The internet is getting an upgrade. Through the use of blockchain technology, online artists, builders, and creators are re-imagining the different ways that we can connect, transact, and interact virtually. But between newly coined buzzwords and business models surrounding Web3, NFTs, and more, it’s clear that the only way to successfully navigate this new digital world is by getting back to the basics.

What is Web3, and how does it work? These are important questions every business and entrepreneur will soon need to answer, especially as they plan their approach to entering the space. Let’s review these Web3 basics and learn how you can leverage its new digital tools.

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What is Web3?

We can start with the BIG question – What is Web3? I can almost guarantee that if you asked 10 different “Web3 people” this question, you’d get 10 different answers. It’s a tough one to answer, but here’s my definition:

Web3 is an online ecosystem of digital assets, tools, and platforms built on a multitude of blockchains.

As we dive into the specifics of Web3, the picture will become a lot more clear – but the biggest takeaway you should keep in mind is that Web3 isn’t just one thing. It’s a combination of things! Like the internet we use today, Web3 is simply an ecosystem of digital things such as social media, blogs, online stores – but now, all based on blockchain technology.

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What makes Web3 so special?

But what makes Web3 so special? What is the benefit to reinventing the internet with blockchain technology? If it ain’t broke, don’t fix it!

That’s a fair sentiment, and people commonly refer to Web3 as a “solution looking for a problem.” But the entire “point” of Web3, that makes it a definitive upgrade to the internet we know today, is digital ownership.

Blockchain facilitates digital ownership.

It’s what blockchains are good at! The Web3 ecosystem is built around establishing ownership over intangible assets like money, media, and content, and taking them with you around the internet. Chris Dixon, a general partner at venture capital firm a16z, and Web3 thought-leader, first wrote that what distinguishes Web3 from both the early internet, and the internet we know today, is the ability for a user to own something online.

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For that reason, Web3 is commonly referred to as the “read/write/own” generation of the internet, where our current ecosystem only allows us to read and write content online. As the ecosystem evolves, we will see new tools and communities crop up making use of this newly unlocked capacity for digital ownership.

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What is the ‘Web3 ecosystem’ made of?

Within this ecosystem, I’d say there are three major components that make up what we refer to today as “Web3.” These are: blockchain networks, digital tools, and online communities.

Each component of this ecosystem directly impacts the other; where you wouldn’t have certain online communities, without first developing a particular digital tool, that ultimately relies on an underlying blockchain. They’re all related!

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#1: Blockchain Networks are the Foundation of Web3

You might already be familiar with blockchain networks. These are chains such as Bitcoin, Ethereum, or Solana. They make up the technical infrastructure of Web3, and enable everything we know as a “blockchain” or “Web3” tool.

You can think of a blockchain network being almost like a major data company such as Google or Amazon. Almost everything on the internet today is built using Google Cloud or Amazon Web Services. If these platforms disappeared, so would countless websites and apps.

Similarly, blockchain networks are the underlying databases that everything in Web3 is built on top of. However, one key difference is that, because blockchains are widely distributed across millions of computers globally, blockchain-based applications can actually run independently in the event of a shutdown. This is made possible by decentralization; a key trait of any worthwhile blockchain.

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#2: New Digital Tools are Enabled by Blockchain

Every blockchain network specializes in a certain type of interaction. Some blockchains are better for financial transactions, while others are better for interacting with media and content. As a result, builders utilizing certain blockchains have started to create new sets of tools that help facilitate these workflows on a specific chain.

Platforms such as Ethereum are aiming to be the “Swiss Army knife” of Web3 – it has an endless number of potential uses, made possible by a Web3 tool known as the “smart contract.” Other platforms, such as Tether, seek to be stable, digital forms of money, made possible by a unique type of cryptocurrency called a “stablecoin.”

Each of these use-cases are vastly different, and there is a lot of intersection between blockchains in terms of capabilities. However, what each platform ultimately becomes known for is largely up to the types of tools the community using a blockchain wind up creating, and how the chain’s structure handles the resulting transactions.

For example: Ethereum, Tezos, and Polygon are three blockchains that use smart contracts. Although they have this in common, Tezos and Polygon aim to make their transaction fees a lot more affordable than other chains like Ethereum, and also seek to minimize their impact on the environment. These traits attract a different kind of audience to each chain – such as artists looking to publish green, low-impact digital art on Tezos; or game developers looking to incorporate many in-game actions via Polygon. These are specializations arising from the types of communities that form around each chain’s toolkit.

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#3: Online Communities Leverage Web3 Tools for Coordination

As builders create new digital tools, reliant on blockchain networks, new online communities begin to emerge that make use of them – changing how they interact with each other, and within industries.

The clearest example of this would be how the fine art community has begun to embrace NFTs as a tool to facilitate the exchange of digital art. Additionally, the way finance and investment communities have fully integrated cryptocurrencies into their investment portfolios. Even community organizers are now leveraging token-based governance models to coordinate mutual aid funds and charitable donations.

Web3 tools have the potential to disrupt entire industries, completely by virtue of the communities that use them. These communities ultimately determine the course of what a blockchain might become known for, and can subsequently take part in the decision-making process of a network by owning tokens that confer voting power.

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How does Web3 work?

All of these components sound great – networks, toolkits, communities – amazing! Web3 really isn’t just one thing, but a combination of things – got it. Here’s another big question: How does it all work?

What is blockchain?

First, to understand how Web3 works we need to answer this question: what is blockchain? Like I mentioned previously, blockchains are like massive databases. And do you remember when I said blockchains are good at facilitating ownership? Well, there are three traits of blockchain that make it especially good at this. Blockchains are effective resources for establishing ownership when they are:

• Public
• Decentralized
• Immutable

As a massive, shared database, blockchains literally enable everyone to “get on the same page.” But keep in mind that not all blockchains are created equal. These are key aspects of a worthwhile chain; but each chain is different and will make some concessions depending on its goals.

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#1: Blockchains are public ledgers

You may have heard someone refer to a blockchain as a “public ledger” before. What does that mean? Simply put – a public ledger is just something that logs information into one place and makes it accessible for anyone to read and use. That’s exactly what blockchain is! (With some additional bells and whistles.)

Above all else, a blockchain’s data being public for anyone to read is what makes it useful. Where a blockchain’s transparency makes it useful for establishing ownership, the additional bells and whistles like decentralization and immutability make it useful for securing that ownership. (More on that later.)

As a public ledger, blockchain is invaluable when facilitating digital ownership because it enables anyone to see the entire lifecycle of a transaction. This includes being able to  trace the movement of valuable assets like money, art, and other media – including data about where it originated, where it ended up, and all the stops it made along the way.

Those utilizing the blockchain to conduct business can therefore use this public ledger to not only review the provenance of whatever product they are buying online, but also whether or not the source of the funds, and the documentation for their purchase are legitimate.

Additionally, this publicly accessible data is foundational for businesses and organizations relying on blockchain technology to identify different groups of people. NFT-based communities, for example, use crypto-tokens to give access to websites, group chats, digital events, and physical spaces.

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#2: Blockchains should be decentralized

Decentralized blockchains are those that are not owned or controlled by any single company, government, or organization. They are widely-distributed, and rely on a network of computers around the world to make decisions, changes, and updates. Some blockchains are “more decentralized” than others.

Chains like Solana are actually run as private companies – meaning they’re not so decentralized because they’re operated by singular entities. Solana specifically also has a hierarchical structure with a CEO and investors, who make decisions on behalf of the network. While this may allow Solana to work more quickly than other chains, it poses valid concerns from users about security, privacy, and consistency.

There have been several instances now where the Solana blockchain was actually halted – meaning no new data was being added. These pauses are devastating to the various businesses and users that rely on it, since their operations are also frozen until the chain resumes. This is only possible on Solana because of the concessions they’ve made to decentralization; in this case, Solana would rather maintain tight control over the chain so that they can more directly address security concerns.

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#3: Blockchains should be technically immutable

“Immutability” refers to blockchain data being permanent. When a blockchain’s data is immutable, this means that it cannot be altered once it has been written. This is critical for a blockchain’s adoption because it reflects how much confidence a user, business, or organization can have in the data as a source of truth. You can’t rely on a platform that constantly changes the rules!

But how is this achieved? So much of the internet as we know it today is easily copy/pasted, or cut and deleted. How exactly can a blockchain keep permanent records? This is achieved through what is known as a "consensus mechanism" and is a massive part of how blockchains are kept secure.

Without getting overly technical, people who contribute computing power to a blockchain have earned the right to vote on big decisions. In the world of blockchain, majority rule = consensus. However, herein lies a potential gap in security for blockchain immutability. If all someone needs is the majority of votes to make a change, then doesn’t that mean the data isn’t immutable? That it can be changed? That’s correct!

While blockchain data is often considered to be permanent, having a 51% majority-vote is one of the theoretical ways things could be undone. While this is extremely unlikely, it is still technically possible on many chains, and is a direct result of how large the chain’s network is. A smaller network can be more easily manipulated.

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Web3 is Getting Everyone on the Same Page

When a blockchain is public, decentralized, and immutable, it possesses three critical factors that make it an effective resource for establishing and securing digital ownership. In effect, this enables blockchain to serve as a single source of truth regarding who owns what, and all of the history associated with a digital asset – getting everyone on the same page. This is otherwise known as digital provenance.

Provenance is at the core of ownership

This is what recordkeeping is, both online and offline, and blockchains do this exceptionally well. However, no matter how many records – on a blockchain or not – that say “you own this,” it is ultimately a matter of trust that will confer ownership.

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Trust that records are accurate; trust that everyone upholds their part of the deal; and trust that assets are legitimate. As blockchain becomes the new standard for ownership, the potential for exploiting and breaching trust in online transactions may be reduced not only as a result of increased transparency (via provenance) but also automated mechanisms for exchange (via blockchain-based tooling.)

This is the future of the internet – a new Web3 ecosystem using blockchain technology to facilitate digital ownership. A future where these owned assets are also interoperable with the various networks, tools, and communities within the ecosystem; ultimately made possible because of blockchain’s public, decentralized, and immutable data.