TLDR;
We are experiencing the early stages of the formation of web3. The building blocks are coming together rapidly and some concepts pop up regularly. For people immersed in the ecosystem, these concepts are well-known and get thrown around in conversation, leaving people like us often confused.
The importance of these concepts cannot be overstated in getting foundational knowledge of how this entire space functions. Learning about them provides a baseline to delving deeper into more granular parts of the metaverse.
Today, we will be taking a quick look at some of these concepts and breaking them down into simple bits so that we can join the conversation too.
What’s Up in web3?
You may be wondering what makes up the web3 universe. The possibilities are endless and many of them are currently unclear. However, we will look into the most common concepts and learn a thing or two about them.
Let’s take a look at Blockchains, dApps, DeFi, NFTs, and DAOs.
Blockchains - the building blocks of web3
A blockchain is best described as a digital distributed ledger that is able to store transactions, oftentimes publicly so anyone that has access to the blockchain can see the transactions as they are performed. Digital means it’s online, Distributed means many people have access to it at the same time and a Ledger is a collection of transactions performed, in this case on the blockchain.
Data is stored in “blocks” (think of blocks as pages of transactions in the blockchain) and as new blocks are added, they form a chain that connects to the previous and future blocks so they are traceable.
Different computers called nodes are able to verify transactions made on these “blocks”. They hold copies of the digital distributed ledger, wherever they are, to ensure absolute transparency.
The defining factor of a blockchain is decentralization! Anyone with the right tools can easily access a real-time copy of the blockchain rather than requesting from a central database.
Common blockchains are Bitcoin, Ethereum, Solana and they form the foundation for a variety of activities - creating tokens (cryptocurrency, NFTs), building applications (dApps), and even trading different kinds of cryptocurrency.
Blockchains provide a majority of the technology that makes web3 possible. Some basic features of blockchains are -
Immutability: This means the data on the blockchain cannot be changed. This is achieved through a complex cryptographic technique called hashing.
Interoperability: Ideally, blockchains should be able to interact with different types of blockchains seamlessly.
Decentralization: As we have discussed, decentralization implies that it is not controlled by a central party.
An interesting thing to note is that ideologies are built around blockchains because of what they represent to different people. Many ecosystem participants are intensely devoted to particular blockchains based on the vision they have developed for them.
This vision often leads to extensive thoughts and innovation around what the blockchain can do now and will be able to achieve in the future.
dApps - Decentralized Applications
Applications come in different forms. We have apps on our smartphones, on our computers and use them for a variety of reasons.
These apps are offered by companies that have full control over the backend and all activities (updates, new features, etc) flow directly from them to the users.
Decentralized Apps take another approach - they are computer applications/programs that run on the blockchain or on P2P (peer-to-peer) systems. They are open source, do not depend on a single computer or system to work, and do not have a single point of failure.
For web3, we will focus on dApps that run on the blockchain. Many dApps run exclusively on the blockchain they were built on. The Ethereum blockchain is very popular for dApps because of how easy it is to ideate and build with.
Blockchain dApps work identically to web2 native apps (the apps we are familiar with). They run similar front-ends (what you see and interact with) but dApps work with “wallets”.
Wallets are the way we connect to the blockchain. They contain the blockchain address which looks something like this: 0x4a72184a13D3C468B308afEf921eEA4Ce… and a cryptographic hash that helps the blockchain identify you as a unique user.
This prevents giving up your actual identity (name and email) to the apps and is a plus for data privacy and security.
Like web2 apps, dApps have a lot of use-cases. They can be used for finance, gaming, social media, data storage, and a lot more.
dApps are the main lens with which we view the world of web3 as many of the interactions we have with the blockchain take place through dApps.
As we are in the early days, many dApps are finding their feet and are not as user-friendly as we’d like. The user interface can be a little bit confusing to navigate for people new to the space BUT as web3 moves more mainstream, this will undoubtedly improve.
DeFi - Decentralized Finance
What DeFi wants is simple - to remove traditional middlemen such as banks or exchanges from the process of transferring money and assets. How it does it though, is a bit more complex. It ensures that anyone is able to perform basic financial actions (buy assets, take out loans, save) on the blockchain without the need for permission from a third party.
In fact, computer code called smart contracts are programmed to carry out extensive calculations that ensure transactions are clear, timely, and legitimate. It makes sure agreed predetermined terms are met without any party trying to outsmart the other.
Most of DeFi is actually conducted through the use of dApps that aim to simplify the process of accessing these financial actions for users.
In 2020, DeFi companies gained a lot of popularity, transacting impressive amounts of money on their platforms. This has increased confidence in the future of DeFi and many use cases around how to improve money and wealth management.
Regulators have also developed a keen interest in the space, posing questions around how DeFi works and how this fits into the existing global financial systems.
DeFi is open to anyone with curiosity and internet access. Granted, there is a bit of a learning curve but when you get the hang of it, the possibilities abound. Some popular DeFi companies are AAVE, Curve, and Chainlink.
NFTs - Non-Fungible Tokens
NFTs are unique digital tokens available on the blockchain. It can be art, music, photographs, website domains, or other creative assets. This skit on Saturday Night Live shares hilarious examples of what can be made into NFTs.
Non-Fungible means that the token cannot be readily interchanged with another of the same type therefore it is a one-of-a-kind asset.
Let’s paint a clearer picture; if I got a really cool painting with a custom signature in the corner from the artist and you got an identical piece from the same artist with its own custom signature, although it’s the same piece of art, the signatures are the distinctive identifiers that make them different.
My copy is unique to me and therefore, non-fungible, as is yours.
Similarly, on the blockchain, there are distinctive identifiers that NFTs possess to ensure they are truly unique. This allows them to be used as proof of ownership for digital and real-world assets.
Minting an NFT is the process of turning the digital file into an asset on a blockchain. This can happen on Ethereum, Solana, Tezos, Binance Smart Chain, and some other blockchains and there are companies dedicated to making the process seamless. Notable examples are OpenSea and Foundation.
As great as this is, NFTs get a lot of flack for a variety of reasons. There are concerns around copyright infringement and environmental impact that has discouraged many from exploring them.
This article provides a really interesting look into NFTs and how they work on a basic level.
DAOs - Decentralized Autonomous Organizations
According to Aragon, DAOs are the next frontier of human coordination. They are a decentralized way to bring like-minded people together to achieve a common set of objectives.
The objective could be anything that interests the community ranging from creating a learning experience like Rabbithole or DeveloperDAO; crypto management like DASH or virtual world experiences like DecentraLand or currency reserve like OlympusDAO.
In DAOs, the concept of traditional hierarchies is discouraged so there are no CEOs or VPs, however, the community is able to produce people to take up positions that ensure the DAO runs smoothly.
This makes sure there is an adequate representation of the community’s interests through a fair decision-making process. This is usually referred to as governance and it is carried out through the use of on-chain tokens that represent voting power.
Governance tokens are a great way to ensure the voices of the DAO members are heard during any form of proposal review. However, how the tokens are distributed is left totally to the DAO’s discretion and this may not allow for the most equitable situation.
Smart contracts are encoded with the rules predetermined by the organization that is used for governance, treasury and token management, and other required activities. This makes sure that human intervention is kept to a minimum.
Coordination can be also done off-chain (outside of the blockchain) through collaborative tools like Discord and Notion but the bulk of the work is performed on-chain (done on the blockchain) to ensure transparency.
As with most things in web3, widespread DAO adoption is new and there are not many hard-encoded rules about how they should work. People are figuring it out as they go. This gives room for massive innovation as well as a lot of stumbling around.
With time and maturity in the space, there will be increased clarity around how DAOs can and should operate.
Conclusion
Understanding the basics in web3 and the metaverse at large starts with looking under the hood at some of the technical parts. This helps provide context and a solid foundation to introduce more complexity.
The blockchain, dApps, DeFi, etc are some of the parts that help clarify the bigger picture and as web3 gets more refined, so will these concepts.
Feel free to use this to further your research and discover even more interesting parts!
Summary Time
We covered the following concepts: Blockchains, dApps, DeFi, NFTs and DAOs.
These are the building blocks and moving parts of what makes up web3. The possibilities of what they can do is endless!
A lot of growth is still happening - as time goes on, we’ll see interesting developments in many of these spaces.
I hope I’ve been able to make some of these concepts easy to understand! As usual, I want feedback - comments, thoughts, suggestions. I want all of it!
Thank you.
Been looking for a way to get a hold of what web3 is about. Keep doing the good work rabii .