Web3 is a collective term for the next evolution of the digital economy, which incorporates many of the emerging technologies we are working with today. This should not be confused with Web 3.0 or the Semantic Web. Web 3.0 is an extension of the World Wide Web through standards set by the World Wide Web Consortium, to make internet data machine-readable.
Web3 is expected to be organised as a series of interconnected networks — answering to no centralised authority — underpinned by blockchain technology. This enables the provision of decentralised finance or DeFi, where trust resides in the technology underpinning the networks and not with a central regulatory authority. This also includes smart contracts, which are established in code on a blockchain that cannot be altered, as well as digital assets and tokens such as cryptocurrencies, stablecoins, central bank digital currencies and non-fungible tokens.
However, Web3 is also used as a collective term for encompassing emerging technologies like machine learning, artificial intelligence, augmented reality and virtual reality and metaverse projects.
Is it actually better than Web2?
Broadly, Web1 is the World Wide Web, launched in 1991 by Tim Berners-Lee. Web2 emerged in 2004 with the launch of interactive platforms such as Facebook and YouTube. With the creation of bitcoin in 2008 and Ethereum in 2014, which enabled the development of decentralised applications, the origins of Web3 started to take shape. Work and refinement of Web3 started in earnest in 2023.
Proponents of Web3 argue that, since it leverages the principles around decentralisation, immutability and transparency, it will usher in a more equitable digital ecosystem.
Those who express caution with Web3 point to several issues. It has already attracted get-rich-quick schemes, which lead to the brief excitement around NFTs. This Web3 environment can be fertile ground for fraudulent activities, warn experts.
Others argue that decentralised governance structure is unstable and doomed to fail. With no centralised structure working to protect participants in the Web3 economy, things might start feeling like the Wild West.
Finally, while Web3 is often presented as a new era for the digital economy, it is still populated and run by the same actors who built both Web1 and Web2. The jury is still out as to whether these people will fix the problems seen in the current version of the internet.
Ultimately, Web3 represents an internet technology, where users interact and transact in a decentralised way, powered by blockchain technologies, without intermediaries.
Is decentralised finance useful?
In finance, many argue that the decentralised nature of Web3 addresses what they see as flaws in traditional finance such as slow and inefficient processes, the concentration of power in a few large institutions, and limited accessibility for many individuals, which make it unfit for the emerging digital era. DeFi moves financial sovereignty to individuals, which is presented as making the industry more participative and less gatekeeper-driven.
Some of the Web3 applications for financial services include decentralised exchanges, the tokenisation of assets, and decentralised lending platforms.
However, after public scandals such as the failure of the crypto exchange FTX, decentralised exchanges have suffered from two years of very bad press.
Decentralised lending platforms provide loans to people and businesses with no intermediaries, while DeFi lending protocols enable the ability to earn interest on supplied stable coins and cryptocurrencies.
Meanwhile, the tokenisation of assets, where the rights to a tangible or intangible item are converted into a digital token on a blockchain, have seen a lot of positive reaction from established banks and financial entities.
Tokenisation can unlock untapped liquidity from assets that are typically illiquid, such as real estate or art. Tokenised fractional ownership can be enabled to allow direct ownership and trade. It can also allow properties, copyrights, patents, or even personal time and skills as tradable, liquid assets.
Outside of issues related to DeFi, Web3 also represents a series of technical risks. Those include phishing and other fraud-related crimes that take advantage of the anonymous nature of blockchains, asset risks, such as fake tokens and smart contract vulnerabilities in the form of human programming code errors.
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