What is Web3?

Web3, also known as Web 3.0, represents the next generation of the internet, aiming to decentralise power, enhance digital ownership and provide users with greater control over their data and online interactions. Unlike Web 2.0, which is dominated by centralised platforms, Web3 leverages blockchain technology, decentralised finance (DeFi) and smart contracts to create a more open, secure and user-centric internet. Web3 seeks to eliminate intermediaries, enabling direct and transparent interactions between users.

• Web3 shifts control from centralised platforms to users, allowing them to own their  data, identity and digital assets without intermediaries.

• It is powered by blockchain, enabling peer-to-peer transactions, smart contracts and decentralised applications (dApps) for greater transparency and security.

• Web3 wallets give users full control over their assets, allowing them to trade, earn and interact with DeFi and other decentralised services.

• While Web3 offers new opportunities, challenges like usability barriers, regulatory uncertainty, and security risks must be addressed for mass adoption.

Web3 explained simply

Imagine using social media, shopping online or sending money to a friend. In today’s internet, every action goes through a central platform – whether it’s a tech giant managing your data, a bank processing your payment or a social network deciding what content you see. These platforms control your access, store your information and can restrict or monetise your interactions.

Now, imagine an internet where you control your data, identity and assets without relying on intermediaries. This is Web3 – a decentralised version of the web where users own their digital presence. Instead of platforms managing everything behind the scenes, Web3 uses blockchain technology to enable peer-to-peer transactions, self-sovereign identities and decentralised applications (dApps).

Centralised vs decentralised systems

One of Web3’s key innovations is shifting from centralised to decentralised systems. In Web2, control is concentrated in the hands of tech giants like Google, Facebook and Amazon, which manage platforms and user data. In contrast, Web3 allows users to own their data and digital assets. Web2 relies on intermediaries such as banks, social media companies and cloud providers to facilitate transactions and services, whereas Web3 enables peer-to-peer interactions without middlemen. 

By removing central control, Web3 gives power back to users, creating a more open, secure and user-driven internet. This shift didn’t happen overnight. Web3 emerged as a response to the increasing centralisation of the internet, where a handful of companies gained control over data, platforms and online interactions.

A brief history of Web3 (and the internet)

The internet has undergone significant transformations, evolving from a static information network into a dynamic, interactive space – and now towards decentralisation. Each phase has shaped how we communicate, transact and engage with digital content:

• Web 1.0 (the static web): The early internet was primarily read-only, with limited user interaction and static websites.

• Web 2.0 (the social web): This phase introduced dynamic, user-generated content, social media and platforms like Facebook, YouTube and Wikipedia, making the internet more interactive but also more centralised.

• Web3 (the decentralised web): Web3 is a response to the dominance of centralised platforms, focusing on user control, digital ownership and decentralisation.

How does Web3 work?

Web3 is built on decentralised networks, primarily using blockchain technology. Here’s how it works:

• Blockchain: A public, tamperproof ledger that records transactions securely. Instead of a central authority verifying transactions, a network of computers (nodes) ensures their accuracy.

• Smart contracts: Self-executing contracts that run on the blockchain. They automatically enforce agreements without the need for intermediaries, making transactions faster and more secure.

• Decentralised networks: Unlike Web 2.0, where platforms like Google and Facebook control user data, Web3 distributes control among its users, removing reliance on central authorities.

• Cryptocurrencies: Digital currencies, such as Bitcoin (BTC) and Ethereum (ETH), serve as native payment systems and incentives for network participation.

• Decentralised identity: Web3 enables users to own their digital identity, reducing reliance on passwords and third-party logins.

Common components of Web3

Web3 encompasses several key components that make it distinct from previous iterations of the internet:

• Decentralised applications (dApps): Applications that run on a blockchain or peer-to-peer network, offering greater security and transparency. Examples include decentralised exchanges (DEXs) and blockchain-based social networks.

• Non-fungible tokens (NFTs): Unique digital assets representing ownership of specific items or content. NFTs are used in digital art, gaming and collectibles, providing verifiable proof of ownership.

• Decentralised finance (DeFi): Financial systems that operate without traditional intermediaries, enabling peer-to-peer financial services such as lending, borrowing and trading through decentralised protocols.

Want to understand Web3 in a nutshell? Watch our video!

Potential benefits and applications of Web3

Web3 introduces a range of benefits and new use cases that reshape how people interact online. By decentralising control and enabling direct peer-to-peer interactions, Web3 empowers users in ways that were not possible in previous versions of the internet.

User ownership and control

Instead of relying on corporations to manage personal data and digital assets, Web3 gives individuals complete control over their information, identity and finances.

Enhanced security and privacy

Blockchain technology ensures data is encrypted and tamper-proof, reducing the risk of hacks and data breaches. Unlike Web2 platforms that monetise user data, Web3 enables self-sovereign identity, where users decide how and when their data is shared.

Decentralised finance (DeFi)

One of Web3’s most impactful applications is DeFi, which allows users to access financial services, such as lending, borrowing and trading, without banks or traditional intermediaries.

Token-based economies

Cryptocurrencies and NFTs enable new models of ownership and monetisation. Artists can sell digital art directly as NFTs, gamers can own and trade in-game assets, and communities can govern projects using decentralised autonomous organisations (DAOs).

Web3 wallets and financial autonomy

To interact with decentralised applications, users need Web3 wallets, which store cryptocurrencies, NFTs and digital identities. Unlike custodial accounts on centralised exchanges, Web3 wallets allow users to fully control their assets, reducing dependency on third parties. Some wallets, known as smart wallets, even include features like automated recovery and transaction approvals for better usability.

With a Web3 wallet, users can:

• Store and manage cryptocurrencies and NFTs securely

• Connect to dApps for DeFi, gaming and trading

• Sign blockchain transactions without relying on a central authority

• Maintain full ownership of their digital identity, ensuring greater privacy and control

Want to learn more about Web3 wallets? Watch our video or read our dedicated guide.

Challenges and concerns

Despite its potential, Web3 also comes with challenges that need to be addressed before mass adoption can happen:

• Usability barriers: Many Web3 applications require technical knowledge, making them less accessible to the average user. 

• Scalability issues: Blockchains currently face limitations in transaction speed and cost. Solutions like layer-2 scaling and new consensus mechanisms are being developed to address this.

• Regulatory uncertainty: Governments worldwide are still figuring out how to regulate Web3 applications, DeFi platforms and cryptocurrencies. The lack of clear regulations creates uncertainty for users and businesses.

• Security risks: While blockchain technology is secure, smart contract vulnerabilities and phishing attacks remain a concern. 

Conclusion

Web3 represents a paradigm shift in how we interact with the internet, offering more transparency, security and user control. Decentralising ownership and removing intermediaries opens up new possibilities for finance, identity management and online interactions. However, for Web3 to reach mainstream adoption, challenges around usability, regulation and security need to be addressed.

Explore more on Web3 with Bitpanda Academy

Want to dive deeper into Web3 and how it’s reshaping the internet? Learn more about blockchain technology, decentralised finances (DeFi) and smart contracts and explore expert insights in the Bitpanda Academy to stay ahead of the next major shift in digital technology!