What is Web3?

Web3 refers to the next generation of web technologies that aim to enable a more user-centric, transparent and decentralized internet experience.

Often associated with blockchain technology and cryptocurrencies, the term Web3 encompasses a set of protocols, standards, and tools that allow users to interact with decentralized applications (dApps) and digital assets on the internet.

Web3 allows users to connect and transact in a more peer-to-peer way that is less reliant on centralized servers or authorities.

Because of this, many feel Web3 will allow individuals to take back control over how their personal data is used and who can access it.

Web3 relies on a type of distributed ledger system called blockchain technology.

Blockchain technology is a public database system powered by a decentralized network of computers.

Anyone can join the network and participate in managing the database.

All new information submitted to the database is completely transparent and must be verified by a majority of computers in the network before it can be added to the online blockchain ledger. 

Each computer in the blockchain network maintains their own copy of the data stored on the ledger.

As the network approves new information added to the network, each computer on the network updates their copy of the ledger as well.

This feature means all blockchain-based data is permanent and immutable, meaning no one can single handedly corrupt, amend, or remove it.

To do so, would require someone to manually change the records of over 51% of computers in the network. Oftentimes, these computers will belong to individual users spread all over the world, making such an attack extremely cost-prohibitive and practically impossible.

Combined, blockchain ledgers have several key advantages over traditional financial ledgers:

• Transparency
• Distributed security
• Immutability
• Decentralized/borderless

Challenges of blockchain

As blockchains grow and more users submit transactions, networks may struggle to keep up with the transactions per second users expect. 

Scalability is balanced against the needs for security and decentralization in a tradeoff called the blockchain trilemma. Striking a balance between decentralization, security and scalability is key to developing blockchain technology.

Another common challenge in the blockchain space is interoperability.

Because many blockchains are built on different code bases and programming languages, it can be difficult to move information between one blockchain and another.

Major blockchain platforms for Web3

Ethereum, Solana, Polkadot and Cosmos represent some of the top blockchain platforms that provide third-party developers with tools and software blueprints to create their own Web3 decentralized applications (dApps) and crypto projects.

A key advantage of these blockchain platforms (known as Layer 1 blockchains) is that developers can often use them to create and launch dApps and projects faster and cheaper than starting their own blockchain from scratch. 

Additionally, by creating decentralized assets or services using Layer 1 blockchain building blocks, new protocols are automatically compatible with other projects built on top of the same blockchain.

Thanks to more recent developments in the industry, Layer 1 blockchains now also offer cross-chain communications.

This feature allows each of these large communities to interoperate with one another, connecting all decentralized services and projects together.

Web3 relies heavily on the decentralized business logic of smart contracts.

Smart contracts are self-executing agreements. Developers create these computer programs to produce certain outcomes when specific, predefined conditions are met.

Once all the conditions for the contract are met, the agreement is executed without any intervention from any central authority or third party.

You can think of smart contracts as "if this, then that" computer programs that are verified by a global network and available for all to audit.

Two friends could make a bet on who's going to win the Super Bowl. Traditionally, some sort of intermediary would be needed to ensure both sides of the agreement (often referred to as counterparties) uphold their end of the agreement.

However, a smart contract could also take the place of the intermediary in this example.

To make sure both parties honor the terms of the bet, they could create a smart contract that automatically transfers cryptocurrency to the winner once the game finishes.

For this particular smart contract, an external data source would be needed to tell the smart contract which team won the Super Bowl. Here, third-party data providers called "Oracles" connect to smart contracts via an API and provide the live information.

In this way, smart contracts have a lot of promising benefits:

• Automation: Once the smart contract launches, it can execute all of its functionality on its own without the need for further intervention.
• Efficiency: With automation comes efficiency and the minimisation of human errors. Smart contracts can operate at all times, without the need for breaks or working hours.
• Trustlessness: Smart contracts operate based on clear instructions and all transactions are final. Not to mention, anyone in the world can audit smart contract code to spot potential loopholes, exploits, or errors. By allowing anyone to view the smart contracts code, users do not need to place trust in its accuracy. Instead, they can verify that its logic works as intended themselves.

The programs that users interact with on Web3 are known as decentralized applications, or "dApps" for short.

dApps are blockchain applications that use a series of different smart contracts to operate. They are capable of performing many functions that we currently rely on intermediaries to complete.

For example, thousands of people use room-hosting platforms such as Airbnb or Vrbo to rent out their vacant spaces. These tech companies serve as the middlemen between hosts and guests, and often charge fees for facilitating transactions and handling disputes.

Decentralized Web3 applications could replace centralized services with smart contracts that manage payments, listings, and even handle basic disputes. 

Because these contracts operate automatically, there would be no staff costs to pay, meaning hosts could keep more of their profits and pass on their savings to their guests.

Challenges of dApps

As the number of dApp users increases, there is a greater strain on the underlying blockchain ledgers.

Just like on busy roads, more traffic equals slower travel times. When blockchains experience high congestion, transaction times slow down as the network struggles to process the influx of payments.

dApps users also need to understand basic crypto concepts before they can comfortably navigate these services.

These areas include setting up crypto wallets, buying cryptocurrencies to cover fees and other payments, and safeguarding against online threats.

Major Categories of dApps for Web3

• Decentralized finance (DeFi) is an area where users can perform all sorts of financial services without having to rely on a central authority. dApps can now perform similar functions as banks, insurance firms, or other institutions, in a trustless manner on the blockchain. These capabilities also include collateralized lending and borrowing, digital asset trading, and earning yield through providing liquidity.
• Non-fungible tokens (NFTs) represent blockchain-based tokens used for proving ownership of digital and tangible assets. Holders can transfer these ownership rights by selling the tokens to other people. Data stored in NFT tokens points to their associated online file or real-world item, creating an indestructible, easily verifiable, and counterfeit-proof certificate of ownership. Like cryptocurrencies, NFTs are stored on a peer-to-peer network, not solely under the watch of a central authority.
• Social media - Influencers on decentralized social media platforms can bring their followers along with them to any platform they choose. Content creators are able to take greater ownership over the user experience they deliver using dApps by creating their own virtual environments and interactive experiences.
• Gaming - Games built on blockchains invite their players to be a part of the community and often provide voting rights over how the game is developed. The gamers also wholly own any virtual world in-game assets, not the underlying company that created the game. In some instances, these assets can produce additional revenue for the holders. Gamers may be able to lend out their accrued items, or create monetized virtual spaces such as casinos, theme parks or virtual real-estate for others to enjoy. This feature opens up the opportunity for entirely new digital economies and immersive experiences.
• Predictive Markets - Users can create markets for betting on how certain real-world scenarios might play out. For example, people can use dApps to place bets on which candidate will win at the next Presidential election. These types of services rely on Oracles and smart contracts to lock in bets, identify outcomes, and distribute winnings.

A Decentralized Autonomous Organization (DAO) is a community-led group that collectively manages a blockchain project. 

Instead of a top-down governance model where only a select few get to make key decisions, holders of a project's governance token can submit, review, and vote on proposals that will affect the development and direction of the project. 

If you want to learn more about how cryptocurrencies are used in the process, you can check out our Kraken Learn Center article What is a governance token?

Being part of a DAO can help foster a greater sense of ownership among the community. This unity can help to make sure that the decisions made by everyone are generally in the best interest of the project.

Major examples of DAOs for Web3

• MakerDAO is one of the earliest DAOs in the crypto community. MakerDAO issues the DAI stablecoin backed by multiple kinds of collateral to guarantee stability. Holders of the MKR governance token can adjust policies related to the DAI token and select new collateral for token support amongst others. Anyone can hold MKR and take part in the project's decision-making process. If you are interested in learning more, you can check out the live MakerDAO (MKR) price here.
• Uniswap is one of the earliest and most successful decentralized cryptocurrency exchanges (DEXs) in the crypto space. It is home to hundreds of crypto tokens and provides 24/7 trading in a permissionless manner. UNI is the token that anyone can buy and hold to take part in the platform's governance matters. If you are interested in learning more, you can check out the live Uniswap (UNI) price here.
• Compound is a DeFi app for permissionless lending and borrowing. Lenders earn interest by depositing funds into a lending pool, while borrowers deposit collateral to gain access to funds. COMP token holders can submit proposals for the community to vote on. If you are interested in learning more, you can check out the live Compound (COMP) price here.

Kraken lets you buy, sell and trade the leading cryptocurrencies that are shaping the Web3 ecosystem.

Sign up for your Kraken account today to get started in the exciting world of Web3.