What is Web3?

Since the early 2000s, the internet has flourished around large corporations. A small handful – such as Google, Microsoft, Meta, and Amazon – have outsized market shares in a broad range of categories such as online search and social media. Their market dominance has led these companies to be colloquially referred to as walled gardens.

The launch of Bitcoin in 2009 enabled individuals to engage in peer-to-peer transactions online without a centralized intermediary and sparked a movement towards decentralized tools and protocols. This developed into Web3, a decentralized evolution of the internet that aims to increase transparency and data protection.

Web3 encompasses blockchain innovations such as decentralized finance (DeFi), which offers a more transparent financial system, and non-fungible tokens (NFTs), digital assets that are provably unique and impossible to duplicate.

History of Web3

The term Web3 was first coined by Ethereum co-founder Gavin Wood in 2014, who proposed that there are three iterations of the internet.

Web1 was born out of the need for global communication and information sharing. This was the first version of the internet when connectivity was limited to dial-up speeds. Websites served static pages, mostly in the form of written content and images, and included the core web protocols that run computers today: HTML, HTTP, URI, etc.

Web2 ushered in broadband connectivity and social media, which evolved the internet into a more interactive experience where users could generate their own content and engage with others. Content—and data as a whole—are generally owned by tech companies and stored on centralized servers. The shift to this model also resulted in the commoditization of user data as part of the social media advertising revenue model.

Web3 brings about decentralization and ownership, giving users more control over their data and content. It also offers the potential to redistribute monetary gains from centralized platforms to individual creators.

Features and principles of Web3

Web3 applications are built using blockchain technology. The features and principles are heavily tied to the capabilities and ethos of the underlying technology and the many transactions that occur when interacting with the decentralized applications (dapps).

Of note, in Web3, “transactions” can mean any online interaction between individuals. While more commonly attributed to cryptocurrency transactions, they can also refer to a fan listening to their favorite musician’s latest track or even a battle between characters in a video game.

Digital ownership

In Web3, users take ownership of their online presence, assets, and data. This can mean holding cryptocurrencies and tokens in an online wallet to use them in dapps or providing people with more agency over the disclosure of their personal data.

One way to achieve this is to enable people to hold their credentials as NFTs in digital wallets. This way, they can determine who gets to access which data, for what purpose, and for how long.

Further, developments in Web3 identity solutions and innovations such as zero-knowledge technology – the ability to prove and verify information without directly sharing it – are set to introduce more privacy and ownership over elements of users’ online identities.

Decentralization

In Web3, decentralization can refer to either the nature of the underlying blockchain technology or the governance of its platforms and applications. Blockchains such as Bitcoin or Ethereum consist of a decentralized group of operators, called nodes, that take collective responsibility for keeping the network running at all times.

These blockchains, as well as the applications that run on them, are also organized in a decentralized way, where token holders vote on key decisions about areas such as network upgrades, development, and funding.

Peer-to-peer transactions

In Web3, users and entities transact directly with one another without the need for intermediaries. Each user has a digital wallet with their own private key and can send and receive assets such as tokens and NFTs to any other user.

Permissionless and censorship-resistant

Web3 dapps are generally designed to be permissionless and censorship resistant. This means that smart contracts (code that automates transactions based on set terms) published on a blockchain cannot be edited or censored, and once they’re in existence, anyone with a blockchain wallet can use them.

Web3 technologies and examples

As Web3 is based on blockchain technology, the underpinning technologies of Web3 are based on blockchain innovations.

Smart contracts and decentralized applications

The Web3 ecosystem consists of dapps, applications that connect two or more parties without the need for intermediaries, that are built using smart contracts, which use programming logic to automate transactions.

For example, decentralized exchanges (DEX), like Uniswap, are dapps where cryptocurrencies can be bought, sold, and traded. When a user wishes to process a token swap, the trade is enabled via a collection of smart contracts without the need for a third party.

Cryptocurrencies and native payments

In Web2, companies rely on a complex network of payment providers, banks, and other intermediaries to process transactions. This often results in high fees and slow payments – particularly when transacting across borders.

In contrast, Web3 protocols are built on blockchains like Ethereum and Polygon, which are settlement layers for their respective cryptocurrencies. Anyone can set up a digital wallet, like MetaMask, take custody of their own funds, and begin sending and receiving digital money within a few minutes.

NFTs

In Web3, NFTs represent a vast array of art pieces (like digital artwork or music), in-game assets (like weapons and skins), and personal documents (like government IDs). NFT development opens new possibilities for online monetization and value creation independently from the major tech platforms.

Taking digital art as an example, before Web3, it was near impossible to define a digital image as an “original” when digital files are infinitely reproducible. However, by tagging an image file to an NFT, it is identifiable as the original piece and can be sold as such via Web3 marketplaces like OpenSea.

NFTs can also be used as a digital representation of a physical asset, meaning that Web3 applications aren’t necessarily limited to the digital realm. For example, projects like Omni or Fraction are using NFTs to enable fractional ownership of real estate.

DAOs

Decentralized autonomous organizations (DAOs), are community-based entities with democratized governance. Unlike centralized entities organized around a self-appointing hierarchy, DAO membership is generally determined by elections, where voting power is determined by token ownership. Aside from these basic principles, the rules governing DAO participation and governance can vary widely.

Examples of DAOs include those governing decentralized financial applications such as Uniswap, Compound, and MakerDAO, as well as mission-specific DAOs like ConstitutionDAO, a DAO dedicated to purchasing an original copy of the US constitution.

Sectors leading Web3

The wide array of Web3 services and use cases illustrate that several segments, such as DeFi, gaming, and identity, have found an immediate utility to explore in Web3. However, there are other sectors also leading the way.

Infrastructure projects, for example, use blockchain to crowdsource idle connectivity and computing resources. Infrastructural Web3 projects have gained traction over recent years as they offer the opportunity to move away from centralized providers for Web3 apps. Examples include Helium, which is a decentralized marketplace for WiFi connectivity, and Filecoin, which aggregates storage for data and files.

Established apparel and luxury brands have also proven eager to explore the opportunities of Web3 and NFTs. Nike, Gap, Prada, and Louis Vuitton have all launched some variations of NFT-based wearables. Decentraland, a decentralized metaverse, became the first Web3 project to host a virtual fashion week in 2022.

Decentraland is also one of several projects operating at the convergence of Web3 and the metaverse. There are other examples, such as Upland, and some that also cross over into the realm of gaming, such as the Sandbox or Axie Infinity.

Web3 essentials

• Web3 is a term that describes the next generation of the internet built on blockchain.

• Features of Web3 include asset ownership, decentralization, and peer-to-peer transactions. These features are underpinned by blockchain-based smart contracts, cryptocurrencies and native payment systems, NFTs, and DAOs.

• Several sectors have emerged as Web3 leaders over recent years, including DeFi, gaming, infrastructure, and the decentralized metaverse.