Web3 101: Part IV- What Are Cryptocurrencies For?Aug 23, 2021·Last updated on Aug 23, 2021
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While the traditional web profits off of its users, Web3 pays its users.
We know - this sounds too good to be true. And that’s because we are all so used to the way in which the current web operates. The websites and digital services we rely on today do not make their money by providing us, the users, with the best experience. They make their money by grabbing our attention and harvesting our data. This creates a great product to sell to advertisers, and ensures that investors and owners see some healthy returns. Everyone’s happy.
Well, everyone except the users. We’re left with a system that turns us into the product while it enriches those who own it.
So, how does Web3 correct this? By making the web’s users its owners.
The Cost of Today's Web
At this point in our Web3 101 series, we have covered how internet behemoths thrive off of user data ad nauseam. It is this user data, our user data, that serves as the fuel to the modern web. This data economy is made up of many companies we are familiar with, like Google and Facebook, as well as a litany of others most of us have never heard of. All together, the data economy is worth trillions of dollars and creates the foundation for today’s web.
So, while it may seem like we have all of these free websites and apps to use, that is a facade. We are, in fact, paying with our data. Not only that, but by handing over our data to every site we use, we are compromising our own privacy and security. We leave packages of our personal information all over the web, just waiting to be picked up by hackers. This constant data harvesting is ultimately a threat to our digital lives.
Needless to say, users are left out in the cold. This reliance on ad revenue has led to a digital world where creating a great user experience doesn’t necessarily equate to turning a profit. Because of this, the incentives of digital businesses are no longer in alignment with what is good for the end user.
Clearly this system could use some rebalancing. But with the immense capital behind this online advertising world, how does Web3 expect to institute a new way of doing things? It starts with making users, owners, and investors one in the same.
Users Become Owners
Starting with the invention of Bitcoin, the crypto world has blurred the lines between users, owners, and investors. The potential impact of this is massive, but may not be immediately evident. Let’s look at Bitcoin itself to see this is in action.
Bitcoin & Blockchain
Bitcoin is the world’s first cryptocurrency, created in 2009 by pseudonymous programmer, Satoshi Nakamoto. Other digital currencies existed prior to Bitcoin, but they all suffered from one big pain point - they required a central entity.
Bitcoin sought to remove this need for a central entity, along with the single point of failure and potential for manipulation that they often introduce. In order to achieve this, Satoshi invented an ingenious technology, now known as blockchain. We covered blockchain in our previous Web3 101 article, but here’s a quick review.
Blockchain is a decentralized, distributed, public ledger. Essentially, it is a secure way to record and keep track of information without the use of a central authority. Instead, it relies on its network of users to add, verify, and store information themselves. This is the core technology on which Bitcoin and other cryptocurrencies are built.
How Does Bitcoin Work?
Blockchain removes the need for middlemen, but in doing so, removes the very entities who typically fund and operate products and services in hopes of profit. The invention of Bitcoin solved this riddle. It works like this:
- Bitcoins are created through mining - a process in which certain users, called miners, compete to solve complicated mathematical puzzles. Finding the answer to these puzzles requires specialized computers that generate trillions of guesses every second.
- Every time a miner solves one of these puzzles, they are actually adding a batch of new transactions to the Bitcoin blockchain, in what are called blocks. This is similar to a bank updating their own financial records. In exchange for performing this work, the miner receives a block reward, which is a chunk of freshly created bitcoins.
- This mining process is the only way new bitcoins are added to the supply. By mining blocks, which supports the network, users receive payment from the system itself. This directly incentivizes users to support the network.
This is a very high-level overview of how Bitcoin works, and you can find a more detailed history and breakdown in our Story of Web3 article. Still, this illustrates Bitcoin’s ability to create a decentralized workforce. Not only that, but this workforce’s sole job is to support and maintain the network. In fact, their income depends on it. Unlike the skewed ad revenue model used by the traditional web, there is no way for a Bitcoin miner to harm the network and still profit from it.
The cherry on top of all of this? These miners, along with anyone who buys bitcoins, are the owners of the Bitcoin network. By allowing anyone to invest in it, Bitcoin has created a system that operates more like a community owned co-op than a traditional corporation. There is no one at the top calling the shots and looking to make a buck at the expense of the network’s user base. Bitcoin’s users, owners, and investors are one in the same.
Cryptocurrencies as Incentives
In this light, we can see that cryptocurrencies are not just speculative assets, stores of value, or mediums of exchange. Their true purpose is to incentivize individuals to maintain publicly owned tools. By recruiting individuals to invest in and support the decentralized web, it is able to forgo the reliance on ad revenue that runs the traditional web.
While Bitcoin may be limited to financial use cases, there are plenty of other blockchain networks whose decentralized workforces create and maintain all sorts of user-owned tools. The most prominent of these is Ethereum.
First proposed in 2013 by Vitalik Buterin, Ethereum introduced additional functionality to the blockchain fundamentals established by Bitcoin. What sets Ethereum apart from Bitcoin, though, is its smart contracts.
A smart contract is self-executing code that lives on the blockchain. In the same way blockchain removes middlemen from the web, smart contracts remove middlemen from individual agreements, and replace them with code. The introduction of smart contracts has allowed for more complex tools to be created on the blockchain. When you take a collection of smart contracts and add a user interface, you get a decentralized application, or dapp.
On the surface, dapps like Uniswap or Audius look like any other applications you would use on the traditional web. But behind the scenes, the way in which they operate is very different.
Similar to Bitcoin and Ethereum rewarding their users with bitcoins and ether, many dapps also reward their users with their own native token. Depending on the dapp, users can earn tokens by contributing in a number of ways, such as providing liquidity to a crypto exchange, curating artwork, or even playing games.
In addition to their financial value, many of these tokens also give their owners governance over the dapp itself. Tokenholders have the power to propose, vote on, and execute changes to the dapp. By rewarding users with these tokens, dapps not only pay their users, but incentivize them to play a larger role in their development and maintenance.
Users are truly the owners and operators of the decentralized web.
We All Own Web3
By allowing users to be the investors, owners, and operators of the applications they rely on, Web3 is restoring balance to the digital world. Cryptocurrencies are curing the web of its ad revenue addiction, removing the need to collect and sell user data. You, me, and everyone else who wants to see the digital world thrive finally have a real seat at the table.
Do you want some more good news? Because Web3 removes the need for our data to be collected, we now have ownership over it. And it’s still very valuable. In our next Web3 101 article, we’ll look at how you can monetize your own data, or finally keep it all to yourself.