What is Web3 and Why Should You Care?
Over the past year or so, you have probably heard a lot about NFTs, cryptocurrency, and Web3. But what is Web3 and how is it different from Web 2.0? What’s driving the current frenzy of NFTs and venture capital investment? In this article, we’ll talk about that and about some of the concepts underlying the new technologies and how it’s going to shape our future.
Web3 is not really a single technology, but a collection of technologies and concepts that intend to shift the current status quo from centralized platforms into decentralized platforms. The idea is that today everyone’s data is housed within companies like Facebook and Google where users are not in control of their own data. Underlying Web3 is the idea of distributed networks built on top of blockchain technology like Ethereum, which aims to be a “world computer” by connecting everybody through a protocol instead of through a centralized data store.
Web3 is not just about cryptocurrency like Bitcoin. It includes concepts like NFTs for ownership, smart contracts for computation, identity ownership, and distributed file storage. These types of technologies combine together to create a system that upends the current centralized platforms which is driving investment and innovation at an astounding rate.
Concepts You Should Know
Web3 is a different kind of internet that requires the use of wallets, identity management, trustless systems, and distributed networks all powered via the blockchain. Let’s go through some of these ideas and try to paint a picture of what Web3 is.
Let’s start with blockchain technology itself. A blockchain is a distributed network of data that’s built upon a trustless system. That means that no one trusts anyone else to add data onto a blockchain without strict approvals. These approvals are handled by using consensus protocols including “proof of stake” and “proof of work” where participants in the platform will essentially check each other’s work before adding data onto a blockchain. This is done through heavy computation and many participants. Without getting into the technical weeds, it essentially means that to authorize some data to be added onto the chain, a complex mathematical formula is calculated to cryptographically sign the new block. This calculation takes into account the existing blocks in the chain making the new block an insurance of the immutability of the chain. Once that’s completed, a consensus must be reached by 51% of participants to add the data. This approach stops malicious actors from hijacking a blockchain and allows a way of decentralizing the approval process.
Bitcoin, Dogecoin and hundreds of other currencies were created by using blockchain as the underlying technology. By creating a currency built on top of a decentralized, trustless system, banks and governments are removed as the central authority. No single authority exists to print money or control inflation. The underlying blockchain protocols and the participants are the ones in control. In theory, this should make this system more stable because there are many more actors involved and it becomes driven more by supply and demand than by central interference. Just a note here: this is all still very new, and cryptocurrency itself has really seen its rise after the 2008 financial downturn. In the coming years, it will be interesting to see how this theory plays out when another downturn occurs.
Wallets are used to store users’ cryptocurrency, to identify users, and to track their ownership of tokens and activity. Only the user has access to their wallet through the use of a secret phrase which is used to encrypt their data to stop malicious actors from accessing their accounts. Wallets also have the benefit of identifying users on Web3 powered sites which removes the need for usernames and passwords. MetaMask is a popular wallet and you can read their FAQ to better understand how wallets provide access to ownership, identity, and activity history.
Blockchain is not only for cryptocurrencies but can also be used to execute code. This means that there’s a decentralized approach to executing logic and creating programs built on top of a blockchain. Smart contracts allow for distributed moderation of agreements so that two parties can exchange currency for a representative token. If the terms of the contract are met, then the rewards are released immediately without having to manually review the contract. This happens without any middleman involved but only using cryptography and a distributed data store.
Building upon smart contracts and cryptocurrency, a new concept emerged called non-fungible tokens or NFTs. I’m sure you have heard all about this with the rise of OpenSea and popular collections like the Bored Ape Yacht Club. Remember the way smart contracts release a reward? Yeah, you can get a picture of a bored ape as a reward once the contract terms are met! There has been a lot of money exchanged with people creating artwork which is guaranteed to be unique. Ownership can be traced back to certain accounts and an owner can claim the original copy of the asset. This may be images, videos, audio, documents or any other digital assets.
Now we have all the fundamental pieces in place to create new decentralized applications, or Dapps for short. Systems can be created that can execute code, store data, identify users, and define ownership. Dapps are nothing more than regular web applications running on top of the technology mentioned above. In the future, we could see Facebook or Instagram clones where the data is stored in a distributed way and users can guarantee that they are the owners of their own data. This promise has led to billions of dollars in investment within the new Web3 space, with nearly $30B in crypto alone last year.
The Reality of Today’s Web3
All of these new technologies are very exciting and promising, but with everything there are trade-offs. The state of today’s Web3 is still evolving and new concepts and innovations are occurring daily. Let’s talk a little bit about both the good and the bad side of Web3 and dive a little bit deeper into the reality of what it means today.
As mentioned before, Web3’s usage of blockchain inherits all of its benefits. Blockchain is consensus driven where the user has a vote on the rules of the web. It is transparent where everyone can see the history of records across the chain. It is immutable, so we know historical records are not changed. It creates a trusted network where third parties are not required to validate trusted transactions.
One of the greatest successes of Web3 so far is the creation of NFTs. There’s been a lot of discussion about the real value of these digital assets, but in our opinion, the emergence of investment flowing into art is both buzzworthy and impactful to a community that has not historically been empowered to reap the rewards of their work. Any investment in art is a benefit to society. As JFK said:
“There is a connection, hard to explain logically but easy to feel, between achievement in public life and progress in the arts. The age of Pericles was also the age of Phidias. The age of Lorenzo de Medici was also the age of Leonardo da Vinci. The age of Elizabeth, also the age of Shakespeare. And the new frontier for which I campaign in public life, can also be a new frontier for American art.”
Another one of today’s realities is the promise of the decentralized network driving large investments. For example Katie Haun, a former Andreeson Horowitz partner, has recently created an investment fund of $1.5 billion dollars just for Web3 investments! Andresen Horowitz and Sequoia Capital along with many others have begun investing in this technology. This may be a fad, but with so much money flooding this space, it’s hard to believe that this trend will be fruitless.
The Not So Good
With any new technology, there’s always some trade-offs and Web3 is no exception. Just the inherent nature of a trustless system that has to get consensus across 51% of nodes requires heavy computation and time. Things aren’t always as fast with Web3 as the current centralized platforms were used to today. Under the current system, as the size of a blockchain increases, the speed in which transactions will be executed will increase as well. It doesn’t sound sustainable under the current models.
In addition to the slower nature of Web3, there’s also the way that the current blockchain implementations require payment for each action taken. For example, let’s say someone were to come up with a Twitter clone, each tweet would cost users money. Instead of paying a subscription fee or viewing ads, users would instead have to pay a small amount to participate. That’s a prohibitive model for a lot of people and acts as a barrier to entry for lower income participants.
There’s also the issue of privacy. Blockchain storage is public by default which contradicts many regulations like HIPAA, GDPR, and PCI. There are ways today of encrypting the data before it’s added to the chain, but there are provisions within GDPR such as Article 17: Right to Erasure. Once data is on the blockchain there is no removing it. Either laws will have to change or new blockchain protocols will have to be invented to account for these types of regulations.
That leads to the final shortcoming which is the number of blockchains available today. As time goes on, these blockchains may split causing a rift in how these systems work. This adds another level of complexity and lack of interoperability between the different blockchains that will limit adoption for any single system.
All of these shortcomings aren’t a reason to dismiss Web3, but are areas of improvement that, once solved, should result in much more stable blockchain protocols and lead to the promise of a truly distributed internet.
Is It Ready?
Creating a new internet will not be easy, but the result should empower users to control and own their data. Web3 has given us the trusted network, next is for the innovation in how to use such a concept. There are already some use cases such as NFTs that have been successful, but for these platforms to grow, there will be a need for new innovations that overcome some of the inherent flaws. Some key things to look for are how Web3 will evolve to remove any barriers to entry for the general population of internet users and how blockchains evolve to enable more use cases for those dapps.