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Blockchain Explained

What is Web3? Here Are Some Ways To Explain It To A Friend

by James BeckJanuary 12, 2022
What is Web3

Since Web3 emerged in 2014 as a term to describe the new types of protocols that enable decentralized consensus, it has now come to describe an entire ecosystem of public blockchains, applications, and even design philosophies. As with other great esoteric ideas, the question “What is Web3?” elicits a torrent of answers that are as varied as the people articulating them. For some, new jargon can be alienating, so in this blog post, we cover nine ideas that describe Web3 with plenty of examples to understand these ideas in practice.  

  1. Web3 is the new trendy name for the decentralized web. 
  2. Web1 is read-only, Web2 is read-write, Web3 is read-write-own. 
  3. Web3 is a money layer for the internet. 
  4. Web3 is an identity layer for the internet. 
  5. Web3 is a reaction to social networks not keeping our data secure, and selling it for their own profit.
  6. Web3 is a way for artists and creators to not only own what they produce on a platform, but the platform itself. 
  7. Web3 is a new patron model for the internet.
  8. Web3 makes it easy to set up cooperative ownership and governance structures.
  9. Web3 is still not entirely decentralized. 

1. Web3 is the new trendy name for the decentralized web. 

Since 2015, Joseph Lubin, founder and CEO of ConsenSys has been giving talks, writing, and supporting teams building Web3 and the decentralized web (as we used to describe it in our style guide). Web3 is the philosophical touchstone that guided all of ConsenSys’ early investments and projects. MetaMask is now the primary way in which individuals can access the Ethereum blockchain, and many more Ethereum-compatible networks. It is a way to generate a public-key securely on your phone or desktop, but what it enables is a new principle for interacting with the web — one where only you have access to your accounts and data and choose what to share and what to keep private. Another way to describe MetaMask is that it is a cryptographic consent manager.

When we referred to the decentralized web, we also referred to the rest of the stack beyond decentralized money and identity. Other aspects of the decentralized web, such as decentralized storage are just becoming essential parts of the stack to persistently store files (such as IPFS and Arweave), decentralized storage (Golem, W3BCloud and others), and decentralized data (Graph Protocol). 

Now, Web3 is the catch-phrase for an entire investment category of a16z and other big venture capital firms, which means it is also the subject of both lengthy Twitter threads, irony, derision, and confusion. It was only a matter of time until Web3 became a large enough part of the public internet discourse that the jesters came for the protocol priests. 

2. Web1 is read-only, Web2 is read-write, Web3 is read-write-own. 

When I asked my brother, a Web3 developer, how he explains Web3, his short answer is that Web1 was read-only, Web2 is read-write, Web3 is read-write-own. The initial version of the Web was built on open source protocols such as TCP, IP, SMTP, and of course HTTP. A protocol as a standard way that multiple computers agree to talk to one another. These foundational protocols govern the flow of information and messages on the internet, and if you want to build an application or service using their rules, you don’t have to pay for access. 

Web2 describes the next evolution built using the free and open source protocols of the internet. An important shift was that unlike static, read-only versions of Web1 websites, individuals could add content to the web. What initially started as upvotes on Digg message boards became microblogging and now over 2 billion Facebook profiles. Another subtle shift happened, too. Rather than maintaining your own server to display your websites, Web2 companies paid the bills. In exchange, however, they also created a silo of user data, behavior, and actions to construct a social graph that is very valuable to advertisers. In Web2, the individual user is the product.

Ownership for Web3 means that the builders, operators, and users of a platform own a piece of what they use. Bitcoin and Ethereum are the earliest examples: in return for updating the ledger and keeping other actors honest, they receive a reward in BTC or ETH in exchange for securing the network. Token-based networks built on Ethereum and other smart contract blockchains have even introduced new models of ownership that are not necessarily the same as a cooperative or shareholder equity model. For example, ownership might be given in the form of a token provided for a service, such as providing liquidity for a trade, and that same token could also be used for governing the future changes to the network. The grand vision is that participants of any network will be able to own a piece of the products and services that they use everyday. 

3. Web3 is a money layer for the internet. 

One of the greatest innovations of the internet was to make information globally accessible, cheap, reproducible, and abundant. These properties are in direct opposition to things of value, be it money or property, which are by definition, scarce and difficult to access. Bitcoin is the first protocol that introduced scarcity to the internet in part by solving the “double spend” problem that had plagued early attempts at digital money. The double spend problem refers to the idea you could use duplicate digital money and spend it simultaneously at two or more places. In the mainstream financial world, banks, credit card companies, and payment processors validate the transactions themselves to minimize the risk of double-spending. With decentralized cryptocurrencies, the network of miners or validators do the work of making sure an account doesn’t double spend. This has profound implications since verification no longer relies on a trusted centralized party. With an internet connection, anyone can participate in the peer-to-peer network and inspect the ledger. Social consensus can protect against a cabal seeking to reverse or censor transactions.

Another attribute of scarcity is whether the individual units are fungible. Fungibility means you can replace one unit with another and it is still worth the same. For example, 1 ETH is worth 1 ETH. Non-fungible means individually unique. NFTs give users the ability to own objects, which can be art, photos, music, text, game objects, credentials, governance rights, access passes. How can a NFT be scarce if I can just right-click the image and save it to my desktop? Fundamentally, what’s important is that the blockchain maintains a record of ownership from one account to the next. It allows an artist or a company to establish the “original” and, just like the foundational problem that blockchains solve, prevents another individual from claiming to be its owner or “double spend.” One of the reasons why many people are excited about NFTs as a way to prove digital provenance is that, since they are Ethereum tokens (NFTs are also now available on other smart contract blockchains), they are interoperable with the rest of the Web3 ecosystem. They can be split into smaller parts so multiple people can own them; used as collateral for other decentralized financial services; include royalties in perpetuity; and even be used as the basis of identity on the internet.  

4. Web3 is an identity layer for the internet. 

One of the greatest omissions among the early internet protocols is that there was no public and open-source identity layer. Web2 platforms like Facebook and Twitter have since monopolized that layer as closed-source applications. The Web3 stance is that you should own your own identity online and reveal parts of that identity only when you decide to. In practice, an identity on Ethereum is very basic. Think of it as a container that allows claims to be associated with it. A government could attest to your date and place of birth without learning anything else about your digital identity you don’t consent to. Your identity could include your transaction history that a financial service could query without needing to know where you were born. Moreover, the digital identity that you develop on a social network could be portable to other networks. 

In practice today, the closest thing we have to a universal identity layer in Web3 is the Ethereum Name Service (ENS). With ENS you can purchase a unique name (for example, jamesbeck.eth) as an ERC-721 non-fungible token, and then have it point to an Ethereum address. ENS created human-readable Ethereum addresses, but it has since been used as a convenient way to airdrop NFTs, show off your tokens or NFT collection with others, and understand who is voting for which proposals is DAO governance votes. There’s an undeniable allure to signalling that you “get” Web3, which is perhaps why Paris Hilton, Shaq, and other celebrities have .eth usernames on Twitter. Like the early internet protocols, though, there are no early investors in ENS, and the protocol itself is decentralized and based on open standards. 

Other services from 3Box Labs such as IDX and Self.ID allow you to connect your wallet and manage your digital identity. You can associate your Ethereum addresses, existing social media profiles, and other self-identifying information you choose. Like ENS, the larger vision is that people can sign up to new services and platforms automatically choose what data and information to share from their personal identities. For now, most traction happening with digital identities using blockchains is still ensconced in the Web3 world — linking your Ethereum address to your social profiles — but the long-term Web3 goal is for real world identities, like a government ID, to also be attested to on-chain.

5. Web3 is a reaction to social networks not keeping our data secure, and selling it for their own profit.

Facebook owns much of the data on your social graph. Even if you quit the service, the data is still tied to Meta’s servers. Gavin Wood, who by some accounts coined the contemporary term Web3, argued in 2014, “Web 3.0, or as might be termed the ‘post-Snowden’ web, is a re-imagination of the sorts of things we already use the web for, but with a fundamentally different model for the interactions between parties. Information that we assume to be public, we publish. Information we assume to be agreed upon, we place on a consensus ledger.” The Cambridge Analytica scandal in 2018 revealed that 87 million people’s personal information had been harvested by a firm attempting to create psychographic voter profiles and influence elections. While this revelation grabbed headlines, significant data breaches happen all the time, affecting millions of Internet users, simply because we entrust companies to store our data, and can’t revoke permissions when we move on to a different service. 

Remember when we described MetaMask as a cryptographic consent manager? The principles of Web3 application design is that individuals “push” information to trusted sources, instead of applications pulling from sources that own your data. For example, in the Web2 world when you “sign in with Google” an application may pull personal identifying data that you don’t consent to. The opacity of the data you give to different applications on the web is one of the reasons why social media networks could create such a dominant position — this information is extremely valuable, and for the most part, we give it all up as soon as we sign a platform’s terms of service. 

Web3 can be considered a reaction to the extractive relationship between users and platforms on the internet today, one where users will always get to choose what to share, and what to keep private. 

h/t @chhlss 

6. Web3 is a way for artists and creators to not only own what they produce on a platform, but the platform itself. 

It seemed that everyone was launching an NFT in 2021, reaching over $23B in total trade volume according to DappRadar. For many digital artists, NFTs represented the first bonafide way to support their craft full-time. And because NFTs are a general-purpose token format, you could mint an NFT by deploying your own code or use an NFT marketplace. Unlike the social networks of Web2, your token can be bought on one service, sold on a secondary market, or used for other games and applications. In other words, by inheriting the properties of Ethereum, NFTs are portable and interoperable representations of value. 

Some of the first NFT marketplaces were quick to realize that their position is simply to act as a marketplace, but to create more alignment between the creators, users, and platform itself. In 2021 SuperRare released a $RARE governance token and created the SuperRare DAO in order to reward it’s earliest artists and collectors, as well as encourage the community to take part in the curation of its art, explaining, “We envision Spaces as the future of community-driven art curation — a vibrant ecosystem of curators, artist collectives, galleries, and community members, onboarding artists and collaborating on auctions, under the shared brand and technology of SuperRare.”

Other applications on Ethereum are now using tokens as a way to reward contributions to the network and help manage decisions. Even Web2 social networks like Reddit are testing the use of tokens known as “community points” so that active subreddit contributors can “own” a part of the social network. DeFi protocols like Uniswap have already created a positive-sum dynamic by incentivizing liquidity providers to provide capital for the trading pairs of nearly every asset on Ethereum. 

The benefits of individuals having a collective stake in the many services they use across the web might perhaps be the biggest threat to the network effects of Web2 social networks. As Scott Belsky asks, “If every stakeholder of these businesses was deeply incentivized to help build, improve, market, and patronize the brands, would that become a competitive advantage against the big guys?”

7. Web3 is a new patron model for the internet.

The increasingly vague “creator economy” is a term used to describe internet spaces meant to help creators monetize in new ways. OnlyFans, Twitch, and other platforms promise platform users freedom to earn directly from their fans instead of relying on an ad-driven, attention-based monetization model. However, unlike Web3 networks, creators can be booted from the network capriciously, and don’t own the content that they share. 

For writers and journalists, the allure of earning income directly from their audience has been amplified over the past year with platforms like Substack, Ghost, and Lede. Yet none of these enable writers to forge a direct relationship with their fans through ownership. Mirror, a Web3 blogging network, lets users sell their work as an NFT and redefines the writer and patron model with “crowdfunds.” The crowdfund feature lets patrons deposit ETH to fund an idea, in exchange for a token which represents your proof of patronage, and can be further used for gaining entrance to a DAO or accessing future rewards from the publication. The token has utility, but also could signal your early support for an idea or writer, and worth more as more people similarly support the crowdfund. As Kyle Chayka, a New Yorker staff writer who funded Dirt.xyz through Mirror put it, “Subscription is certainly a sustainable business model for many forms of media, but it does not necessarily suit all forms of content or experimental work, which collectors and patrons are ideally suited for. NFTs can provide support for the collector and patron relationships, as can the kinds of tokens that Mirror is supporting, like $ESSAY or Emily Segal’s $NOVEL. I want to see blogs, series, and think tanks funded by tokens and NFTs rather than just readers and recurring payments, with rewards for both creators and patrons.”

With fungible or non-fungible tokens as a part of the patron-artist relationship, artists also have a direct line with their earliest supporters — a collection of Ethereum addresses or ENS names that can be used for mailing lists, entry pasess, and payment systems for artists to engage their fans no matter the platform they are using. 

8. Web3 makes it easy to set up cooperative governance and ownership structures.

If you joined any DAOs in 2021, you might have entered a Telegram or Discord group with a bunch of internet strangers for a variety of reasons: vote on a DeFi governance proposal; decide which project to fund; gain access to an Erykah Badu concert; join a residency program for artists and developers; collectively buy the sole copy of Wu-Tang Clan’s 2015 album Once Upon a Time in Shaolin; or even team up to buy a copy of the U.S. Constitution

A DAO, or a “Decentralized Autonomous Organization,” is a community-led entity that uses Ethereum smart contracts to establish the foundational rules and execute the agreed upon decisions. Some of the largest and earliest DAOs in Ethereum govern the growing coffers of decentralized financial protocols. Nearly $10.5B worth of digital assets are currently held in the top 20 DAOs.

DAOs are not just limited to DeFi. Media organizations like Bankless and public funding entities like Gitcoin all utilize DAOs to coordinate, govern, and manage their financials. There are now more than 1.3 million DAO token holders in Web3. One NYTimes journalist quipped that DAOs are “chat rooms with bank accounts.” But an undeniable draw of Web3 is the way in which leaderless online groups of like-minded people can quickly gather, collectively pool capital, and make decisions. 

9. Web3 is still not decentralized at every layer.

Anyone who has been around in the Web3 ecosystem long enough is aware of the design tradeoffs engineers encountered when attempting to adhere to maximally decentralized architectures, easy to use applications, and scalable infrastructure. As the founder of Signal, Moxie Marlinspike, recently wrote in his own exploration of Web3, “The premise for web1 was that everyone on the internet would be both a publisher and consumer of content as well as a publisher and consumer of infrastructure. We’d all have our own web server with our own web site, our own mail server for our own email…However – and I don’t think this can be emphasized enough – that is not what people want. People do not want to run their own servers.” 

He shouldn’t have been too surprised then to learn that much of Ethereum’s applications call data from trusted API sources. Or that the current number of Ethereum full nodes is 5,433, 40% of which are currently being run in the United States. This was also one of the first design decisions that MetaMask made — that instead of requiring every user to run a self-hosted Ethereum node, they would instead connect to Infura to serve Ethereum data so that developers could focus more on the applications they were building, rather than running network infrastructure. As MetaMask founder Dan Finlay writes, “This allowed users to get started right away and without constantly draining their laptop batteries. It was a game changer for adoption, and it kind of demonstrated what Moxie said here: People don’t really want to host their own server (certainly not one that is designed to consume a full laptop of capacity).”

This is not to say that Ethereum and the Web3 community is still thinking about how to reduce trust on every level, either through decentralized data centers like W3BCloud, or implementations to bring light clients to Eth2. While MetaMask uses Infura as a default, they’ve always allowed users to choose their own blockchain connection instead, and moreover, with Snaps, the users will be able to choose alternatives to the entire relationship of wallet-server. As Dan Finlay explains, “A snap might help a user run light clients, choose alternative runtimes like zk-STARK chains or new friendly languages, or maybe it just lets users connect to their preferred centralized service.”

The Ethereum community has a lot of teams dedicated to improving decentralization, yet the success of some newer, more centralized, crypto networks proves that users might not care as much. However, there is no reason to think that the current status quo of Web3 infrastructure will look the same in the future — especially as more people experience the advantages of fully decentralized networks.

If you are interested in learning more about the entire Web3 economy, check out our most recent Web3 report.