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a16z: What needs to be regulated should be Web3 applications, not protocols

a16z crypto

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The rules are dependent on the environment.

Original title: "a16z: What needs to be supervised should be Web3 applications, not protocols"

Original author: Miles Jennings

Original compilation: The way of DeFi

Many early proponents of the Internet advocated that it should always remain free and open, making it a borderless and unregulated tool for all of humanity. Over the past 20 years, that vision has lost some clarity as governments have cracked down on abuse. Despite this, however, much of the Internet's underlying technology -- communication protocols such as HTTP (data exchange for websites), SMTP (email) and FTP (file transfer) -- remains as free and open as ever.

Governments around the world are maintaining the promise of the internet by embracing the technology's reliance on open-source, decentralized, autonomous and standardized protocols. When the United States passed the Scientific and Advanced Technology Act of 1992, it paved the way for the commercial Internet to flourish without tampering with TCP/IP, the computer networking protocol. When Congress passed the Telecommunications Act of 1996 (Telecommunications Act), it did not interfere with the way data traversed the network, but still provided enough clarity to enable the US to compete with today's giants such as Alphabet, Amazon, Apple, Facebook ; and others to dominate the internet economy. While no legislation is perfect, these guardrails allowed for the growth of industries and innovations that enable many of the Internet services we enjoy today.

One of the major tailwinds: Instead of a regulatory agreement, the government seeks to regulate applications, including applications such as browsers, websites, and other user-facing software , often referred to as "clients" -- users access the network through them. This guideline that still governs the web should extend to Web3, the evolution of the internet that will have new applications or clients such as webapps and wallets, and advanced decentralization protocols including those powered by blockchain and smart contracts Realized value exchange settlement layer. The question is not whether there should be Web3 governance. The answer to this question is obvious. Rules are necessary and welcome. The question is at which layer of the technology stack Web3 governance makes the most sense.

a16z: Web3 applications should be regulated, not protocols

Today, a typical web user experience may include connecting through a regulated Internet Service Provider, followed by regulated browsers, websites, and applications Programs access information, many of which rely on free and open protocols. Governments can shape this online experience by imposing access restrictions on website content, or requiring compliance with privacy rules and copyright excerpt requests. This is how the U.S. forced YouTube to take down terrorist recruitment videos without taking action against Dash , a video streaming protocol.

There are several reasons why regulation at the protocol level is undesirable and not feasible. First, it is technically impossible for an agreement to comply with regulations, because regulations often require subjective judgments that cannot be defined. Second, it is impractical for agreements to incorporate global regulations, which vary across jurisdictions and may conflict. Third, rewriting the technical foundations of the network is unnecessary and counterproductive, given that applications or clients can adhere to higher-level technical specifications.

Below, let us explain each reason in more detail.

Agreement technically cannot comply with subjective regulations

No matter how intentional a regulation is Well, if it required subjective assessment, its application to the protocol would be disastrous.

Such as spam. Hatred of spam is almost universal, but what would the web look like today if authorities made it illegal for the email protocol (SMTP) to facilitate sending spam? The definition of spam is subjective in nature and has changed over time. Big companies like Google spend huge sums of money trying to eliminate spam from their email apps or clients like Gmail -- but they still make mistakes. Also, even if some institutions mandate that SMTP filters spam by default, because the protocol is open source, malicious actors can still simply reverse engineer the filter to circumvent it. Therefore, disabling SMTP from facilitating the sending of spam is either ineffective or the end of email as we know it.

In Web3, we can compare Token to email in the context of a decentralized exchange protocol (DEX). If governments wish to prohibit the use of such agreements to exchange certain securities or derivatives that they deem Token , they need to be able to articulate technical specifications that objectively fit this classification. But such objective classification criteria are not possible. Determining whether an asset is a security or a derivative is subjective and requires an analysis of fact and law. Even the SEC is grappling with this problem.

Trying to embed second-order subjective analysis into the base layer instruction set is a futile exercise. Just like SMTP, a decentralized and autonomous protocol like a DEX has no way to conduct subjective analysis without adding human intermediaries, thereby negating the decentralization and autonomy of the protocol. Therefore, applying such regulations to DEXs would effectively ban the protocol, outlawing an emerging category of tech innovation entirely and jeopardizing the viability of all of Web3.

Agreement cannot practically comply with global regulations

Even though it is technically possible to establish Complex and subjectively determined agreements, it is also unrealistic to do so on a global scale.

Imagine the quagmire of conflict. SMTP allows us to send email to anyone in the world, but if the US requires SMTP to filter spam, we can assume that foreign governments will require similar restrictions. Also, since the definition of spam is subjective, we can also assume that government requirements will vary. So even if it were technically possible to build protocols capable of making complex and subjective decisions, doing so would run counter to the notion of creating a standard that is practical across the globe. It is simply impossible for SMTP to incorporate the ever-changing spam filter requirements of 195 countries, and even if the protocol could, it would have no idea what country the user is in and how to fairly prioritize the competition. Adding subjectivity to protocols undermines one of the pillars that make protocols useful: standardization.

The rules are dependent on the environment. In Web3, what is allowed under securities and derivatives laws varies from country to country, and those laws are changing all the time. There is no way for DEXs to establish a global standard for these laws, and, like SMTP, there is no way to restrict access based on geography. Ultimately, there is no way for protocols to succeed if they are required to build on ever-changing global regulation.

Avoid these problems by making the application or client comply

Now, why It should be obvious that governing the application, not the protocol, is critical. Regulation at the application level can achieve government goals without compromising the underlying technology. We know this because this approach is already working.

Earlier web protocols are still useful more than 30 years later because they are still open source, decentralized, autonomous, and standardized. But governments can limit the information that passes through these protocols by regulating apps. Or they could protect the free flow of information, as the United States did by approving Section 230 of the Communications Decency Act of 1996. Each country can decide its own approach, and businesses operating browsers, websites and applications within their respective jurisdictions have the ability to tailor their products to comply with those decisions.

Since the dichotomy between protocols and applications is the same in Web3, the approach to governance for Web3 should remain the same. Web3's applications, such as wallets, website applications, and other applications, enable users to deposit digital assets into the liquidity pool of the lending agreement, purchase NFT through the market agreement, and trade assets on DEX. These wallets, websites, and apps can be regulated in every jurisdiction they attempt to provide access to, and it is reasonable to require them to comply.

The first generation of the web gave us incredible tools in the form of networking, data exchange, email and file transfer protocols, all of which made Information moves at the speed of the Internet. Third-generation networks make it possible for value transfers to happen at this speed, and lending and asset exchange already exist as native features of this new Internet. This is an incredible public interest that must be protected. As Web3 expands from decentralized finance or "DeFi" to video games, social media, creator economies, and the gig economy, regulation that levels the playing field for these industries will become even more important. Weighing all the factors, the right approach becomes obvious.

Applications should be governed, not protocols.