After attending Token 2049 in Singapore, I spent a reasonable amount of time catching up with a few of the investors I met along the way. Two themes arose in our conversations. The first was what had happened with FTX (easy answer, fraud), and the second, which came from other investors with a traditional finance background, was rooted in determining the purpose behind Web3 tokens.

This is Part II of a two-part article. In Part I, we analyzed what a smart contract is at a high level and how it will enable the future of P2P internet interactions absent centralized intermediaries. We also analyzed early use cases for smart contracts today ranging from DeFi to tokenizing real-world assets.

Smart contracts are part of the “how” that enables this change: they change how we can transact on the internet without the friction of an intermediary.

Many critics of Web3 claim that there are few, if any, use cases of Web3 that surpass the benefits of a comparable Web2 company. It’s not the fault of critics - few have come close to demonstrating a vision of what the future of networks will look like. Just as it was impossible to see the impact of the Internet in the early 2000s, the same can be said for the impact of blockchain today. The technology is too early. Yet, those who dismiss it publicly (i.e., Steve Ballmer)  have continued to see their remarks as exemplary in what not to do: bet against the future.

A blockchain wallet is software written to store your private key, public key, and blockchain address. It is the interface that allows you to interact with a blockchain network (and in some cases, more than one!). Web3 wallets also enable:

Without cryptography, there would be no blockchain, no password management, and no malicious download defense. How we interact with the internet is driven by our interaction with cryptography.

There are three components that define a decentralized blockchain: Open-Source, Permissionless, and Public. Open source allows anyone to contribute to a protocol. Permissionless allows anyone to evaluate a ledger and change the state of a blockchain. Public allows anyone to be a user of the blockchain and view the entire history of transactions. 

In my last post, I discussed how protocols design systems to discourage participants from manipulating the network and how important this is in the absence of a centralized institution. What is to prevent a network validator with a copy of a ledger from sending false information to other nodes?

In Bitcoin’s whitepaper, Satoshi Nakamoto coined a term that has since captivated a generation: “chain of blocks.” Nakamoto used this term to describe the mechanism required to create bona fide internet money. At a high level, the concept proposed a set of programming in which all computers in a peer-to-peer (P2P) network held the same ledger. This was a verifiable catalog of transactions with which all copies could be used to validate past transactions, acting as an immutable point of reference. As laid out in the whitepaper, its function cemented how a blockchain ledger is collectively managed and updated, leveraging game theory and tokens to ensure cooperation.