The Building Blocks of Web3: How Does Web3 Actually Work?

We’re all excited for the next era of the internet, Web3, to emerge. Web3 plans to address many of the grievances that we have with the current iteration of the internet, Web2. 

In Web2, we see high levels of centralization where a handful of large companies decide how and what content you see. Programs you use on the web are often opaque; packaging in functions such as personal data collection that you may not be comfortable with. And virtual items and properties you purchased on the web may not actually be verifiably owned by you.

With this in mind, Web3’s goals become clearer: 

• Ownership - users own digital items without third-party services
• Personalization - digital experiences can be personalized for more user expression
• Collaboration - higher levels of transparency for easier collaboration 

These goals may seem impossible to achieve. YouTube, for example, and its parent company Google have a lot of backend infrastructure that allows 500 hours of video content, on average, to be uploaded every minute.

Creating a similar competing service would require a similarly daunting level of capital to set up and maintain. Therefore, it would seem that centralization is necessary for web services. A service without a controlling entity would be impossible, right? Not quite.

Web3 technology seeks to eliminate this bar to entry by utilizing a few key technologies. In this post we’ll look at how these technologies work in simple terms and point to some resources where you can learn more.  

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The foundation? Blockchain.

Blockchain databases are new(ish) record-keeping systems that emerged alongside Bitcoin. Unlike physical currency, bitcoin functions as a virtual currency that isn’t backed by any financial institutions or federal entities. But how can Bitcoin be created (or minted) if there isn’t a centralized entity minting it?

This is where a blockchain database comes in. As a decentralized and public ledger, data storage takes the form of “blocks” that can be thought of as pieces of data that have a certain storage capacity for information. When enough new transactions, or changes to the data, occur, a new block is created that’s linked to the previous block by a cryptographic hash. 

A cryptographic hash is basically a very difficult mathematical problem that makes the hash extremely secure. New blocks are created very often – on average from every few seconds to a couple of minutes. They’re referred to as chains because the database is a series of these data blocks linked together.

A key characteristic of blockchains is that they are very hard to alter or hack. Data contained within the chain is often based on data in the previous block, which is based on data in the block before it, and on and on. 

Think of it as a long metal chain where each link is a piece of data. If a hacker wanted to falsify data in a particular link they would have to simultaneously alter the data in the original link and all the links that come after. Otherwise, the chain would fall in half and it would be clear exactly where the breach was. 

New blocks within a blockchain are also not produced by a controlling entity that has thousands of computers with millions of terabytes of storage. Rather, the data is spread out across thousands of nodes run by individual people. This also helps prevent breaches or hacks, as if one node is compromised, the other nodes will still be safe as they can reference data pieces with one another to identify where the breach was. Data centers, in contrast, are compromised if any computer connected to their network is breached. 

Blockchains incentivize users to operate nodes and process new data. The popular blockchain Ethereum, for example, allows you to stake currency to secure a network and earn rewards. Because users are incentivized to operate nodes, data centers aren’t required to run blockchain networks. 

Now, what technologies and processes does this enable? 

What Blockchain enables

Global reach

Perhaps all of Web3’s developments stem from a simple idea: transcending the limitations of the physical world. In the past few centuries, global communication and connectivity have been limited by the technologies of their ages. While the mail, telegram, radio, and phones have all advanced the speed and depth of communication across the world, Web3 aims to eliminate these spaces between spaces. 

Web3 technology enables digital globally spanning, economies, and even societies. 

Of course, many of these concepts were “possible” with Web2, but not feasible. One of the main reasons is that Web2 lacked systems to verify and establish trust. The classic saying, “Don’t trust a stranger on the internet,” comes from the idea that anyone on the internet could be lying to you. Web2’s verification systems usually require a username and password, which can be stolen, and are operated and stored by a single central authority, such as a bank. What if this bank’s data storage is compromised? What if your project interferes with the business goals of the central authority you’re communicating through? 

This circles back to some of the main goals of Web3: ownership and collaboration. You can’t start a globally spanning digital economy if you can’t verify whether or not someone actually owns a digital token. You can’t communicate and start projects on a global scale if you can’t trust the identity of the person on the other end of the chat. 

Herein lies the necessity of a blockchain: an independent, decentralized network where users establish trusted global communication networks.

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Cryptocurrency

We mentioned cryptocurrency before; a form of money that exists in a digital space and isn’t backed by any federal reserve or financial institution. Cryptocurrency acts similarly to regular currency in that a certain amount of new “coins” are minted every year and put into the market. But these coins aren’t just given away to banks. Rather, they’re mined. 

Crypto mining can function very similarly to operating a node in a blockchain network. A miner sets up their computer to solve difficult mathematical calculations for the cryptocurrency’s blockchain network. As a reward for contributing to the network, they’ll receive newly minted crypto and collect fees on transactions made. This is referred to as a proof-of-work system. 

Crypto mining can also use a proof-of-stake system. We have a separate article explaining how this system works.

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NFTs

NFTs, or non-fungible Tokens, are digital tokens that are each verifiably unique. Fungible means an item can be exchanged for another of its type for the same value. When something is non-fungible, it has no inherent value and must be appraised.

There are many items in the real world that, although they are similar, can be considered unique. For example, you and I may have the same model and make of car. But your car has a different VIN (vehicle identification number) that specifies it as a separate physical identity. Before NFTs, it wasn’t possible for digital properties to be unique from one another.

The verification process for NFTs being unique exists within the blockchain. We go into more depth on NFTs in our NFT guide, but know that the inherent security of the blockchain ensures that it’s near-impossible to falsify an NFT’s unique identifier. 

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Digital Wallet

The cryptocurrency that you own needs to be stored somewhere, right? A digital wallet acts as storage for your currency without any physical cards or banks. Your digital wallet is tied to you, not your account. With a digital wallet, you don’t need to carry around credit/debit cards. You can make all of your transactions using your digital wallet app on your phone.

Digital wallets have an extra layer of security as all of the transactions that occur have layers of encryption. For example, when you make a purchase at a store, your sensitive wallet information is converted to a unique encrypted token. When the store receives your payment token, only their specific payment gateway is able to use the encrypted token and verify your payment. 

Think of it as handing a cashier a scrambled, coded letter that contains your payment information and exactly how much you want to pay. If you accidentally dropped this letter, it would be meaningless jumbled letters and numbers to anyone else who found it. Only the cashier has the tools to decipher it. 

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Interoperability

Interoperability in technology refers to the ability of one computer or system to exchange with other computers or systems. Essentially, this forms a network, and its success depends on its interoperability. There are several different types of interoperability that represent the different ways systems may communicate and interact with one another. So where does Web3 fit into this?

Web3 services and functions are generally accessed using the aforementioned digital wallets. Whereas Web2 sites may require multiple accounts to gain access, a digital wallet acts as a primary identifier. In other words, connecting your wallet to Web3 sites and projects is all that’s needed for those sites to identify who you are. This is particularly useful as a digital wallet is far more secure than a traditional username and password login system. 

When a Web3 project is connected to your digital wallet, it can then check what assets you own and change your access level based on what you own. For example, if you own an NFT that corresponds to certain rewards and benefits with the Web3 service, connecting your digital wallet is all that’s needed to reap the rewards of your asset. Your digital wallet can then contain multiple NFTs that grant access to several different projects and services. 

As Web3 is further developed, interoperability is accounted for and implemented from the ground up rather than welded or tacked on later when it becomes necessary. 

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Conclusion

These key technologies are just a few broader examples of the many exciting things that people are doing with Web3. Think of the technologies we’ve listed as the core pillars of Web3 that enable greater levels of decentralization and personal ownership on the web. Groups of people are utilizing these technologies in new ways every day to broaden the scope of what’s possible in Web3.