What is Web3?
Web3 is a hot topic. Between Google searches for the term surging since early this year, and a16z’s recent crypto-focused fund close, we are amidst a revolution in the way the Internet operates. And yet, the world of web3, its offshoots, and subsequent components remain nebulous. There is an interesting irony in the amount of publicly available knowledge and varying definitions, terms, and ideologies that persist within this space.
That’s because web3 is still in its infancy. Founders, creators, developers — everyone in the community — is building the plane and flying it too. We are figuring it out as we go and hoping for the best, or should we say, HODLing? Chingona Ventures has already invested in a few web3 ventures (including Alpha’a and Suma Wealth); at the same time, we are taking an active stance on learning more about this exploding space. We hope to share our learnings with you in this post.
Defining Web3
There are a plethora of definitions out there depending on who you ask. I prefer to illustrate a timeline of events. From there we can discuss the philosophies of web3 using real-life examples:
The early days of the internet are now called Web1. Think of Web1 as a public library with a ton of books! You can read these “static HTML pages” that only contain text and you can also ask the librarians (Yahoo, Google, Netscape, etc.) for help in finding the right “books.” Just like a library, on Web1 you can pretty much just go in and read-only 😊 This example is “decentralized” since it’s a public library that anyone can walk into.
Following Web1 is Web2 and you can think of the internet as a Barnes & Nobles but with the added bonus of the ability to write your own “books,” & reviews, having others at the bookstore read them too (think of people who write Wikipedia articles or make Youtube videos). Barnes & Noble still owns those books and most of the money goes to them when they make a book sale. The ownership is centralized but people can still participate by going inside B&N, browsing, writing books + reviews, and/or selling their own books there.
Lastly, we have Web3, which is a combination of Web1 and Web2, with the added bonus that there is no “bookstore owner” or “Barnes & Nobles.” Instead, this is a community-owned library, where the “books” or internet information isn’t owned by anyone. That’s what many people mean when they use the word “decentralized,” there is no one main owner of the information or “books.” Anyone can drop off books to share, read books, and even write their own books without limitations. This is what we mean by no intermediaries and decentralization.
Here are some of the frameworks associated with defining Web3 and the bottom line for what it all means:
- Web1 — Allowed a one-way passage of information via search engines. Basically, think of information passing through on a public train. Anyone can get on and there are designated stops you can jump on and off, but no one is tracking you.
- Web2 — Building upon Web1, allowed peer-to-peer engagement, but all data was centralized on main platforms (Twitter, Facebook, YouTube). In this example, you can think of information passing along on an Uber or Lyft pool. Passengers still have to abide by Uber’s and Lyft’s guidelines, but can input their own stop. Uber and Lyft still collect all your information (address, credit card, etc.).
- Web3 — Combining the best of both webs, gives data ownership back to the creators and users. Finally, you can think of information in Web3 as passing along in their cars on a road with no rules (scary but exhilarating!)
The table below summarizes the examples we talked about:
Web3 is founded upon the main principles of ownership, creation, and truth in digital identity. Because of these principles, another major tenet of Web3 is community. Community is the future of the internet.
Building Web3
If ownership is the defining characteristic of Web3, then it begs the question: how? And what is owned? The Web3 stack is composed of layers. It is within these layers that opportunities lie for growth, innovation, and investment. Recall the earlier plane analogy: web3 is being built and flown at the same time. As solutions are created for the layers, more issues are uncovered. This leads to more learnings and solutions, etc. This is also compatible with the community aspect of Web3 — when you put minds together, that is where creativity flows and protocols are built rapidly.
Below is Coinbase’s infographic on the various layers (Chingona Ventures will explain more on the various layers in our next article, stay tuned!)
Blockchain
Blockchain is the technology that empowers Web3. It is the foundation, or “Layer 1” protocol. Think of blockchain-like links or tracks that help guide a train as it runs — we are constantly building the train tracks as the engine is moving. Thus, blocks or “tracks” are added to the chain as frequently as every five seconds. To keep track of the path the “train” is moving in and where it’s moved, there is a public record of this called a “digital ledger.” This is why the blockchain is permanent and unchangeable, because any change to one record will require changes to all the records, and to change a record is virtually impossible given how quickly blocks are added to the chain. Each transaction is batched into a block and added to the chain for verification and processing, and this is done around the world at any time.
Another powerful facet of the blockchain is that it is open and transparent — all historic transactions are published. This doesn’t mean that there is a lack of privacy; however, given that personal information is not needed to transact on the blockchain. Another advantage of blockchain is that it completely eliminates the middleman in any transaction (there is no “train conductor” in this case), thereby potentially decreasing costs and complexities associated with the traditional way of transacting. Lastly, because the blockchain is open to all, that means that it is owned by no one either.
Cryptocurrency
If blockchain is the train tracks, then cryptocurrency is the train that rides on top of it. Also shortened to “crypto”, cryptocurrency refers to digital coins or tokens that can be bought, sold, or traded in a decentralized manner. Cryptocurrency comes from a process called mining as a reward for verifying a transaction (aka verifying each “train track” or block on the blockchain). To invest in crypto, a digital wallet, such as Coinbase, is required to hold currency and trade on an exchange. Crypto can be controversial at times, as there are ESG implications with the mining process and are not fiscally tied to real currency. Enter stablecoins, which are crypto pegged to the market value of an external reference (currency, commodity, financial instrument, etc.)
Decentralized Finance (DeFi)
DeFi refers to all financial tools built and run on a blockchain. In DeFi, the middlemen (banks and brokers) are eliminated, so users can lend, borrow, and bank instantaneously using blockchain technology. The middlemen are automated by smart contracts. It’s a great solution for breaking down barriers of entry for those who lack access to bank accounts, or those who prefer to keep their identity and information confidential.
DeFi is one of the fastest-growing areas within Web3 because of its “composability”. DeFi apps are built such that anyone can create, modify, mix/match, or build on top of any existing DeFi app/product without permission; therefore, the opportunities are endless. Additionally, these apps are “open”, so anyone can use the applications by using a wallet without disclosing identifying information.
Non-Fungible Tokens (NFTs)
Often conflated with crypto, NFTs are distinct in that they are “non-fungible”. For crypto, 1 Bitcoin = 1 Bitcoin. However, for 1 NFT ≠ 1 NFT. This means that each NFT is unique, like limited-edition collectibles. Think of them like baseball trading cards, their value can go up and down depending on its popularity — there sometimes is no inherent value for it, but it can be more speculative depending on demand.
NFTs are typically associated with art, but they can be anything digital (music, a video, or even a tweet). They have the potential to revolutionize art ownership and the creator economy.
Because NFTs are secured via blockchain, and the blockchain eliminates the middleman, creators can sell digital assets to their community base and reap unprecedented revenues. An analysis of this is shown below. As a consumer, NFTs give access to ownership of fine art that would otherwise be out of reach, through a process known as fractionalization.
Physical assets can be “tokenized” into NFTs too, with the added benefit of more efficient buying, selling, and trading with a decreased likelihood of fraud due to the security of blockchain. For instance, digital fashion brand Cult&Rain launched its first NFT sneaker collection minted on the Ethereum blockchain — if you bought their sneaker NFT, you can redeem it for an identical pair of physical shoes.
Decentralized Autonomous Organizations (DAOs)
Although it’s in the name, DAOs are not technically autonomous in that people are still involved in DAO operations and participation. A DAO is a community of like-minded people that come together over a shared vision. There are DAOs out there, for example, that were created to buy the constitution. In addition to the shared vision, DAOs must also have a shared wallet and a shared token. The wallet enables DAO activities to be financed and executed. DAO tokens, on the other hand, allow community members to vote on said activities and manage DAO operations. Think of this like a community-run fund, where based on the number of tokens you have, the more voting power you have over the DAO’s financial activities.
DAOs are programs on the blockchain that can employ individuals, invest in treasuries, and break down barriers to forming a collective. There are many different types of DAOs, differing primarily on the vision/purpose, explored below. With DAO creation are a number of DAO tools, used to stand up and run the DAOs.
DAO Examples:
- PleasrDAO — A collector DAO that aims to buy and fund culturally significant art and give it back to the community in a charitable way
- Friends with Benefits — DAO that is social in nature. Think Facebook meets SOHO house.
- BreederDAO — DAO playing in the gaming universe, conceived as a product of the Play-to-Earn gaming movement. Focus on generating NFTs and in-game assets in a scalable way for distribution to guilds and other communities for use in Metaverse or in-game
- GitCoin — Charity DAO in which developers submit a project proposal and members of GitCoin DAO vote on and fund the winning proposal
- Definitize — Medical DAO that uses DeFi for healthcare
Web3 Wrap-Up
Web3 is fraught with movement, hype, and investment. VCs have pumped over $30B into crypto startups in 2021, and this is just the beginning. The best way to ride the wave is to stay up to date and participate by jumping right into the discussion. Some of the best ways we’ve done that at Chingona is by participating in the Stanford DAO Symposium and SheFi cohort. Our other favorite resources include Twitter threads and skimming white papers on various DAOs or blockchain websites.
Investors in this space are essentially investing in the community that Web3 will bear fruit to. As members of the online community, we must all do our part in sharing knowledge. Below are some starting points to do just that:
Special thanks to Cat Knoerr for sharing her Web3 research with me! Check her out on LinkedIn.
