The Dream of Web3

This is a Web1 experience. Right now, you’re consuming noninteractive content created by an organization renting digital space on a server that you pay a provider to view and access. The content is read-only, and you, the user, are here to consume it. That’s how the internet started, and, for a while, it was the only option. Around 2004, Web2 began to develop. With Web2, users could create content for organizations renting or owning space on servers. The problem with Web2 was the users became consumed. Not only do providers host user-created content for free, but they also harvest web data from their users, which they sell to advertisers. Currently, users willingly give all this information to these organizations for free, but the idea behind Web3 is that every data transaction will be tracked and monetized publicly. Then users could truly own their data. This dream of Web3 is kept alive by a technology known as a blockchain.

The Blockchain: Securing Digital Data

In order to commodify everything on the internet, there needs to be a secure way of recording the information. That’s where the blockchain comes in. Stuart Haber and W. Scott Stornetta initially developed blockchain in 1991. Haber and Stornetta started a company called Surety to assist organizations in protecting their data and have been quietly publishing their hash, a cryptographic time stamp used to link documents chronologically, in The New York Times since 1995. Later, under the pseudonym Satoshi Nakamoto, someone or some people created a decentralized version of blockchain called bitcoin. Whether Web3 currently exists or ever will is a bit of a debate. Some regard Web3 as a myth or marketing buzzword; however, bitcoin’s hold on the financial system seems to be strengthening as major US companies, including banks, have begun acquiring it in significant amounts.

Bitcoin

Nakamoto noticed the failures of the current financial system and sought to establish a new one where wealth was decentralized and attempted to challenge the banking system by allowing anyone to log savings and transactions. Each block created for bitcoin has a complete log of every transaction ever made using bitcoin. Holders keep their bitcoin in digital wallets, but a wallet is just a log of bitcoin owned by a holder, protected by two complex password keys. Hot wallets exist online and are thus susceptible to hacking. Cold wallets are highly encrypted USB drives.

Bitcoin essentially exists on nodes. A node is a small computer with a large hard drive running the Bitcoin Core software, which is available to download for free on Bitcoin.org, the original bitcoin exchange site. Nodes stay up to date with each transaction using miners. Miners receive the coins they mint and transaction fees paid by users in those transactions. Miners require much more powerful equipment to compute complex algorithms and encryptions of bitcoin transactions. The more miners there are decrypting and quantifying transactions, the more complex the algorithm becomes and requires more computing power to solve such that the process always takes 10 minutes to complete, protects bitcoin from inflation, but that’s not the only thing bitcoin uses to stave off inflation. Every four years, an event called The Halving occurs. Halving decreases the bitcoin reward given to miners by one-half. 

Eventually, the reward will decrease to zero, meaning that a maximum of 21 million bitcoins can be minted, which should occur around 2140. The algorithm’s smallest unit of measure is satoshis, which equals 0.00000001 BTC. So, the halving process will round down to zero. And since people also tend to lose large amounts of Bitcoin when they forget the passwords to their cold storage devices, significantly less than 21 million Bitcoins will probably be in circulation.

In 2022, decrypting a block yielded a reward of 6.25 bitcoins and processed an average of 500 transactions. After the minting of the last coin, miners will only receive transaction fees. This limited supply makes bitcoin comparable to gold. Thus Nakamoto’s vision of bitcoin becoming a regular currency seems unlikely, though it effectively lays the foundation for other forms of cryptocurrency to take on that role. Also, this method may cause problems with Nakamoto’s ambition of a decentralized currency. As mining becomes more demanding, it becomes less cost-effective for regular people, which can result in a corporate mining monopoly, thus being less centralized.

By 2018, 20 companies owned over 90% of all mining power, the biggest being Bitmain, which created its own specialized hardware specifically for mining bitcoin. At that time, Bitmain controlled 41% of the hash rate or percentage of computational power used to process all transactions. After seeing this in a report, the owner of the domain of the original site Bitcoin.org, Cøbra Bitcoin, wrote an open letter asserting that the mining algorithm should be rewritten. If one person or organization gained control of 51% or more of the hash rate, they would be able to execute a 51% attack, essentially allowing them to fabricate coins, and the rest of the network would have to accept them as authentic because they would be in the minority. Doing this would compromise Bitmain’s business, though, and it would also require massive amounts of computing power because bitcoin’s network is so extensive. Smaller cryptocurrencies have successfully been hacked in the past, however.

51% attacks can be avoided with Proof-of-stake (POS). Bitcoin runs on Proof-of-work, where miners receive a reward for their computing power. POS eschews miners and instead uses validators to mint new blocks. An algorithm chooses validators at random, but depositing more money into the network improves a potential validator’s chances. While much more challenging to commence an attack this way, it can still be possible if a validator owns more than half of all the coins. So, another option is Delegated Proof of Stake (DPoS), where users vote on delegates to verify transactions.