smartworlder logo
smartworlder logo

Web3 Explained

Content
– Web 1.0 – Decentralized and Open Protocols
– Web 2.0 – Increasingly Centralized With Proprietary Protocols
– Security, Privacy and The Big Data Grab
– Identity in Web3 Works Differently
– Decentralization is at the Core of Web3
– InterPlanetary File System (IPFS)
– Decentralized Autonomous Organizations (DAOs)
– Decentralized Finance - DeFi
We are about to embark on the third major iteration of the Internet: Web3 – the next wave of websites and apps built on decentralized technology and running on cryptocurrencies, NFTs, and other blockchain entities.
The evolution of the web
The evolution of the web. (Source: moralis.io)
But before we get into that, let’s take a look at how we got here.

Web 1.0 – Decentralized and Open Protocols

The first phase of the Internet – Web 1.0 – lasted about until the mid-2000s and was mainly about linking static content across the Internet. It consisted mainly of websites with text or image content with clickable hyperlinks to other pages, built around open protocols like TCP, IP, SMTP, and HTTP.
In this context, ‘open’ means that these protocols were controlled by the Internet community. Most participants were consumers of this content, served up by a motley group of developers.

Web 2.0 – Increasingly Centralized With Proprietary Protocols

Web 2.0, which is still going strong, has become a dynamic, interactive and social web dominated by apps developed and provided by large for-profit tech companies. Thanks to these apps (Facebook, YouTube, Twitter, LinkedIn, Instagram, …) everyone can now easily participate in content creation.
As the software of these services began to outpace the capabilities of open protocols, a second layer of proprietary, closed protocols were built on top of them. This trend was accelerated dramatically with the explosive growth of smartphones, which run almost exclusively on mobile apps.
A key development that happened in Web2 is the rapid centralization of services, often inside closed communities, and running on the servers of large Internet companies. On the upside, this has allowed billions of people access to amazing technologies and, for better or worse, become ‘creators’ and consume and share any information they want (assuming you don’t live in a totalitarian state).
On the downside, large Internet companies have amassed unilateral power over important questions like who gets network access, who gets thrown off, how revenue is divided, what features are developed and stay supported, how content is distributed (such as Facebook’s algorithms deciding what makes it to the top of your feed) or how user data is secured.

Security, Privacy and The Big Data Grab

Of course, all these great free apps and services aren’t altruistic acts performed by Internet companies. As the saying goes: “If you’re not paying for it, you’re not the customer. You’re the product.” Specifically, the product is your data. And it is captured (often without your consent) and stored in large, centralized databases.
Without going into the revenue models of large Internet companies like Google and Facebook, in a nutshell it works like this: The more data they can capture about a user the better they can personalize the content and ads to show them. This leads to more pageviews, clicks and ultimately more advertising revenue.
One could say that the centralization and exploitation of user data is at the core of Web 2.0. As is the recurring stream of announcements about data breaches. Wikipedia keeps a list of large data breaches. For instance, in 2019, a collection of 2.7 billion identity records, consisting of 774 million unique email addresses and 21 million unique passwords, was posted on the web for sale.

Identity in Web3 Works Differently

Web3 can remedy the online privacy failures that prevail in today’s data-sucking, centralized systems. Secure digital identities will be the tool to make that happen.
Current online identity verification relies on usernames, passwords, email addresses, date of birth, social security numbers, security questions, etc. There is little to none oversight on how this personal information is stored and shared (or sold).
Decentralized identities built on blockchain (which means they will be tied to the wallet address of the user interacting with the application) allow web users to maintain full control over their private data and grant access to it through private keys. Importantly, an identity can be seamlessly used across applications if the user chooses to use the same wallet.

Decentralization is at the Core of Web3

The key defining feature of web3 will be that developers link content and programs directly to each other, bypassing intermediary organizations and allowing anyone to participate without monetizing their personal data. Thanks to decentralized coordination and public verifiability, web3 will move power from corporations into the hands of communities (we’ll talk more about these Decentralized Autonomous Organizations (DAOs) below).
These decentralized applications (referred to as dapps) will run on blockchain, decentralized networks of many peer-to-peer nodes (servers), or a combination of the two that forms a cryptoeconomic protocol. This term describes a combination of the tools and concepts from computer science that enable cryptocurrency, such as distributed systems and cryptography, and economic mechanisms in the form of incentives.
The role of (economic) incentives is critical for the development and maintenance of public goods like the decentralized networks of web3. Cryptocurrencies, i.e., coins and tokens built into blockchains, help solve this problem by providing economic incentives for development, much like the incentives for Bitcoin miners.
The result will be open, trustless and permissionless networks. Open means that they are built by an open community of developers with open-source software and accessible by everyone. Trustless describes a network and all interaction among participants that doesn’t require a trusted third party. And permissionless means that none of the participants requires authorization from a governing body. Everyone can access and interact with them (which does not mean that everyone can do what they want – there are rules).

InterPlanetary File System (IPFS)

A key component in building web3 dapps is a protocol and peer-to-peer network for storing and sharing data in a distributed file system called the InterPlanetary File System (IPFS).
IFPS powers some major differences to today’s web2:
HTTP downloads files from one server at a time — but peer-to-peer IPFS retrieves pieces from multiple nodes at once, enabling substantial bandwidth savings. With up to 60% savings for video, IPFS makes it possible to efficiently distribute high volumes of data without duplication.
The average lifespan of a web page is 100 days before it's gone forever. The medium of our era shouldn't be this fragile. IPFS makes it simple to set up resilient networks for mirroring data, and thanks to content addressing, files stored using IPFS are automatically versioned.
IPFS powers the creation of diversely resilient networks that enable persistent availability – with or without internet backbone connectivity. This means better connectivity for the developing world, during natural disasters, or just when you're on flaky coffee shop wi-fi.
The way IPFS works is that when you add a file to IPFS, your file is split into smaller chunks, cryptographically hashed, and given a unique fingerprint called a content identifier (CID). This CID acts as a permanent record of your file as it exists at that point in time. If you add a new version of your file to IPFS, its cryptographic hash is different, and so it gets a new CID. This means files stored on IPFS are resistant to tampering and censorship – any changes to a file don't overwrite the original, and common chunks across files can be reused in order to minimize storage costs.

Decentralized Autonomous Organizations (DAOs)

In a nutshell, DAOs are online organizations that coordinate activity among a distributed community of stakeholders. They are decentralized because no single individual or centralized party can change rules; autonomous because votes are tallied and decisions implemented based on logic written into a smart contract, without human intervention.
Governance structures determine how an organization makes decisions that align the interests of participants. The challenges with many existing organizational forms, such as corporations, are that decisions are not made in a transparent way and often stakeholders face high barriers to entry to participating in governance.
That’s where DAOs come in. They are supposed to form an emergent governance model for new kinds of organizations built around transparency and inclusion. The principles can be applied to a wide variety of organizations, including non-profits, collectives, cooperatives, and investment funds.
The basic structure of a DAO revolves around a crypto token, tracked on the block chain, that serves as a measure of an individual’s stake in the group. In most DAOs, tokens reward participation, guarantee voting rights, and, importantly, are tradable outside the DAO – which means they can accumulate value.
The DAO landscape as of June 2021
The DAO landscape with more than 100 DAOs managing over $10B in assets, as of June 2021. (Source: @Coopahtroopa) (click on image to enlarge)
One of the most prominent DAOs, Friends With Benefits, has received a $10 million venture capital investment. The FWB community of web3 builders and artists has issued one million tokens ($FWB) on the blockchain, about one third of which is retained in a community treasury (to be distributed according to the wishes of the DAO, with a set number disbursed every few months to members, based on contributions like providing liquidity or serving on committees). The rest circulates on the open market. To join FWB, you can buy $FWB tokens or earn them. People who own at least 75 FWB tokens can propose resolutions in binding elections where each token equals one vote.
You can find an excellent introduction to DAOs here.

Decentralized Finance – DeFi

One element of web3 that is gaining a lot of traction is decentralized finance, which involves conducting financial transactions on the blockchain without assistance from banks or the government.
Decentralized Finance or DeFi (also referred to as Open Finance) describes decentralized financial products and services such as saving, lending, trading, insuring. Imagine a global, open alternative to every financial product you are using today – but accessible online to everyone in the world.
Already, there are DeFi dapps that allow you to lend out money and earn interest, take out a loan, receive investments into your start-up, exchange assets, or create stablecoins – privately issued cryptocurrencies that maintain a stable value relative to another asset, for instance by being pegged to the Euro or U.S. dollar. Stablecoins offer the advantages of cryptocurrencies without the volatility.
Once the rules for a financial product are written in code (a ‘smart contract’) and deployed to the blockchain, DeFi dapps remove intermediaries and run themselves with little to no human intervention. That means financial institutions are removed from the equation in favor of peer-to-peer transactions and automation.
What this means is that, even without a bank account (there are almost 2 billion unbanked adults in the world), consumers can obtain and store cryptocurrency in virtual wallets, send and receive payments from mobile devices, access alternative credit markets, and invest in global asset markets – often without interacting with traditional financial infrastructure at all.
Top DeFi projects
Top DeFi projects. (compiled by 101blockchains.com) (click on image to enlarge)
SmartWorlder logo
Check out our SmartWorlder section to read more about smart technologies.