one who has access & control to your digital wallet. A popular wallet is https://metamask.io/ for example which you can install for free as a plugin into your chrome browser.

2/ Tokens/Coins

As discussed earlier we need something which represents/describes the assets you want to own. This may sound strange but we do have the same concept already in the real world. When you buy a house the ownership is represented by a title which is just submitted to an official register. It’s the paper which counts. The blockchain equivalent is what we call a token. There are different types of tokens but it’s basically a defined standard just like a DIN Norm to describe an object in a digital way. If it has its own blockchain it is called a coin. If it “lives'' on somebody else's blockchain it is called a token. Since it is standardized it can be exchanged & traded worldwide on exchanges/marketplaces.

You can use coins & tokens for lots of things - it’s just an abstraction layer - so you can use it for almost everything from digital money to representing a share of ownership. Here are some examples:

  • Cryptocurrencies: you heard about these ones: Bitcoin, Ethereum etc. Like with fiat money (=EUR, USD etc., coming from Latin “fiat” =” it shall happen” because government issued money is not backed by assets but rather has value based on supply & demand / economic activity) you can use cryptocurrencies to pay for goods & services. Again their actual value depends on Supply & demand for them. If people think they have value, they have value. Since the actual economic activity in terms of money for goods/services is still very limited, the speculation is mostly based on speculating if other people may believe it will have value. In the case of Bitcoin this is helped because the supply of Bitcoin is limited on the protocol level to sth like 21m Bitcoins. So there can never be supply driven inflation - however of course demand can still cease to exist and then Bitcoins would also be worthless.
  • Utility Tokens: The tokens get value because they can be used for sth in the digital world (think about it like a slot machine). So basically every service/product could create its own utility token which acts a little like an internal currency. You may remember that some amusement parks force you to buy their little vouchers to pay within the park. Same principle with utility tokens ;)
  • Governance Tokens: They give you voting power - for example a community could decide to let people vote on certain topics and the more governance tokens you have, the more your vote counts. One type of community which can self-organize is called a DAO in Web3 terms - which just stands for Decentral Autonomous Organization.
  • Asset / Equity / Security Token: They represent ownership for virtual or physical assets. Just like shares of a company. These kinds of tokens are typically heavily regulated so be careful if you ever try to issue security tokens.

So as you can see coins & tokens can take different forms & types. In all cases they represent some digital or real-world right and therefore have value. They make it possible to trade digital goods since naturally you can’t physically bring them from A to B.

3/ Scarcity via NFTs

One of the beautiful things of the digital world is that it scales with basically 0 marginal costs. You can create a perfect copy of all things digital and the copy is as good as the original. It is exactly the same. While this is GREAT most of the time (=you can give things with value to people basically for free) there are some cases where having an original or at limited editions has emotional value to people. Streaming a song on Spotify is great but having the original CD which your “then-girlfriend” gave you and you have been listening to for 20 years can have a lot of emotional value to people. Also some people just value owning things that nobody else has. So there is (in some cases) value in scarcity.

In a way the whole point of capitalism is to put a price on scarcity to help allocate resources. So with NFTs you can now make a digital object unique (or limited editions) and therefore re-introduce the concept of scarcity back to the digital world. Imagine it like signing a CD by the original artist. Your CD itself may be the same but only yours has the signature of the artist on it.

4/ Decentral Infrastructure which allows (automated) transactions without middleman:

You may ask yourself: why is this important? Why do I need to be able to transact without a middleman? If you currently sell sth on the internet you always have several middlemen with power in between. Paypal & your credit card company are the middleman for payments. Amazon as a market place etc. All of those middlemen have the power to lock your account and NOT allow you to transact. They normally don't do that but still they have the power to do so. Mostly they just use that power to make a margin on you but sometimes they also outright censor you. I am not saying this is always bad to have that option but still it limits the ownership of your digital goods. If somebody else can decide what you can do with your stuff you don’t really own it. Compare that to physical goods: Here you always have the option to just sell it against cash in your yard. This means you actually possess it and have full control over it.

For this point it is also worth going a bit into technical detail HOW the blockchain is enabling decentral infrastructure which allows transactions without a middleman. In essence a blockchain is different to a “normal” digital infrastructure like this: When you use the cloud you just rent a server (=a computer connected to the internet) which is operated by a data center operator. The data center operator has full (admin) control over that server and it gives you some limited access so you can do your stuff, e.g. host your website /app. At any time the data center operator has full control and if the operator so pleases can always turn off your server.

In the blockchain world everything is not run on one single server but rather distributed on several servers together. So if one server stops working it does not matter - the other ones will just take over. Same with data etc. If the blockchain is sufficiently decentralized no single server has control over the transaction. A transaction may not be free - you may still have to pay a gas fee to pay all the servers involved in a transaction - but no server can control if the transaction goes through or not.

Another big advantage of the blockchain ist that you can “hardcode” the rules of a transaction into the blockchain. This is what is called a smart contract and allows to automate the transactions. For example you can make up a rule that on every transaction 10% of the price will go to the creator of the digital artwork. While a normal marketplace could technically change the rule as they please, in the smart contract world this rule cannot be changed without the consent of everybody involved once the smart contract has been “minted”. A marketplace technically always has no option to change all the rules - the creator does not need to trust the marketplace that they won’t do it. That’s a big difference!

Again both of these points are only true if the operation runs on enough different / decentral servers. So the blockchain solves the problem of central services by letting those services run by lots of servers at once. So if one server becomes “evil” it does not matter. So only if your blockchain is sufficiently decentralized it will enable transactions without a middleman and therefore provide true ownership.

Ok great - looks like we have all the ingredients together to enable true ownership in the digital world. Nice but what could be the impact on that? What could change?

Potential impact of Web3 on the digital economy and society

To explore this let’s take a look at popular business models and use cases and discuss how they may be impacted by Web3.

Marketplaces could become “coops”

Currently marketplaces follow a common playbook: they start out making life better for both the supply &  demand side by improving match-making and solving process/logistical issues. (see here for more insights in how to build marketplaces). However once they gain market power by locking in the demand side they start to focus on extracting significant value - often so much that both supply & demand may have been better off not having the marketplace active in the market at all. They change the operating model of the marketplace. This problem is so commonplace now that people are sometimes no longer happy when new marketplace players enter a market (e.g. in den Food Delivery Space) and rather use platforms like Shopify which try to enable the selling side while letting them keep the direct relationship to the customer.

Web3 now can enable a new type of marketplace which mitigates some of the downsides of a traditional marketplace: they give both demand & supply side governance tokens and therefore the right to shape the operating model moving forward. If done right this can prevent that the marketplace will later be changed into a model which is mainly focused on extracting maximum value. Basically supply & demand have a “veto” power on important changes of operating & business model. This in turn can make it easier to convince market participants to join the marketplace and make it big in the first place.

One example of this approach is at least publicly https://www.usebraintrust.com/ which claims to be governed by its users. Braintrust is a freelancer matching platform. The biggest difference being that they don't take a 30% commission fee but a rather modest 10%. While it’s not new that new platforms take less fees, in this case Braintrust (at least says) can never take more than 10% because it (wants) to give their users a say in that decision.

This kind of model interestingly also opens up new possibilities to finance creating such a model and get in the initial users. For example you could do an ICO (Initial Coin Offering) and sell tokens to early investors for a lower price even before the marketplace has been launched. This money can then be used to build & promote the marketplace. Similarly early users could be rewarded with these tokens which can lower the marketing costs significantly.

Ecosystem collaboration between competitors - e.g. to solve climate change

Similar to what we described in the marketplace (bringing together supply & demand), Web3 could also enable collaboration within the supply side ecosystem - even between competitors.

Let’s take Carbon (CO2) accounting as an example. In a few years all companies will have to do carbon accounting the same way as they currently have to do financial accounting.  It would be great if there would be a common industry platform which would include all the CO2 data from all parts which could be accessed by everybody via APIs. However currently it is hard to create such a database since owning this information would be quite a significant competitive boost. For example if Volkswagen would own that platform all the suppliers would not really want to put their data in there because this could give Volkswagen information relevant for price negotiations. Don’t even start about BMW not wanting to use it.

The traditional way to solve such a problem would be to create a joint venture which would operate such a platform. However even in a joint venture often the big companies have more rights than the others and in the end the CEO of the joint venture will do what the big companies want. Also via new investment rounds power can always shift and then the rules can be changed. Therefore often smaller players don't want to join these kinds of joint ventures.

Web3 now allows a new kind of platform again. The rules of the game can be implemented into the smart contracts of the platform and then - if set up well -  they cannot “physically” be changed without the agreement of the smaller players.

In our case this means that all the players would submit their CO2 data to our blockchain platform but they would still keep control over their data. They would need to approve the usage with their private key every time somebody wants to use it. Basically they keep the same control over it as if they would have kept their platform private.  They simply don't give away a key to their data. This is what Web3 people mean when they say this system is “trustless” - you can work with other people together even when you don’t trust them.

Social Networks: Shift from Ad-supported to Pay-per-use:

Currently social networks like facebook sell your attention. Basically they offer the service for free to the users but make advertisers pay to show themselves to the users. You basically pay for the service with your data which facebook then uses to improve matching between you and potential advertisers because this increases the average revenue per view.

The Web3 way to build a social network would be that you keep your data and your social graph (so who you are friends with etc.) to yourself. This information is stored in your wallet and you only “loan” it to services to have a nicer UX. Basically social network services would be reduced to a frontend and you could easily switch from one to the next with your wallet. You could take your friends & followers from one social network to the next. https://www.deso.org/ is an example of a social platform backend which tries to enable such a thing.

The business model of such frontend services would also need to be different since they could no longer sell your data. Likely they would either need to give you a cut of the data shared or maybe they simply would take a fee to use the platform. The user then could use a different service to “monetize” his/her own data (and see ads) if he/she chooses to do so.

From subscription based “Netflix for X” models to real Digital IP

Currently the best way to monetize digital content like music, video etc. is currently to offer a streaming service like Netflix and simply let people pay for accessing that streaming service. This model has saved the music industry from collapse (due to less CD sales due to Napster & Co) and ushered in a new golden TV era.

However the ones who make most money are the industry and not the creators. Especially music artists get a really bad deal with only ~3 USD per 1000 streams. This is much less than the 1 USD or so they used to earn from selling one 10 USD physical CD.

Again Web3 offers a new option for the Creators to monetize their content. For example they could jointly create a platform which they exclusively use to release new works. They then get to define the rights of their work into a smart contract associated with that work. So if a player like Spotify now wants to play that song they can but they have to adhere to the terms of the creators. For example unknown artists could even allow to stream the first 1000 streams for free, make a little more expensive until stream 100k and then get really expensive after stream 1.000.000. Likely they would be standard contracts and industry standards pretty soon. However it would be the creators in charge and not the labels or streaming platforms. Of course this only works when “enough” artists do this to force the “Spotify’s” of this world to connect to such a platform. In addition artists could sell “moments” and other NFTs to make additional money based on their works.

This is not as far-fetched as it sounds. There are already quite a few startups try to develop such a platform - e.g. see this article here

Metaverse with a digital economy

Last but not least let’s talk about the metaverse. You may have seen Meta’s vision of the metaverse here. It’s actually quite interesting. However you may come back from this presentation as believing the metaverse is basically you with VR glasses spending your time in a second life like experience. This sounds years and years into the future.

However, a better definition I heard about the metaverse is that we have reached it when we spend the majority of our time in the digital realm (vs. the real world / physical realm). We are closer to this than you think. How much of your time do you spend already in Zoom, on your smartphone etc.? For teenagers it’s maybe already more important how they look in their tik tok, instagram than in real life. Money always follows attention so naturally people will spend more money in the metaverse. True ownership in the digital space enables capitalism in the digital realm as we have already discussed above. Meta has clearly communicated that they want to build a digital economy to boost that. And lots of other smart people seem to agree that this is a really big opportunity. See here:

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Bonus: Improving democracy & society

Here in Germany we don't like to give the government lots of data because historically power has corrupted people and data is power.  For example that’s why up until 2022 Germany does not have a central citizen database which makes German bureaucracy a real pain. You really have to go to one department to get your own data and then send this physical letter to another department to get what you want. This is not quick and not fun.  

With Blockchain there could be a new option. Similar to what we discussed in the ecosystem play, you could create a joint but decentral database of German citizens in which “physically“ the state cannot use any information without your private key. However, whenever you want some department to have your data, you can easily share that data with your private key. Since the data in that database has been issued by some other official German department the department can easily trust it. This way we can achieve much more efficiency without giving up on control of our government - pretty cool!

Also democracy itself is not working perfectly yet - especially looking at the US right now ;) We currently have really slow iteration cycles where the voting system is not being optimized for hundreds of years. One really great thing about DAOs is that they will experiment now much much faster with different voting systems and I am sure we will gain a much better understanding about which voting process is good for which process much faster than having to wait until a new state is being founded before we can try out a new system. Can't wait for somebody to try out a Habsburger Tax model for real for example. DAOs may also make it easier for consumers to coordinate against government and big companies and therefore shift the power towards their favor. Basically they make it easier to form gold old-fashioned unions even though I am sure some smart US people will find a much better new name for it ;)

Another way Web3 could improve governments is by providing basic services where the local governments may fail to do so. While in the Western world there is no real problem using the title register to record who is owning which land, this may not be the case in all countries. A blockchain could serve here as an immutable record and could also be a good tool to prevent corruption or records getting “lost”.

As you can see Web3 could potentially have a tremendous positive impact on business and the world - however unfortunately it is not clear at all if those positive things will happen … it is still completely possible that we will end up in the Matrix or Demolition Man. Let’s discuss that in the next chapter.

Not all is going great in Web3

Unfortunately in reality not all things are going great in web3 country - please just check out https://web3isgoinggreat.com/  to get a good impression of lots and lots of real world examples :)

One of the reasons is that the 4 new developments I described earlier all still have significant issues:

1/ Wallets

Yes there are open source wallets like Metamask which gives you control over your wallet. However if you look deeper there are still lots of middlemen involved: Metamask is a plugin for the Chrome browser, which is provided centrally by Google (even though it is partly Open Source). Also likely you run Google Chrome on an Operating System from Microsoft or Apple which are also controlled by private companies. All of these players could theoretically take over control over your wallet in a way you likely would notice much too late. Also most wallets use Middleware in their offerings - which is often provided by a central/commercial provider. For example Metamask is using a middleware from OpenSea to show your artworks in your wallet. So if OpenSea censors an artwork it also no longer shows in your wallet (even though it is technically still there).

You could use Linux and true open source browsers but at least currently most are simply not doing that. Even then you would still run on commercial hardware and need electricity from a commercial provider. True ownership (=zero dependence) is really hard to get in the digital world and I am truly thankful for the open source software which at least gets us closer to the desired state.  

Another fun fact: In most current implementations of a wallet you cannot prevent other people from sending stuff to your wallet. So you have the spam problem all over again just like with email. In this case it is even worse since you are sending around money which you can use to try to bribe people - as happened here where people tried to give 40% of the coins to Vitalik (founder of Ethereum) to make their coin popular. Vitalik then had to burn 7bn USD worth of coins to keep his (perceived) independence.

An even bigger problem is that most people actually dont use a “real” wallet but they use what is called a “custodial wallet” like from Coinbase.com. So basically they use a wallet which is being controlled by a third party for convenience reasons - so we are back at Web2 where a giant corporation controls your account. Back to square one ;)

2/ Tokens/Coins

Most Tokens & coins are a ponzi scheme and have big issues with insider trading & “market making”. There are reasons why in the real world there are lots of regulations around stocks or any kind of asset trading. Crypto completely ignored all these learnings and is now doing these experiences again in a “fast forward mode”. Check out the fall of Terra as the latest example.

Next to the prevention of insider trading there are other real-world learnings which are missing. For example Bitcoin would be a terrible world currency if used at scale for exactly the reason why some people love it: fixed supply. Economics 101 is that when a depression happens a central bank SHOULD increase the monetary supply to keep the economy afloat. To put it simply: the reason is that it’s not the nominal monetary supply that is relevant, but the effective monetary supply which includes the velocity of how often money changes hands. Think about it: If you have 100 USD under your pillow and never use it, it is the same as it does not exist for the rest of the economy. So in such a situation it makes a lot of sense for the central bank to issue new USD to keep the economy active. This experience was learned in the last great depression in the 1930s … and since Germany did not react properly at the time people were extremely unhappy and that was one of the reasons they voted Hitler into power. As a German I say: Let’s not do that experiment again ;)

3/ Scarcity

As discussed above NFTs make it possible to “sign” a digital asset and make it unique. This is a great idea but if you look deeper it also has some serious issues. For starters in current implementation the actual file is NOT included when you buy an NFT. So basically you just get a receipt which links to the digital asset. So a future iteration of NFTs should include the actual asset stored on decentral storage like IPFS - this is solvable but currently not solved at scale yet. A bigger problem is that there are a million chains around and everybody can create NFTs as they please. How to decide which is the real one? Also are NFT ownerships over physical goods legally binding? The situation is complicated: While some countries like Luxembourg and UAE have started to make NFTs “legally binding” just putting your company in those countries may not help you if you sold the NFT to a German who bought it under German law.

4/ Decentral Infrastructure

This is probably the biggest problem. As we have discussed, the whole blockchain stuff only makes sense, if the underlying infrastructure is sufficiently decentralized. However most new projects are still 100% owned & operated by the founders. Necessarily so to get them off the ground. However at the same time this gives them the option to do a “rug pull” - meaning taking the money and then running away with it. Since they control the chain there is nothing other people can do. This is a known problem and not really solved yet. Investors currently suggest to just promise to users to do “decentralize over time”. So in effect: until things are decentralized you have to trust them just like you trust or not trust a Web2 company. Not great!

But that’s not all - here is a list of additional problems:

Some chains still run on (useless) “proof of work” to coordinate the collaboration of the decentral servers. Basically they solve complex math problems to decide who can write the next data into the blockchain. This wastes a lot of energy and should be replaced with something better like proof of stake - something Ethereum is trying to do sometime this year.

We don't have good interoperability between the different experiences & chains yet. Here we still need a real standard to bring one good to the other (XML for Metaverse)

Then we have the issue that smart contracts are not readable by normal people. So you need to trust an engineer that the contract is right. Solutions exist to try to mitigate this like https://meetlexon.com/ but they are not adopted at scale yet.

Another problem is that Governance of these solutions does not solve all the problems of reality. For example, often in the real world being “immutable” is actually really not great. Mistakes always happen. We need some kind of censorship / the equivalent of a judge in the digital world. Complete freedom does not work.

So there is lots of work to be done and it is unclear if this is just the “normal” phase of a young technology or will eventually be solved. If you enjoyed that, please check out this 2 hour rant about Web3 which is really good. I am an optimist but it is totally possible that Web3 ends up like Linux. Great idea but most people don't use it in its true implementation.

Or maybe we are lucky and it may end up like Open Source. Great idea and most people use it without even knowing it. For this to happen lots of things need to go right and I do believe that there is also a role for government / regulation in this. Let’s look at this in the final chapter.

Final words

To sum things up I think Web3 currently has lots of problems but it is based on a really good basic idea. I believe society will move more and more into the metaverse over the next decades - if we want to or not. When this happens we have basically 3 options:

  • We hand over control to big corporations (current US path)
  • We hand over control to the government which heavily regulates corporations (current China path)
  • We keep control decentral also in the digital world (ideal Web3 path)

However in order for the Web3 path to succeed we need to solve the problems mentioned above. We also need to work on equivalents to

So we will need lots of equivalents which we have in the real world:

  • Jurisdiction: we need a neutral third party which can look at problems and then judge based on the facts. Mistakes & shady businesses will continue to happen in the real world and you need a way to correct those mistakes.
  • Police: we need a new digital police who is actually able to look at a digital crime and do something
  • We need an equivalent of a consumer protection agency. The tools & projects should be checked by neutral 3rd parties with technical knowledge and then be rated accordingly. We probably also need “default contracts” in the smart contract world just like we have default contracts in the open source world.
  • Probably lots of other things I cannot think about right now …

So lots of work to do but if things work out we have a chance to have a society which combines the efficiency of an authoritarian regime with the equality & freedom of a decentral democracy. Wouldn’t that be great?