What is the relationship between blockchain and Web3?
Published on 06/11/2023 by David Jani
This article was originally published on 17/05/2022.
Blockchain and Web3 (also known as Web 3.0) are said to be the next steps in the development of the internet, bringing with them numerous technological advances. Whilst these are interconnected technologies it is not always clear how they link to one another. This article explains how they are associated.
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Keeping up with emerging technology trends is crucial for small businesses to avoid being left behind in the market. With Web3, blockchain platforms, and cryptocurrency gaining ground in the public consciousness in recent years, they may be innovations that companies consider adopting.
Yet, how does this work, how do blockchain and Web3 interconnect and how could they potentially help small and medium-sized businesses achieve their goals? To find out, we dive into Web3 and blockchain’s meanings, studying what they do, and how applications using these systems may be adapted by businesses.
What is Web3?
Web3 is predicted to represent the latest cultural and technological shift for the internet. The main trend of Web3 is to move towards a distributed and, ultimately, decentralised World Wide Web.
The term “Web3” was first coined by Gavin Wood, a co-founder of the decentralised software platform, Ethereum. In an article posted in 2014, he outlined Web3’s meaning and the vision for the technological trends of the shift.
The hope of Web3 advocates is that it will eventually make the Internet truly egalitarian and reduce reliance on a few big companies, platforms, and intermediaries for essential services online.
What this means in practical terms is an online infrastructure where transactions, digital assets personal data, and information sharing will be managed and protected cryptographically via machine-to-machine processes across a distributed network.
For example, instead of relying on banks to confirm transactions or requiring your information to be processed by an organisation, processes will be self-governed by stakeholders using technology such as blockchains to independently manage these jobs themselves instead.
This could allow individuals to complete trustless and permissionless transactions or exchange secure personal data without a third party or middle-man company needing to securely validate the process or store the information on their proprietary database.
Did you know?
Traditional payment processing software providers are increasingly incorporating Web3 elements into their platforms, allowing businesses to explore the possibilities offered by the evolving trend.
For example, recent FinTech start-ups, such as Revolut or Monzo, incorporate some Web3 elements such as access to cryptocurrency exchanges into their services.
What’s the difference between Web2.0 and Web3
Web 2.0 (or Web2) and Web 3 are two of the big developmental shifts in the evolution of the internet that have both come about thanks to new technologies and systems.
Gartner defines Web 2.0 as “the evolution of the Web from a collection of hyperlinked content pages to a platform for human collaboration and system development and delivery”. This change was heavily focused on user-generated content, that proliferated thanks to the rise of social media.
Web3 on the other hand is a later development of the internet. This moves it away from a centralised system dominated by big tech companies to a more decentralised and democratised system.
What is a blockchain?
A blockchain is a digital distributed ledger that contains data secured with cryptographic encryption, which is stored as informational blocks across numerous servers (which are known as nodes in this process).
Blockchain is a key component of Web3 infrastructure, which is necessary to facilitate trustless transactions and allow users to make secure transactions that can be verified without the need for a centralised financial entity or bank.
It is important to note that not all blockchains are equal, however. The technology may be designed for widespread distribution across a network of node servers, as is seen with widely available services such as Bitcoin.
Yet many smaller blockchains exist which are shared between a series of trusted nodes privately. These allow information to be kept securely among a network of entrusted individuals.
How are Web3 and blockchain connected?
Web3 and blockchain may sometimes be thought to be one and the same. However, despite their similarities, there are some important differences between these two concepts.
The theme that connects these two concepts is in fact Web3 itself, as blockchain is a key Web3 technology. Web3 is the general term for the technological shift towards decentralised digital assets and processes. Blockchain, on the other hand, is a part of the broader umbrella of Web3 technologies, which facilitates secure, decentralised cryptographic data sharing.
Did you know?
It is quite common to see Web3 and blockchain solutions discussed adjacent to the financial services sector. However, financial technology (or FinTech) innovations encompass many other developments in addition to decentralised networks. Our explainer looks in detail at how FinTech works and some of the tech it uses.
Is Web3 and blockchain technology right for SMEs?
Most Web3 applications work on the principle of decentralisation using a series of nodes and/or a blockchain to encrypt and store data. This is used instead of a single proprietary server belonging to an intermediary company.
It offers many advantages, namely giving businesses much more individual control over their transactional and user data rather than relying on big companies to process and store it securely.
However, there are a few reasons that businesses could be hesitant to adopt Web3 and blockchain right now.
What might be holding businesses back from adopting blockchain and Web3?
At present, many elements of Web3 are still being figured out, not least how their transactions fit into national governance and lawmaking structures.
There are currently plans by the UK Government to introduce more legal frameworks, as well as consultations on the introduction of legislation to regulate cryptoassets. However, as of February 2023, this is still being drafted and developed.
The lack of regulation does, of course, lead to some worries for Web3 early adopters. As the technology is still new and the law has yet to fully integrate with its processes, users could be left concerned about the risks they might face from the lack of legal recourse they might have.
Additionally, there are still many barriers to entry such as an unfamiliarity with blockchain and Web3 technology and a lack of expertise or a knowledge base existing within a company.
Yet, numerous fledgling Web3 small and medium businesses (SMBs) and decentralised applications (dApps) are appearing on the market. These are able to provide the expertise and services necessary to help companies adopt these new technologies faster.
What opportunities exist for businesses that embrace Web3 and blockchain?
There are many opportunities available for businesses with specialities that lend themselves well to the adoption, understanding, and implementation of Web3 projects.
This could be the case for market surveillance providers, network security companies, traditional financial services, and those able to provide analytics, amongst others. With the potential for Web3 processes to become more commonplace in the market, it’s worth considering how to position businesses more suited to this shift.
What are the main Web3 trends to watch?
There are a number of technologies that are being used and developed as part of the shift towards Web3. Knowing and following the evolution of these can help companies keep on top of the growth of this trend.
To keep up to date with these developments, companies should consider keeping an eye on the following Web3 examples:
One of the biggest trends associated with Web3 is cryptocurrency. Web3 crypto payments work on blockchain technology, which can be used to validate and process transactions. It allows individuals to hold and exchange a digital currency outside the mainstream international banking system.
Decentralized finance (DeFi)
Decentralized finance works similarly to cryptocurrencies in that financial information is exchanged on a secure ledger without the need for banks to confirm a transaction. This allows peer-to-peer financial transactions and even the ability to sell financial products such as loans or mortgages using a blockchain.
For example, to borrow money using DeFi, users would download and use a finance dApp to source a lender rather than applying for a loan at a bank or building society.
A major aim of Web3 is to speed up the digitisation of legal documents to facilitate the use of smart contracts. A smart contract is securely exchanged and validated on a blockchain, allowing assets such as homes to be paid for in cryptocurrencies. Contract terms are enforced via the blockchain to ensure that parties comply with their obligations.
What are the downsides of Web3 and blockchain?
Proponents of Web3 such as Gavin Wood like to sell the Web3 trend on the basis that it champions “less trust, more truth” than the current Web2 paradigm currently does.
However, whilst the technology involved is showing a lot of promise, there are a number of challenges it has yet to overcome. Some of the key disadvantages of using Web3 currently include the following:
- There are fears that Web3 technology such as blockchain can have an impact on the environment due to the amount of computing power needed to run it. However, it is thought that these problems can be overcome as the technology itself and greener environmental energy policy develops.
- Many companies lack the expertise to fully utilise Web3 effectively right now.
- Cryptographic transactions are currently slower than those provided by banks.
- Despite claiming to give power back to its users, many of the entities behind the funding and control of essential Web3 tools are themselves big financial corporations and tech companies.
- Whilst Web3 makes data harder to hack, it isn’t completely unhackable. The cryptographic ledger may itself remain secure but the trading exchanges and software clients that manage the transfer of transactional data can be a viable target for hackers.
What is the future for blockchain and Web3?
Web3 and blockchain might not be something businesses can exploit fully today but it is a trend that companies may want to keep a close eye on in the coming years.
Web3 is also a trend that could gain higher adoption in some form or another. Therefore it is wise to consider how it might fit into the future functions of your business.
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