Web3 High-level Overview

What Web3 is about and what it brings to the table

Blockchain became a popular destination for geeks with a vision: this tech in their hands would shape the future of web architecture and replace it with a fundamentally fair environment driven by code, also known as Web3.

Then came the skeptics. They noticed signs of immaturity, large-scale protocol attacks that drained millions of dollars, network outages, and only a handful of use cases for blockchain applications in daily life.

Another group still keeps its distance from crypto. They know there is something called Bitcoin and they noticed the NFT art bubble, but they have not looked closely enough at how blockchain technology actually works.

Whichever group you belong to, let me walk you through a high-level overview of what Web3 is about, how it is structured, and how building Web3 dapps differs from building traditional web applications.

Table of content:

If you google "Web3 definition", you get a lot of different interpretations. Some of them list blockchain as one puzzle piece in a people-driven shared economy, next to fields like Artificial Intelligence or the Internet of Things.

This article focuses purely on the blockchain concepts behind decentralized smart contract platforms, the foundation for decentralized web applications (dapps). Their key values are:

Full-stack decentralized web applications that follow all three concepts still live in client-server architecture. Two things set them apart: how the server part operates and how you have to maintain the whole stack.

As mentioned, the client side in Web3 stays consistent with the traditional web experience. A dapp frontend has two main jobs:

When you pick a stack, React/Next became #1 thanks to its maturity and its compatibility with a large ecosystem of libraries.

React paired with TypeScript is the usual combination for anyone chasing a career as a Web3 frontend developer.

React also rewards beginners with a rich set of dev tooling and ready-made boilerplates like Wagmi, Thirdweb, or Rainbowkit.

A blockchain records data on its own and does not follow traditional database systems like SQL or noSQL. It is designed to share and update its state rather than to store large amounts of data, so that thousands of individual nodes can join the network without huge storage requirements.

With a limited block size (1 MB for Ethereum), dapps have to find other ways to store persistent data like images or media. One option is specialized P2P networks similar to BitTorrent, which a dapp can reference, for example:

This workaround only lets the dapp access static data references, often immutable. Processing dynamic data from outside the blockchain through an API is not recommended, because that data lives outside the decentralized world and the output could be tampered with. This situation is often called the Oracle problem.

To solve the Oracle challenge and securely fetch data like exchange rates, sporting events, or even a random number, the application has to connect to a data provider that serves data in a trustless way. That adds yet another decentralized network to the stack. Chainlink leads the oracle market by far, with a solid approach to connecting data providers and motivating them to behave correctly through defined penalties and rewards.

Up to this point, the layers used more or less the same concepts, just in a form tailored for Web3. The server part handles both transaction processing and state updates.

Instead of running your own server instance, you can use one of dozens of blockchain networks that are already publicly open for interaction. They fall into three groups by functionality:

The most used smart contract function is a swap, a trade function for decentralized exchange of cryptocurrencies that runs without any institution in the middle. It comes with two programmatically defined pieces:

Functions written this way, with only hundreds of lines of code, have already handled billions of dollars transferred securely through the Uniswap decentralized exchange.

The current #1 language for smart contracts, Solidity, was built as a developer-friendly tool to simplify byte-code execution on Ethereum. Over time it became the industry standard because:

The most used languages for writing smart contracts on blockchain:

One of the many paralyzing parts of deploying a dapp is the choice of network. Instead of one "internet", there are dozens of independent blockchains, often without an effective way to talk to each other.

Projects under financial pressure from venture investments (in return for utility tokens) cannot afford to split across all the networks, because that damages the project's tokenomics: the price of assets with lower liquidity is easy to manipulate for whales and trading robots. So many projects only get one shot to pick the best environment to start their business.

As you might guess, there is no single right choice, and you cannot say which tech will rule the market in the coming years and which one will perform poorly and eventually die. Due diligence increases the probability of success.

During the analysis phase, everyone is responsible for finding the right match by asking questions like these:

Hard aspects

Examples of network adoption aspects:

One-time deployment of self-governed, decentralized or semi-decentralized applications brings a whole new challenge not yet seen in web development.

Projects need to evolve over time, adjust to market trends, or keep up with competitors. The concept of a DAO (Decentralized Autonomous Organization) gives you the tooling to sustain project goals long-term, if you design it carefully.

Utility tokens act as the engine from the investment phase through continuous maintenance, keeping the project healthy. Whatever kind of application you build, you have to adopt some token strategy, and it heavily shapes the project's business. The questions to answer:

Answering questions like these helps you design:

Once the project is fully developed and shifts into the "decentralized" mode where everyone rules, updates and protocol optimizations usually happen through governance voting. Holders of utility tokens put forward proposals and try to reach a model of maximum financial or technical prosperity.

If you want a deep level of decentralization, the project needs to identify which dimensions are worth governing and how to do it. That includes:

Like DAO and want to dive deeper? Look at:

Not everything is meant to be decentralized. The architecture of blockchain platforms adds new options to web development that only make sense alongside traditional web servers and databases, and sometimes not even then.

It helps to understand what blockchain does differently:

Today's Web3 application market (roughly $80b–$100b) gained traction in two main areas, DeFi and NFTs:

Decentralized finance (DeFi), with more than 90% of the market value, aims to offer alternatives to traditional fintech. It rests on a few key pillars:

The NFT (non-fungible token) phenomenon took the second largest market share thanks to the 2021 mania, after the entertainment industry got involved and celebrities drew a wave of retail users. Most of them were looking for fun in these categories:

One less visible and less successful on-chain application is the decentralized social platform, a censorship-resistant, fee-free alternative to popular networks like Facebook or Twitter. Setting aside their lower service quality and weak market demand, a few examples stand out:

This financially heavy ground is unfortunately overshadowed by problems: an immature industry, a lack of best practices in program design, and greed among some of the players.

With every DeFi or NFT innovation, where millions flow daily, another door opens for hackers and impostors looking to steal someone's life savings and exploit weak spots.

Designing good DeFi carries great responsibility, not only for code quality but also for the community of users. Those users are regularly hit by clever phishing techniques and attacks, often without proper education, and the application UX is poor because it was pushed to production before testing could finish.

Another lively debate is how decentralized blockchains and dapps really are, even though they are widely sold as 100% censorship-proof. In reality, some networks still run on just a couple of computers, the dapps' censorship resistance was never truly battle-tested, some networks suffer outages, and they still need centralized care to operate.

The golden age of decentralization will arrive when creators "steal" world-class entertainment brands like Marvel, Star Wars, or Pokemon, use them, and run their own business publicly on-chain through a DAO, with no one in the world able to stop it. That is not where we are right now:

Am I scared about the future of Web3 in today's market, full of skepticism and gloom? Not at all. The cryptocurrency market is still roughly 3x larger than two years ago and 10x larger than five years ago. This trend will continue as the industry attracts top technical minds willing to share everything they know and push the boundaries further. That leads to steady improvements and the current trends of:

This pace of improvement will allow early use of blockchain computing resources as a replacement for application servers and databases in the traditional IT industry, all for pennies on the dollar. That will boost the network effect of some smart contract platforms past the point where anyone can stop it.

Less successful platforms are destined to die. Technically unattractive or less adaptive chains will become obsolete in this competitive battle of billion-dollar protocols. As with the dot-com bubble, it simply does not make sense for everyone in this field to prosper, despite the technological potential and the possibly huge impact on the modern web.

[1] https://www.weforum.org/agenda/2022/02/web3-transform-the-internet/

[2] https://itnext.io/top-3-web-3-0-architecture-layers-explained-frontend-backend-and-data-e10200f7fc76

[3] https://www.euromoney.com/learning/blockchain-explained/how-transactions-get-into-the-blockchain

[4] https://docs.uniswap.org/protocol/V2/concepts/protocol-overview/how-uniswap-works

[5] https://tokenomicsdao.substack.com/p/tokenomics-101-dydx

[6] https://threadreaderapp.com/thread/1534553671203139584.html

[7] https://blocksize-capital.com/from-defi-to-dao