What are Cryptocurrencies, DeFi, NFTs, Metaverse and Web3 ?19th February, 2022 (4:32 PM UTC)
One day you wake up and it seems everybody is talking about this “Metaverse” thing or “NFTs”, and you think “what did I miss?”. Don’t worry, you are not the only one. In order to understand it, we have to go way earlier and follow the timeline:
- the Internet (Web1, Web2, Web3)
Everything started with the ARPANET project in 1970: a network of computers all over the US to share information during the Cold War, mainly for military use. In the following 10 years (official date January 1st, 1983), that little project evolved into the worldwide network used by both public and private sectors, known as the Internet. That’s what it really is: hundreds of submarine cables connecting all the computers in the world.
The collection of documents that are accessed via the Internet is the World Wide Web (WWW), created in 1990 at CERN. The earliest version of the Internet is called Web 1.0 and was “read-only”: made of static HTML pages and users received information passively without any kind of interaction.
Then the era of social networks arrived, bringing the so-called Web 2.0, allowing users to interact and collaborate with each other through social media. Six Degrees (1997) is considered to be the very first social networking site, but there wasn’t much interaction mostly due to the lack of people connected to the Internet as networks were limited. This second phase of the Internet properly started in 2004 with the first worldwide social networks like LinkedIn, MySpace, Facebook. The era of the “sign-up/log-in”: users could generate information by creating content in a virtual community, and collected data grew exponentially thanks to web and mobile apps. However, all that information is owned by the tech companies that convert data into cash by selling to advertisers, without sharing profit with the users. This is why Web 2.0 is said to be centralized, an Internet dominated by corporations that provide services in exchange for your personal data, in which we’ve given up our privacy for cool apps. The picture you posted a few minutes ago on Instagram isn’t owned by you, but by the company behind the platform, we don’t own anything. To be precise, the only digital asset that can be bought, registered and, therefore, owned on Web 2.0 is a domain (i.e. www.mydomain.com).
The advent of Blockchain technology changed the game, leading the Internet to its third phase: Web 3.0, a decentralized system controlled by no one who can monetize your personal data, instead you can do that. Profits made by platforms on the Web 3.0 are distributed to their users as an incentive to contribute to decentralized governance. For instance, an app might pay you for some personal information, so the profit would go to you and not to the third party running ads on the home page. Imagine:
a marketplace for data (like OceanProtocol)
a social network that rewards you to be an active user (like Steemit)
video platforms that pay you for watching (like DTube)
a browser that values your privacy with money (like Brave)
an online filesystem that pays you for storing files on it (like IPFS)
Play-to-Earn videogames, so-called “GameFi” (find them all here)
This is where we are now, the beginning of a new era in which you are the only owner of your data and your time, and you can monetize them. The main protagonists of the next scene will be our beloved Artificial Intelligence, Decentralized Apps (“DApps”, apps to interact with the Blockchain, like the ones listed above), and Decentralized Autonomous Organizations (“DAOs”, companies controlled by the community instead of a chairman).
In a nutshell, the Blockchain is a secure and decentralized database.
More precisely, the Blockchain is a distributed database, shared among the nodes of a computer network, that stores information electronically and guarantees the fidelity of data without the need for a central controller.
But if there isn’t a centralized control, how can it be safe?
Good question… the database is continually copied on every computer of the network, so if 1 person over 4 tries to cheat the data, there are 3 others that can verify what’s correct and what’s not.
More in detail, the Blockchain is a growing list of records (“blocks”), that are linked together using cryptography. Blocks have certain storage capacities so when filled, they are linked to the previous block, forming a chain of data. Since every block contains information about the previous one, once recorded the data cannot be altered retroactively without altering all subsequent blocks. That makes Blockchains resistant to modification.
Technically, each block is made of: a cryptographic hash of the previous block + a timestamp that proves that the data existed when the block was published + the data in the record (i.e. transactions) + a random password called “Nonce” (“number only used once”) which determines the complexity of the Blockchain.
Blockchain was first invented in 1991 around the idea of implementing a system where document timestamps could not be altered. But its first big application was with Bitcoin (2009), acting as a digital ledger (a giant spreadsheet) for the recorded transactions, this is why Blockchain is also known as Distributed Ledger Technology (DLT).
Cryptocurrencies are nothing more than monetary transactions registered on a Blockchain.
Acting as digital coins (or “tokens”) whose ownership records are stored and verified in the Blockchain ledger, crypto money has 3 main features:
it doesn’t exist in physical form (like paper money)
it is not issued by a central authority (decentralized)
it is not backed by any commodity such as gold or silver (so-called “Fiat money”)
In 2009, the first decentralized cryptocurrency, Bitcoin, was created by Satoshi Nakamoto, or at least that was the name on the paper Bitcoin: A Peer-to-Peer Electronic Cash System.
In Florida, 2010, occurred the first known commercial transaction when a programmer bought two pizzas for ₿10k.
But if not issued by a central authority, how is a crypto token generated?
Another good question… cryptos are mined. Every time network actors (miners) validate block data (transactions) according to some predefined rules (Proof-of-Work system), they get rewarded with the network token (Bitcoin) for “auditing” the Blockchain, so new coins enter into circulation. The bigger the network, the safer it is. It would take a supercomputer as big as the moon for one person to cheat all the other miners and modify the data stored in the Blockchain.
On January 3rd, 2009, the Bitcoin network came into existence when Satoshi Nakamoto mined the genesis block (block number 0), which had a reward of ₿50. After that, he had mined about ₿1 million before disappearing in 2010, leaving the project in the hands of the Bitcoin Foundation (as of today ₿1=$50k).
Based on the Bitcoin code, other cryptocurrencies started to emerge, so-called “AltCoin” (as for coins alternative to the main one). Today, there are more than 10k other cryptocurrency systems, you can find them all on CoinMarketCap (if it ain’t here, it’s a scam).
Behind a new digital coin, there usually is a tech project involved with the Blockchain and the decentralization of something. In fact, in the crypto universe, just like in the stock market, there are two types of investors: traders and “holders”. A trader looks only at short-term oscillations of the prices and buys/sells multiple times in a day. On the other hand, a holder does “value investing” by taking long-term positions on tokens linked to projects with potential value. The latter requires a lot of research as new projects appear every day, and you don’t wanna put money on a token invented this morning by some teenagers just for fun. For example, DTube coin is the token generated by the Blockchain of the aforementioned decentralized video platform. At the moment, it’s valued at $0.30… is it a good investment? Who knows, depends on whether you think people are willing to switch from YouTube to DTube and how serious the project is (i.e. age and scope of the use-case, contacts and website of the team, country of domain, how active is the community…).
The most important digital coin after Bitcoin is Ethereum, created in 2013 (source code here, all mined blocks here). Ethereum is leading this new Web 3 revolution by applying Blockchain decentralization to everything, not only transactions. Nevertheless, the most genius idea those guys had was that even code itself can be decentralized and that’s what Smart Contracts are: a set of rules encoded and permanently placed on the Blockchain (using the Solidity programming language). As a result of that, we are now witnessing some new phenomena:
DApps, open-source applications made of Smart Contracts used to interact with the Blockchain. For instance, we can read from DTube’s full code how their video recommendation system works, do you know how YouTube’s one works? Anyway, have fun checking out the most used DApps.
DAOs, decentralized organizations based on Smart Contracts, with no need for a CEO because everything is run by the community. Each token gives a vote and there are no company secrets because everything is open-source. It’s still unclear if a business model like this can work in the long run. A famous controversial case is The DAO, a venture capital fund launched in 2016 that raised $150 million which was hacked and lost in the first 5 months of business.
“Crypto City”, real-world cities where everything is based on the Smart Contract system. For now, it’s just an idea but somebody is really trying to build one, like CityDAO which already owns a little piece of land in Wyoming, US.
Since any contract of ownership can be registered in a Blockchain, for the first time in history we have the concept of digital assets (NFTs) and decentralized finance (DeFi).
NFTs (non-fungible tokens) are digital assets registered on a Blockchain. To put it in another way, an NFT is a contract of ownership of a piece of the Internet.
A picture of your dog is not an NFT because is not unique (one can copy and paste it), so it’s not a digital asset and it cannot be owned. On the contrary, a picture of your dog registered on a Blockchain (or “minted”) is an NFT as it is unique and, therefore, a digital asset that can be owned. Any digital file can become an NFT through a digital ledger that provides a public certificate of authenticity or proof of ownership (images, videos, music, videogame items…).
Digital art was an early use case for NFTs, because of the Blockchain’s ability to assure the unique signature and ownership of the asset. In 2014, a digital artist registered the first-known NFT, “Quantum”, which was sold in 2021 for over $1.4 million in an official Sotheby’s auction.
Since then, NFTs have slowly moved into public awareness before exploding into mainstream adoption in early 2021. These NFTs are bought for 1 of 3 reasons: passion for art (like buying an original Picasso), owning some hyped collections gives you status (like a Rolex watch), or to re-sell at a higher price.
DeFi (decentralized finance) is an emerging financial system based on the Blockchain without relying on intermediaries, such as banks.
It all started in summer 2020, also known as “DeFi summer”, when crypto users started getting rewarded for putting money in the DEX Uniswap (so-called “liquidity mining”). It was because decentralized exchanges have less liquidity than centralized ones, so there needed to be some sort of incentivization. Hence people understood that they could earn interest by depositing and lending cryptos without needing banks because there are Smart Contracts (pieces of open-source code) running and acting as an intermediary.
Everything I said before about tech giants owning and selling your data for profit can be observed for the banking system as well. In Web 3, DeFi is the new alternative to centralized finance, which is selective and expensive. On the contrary, DeFi is accessible by anyone, even people living in developing countries who currently can’t access the traditional financial system. On Web 3 nobody knows who you are and where are you from.
But if it’s anonymous, how can lenders protect themselves from high-risk borrowers and scams?
You’re on fire with good questions today… in the same way banks do in the real world, with collaterals. For every Blockchain, there is a marketplace for borrowers and lenders (like Aave), and often NFTs are used as the collateral for the loans (like NFTfi). The NFT used as collateral is locked inside a Smart Contract and registered on the Blockchain. This means if the borrower doesn’t pay back the debt, the Smart Contract automatically puts the NFT for sale to get the money to reimburse the lender. So, if you are the “I will pay next week” type of borrower, who’s often overdue, then don’t use DeFi because there is no middle man to talk to as everything is automated. Besides, people who really hate taking risks can use decentralized insurances (like NexusMutual) as the cherry on the pie of this type of operation in case something goes wrong. Because yes, things can go wrong (i.e. a Smart Contract with exploitable loopholes)… it’s a Wild West out there.
The Metaverse is a network of 3D virtual worlds linked to the Blockchain, and it’s going to be the front-end of this decentralized Web 3, just like the browsers are the front-end through which one can operate on Web 2. To put it in another way, so far you’ve digitally interacted with people and companies from a flat-screen (web or mobile) and now you can do it in a 3D space… you can literally “walk” into the Internet.
The term “Metaverse” appeared for the first time in the science-fiction novel Snow Crash (1992) as a virtual-reality successor to the Internet. Today, the majority identifies the Metaverse with some 3D RPG game, but it’s much more than that. There are some virtual spaces with a gaming component, but the biggest revolution is happening in the back-end with the decentralization of control. If an online game is not decentralized, then it ain’t Metaverse.
The first online platform that allowed people to create an avatar for themselves and interact with others in an online virtual world was Second Life, created in 2003. Despite being pretty innovative for that time (it even has its own virtual currency), I wouldn’t consider it part of the Web 3 Metaverse because it doesn’t use the Blockchain. Everything you buy on it (like outfits for your avatar) belongs in fact to the company owning the platform, not to you. The same thing goes for major online games like Fortnite, as whatever you purchase there stays only there, you can’t use it outside that platform. On the contrary, anything you purchase on the Blockchain becomes a digital property of yours in any Metaverse.
Let’s say I buy a real-world good (i.e. a hat) from H&M in Italy, I am able to take it with me even if I go to Japan, because I own it. The Metaverse is trying to mimic the dynamics of the real world, think of it as a huge shopping mall. Let’s say you (actually your avatar) are walking in the CEEK VR Metaverse, your attention is caught by an advertisement from the H&M virtual store, and you decide to enter and buy an NFT (i.e. a hat for your avatar). Since you own it, you shall be able to bring and use this digital asset to other Metaverses, and even resell it.
By now, we hope you have a better understanding of cryptocurrencies, DeFI, web3, NFTs and the metaverse. Here is a quick recap:
- Web 1: read-only static HTML pages (1983–2004)
- Web 2: tech giants own your personal data (2004-now)
- Blockchain: a secure and decentralized database
- Cryptos: transactions on the Blockchain
- Smart Contracts: code on the Blockchain
- DApps: apps on the Blockchain
- DAOs: companies on the Blockchain
- NFTs: digital assets on the Blockchain
- DeFi: finance on the Blockchain
- Metaverse: 3D virtual worlds on the Blockchain
- Web 3: all the above
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