What is Web3? The Decentralized Internet of the Future Explained

The internet is undergoing a paradigm shift. Over the past 30 years, it has evolved from the read-only Web 1.0 of static websites to the interactive and centralized Web 2.0 platforms like Facebook, YouTube, and Twitter that have come to dominate the digital world. Now, a new stage of the internet‘s evolution is emerging: Web3, a decentralized and user-controlled internet powered by blockchain technology and cryptocurrency.

In this article, we‘ll take a deep dive into what Web3 is, how it works, and the immense potential it holds to reshape the internet as we know it. As a full-stack developer who has built applications across the Web3 stack, from Ethereum smart contracts to decentralized front-ends, I‘ll share an expert perspective on the key concepts, technologies, and implications of this paradigm shift.

From Web 1.0 to Web 2.0 to Web3

To understand Web3, it‘s helpful to look back at how far the internet has come. The first stage, Web 1.0, spanned roughly from 1990 to 2004. Websites were simple and static, content was served from filesystems rather than databases, and there was little interactivity. Most users were passive consumers of content.

Web 2.0, which we‘re still largely in today, brought a more participatory and social internet. Centralized platforms emerged that allowed users to create content, interact with each other, and exchange information on a massive scale. Social media, user-generated content, and cloud applications became the norm. However, this has come at a cost: the centralization of power and control in the hands of a few dominant tech giants, as well as the mass collection and monetization of user data.

Web3 represents the next stage of the internet, aiming to address the limitations and downsides of Web 2.0. At its core, Web3 is about decentralizing power and control, and giving ownership of data and value created online back to users.

The Web3 Technology Stack

So what exactly is Web3 from a technical perspective? The foundation is blockchain technology, which allows data and value to be stored and transferred in a secure, trustless, and decentralized way without intermediaries.

Ethereum, the leading programmable blockchain, enables Web3 applications to be built through smart contracts – self-executing code that automatically carries out an agreement. The Ethereum Virtual Machine (EVM) provides a runtime environment for smart contracts, executed by a decentralized network of nodes. Gas fees are paid in ETH to compensate nodes for the computational work of executing transactions and smart contracts.

On top of Ethereum and other Layer 1 blockchains, key building blocks of the Web3 stack include:

• InterPlanetary File System (IPFS) and Filecoin for decentralized file storage and content addressing
• Decentralized oracle networks like Chainlink that connect off-chain data to smart contracts
• Indexing and querying protocols like The Graph for efficient access to on-chain data
• Web3 software development kits (SDKs), libraries, and frameworks like Web3.js, Ethers.js, and Hardhat
• Cryptocurrency wallets like MetaMask that act as secure keystores and interfaces for Web3 interactions
• Decentralized exchanges and automated market makers like Uniswap and Curve for token swapping and liquidity provision

When combined, these technologies enable developers to build decentralized applications (dApps) where the frontend code runs on decentralized networks like IPFS rather than servers, the backend logic is executed by smart contracts, and data and assets are stored on blockchains and decentralized storage networks.

Web3 Adoption and Market Size

Web3 has seen explosive growth over the past few years across multiple metrics. As of June 2022:

• Ethereum has over 200 million unique addresses and processes 1.2 million transactions per day (source).
• The total value locked (TVL) in DeFi protocols built on Ethereum exceeds $100 billion (source).
• OpenSea, the largest NFT marketplace, has over 1.8 million active user accounts and has processed over $30 billion in NFT trading volume (source).
• Over 18,000 developers pushed code to open-source Web3 projects in the last 12 months, a 75%+ increase from the prior year (source).
• Web3 and blockchain companies raised over $25 billion in venture capital funding in 2021 alone (source).

Web3 adoption is also reflected in the entrance of major tech companies and platforms into the space. Twitter integrated Bitcoin tipping and NFT profile pictures, Reddit launched an NFT marketplace, Instagram is piloting NFT sharing, and YouTube announced plans to leverage Web3 for new creator monetization models.

Perhaps the biggest indicator of Web3 going mainstream is Facebook‘s rebrand to Meta and pivot to the Metaverse, which CEO Mark Zuckerberg described as an "embodied internet" that will be largely enabled by Web3 technologies.

Web3 Use Cases and Applications

Web3 is reinventing and disrupting major online industries from finance to gaming to social media. Some of the most prominent and high-potential areas include:

Decentralized Finance (DeFi)

DeFi leverages Web3 to transform financial services through decentralized lending, trading, savings, insurance, and more. Leading DeFi protocols built on Ethereum include:

• MakerDAO, a decentralized credit platform that supports the DAI stablecoin
• Compound, a decentralized money market for lending and borrowing crypto assets
• Aave, a decentralized non-custodial liquidity protocol for earning interest on deposits and borrowing assets
• Uniswap, an automated market maker enabling permissionless token swaps

Non-Fungible Tokens (NFTs)

NFTs are unique, provably-scarce digital assets secured by blockchains like Ethereum. They are transforming digital ownership, enabling creators to monetize directly to fans, and powering a new wave of online gaming and virtual worlds. High-profile NFT use cases include:

• Bored Ape Yacht Club and CryptoPunks, iconic avatar NFT collections that have generated billions in trading volume
• NBA Top Shot, an NFT marketplace for officially-licensed basketball video highlights that has seen over $1 billion in sales
• Decentraland and The Sandbox, Ethereum-based virtual worlds where land and in-game items are tradable NFTs

Decentralized Autonomous Organizations (DAOs)

DAOs are a Web3-native organizational model where governance, treasury, and operations are mediated by blockchain-based rules and voting by token holders. There are now over 4,800 DAOs created with $8 billion in treasury assets (source). DAOs are being used for everything from investment clubs to social networks to charities.

Self-Sovereign Identity

Web3 enables self-sovereign identity where users have control over their own personal data and online reputation through decentralized identifiers and verifiable credentials stored on blockchains. This can reduce identity fraud, give users portability of their data across platforms, and enable pseudonymity. Projects working on Web3 identity include Ethereum Name Service (ENS), Ceramic Network, and Spruce.

Decentralized Wireless and Compute

Web3 is extending beyond just the application layer to decentralize the physical infrastructure of the internet itself. Helium uses token rewards to incentivize a user-owned network of wireless hotspots that now has over 850,000 nodes worldwide. Akash and Livepeer are decentralizing cloud compute and video transcoding by allowing anyone to monetize their spare processing power.

Challenges and Tradeoffs of Web3

Despite its immense promise, Web3 faces significant challenges and tradeoffs that will need to be addressed as the technology matures.

Scalability is a major technical hurdle, as decentralized networks are inherently less efficient than centralized servers. Ethereum and other blockchains face a trilemma of tradeoffs between scalability, security, and decentralization. Layer 2 solutions like rollups and sidechains, as well as alternative Layer 1 platforms focused on scalability like Solana and Avalanche, are aiming to enable Web3 to support billions of users.

Usability and accessibility are other key challenges. Interacting with Web3 today is far more complex and intimidating than Web2, requiring users to manage seed phrases, sign transactions, and pay gas fees. Improving user onboarding and abstracting away technical complexity is crucial for broadening Web3 adoption beyond crypto-natives.

There are also concerns about the centralization of Web3 infrastructure and governance in the hands of a few powerful entities. While Web3 aims to decentralize at the protocol and application layer, most activity currently runs through centralized access points like Infura and the Ethereum Foundation holds significant power over network upgrades. Fully realizing the Web3 vision requires maximizing decentralization and minimizing trust at all layers of the stack.

Finally, there are open questions around the sustainability and reliability of tokenized incentive models that underpin much of Web3. Crypto asset prices are highly volatile, making it difficult for Web3 projects to budget and plan long-term. There are also risks of misaligned incentives, plutocratic governance, and concentration of token ownership.

The Future of Web3

Web3 is still in its early stages, but its potential impact is hard to overstate. We are on the cusp of a once-in-a-generation shift to a user-owned, open-source, and natively digital economic infrastructure.

In the near future, Web3 will likely gain traction in narrow domains like decentralized finance, NFT-based gaming and virtual worlds, and DAOs for online communities. Web3 technologies will increasingly integrate with and complement existing Web2 platforms, as we‘re seeing with Reddit NFT avatars powered by the Polygon blockchain and Twitter supporting NFT profile pictures.

In the long term, Web3 has the potential to fundamentally reshape major pillars of the digital economy by disintermediating centralized gatekeepers and returning data and value capture to users and creators. Web3 could underpin an open metaverse of interoperable virtual worlds and assets, a renaissance in user privacy and control of personal data, and new models of organizing online communities and governance.

However, the path to mainstream adoption of Web3 will not be easy or linear. Web3 will need to overcome major technical challenges around scalability, sustainability, and security. We need better abstractions and user experiences to onboard the next billion users. And we need safeguards and policies to mitigate the risks of speculation, fraud, and centralized capture as more value flows onto Web3 networks.

Ultimately, the successful realization of the Web3 vision hinges on two key factors – education and values-alignment. We need more resources, courses, and entry points to educate and onboard more Web2 developers and users to Web3 concepts and technologies. And we need to vigilantly uphold the core tenets of decentralization, user-ownership, and open-source composability even as Web3 scales.

If we can navigate these challenges while staying true to the founding ethos, Web3 has the power to build a better internet and a more open, empowering, and economically generative digital world. An internet that is truly of the people, by the people, for the people. That is the promise and the imperative of Web3 – to lay the foundation for the next era of the web, one block at a time.