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What Is Web3 and How Does It Work?

Web3 is the term used to describe the next stage of the internet, built using blockchain technology and fundamentally controlled by its users. However, many don’t even understand what exactly constitutes Web2 technology, and so it can be difficult to comprehend the meaning of Web3.

Learn more about Web3, how it works and what it can be used for, and how it differs to Web1 and Web2.

What is Web1 and Web2?

To fully understand how Web3 works, it is essential that you first understand the technology that came before it.


The first version of the Web, now referred to as “Web1” or “Web 1.0”, was a much more basic implementation of the internet that we know now. Anybody that spent time online in the 1990s and early 2000s would have experienced Web1, although they may not have known it at the time.

Web1 provided users with access to information, and was primarily utilised by those searching for data. Content and web pages were created by a small group of people, with the intention of reaching a larger number of individuals than had otherwise previously been possible.

Some people consider Web1 to have been akin to a “read-only” version of the internet, with users able to read, but not interact, with content online. The earliest version of the World Wide Web, Web1 hinted at the future possibility of digital communication between users.


The transition from Web1 to Web2 saw even larger volumes of content being created for an ever-growing audience. The key difference, however, was the potential for increased participation and contribution from the end-user.

Web2 prioritised user-generated content, interactivity and wider compatibility between systems. Community and collaboration was enhanced during this era of the internet, with most considering Web2 the primary method of digital interaction between users. The introduction of social media platforms is an excellent example of how the Web changed between Web1 and Web2.

What is Web3 and How Does It Differ to Web2?

Web3 was brought about due to the introduction of blockchain technology, and is widely considered to be the future of the internet. Web3 is a decentralised version of the internet that functions using distributed ledger technology and a community of participants. 

The transition from Web2 to Web3 is currently in progress, with new elements continuously being implemented, while others are still theoretical. Web3 advocates argue that a small number of corporations currently preside over Web2, and so the primary vision for the next era of the internet involves the removal of this centralised control.

Web3 should provide users with control over their own information, without a reliance on the intermediaries that are often needed today. The management of information, the monetisation of the internet and the functionality of digital companies could all change as Web3 technology progresses.

One of the fundamental selling points of blockchain technology is the importance of trust. In Web2, the exchange of data requires two parties – often with a central facilitator – to trust one another regarding the information being shared. In contrast, Web3 technology enables monetary and informational transactions whenever certain, pre-agreed criteria are met.

What Are The Main Purposes of Web3?

The move towards Web3 is driven by some fundamental principles, and supporters of the technology argue that these factors make Web3 an inherently better option than its predecessors.

Firstly, as mentioned above, Web3 is decentralised, with ownership being distributed amongst the developers and users of Web3, rather than large, centralised entities. Although there is no singular owner of Web2, big tech companies such as Microsoft, Apple and Meta are believed to have significant influence on user-experience and data storage.

Web3 is also designed to be permissionless. This means that everybody can participate equally, without authorisation, marking an important milestone in the drive for inclusivity and fairness.

Web3 is also trustless, operating using technologies, financial mechanisms and incentives that limit the reliance on third-parties. The trustless nature of Web3 also means that participants do not need to know or trust the other users that they interact with. Instead, the use of blockchain technology, cryptography and various consensus mechanisms guarantees the legitimacy of any data that is shared.

What Technology Will Support Web3?

There are a range of technologies that will enable the continued introduction of a decentralised internet.

Blockchain Technology

Blockchain technology is arguably the most important aspect regarding the transition from Web2 to Web3. Blockchains are immutable (unchangeable), distributed digital ledgers. They function as a digital record of information, including transactions. Data stored on a blockchain cannot be altered, making it more accurate than other forms of data storage, and it is stored in multiple places on a computer network, making it more secure and less susceptible to malicious attacks.

Smart Contracts

Smart contracts are software programs that automatically execute when predetermined conditions are met. This automation means that third-party intermediaries are not required, and that data sharing, transactions, and more, can be facilitated quickly and with guaranteed trust. Smart contracts are also coded directly onto a blockchain, meaning that they cannot be tampered with.

Digital Assets

Web3 also relies on – and utilises – digital assets such as cryptocurrencies, central bank digital currencies (CBDCs) and non-fungible tokens (NFTs). The tokenisation and increasing digitisation of assets such as real estate, art and luxury goods will also further speed up the transition to Web3.

What Are The Most Popular Web3 Use Cases?

To truly understand how Web3 differs from Web1 and Web2, it is worth considering some of the key Web3 use cases and components.

Decentralised Autonomous Organisations (DAOs)

A decentralised autonomous organisation (DAO) is a governance structure without a central governing body. Instead, members of the organisation make collective decisions that they believe will positively impact the project or network in question. To put it most simply, a DAO functions using a bottom-up management style, which is perfectly in keeping with the fundamental principles of Web3.

Decentralised autonomous organisations were first popularised within the cryptocurrency space, with governance being distributed to owners of the cryptocurrency in question. Although the specific governance structure will vary by project, token holders are typically given the opportunity to suggest and vote on changes to the ecosystem or entity being governed.

These decisions are publicly visible on a blockchain, meaning that they are always transparent.

Some of the most popular DAOs include:

  • Uniswap: A cryptocurrency exchange built on the Ethereum blockchain, governed by holders of the UNI token.
  • Decentraland: A metaverse project governed by holders of the MANA token.
  • Arbitrum: An Ethereum Layer 2 scaling solution governed by holders of the ARB token.

Decentralised Applications (dApps)

Decentralised applications (dApps) are applications powered by blockchain-based smart contracts. Automated and decentralised, dApps work in a similar manner to traditional applications, but with greater benefits in terms of security and trust.

Decentralised applications can be used within any industry, with a variety of uses cases:

  • Supply Chains: dApps can help to maintain visible and unalterable records, and manage inventories.
  • Financial Services: dApps can enable peer-to-peer transactions through decentralised exchanges (DEXs). Payments and transactions can be automated, and trust guaranteed.
  • Identification: dApps can help to securely store and verify information relating to identity. This could help to improve passport application processes or voter registrations, for example.

Decentralised applications can also be – and are – used within education, healthcare and real estate, with an ever-growing number of use cases. These include data storage, the creation of learning platforms, and the ability to track property ownership.

The Metaverse

The metaverse is considered by many to be the future, digital face of Web3. It is a network of interconnected digital worlds, able to be navigated through using virtual reality (VR) and augmented reality (AR) devices.

A concept introduced by novelist Neal Stephenson in his 1992 novel Snow Crash, the metaverse has been picked up by corporations looking to capitalise on the next wave of the internet.

However, the increased ability to communicate, collaborate and take ownership of a virtual world means that the metaverse is set to play a fundamental role in the transition to Web3, regardless of its potential for monetisation.

Some of the biggest metaverse projects include:

  • Decentraland (MANA): An established metaverse project that allows users to shop digitally, attend events, meet people, play games and build businesses.
  • The Sandbox (SAND): Built on Ethereum, The Sandbox is a 3D world in which users can build games, assets and applications on top of their own plot of land.
  • Sensorium Galaxy (SENSO): A metaverse consisting of several worlds offering experiences in music, entertainment and education.

Why is Web3 Important?

In much the same way that Web2 was a hugely important step up from Web1, Web3 is set to bring about vast improvements to the way that people engage with data, make transactions and communicate with each other.

Web3 is important for many of the same reasons that blockchain technology is. Individuals that do not understand the purpose of decentralisation will likely struggle to believe in the benefits of Web3 technology, but there are many to be aware of.


Unlike Web2, the implementation of non-fungible tokens means that it is possible to take full ownership of digital assets. Already this advantage is incredibly apparent within blockchain-based games, although its usefulness outside of this industry is also considerable.

Non-fungible tokens work by attributing a unique identifier to a digital asset. The owner of this asset is clearly recorded on the blockchain, as is any future sale or transferral of ownership. This means that there can be no questions as to the owner of a particular item.

As the technology progresses, and additional legal frameworks are implemented, the usefulness of the above will extend far beyond Web3 gaming and will likely impact every possible industry. From housing to luxury goods, blockchain technology will allow individuals to prove ownership of a range of both real-world and digital assets.

Censorship Resistant

There are certain rules within the Web2 space, typically implemented by governments or other centralised governing bodies, that allow for the possibility of censorship. Web3 promises to limit this centralised control, which should, in theory, increase the freedom experienced by its users.

Web3 technology will provide users with greater autonomy over their data and assets, thanks to higher levels of decentralisation. The use of distributed ledger technology means that there cannot be a single point of failure within the network, making it drastically more difficult for a government or agency to shut down a Web3 service.

What Are The Limitations of Web3 Technology?

Despite the promises made by Web3 advocates, there are a number of potential issues that arise when considering the move away from Web2.

Idealistic Expectations

A lot of what we know about Web3 is hypothetical. Although the theory is there, we are yet to experience a truly decentralised internet, and so it is difficult to know how it might play out. Granted, there is huge potential for greater control and user autonomy, but the technology is still relatively new and its implementation is a work in progress.


Although blockchain technology continues to become more mainstream, there are still a huge number of individuals that do not understand how it works. While many elements associated with Web3 are user-friendly and contain many similarities to Web2 technology, it is unlikely to see global adoption in the very near future.

With cryptocurrencies playing an important role in the Web3 space, adoption could remain limited until people’s understanding grows. With significant volatility and limited regulation, many are wary of crypto, and therefore are also naturally wary of Web3 technology.

User Experience

There are also several technical barriers-to-entry, as far as Web3 is concerned. With additional security elements to be aware of, as well as potentially complex documentation and difficult-to-navigate interfaces, the theory behind Web3 is not necessarily enough to guarantee its success.


Web3 has the potential to significantly improve the digital user experience, although a lot of the positives are still somewhat theoretical. Regardless, Web3 promises increased decentralisation, control and trust, and could revolutionise the online space, given time.


What is the Link Between Crypto and Web3?

Cryptocurrencies are used to make payments within Web3, which enables peer-to-peer transactions. Both are built using blockchain technology, and the use of crypto within Web3 helps to avoid a reliance on central governing bodies, thus ensuring decentralisation and user control.

What is a Decentralised Exchange (DEX)?

A decentralised exchange is a peer-to-peer marketplace, used for the buying, selling and trading of cryptocurrencies. Buyers and sellers connect directly with one another, rather than a central body or third-party facilitating the exchange. Unlike centralised exchanges, decentralised exchanges are non-custodial, meaning that participants remain in complete control of their assets and private keys.

Some of the biggest decentralised exchanges include Uniswap, Jupiter and Pancakeswap.

Who Created Web3?

There is no single creator of Web3, although the phrase was coined by Ethereum co-founder Gavin Wood in 2014. As blockchain technology has grown in popularity, the term – and ideas attached to it – has experienced wider mainstream attention.

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