Some Features that Make Web3 Standout.
1. It Gives Financial incentives.
The buzzword “Web3” always has a way of bringing cryptocurrency into the conversation. This is because cryptocurrency plays a big role in many of these protocols. It provides a financial incentive (tokens) for anyone who wants to participate in creating, governing, contributing to or improving one of the projects themselves. These protocols may often offer a variety of different services like computation, storage, bandwidth, identity, hosting, and other web services commonly provided by cloud providers in the past.
People can make a living by participating in the protocol in various ways, in both technical and non-technical levels. Consumers of the service usually pay to use the protocol, similarly to how they would pay a cloud provider like AWS today. Except in web3, the money goes directly to the network participants.
In this, like in many forms of decentralization, evidently, intermediaries are cut out.
Many web infrastructure protocols, such as Filecoin, Livepeer, Arweave, and The Graph, have utility tokens that govern how the protocol operates. These tokens are also a form of reward to the service users at various levels. Even native blockchain protocols, such as Ethereum, work in this manner.
2. Decentralized Finance
Decentralized Finance (DeFi) is centered on Decentralized Applications (DApps) often accessed via a Web3 enabled browser plugin or programs, such as MetaMask and other wallet connectors, enabling users to interact directly with the blockchain via a digital wallet. Transactions are made directly between participants, mediated by smart contract programs, rather than through a centralized intermediary like a bitcoin exchange or regular securities exchange on Wall Street. These smart contract programs, also known as DeFi protocols, are often constructed and maintained by a community of developers.
Many of these DApps can communicate with one another to form complicated financial services. Stablecoin holders, for example, can lend assets like USD Coin to a liquidity pool in a borrow/lending protocol like Aave, and allow others to borrow those digital assets by depositing their own collateral, which is usually greater than the loan amount. The protocol modifies interest rates based on the asset’s demand at any given time.
Other DeFi protocol are Pancake on Binance Chain, Uniswap on Ethereum, Paraswap on Polygon, which are Decentralized Exchanges or DEXs, all running on various blockchains.
These DEXs encourages users to create liquidity pools in exchange for a share of the trading fees made by traders transferring tokens in and out of the liquidity pools, rather than using a centralized exchange to fill orders.
Uniswap for instance allows for the trading of hundreds of different ERC20 tokens issued on the Ethereum blockchain. These liquidity pools allow users to swap one token to another, in a fully decentralized manner, while maintaining control over their funds. At the same time, liquidity providers are encouraged to deposit tokens for a portion of the fees generated by the exchanges. After having pooled their tokens, liquidity providers may remain completely passive as the smart contract takes care of automatically adjusting the liquidity-providing logic depending on the current market price.
Thus, DEXs are powered by Automatic Market Makers(AMM) which are based on mathematical formulas, making it possible to estimate the exchange rate between two assets by considering the liquidity present on the protocol.
Because no centralized party runs Uniswap (the platform is ultimately governed by its users), and any development team can leverage the open-source software.
Also, crypto infrastructures like Bitpowr enable users to integrate easy, anonymous, and secure international payments and transactions into web3 applications.
Unlike the current financial system, users do not have to go through the traditional numerous, friction-filled steps to interact with and participate in the network. All they need to do is download or install a wallet, and they can start sending and receiving payments without any gatekeeping.
3. A new way of building Governance
DAOs (Decentralized Autonomous Organizations), are an alternative way to build what we traditionally thought of as a company, are gaining tremendous momentum and investment from both traditional developers and venture capital firms. These organizations are tokenized, and they change the concept of organizational structure by providing real, liquid, and equitable ownership to a wider number of stakeholders, as well as aligning incentives in novel and exciting ways. For example, Friends with Benefits is a DAO of web3 builders and artists, is about a year old, has a market cap of around $125 million and recently received a $10 million round of investment from a16z.
Tokens also give rise to tokenization and the creation of a token economy. Consider the present condition of software development. Someone has an idea, but they need money to get started. They raise venture capital and distribute a portion of the company’s stock to get the funds. This investment creates misaligned incentives right away, which will make it difficult to build out the optimal user experience in the long run.
Also, if the company ever does become successful, it will take a very long time for anyone involved to realize any of the value, often leading to years of work without any real return on investment.
Instead, imagine a new and exciting project that solves a real problem is announced. From the beginning, anyone can contribute to its development or invest in it. The company announces the release of x number of tokens, of which 10% will be distributed to early builders, 10% will be sold to the general public, and the remainder will be set aside for future contributor payments and project funding. Stakeholders can use their tokens to vote on changes to the project’s future, and those who contributed to its development can sell some of their holdings to profit after the tokens are released. People who believe in the project can buy and hold ownership, and people who think the project is headed in the wrong direction can signal this by selling their stake. In contrast to buying equity in private or centralized businesses where a lot are often cloaked in secrecy, activities are publicly open and completely anonymous eliminating the issues of trust or security.
This is already happening in the web3 space vivid examples are:
Radicle (a decentralized GitHub alternative) which allows stakeholders to participate in the governance of their project.
Gitcoin is another that allows developers to get paid in cryptocurrency for jumping in and working on Open Source issues and projects.
Yearn allows stakeholders to participate in decision making and voting on proposals.
Uniswap, SuperRare, The Graph, Audius, and countless other protocols and projects have issued tokens as a way to enable ownership, participation, and governance.
DAOs could encompass an entire post in and of themselves, which we will look at in the next article but for now, let’s just say that they are the future of building products and companies.
4. A Better Way of Identification
In Web3, identity works much differently from what we are used to, the technology may become one of the most important features of Web 3. The point is that Web 2.0 is infested with cybercrime of all kinds, from identity theft to click fraud.
It occurs because the connection between two computers has not been properly authenticated. With Web 2.0, a server never knows for certain that the client software accessing it is what it claims to be, the browser has no way of knowing whether the server and files it is accessing are the ones it intends to access.
However, if everyone involved in such an interaction had a verifiable identity, deception and fraud would be much more difficult to perpetrate because each ID must be linked to a unique credential, such as a birth certificate, individuals can only have one verifiable identity with Digital IDs. Organizations, too, can have only one verifiable identity. Everything else (hardware and software) involved in a client-server interaction can be directly linked to a unique ID belonging to an individual or an organization.
Also in most Web3 apps, IDs are linked to the user’s wallet address.
Unlike Web2 authentication techniques like OAuth or email + password, wallet addresses are fully anonymous unless the user chooses to link their own identity to it publicly. If a user uses the same wallet for various dapps, their identity is also instantly convertible between apps, allowing them to build up their reputation over time.
Protocols and tools like Ceramic and IDX already allow developers to build self-sovereign identity into their applications to replace traditional authentication and identity layers. The Ethereum Foundation also has a working RFP for defining a specification for “Sign in with Ethereum” which would help provide a more streamlined and documented way to do this going forward.
Evidently, it’s undeniable that Web3.0 technologies are fast-growing and making the internet more equitable. It is also providing users with a high level of autonomy and anonymity against identity risks or crises etc and rewarding with incentives for being a user of the technology.