What is Web3?

Eric Huffman

Last updated: February 14, 2024 05:42 EST | 21 min read

The term web3 refers to a decentralized web that’s based on blockchain technology in which crypto wallet addresses act as an online identity.

Web3 describes an evolution of the web where users control their information rather than ceding control to corporations through tracking cookies and seldomly read terms of service.

The concept of web3 closely intertwines with crypto concepts like decentralization and tokens, so we’ll discuss the intersections of these technologies. We’ll also examine how web3 might transform how we use the web — as well as how it already has.

From Web 1.0 to Web 3.0 – How Did We Get Here?

To understand web3, it’s helpful to contrast web3 against earlier iterations: web 1.0 and web 2.0.

Web 1.0

In the early days of the web, websites served up static content. If a page needed updating, someone had to edit the HTML document. The page stayed that way until someone updated the code again. Web 1.0 lacked the interactivity we’re familiar with from today’s web.

While the World Wide Web was invented in 1989 as a way for scientists to share information, the commercial web wasn’t far behind. By 1993, sites like bloomberg.com went live, followed by apple.com in 1994.

Web 2.0

The 90s solidified the web’s utility as a storehouse of information on nearly any topic imaginable and a way to link to related content. However, the content on each of these pages remained centralized. Companies or individuals controlled what each static page contained.

Web 2.0 changed the world by making the web interactive and dynamic. User-contributed content became the main focus on top sites like MySpace (2003), Facebook (2004,) and Reddit (2005).

While new content generated by users hinted at decentralization — at least in some aspects of content creation, site administrators and corporations still controlled who could post and which content was acceptable.

The shift to Web 2.0 also brought new uses for JavaScript, a programming language initially created in 1995 that can execute code in web browsers, making web pages interactive.

Web 2.0 makes the web we use today more interesting, but it also paved the way for corporations to monetize the web by gathering user data on an industrial scale.

In addition, Web 2.0 brought censorship concerns, as sites we view as a “public square” moderate speech or even ban users, effectively erasing their contributions to the site in many cases.

In practice, Web 2.0 made the web more centralized than many had even imagined possible. However, the advent of web3 (Web 3.0) promises to return ownership of data and online identities to users. Will it work? Maybe. Some early examples of web3, highlighted later, allow us to see where a decentralized future might lead.

So, What is the Meaning of Web3?

Web3 refers to using crypto wallet addresses as online identities. Web3 platforms often also decentralize other aspects, such as web storage using peer-to-peer file sharing as well as transaction data, which is stored on the blockchain and replicated across hundreds or thousands of computers worldwide.

These wallet addresses can interact with smart contracts, which are computer programs that run on the blockchain. In short, Web3 means we each control our online identities. No corporation or moderator can remove that identity. And by using multiple identities, we can manage online privacy as well.

For example, Vitalik Buterin, one of Ethereum’s co-founders, publicly disclosed a wallet address on Twitter (now X). This example wallet address could serve as an online identity on web3 platforms. In this case, we already know the address belongs to Vitalik, so we aren’t compromising anyone’s privacy.

A crypto wallet can be used to log into blockchain-based web3 sites using a wallet address as the online identity and signing the “login” with the wallet’s private keys.

If you’re not Vitalik, you won’t have access to Vitalik’s private keys. Similarly, Vitalik won’t have your private keys. In this regard, web3 uses pseudonymous identities to navigate supported sites on the web using crypto wallets as a form of authentication.

Each person or entity can also have a nearly unlimited number of address-based identities. For example, you might use one wallet address for small transactions, another for storing larger balances, and a third, fourth, or fifth for interacting on web3 platforms.

In addition, it’s possible to link an Ethereum address to an ENS (Ethereum Name Service) domain. For example, vitalik.eth points to another wallet address belonging to Vitalik.

Privacy by Default

In a web3 world, near-anonymity (pseudonymity) or full disclosure is a choice, and we each control our identities. The result is a censorship-resistant web that offers access to everyone. Newer blockchain technologies like zero-knowledge proofs may also play key roles in protecting the privacy of interactions.

The key to understanding web3 is knowing that a pseudonymous wallet address that you control becomes your online identity, granting fair access and control over your data.

This differs from web2, in which a site admin or corporation decides who can use the site or app and in which corporations gobble up vast amounts of user data for marketing and other purposes. You’re the captain now.

Comparing Web 1, Web 2, and Web 3

Control over data in web3 applications may eventually resemble computer file permissions, in which we are administrators for our identities and can control which data is shared at a granular level.

Key Terms You Need to Know to Understand Web3

Like other tech innovations, web3 comes with its jargon. Let’s break down some of the key terms you’ll encounter.

• Blockchain: Blockchains are a way to store data and transactions in a way that prevents changes or tampering. Transactions are grouped into blocks, which are then connected using cryptography to form a chain. Blockchain networks can reach tens of thousands of computers worldwide.
• Smart contracts: A smart contract is a computer program that runs on a blockchain network. In effect, they work like switches — if this happens, then do that.
• Crypto: Cryptocurrencies are the fuel that powers blockchain networks — digital money. The term crypto describes the industry and technology as a whole but has its roots in the cryptography that connects chains and records transactions.
• Crypto wallet: A crypto wallet generates and stores the private keys that control your assets on the blockchain. Hot wallets refer to software apps that are exposed to the internet. Cold wallets refer to hardware devices that cannot connect to the internet.
• Pseudonymous: Many people think crypto is anonymous. However, crypto is pseudonymous, which means crypto wallet addresses act as an identity in transactions.
• NFT: A non-fungible token is a blockchain asset that confers ownership or provides proof of authenticity. In web3, NFTs serve a variety of purposes, ranging from digital art to ownership of financial investments.
• Decentralization: As the name suggests, decentralization refers to management without a center. In a web3 context, decentralization speaks to the management of apps or blockchains, control of identities, and universal access.
• DAO: A decentralized autonomous organization (DAO) is a way to manage blockchains or apps by giving the community voting rights using tokens.
• DeFi: Decentralized Finance (DeFi) refers to an innovative way to access money markets or swap assets without an intermediary like a bank, payment provider, or crypto exchange. DeFi apps offer some of the best examples of web3.
• Signatures: Web3 used crypto wallets to sign into decentralized applications. A crypto wallet uses private keys to verify your pseudonymous identity when signing into apps or confirming transactions.

What are the Opportunities in Web3?

The growing universe of web3 platforms creates opportunities for entrepreneurs, job seekers, and users alike.

Top Web3 Jobs

Web3 job opportunities parallel those for web2, although with a shift in technology and credentials for back-end developers. It also differs in its blockchain focus, a knowledge set not required for most web2 jobs.

• Smart contract developer: Smart contracts that run on the Ethereum Virtual Machine (EVM) utilize the Solidity programming language, based on C++, Python, and JavaScript. However, Solana smart contracts use Rust, C, C++, and Python. Cardano uses Haskell.
• Front-end developer: Decentralized applications (dApps) look like everyday websites on the front end but utilize smart contracts on the back end. However, dApps often follow a similar design language that offers an intuitive experience as web3 users navigate from app to app. Front-end developers need HTML, CSS, and JavaScript coding chops.
• UX designer: The user experience plays a key role in adoption. Top web3 protocols offer a clean UI with more powerful features available within easy reach. UX designers provide the finishing touches that can make an app a hit or a miss.
• Full-stack developer: As a jack-of-all-trades, a full-stack developer works on all aspects of dApp development and maintenance, ranging from HTML and CSS to smart contracts written in Solidity.

Web3 Gaming

From game development to play-to-earn crypto games, web3 gaming brings additional opportunities. Many of today’s web3 games offer in-game economies, with NFTs at the heart of property ownership in NFT games and traditional games that run on blockchains.

Metaverse worlds offer a hybrid experience between gaming and immersive social experiences. The metaverse also offers a profit opportunity, however, both in the value of the web3 tokens and virtual real estate as well as jobs performed in the metaverse.

Web3 Wallet Apps

Crypto wallets are at the heart of web3 because they hold the private keys needed for logins and transactions. This creates an opportunity for coders, back-end developers, and UX designers who want to contribute to the web3 space. Many web3 wallets, like MetaMask, utilize browser extensions, providing an always-ready wallet that’s cross-platform. Some wallets come as installable apps, however, such as the Frame wallet. Others offer mobile-only wallets.

For users, web3 wallet apps provide a gateway to the decentralized world. Many wallets include built-in support for staking, a way to earn a yield by contributing to the blockchain’s security, or swaps, a way to exchange one cryptocurrency for another easily.

Web3 Marketing

Web3 marketing creates income opportunities for users, ranging from airdrops to promotional giveaways.

• Airdrops refer to tokens given away to ecosystem users. For example, the Arbitrum community benefitted from the largest airdrop of 2023, valued at nearly $2 billion. The ARB token giveaway went to key protocols on the Arbitrum blockchain, which then used the tokens to reward or incentivize users, as well as users who met eligibility criteria.
• Promotional giveaways include Coinbase wallet quests, which are simple DeFi tasks such as minting an NFT that pays rewards in cryptocurrency. Debank, a crypto portfolio tracker, offers another example with its Activity rewards and “Hello” payments, the latter of which allow projects to message users directly to boost awareness.

Why is Crypto so Foundational to Web 3?

Web3 centers on blockchain, smart contracts, and crypto wallets, all of which utilize cryptocurrencies.

• Blockchains are intrinsic to web3 because of their decentralized nature. Centralized servers with administrators would defeat the purpose of web3 and its equal-access goals. By contrast, blockchains can store data and reach an agreement on the state of the blockchain without an administrator.
• Smart contracts form the architecture of web3, with code running on the blockchain network governing logins and actions on web3 platforms.
• Crypto wallets allow users to control their private keys and, by extension, their logins and interactions using their public wallet address.

Cryptocurrencies themselves also play a role in web3. For example, on the Ethereum network, ether (ETH) is the cryptocurrency fuel for the network. ETH pays for computing power used for smart contracts, with more complex transactions having higher costs. Sending an asset like an NFT or a token from one wallet address to another also costs a transaction fee paid in ETH.

Of note, web3 logins themselves don’t incur a network fee. In this case, a cryptographic hash verification is used to verify ownership of a wallet address identity.

How Does Web 3 Affect the Real World?

Despite its challenges, which we’ll discuss later, web3 promises to revolutionize the way we perform everyday interactions. In web3, the digital world is the real world, but with new ways to transact and interact.

• NFTs and tokenization of real-world assets: NFTs provide proof of ownership or rights. While the NFT market centers on collectible digital art, many see a future in which real-world assets (RWA) will be tokenized in the blockchain. This change could bring a level of liquidity, trading opportunities, and collateralization opportunities unprecedented in traditional markets.
• Privacy: Web3 offers better privacy in many regards because your wallet address becomes your identity for the purposes of the interaction.
• Financial freedom: Cryptocurrencies provide an alternative store of value relative to traditional currencies. Bitcoin and Ethereum, for example, have rewarded early buyers with returns much higher than traditional investments. Web3 also allows financial transactions without an intermediary, like a bank. Need a loan? You can borrow against your cryptocurrency in a few clicks using a web3 platform like Aave.
• Immutability: By design, blockchains create an immutable record, making them an ideal way to document events, such as scientific research or financial transactions. In the real world, these data types are more subject to manipulation. For example, a bank can change your balance, forcing a lengthy dialogue to correct the error.
• Social platforms: Protocols like Farcaster may change the way we communicate on social media. The protocol acts as a framework for building social networks in which users have full control over their data and in which a decentralized ID can be used on multiple platforms.

What are the Key Issues that Web 3 Aims to Tackle?

Web3 follows a sovereignty-based ethos, giving control back to users: control of data, control over privacy and transactions.

Several key aspects of web3 work toward this goal.

• Pseudonymity: Users can navigate web3 protocols using a pseudonymous identity or use several, each a wallet address.
• Transparency: Transactions are viewable on blockchain explorers, allowing users to verify DAO treasuries, smart contract interactions, and more.
• Censorship resistance: Web3 brings censorship resistance by eliminating centralized decision-making. Anyone can transact with smart contracts or platforms without intermediaries and without seeking approval.
• Data ownership and data portability: Platforms like Farcaster promise granular control over your user data, with whom it’s shared, and when.
• Open-source code: From operating systems to websites, closed-source code enables corporations to use tracking features that may not be obvious. By contrast, smart contracts used in web3 are open-source, and the contract address is available on the blockchain.
• Decentralized storage: Protocols like Arweave and Bluzelle offer blockchain-based data storage, while grouped protocols like the Interplanetary File System (IPFS) offer a way to host web3 sites by leveraging peer-to-peer (P2P storage).

What are the Biggest Problems With Web 3?

The promise of web3 comes with some challenges as well. Blockchains are slower in comparison to centralized servers. However, the industry faces some additional challenges.

Transaction Costs

Many interactions on web3 platforms come at a cost. Transfer an NFT; pay a network fee. Change a setting on a DeFi platform; pay a network fee. In the real world, many everyday actions come without fees. The transaction fee frenzy can be alarming for new crypto users.

Learning Curves

Web3 requires familiarity with crypto wallets. Wallet signature hashes do not require gas, but additional functionality may require network fees. In addition, crypto wallets require a base level of knowledge on wallet safety and the importance of protecting your private keys.

Privacy Concerns

Anonymity isn’t guaranteed in web3. By design, crypto wallets transmit IP addresses to nodes. What these nodes do with that information may vary.

For example, here is what MetaMask says about the default (Infura) nodes used by the leading crypto wallet.

Regulatory Risk

If one or more government agencies act against a web3 platform, the value of assets on the platform and the tokens themselves may be at risk.

The risk is real. In 2022, the US SEC won a case against LBRY, Inc., the company that launched the decentralized LBRY file-sharing protocol, alleging that the company sold unregistered securities.

Tax Considerations

The success of the recent Bitcoin ETFs can be partly attributed to the simpler tax structure of ETFs compared to making cryptocurrency transactions. Popular tax software can handle ETF trades with ease.

However, blockchain transactions require converting the value of each transaction to its value in dollars at the time of the transaction to report capital gains. When making a few transactions per year, this doesn’t seem as daunting, but web3 may involve dozens of crypto transactions daily.

Hacks and Rug Pulls

Smart contracts are code written by humans (or AI). To err is human, and AI isn’t much better yet. A flaw in a smart contract could allow an exploit, putting users at risk.

Rug pulls refer to intentional or incidental abandonment of projects. Imagine a community forming around a web3 project, investing time and money, only to see the project abandoned — or worse, drained of its funds. Much like in real-world investing, your investment value can crash to zero overnight.

Slow Adoption Rates

Limited adoption means there are relatively few web3 platforms. This creates risk for investors and people who buy tokens to participate in a web3 ecosystem. There’s no guarantee that that platform will remain viable without a critical mass of users and the liquidity they bring.

What’s the Difference Between Web 3 and the Metaverse?

Blockchain-based metaverse projects are a part of web3, but web3 isn’t limited to metaverse projects (and not all metaverse projects are blockchain-based).

What Is The Metaverse?

The metaverse refers to virtual worlds where users can interact with other users, own property, and even carry out everyday tasks, like a virtual visit to the doctor. There isn’t one metaverse, although the term is often used to describe metaverse worlds as a concept.

How Do Blockchain-Based Metaverse Worlds Interact Using Web3?

Blockchain-based metaverse worlds like Decentraland, sometimes called Virtual Blockchain Worlds (VBW), use crypto wallet addresses as a gateway to the virtual world. The wallet also holds metaverse assets, such as NFTs.

Decentraland uses an installable app to bring 3D worlds to life. The project is owned by users and run by the Decentraland DAO, a decentralized autonomous organization that lets users vote on changes and improvements using MANA, the crypto token for Decentraland.

How Can I Invest in Web3?

Investment opportunities for web3 projects range from traditional investments, like stocks, to platform-specific tokens.

Stocks

Publicly traded companies offer some exposure to web3 but may be too diverse regarding revenue to see price movements based on web3 developments.

• Coinbase (COIN): As the world’s largest publicly traded crypto exchange, Coinbase makes a popular investment choice for investors who see a bright future for crypto.
• Unity (U): Unity is the company behind many of today’s mobile games and is expected to be involved in future web3 games.
• Amazon (AMZN): Amazon is best known for its online retail store, but Amazon Web Services make up 70% of the company’s profit. Cloud providers like AWS host a growing number of Ethereum validators. In turn, Ethereum and EVM-compatible blockchains host the majority of web3 applications.

Cryptocurrencies

Specific cryptocurrencies may see price moves based on growth in web3, especially if we see mainstream adoption of DeFi.

• ETH: As the top smart-contract blockchain network, Ethereum’s cryptocurrency, ether, makes a popular investment choice.
• MATIC/POL: The Polygon network also hosts a variety of web3 applications. Polygon’s native token, MATIC, is transitioning to POL, which brings more functionality. Users can swap MATIC for POL 1:1 when the transition is complete.
• SOL: The Solana blockchain was built for speed and offers low-cost transactions. Solana is home to a growing number of web3 dApps, including DeFi and NFT platforms.

Platform-Specific Tokens

For a more focused way to invest in web3, you can consider tokens for specific web3 platforms or tokens likely to benefit from web3.

• AAVE: The AAVE token is the governance token for the Aave protocol, a leading lending and borrowing platform. AAVE holders can also stake the token to earn a yield by providing an insurance fund for the protocol.
• MANA: The leading web3 metaverse project, Decentraland, uses MANA as a governance token and a currency within the virtual world.

NFTs and Tokenized NFTs

Non-fungible tokens are an integral part of web3. Top collections like Pudgy Penguins have seen incredible growth in value. However, NFTs offer less liquidity compared to other speculative web3 investments. Tokenized NFTs, in which buyers own a small part of a valuable NFT, may offer more trading opportunities. Do your research first and choose carefully.

Is Web3 Here Already?

Yes. DeFi leads the way in web3 platforms thus far, although several other segments have attracted impressive communities as well.

• Aave: The Aave protocol offers decentralized lending and borrowing. Earn a yield on assets you stake to lending pools or borrow against your crypto collateral.
• Uniswap: The Uniswap protocol allows users to swap cryptocurrencies using liquidity pools. Users can also supply tokens to liquidity pools for others to swap, earning a fee based on their percentage of ownership in the pool. Uniswap uses NFTs to represent ownership of pool positions.
• Lido: The Lido protocol is the top liquid staking platform for Ethereum and also supports Polygon staking. Users utilize smart contracts to stake their ETH or MATIC and receive an interest-bearing liquid staking token they can hold, trade, or use as collateral.
• MakerDAO: The Maker Protocol uses top crypto assets like ETH and USDC as collateral to mint DAI, a stablecoin pegged to the US dollar. Stablecoins are popular because they hold a stable value.
• Hunters On-Chain: Looking for an NFT game? Magic Eden’s Hunters On-Chain supports Solana, Polygon, and Ethereum.
• Decentraland: The Decentraland DAO owns the virtual world of Decentraland, giving users control over the metaverse and the ability to own in-world assets.
• Steemit: Blockchain-based blogging finds a home on Steemit, where users can earn STEEM for curating or publishing content or for top comments.
• Brave Browser: The Chromium-based Brave Browser is web3 ready, with a built-in crypto wallet and native support for IPFS pages.
• Storj: The aptly named Storj network offers decentralized storage. People with extra storage space, an always-on computer, and a reliable data connection can get paid to run a node.
• OpenSea: Trade NFTs and view market trends for top collections on one of the largest NFT marketplaces.
• Farcaster: The Farcaster protocol aims to decentralize social media while giving users complete control over their data. User signups went parabolic.

Conclusion – Why Web3 Matters

Web3 is about returning control of the web to individuals and making the web more democratic. As importantly, web3 provides equal access and resists censorship by using wallet addresses as an alias. The concept reaches well beyond web browsing, spanning decentralized finance to metaverse worlds to games and storage.

Ultimately, we may see real-world assets make their way onto the blockchain, and web3 will be at the center of it all, allowing people to transact with privacy and without using intermediaries. Web3 represents a shift in power and a massive divergence from traditional systems, tipping the balance to individuals rather than corporations. The industry has some tall challenges ahead but also benefits from the synergy of open systems and the commitment of people who want to make the world a better place.

FAQs on Web3.0

What does Web 3 Mean?

Web3 refers to a movement to decentralize the web using blockchain technology by utilizing crypto wallet addresses as online identities.

What are the differences between Web 1, Web 2, and Web 3?

Web1 was made of static HTML pages. Web2 brought interactivity and user-created content but at the expense of monetized user data. Web3 aims to return ownership of data and online identities to users by using blockchain technology and decentralized protocols.

How can you access Web 3?

To access web3, you need a crypto wallet and a web browser. Your wallet address becomes your online identity rather than using your real name. Web3 destinations range from decentralized financial platforms like Aave to metaverse platforms such as Decentraland.

When will Web3 be released?

Many well-known web3 platforms are already here. Protocols like Aave, Uniswap, Farcaster, Lido, BLUR, and Steemit all support web3 values.

What skills are needed for Web3?

As a user, you should have a basic understanding of blockchain technology and how network fees work. You’ll also need a working knowledge of crypto wallets and how to protect your private keys. As a developer, programming skills in Solidity or Rust can get you started with top web3 blockchains like Ethereum and Solana.

What is a Web3 developer?

A web3 developer usually refers to someone who can write smart contracts in Solidity or Rust to power web3 applications. However, the industry also needs front-end developers, UX specialists, and full-stack developers.

References

• The birth of the Web (home.cern)
• What is IPFS (ipfs.tech)
• Vitalik Ethereum Address (twitter.com)
• Etherscan (etherscan.io)
• ETHEREUM VIRTUAL MACHINE (EVM) (ethereum.org)
• A crypto wallet & gateway to blockchain apps (metamask.io)
• MODERN WEB3 FOR DESKTOP (frame.sh)
• $ARB airdrop eligibility and distribution specifications (arbitrum.foundation)
• Does MetaMask collect my personal data? (metamask.io)
• LITIGATION RELEASES LBRY, Inc. (sec.gov)
• The metaverse in medicine (nih.gov)
• Decentraland DAO (decentraland.org)
• Amazon’s cloud revenue is up 12% amid AI demand (qz.com)

About the Author

Eric Huffman

Eric Huffman's background includes a decade plus in business management as well as personal finance industry experience in insurance and lending. A strong understanding of consumer finance combined with a consumer advocate stance brought Eric to the crypto industry, where he writes articles and guides aimed at making crypto easier to understand.

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