Web3 is pretty much at our doorstep today, and it's going to be transformative. Through its reliance on blockchain technology and decentralized networks, Web3 is poised to change how we exchange goods and services by providing a trustless, verifiable, secure, and self-governing system. And while the previous sentence appears to make sense (and it does), Web3 comes with many new concepts that can be difficult to understand. Even folks working within Web3 sometimes have a hard time explaining what its buzzwords actually mean.
But fear not! This post aims to go over some of the key concepts of Web3 and blockchain and explain them in everyday, non-technical language to make them less intimidating and easier to understand. It stands to argue that it won't be long before these buzzwords are on everyone's tongue - it won't hurt to know what we're talking about.
It's always good to start at the beginning. So let's begin by defining Web3 as it will make the rest somewhat clearer.
Web3 refers to the next generation of the World Wide Web. We started with Web1, which was essentially read-only. We then moved on to Web2, characterized by user interaction and the emergence of centralized social networks. The next evolution is Web3, which is based on decentralized technologies like blockchain, peer-to-peer networks, and cryptocurrencies to create a more secure, transparent, and open internet experience that enables direct interactions and value exchanges between (network) peers without any intermediary or centralized authority.
The latter point is key to Web3 - one of its main characteristics is its decentralized nature. Web3 enables direct interactions (exchanges) without any centralized server or authority to manage those exchanges.
We're still at a fairly conceptual level here. Things should get more precise as we move down the page.
In Web3, instead of a central authority, we have the blockchain. The blockchain is a digital, time-stamped (and theoretically hack-proof) ledger that is public to all nodes on a peer-to-peer network. The blockchain records and distributes all of the transactions that occur within a decentralized network of peers. In Web3, blockchain is used to transfer non-fungible tokens (NFTs), pictures, videos, music, royalties, payments, etc., without the need for a central authority. There are no third parties (governments or financial institutions). Within the blockchain, exchanges are made directly between peers.
The modalities of each exchange are stored in a block, and once filled, it's closed and becomes unalterable. Any new information meant to modify an existing block (for example, the name of the purchaser or seller) can only be added to a new block. This new block is linked to the previous block, which remains intact in the chain. Together, these blocks form a chain: the blockchain.
Because all blocks remain in the chain and the blockchain is public, the system is verifiable and transparent while remaining free of intermediaries (trustless).
Cryptocurrency is a digital currency used in exchanges within a peer-to-peer network and is recorded and verified by the blockchain. A cryptocurrency has two main characteristics:
- Cryptocurrency is exclusively virtual, meaning that it has no real-world equivalent that you could put in your pocket. Well-known examples of cryptocurrency would be bitcoin and Ethereum.
- Cryptocurrency is not issued nor backed by a central authority. It uses distributed ledger technology (blockchain) as a public financial transaction database that records and validates all exchanges within the peer-to-peer network.
So, for example, when you buy cryptocurrency, you exchange real money for virtual money to be used within a peer-to-peer network. And you're doing that without interacting with a central authority (government or bank) - you're purchasing directly from a seller on the network. And both the buyer and seller rely on the blockchain to validate and record the exchange to a new immutable block within the blockchain.
Once you own cryptocurrency, you can use it to buy any real-world goods and services or any digital assets (such as NFTs) being sold over the network.
NFT stands for non-fungible token. And while NFTs appear to have a lot in common with cryptocurrencies, they're different in many ways. In fact, an excellent way to understand NFTs is to highlight their differences from cryptocurrencies. But we'll start by providing a general definition.
An NFT is a unique digital asset - so anything from a picture to a piece of music, a domain name, or even a tweet.
An NFT's value lies in its exclusivity, as assessed by its digital signature and proving ownership. While I can screenshot your NFT (presuming it's an image in this example), my screenshot is essentially worthless as it doesn't include the digital signature that the blockchain can verify to validate its authenticity and uniqueness.
Unlike cryptocurrencies, which are fungible (i.e., easily exchangeable), NFTs are non-fungible, meaning they can be sold through the blockchain, but they aren't easily swappable.
Also, every unit of a cryptocurrency (one bitcoin, for example) is identical. It makes no difference which bitcoin you have; its value is always the same). NFTs, on the other hand, are unique (one NFT may have a different value than another, they are not interchangeable).
In a nutshell, NFTs are unique and certifiable digital assets that are bought and sold through the blockchain.
Smart contracts can be seen as the glue that binds all of the above together.
A smart contract is an agreement (in digital form) between two or more parties on a peer-to-peer network. A smart contract contains all of the modalities of the agreement. It is stored on the blockchain, which guarantees its fulfillment as soon as its conditions are met. And it does this without interference from intermediaries (such as banks or governments). For the smart contract to be triggered and fulfilled, a specific sequence of events, detailed in the contract and enforced by the blockchain, must occur.
Because they rely on blockchain technology, smart contracts provide the following benefits:
- Transparent - Smart contracts are public and can be consulted by any node on the network.
- Immutable - Once (digitally) signed, smart contracts cannot be modified. A new block, linked to the original, must be created and added to the chain to make any changes.
- Private - Only the information strictly necessary to fulfill the contract is exposed in the ledger.
- Decentralized - Smart contracts do not rely on any kind of central authority - they're unmediated agreements between peers that are guaranteed by the blockchain.
So there you have it. That was our crash course in Web3 terminology.
In general, regular, non-virtual finance can sometimes be pretty abstract and difficult to understand. Add cryptocurrency to the mix, and it becomes easy to get lost. Hopefully, this post can help you make sense of all this, and with a bit of luck, by the time you end up with your own bitcoin or Ethereum wallet, you won't find it all that intimidating.
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