It bothered me that I kept hearing about web3, so I am writing this post to find out what it is.
Web 3
Web3 refers to a coming together of advances in computing power, artificial intelligence, and cryptography to change how we interact with data and transact with one another. Its hallmarks include semantic search, meaning that you can use it with natural language (web 3 has been called the semantic web), and decentralization, as in people can interact with one another without the need for an intermediary like a bank (for transactions), a government (for money), or a third-party platform like Facebook or Twitter.
An early example of web3 comes from John Markoff, a technology reporter at The New York Times, who discussed it in an overview from 2007. Web 3, in his telling, could provide a helpful response to a common-sense, natural-language search like this one: I’m looking for a warm place to vacation, I have a budget of $3,000, and I have an 11-year-old child.
A more recent example is Bitcoin. If you pay someone in Bitcoin, a global network of computers verifies the transaction rather than a bank (if the payment is electronic) or a government that issued the money if it’s in cash.
Difference from the web today
Today’s web (web2) emphasizes walled social networks like Twitter, Facebook, Instagram and TikTok where people upload video, photos, posts, reviews, and other content they generate. It’s not decentralized.
In web2, a developer can connect a database of vacation homes for rent with Google Maps to show the locations of each listing. But to find a vacation rental that’s within your budget or that works for a family with kids would require you to read through the listings, ask people on a social network, or rely on reviews.
In a 2001 article for Scientific American, Tim Berners-Lee, who invented the World Wide Web, explained that unlike the web of that era, which was designed for humans to read, the semantic web comprises content that “computers can manipulate meaningfully.”
As NPR noted this year, in web3 “people control their own data and bound around from social media to email to shopping using a single personalized account, creating a public record on the blockchain of all that activity.”
Or as Kara Swisher predicts, “in 2022, we’ll see new forms of social interaction being built on the blockchain, as well as formidable new search (Neeva) and e-commerce alternatives (Shopify) that will slowly leech at the foundations of the larger operations.”
On to the blockchain.
Decentralization
Web3 is decentralized. You don’t need an intermediary. (Well you do, kind of; the cryptographer Moxie Marlinspike explains why here.) But let’s run with the premise of decentralization.
By design, digital currencies like Bitcoin or Ethereum can be exchanged independently of banks. Instead of being money issued by a government (like dollars), records of cryptocurrencies are stored on so-called distributed ledgers, which have no central authority.
Anyone can exchange Bitcoin, Ethereum, and other digital currencies with anyone else in the world without the need to go through a bank or payments processer like Visa, PayPal, or MasterCard. To ensure that a Bitcoin cannot be spent twice, miners lend their computing power to verify others’ transactions. People can transact anonymously.
Decentralized finance (DeFi) refers to financial services that are accessible to anyone with an internet connection. To use a bank or credit card, or to use an app like Robinhood, you need to apply for an account. DeFi is open to anyone. So, for example, anyone can send, receive, borrow, or earn interest on money without a third party, a gatekeeper, or the need to obtain permission.
DeFi leverages Ethereum, a network that developers use to build apps for trading, lending, borrowing and other financial activity. In short, Ethereum harnesses cryptography and the blockchain to offer an alternative financial system.
Smart contracts refer to programs that can be deployed to the Ethereum blockchain. A smart contract allows parties to form an agreement that is moderated by software. Compliance with the terms can be reliably verified on the blockchain. Once a condition is met, the contract is executed. Imagine, for instance, a smart contract for agreeing to sell your house to someone. If the buyer pays the purchase price (in Ethereum), title transfers automatically to the buyer, without any human involvement.
DeFi isn’t solely about finance. Ethereum supports applications for gaming (the creation of digital worlds), technology, and the trading of arts and collectibles.
Nonfungible tokens
The Ethereum network also supports nonfungible tokens (NFTs), which are digital files that confer authenticity on an object, whether it’s a trading card, a video clip, or a piece of digital art. NFTs also confer scarcity by authenticating collectibles. Think trading cards turned into digital files. Whereas Bitcoin is a fungible token (one Bitcoin is just like any other), NFTs are linked to a specific digital asset.
NFTs made news in 2021 when someone who goes by the pseudonym Metakovan paid $69.3 million in an auction at Christie’s for a work of digital art that exists solely as an NFT. (Both cryptocurrencies and NFTs allow people to use them anonymously.) The NBA hosts a popular marketplace for officially licensed digital collectibles that’s called Top Shot. You can buy collectibles of things like digital video trading cards of Kevin Durant dunking.
As the Times’ Kevin Roose, who made one of his columns into an NFT that he later sold on the blockchain, has observed, “NFT fans think the technology could be used to keep track of all kinds of goods in the future — titles to houses and cars, business contracts and wills.”
Note that owning an NFT does not confer ownership of a copyright. (Unless the seller and buyer were to agree to that.) Whoever bought the NFT of a New York Times column does not own the copyright, which still belongs to the Times. In July, Jay-Z sued his former partner Damon Dash for trying to auction an NFT of Dash’s share of the streaming rights to the Jay-Z’s album “Reasonable Doubt.” (The lawsuit is pending.)
As Quartz explains in its guide to NFTs, while an NFT is stored on the blockchain, the metadata that comes with it may be stored elsewhere and, hence, can, in some instances, be altered. There’s also no way to verify that whoever mints an NFT owns or has anything to do with the file.
That can create some thorny questions. One, as Quartz notes, centers on the tie between the code — the NFT — and the work itself. Motherboard explains:
“This is because NFTs are not JPEGs, or tweets, or anything like that; they are cryptographic signatures (an alphanumeric code) that buyers and sellers merely believe is somehow connected to the work in question. Where and how the actual work itself is stored or hosted online is incidental to this cryptographic proof.”
That means in theory, the work itself, which is not hosted on the blockchain, can be changed. Or removed from the server where it’s stored. All by someone who doesn’t own the NFT. That could leave the owner of the NFT with a string of code that doesn’t connect to the asset. A buyer who bought an NFT certified by an auction house like Christie’s or the NBA may be able to sue the seller (the artist, for example), the auction house, or the company that hosts the work of art (or all of them) for breach of contract and/or, possibly, for conversion (you took something of mine entrusted to you that you had no right to take). But still.
Another potential problem arises when people tokenize (meaning make an NFT of ) artwork or other assets they have no stake in. That may be a violation of the creator’s intellectual property. Federal law authorizes copyright holders to obtain so-called takedowns of unauthorized works. But the anonymity that the blockchain offers can get in the way of identifying whoever violated the copyright.
So, if I were to buy an NFT of a photograph that belongs to someone else, the person who owns the copyright could ask the service that hosts the NFT to take it down. Unless the person who sold me the NFT is operating anonymously. Which is why if you buy an NFT that you care about you probably want a reputable third party like Christie’s or the NBA to certify the sale.
And as an attorney who works with rights holders told Motherboard, companies like the NBA or Disney have armies of lawyers who can go after someone who steals copyrighted material.
Suppose I buy an NFT of a photograph of the Mona Lisa. I would own the unique NFT of that photo. But I would not own Leonardo’s painting that hangs in the Louvre. I can later sell the NFT of the Mona Lisa photo to someone else, but I cannot sell the Mona Lisa that hangs in the Louvre because I don’t own it. Which is why most people probably would not pay much for an NFT of a photo of the Mona Lisa. If you’ve visited the Louvre and watched the crowds that gather at the painting, smartphones in hand, you know there’s nothing scarce about that.