Web3 Rundown
It is easy to feel overwhelmed by all the new concepts coming out of Web3 by the second.
In this article, we'll go step-by-step through what each of these is, why they're cool, provide some examples, and add in extra resources for a further dive if you're up for it.
This is today's menu:
- Blockchain
- Cryptocurrencies
- Smart contracts
- NFTs
- DeFi
- DAOs
Blockchain
Definition
At its core, blockchain is a technology to record, verify, and store data in chronological order. The best analogy for it is a ledger - a record of transactions which is super secure and open for everyone to use.
You can imagine the blockchain as an open database you can build upon - as if Google, Facebook, Twitter, and Amazon all shared the same database and open repository of code.
Why is it cool
Blockchains are cool because they are the foundation for a revolution in money, identity, ownership, value, and collaboration mechanisms.
What makes blockchains special is that technology allows them to have special characteristics, such as:
- Blockchains are distributed. All the data is public for anyone to read and write to. This information is shared between the network participants without needing any permissions. As an example, you can read every transaction ever recorded on the Ethereum blockchain here.
- Blockchains are decentralized. There is no central authority figure making decisions about the data. Beyond that, there is not even a central database. No unique blockchain copy is more important or valid than others. The protocols determine the correct version and it is validated by the network.
- Blockchains are secure. Cryptographic hashes, used for compressing data, are implemented to make it almost impossible to alter data in the blockchain. This makes it an incredibly useful tool for accountability tracking. Data in the blockchain is considered immutable.
Examples: There are many different blockchains, with different philosophies and special features. Some of the most famous ones are:
Further resources
The definition provided here is an oversimplification. If you want to dive deeper into blockchain concepts, here are some good initial resources:
- What is blockchain technology?
- Blockchain Explained - Investopedia
- Blockchain Demo - Anders Brownworth
Cryptocurrencies
Definition
Cryptocurrencies is how the blockchain incentivizes people to verify transactions.
Every time a computer verifies a transaction, the "miner", as these transaction-verifying servers are called, receives a token. You can see these tokens as assets, money programmed on top of the blockchain.
These cryptocurrencies can be either bought in exchanges or earned by validating the the transactions in the blockchain. This is called "mining", and in the beginning of crypto time, you used to be able to do them using your personal computer. Nowadays, entire companies and server compounds with massive computing power are needed solely dedicated to mining.
You can transact with cryptocurrencies without any intermediary, which is why crypto is a peer-to-peer system, but be careful - the value of cryptocurrencies can be very volatile.
Why is it cool
Cryptocurrencies are cool because they make it easy to spin up micro-economies. You don’t need governments, banks, or lawyers to create your own token and build incentives and utility around it. There is no entry barrier beyond owning a device connected to the internet.
Examples
There are A LOT of cryptocurrencies out there at the moment. Here are some of the top ones based on market cap and popularity:
Smart Contracts
Definition
Smart contracts are self-executing pieces of software that live within, and interact directly with, the blockchain. You can envision them as mini-apps that get triggered whenever a specific transaction occurs on the blockchain.
Code determines the conditions and execution, and every transaction is traceable and irreversible.
Smart contracts function very much like traditional contracts in the sense that once they're agreed upon (or deployed), no party can unilaterally modify the agreement.
Why is it cool
They're cool because they allow us to build automations on top of the blockchain. They allow us to write code on top of money 🤯.
Examples
- Vocdoni: offers blockchain voting for government institutions and organizations
- Additional use cases include supply chain management industry, health-care tracking, tokenized real estate, DeFi, among others.
How to read them
If every smart contract is out there for everyone to read, it's important to learn how to understand smart contracts. Here is a very useful guide on how to read them.
NFTs
Definition
NFTs, or non-fungible tokens, are a type of smart contract, with two key characteristics:
- Tokens: NFTs work as a representation of something else. They can represent value, ownership and/or access rights. They increase or decrease in value based on market demand or owner's decision.
- Non fungible: Every NFT is unique, meaning that it is not interchangeable. You can imagine an NFT the same as your national id, except this one is registered in the blockchain, rather than on a government database. Scarcity combined with transparency — meaning the history of ownership of the NFT can be traced and verified on-chain — is a big part of what gives NFTs value.
Why is it cool
With NFTs everything is about proof of ownership, constantly pushing the limits of what we've traditionally considered valuable.
It's traceability and smart contract backbone allows for royalties to be granted to artists everytime the NFT is transfered ownership - rewarding artists for their work for as long as the collection exists. They've changed the landscape for artists, as well as for creators.
Because you can check whether a person has the token in their wallet or not, they have also become entry points to other products, like real-life events, memberships, certifications, etc.
Examples
- Surge Passport NFT: a bundle of perks that act as a golden ticket into Web3.
- Bored Ape Yacht Club: one of the first projects to build utility around their community.
How to get one
NFTs can be bought on the primary market by minting them directly with the creator, or in marketplaces in the secondary market. Some examples of marketplaces are:
Further resources
What Are NFTs & Why Should You Care?
What are NFTs? Mapping the NFT Ecosystem
DeFi
Definition
Decentralized Finance is the equivalent of the traditional finance system, but built on top of smart contracts and blockchains.
Loans, credit, and other financial services are offered, as well as native Web3 products with fascinating yields.
Why is it cool
Because it removes the need for intermediaries like banks and lawyers, it redefines a lot of what we understand from financial instruments, institutions, incentives, and investment returns.
A lot of smart contracts bundled together are often referred to as protocols.
Examples
- Aave: Allows users to earn interest on their crypto, borrow assets with crypto as collateral, and build applications on top of their infrastructure
- Lido: Simplified and secure staking for digital assets
- PancakeSwap: trading liquidity provider running on a decentralized exchange
Further Resources
DAOs
Definition
Decentralized Autonomous Organizations are the Web3 equivalent of public companies. They can be understood as an internet community with a shared crypto wallet they decide how to spend collaboratively. The members of DAOs coordinate resources around a shared vision, with ensured trust among strangers thanks to tokenized incentives, ownership, and smart contracts.
Like any organization, DAOs can set their own rules on purpose, membership, decision making, voting mechanism, governance structure, and any other topic that the community deems relevant. The difference is that the rules are automaticaly enforced by smart contracts, ensuring trust among strangers.
Why is it cool
DAOs are all about aligning incentives. Because token-holders are the consumers, contributors, and investors of these organizations, we're able to build micro-economies where all stake holders are aligned. This is very different than the current existing Web2 reality misaligned by the ad internet's model.
Examples:
Further resources
Conclusion
Web3 is a rising tide for everyone. It is a paradigm change in how we're used to thinking of collaboration mechanisms, financial transactions, art, institutions, and organizations.
Welcome to the rabbit hole 🐇.
