The Web3 Paradigm: Open Tech Stack
Web3 refers to the new phase of the internet that develops the concept of digital property by leveraging blockchain technologies. Digital property can be defined as ownership of something of value online, like data, content, representation of money, voting rights, social connections, etc.
For how much we interact with the web, today we own surprisingly little on it (domain names are probably common exceptions). Internet users find themselves in a world where Internet companies preside over their content and data. This has prohibited consumers from owning digital property and directly generating economic value from their digital footprint. The reason for limited digital ownership becomes clear when we examine the web’s current closed structure.
Closed Infrastructure of Web2
Consider a Web2 internet incumbent like Twitter. As the below diagram shows, a typical Web2 company’s technology stack (set of technologies that are utilised together to build any application) will involve:
Centralised private database which stores user data like posts, tags, comments, etc.
Backend code which implements Twitter’s business logic.
Frontend code which implements user interface logic and renders the website.
Essentially, a Web2 company is built as closed infrastructure. Twitter stores user data in its private database, insights from which are then monetised through advertisement sales. Because user data is valuable, internet companies rationally protect user data from being transported to other environments.
Such architecture could be at odds with user interests. For example, if you have 10k Twitter followers, your audience is limited to Twitter. You don’t own your digital popularity because if Twitter shuts your account down, you would need to rebuild your audience elsewhere. Over the last twenty years, this closed architecture has created so called network effects (or more pejoratively ‘walled gardens’) and consolidated internet traffic and value around few oligopolies.
Open Infrastructure of Web3
Web3’s architecture is completely different. The ethos of Web3 is to make the Internet more equitable, not just controlled by a few tech giants. To open up Internet’s existing walled gardens, users i) need rights to their digital property and ii) should be able to freely transport their property to other digital environments. This is exactly what blockchains, Web3’s base layer, enable. Let’s examine the simplified technology stack.
Blockchains (also called Layer 1’s or L1’s) are Web3’s solution to a company database. Similar to private databases, blockchains store data. But they are different in that blockchains are essentially public infrastructure that is not owned or controlled by a single entity. Blockchain data is public for anyone’s viewing, though certain elements are anonymised. Have a browse on www.etherscan.io for entries on the Ethereum blockchain.
Running a blockchain is a collaborative effort: it is co-maintained by validators, co-owned by the holders of the network’s native token, and co-accessed by the seekers of a reliable ledger that will keep a truthful record of past events and current financial standings. Public blockchains like Ethereum are open networks, meaning anyone can participate freely and permissionlessly as a validator, a tokenholder or a user.
Generally, blockchains handle two key functions: consensus and compute.
Consensus is a step that validators (blockchain’s co-maintainers) need to go through to come to an agreement about what goes into the ledger. Validators are collectively responsible for the validation of truth and record-keeping. And for providing this service, they get compensated in the network’s native currency. But you might ask, how can one believe a bunch of random validators to keep a trustworthy ledger? This is the cool part about blockchains. Thanks to some math and careful incentive design, blockchains limit bad actors from overtaking the network.
Second function blockchains provide is compute. Blockchains have an in-built computer called virtual machines which execute pieces of software called Smart Contracts. Smart contracts encode business logic of decentralised applications, the next layer of the Web3 tech stack. See below for a simplified diagram of the Ethereum blockchain, which takes in business logic from apps, carries out computations through the virtual machine, and settles the output on the ledger.
Decentralised applications (also called Dapps): Similar to how the invention of iPhone resulted in a multitude of new apps being built on top, software developers can build decentralised applications called ‘dapps’ on top of blockchains. Just as Web2 applications have backend code which implements business logic, dapps have Smart Contracts, set of conditions that determine how value is moved around.
A transaction that doesn’t need much logic is a simple payment like Alice sending Bob $1000. However, a more complicated transaction might be if Alice sends $1000 to Bob only if Bob posts 1 ETH as collateral (i.e. secured lending). The dapp’s smart contract code will embed such logic, which if built on Ethereum, would get compiled (transformed from human-readable programming language into machine-readable code) to the Ethereum Virtual Machine and settle on the Ethereum blockchain.
Aave is one such example. It is a dapp which acts like a bank. Started in 2017, Aave has attracted over $5.5 billion of liquidity on the protocol. Users can connect their digital wallets (more below) to deposit their crypto such as ETH as collateral to borrow stablecoins (digital assets pegged to the dollar) against it. Any transactions done through Aave are visible on the Ethereum blockchain.
Source: app.aave.com
In the spirit of open collaboration, dapps like Aave typically have their codebase shared on public depositories like Github. This allows for easier code verification and potential bugs in smart contracts to be more efficiently identified. The open-source code also allows others to copy the codebase (called forking) and improve or change it to make a new product. The result is faster innovation because developers can build new things by standing on the shoulders of giants. Contrast this with Web2 companies whose codebase is mostly private. Replicating Twitter will require rewriting the entire codebase which is likely a large amount of work.
Wallets: At the top of the Web3 stack are user wallets. Think of a digital wallet like a bank account, except the assets in one’s account are custodied by the individual rather than a third party like a bank. Morever, anybody can open a wallet without permission just with internet connection.
Different wallets can provide different functionality, but at the core is the ability to view digital assets, transfer them to another account and connect with dapps to engage in other economic activities. This is all done without the help of a trusted intermediary like a bank, thanks to blockchains. Transferring value on the internet is now as easy and permissionless as sending an email.
Putting it all together: Implications of Web3
Blockchains have created a new paradigm for digital ownership. Valuable data, previously ensnared in the private walled gardens of companies, can now live in a secure open environment where digital property rights are assured by the social consensus of blockchain validators.
As the Web3 architecture takes off, the implication on the data monopolies of today could be huge. Over time, value could shift away from their equity to tokens in decentralised networks. Further, the role of intermediaries like banks, who were previously trusted to custody people’s property and assist with value transfer between individuals, could be diminished as blockchain technologies present a credible substitute.