If you’re even remotely interested in cryptocurrencies, you know that it generates a steady supply of jargon. To mention a few, there’s NFT, dapp, DeFi, and tokenomics. Get ready for a new one: Web3. The idea is that crypto might be used to develop a complete new web, not only for sending money or speculating with them. Even if you never touch Bitcoin, if the believers are correct, this is one bit of cryptospeak worth learning.
Of course, the software that drives the internet is always evolving. What sets Web3 apart—and makes it a little strange—is that it would include financial assets in the form of tokens into the inner workings of nearly any online activity.
Its advocates believe that by doing so, it will be able to replace corporations with decentralized, internet-based organizations governed by software protocols and token holders’ votes.
It’s the first real consumer penetration” for crypto, says Jeff Dorman, chief investment officer of crypto fund Arca. Over time, every company became an internet company. I think it will happen here in digital assets.
Many skeptics argue that this technology is still far from proving its utility outside of niche applications, many of which are tools intended for crypto traders. It could also be an attempt to bypass regulations at a time when politicians are preparing to establish clearer crypto laws. Web3 is a heady mix of innovative new enterprises, technological utopianism, and financial engineering. Here’s a quick guide on everything you need to know.
What does Web3 mean? What were webs 1 and 2 again?
From the initial connectivity of computer networks in the 1970s and 1980s through the first flowering of browsers and websites in the 1990s, Web 1.0 encompasses everything. Companies built applications on top of it in the next phase, Web 2.0, varying from social media to search engines to wikis, much of it based on user-generated content.
Although this made much of the web decentralized in some ways, most things still run through large corporations. Web3’s goal is to create software and platforms that aren’t reliant on existing businesses or Web 2.0 economic models like advertising. Users could, for example, pay for services directly with tokens. Web3 services are designed to be operated, owned, and enhanced by communities of users in an ideal future. (As for why it’s Web3 rather than Web 3.0, it’s primarily due to changes in how developers communicate online.)
What exactly does this have to do with cryptocurrency?
Bitcoin, the first cryptocurrency, works by storing all transactions on a public database known as a blockchain. It’s decentralized because the ledger is maintained by a huge network of computers linked to the internet, whose operators are rewarded for their efforts with the opportunity to earn more Bitcoin. However, a blockchain can be used for more than just recording digital coin transfers. You may use it to create contracts and manage the functionality of software and apps.
Web3 applications are frequently built using Ethereum, a cryptocurrency that, like Bitcoin, rewards users who contribute to the network’s maintenance. Its currency is called Ether, and it has a total value of $511 billion. Apps can also have associated tokens, which can be used to not only pay for services but also to regulate the development and cost structure of the apps. Much of the motivation for this action, at least at first, is the possibility of a price increase in the token. It may increase as more people join the community, but speculation can also inflate it. In crypto, there’s a lot of that.
Why do I keep hearing about this?
A huge part of it is the speculative boom, but it’s also that people are starting to see the technology in reality. Venture capitalists invested billions of dollars into building and enhancing distributed apps, or dapps, as Bitcoin and other cryptocurrencies surged earlier this year. Many dapp teams also got coin payouts, which increased in value and sparked even more interest. “We’re at an inflection point that will lead into an even faster pace of innovation and growth in Web3,” Ali Yahya, a crypto general partner at venture capital company Andreessen Horowitz, says.
On the tracker DappRadar, there are over 8,700 active dapps. There are numerous crypto trading platforms and games available.
The distinction between them can be confusing at times: Many games include winning and trading nonfungible tokens, or NFTs, which are virtual characters or objects that may sell for exorbitant amounts of money.
Although using a distributed network can be problematic, the user experience is improving. “It’s still early, but it’s been transformed in the last six months,” says Jonathan Dotan, founding director of the Starling Lab, a research nonprofit founded by Stanford and the University of Southern California Shoah Foundation to help preserve and verify documents, including sensitive historical records, using cryptography and decentralized networks. One of the group’s goals is to upload over 55,000 video testimony of genocide survivors to Filecoin, a distributed network in which over 3,500 providers throughout the world store data on their computers in exchange for FIL tokens.
According to Dotan, the Starling Lab can now pump three times more data per day into Filecoin than it could at the start of the year.
Dish Network Corp. announced a 5G wireless connectivity partnership with startup Helium Inc. in October. For providing coverage, hotspot providers are paid in the HNT token. “What people are starting to realize is this is a very new opportunity that’s reminiscent of Airbnb or Uber,” says Helium CEO Amir Haleem. The city of San Jose is putting up 20 Helium hotspots to earn HNT tokens to help low-income citizens get internet connection.
Engineers at Twitter Inc. are working on Bluesky, a decentralized social media platform. Ubisoft stated on December 7 that players in a single game will be able to obtain NFT collectibles such as vehicles for their characters. In other words, traditional web players will face strong competition from decentralized apps. “The biggest battle here is with the big tech companies,” says Aaron Brown, a crypto investor. “The financial incentive of these companies is basically to hijack Web3” with Web3-like versions of their apps.
Is it important to me that apps are decentralized?
Brown says, “centralization is convenient.” Web3 is likely to be “a place for niche groups. People who are developing new ideas .” Many of these undertakings aspire to become a DAO, or decentralized autonomous organization, which refers to thousands of individuals governing a project via chat groups and tokens. “I think DAOs will be as ubiquitous as companies, clubs, nonprofits, and different kinds of ‘official’ organizations today,” says Maria Shen, a partner at venture capital firm Electric Capital.
What are the downsides?
Decentralization can be a cover for business as usual with less responsibility, despite the fact that Web3 is typically portrayed in terms of idealistic cooperatives. Regulators are concerned about some projects, including decentralized finance, or DeFi, apps that allow people to lend, borrow, and exchange currencies with one another without validating their identities or performing anti-money laundering checks. Many development teams believe they aren’t to blame because they have delegated authority to their users. “What are these dirty little secrets that no one talks about?” asks Avivah Litan, a blockchain expert at analyst Gartner Inc. Right now, DeFi is run by centralized companies. But the difference is you can’t stop the protocols. You can arrest the people, the regulators can put them in jail, but you can’t stop the protocols.”
The huge amount of computing power required by some blockchains has raised environmental concerns, while newer systems may ease this. Software bugs and malicious hacking attacks abound since so much of the code was written in all-nighters. Many initiatives don’t even provide phone numbers, even if they do have online chat groups. If you send money to the wrong account by accident, it could be lost forever. You won’t be able to fix the problem by calling a bank’s customer service line.
Many Web3 ventures have few paying clients but can benefit from the underlying token’s value, making them vulnerable to a wild market. Piknik & Co., for example, employs roughly 30 employees and runs two Filecoin data centers. It generates revenue by issuing FIL tokens, which have nearly doubled in value this year. However, they’ve dropped 82% since their April. Customers in experimental programs, according to CEO Kevin Huynh, will eventually start paying him. He’s put a lot of money in Web3. He was a surgeon before starting Piknik, and to get started, he liquidated his 401(k) and solicited small contributions from roughly 70 family and friends.
I think it’s going places, he says.
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