What is Web3? A Beginner’s Guide

January 1, 2024

Web3 was coined in 2014 by Gavin Wood, president and founder of the Web3 Foundation. However, to understand its context we need to go back to the beginning.

So, in the beginning…!

There was Web1. A simple information based static document sharing web, based on the HTML protocol that ran on top of the internet.

Then after a lot of innovation and finding its way the current Web2 was born. This is a dynamic collaborative platform-based web where user-generated content, social-media, e-commerce and cloud services materialized. These are centralized business platforms where user data is the commodity that is central to their business models.

Now with the advent of blockchain technology we have seen the rise of Web3.

Web3 is based on a permissionless decentralized network of nodes running cryptographically secured blockchains. They can create token economies, decentralize application, codify governance rules and invert control of personal data back to the user. All this is done by using publicly viewable and immutable self-executing code, called smart contracts. These networks are decentralized and have the added benefit of having no single point of failure, no centralized business control and also offer a public and transparent audit trail.

What Makes Web3 Different From a Blockchain?

Web3 is built on blockchain technology and although the definition between the two is blurred we can define some distinctions. Blockchain’s have already found some compelling uses in many industries. Some industries have fragmented supply chains that result in a lack of provenance for products or their constituents and blockchains are used to log this in an immutable audit trail.

Other industries are using blockchain’s immutability data structure as a cryptographically secure data layer for data security like drone airspace management and devices on the internet of things (IOT).

Some of these industries use internal private blockchains and although some maybe public they are not disrupting the preexisting centralized, data centric, business models of the Web2.

Web3 innovation and disruption has predominantly encompassed the building of decentralized apps, self-enforced governance organizations, self-sovereign identity management and token economies. Some further divisions and terms are Cryptocurrencies, Smart Contracts, DEFI, DAOs, NFTs, DIDs and the Metaverse. These uses case are used in the public domain and where the innovation is occurring it is having a widespread effect on many sectors.

Cryptocurrency and tokens.

The most popular case in blockchains is cryptocurrencies. All blockchain platforms have their own native tokens, like Bitcoin and ETH on Ethereum. These tokens transact value natively on their blockchain and are used for transaction fees. However smart contract-based platforms can also define token types that users can create and manage themselves, so they don’t need to run their own blockchain.

These token types have predefined interfaces so they can be universally read and understood by wallets, exchanges and other Dapps alike. Some standards are the ERC20 and ERC271 token interfaces made popular on the Ethereum blockchain. These tokens can be made with a few lines of code and have the ability to help create new business models around token economies. There are many standards for different cases and are used for many purposes from utility, reward, governance, ownership, security, data and stable tokens.

Because of the ease of creation there has been an influx of these token with different use cases, some credible and some not so credible. Therefore, it is important to have well thought out tokenomics and governance rules and in this way, it will enhance the credibility and legitimacy of your businesses use case.

Smart contracts.

Originally, we had Bitcoin which is a blockchain that is a ledger that records the transactions and balances of addresses. Then came Ethereum which gave us the addition of addresses that could hold and execute code called contracts. When deployed to the blockchain these contracts are decentralized, immutable and publicly viewable, therefore the rules they dictate are transparent and cannot be altered for anyone’s self-purpose.

The code is law, as they say. This removes intermediary, legal and external enforcement mechanisms along with removing any counter party risk with regards to non-fulfillment of agreements. Definition of terms are clear and cannot be changed for any reason and the agreement is always fulfilled. Ultimately it removes any trust issues and fees paid to third parties or counterparties.

With that definition we can see how and why smart contract can disrupt many existing business models. By removing the intermediary control, we open the door to new kinds of application that base themselves on a new types of decentralized business models.

DAPPS (Decentralized Applications)

Smart contracts have the ability to build full applications that run on the blockchain. These are called Dapps for decentralized apps. Because Dapps are written in smart contracts, they have all the attributes of smart contract laid out above. Dapps therefore can work without third party or centralized intervention. There is no central point of attack as they are decentralized and they have the implicit security of a blockchain. They are also permissionless and users do not need to part with personal data to use them.

Dapps innovations are causing disruption across industries from decentralized finance (DEFI) like decentralized exchanges, lending and staking platforms, to gaming (play to earn, lotteries, VR), to social (content driven economies, fan tokens) and NFT markets (property, art, collectables, fractional ownership) to name but a few.

DAOs (Decentralized Autonomous Organizations)

DAOs are decentralized autonomous organizations that again are created with smart contracts. There are not meant to be applications but a set of governance rules with token-based voting algorithms. Participant vote to make decisions in the organizations future direction and the actions are self-executed by the rules encoded in the smart contract. In essence they are traditional companies with voting shareholders, but the smart contract code governs as opposed to management. Hierarchical structures are disrupted in favor of a collaborative governance structure.

DAPPS can be DAOs where ownership of the DAPP is renounced to the actual contract address and then proposals that win votes can be automatically executed without hinderance. Many already exiting DAPPS are DAOS like Uniswap, MakerDao and Aave.

DIDs (Decentralised Identifiers)

Decentralized identifiers or DIDs are secure self-sovereign, persistent, portable and verifiable digital identities. Although DIDs are not new to the web, blockchains enhance their use and benefits.

At present the web does not have a digital identity layer to control authentication and verification of users. In Web2 we use emails and phone numbers as unique identifiers for us to authenticate ourselves in server centric environments. Initially servers would use their own authentication method leaving the user to manage passwords for each service. Then private companies, like Google and Facebook offered openid solutions where users could use their platform credential to authenticate themselves on third party sites. This made password management easier and reduced the overhead of authentication and data management for smaller companies.

However, this led to the control and centralization of personal data where these companies’ tracked behavior, browser history, locations and more in what is coined surveillance capitalism. They can also sale your data, revoke access to accounts or delete users altogether. But due to these silos of personal data they are targets for hackers which have resulted in many mass data breaches. Other issues with these types of identifiers are there is no true way to verify the end user as even emails could change hands like phone numbers. So, as you see this type of digital identities are not secure, self-sovereign, persistent, portable or truly verifiable.

DIDs have three elements, identity issuers, owners and verifiers. Identity issuers can be organizations or just web wallets that create private/public key pairs and store the public key on the public blockchain. Owners keep the private key and control the data associated with them. Owners can sign a claim to access a service with their private key and present it to a third party with any relevant personal data. In this way they can also control third party access to personal data they store off chain. The third party is the verifier who uses the public key on the blockchain to verify the signed claim in order to give access to the owner. In this process the digital identity becomes self-sovereign to the owner, persistent and portable due to the immutability and public qualities of the blockchain and truly verifiable because they are inherently non-transferable.

Of course, you still have security issues around the private key but these no longer have the attack surface of a centralized server. The owner has self-custodial responsibility of the private keys and they cannot be revoked or deleted by a third party.

What else?

The explosion of innovation in Web3 has led to new applications and business models. The ecosystem continues to grow as the technology evolves. The above concepts should give you a top-level overview of the present landscape, but there are other applications that are worth a mention.

Gaming has seen the adoption of Web3 technology utilizing cryptocurrencies in play-to-earn games.

NFTs for in-game asset ownership and DAOs that create player driven ecosystems.

If you add some VR and social media to this you become immersed in a socially connected 3D virtual world with the ability to trade and own assets in thriving economies. This is referred to as a Metaverse and some large Web2 players have already banked on this being the future and have started building their own Metaverses.

Further to this, the convergence with other technologies like AR, AI and IOT is securing Web3 as an integral and essential technologies in many existing and future business models.

With all these fast-changing new concepts and growth it can be difficult to sift through the noise. But, hopefully this gives you an overview of the technology and ecosystem from a top level.