Web3is a vision and technology effort—coupled with economic incentives—to rebalance economic power in the web across service providers, application developers and consumers. This effort envisages a decentralized, more balanced world. Trust and power are distributed across service providers and application or content creators, consumer privacy is honored (as responsibility of data management moves to the edge) and creators are compensated for their creations.
In today’s web architecture (Web2), platform owners make unilateral decisions on the future of applications they support, with no transparency in the decision-making process. The same corporations also manage user data as service providers (such as social media platforms) and maximize their revenue by leveraging user data analysis to optimize their services (for example, the advertisement business on social media). Such architectures are often tuned to protect and extend the business of a few platform owners at the cost of many application developers and consumers. This stifles innovation, and single control points raise risks to application security and user privacy. Privacy concerns are expected to grow as the metaverse (augmented and virtual reality realms) evolves, with higher amounts of data to be exchanged and collected.
Centralized identity vs. self-sovereign identity
As the Investopedia team and TBD’s Angie Jones have noted, Web3 concepts revolve around decentralized and transparent governance, transaction processing, and self-sovereignty of user identities, data and assets. Web3 decentralization removes single points of failure, trust or control, leading to systems with higher degrees of resilience to compromise (compared to legacy applications). Self-sovereignty of data refers to the user storing and managing access to their own credentials and application data.
Traditional centralized or federated digital identity models require users to register to service providers or identity providers, who maintain user data and can attest properties or attributes for the user to third parties upon user request. The Self-Sovereign Identity (SSI) model allows the user to acquire credentials (identities) from one or more identity issuers, and subsequently manage the storage and access of their credentials. Users (also called credential subjects or holders) can demonstrate ownership of these credentials to third-party verifiers. These verifiers can securely check the authenticity of these credentials regarding the claimed credential issuer and the subject.
How blockchain technology enables Web3
Web3 is powered by public blockchain technology, which offers decentralized transaction processing and associated economic incentives.
Blockchain systems offer decentralized transaction processing and governance, where decentralization refers to the distribution of trust across multiple potentially distrusting parties regarding each transaction’s validity. System-processed transactions are appended to a system-wide ledger that constitutes the source of truth for the system.
Blockchain systems guarantee that if most of the system participants are not compromised, the system will record and process transactions correctly, update the system’s state and transaction log (ledger) accordingly, and respond to queries as per the ledger’s content. The ledger maintains a critical log of all the transactions that take place in the system. The exact type of participant majority required depends on the underlying blockchain system’s consensus. For example, Ethereum employs a proof-of-stake consensus where the parties who own the majority of the system’s stake (Ethereum cryptocurrency) vote on the verdict of the transaction. In Bitcoin, the majority is defined in terms of computing power.
Blockchain protocols provide transparency, as the system ledger can be shared across system participants. They also provide high degrees of resilience, as the content of the ledger is not vulnerable to single points of control, failure or compromise. The Ethereum and Bitcoin ledgers are available to every participant in the system. They are also verifiable, in the sense that everyone possessing the ledger can check its integrity. In fact, even if nodes in the system are corrupted or compromised, the ledger content is guaranteed not to change, as long as the majority of the system’s stake or computation honors the rules of the blockchain protocol.
Finally, many blockchain systems provide automation, as transaction validation logic is easily configurable via smart contracts.
The future of the tokenized economy
Web3 has introduced a tokenized economy, where tokens are abstractions used to represent various types of business assets in a digital system (blockchain), facilitating transparent and cost-effective operations on these assets. These business assets can be physical (a piece of land), digital (a piece of music) or even a right (an access right or a vote). In tokenized economies, tokens also represent application- or system-specific stakes (for example, the overall amount of an application-specific or system-specific currency in circulation). Tokens also transparently distribute power and profit across the application developers, owners and consumers, incentivizing further participation.
Decentralization provides the right foundation for multiple ecosystems or industries to come together and trust or co-govern the same system. This allows the tokens of one system to represent a variety of assets. These include two classes of tokens. Fungible tokens are divisible and equivalent assets. Non-fungible tokens (NFTs) are unique physical or digital assets on systems that monitor the respective assets’ ownership or operational lifecycle. Both types of tokens can be traded, exchanged or used as collateral transparently and securely. Fortune estimates that the total value of Web3 application stake or tokenized assets is in the trillions of US dollars.
The rapidly evolving world of Web3 holds opportunities for the enterprise that can navigate its risks. To ensure your Web3 success, work with a trusted technology provider.