What Is Web3? The Confusing Term, Explained

Who knew the internet gets sequels? If you read about cryptocurrency, NFTs and the metaverse at all, you'll inevitably come across the nebulous term "Web3." A term coined by ethereum's co-founder, Web3 is what crypto enthusiasts call the next phase of the internet.

There are two ways to define Web3. The quick, easy description is a blockchain-integrated internet or an internet where cryptocurrencies and NFTs are built into the platforms you use. The more complicated but more specific way to think about Web3 is an internet owned by users. That's the dream of crypto boosters, who say the integration of blockchain technology will lead to an egalitarian internet.

Here's the argument: The current internet is owned by just a few companies -- Facebook , Amazon  and Google chief among them -- which creates e-feudalism, in which internet users toil on the properties owned by a handful of giant corporations. The fix is Web3, which uses decentralized technology to cut out the middleman.

"Take how we pay for things online," ethereum co-founder Gavin Wood said way back in a 2018 blog post. "You are not empowered to make payments per se. In reality, you must contact your financial institution to do it on your behalf. You are not trusted to do something as innocuous as pay your water bill. You are treated like a child appealing to a parent." 

Compare that to Web3 payments via cryptocurrency, where money can be sent from one wallet to another by using an open-source protocol rather than a financial institution. 

Some go further, envisioning an internet where platforms are decentralized by ownership spread among users. Take Facebook. A hypothetical Web3 version of the social network wouldn't undergo an initial public offering. Instead, it would create a cryptocurrency token and airdrop it to early adopters. People would be rewarded for going viral. Perhaps tokens would be earned based on engagement. Those coins may even double as governance tokens, which could be used to vote on decisions about content moderation or other policy issues. 

Since the value of those tokens would depend on the platform's success, every person who holds them would have an incentive to make Facebook as pleasant a place as possible.  

When Web3 proponents talk about "decentralization" -- a word vague enough to make your eyes glaze over -- this is essentially what they're referring to: taking an internet controlled by a few companies and spreading that power among users. Yet critics call it a pipe dream that's technically impossible to achieve. 

What are Web1 and Web2?

If there's a Web3, there must necessarily be a Web1 and a Web2. Thankfully, these definitions are much easier to wrap your head around.

Web1 is the first iteration of the internet. It's the internet of the 1990s and early 2000s, sometimes called the "read" internet. It refers to static webpages where people could see and (slowly) download information, but do little else. It's the time when the internet was trying to replicate existing media: computerized versions of magazines, newspapers and newsletters. Crucially, the protocols it ran on were open source. 

Web2 is the "read/write" internet that kicked off around 2004. "Read/write" refers to option of people to upload information as well as download it. Think about uploading posts and photos to Facebook and publishing videos on YouTube. The shorthand way to think of Web2 is the social media era when the internet evolved from a computerized form of existing media and transformed into its own thing. But that also gave way to the rise of platforms that increasingly dominated the internet.

"We are now at the beginning of the web3 era, which combines the decentralized, community-governed ethos of web1 with the advanced, modern functionality of web2," Chris Dixon, a partner at famed Silicon Valley venture capital firm Andreessen Horowitz, wrote in fall 2021.

Is Web3 related to the metaverse?

Yes. Just like platforms such as Facebook and YouTube were the products of technological advances that enabled data uploading and cloud storage, many believe the metaverse will be the face of blockchain technology. Facebook turning itself into Meta in October signaled its transition from a Web2 company to one whose primary focus is in Web3.

Meanwhile, metaverses likes Decentraland and Sandbox embody the ethos of Web3. These are virtual worlds made up of a fixed amount of virtual land, which can't be added to or taken away. People can buy the land and do what they please with it: create games, shops and fashion districts, sell ads or just build a house. (Snoop Dogg, for instance, has a mansion in Sandbox, from which he hosts parties and concerts.) 

Already people are paying huge amounts for metaverse land, ranging from thousands to millions of dollars. The idea is that everything in these metaverses is owned by users. When you create an item in Sandbox, for instance, you own it as an NFT and can sell it for cryptocurrency. You can run games and provide services to others within the space -- for a fee. Most importantly, you can decide what to do with the space you own. 

Compare this to centralized metaverses, like Second Life or Fortnite, where creators have full control over what the virtual world looks like and who can inhabit it. Where Meta places its metaverse on the centralization scale is a topic of speculation and fierce debate. 

Are there downsides? 

The answer to this question depends on who you ask. Many say that tokenizing participation in platforms like Facebook and Twitter will create harmful incentives towards engagement at any cost. Others, like Elon Musk , question whether Web3 exists at all. The Tesla and SpaceX founder calls it "more marketing buzzword than reality."

Beyond philosophical disagreements, there is uncertainty over whether a true Web3 can actually be technically achieved. Critics argue that the kind of Web3 utopia often described by proponents would require the exact type of centralization that's being railed against. 

Ethereum, the blockchain on which most of this is based, is notoriously inefficient. Transactions are costly and energy intensive. People are working on solutions, including apps built atop ethereum to make it more efficient and the adoption of carbon-neutral blockchains like Solana, but the idea of pervasive blockchain activity sounds technically unachievable to some. 

"On a compute basis, blockchain networks don't scale except by becoming the very same plutocratic and centralized systems they allegedly were designed to replace," programmer Stephen Diehl argued in December. "Blockchain solutions are vastly more expensive to maintain than centralized solutions, and centralization always wins purely from its ability to physically serve data over a network to customers more efficiently."

There are also concerns about how economically decentralized Web3 can really be. Big venture capital firms have made huge investments in Web3 technology: just under $18 billion last year. And the likes of Twitter co-founder Jack Dorsey  expect that these powerful companies will own the industry.

"It's ultimately a centralized entity with a different label," Dorsey tweeted in December. "Know what you're getting into."