What is Web3 and Why Should You Care?
Updated: Aug 21
Web2 vs Web3
Over the past year or so, you have probably heard much 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? This article will discuss these questions and some concepts underlying the new technologies and how they will shape our future.
Web3 is not 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 do not control their 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 a centralized data store.
Web3 is not just about cryptocurrency like Bitcoin. It includes concepts like NFTs ownership, smart contracts for computation, identity ownership, and distributed file storage. These types of technologies combine to create a system that upends the current centralized platforms driving investment and innovation at an astounding rate.
Concepts You Should Know
Web3 is a different kind of internet that leverages 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 data network built upon a trustless system. That means no one trusts anyone else to add data onto a blockchain without strict approvals. These approvals are handled 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 requires heavy computation and many participants. Without getting into the technical weeds, it essentially means that a complex mathematical formula is calculated to cryptographically sign the new block and authorize adding new data to the chain. This calculation considers the existing blocks in the chain, making the new block an insurance of the immutability of the chain. Once completed, you must reach a consensus 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 using blockchain as the underlying technology. Banks and governments are removed as the central authority by creating a currency built on top of a decentralized, trustless system. 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 many more actors are involved, and it becomes driven more by supply and demand than by central interference. This is all new, and cryptocurrency has risen after the 2008 financial downturn. It will be interesting to see how this theory plays out in the coming years when another downturn occurs.
Wallets are used to store users’ cryptocurrency, identify users, and track their ownership of tokens and activity. Only the user has access to their wallet through a secret phrase used to encrypt their data to stop malicious actors from accessing their accounts. Wallets have the added benefit of identifying users on Web3-powered sites, removing the need for usernames and passwords. MetaMask is a popular wallet, and you can read their FAQ to understand better how wallets provide access to ownership, identity, and activity history.
Blockchain is not only for cryptocurrencies but can also be used to execute code resulting in a decentralized approach to executing logic and creating programs built on a blockchain. Smart contracts allow for distributed moderation of agreements so that two parties can exchange currency for a representative token. If the contract terms are met, the rewards are released immediately without manually reviewing the contract. This happens using only cryptography and a distributed data store; with no intermediary.
Building upon smart contracts and cryptocurrency, a new concept emerged: non-fungible tokens or NFTs. I’m sure you have heard about this with the rise of OpenSea and popular collections like the Bored Ape Yacht Club. Remember the way smart contracts release a reward? You can get a picture of a bored ape as a reward once the contract terms are met! There has been much money exchanged with people creating artwork that is guaranteed to be unique. Ownership is traced back to specific accounts, and an owner can claim the original copy of the asset, including images, videos, audio, documents, or any other digital asset.
Now we have all the fundamental pieces in place to create new decentralized applications, or Dapps for short. Systems can be created to 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 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
These new technologies are exciting and promising, but with everything, there are trade-offs. Presently, 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 votes 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 much discussion about the actual value of these digital assets. Still, 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 significant 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, Sequoia Capital, and 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 this trend will be fruitless.
The Not So Good
There are always some trade-offs with any new technology, and Web3 is no exception. 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 we use today. Under the current system, as the size of a blockchain increases, the speed at which transactions are executed will also increase. 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, if 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 have to pay a small amount to participate. That’s a prohibitive model for many people and 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: the number of blockchains available today. These blockchains may split as time passes, causing a rift in how these systems work, adding another level of complexity and lack of interoperability between the different blockchains that will limit adoption for any single system.
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 promise a truly distributed internet.
Is It Ready?
Creating a new internet will be challenging, but the result should empower users to control and own their data. Web3 has given us a trusted network; next is innovation in how to use such a concept. Some use cases, such as NFTs, have already 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.