Six things to understand about Web3 before reaching for your cryptocurrency

By on
Six things to understand about Web3 before reaching for your cryptocurrency

Want to navigate the world of Web3? You will need to familiarise yourself with a range of new concepts, technologies and services. To ease the transition here is a very simple primer for you. By the end of the article, you will be a little bit closer to being able to buy that virtual waterfront property you’ve been craving in the virtual world of Decentraland, paying for it with Ethereum.

(On a serious note, this article isn’t investment advice. While many believe Web3 to be the next big tech innovation, it’s at a very early stage, and to get started you might just want to buy a cheap shack in a virtual desert instead…)

Cryptocurrencies

Cryptocurrencies are a cornerstone of Web3. Satoshi Nakamoto’s famous paper described the blockchain that forms the basis of Bitcoin (the largest cryptocurrency by market capitalisation), providing a technical substrate that’s been used far beyond its original application. 

At its core, a cryptocurrency is akin to digital money. There is a lot of debate from notable parties on both sides of the argument over what actually drives value in a cryptocurrency (and indeed, whether there is any fundamental value).  One thing is clear - if it is to succeed, Web3 will require its own native, digital set of currencies for participants to transact with. 

Even the naysayers can take some comfort in the fact that the early generation of cryptocurrencies is constantly evolving, with new ones being developed constantly to address today’s shortfalls.

Smart contracts

A smart contract defines the rules under which a blockchain transaction may be executed, without needing a human to act as a trusted third party. It’s one of the key drivers for applications other than cryptocurrency. 

For example, a smart contract might govern how we go about renting a car by asking questions like - is the car available for this booking? Is this individual permitted to rent the car? Has the payment been processed? The process of making, verifying and approving the booking all happens between peers with no human interaction.

Think of it as software code that can sit on a blockchain to create applications every bit as complex as we see in more traditional computing environments, but with all the benefits of the Web3 architecture.

Non-Fungible Tokens

The Non-Fungible Token (NFT) is a means of making digital assets as uniquely identifiable as physical assets. That in itself is valuable, as more of the world becomes digital. Its most prominent manifestation is as a way for creatives from Banksy through to amateurs like the writer of this article (I do a mean stick figure!) to profit from the creation and trading of digital artwork.

The NFT is, quite simply, a non-interchangeable piece of data stored on a blockchain. Each NFT is cryptographically unique; as a trading vehicle, it can be associated with a digital file such as an image, audio or video. That’s supposed to tie the NFT to one copy of the digital file, as a certificate of ownership — its provenance, basically — the characteristic that allows NFT trades to be bid up even while people are freely copying the file it’s tied to. Have a listen to our mini cast for some real-world applications!

Metaverse

For the trivia buffs amongst you, the term Metaverse was first coined in the 1992 science fiction novel Snow Crash by Neal Stephenson. The most accessible definition of the Metaverse comes from Tim Sweeney, the founder and CEO of Epic Games, who describes it as real-time 3D social media where people can create and engage and share experiences as equal participants in an economy. Not impressed? Constellation Research CEO Ray Wang says the Metaverse economy will be worth $21 trillion by 2030. 

Recently Microsoft’s CEO Satya Nadella explicitly linked the company’s $68 billion purchase of gaming giant Activision Blizzard (the developer of diverse games such as World of Warcraft, Candy Crush and Crash Bandicoot) to the need to take a position in the emerging Metaverse space. Sony clearly agrees with Microsoft, also announcing the $3.2 billion acquisition of Bungie (the original developer of Halo and Destiny). 

Beyond the world of gaming, which provides the original model for the Metaverse, it was Mark Zuckerberg who took Metaverse mainstream last year by announcing that his company’s future lies there — renaming it Meta and spending billions on trying to build a commercial model for the future. 

All this activity is leading to people and companies buying up virtual land and equipment so that one day we can all work and play in the new metaverse. Big brands want the prime real estate in the virtual shopping malls, families want the house with a white picket fence and the hipsters are hot for one-bedroom inner-city dwellings. Sound familiar?

DAO 

The Decentralised Autonomous Organization (DAO) updates an old concept into the Web3 world. It operates rather like a genuine co-operative — members own the organization, and decisions are made by votes of the membership. The DAO takes this to the blockchain: it’s a collective owned by its members, with funds stored in a blockchain treasury, and transactions governed by smart contracts. 

A recent example using some of your newfound lingo is Yield Guild Games, a DAO set up to invest in NFTs in the gaming / metaverse space. It was created by a group of veteran crypto venture capitalists with a set of rules (like a constitution) for buying in-game NFT assets. Those NFTs are then loaned out to players of the game for a fee, with the profits distributed back to the DAO’s treasury.

Whilst ‘Christin DAO’ renting you a digital rocket it owns to compete in a Space Invaders tournament for a slice of the prize profits may sound interesting – there are also many real-world applications, such as charitable and scientific research projects where minimising capital leakage and maximising participation makes all the difference.

DeFi

Decentralized finance uses the blockchain to eliminate the banker (and other centralized financial services) from transactions that require facilitation from third parties.

A simple example is a consumer or business loan that relies on a financial institution to assess the creditworthiness of an applicant. Smart contracts on a blockchain can instead conduct the credit check and automatically lend the money without anyone profiting from the issuance of the loan. 

More relevant to our Web3 discussions are DeFi platforms that allow me to put up my newly purchased Banksy NFTs as collateral to take out a loan. The whole process of assessing the value of the NFT, finding someone willing to lend against it, presenting their loan terms for acceptance and then transferring the proceeds of the loan (in cryptocurrency of course) is all administered by smart contracts on the blockchain. No intermediaries, no fees – welcome to Web3.

A final note: You may read about the concept of Web 3.0 first proposed by Tim Berners-Lee, regarded as the creator of the world wide web. This is also known as the Semantic Web. It is a similar concept to Web3 but very different in execution. Best not to confuse the two, especially if it’s your money you’re spending.

Christin Burns is a partner at North Ridge Partners. This article is reproduced with permission.

© Digital Nation
Tags:

Most Read Articles