What Is Web3, And Why Is Everyone Talking About It?

Bishal Kumar Chanda
27.01.2022

Introduction

Apart from endless pandemic, inflation, and supply chain crisis, we have also witnessed tremendous technological advancements as we started this new decade. Four decades after the inception of the Internet in the late 1980s, we have a new version of the Internet: Web3 or Web 3.0. Web3 is being hyped by the crypto and blockchain community as the future of the Internet. The concept behind Web3 is a tad complicated. Still, the general idea is the creation of a decentralized web, where users need not depend on tech giants like Facebook, YouTube, and Amazon. But does Web3 measure up as the new Internet that can change the world, or is it just a new bubble set to burst soon?


What Came Before Web3?

For understanding the true essence of Web3, it is essential to know what came before it. We got the first version of the Internet back in the late 1990s, called Web1. The initial version only consisted of a collection of links and connected homepages. There were not many complications, usability, or scope in Web1, and all you could do was read things and publish articles that others could read. With limitations in infrastructure, access, and ability, the online community was very secluded in practice. You could find a small community of bloggers and forums, but very few people made money online like the present day. 

After almost ten years of Web1, in 1999, the Internet entered the second phase known as Web2. Some people named it the read and write version of the Internet as the websites had more scope of user interaction. With blogs like Tumblr and later Facebook, Instagram and Twitter, people were empowered to grow from being content consumers to content creators. As the Internet became more accessible and legible, it evolved into a platform where anyone can create and extend functions from real life. Although Web2 had a decent run for more than two decades, innovators are pushing to make the Internet more decentralized.


What is Web3?

Web 3 or Web 3.0 is the third major phase of the Internet since its inception, also known as the New-Age Internet. If Web2 can be called the read and write phase, we can understand Web3 as the read, write and own phase. While the Web2 Internet is an integral part of our life today, there is also some unwanted baggage. A few big companies monopolize the Internet, such as Google, Amazon, Microsoft, Apple, and Facebook. Web3 aims at giving consumers more control over their data and intends to bring the openness of Web1 along with the scale of Web2. In essence, Web3 will look more or less the same on the surface, retaining all the functionality of the present Internet, only changing the underlying technology.


How Does Web3 Work?

Web3's main purpose is to decentralize the present Internet by taking control from internet behemoths like Google, Facebook, and Amazon and giving it to the end-users. Since Web3 is pushing for decentralization, only one technology implements it best - Blockchain. Like other buzzwords such as NFT and Bitcoin that took 2021 by storm, the concept of Web3 is also based on blockchain technology. Ethereum co-founder Gavin Wood first coined the word Web3 in 2014 and now runs the Web3 Foundation. At present, most Web3 development is based on the Ethereum blockchain.

Re-building the existing Internet on the blockchain would mean that no single entity will control an application on Web3, termed as dApps (decentralized application). The present-day websites and applications work through their servers, to which information goes in and flows out. Every time you do something on the Internet, you get a response back. But whatever is happening in between is only known by the platform owner. Users are often kept in the dark about privacy protection measures, security protocols, and other actions—Web3 changes this by using blockchain. In this distributed ledger system, all participating systems act as nodes. 

By using a network of computers as nodes, Web3 does away with the concept of a platform-controlled central server. This would ideally mean that you can send peer-to-peer messages without your message passing through any particular platform's server. The same concept applies to money, as you can send or receive money without any platform's involvement. 


Your Identity on Web3

In Web3, the identification system is different from what you are used to in today’s Internet (Web2). On any Web3 platform, your identity will be tied to the crypto wallet address that you use to interact with the platform. MetaMask is an excellent example of such a crypto wallet, and its browser extension allows you to convert your Web2 browser to a Web3 browser. Unlike the current Web2 methods of authentication, such as logging in through email or social media accounts (where you need to provide personal information), a wallet address is anonymous unless you publicly declare it as your own.

You can use the same wallet address across different decentralized applications just by transferring your identity-building up your reputation over time. To replace traditional authentication and identity layers, specific tools and protocols such as IDX and Ceramic allow users to build their self-sovereign identity. The Ethereum Foundation is also working on identity management on the blockchain to sign in with their Ethereum address.


What Problems Does Web3 Solve?

While the foundation of the present-day Internet was decentralized in itself (using consensus-driven TCP/IP standards), most platforms that developed on it were not the same. Tech giants such as Google and Facebook get to decide what you can post on their platform and what you can not. Internet users also face issues with data portability as they can not bring their information across devices. For example, if you purchase an application on one platform, it will probably not work on other platforms. It is no secret that they earn most of their revenue while feeding on your user data and showing you advertisements.

Web3 wants to shift the control back to the users as a decentralized network. It means that you would not need to take permission from any service (no censorship or bans), no one can use your data without your consent (no violation of privacy), and you will be able to transfer your information across devices without hurdles. The Web3 servers are decentralized, making it very difficult to hack into them, and there would be no single point of failure. With Web3 technology, these functionalities extend to all kinds of data, with examples such as DeFi and NFTs.

DeFi or decentralized finance is usually built using smart contracts on blockchains such as Ethereum, Solana, Binance Smart Chain, etc. With DeFi, you can trade, invest or lend cryptocurrencies without the the involvement of any middlemen. It is usually governed by a structure known as DAO (decentralized autonomous organization) with the help of a native token. NFTs or non-fungible-tokens are a way to own tokens that represent ownership of digital or real-world assets. NFTs disrupted the art industry in 2021 with billions of dollars in sales, and it continues to penetrate various sectors to date. DeFi and NFTs remove the need for a third party to handle your transactions, and you get to decide whatever you wish to do with your assets.

The paradigm shift from companies to consumers is greatly evident in the gaming industry. With the rise of Web3, gamers can now invest in the game itself and participate in the decision-making process of development. Many existing Web2 companies such as Ubisoft and Meta are now entering the Web3 space in hopes of being a part of this new phase. NFTs have also played a huge role in the gaming industry by giving players ownership of their in-game items. 


A New Way of Building Companies: DAOs

As we fully transition into Web3, the idea of tokenization and creating a token economy will become more prevalent. Let us consider the current method of building a company. First, someone comes up with an idea, and to build a company around that idea, they need funds. To get the funds, they trade off a certain percentage of the company to venture capitalists. Now, whenever venture capitalists get involved, there will be non-aligned interest, and in the long run, the company will not be able to provide the best user experience. Even after the company becomes successful, the people involved would have to put in years of work without getting any proper return on their investment.

However, things run differently in the Web3 space. Whenever there is an exciting new project that aims at solving a real problem, everyone in the community has the option of investing in it from day one. The company can announce the release of its tokens, give a portion to the early builders, put a portion up for sale and save the rest for future funding and payments. The token acts as a governance token with which investors get to vote in decision-making processes. The people involved in early development can sell some of their tokens to take profits after the release. 

Decentralized Autonomous Organizations (DAOs) offer a different approach to building companies that outperform traditional ones. It is gaining massive popularity both among developers and venture capitalists. The tokenized concept of DAOs offer actual, liquid and equitable ownership to a more significant number of stakeholders and align their interest uniquely. Unlike buying equity in private or centralized businesses, all the data on the blockchain is open to the public, making it fully transparent.


The Metaverse and Web3

Metaverse is the interconnected online world that has taken crypto enthusiasts, social media tycoons and game developers by storm. The concept of metaverse as a group of the traversable online world requires you to use your user account, avatar, and data seamlessly from one world to another. Every company is building its version of the metaverse, and they are not likely to collaborate as they don't want to share their userbase. That is where Web3 comes to the rescue with its decentralized Internet. If no single entity owns or controls the different metaverse worlds, users can easily switch from one metaverse to another. The use of crypto as the primary currency in the metaverse has attracted a lot of crypto enthusiasts to Web3's development. 


Criticisms of Web3

The main criticism faced by Web3 is that the technology falls short of the ideals set by itself. It is a fact that ownership over a blockchain network can never be equally distributed, as most of the governance tokens are held by early adopters and big investors. Many users are questioning whether the number of blockchain projects is not as decentralized as they promise to be. The best example of this decentralization muse is private blockchains and DeFi protocols where a few people have access to millions of dollars in user investments. Even in the Ethereum ecosystem, Vitalik Buterin holds enormous power over the network even though he is not actively involved in Ethereum's development.

Many have also pointed out that Web3 promises to remove many present security measures. While this might be a good thing for the general public, it also creates a premise for spreading misinformation, hateful, and incentive content. Right now, we can blame the platform and make them take action according to the law, but who can be held responsible in Web3? If we look carefully, not all of Web2 needs to eliminate the security and censorship measures required for jurisdiction. 

Elon Musk also tweeted his uncertainty about Web3 and called it a "marketing buzzword than reality". The former Twitter CEO Jack Dorsey has also called out Web3 as a hoax as he feels that it will not be owned by people but by Venture Capitalists. Does it mean we are getting the same old centralized entities repackaged under a new label?


Web3 and The Future

Web3 believers will tell you that it will be the prevalent form of the Internet in the future. However, the reality of the future Internet will be an amalgamation of the early Web1, the present Web2, and the developing Web3. The current big tech companies like Facebook have already invested a lot of money and resources in Web3 and won't be giving up on their control anytime soon. We will most likely experience a gradual transition from Web2 to Web3, and you will hardly notice it. It's just like the moment Web1 users transitioned to Web2 without even realizing it. The innovation potential is immense in the Web3 ecosystem, where people get more control over their data and services. But it certainly won't be as perfect as promised by the Web3 advocates. The Internet is always evolving, and this is just another evolution that will come naturally with time. 

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