Web3 has become a dominant conversation topic in technology circles, with industry leaders offering a wide variety of opinions on what it is, why it matters and where it’s going. But as is so often the case with blockchain topics, the discourse is hindered by a lack of common technical understanding and further disrupted by distracting debate around tokens, market dynamics and NFTs.
In reality, the most significant promise of Web3 is that it is based on decentralized systems that are already transforming how individuals and institutions reach agreements. Web3 technologies like smart contracts and oracles are placing control back in the hands of users and demonstrating the power of cryptographic truth for everyday interactions.
To better explain Web3 and its possibilities, this piece will distinguish it from earlier phases of the Internet, walk through its core technologies and explore the current and future state of the Web3 ecosystem.
The Internet’s Evolution
Understanding how the Internet developed and how Web3 differs from its predecessors, is essential for grasping what those building Web3 are trying to achieve.
The general public began to interact with Web 1.0 around 1994. Back then, the Internet was largely a network of static HTML pages, with user interactions restricted to private chats and discussion boards. As encryption was limited, financial transactions were rare and risky. For instance, while Pizza Hut innovatively created an online order form in 1995, customers still had to pay in cash to complete the transaction.
Web 2.0 emerged around 2004 as improved Internet speed and fiber optic infrastructure spurred user demand for complex social networking, music, video sharing and financial applications. This demand fueled the growth of today’s Internet institutions, including search engines to help users navigate huge quantities of newly-available information. On the financial side, institutions like Bank of America leveraged new encryption standards to meet the demand for financial interactions and electronic fund transfers.
These new interactive applications came at the cost of users delegating massive quantities of information, including personal data, to siloed and opaque third-party platforms. Over the last two decades, these entities have amassed considerable data and content, which has translated into vast power and influence. In the United States alone, Google, YouTube, Facebook and Amazon combined received 23.56 billion visits in October 2021—roughly double the traffic of websites ranked 5-20. Our ongoing reliance on centralized providers shows the onset of Web3 has not yet ended the Web 2.0 era; currently, both versions are evolving simultaneously.
Web3 began with the publication of the Bitcoin whitepaper in 2008. It presented a new model for online financial transactions with users able to exchange money digitally without a trusted third party like a bank. Web3 leaped forward with the introduction of smart contracts, or programmable, blockchain-based code agreements. The combination of secure peer-to-peer payments (through cryptocurrencies like Bitcoin) and decentralized applications (powered by smart contracts) forms the basis for a transparent, cryptographically-secured Internet based around direct, user-to-user interactions.
Put simply, Web3 is a decentralized vision of the Internet. Web3 brings back the user-focused, decentralized architecture of Web 1.0 and combines it with the rich, interactive experiences of Web 2.0 applications. In this version of the Internet, users own their data, transactions are secured by cryptography and agreements are arbitrated by decentralized software—not one company’s platform.
Understanding the Key Web3 Technologies
Key components of Web3 include blockchains, cryptocurrencies, smart contracts and oracles.
A blockchain is a highly secure digital ledger operated by a network of computers (nodes), rather than a central authority. Blockchains are the backbone of Web3, as cryptocurrencies, smart contracts and decentralized applications (dApps) are built atop them.
Cryptocurrencies are digital tokens that leverage blockchain technology to facilitate highly secure transactions. They are the native form of payment in Web3, where a token might be held as an investment, used to pay for a service or to participate in protocol governance.
Smart contracts are pieces of code on blockchains that enable automatic transactions by using conditional software logic such as, “if x is true, then execute y.” Programmable smart contracts enable the creation of dApps, which are not maintained by any single organization or individual (unlike Web 2.0 apps). Smart contracts are already facilitating advanced use cases, including peer-to-peer financial services (DeFi), parametric insurance products, play-to-earn online games and more.
To achieve full utility and ultimately widespread adoption, smart contracts need to access real-world data and systems that exist outside of blockchain networks. To access these resources, they need oracles. Without oracles, blockchains cannot access the data needed to create the complex applications users demand. For instance, Chainlink oracle networks not only feed financial market data to DeFi applications, but can also deliver a huge variety of data, including business financials, weather, election results and sports results.
Web3 Is Already Reshaping Global Industries
Web3’s proponents hope to create a fairer, more open version of the Internet driven by direct interactions and transactions. dApps like permissionless financial tools, peer-to-peer cryptocurrency exchanges and verifiable NFT marketplaces are already enabling users to interact without the intervention of a central arbiter.
Decentralized finance (DeFi) protocols offer users access to financial products with unprecedented openness and transparency without requiring a mediating institution. DeFi has grown explosively over the last year, with users exploring more sophisticated financial instruments such as no-loss savings games and peer-to-peer lending and borrowing. While the novel financial applications offered by DeFi are currently one of the most prominent aspects of Web3, the Web3 model extends far beyond financial transactions.
NFTs, blockchain gaming and the metaverse are emerging as key pillars of the Web3 ecosystem. NFTs offer verifiable ownership of digital assets, allowing digital goods to achieve uniqueness on par with real-world items, empowering digital creators and presenting huge potential for metaverse applications and video games.
Another exciting use case is decentralized parametric insurance, with projects like Arbol and Etherisc offering frictionless and automated insurance for crops, flights and more. As an example, farmers looking to insure their crops against inadequate rainfall normally face lengthy, complicated processes to receive funds, with a centralized insurance provider required to verify rainfall volume. By comparison, an Arbol insurance policy uses hardcoded parameters to define insurance cost and payout terms, with payment automated through an insurance smart contract based on weather data provided by Chainlink. The resulting process is quick and painless: did IoT sensors record less than 20 inches of rain that season? If yes, pay the farmer; if no, do not pay him.
The Future of Web3
The journey into Web3 has only just begun. Smart contract applications like DeFi and NFTs, which have experienced a recent surge in popularity, are still very early examples of decentralized technologies and cryptographic truth making their way into everyday life and industry workflows.
However, Web3 is already transforming online interactions, from investments and financial exchanges to games and artistic expression. More and more users and institutions worldwide are realizing the power of cryptographically-backed agreements and how they’re enabling a return to the Internet’s founding ideals of transparency, reliability and expediency. In this new vision for the Internet, decentralized technologies will deliver control of data, finances and creative output back to users, unlocking a digital ecosystem that serves everyone.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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