Understanding Web3.0: the Future of the Internet that Works on Blockchain
Author: Eddie Liu - Investment Analyst at Bridge Point Capital
In 2022, you almost can't escape the buzz surrounding NFTs, cryptocurrency and Web3. For those who have some experiences working with cryptocurrencies, the Ethereum (ETH)’s merge that help ETH transforming into PoS structure ignites the discussion of Web3 on social media again. In fact, Web 3.0 simply refers to the next iteration of the Internet that promotes decentralized protocols. It is bringing a fundamental change to how people interact with each other by introducing new technologies and concepts such as NFTs, cryptocurrencies, DAOs, DeFi and more.
Figure 1. Stages of the Internet (Source: Medium)
From Web 1.0 to Web 3.0
Let’s start with Web 1.0 or Web 1. Web 1 refers to the internet from the 1990s to the 2000s, and it was a classic version that offered a simple, static, and passive platform for reading web pages (you can find some very familiar names in Figure 1). Because they were developed using open protocols, the infrastructure was not solely controlled by one business or organization. For instance, a user who wishes to access a Web1-based website is not required to obtain any special authorization, buy any special hardware, or make any payment to any organization. The procedure is as simple as passively reading the standard and verifying that the computing equipment complies with it. As a result, Web1 has few content creators, and the major customer group was the consumers.
The term "Web2" does not specifically refer to any internet-related technological advancements. Web2 encourages users to create content and share it with others rather than only offering "read-only" web pages to users. The current state of the web is described by Web2. The interconnection of participants and the end-user experience led to Web2's rapid expansion and various exponential developments, including social networks and mobile access. However, individual businesses with centralized administration are in charge of the data and information. As a result, customers typically have to pay the business to obtain access.
Web3, also referred to as the next phase of the web, is founded on the fundamental principle of decentralization, which promotes users to have control over their own data, identity, and means of making money from their activities and contributions to the web. In Web3, posting, sharing, and commenting are all permitted without central authority approval. The purpose of Web3 is to provide users with security and freedom. The Web3 core value that was previously mentioned provides the foundation for the construction of cryptocurrencies, NFTs, DeFi, and DAOs. As an overview, referring to Figure 2, Web3 can play an important role in a variety of uses cases in all businesses, including entertainment, data security, organization management, and finance.
Figure 2. Top Use Cases of Web3 That You Should Know (Souce: https://101blockchains.com/blockchain-infographics)
Web3 and Cryptocurrencies
One of the most popular areas in Web3 is cryptocurrency, as represented by Bitcoin and Ethereum. Cryptography is used to secure cryptocurrencies, improving their security and uniqueness because it is so difficult to duplicate or counterfeit. Cryptocurrencies are different from traditional currencies in that they are a type of digital asset. Cryptocurrencies are typically produced from two ways, mined or bought from a cryptocurrency exchange. Collectively, Bitcoin and Ethereum make up more than half of the overall market capitalization of cryptocurrencies. However, even Bitcoin and Ethereum, are not suitable for use in retail transactions. Traditional currency, commonly referred to as "Fiat currency," derives its value and authority from centralized institutions like governments and monetary agencies. Cryptocurrencies, on the other hand, lack any backing from either public or private institutions, enabling them with decentralization features. Therefore, by eliminating intermediaries, cryptocurrencies promise to simplify the transfer of funds between two parties. The use of smart contracts, public and private keys, or various types of incentive systems, such as proof-of-work or proof-of-stake, secures the transactions even though they are not supported by any authorities.
Figure 3. Bored Ape Yacht Club, which launched in April, is a strange combination of gated online community, stock-shareholding group, and art-appreciation society.Source images courtesy Bored Ape Yacht Club
What about NFTs?
Non-fungible tokens, or NFTs, are a growing paradigm resulting from Web3 and blockchain technology. A decentralized digital asset collection is made possible by NFT. The blockchain technology, which guarantees that the collection's ownership belongs to the buyers. As a key component of the overall transaction, Ethereum will promise that the transaction will be publicly verifiable, assures that the products or collections, despite the possibility to be screenshotted, remain unique and irreplicable. Similar to how cryptocurrencies operate, NFT can link artists and collectors directly, obviating the need for intermediaries and facilitating a more straightforward transaction. It can also return creators their financial stakes back. NFT is a representation of digital collectibles, and it is on the upswing to expand into fan economies like the NBA and soccer leagues using fans tokens.
The most well-known NFT incident involves a collection of Beeple NFTs that sold for over $69 million. In addition, the Bored Ape Yacht Club is dominating Twitter and sold out of all 10,000 images in one day of release. As shown in Figure 3, the arts aboard the Bored Ape Yacht are a digitalized image with a theme, somewhat similar to traditional arts. However, the use of Ethereum guarantees the ownership and traceable trading history through blockchain technology and Web3, which distinguish those collections. As a result, each collection become unique.
Figure 4. How to buy and sell NFTs? (Source: ideasoft.io)
Decentralized Finance (DeFi)
Another revolutionary field developed from Web3 and blockchain technologies is DeFi. Decentralized finance, or DeFi for short, is one use case for the blockchain technology, which eliminated the requirement for centralized administration or third parties, as in conventional finance. Figure 5 shows how CeFi differs from DeFi in which it requires Sarah to go through centralized policies step by step in order to transfer a fund or do business with Robert. DeFi, on the other hand, uses blockchain to restructure the process, removing the intermediaries and decentralized the process.
To explain a little bit further, DeFi developed Smart Contracts to automate the procedure and protect the transaction with logic code that cannot be refuted. By providing liquidity through lending or staking cryptocurrency in exchange to DeFi liquidity pools, contributors will receive interests as profits. This function, which develops new markets and an environment for cryptocurrencies, is referred to as Yield Farming.
Figure 5. CeFi vs DeFi (Source: https://bap-software.net/en/knowledge/defi-finance/)
The Web3 and blockchain industries are still in their early stages and are experiencing rapid growth. More Web3-based products and features have recently been launched. For example, the fast-growing blockchain concepts and technology benefitted decentralized autonomous organizations (DAOs), an emerging form of community or structure with decentralized management. We anticipate that further uses and capabilities for cryptocurrencies and blockchain technology will arise in the near future.
The industry offers a wide range of opportunities, but there are also certain risks regarding the above functions. For instance, wallet security is a major concern. Thousands of cryptocurrency wallets with a Solona address were the subject of an attack in August 2022, which cost its customers approximately $5 million. Additionally, cryptocurrency has been extensively exploited for fraud and criminal activity due to its inherent core values of privacy and decentralization. Future regulations from government entities will also increase the industry's volatility and ambiguity regarding its developments in the future.