Web3 technology: how does Web3 work?

The internet has undergone significant transformations over the years, evolving from a static, read-only platform (Web1) to an interactive, centralised ecosystem (Web2). While Web2 has enabled global connectivity and innovation, it has also concentrated power in the hands of a few corporations. This centralisation has led to growing concerns over data privacy, security breaches, censorship and a lack of digital ownership. If you're new to the concept, check out our comprehensive guide on Web3 vs Web2 vs Web1 to understand how these internet phases compare. 

Web3, the next phase of the internet’s evolution, promises to restore control to users through decentralisation, blockchain technology and smart contracts. Instead of relying on central authorities, Web3 enables individuals to own their digital assets, interact securely and participate in open, trustless ecosystems.

As this transition gains momentum, it is crucial to understand why Web3 matters and how it is shaping the future of digital interactions:

• Web2’s centralised model has led to privacy concerns, security risks and data exploitation by major corporations.

• Web3 introduces decentralisation, blockchain technology and smart contracts, giving users control over their digital assets and interactions.

• Industries such as finance, gaming, social media and healthcare are being transformed by Web3 innovations.

• Despite its potential, Web3 faces challenges such as scalability, user adoption and regulatory uncertainty, which are gradually being addressed.

The flaws of Web2: centralisation and control

Web2, the version of the internet most people use today, has been instrumental in driving global connectivity, e-commerce, social media and financial technology. However, it has also shifted power to centralised entities, creating an internet controlled by a handful of corporations.

Some of the major issues with Web2 include:

• Data exploitation: Large companies collect, store and monetise user data without transparent consent.

• Security risks: Centralised platforms are prime targets for hackers, resulting in data breaches and financial fraud.

• Censorship and content control: Governments and corporations have the ability to restrict content and control digital narratives.

• Lack of digital ownership: Users do not truly own the content they create, as platforms can deactivate accounts, remove access to funds or change policies without warning.

As concerns over privacy, security and centralisation grow, Web3 presents a new approach that prioritises user sovereignty and decentralisation.

How Web3 gives users true digital ownership

Web3 challenges the centralised model of Web2 by offering a user-centric internet where ownership and control belong to the individual.

This is made possible by blockchain technology, which enables:

• Decentralised applications (dApps): These are apps built on blockchain networks that run across many nodes instead of central servers. They let users interact directly with one another (peer-to-peer), cutting out middlemen like big tech platforms and reducing censorship or control.

• Smart contracts: These are pieces of code stored on the blockchain that automatically execute actions – like transferring funds – once set conditions are met. They remove the need for intermediaries and help ensure transparent, tamper-proof transactions.  

• Token-based economies: Web3 uses digital tokens – such as cryptocurrencies and NFTs (non-fungible tokens) – to represent value and ownership. These tokens let users own, trade or earn from digital assets in a way that’s verifiable and controlled entirely by them, not by a central platform.

Web3 wallets play a key role in this ownership model. They let users store, manage and interact with their digital assets securely, without relying on a central service. Whether it's holding cryptocurrencies, accessing DeFi protocols or signing into dApps, wallets give individuals full control over their online identity and assets.

Blockchain and Web3

One of the most transformative aspects of Web3 is its security-first approach. Blockchain, the underlying technology of Web3, ensures:

• Immutability: Transactions and records cannot be altered or deleted.

• Transparency: Every transaction is recorded on a public ledger, increasing accountability.

• Enhanced cybersecurity: Unlike centralised servers, which are vulnerable to single-point failures, distributed ledger technology (DLT) secures information across a global network.

This trustless infrastructure is particularly impactful for sectors that rely on security and transparency, such as:

• Finance: Blockchain-based solutions reduce fraud and improve financial inclusion.

• Supply chains: End-to-end traceability ensures product authenticity.

• Digital identity: Self-sovereign identities put users in control of their personal data.

Web3 and privacy

Web3 also brings a major change in how users manage and protect their personal data. In Web2, users often give up control of their information in exchange for access to services. This has created a system where platforms profit from user data, often without clear consent or visibility. Web3 flips this model on its head by prioritising privacy, security and self-sovereign identity and strengthens privacy through: 

• Decentralised identity (DID): Instead of creating separate logins for every platform, users can manage a single identity across multiple services, without revealing unnecessary personal data.

• Self-sovereign data ownership: Users control who can access their data and can revoke access at any time. This reduces the risk of third-party misuse.

• Encryption-first design: Many Web3 protocols are built with privacy as a default, using advanced cryptographic techniques to protect user interactions.

This shift gives individuals more control, greater transparency and better protection online, especially in sectors where privacy is non-negotiable, like finance and healthcare.

Web3’s impact across industries

Web3 isn’t just changing how the internet works, it’s expected to transform entire industries. Experts predict its biggest impact in areas like:

Finance: The rise of decentralised finance (DeFi)

DeFi has the potential to reshape traditional banking by offering borderless, transparent financial services without intermediaries. With DeFi, users could:

• Access peer-to-peer lending and borrowing without banks

• Earn yield through staking and liquidity provision

• Trade assets on decentralised exchanges (DEXs) with full control over funds

Gaming: Play-to-earn (P2E) models

Web3 gaming is expected to unlock new ways for players to earn real value from their time and in-game assets. Compared to traditional games, players could:

• Truly own items like skins, weapons and characters through NFTs

• Earn income through play-to-earn mechanics

• Use assets across multiple games, thanks to interoperability

Healthcare: Secure and transparent medical records

Blockchain could enhance healthcare by improving privacy, security and data sharing. With Web3 solutions, patients could:

• Keep their medical records secure and tamper-proof

• Control access to their personal health data

• Share data seamlessly with trusted providers

Challenges ahead

Even with all its potential, Web3 still has a few challenges to overcome before it can go mainstream. Challenges ahead include: 

• Scalability: Blockchain networks need to improve transaction speeds and reduce fees.

• User experience: DApps can be complex for beginners, requiring simpler interfaces.

• Regulatory uncertainty: Governments are still navigating how to regulate decentralised technologies.

Overcoming these challenges

The good news? Developers, designers and organisations across the Web3 space are already working on real, practical solutions to these challenges, making the technology more scalable, user-friendly and compatible with existing systems.

• Layer 2 scaling solutions: Technologies like Ethereum’s rollups improve speed and efficiency.

• More intuitive dApps: Better design and user-friendly wallets improve accessibility.

• Regulatory frameworks: Clearer regulations can bridge the gap between Web3 and traditional finance.

Want to explore these challenges in more detail? In this article, we take a closer look at the realities behind Web3’s biggest hurdles. We debunk common myths and misconceptions and shine a light on the issues that really matter.

The future of Web3

Web3 represents more than just a technological upgrade, it is a shift towards a fairer, more transparent and decentralised internet. As adoption grows, we can expect the following:

• More financial inclusion: DeFi will expand access to banking and investment tools.

• Better privacy and security: Users will regain control over their data.

• New economic models: Blockchain will enable innovative business structures based on decentralised governance.

Explore more on Web3 with Bitpanda Academy

Want to dive deeper into Web3, how it’s shaping the internet, and what role Web3 wallets play in this new digital era? Explore more expert insights in the Bitpanda Academy and stay ahead of the next big shift in digital technology!