Web 3.0

Lot of news lately about cryptocurrency crashing. I’m not an expert on crypto so I can’t really speak to it as an investing vehicle. Another thing that has been popping up in my newsfeed is the word Web 3.0, so I decided to investigate what Web 3.0 is.

Under that rubric of Web 3.0, there is fintech, defi, cryptocurrency, Bitcoin, NFTs, tokens, smart contracts, blockchains.

I believe fintech is the use of technology and innovation in the arena of finance, possibly to disrupt the old way of doing things. DeFi is a shortened term for Decentralized Finance which operates on the new technology of blockchain and removes the middlemen such as banks and Wall Street. There are probably no regulations, and the removal of middlemen means potentially lower costs.

Undergirding Web 3.0 is the blockchain technology which is hoped to revolutionize the web. Web 1.0 was the early internet age with the world wide web and simple websites. Web 2.0 brought in the social media age with user-generated content. Blogging is more Web 2.0 than 1.0. It is also at this stage that companies started to own large parts of the web. Web 3.0 at this point in time appears to rest on the blockchain technology and proponents hype that the users will become the owners of the data, not the large companies.

Okay, blockchain – I will try to describe this as best as I can but I think I will have to go back to the course that first laid out what blockchain is. “They” call this a “distributed ledger technology” – like an accounting ledger where one logs the statistics or details of the transactions, deals, contracts, whatever. It’s distributed because there are multiple copies of this ledger, so if one piece goes down, there are others to backfill. The chain aspect of this is that each time a new transaction is added to the “block”, it is mathematically woven into the prior transactions, thus the new transaction is “chained” to the ledger. Apparently, this is all done mathematically – I don’t understand that part yet – hopefully later I will get how this works. If someone were to try to get into the ledger to change it, the action would change the mathematics and make the blockchain unusable – the chain would be broken.

I imagine the mathematics is like the checksum done for the ACA healthcare reporting: you run a SHA256 over the file and the program creates a mathematical description of the file. If you change anything in the file, running the SHA256 creates a different mathematical description. This checksum method in the ACA healthcare reporting was a way for the government to make sure that the data transfer had not been corrupted. The person submitting the healthcare data runs a SHA256 program over the file and gets a mathematical code. He sends that code to the government. The government, on its end, runs the SHA256 over the file and compares the mathematical code it gets with the one sent by the transmitter. If both are the same, then the file did not get corrupted during transmission.

I imagine the mathematics of blockchain works similarly.

When a transaction is created, there are people called “miners” who verifies the transaction. I’m kind of weak here on the mechanics but it sounded like a bunch of people rush to verify the transaction and the first person to successfully verify the mathematics, he wins cryptocurrencies. But others also verifies that verification (I think) and eventually, the transaction gets chained into the blockchain. And all other redundant blockchains also update with the latest transaction.

This verification is called “proof of work” (I need to go back and re-learn this part) and this mining consumes a lot of energy. How much I don’t know but it must be significant because it is said that the industry is trying to find an alternative to this “proof of work” mining. So, this mining could exacerbate climate change.

If the industry can solve the energy use, blockchain could be a significant develop and drive a lot of innovations. One innovation is the smart contract which sounds like a contract between two players. Smart contract is an application that executes the contract between two people. These codes reside within the distributed blockchain, carrying out the instructions of the contract. Again, the middleman or third parties are out of the loop with the smart contract doing the execution.

Tokens and NFTs (non-fungible tokens) are “things” that either represents a promised service or some kind of digital goods. NFTs are currently used by artists – like painters and such – as some kind of original digital art with a permanent record of provenance on the blockchain, enabling everybody to determine who was the originator of the art and who owns the art. I believe people can invest and trade in NFTs like stock or regular art. Some artists are making a lot of money with NFTs, but I do wonder how this pans out over the long term. In order for people to buy your NFTs, they have to be convinced that those NFTs will appreciate in value over time and that, to me, is an iffy proposition.

Okay, I got to wrap up. Cryptocurrencies, which by the way relies on blockchain technology, are crashing now. The crypto fanboys have been religiously promoting cryptocurrency as a way of getting around the government regulating money. They are probably the ultimate libertarians: get the government out of my business! The problem is, the average person really does want the government to regulate, especially in regard to money, because the minute they start losing money, they call for government to step in and set out rules.

So, with crypto crashing, people may pull back and decide to sit out the cryptocurrency market until there are enough regulations to ease people’s concerns.

Whenever I hear that criminals are flocking to cryptocurrency, I think “don’t get in until there are strong government oversight”.