By Kate Rosenblatt
1. What is web3?
Web3 represents the next phase of the internet and, perhaps, of organizing society. Web 1.0, the story goes, was the era of decentralized, open protocols, in which most online activity involved navigating to individual static web pages. Web 2.0, which we’re living through now, is the era of centralization, in which a huge share of communication and commerce takes place on closed platforms owned by a handful of big corporations—think Google, Facebook, Amazon—subject to the nominal control of centralized government regulators. Web3 is supposed to break the world free of that monopolistic control.
At the most basic level, Web3 refers to a decentralized online ecosystem based on the blockchain. Platforms and apps built on Web3 won’t be owned by a central gatekeeper, but rather by users, who will earn their ownership stake by helping to develop and maintain those services.
2. What is crypto and the blockchain?
The term “digital asset” generally refers to an asset issued or transferred (or both) using distributed ledger, or blockchain technology. It includes assets sometimes referred to as cryptocurrencies, virtual currencies, digital coins, and digital tokens. Bitcoin was the world’s first, and most popular, cryptocurrency. It currently has a market capitalization of more than $890 billion, and investor enthusiasm surrounding bitcoin has generated a broad market for other cryptocurrencies with varying features.
The core technical feature of most cryptocurrencies is the “blockchain,” or distributed ledger, which is essentially a peer-to-peer database spread across a network of computers that tracks ownership and transfer of the cryptocurrency at issue. Information held on a blockchain exists as a shared and continually reconciled database. The blockchain database is not stored in any single location; rather, it is distributed – or decentralized – because it is hosted and perpetuated by a large network of computer “nodes.” Once a transaction is recorded on the blockchain, it cannot be canceled, changed, or reversed, and all transaction records are available all the way back to the blockchain’s inception.
3. What is a smart contract and what is an NFT?
Each blockchain is subject to different technical rules devised by their creators, but they all seek to attain the goal of decentralization. To achieve this, they provide a framework of incentives to encourage users to do the work of validating transactions, which often requires significant computational mechanics. This has the effect of making the blockchain more accurate and secure. In the instance of the Bitcoin network, users who validate transactions on the Bitcoin blockchain are rewarded with newly minted bitcoin. In bitcoin parlance, this process is referred to as “mining,” and those who validate information in exchange for bitcoin are called “miners.”
Ethereum is another type of blockchain, and it functions similarly to the Bitcoin blockchain with regard to miners’ validation of the network, except in this case, they are rewarded with newly minted ether. Ethereum differs from Bitcoin, however, because it enables “smart contracts,” which are programs that verify and enforce the negotiation or performance of binary contracts. They are thus self-executing and self-enforcing, making the transactions more secure and less costly.
To understand a smart contract in more concrete terms, consider a hedging contract. Each party may dedicate $1,000 worth of ether, and at the end of the month, one will receive back $1,000 of ether at the dollar exchange rate, while the other receives the remainder of the ether. Depending on whether ether’s value has increased, the party receiving the remainder of the ether may have an asset worth more or less than the $1,000 originally committed. A smart contract enables these parties to submit the ether to a secure destination, which will automatically distribute the ether in accordance with the terms of the hedging contract at the end of the month, without any third-party action. Smart contracts can be used to create – or mint – various types of digital assets, including non-fungible tokens, or NFTs.
An NFT is a non-interchangeable unit of data stored on the blockchain that can be sold and traded. There are different types of NFT data files that can be purchased. The most basic NFT data file is similar to a .jpeg image file that provides a purchaser with an electronic image and a certificate of ownership. By contrast, a “utility” NFT data file offers added benefits, such as reward programs, giveaways, and early access to events for NFT holders. Each NFT is commonly referred to as a “token” and is uniquely identifiable on the blockchain.