Web3 Technology Explained
Web3 is the newest iteration of the World Wide Web, succeeding Web 2.0 (2000-2021) and Web 1.0 (1990-2000).
The term Web3 gained traction in 2021 as the broader business and technology communities recognized and emphasized several transformative changes that distinguish this phase of the Internet’s development from its forerunners.
To grasp the characteristics, advantages, and obstacles of Web3, it’s essential to revisit the evolution of the web.
Web3 is characterized by several key properties that differentiate it from its predecessors. One of the most important is decentralization, which represents a shift away from the dominance of a small number of companies over internet traffic and search.
In the Web3 ecosystem, individual users have greater control over online communication, leading to a more distributed internet. Unlike in Web2, where a few large corporations like Google controlled the social graph of internet users, data ownership is shifting to the user in Web3. This new phase of the web may give rise to a new wave of corporations that facilitate decentralized interactions.
Although it is still early, as more and more applications rely on decentralized principles, the share of attention and data ownership held by a few technological superpowers will diminish. This decentralization is enabled at a technical level by blockchain technology, which is a key conceptual backbone of Web3.
USER DATA OWNERSHIP
Web3 brings a shift in data ownership from tech giants to end-users. Unlike Web 2.0 where user data ownership is embedded in the terms and conditions of tech giants, Web3 applications allow users to securely own and retain their data. This enables users to manage, transfer and secure their data as they are the ultimate owners of this asset.
This shift signals a power move from corporations that harvest user data for profit. As a result, tech companies may have to reconsider their business models and identify new ways to generate revenue in a Web3 world. For instance, Meta may have to abandon selling user data if they no longer own it and explore new monetization strategies, such as subscription models that require payment for access to its application.
One of the benefits of Web3 is the reduction of intermediaries in transactions. With decentralization comes disintermediation, which leads to lower transaction fees for users. This is because value can be traded using tokens directly through a blockchain network in a peer-to-peer system, without the need for intermediaries.
In contrast, in Web 2.0, transactions are typically conducted through third-party platforms such as online banking apps, Venmo, or PayPal. In Web3, users can transact directly with each other on a blockchain, exchanging value in a peer-to-peer manner without relying on banks or other intermediaries.
Web3 is also characterized by increased transparency, which is facilitated by the use of blockchain technology. With fewer intermediaries involved in transactions, there is less information asymmetry and more open access to data.
In a Web3 ecosystem, blockchain networks constantly validate the legitimacy of transactions while maintaining the privacy of users. This ensures that everyone can transact freely while being able to see who has transacted on the public ledger record.
To maintain anonymity, users can use digitally created addresses instead of their real names. The combination of transparency and privacy ensures that users can transact securely and freely without sacrificing the privacy of their personal information.
Critiques of Web3
Web3 technologies are currently facing a significant regulatory challenge due to the lack of a legal framework, which creates room for fraudulent behavior, anti-competitive market dynamics, and potential financial loss for end-users who fall victim to fraudulent platforms. High-profile cases involving Sam Bankman-Fried and FTX are examples of this problem.
Web3 and blockchain technologies have come under scrutiny for their massive computing and processing power requirements, which have raised concerns about their environmental impact. As a result, the sustainability of Web3 is a crucial issue that must be addressed to ensure public confidence in its development without harming the planet.
The high energy consumption of some blockchain architectures required to preserve and validate transaction ledgers is a key concern. However, mitigating mechanisms are available, such as changing the blockchain validation method itself or using renewable energy sources to power the computing infrastructure.
THE ACTUAL DEGREE OF DECENTRALIZATION
The decentralization property explained above may not actually fully be applied in practice since the blockchain industry has undergone consolidation.
This may lead to an industry where the main blockchain networks and related applications are controlled by a small number of corporations, thus failing to provide a true distribution of ownership stakes in the market.
If this trend continues, especially if unregulated, the industry may come to resemble a sector where a few players control most of the market share and power that comes with it — not unlike Web 2.0.