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Frequently asked questions
As follows, we help you understand the other concepts within Web3.
Web3 (also known as Web 3.0) is an idea for a new iteration of the World Wide Web which incorporates concepts such as decentralization, blockchain technologies, and token-based economics.
Web3 offers the following unique traits:
- Web3 is open and composable, as it includes open-source software with the benefit of easy accessibility while anyone can build on anyone’s creation.
- The web3 networks are permissionless, where users and providers don’t need permission from centralized controlling organizations. Web3 real-world use cases provide users with the freedom to interact privately and in public without any intermediaries in a trustless environment.
- Most notably, web3 also offers ubiquity which can ensure internet availability irrespective of location, time, and device.
The term “Web3” was coined in 2014 by Ethereum co-founder Gavin Wood, and the idea gained interest in 2021 from cryptocurrency enthusiasts, large technology companies, and venture capital firms.
The backbone for web3 is something called DLT – Distributed Ledger Technology (also called a shared ledger).
DLT is the consensus of replicated, shared and synchronized digital data that is geographically spread (distributed) across many sites, countries, or institutions. In contrast to a centralized database, a distributed ledger does not require a central administrator and, consequently, does not have a single (central) point of failure.
In general, a distributed ledger requires a peer-to-peer (P2P) computer network and consensus algorithms so that the ledger is reliably replicated across distributed computer nodes (servers, clients, etc.). The most common form of distributed ledger technology is blockchains (commonly associated with Bitcoin or Ethereum), which can either be on public/permissionless or private/permissioned networks.
In addition to blockchain-based DLTs, there are also other types of systems, most of which today are based on the Directed Acrylic Graph (DAG) chain (e.g. ByteballObyte and IOTA).
In short, a blockchain is a list of data records that works as a decentralized digital ledger. The data is organized into blocks, which are chronologically arranged and secured by cryptography.
The earliest model of a blockchain was created in the early 1990s when computer scientist Stuart Haber and physicist W. Scott Stornetta employed cryptographic techniques in a chain of blocks as a way to secure digital documents from data tampering.
The work of Haber and Stornetta certainly inspired the work of many other computer scientists and cryptography enthusiasts – which eventually led to the creation of Bitcoin as the first decentralized electronic cash system (or simply the first cryptocurrency). The Bitcoin whitepaper (LINK: https://bitcoin.org/bitcoin.pdf) was published in 2008 under the pseudonym Satoshi Nakamoto.
Although blockchain technology is older than cryptocurrencies, it was only after the creation of Bitcoin in 2008 that its potential started to be recognized. Since then, the interest in blockchain technology has been growing gradually, and cryptocurrencies are now being acknowledged on a larger scale.
Blockchain technology is mainly used to record cryptocurrency transactions, run smart contracts, and host NFT metadata and is an essential part of dApp, DAOs, DeFi, Metaverses and the other web3 use cases.
Blockchains with the most developer activity in 2022 include Ethereum, Cardano, Polkadot, Cosmos, ICP, Solana and NEAR, while layer 2 protocols like Polygon, Optimism and Arbitrum are growing very fast.
A cryptocurrency (or crypto) is a form of digital cash that enables individuals to transmit value in a digital setting.
You may be wondering how this sort of system differs from PayPal or the digital banking app you have on your phone. They certainly appear to serve the same use cases on the surface – paying friends, making purchases from your favourite website – but under the hood, they couldn’t be more different.
Cryptocurrency is unique for many reasons. Its primary function, though, is to serve as an electronic cash system that isn’t owned by any one party.
A good cryptocurrency is decentralized with no central bank or a subset of users that can change the rules without reaching a consensus. The network participants (nodes) run software that connects them to other participants so that they can share information between themselves.
In the world of cryptocurrencies, we may define a smart contract as an application or program that runs on a blockchain. Typically, they work as a digital agreement enforced by a specific set of rules. These rules are predefined by computer code, which is replicated and executed by all network nodes.
Blockchain smart contracts allow for the creation of trustless protocols. This means that two parties can make commitments via blockchain without knowing or trusting each other. They can be sure that the contract won’t be executed if the conditions aren’t fulfilled. Other than that, using smart contracts can remove the need for intermediaries, reducing operational costs significantly.
Although the Bitcoin protocol has been supporting smart contracts for many years, they were made popular by the creator and co-founder of Ethereum, Vitalik Buterin. It’s worth noting, though, that each blockchain may present a different method of implementing smart contracts.
An NFT is a cryptographic token that cannot be interchanged in a like-for-like manner. These tokens are entirely distinguishable from one another and are unique and limited in quantity.
NFTs can be used to represent real-world items on the blockchain but can also be used for digital collectables. Digital identity and the metaverse are other sectors that can utilize NFTs.
NFTs have been popularized in mainstream culture as a new form of digital art. However, they also have potential applications in many fields, such as video games, digital identity, licensing, certificates, or fine art – and even allow fractional ownership of items.
Decentralized applications (DApps) are applications that run on top of blockchain networks. There is a great variety of DApps with different use cases, such as gaming, finance, social media, and more.
Although DApps can look similar to regular mobile apps on your phone, their backend system is different. DApps rely on smart contracts on a distributed network instead of a centralized system to function. It makes them more transparent, decentralized, and resistant to attacks but also introduces new challenges.
As the name suggests, DApps run on decentralized peer-to-peer networks and have the following features:
- Open-source: The source code of DApps is available to the public, meaning anyone can verify, use, copy, and modify them. There is no single entity controlling the majority of its coins or tokens. Users can propose and vote on changes to the DApp too.
- Decentralized and cryptographically secure: To ensure data safety, all information of the DApp is cryptographically secured and stored on a public, decentralized blockchain maintained by multiple users (or nodes).
- A tokenized system: DApps can be accessed with a cryptographic token. They can adopt cryptocurrencies like ETH or generate a native token using a consensus algorithm, such as Proof of Work (PoW) or Proof of Stake (PoS). The token can also be used to reward contributors like miners and stakers.
A Decentralized Autonomous Organization or DAO is a community-led group governed using tokens or NFTs that grant members voting rights. DAOs use smart contracts to execute commands automatically whenever a set of conditions are met. As the name suggests, DAOs are decentralized and autonomous. The rules of a DAO are stored on an opensourced blockchain, meaning anyone can look at their code and transaction records. A central entity does not direct the decisions in a DAO but through proposals shared with the project community, who then vote on them.
In a sense, a DAO functions similarly to a corporation, except it works without a hierarchical structure; it attempts to provide a new, democratic process through decentralized governance. Unlike a traditional organization, members of a DAO are not bound by any formal contract. Instead, they are bound together by a common goal or incentives written into their rules.
There are many types of DAOs out there, and you can even create your own if you wish.
DeFi stands for “decentralized finance” and refers to the ecosystem of financial applications developed on top of blockchain systems.
DeFi may be defined as the movement that promotes using decentralized networks and open-source software to create multiple types of financial services and products. The idea is to develop and operate financial DApps on top of a transparent and trustless framework, such as permissionless blockchains and other peer-to-peer (P2P) protocols.
Currently, the three most significant functions of DeFi are:
- Creating monetary banking services (e.g., issuance of stablecoins)
- Providing peer-to-peer or pooled lending and borrowing platforms
- Enabling advanced financial instruments such as DEX, tokenization platforms, derivatives and predictions markets.
The metaverse is a concept of a persistent, online universe that combines multiple different virtual spaces. You can think of it as a future iteration of the internet. The metaverse will allow users to work, meet, game, and socialize in these spaces.
The metaverse isn’t entirely in existence, but some platforms contain metaverse-like elements. Video games currently provide the closest metaverse experience on offer. Developers have pushed the boundaries of what a game is by hosting in-game events and creating virtual economies.
Although not required, cryptocurrencies can be an excellent fit for a metaverse. They allow creating a digital economy with different types of utility tokens and virtual collectables through the use of NFTs. The metaverse would also benefit from using crypto wallets like Trust Wallet and MetaMask. Also, blockchain technology can provide transparent and reliable governance systems.
Blockchain, metaverse-like applications already exist and provide people with liveable incomes. Axie Infinity is one playto-earn game many users play to support their income. SecondLive and Decentraland are other examples of successfully mixing the blockchain world and virtual reality apps.