Introduction & education for people new to Web3 and Decentralized Finance (DeFi)!
TLDR
Imagine an internet where you, not big corporations, hold the keys to your data and access to the digital world. That’s Web3, and it’s redefining the way we connect and transact online.
From the static Web1 of the 2000s to the interactive social-media era of Web2, Web3 will empower individuals and democratize the digital realm, shaping a more transparent and inclusive online universe.
After reading this article you will be able to define Web3, understand its core benefits (e.g. Decentralization, Data Ownership, Community Governance and more), and learn key examples of Web3 Products today, in decentralized finance (DeFi) & NFTs for real estate.
1. Web3 Definition
Web3 refers to a paradigm and vision of a more decentralized, open, and user-centric internet, where users have more control over their:
- data
- digital identities, and
- interactions online
The appeal of this new form of internet stems from the lack of control centralized authorities have over users. For example, in today’s internet (Web2) Facebook/Instagram users must abide by their current rules, influenced by Mark Zuckerberg. Similarly, X (Twitter) users have to be at the whim of Elon Musk. In the context of banking, if someone wants to send an international wire transfer to a family member back home, they must pay high fees and wait up to five business days for the transfer to settle. While there are benefits of having this central authority, companies with this structure force users to comply with their rules & can restrict users’ freedom. Decentralization is one of the core principles for Web3, which aims to create a more inclusive, transparent, and equitable digital ecosystem that empowers individuals and fosters innovation.
Web3 is enabled by blockchain technology. At its core, blockchain technology is essentially a publicly distributed ledger. Think of a ledger as a record-keeping book where transactions or information are recorded. The term “distributed” means that this ledger is not stored in one place, but copies of it are held by many different computers all around the world.
In a blockchain, each “block” contains a list of transactions. Each new block is linked to the previous block (list of transactions) in a chain, hence the name “blockchain”. What makes it special is that when a piece transaction is added to a block, it’s incredibly hard to change or delete. This provides a high level of security and trust in the data recorded on the blockchain. So, at its core, a blockchain is a public distributed ledger that ensures transparency, security, and immutability of the recorded information.
Before we dive into the specifics of Web3, I wanted to orient you on the evolution of how we got to Web3. I personally found this very helpful in terms of anchoring my understanding of where we are in the internet timeline, and why Web3 is called Web3 (hint, it’s a lot simpler than you think). Web3 got its name because it’s the 3rd iteration of the internet! That simple.
Web1 (1990s-2000) was the first iteration of the internet, static and informational, only having one-way communication from the site to the reader. Web2 (2000s-early 2020s) was the second iteration, it brought interactivity and social engagement, allowing for two-way communication. Web3 (Now) aims to increase democratization of the internet. This includes increased data ownership, digital identity ownership & enhanced user control over digital experiences for individuals.
Imagine the internet as a vast city with various shops, parks, and people interacting. In Web2’s internet, a few big store owners (e.g. Amazon, Meta) controlled what items were sold, what events took place, and the rules of the city.
Now, in the age of Web3, each person in the city has a voice in deciding what new stores should open, what events should happen, and what rules should be in place. Everyone participates in discussions and votes on what they believe will make the city better. This way, the control and decisions are more spread out among the city’s people. It’s like a community-driven city where everyone’s opinions matter, and the city evolves based on what the majority of its residents want, creating a fairer and more inclusive place for all. In this example, not only is the internet the city, but the citizens are anyone on the internet, globally.
Each phase represents a significant evolution in the capabilities and user experiences of the internet. Here’s a simple comparison of Web1, Web2, and Web3:
Web1 (Static Web):
- Nature: Informational and static web pages with limited interactivity.
- Technology: Basic HTML and early internet protocols.
- Interaction: Users mainly consumed content, and communication was one-way.
- Examples: Early websites, static pages with text and images.
Web2 (Social Web):
- Nature: Dynamic, interactive, and social web, characterized by user-generated content and two-way communication.
- Technology: Advanced web technologies, social media platforms, APIs, and dynamic content.
- Interaction: Users could create and share content, interact with others, and participate in online communities.
- Examples: Facebook, YouTube, Twitter, blogs, interactive websites.
Web3 (Decentralized Web):
- Nature: Decentralized, user-centric, and trustless web with focus on data ownership, privacy, and the decentralization of digital interactions. In this context, “Trustless” means that you don’t have to trust a third party (e.g. a bank, a person, or any intermediary) that could operate between you and your financial transactions or holdings.
- Technology: Blockchain, smart contracts, decentralized applications (DApps), decentralized identity systems, and distributed ledger technology (DLT).
- Interaction: Users have control over their data, participate in governance, own digital assets (NFTs), and engage in trustless transactions without intermediaries.
- Examples: Ethereum, DeFi platforms (e.g. Uniswap), NFT marketplaces (e.g. OpenSea), and projects focused on decentralization and blockchain integration.
Web3 is still in the early development phases when it comes to mass consumption for the general population. Though as we’ve seen in the early stages of Web1 and Web2, Web3 Products will continue to iterate, become more easily consumable, and have increased real-world applications as more resources are invested into it.
2. The Value Propositions of Web3
As mentioned, the value of Web3 is derived from several key principles and the potential benefits it offers. The main value propositions of Web3 technology are listed below.
It is key to note that not every Web3 Product delivers all of the value propositions listed below, this depends on the product’s use case. The list is prioritized based on my research & critical assessment of the most prevalent benefits from today’s Web3 offerings.
1 — Decentralization & Trustlessness (i.e. not required to trust third parties):
Web3 aims to reduce reliance on centralized authorities, putting more control in the hands of users. In blockchains, transactions are validated by a decentralized network of individuals. This validation structure can lead to users having increased assurance that actions and transactions aren’t manipulated by a single authority.
2 — Data Ownership and Privacy:
Web3 emphasizes individuals owning their data and having control over how it is used. Users can choose what data to share, enhancing privacy and reducing the risk of data misuse by corporations or other entities.
3 — Smart Contracts and Programmability:
Smart contracts, enabled by blockchain technology, allow for automated and trustless execution of agreements. Similar to an IFTHEN statement in Excel, for example “IF I send you 2 ETH THEN I get this NFT”. This opens up new possibilities for various applications like decentralized finance (DeFi), supply chain management, and more.
4 — Interoperability:
Web3 seeks to enable seamless interaction and transfer of value across different platforms, applications, and blockchains. This can lead to a more connected and efficient digital ecosystem.
5 — Incentivization and Tokenization:
Web3 often incorporates tokenization and incentive mechanisms, using cryptocurrencies and tokens to reward users for contributing to the network or using specific services. This can foster engagement and collaboration within the ecosystem.
6 — Community Engagement and Governance:
Many Web3 projects involve their communities in decision-making processes through decentralized governance models (DAO — Decentralized Autonomous Organization). This ensures a more inclusive and democratic approach to project development and evolution.
7 — Resilience and Censorship Resistance:
The decentralized nature of Web3 can make it more resistant to censorship and single points of failure, enhancing the resilience of the internet against potential disruptions or attacks.
8 — Empowering Developers and Creators:
Web3 provides opportunities for developers and content creators to have more direct relationships with their audience and consumers. They can monetize their work through decentralized platforms without relying on centralized intermediaries.
3. Web3 — Products vs. Enabling Technologies
I want to give you two examples of popular Web3 Products today, but before we can get into this, we need to align on the definition of a Web3 Product vs. Web3 Enabling Technology. In my research, a lot of sources combine Web3 Enabling Technologies with Web3 Products and lump them all together as ‘Web3 Products’. This was a source of a lot of my confusion initially, and I want to help clarify this for you.
Enabling Technologies are the foundation of Web3. These few pieces of technology are what enable Web3 Products, and are where a lot of the core benefits mentioned above are derived from. We’ll call these the ‘primary colors’. Web3 Enabling Technology:
- Blockchains
- Protocols
- Smart Contracts
- Cryptocurrency
Web3 Products are different interfaces and/or digital items that end users leverage for economic transactions or social interactions. We’ll call these the ‘secondary colors’ as they are made up of different combinations of Web3 Enabling Technologies. Web3 Products:
- DApps (Decentralized Applications)
- DAOs (Decentralized Autonomous Organizations)
- NFTs (Non-Fungible Tokens)
- Tokens
Making it consumable for end users is key, and different Web3 Products can be applied to many industries. I’ve listed out the most popular industries Web3 Products operate in today (2023), with DeFi being the largest by a wide margin. Web3 Industries — for End Users:
- Finance (Decentralized Finance — DeFi)
- Data Ownership (NFTs) — applicable to Art, Real Estate, Goods or any products with proof of unique ownership
- Real World Assets
- Gaming
- Social Media
- Education
- etc.
4. Examples of Web3 Products
To show the practical applicability of the above Web3 theory, below are two tangible examples of Web3 Products, showing their:
- Enabling Technologies
- Web3 Industries, and
- associated Value Propositions
DEXs
A Decentralized Exchange (DEX) is a platform that enables users to swap/trade cryptocurrencies without the need for a central authority or intermediary. This is one of the most popular types of Web3 Products (by TVL — Total Value Locked, DefiLlama).
DEXs fall under the Web3 Industry of Finance (DeFi) and the Enabling Technologies of DEXs are all of the ones previously listed — Blockchains, Protocols, Smart Contracts, Cryptocurrency.
DEXs operate on a blockchain or a decentralized network, allowing users to retain control of their funds (Value Proposition #1). DEXs use smart contracts to facilitate trades (Value Proposition #3), ensuring transparency and security. Users maintain ownership of their private keys — comparable to a PIN for someone’s Bank Account — providing enhanced privacy and reducing the risk of hacks (Value Proposition #2). Overall, DEXs promote the decentralized ethos of blockchain technology, offering a trustless and censorship-resistant environment for trading digital assets (Value Proposition #2 & #7).
Examples of the most popular DEXs include: Uniswap, Curve DEX, PancakeSwap, Balancer
Logos of most popular DEXs (by TVL, DefiLlama)
Note: there are plenty other examples of financial actions that users can execute using Web3 technology (e.g. Lending, Borrowing, etc.) that have similar benefits to DEXs, but for today we’re only giving the one example.
NFTs for Physical Real Estate
‘Physical real estate’ NFTs register real-life assets, creating a tamper-proof record of ownership and transaction history. This is not to be confused with ‘Virtual real estate’, which involves digital environments where one can buy, own, and sell within online platforms — replicating real-world locations.
NFTs for Physical real estate fall under the Web3 Industries of Data Ownership & Real World Assets. They are powered by the Enabling Technologies of — Blockchains, Protocols and Smart Contracts.
These NFTs introduce automation through smart contracts, streamlining transactions and enhancing efficiency in buying or selling properties (Value Proposition #3). The use of smart contracts ensures irrefutable ownership history and enables secure, rapid asset transfers without traditional middlemen (Value Proposition #1, #2 & #7). Forbes
Additionally, fractional ownership is a possibility, facilitated by tokenizing properties, allowing for shared ownership and simplifying real estate investment for multiple stakeholders (Value Proposition #5). Ultimately, NFTs pave the way for a transformative shift in the real estate industry, promising transparency, efficiency, and new possibilities for property ownership and transactions.
Examples of the most popular Real Estate Tokenization Companies include: Blockchain App Factory, Somish, Propy, Solulab
Source: Top 10 Real Estate Tokenization Development Companies In 2023: Level Up Your Real Estate Business
5. Conclusion
In conclusion, Web3 represents a transformative vision for the internet, emphasizing decentralization, user control over data, and trustless interactions. The name “Web3” signifies its position as the third iteration of the internet, building upon the static Web1 and the interactive Web2. The core value of Web3 lies in its prioritization of decentralization and empowering users by removing the centralized authority’s control over their digital experiences. This marks a fundamental shift toward a more inclusive, transparent, and equitable digital ecosystem, fostering innovation and enhancing user empowerment.
The key value propositions of Web3 encompass decentralization and trustlessness, data ownership and privacy, among others listed above. These propositions underpin a wide array of Web3 products that operate in various industries, including finance (DeFi), data ownership (NFTs), real world assets, gaming, social media, education, and more.
Two prominent examples of Web3 products are Decentralized Exchanges (DEXs), facilitating secure and direct cryptocurrency trading, and Non-Fungible Tokens (NFTs) for physical real estate, revolutionizing the way we perceive and transact with real-world properties.
These two examples are only scratching the surface and there plenty of other exciting & innovative areas in Web3 today that I encourage you to deep dive into, including Prediction Markets, Yield Farming and many more.
Despite the immense potential, it’s crucial to acknowledge that Web3 is still in its early stages, facing challenges like scalability issues and regulatory uncertainties. Overcoming these hurdles will be pivotal in determining how long it will be until the true value and impact of Web3 is realized by the general population. Overall Web3 will become a mainstay in society, and it has the ability to reshape the internet and digital interactions for years to come.
