What I’ve learned about web3 so far

I was initially turned off by web3 because of the laser-eyed, diamond-handed cryptobros flooding Twitter with shitty JPEGs and Pepe memes.

It all struck me as juvenile “for the lulz” trolling. Crypto felt like a pyramid scheme built on fuzzy tech. I didn’t want anything to do with it.

Heck, even thinking back to the early days of Bitcoin, the whole thing felt like a gong show of FOMO. As the hype grew, the value grew, because supply & demand. It was a gold rush!

But why the hype? Why were people building custom rigs to mine a virtual currency invented by an anonymous creator? Did they really think it was going to replace fiat currency? That it was going to overthrow our modern financial system?

The whole thing felt like a prologue to a sci-fi anime from GAINAX.

Thing is, as time went on, more people I knew and respected moved into the space. In the last few years, especially, I couldn’t help but pay attention. And in the last few weeks, I went down the rabbit hole. I started reading up on blockchain tech, NFTs, DAOs, metaverse(s), et al.

To my surprise, I found it interesting. Hell, even exciting. Underneath the hype-fueled digital gold rush of day-trading monkey avatars lays the foundation of something real.

The web3 hat trick

What follows is my high-level interpretation of what the pillars are for web3, and why they’ve captivated my interest. Forgive me if it’s overly simplified or inaccurate in places… I’m still wrapping my head around everything. Learning in public and all that.

Blockchains & cryptocurrency

Blockchains are decentralized ledgers.

Multiple servers, called nodes or workers, each have a copy of the ledger (the chain). Validation of a ledger entry (a block) is determined through consensus. Every participating server on the network checks their copy of the ledger to confirm that the entry is legitimate.

The ledger is designed in a way so that previous entries cannot be modified. They’re permanent. That creates an audit trail that anyone can view. To protect privacy, ledger entries are anonymized by code.

Because the ledgers are decentralized, it’s harder — but not impossible! — to mess with them. That’s by design. You can hack or knock out a few servers (nodes) that run the ledger (chain), but the system lives on. Bad ledger entries on a handful of nodes will still be overruled by the rest of the network, thanks to the consensus system.

In other words… imagine you have a bunch of people working on an Excel spreadsheet. Instead of working from a single shared file, they each have a separate copy of the spreadsheet.

When new data is added to the spreadsheet, the group checks with each other to make sure their local copy is updated, and that their local copy matches the others.

Servers are incentivized to participate via virtual currency.

The currency (aka tokens) is native to whichever chain the server participates in. In return for doing computational work, the server receives a currency payout.

This is where the broad subject of tokenomics comes into play. I’m not a finance guy, so I start losing the plot here, but the gist of my understanding is this: there needs to be a balance of incentives between all participants so the chain is stable and sustainable.

Cryptocurrency was only the beginning.

Bitcoin brought us blockchain tech, but it was designed explicitly for currency. Ethereum came along, took the blockchain tech, and basically said, “what if we used this for more than just virtual currency?”

Ethereum opened the door to smart contracts (code that runs on the blockchain), enabling distributed apps (dApps), NFTs, et al.

Unfortunately, as interest and activity picked up, we hit the bottleneck on inefficiency and environmental impact. Basically, if every server on a blockchain network needs to validate every transaction, it’ll be very slow and resource-intensive.

Work is being done to address those issues. Ethereum is making changes to their system. New projects are coming online to act as intermediaries between Ethereum and user apps. And there are projects aiming to succeed Ethereum, improving the tech while maintaining compatibility.

TL;DR = Blockchain technology is a major part of the underlying infrastructure for web3.

NFTs & DAOs

NFTs are unique virtual certificates, or proofs of ownership.

Non-Fungible Tokens (NFTs) aren’t images! It just happens that images were one of the easiest things to connect NFTs to. It worked out nicely, because we could show off that ownership through social media. When we’re all online, where we live and what we wear doesn’t have as much clout — so NFTs step into that need to show off.  That led to the snowballing hype, FOMO, and scams that’ve dominated the conversation around NFTs and web3.

The proof of ownership runs on blockchain tech.

Specifically, the vast majority of NFTs run on the Ethereum blockchain, which is why you need to purchase Ether ($ETH) to buy NFTs. The cost of Ether is prohibitive for most people, and is a major barrier to entry for mass adoption. Additional chains (e.g., Polygon) are trying to address that, by being interoperable with Ethereum, but without some of the costs associated (e.g., creators needing to pay $ETH to add their work to NFT marketplaces).

DAO membership is an emerging utility of NFT.

2021 was the year of shitty JPEGs, and admittedly, there’s not a lot you can do with a shitty JPEG. There’s no real difference in utility — that is, what you can do — between the JPEG you bought on OpenSea (the biggest NFT marketplace) and the copy that someone has from right-clicking your image.

There needs to be additional perks for owning an NFT! This is the part I’m really excited about. When folks talk about NFT utility, they’re talking about “things that I can do by owning this token”. It’s like saying, “what are the benefits of me having a membership?”

That’s where the DAOs come in. Decentralized Autonomous Organizations. NFT ownership is your access into those clubs, and that starts tying into loyalty programs and membership incentives. What stuff do you get for owning an NFT? What access do you get? What powers/capabilities do you get? What status does it give you?

TL;DR = NFTs are unique virtual certificates that run on blockchain tech.

Metaverses

Metaverses are virtual worlds.

My adventures on the web began with gaming forums and fan sites. I played a ton of Pokémon, Quake III, Call of Duty, Enemy Territory, Grand Theft Auto, and World of Warcraft. I made friends through these games and online communities, many who I’m still in touch with years later.

I see it happening with the next generations. Whether it’s League of Legends, Minecraft, Fortnite, Roblox, or something else, these virtual worlds are an escape, a place to hang out with your friends while you’re stuck at home under COVID lockdowns.

In these worlds, you are your avatar.

How you show up, the gear you wear, the virtual environments you spend time in. It’s a digital representation of you, whether real or idealized. But all of that is tied up in whatever world you inhabit.

For example: My warlock in World of Warcraft, a character I’ve spent over a decade with, is locked in Azeroth. Ditto for everything I’ve collected in the game. I wish I could transfer it out, or at least sell some if it, since I’m barely playing anymore.

NFTs represent your virtual assets.

If game developers had NFTs that corresponded to in-game assets, players would have the freedom to move their stuff from one world to another, or the freedom to sell their stuff on the open market.

As the idea of virtual worlds, and virtual environments, moves beyond gaming to other use cases, across worlds on screens or in AR or VR, NFTs become the interoperable standard. It’s not about being a cash grab — though revenue would certainly be part of the biz case — it’s about enabling trade for something digital.

New opportunities for digital creators.

There’s a long history of artists and developers creating cool or useful things to extend the functionality of existing software. In Grand Theft Auto, fans created San Andreas Multiplayer — a free PC mod — years before GTA Online was ever a thing, and in World of Warcraft, fans created UI add-ons that Blizzard later rolled into the game as core features.

How are these folks compensated? Through donations, sponsorship, maybe a Patreon, or if they’re lucky, some stable corporate backing that lets them do their work full-time.

I’m not suggesting that NFTs are going to replace any of these other compensation methods. But it’s a powerful addition to the potential revenue streams. Creators and developers can contribute their work to these virtual environments. In return, they get a stake in it.

We have a precedent here, too, with Valve’s Steam Workshop (now a decade old!), a marketplace where creators can share and sell mods.

Now imagine if something like that existed, but across games, across platforms? If you created, say, a piece of gear in an MMO that transformed into something else when transported to a different environment?

And what if instead of it being one marketplace, where they take a predatory cut, the transaction could happen on any number of exchanges, and the exchanges have to compete to win your business?

TL;DR = Metaverses open infinite possibilities for trade & commerce.

What’s next?

web3 is in its very early days. There’s a lot of volatility. Cryptocurrency dominates the conversation, followed by NFT hustlers. I fully expect regulators to swoop in, and for projects to fail or consolidate. But that doesn’t undermine my faith in where things are going.

Two years ago I made a tweet that picked up some traction. I said that the 2020’s would bring us more niche communities of interest and purpose.

I still believe that. And I believe that web3 is how that happens.

I don’t hold any currency or NFTs yet. Like I said above, I’m not a finance guy, and the $ETH cost is out of my comfort zone. So I’m lurking, listening, and taking notes.

I have a separate profile for web3 stuff, which feels like a comfortable return to the pseudonymous  early web, where identities were disclosed only after trust was built.

A few projects that have my close attention:

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So that’s where I’m at. What did I get right? Wrong? Let me know on Twitter.

Otherwise – have a great week!