“Started From the Blockchain…Now We’re Here” — Blockchain as the Foundation to Web3
In our previous post, we shared our excitement about the technological innovation happening within the blockchain and crypto space. We expect these technologies to power a whole new generation of applications, services, and businesses that will likely create trillions in value and reshape our day-to-day interactions and the communities we engage with.
Nothing was the same…
This new era of the internet is what people are referring to as Web3 and, while the technology stack underpinning this movement is still nascent and fragmented, we thought it’d be helpful to provide a comprehensive (yet non-exhaustive) view of the foundation behind it. We will zoom in on how blockchain technology is driving the fundamental technical differences between this so-called “Web3” and the internet as we know it today, and why, similar to Drake’s 3rd studio album, people might look back at this 3rd wave of the internet and say that, after it, “Nothing Was the Same”.
With that said, let’s dig right in!
We think the best way to explain Web3 architecture is to compare it to Web2.
Web2 is the Internet today…
Today’s internet, let’s call it “Web2”, is largely dominated by a handful of tech incumbents which, in many ways, helped pioneer the era of mobile, social, and cloud while pushing the boundaries of technological innovation over this past decade. However, as these companies have reached meaningful scale and influence, the centralized nature of the client-server architecture that most of these companies were built on has also resulted in a number of tradeoffs that have often left users and creators (who are the heart and soul of these businesses) feeling frustrated and dissatisfied with their relationship with these businesses.
A 2018 report by Citigroup showed how recording artists received just 12% of the $43 billion that the music industry generated that previous year, with the majority of that coming in the form of touring payments. A more recent report published by the House of Commons Digital, Culture, Media and Sport Committee showed that ~50% of UK performers surveyed don’t receive any revenue from online streams, showing the continued inequity experienced across some of these industries.
In this traditional Web2 client-server architecture model, servers act as closed systems owned by specific companies. While this centralized model enables faster business model iterations, scalability, and powerful network effects, it also positions a lot of today’s companies as “middlemen” and gatekeepers to creator’s content and user’s attention, supporting ad-driven, data monetization business models which have, over time, created friction and misalignment of interests between users and its platforms.
Web3 is the internet that has been pioneered by blockchain & crypto…
One of the biggest promises of Web3 is that it enables public access, decentralized governance, and personal ownership of the internet, powered by blockchain technology and the digital asset ecosystem being built around it. It’s built off peer-to-peer (P2P) networks of computers that talk to each other without the need for “middlemen”, and builds on the idea that the decentralized nature of P2P networks provide a universal data set that every actor can trust, even though they might not know or trust each other directly.
In many ways, Web3 represents a continued shift towards platforms and applications that empower creators and users by allowing them to further capture the value of the content, data, labor, they produce (rather than having it captured by its distributors), building on the principles of community, ownership, and equitable distribution of economic value, and powered by blockchain technology.
But how exactly does blockchain work and what is it solving for?
Three T’s of blockchain — Trust, Traceability, and Tamper-Proof…
The concept of blockchain first came to fame in October 2008, as part of a proposal for Bitcoin. The aim was to create a P2P currency without banks, but it soon showed the potential to enable the peer-to-peer transmission of electronic value and ownership in a decentralized and transparent manner across a number of verticals and use cases.
Let’s define the term: a blockchain is a linked list of transactions stored on a network of decentralized computers that everyone can inspect but which no single user controls.
Blockchains are meant to be:
- Decentralized: Transactions are stored on a network of computers (nodes).
- Immutable: Transactions cannot be changed once committed to the block.
- Open: Transactions can be viewed by anyone.
Each block within this chain/ledger of transactions has:
- A list of individual transactions (e.g., Pablo sending 1 Bitcoin, or a Cryptokitty, to Michelle)
- A hash (a long string of random characters) for the block
- The previous block’s hash (this is how the blocks are linked)
To process transactions without trusting “middlemen”, nodes (i.e., this network of decentralized computers) need to be able to reach consensus themselves, and they do this through two popular methods or consensus mechanisms.
Consensus Mechanisms — Proof of Work vs. Proof of Stake
Proof-of-Work (PoW) — requires the participating computers or miners in the network to solve a mathematical puzzle before anyone else on the network and then validate the data. Miners who do this successfully are rewarded with the platform’s cryptocurrency, paid in the form of tokens (e.g., Bitcoin, Ethereum 1.0, etc.)
On the other hand…
Proof-of-Stake (PoS) — instead of having to solve a puzzle, miners are required to deposit platform-specific coins into a secure wallet to become a validator. Methods used to select the data validator include randomized selection or based on how much stake (coins) they have in the network. The selected validators are then rewarded by the platform in the form of its relevant token (e.g., Ethereum 2.0, Solana, etc.)
Proof of Work is the older of the two consensus mechanisms and used by protocols such as Bitcoin, Ethereum 1.0, and many others, while Proof of Stake is the “new(er) kid on the block” and powers protocols such as Solana, Avalanche, Polkadot, Cardano, and other (generally newer) cryptocurrencies.
One of the main differences, closely related to sustainability, between both consensus mechanisms is energy consumption. PoS blockchains don’t require miners to spend electricity on duplicative processes (competing to solve the same puzzle), so proof of stake allows networks to operate with substantially lower resource consumption than PoW protocols.
However, PoW has the advantage of making it very expensive to attack a cryptocurrency’s network, since it would require an increasingly large investment in energy (and, therefore, money), for a would-be bad actor to verify invalid blocks. Therefore, while PoS avoids the massive energy consumption of PoW, it hasn’t been proven to be as secure and stable as proof of work at scale. This tradeoff between scalability, security, and decentralization is commonly referred to as the Blockchain Trilemma.
Decentralization, Security, or Scalability — Take Your Pick…
The blockchain trilemma is a concept coined by Vitalik Buterin that proposes a set of three main issues that developers encounter when building blockchains and is based on the idea that, more often than not, creators are forced to sacrifice one of the following for the sake of the other two.
Decentralization: as described earlier, decentralized systems matter because they empower permissionless ownership where anyone can use and build on the platform and where decisions are made by consensus. The decentralized nature of these protocols also enables increased composability, allowing anyone in a network to take existing programs and adapt or build on top of them, which further increases the pace of innovation and opens the door for a near-limitless number of use cases.
On the other hand, the main trade-off of pure decentralization, however, is speed (or scalability). If a transaction requires multiple confirmations before reaching consensus, then inherently, it would take longer than if a transaction can be confirmed by a single entity. Together with that, sometimes blockchains can be seen as “isolated” databases. Therefore, blockchain interoperability will become increasingly important and could further enrich use cases for blockchains like cross-chain asset portability.
Scalability: is important for mass adoption and usually the most challenging feature to incorporate into modern blockchain networks. It’s the question of how much load a blockchain system can sustain, and whether the system can operate smoothly as demand increases, which often comes as a trade-off to decentralization and permissionless networks.
Security: while scalability focuses on the upside, security prevents the downside; without it, blockchains would be completely useless as everyone would have the ability to disrupt ledgers and even manipulate them. The number one reason why blockchains are less “secure” than centralized databases is that decentralized technology is also open-source. Therefore, blockchains must utilize robust PoW-like consensus mechanisms in order to support the network’s security. But as more miners join the network and make it more secure, aspects like scalability tend to suffer.
It’s important to note that the Trilemma is just a model to conceptualize the various challenges facing blockchain technology. There is no law stating that the 3 aspects cannot be achieved.
So, how do we solve this dilemma?
For adoption, scalability (more transactions faster) is key, with the landscape evolving quickly with competing protocols attempting to solve the blockchain trilemma. Two potential direct solutions at Layer 1 are the transition from proof of work (PoW) to proof of stake (PoS), exemplified by Ethereum 2.0, and sharding.
On one hand, sharding is a database concept that allows data on the main database to be split into distributed databases in an efficient manner. Breaking a blockchain into shards increases the scalability of the network (with protocols such as Polkadot deploying this technology). On the other hand, PoS protocols such as Solana, Avalanche, Near, and Cosmos have garnered a lot of interest over the last year and earned the respect and growing support in the crypto community thanks to their promise of providing better transaction speeds, lower costs, cross-chain interoperability, and offering a “greener” alternative to PoW protocols.
With scalability being one of the most prominent roadblocks for mainstream blockchain adoption, it is essential to find efficient, long-term blockchain scalability solutions, with a lot of current first-layer and off-chain second-layer scalability solutions still in the initial stages of development but showing promising use cases. We’ll be talking more about the need for scalability to power decentralized applications in our next post(s) so make sure to follow us on social media to stay up to date (links at the bottom of this article).
“Just hold on, we’re going home”…
Over the past year, as blockchain technology has matured from an alternative to fiat money to include more advanced solutions for ownership and transactions, we have witnessed progress in the adoption and implementation of real-world blockchain-enabled solutions across a variety of businesses and sectors. From startups leveraging tokens to connect artists and fans such as Royal, to play-to-earn, NFT-based online video games and interoperable pixel metaverses such as Axie Infinity and Worldwide Webb, to companies using blockchain to make title issuance instantaneous like Propy or bring compliance to cryptoassets such as Elliptic, blockchain’s “three T’s” (Trust, Traceability, and Tamper-Proofness) have become the foundation underpinning the broader Web3 movement and a large majority of the crypto applications being built as part of it.
With blockchain and Web3 comes the promise that peer-to-peer networks provide a universal data set that every actor can trust, even though they might not know or trust each other. Together with that, they provide increased public access, decentralized governance, and personal ownership of the internet, meant to empower internet-native economies designed for the digital era we live in. More users and more transactions have also resulted in a number of new challenges, particularly around scalability, which developers are continuously looking to address in order to reach a level of mainstream adoption where blockchain can truly revolutionize everyone’s world and not just one small community.
As developers continue to scale these building blocks and protocols, they will act more like operating systems and, as these networks further mature, applications will continue to be built on top of them for a wide range of use cases across finance, digital media, supply chain, identity, and more. In our next post, we will move up the digital asset technology stack to expand on the development of crypto-native economies. This will include a look at the adoption of fungible tokens used to exchange goods, store value, and make collective decisions, as well as the excitement driving the rise of non-fungible tokens (NFTs) which are powering the future of the ownership economy. Stick around to read and learn what all the hype is all about!
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