As the internet continues to evolve, the integration of these technologies promises a more inclusive, decentralized, and transparent digital future. But what are NFTs and the Web3?
In order to understand Web3. First, we need to know about Web1 and Web2, and how they set the stage for Web3.
The Journey from Web1 to Web3
Web1: The Dawn of Digital Era
Around 1983, the foundations of the internet were laid, but the real transformation began in the early 90s. This is thanks to innovations by Tim Berners-Lee like HTML and web browsers. This phase, spanning until the early 2000s, is termed 'Web1' – the internet's 'read-only' stage. During this time, websites were mainly informational, resembling digital brochures.
Web2: The Rise of Interactivity
Following Web1, we entered the Web2 era. Here, the internet shifted from 'read-only' to 'read and write'. Users could now interact and contribute to the web. Features like online reviews became common, and the birth of social media platforms transformed how we communicate and share content online. Giants like Facebook and Twitter began to dominate the digital space.
Web3: A New Frontier
Now, we're witnessing the onset of Web3, a transformation driven by blockchain technology, aiming to create a more decentralized internet. Web3 envisions a digital landscape where creators, communities, and everyday users have more control and influence.
The most important difference is that Web2 is about selling as opposed to Web3 which is about adding value to your customers, creating new experiences and engaging with your community.
Breaking Down Blockchain Technology
What is Blockchain Technology?
Blockchain technology stands as the cornerstone of web3. Each facet of web3 we discuss rests upon the foundational technology of blockchains. As defined by the Cambridge Dictionary, a blockchain is a digital record tracking all transactions of a cryptocurrency (like Bitcoin), continuously growing as new blocks are added.
How Does Blockchain Work?
Imagine blockchain as a sequence of transaction-filled blocks, each linked over time. Each block can contain numerous transactions, verified by multiple computers, ensuring authenticity and security — akin to a banking system, but without the banks.
Traditional vs. Blockchain Transactions
In conventional finance, transactions between banks are facilitated through methods like wire transfers and systems such as SWIFT. In contrast, blockchain eliminates the need for banks, decentralizing the transaction process. This system depends on a network of computers for transaction verification, preventing misuse and fraud.
Different Blockchains
The term “the blockchain” often misleads into thinking there's only one, but numerous blockchains exist, with more emerging regularly. Bitcoin, Ethereum and Cardano are the most well-known. These primary blockchains are known as layer 1 blockchains, forming the base of the blockchain world.
On top of these, layer 2 blockchains (e.g., Polygon, Arbitrum) function primarily as scalability solutions. With growing popularity, blockchains can become congested, driving up transaction costs — often referred to as 'gas prices'. Layer 2 blockchains help manage these issues by batching numerous transactions, thereby reducing individual transaction fees on the main blockchain.
Cryptocurrency and DeFi Explained
Cryptocurrency
Cryptocurrency, or crypto, refers to digital currencies like Bitcoin, developed on public networks and secured by cryptography. Crypto was the inaugural application of blockchain technology and has become synonymous with the currency of web3. With over 10,000 active cryptocurrencies and around 300 million users, crypto has evolved to parallel traditional currencies like the dollar or pound in digital finance.
Decentralized Finance (DeFi)
Emerging from cryptocurrency, DeFi (decentralized finance) presents a new model for financial transactions. Initially, cryptocurrencies were primarily for trading, but as the space matured, more structured financial activities like lending and payments emerged. Smart contracts enabled traditional finance activities to migrate to web3's decentralized ecosystem, free from the influence of banks and governments. The DeFi sector allows users to execute tasks ranging from simple token swaps to more complex lending activities, generating interest.
Comparing DeFi and Traditional Finance
DeFi projects and protocols continuously seek to replace traditional financial intermediaries. This involves using cryptocurrencies for all financial operations, sidestepping banks, and other institutions. Conventional finance typically involves centralized entities for processes like loans, often requiring thorough checks on credit history and personal finances. DeFi, however, operates through pooled user funds for loan issuance, utilizing processes like 'liquidity pooling' for money provision and exchange.
Non-Fungible Tokens (NFTs)
Non fungible means that something cannot be exchanged for another item because it is unique. For instance, one piece of art is not equal to another. Both have unique properties. Fungible items on the other hand can be exchanged for one another, for instance $1 or 1 bitcoin is always equal to another.
Fungible means something is able to be exchanged or substituted and will hold the same value. It's interchangeable like the dollar, gold, casino chips, Bitcoin or Ethereum. If I lend you $100 cash and you return to me $50 banknotes, I'm fine with that, because even though they are different, they hold the same total value. They're fungible.
Βut what is an NFT? NFTs are tokens that live on a blockchain and represent ownership of unique items.
So how can you prove who's the original owner when everyone has an identical copy of the file? NFTs solve this problem. Imagine that you made a piece of digital art, essentially a JPEG on your computer. You can create (or mint) an NFT out of this. The NFT that represents your art, contains a bit of information about it, such as a unique fingerprint of the file, a token name, and a symbol. This token is then stored onto a blockchain, and you the artist become the owner.
Now you can sell that token by creating a transaction on the blockchain. The blockchain makes sure that this information can never be tampered with. It also allows you to track who is the current owner of a token and for how much it has been sold in the past.
It's important to note that the artwork itself is not stored within the NFT or the blockchain. Only its attributes, such as the fingerprint or hash of the file, a token name and a symbol, and optionally a link to a file hosted on IPFS.
Now, here's where NFTs become weird. When you buy an NFT that represents artwork, you don't get a physical copy of it. Most of the time, everyone can download a copy for free. The NFT only represents ownership and that is recorded in a blockchain, so nobody can tamper with it.
Now aside from digital arts, NFTs can also be used to sell concert tickets, domain names, rare in game items, real estate and basically anything that is unique and needs proof of ownership.
For example, Jack Dorsey the founder of Twitter sold his first tweet as an NFT. Anyone can see that tweet on his profile, but now only one person can own it, and that person paid over $2.9 million for it.
Now, why are some NFTs worth millions? Well, their worth is determined by what people are willing to pay for it. If I'm willing to pay $100 for a particular NFT, then it's worth $100. Prices are driven by demand, so be careful because an expensive NFT becomes worthless if nobody wants to buy it.
How do they work technically? NFTs are built on smart contracts that live on a blockchain. In this case, the contracts store the unique properties of the item and keeps track of current and previous owners. Lastly, an NFT can even be programmed to give royalties to the creator, every time it exchanges hands.
NFTs vs. Cryptocurrencies
The primary distinction between NFTs and cryptocurrencies lies in their fungibility. NFTs are unique and cannot be interchanged, akin to unique trading cards, each valued based on rarity, condition, etc. In contrast, cryptocurrencies and traditional currencies are fungible, meaning each unit is interchangeable and holds the same value as another of the same kind.
Conclusion
In the evolving landscape of the digital age, the progression from Web1 to Web3 signifies our journey from basic, static online information to an interactive, decentralized digital space. With Web3, backed by blockchain technology, the internet is no longer just a place to retrieve and post information but a realm where financial, artistic, and communicative transactions can be conducted seamlessly and securely. Central to this transformation is the rise of cryptocurrencies and the inception of Decentralized Finance (DeFi), which offers an alternative to traditional financial systems, sidestepping banks, and other intermediaries.
But perhaps the most emblematic symbol of this new era is the NFT technology. These digital tokens, unique and verifiable on the blockchain, encapsulate the concept of provenance in the digital world, allowing artists, creators and brands to monetize their work in novel ways and users to assert ownership over singular digital assets. As the internet continues to evolve, the integration of these technologies promises a more inclusive, decentralized, and transparent digital future.