Cryptocurrencies, NFTs and Blockchain. These terms have been very popular in the last couple of years. From the viewpoint of a distracted spectator, they entail nothing but confusion, speculation and even hysteria. Many people avoid this subject because they either believe that it will not be of any importance to them or because they think they will not comprehend it anyway. While most people will indeed not make their own blockchain platforms or deal with complex code, it is actually far simpler than many think. Does all of this – NFTs, Blockchain, Bitcoin and their future have a name? Yes, it’s loosely defined by something called the third web.
Web 1.0 and 2.0
Web 3.0, like the name suggests, is the third iteration of the Web or the internet. But what were the first two iterations? Well, mostly, not that exciting – for us at least. Back in the 90s, when the foundations for the first Web were being built, they were considered revolutionary. With the technology being so new at the time, access to the web was only restricted to institutions, such as Universities. Building Web pages was incredibly difficult to do, since there were no third parties yet. This meant that everything had to be done painfully from scratch. The first web was mainly used as a basic database, mostly by scientists, looking to share their work. But that’s really all there was to it.
Web 2.0 ought to ring more bells, since that’s exactly what we have today. Web 2.0 gave way more people access to the internet, which allowed for it to be used a different manner than before. Web pages started to look better and there was a larger social presence. It started with blogs but slowly morphed into the social media that we know today. Next to greater access to the web and a great emphasis on social media, the essence of web 2.0 became its centralisation. Centralisation is the monopoly that companies have over users and their data. This means that if you have a Facebook account and post something, Facebook has the complete authority over how that post is used, since you gave it to them. Sure, you have to agree to their terms (let’s be honest, no one reads those anyway), but if something goes wrong, it’s completely their fault, at least most of the time.
Many people are of the opinion that web 2.0 is inherently flawed, in many ways. The aforementioned monopoly through centralisation is one problem. When a platform messes with your data, you might not even hear the news. The exact events that transpire around your data are not shared publicly, most of the time. The centralisation also means that hacking the database can be pretty easy. These problems and others have brought on new technologies that are supposed to be the backbone of the third Web. The main technology used for this purpose is called Blockchain.
Blockchain
In order to understand cryptocurrencies like Bitcoin or Ethereum, we have to discuss the Blockchain.
When you strip down Blockchain to its bare essentials, it’s only a way to store data. That’s all it is. More specifically, data is stored in blocks, that, when combined, form a chain – hence the name. A block can store data – any data that you could want it to store. In the case of cryptocurrencies, it’s the balances of the users and the transactions that they make. Actually, the balances are given when a user joins the platform, that way, only the transactions need to be specified in the blocks, and you can compute the balance from there. For example, if I deposit $100 to the bank, transfer 50$ to someone else and then deposit another $20, my balance is 100 – 50 + 20 = $70. Bitcoin also works like this. For increased security, the data in the blocks is hashed. Hashing something means putting something through a hash function that spits out a string of characters from the data you’ve given it. This means that a simple string of text like “John gives Amy $20” is put through a function that spits out a long chain of characters that make no sense to us. The point of this is to make it easy to see an alteration in the blockchain. When you change the text to “John gives Amy $30”, the hash is changed completely and will not resemble the old hash text at all.
So, to sum up, this is what a block in a cryptocurrency stores: A transaction and its hash function. Something else is also stored: The hash of the previous function. When you create a new block, the hash of the data of the previous block is also included. This means that when one block is tampered with, the next block will have a different hash from the tampered block. This makes it easy to see what blocks have been tampered with. Here is an example:
Block 1 Block 2 Block 3
Hash1 Hash2 Hash3
--------- Hash1 Hash2
Imagine Block1 was altered, that would alter Hash1 from block 1. But Hash1 from block2 would no longer be the same Hash1 stored in block 1. What if you would just change all hashes? Well, that would take some time, since a blockchain is not stored on a single computer but on many. Those computers are called nodes. So, if you want to alter or hack a block, you would have to change each block (and there can be a lot of blocks) and do the same with at least 51% of all nodes that store the blockchain. I say 51% because once the majority agrees that everything is in order, all nodes must agree. This is called creating consensus. Furthermore, there is something called proof of work, which entails solving a complex mathematical function in order to add a new block to the chain. If you solved the function, you get a reward. In the case of bitcoin, you get bitcoins. This is called mining bitcoin. If you have more computing power, you will have a higher chance of solving the equation first.
So, this is a pretty secure way to store data: No central entity owns it, if you change one thing, you’ll change everything, if you change the whole blockchain on one node, you’ll have to do the same thing on the majority nodes and you have to do the proof of work (which actually takes time) for every block again. This is pretty much impossible to do. This is also why blockchain is considered pretty safe, it’s just a lot harder to hack than traditional databases. However, this also means that making changes is becoming harder, which may be problematic in some cases.
Just to clear things up: Bitcoin is a blockchain platform which just notes transactions of numbers (BTC) on a ledger. These numbers are used as a currency and that’s really all that bitcoin can do. But what if you wanted to store different types of data on blockchain? What if you wanted to store digital assets and trade with them? Well, Ethereum might be more helpful. Ethereum uses smart contracts and tokens to trade a variety of assets. And some of those tokens are Non fungible. They’re called NFTs.
Tokens
In order to understand tokens, you have to understand smart contracts. Smart contracts are basically conditional clauses. If a condition is true, then something else will happen. These “contracts” are basically pieces of code. The bitcoin blockchain supports only one smart contract: Bitcoin and how to transfer it (and of course other important details like mining etc.). But the blockchain itself is not the currency. The currency makes use of the blockchain. Bitcoin can be classified as a digital asset. And that is exactly what a token is. On Ethereum, which is another blockchain, there is a native currency but you can create tokens that represent shares of a company, for example. Tokens take normal assets and just store them on a blockchain. Note that smart contracts don’t have to distribute digital assets. They’re just if-clauses. Also, what I’ve said above basically means that all cryptocurrencies are tokens. However, not all tokens are cryptocurrencies.
Before I move on to NFTs, I should note that you can only get tokens by converting your money into the blockchain’s native currency. This currency has an inherent risk on the market (it’s basically all over the news when someone important says something bad about Bitcoin and its price plummets). Investing into another digital asset after you’ve converted your money into coins is very risky, so even though the whole blockchain thing is nice and all, be mindful of its volatility.
Now, NFTs are arguably the most topical thing I could talk about. What does the NF in NFT even stand for? We know what the T is: Token. NF stands for Non fungible. Non fungible is a synonym for unique. So NFT just means Unique token. While the aforementioned tokens can represent shares which aren’t at all unique, people can set up smart contracts that basically says that you own something irreplaceable on the internet through the blockchain. This can be Art, a piece of music… really anything! The point is that it’s unique.
Problems with the technology
All of what I’ve said above sounds fun and futuristic and exciting, but like all things that seem to good to be true it doesn’t come without its problems. First of all, blockchain is slow. The process that you need to go through to add something new to the chain is just really slow. You need to find the answer to a complex math problem and even then, there’s not enough transactions grouped together. A way to solve this would be to make the tasks less difficult, but overdoing it would take away some of the security that Blockchain offers. Next, and many people probably heard of this: It’s very energy consuming. The entire proof of work process is very slow, so some determined people buy a lot of computers to get the solution sooner. This means that the Blockchain consumes lots of energy, which is obviously bad for the climate. Also, with no one really at the helm, a blockchain platform is pretty difficult to fundamentally change. Another problem is that it’s difficult to delete or fix something once you’ve uploaded it to the blockchain. Meaning if your smart contract has a bug after many people invested coins into it, well… that’s pretty much that.
Investing in tokens as digital assets means double the risk (I already said this above) and NFTs basically have… no value. They’re pretty much worthless, intrinsically, at least. What this means is that if you own an NFT linking to a piece of art, you don’t own it. You have your name on a blockchain that says that you own it but you don’t actually have the rights to do whatever you want with it. If there is someone else with an NFT on a different blockchain pointing to that same item, who really owns it? The answer: Neither person! Blockchains have no real authority over tangible things unless it is verified by a higher authority (which, isn’t the case, most of the time).
Web 3.0
So, as a general definition: Web 3.0 is the third iteration of the Web. It is based on blockchain technology to store data in a decentralised manner. This means that money, texts, pictures and videos will soon all become part of a blockchain.
Note that this is the current outlook on Web 3.0 and that there is no “official” definition for it. But I think that this one is the one that a lot of people would agree with.
Conclusion
The third web uses blockchain to create a new decentralised economic and digital environment. Despite the claims of many, blockchain also has huge issues. The problems of the old decentralised world are replaced with new ones and much of the Crypto market (particularly NFTs) is based on hysteria. However, that isn’t to say that this version of the web doesn’t have a future. The opposite: while imperfect, blockchain is becoming the most popular way to store data.
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