Web3: blockchain, cryptocurrencies, NFTs – where will it end?

There’s a buzz currently around Web3. “What’s that?”, you ask. You’ve doubtless heard of cryptocurrencies and perhaps now also about blockchain and NFTs. These are all part of the same picture, but how do they relate to each other and where will they lead us?

The 1-2-3 of the web

Web 1.0 was the term web inventor Tim Berners-Lee coined for the original web of static websites delivering content to users, which he referred to as the “read-only web”.

In 2004 Tim O’Reilly popularised the term Web 2.0 describing the rise of websites emphasising user-generated content, participation and interoperability with other products, systems and devices (Berners-Lee’s “read-write web”). This is the web we know today where the web is used as a platform to deliver centralised services and engage users interactively. It has come to be dominated by Big Tech.

In 2006 Berners-Lee used the term Web 3.0 to refer to the “semantic web” (a term he had coined in 1999), a newly-structured world wide web which could be read directly by computers.

He launched a decentralisation project called Solid, based around personal data stores or “pods”, over which individuals retain control. The project aims to radically change the way web applications work, resulting in true data ownership and improved privacy, by developing a platform for linked-data applications that are completely decentralised and allowing users to have full control of their own data, including access control and storage location. He has formed a company called Inrupt to help build a commercial ecosystem to fuel Solid.

Equal Experts describe how Berners-Lee’s vision hasn’t yet come to complete fruition, but there have been technological advancements and the increased realisation that our data provides the immense value which Big Tech consumes and hoards.

In 2008 the Bitcoin blockchain was created as a solution for a decentralised, digital currency and in 2014 Ethereum followed as a fully decentralised computational platform. These ideas gained interest in 2020 and 2021 from cryptocurrency enthusiasts, large technology companies and venture capitalists, leading to the so-called Web3 vision, based on blockchain technology.

Technological innovation

Web 3.0 is built largely on three new layers of technological innovation: edge computing, decentralised data networks and artificial intelligence.

With Web 2.0 data is stored in large data centres; with Web 3.0 data is moved out to the “edge” – to you and me and our devices and appliances. Networks are decentralised, peer-to-peer, where data owners (you and me) retain control.

Fabric Ventures considers Web 3.0 to be “the next large paradigm shift in internet applications”, describing it as:

“a leap forward to open, trustless and permissionless networks: ‘Open’ in that they are built from open source software built by an open and accessible community of developers and executed in full view of the world. ‘Trustless’ in that the network itself allows participants to interact publicly or privately without a trusted third party. ‘Permissionless’ in that anyone, both users and suppliers, can participate without authorisation from a governing body.”

The technology which predominates is blockchain.

Blockchain – a glossary

A blockchain is basically a decentralised, networked database, built on peer-to-peer connections. Every device on the network handles a tiny portion of the computation and communication happening on the network, creating a serverless online network. The technology itself is referred to as blockchain.

Each record in a blockchain database is called a block, and the database can only be amended by adding another block, linked to the previous block. Hence the database is literally a chain of blocks, a blockchain.

A blockchain is often referred to as a distributed ledger.

A digital asset is a non-tangible asset that is created, traded and stored in a digital format.

A token is a digital asset stored securely on the blockchain using cryptography, an encryption technique that assures authenticity by removing the possibility of counterfeiting or double-spending.

The entire ecosystem of blockchain tokens is often referred to as crypto.

A cryptocurrency is the native asset of a blockchain, the best known of which are Bitcoin and Ehereum.

A non-fungible token (NFT) is a blockchain token that is unique, as opposed to a fungible token like a Bitcoin which is the same as any other Bitcoin. Any digital work, or any physical goods that can be digitised, eg via a photo, video or scan, can be turned into a non-fungible token which takes the form of a metadata file containing information encoded with a digital version of the work.

NFTs are powered by smart contracts which handle the transferability and verify the ownership; these are programs stored on a blockchain that run when predetermined conditions are met.

The case for

As we’ve seen, Web 3.0 networks are designed to be decentralised, open and transparent, trustless and permissionless – all of which we can assume to be good things. Blockchain also makes life difficult for hackers, as to alter one transaction, they must alter not only the relevant block in every node in the blockchain separately but also all the subsequent blocks in the chain; otherwise discrepancies in their links may be obvious or rejected entirely.

The upsides to Web 3.0, shared by many optimists, were well stated by Charles Silver on Forbes in early 2020:

“Web 3.0 will bring us a fairer internet by enabling the individual to be a sovereign. True sovereignty implies owning and being able to control who profits from one’s time and information. Web 3.0’s decentralized blockchain protocol will enable individuals to connect to an internet where they can own and be properly compensated for their time and data, eclipsing an exploitative and unjust web, where giant, centralized repositories are the only ones that own and profit from it.”

More recently, others, like Lifehacker, have become more cautious:

“While the possibilities of peer-to-peer communication are exciting, the blockchain is thus far best known for powering cryptocurrency and NFTs, both of which are important Web3 technologies in their own right. Many people (rightly) see NFTs and crypto as temporary ‘tech bro’ distractions at best, or outright scams at worst. However, there are examples of NFTs and cryptocurrencies being used in ways that are beneficial to artists and general users.”

The case against

The hype around cryptocurrencies and NFTs has reached fever pitch and the case against crypto is fast gathering pace. There are two fundamental concerns.

First, blockchain transactions consume large amounts of energy. Each transaction requires more storage than in a centralised system, as the electricity required is multiplied by the number of nodes on the blockchain, each of which processes almost as much data as the centralised system would. Also, authenticating a transaction requires tracking its history all the way to its origin in order to secure the blockchain by making it unfeasible to validate fraudulent transactions. Consumption is so significant that it is estimated that Bitcoin uses more electricity than many countries.

The second major area of concern relates to the fact that, whilst crypto assets can perform useful functions, they are in practice currently very largely minted and traded for unregulated speculative investment purposes, mainly premised on getting in early in the expectation that prices will continue to rise and cashing out later to someone more gullible. Whilst prices of crypto currencies (and latterly NFTs) have been volatile, they have remained on a sharply ever-upward trend, but this is a classic bubble which inevitably will burst, leaving smaller, less sophisticated investors in its wake.

As Martin O’Leary on Watershed puts it:

“The promotion of cryptocurrencies is at best irresponsible, an advertisement for an unregulated casino. At worst it is an environmental disaster, a predatory pyramid scheme, and a commitment to an ideology of greed and distrust. I believe the only ethical response is to reject it in all its forms.”

Stephen Diehl is a software developer and a vociferous and articulate critic of Web3:

“Web3 is that technical manifestation of this empty grasping for a messianic solution that’s going to solve all our problems. It’s entirely rational to want to build a more decentralized technology stack and to aspire to a more egalitarian internet, a more equitable society, and a better world. However web3 is not the golden path that leads us to that world, it’s the same old crypto bullshit just packaged up in a sugar pill to make it easier to digest.”

Meanwhile, whatever the merits or demerits, where there are business opportunities, there will be lawyers involved. It is hoped the above provides a good grounding and the links below will provide more depth.

Internet for Lawyers Newsletter

Edited by Nick Holmes