I’m not a crypto or blockchain expert. In fact I barely know what I’m talking about, and maybe because I’m such a crypto beginner I can explain it simply for other beginners.
I always thought of crypto as an investment option.
This is wrong!
Crypto and the blockchain are so much more than just another way to speculate or trade—really at its essence crypto is about democracy.
It’s all about decentralization of the internet.
As an idea, the cat is out of the bag, and I can’t see it ever going away… just like I can’t see the internet going away.
Crypto and the blockchain are basically the next evolution of the internet, where instead of one company owning pieces of the internet, it is owned by its users.
It’s so much more than about currency or investing.
This new idea, using the blockchain as its vehicle, has implications for all-new decentralized versions of:
- Social media platforms
- Video gaming
- Finance (decentralized finance, or “DeFi”)
- New apps in general (“dApps”)
Trust me this seems like it’s one of those things that you will learn about eventually, because it’s likely everybody will use decentralized apps someday soon, just like everybody uses Facebook or Netflix today.
In fact, blockchain developers make an average of $109k per year (according to Glassdoor). It’s in high demand and people are figuring this out.
This is the new internet.
To really break down the whole concept of crypto and blockchains so that even beginners can understand it, we’ll discuss the following:
- Web 3.0: Definition and Examples
- How the Cloud Transformed the Internet
- Examples of New Blockchain Websites and Apps
- How Does Blockchain Work
- So Are Non-Blockchain Companies Dead?
This might seem like a firehose of concepts, but they are each critical to understanding why crypto is the future, and how blockchain enables it.
To start, we need to understand “web 3.0”, and what it means for the future of the internet.
Web 3.0: Definition and Examples
In the beginning of the internet, we had web 1.0. I’ll be honest that this was before my time (though I did use AOL’s AIM!); at the early stages of the internet, websites were basically like online magazines.
The way I’ve heard it described is that, like a magazine, websites had articles to read, with pictures uploaded.
All you could do was read the online magazine.
Web 1.0 was all about a one-sided interaction between the website owner and the reader. The reader could not interact on the website.
After web 1.0 came web 2.0, which is basically the internet as most of us know today. In the web 2.0, users could contribute to websites and interact, by doing things like commenting and posting.
Facebook’s website is a perfect example of web 2.0; it’s more of a living and breathing platform with two-sided interactions, where the user can contribute to the content.
Of course, Facebook’s website is owned by Facebook, so at the end of the day it’s their discretion about what is allowed to stay on the platform (which has been the center of controversy lately, especially around censorship).
Which leads us to web 3.0.
In web 3.0, one more layer is added to the web 2.0 framework. Instead of a website being owned and controlled by Facebook, a web 3.0 website would be controlled and owned by its users.
It’s basically a democratized website (or app).
Now, you might be thinking this comes with its whole worm of problems.
Like for starters, couldn’t a government just shut down these properties? Isn’t a democratized website just eventually controlled by the money? Whoever has the money has the power?
That’s where blockchain comes in.
But to understand why blockchain can really make the internet decentralized and democratized first we first need a primer on the infrastructure of the internet. In other words, what are the building blocks that make the internet come to life on our computers and smart devices, and how does that affect web 3.0?
In one word—the infrastructure today is run by the cloud.
How the Cloud Transformed the Internet
Whether you’re talking about web 1.0, 2.0, or 3.0, websites (and apps) are only made possible by data.
At the end of the day, data needs to be stored somewhere, and that data needs to be transferred to make text, pictures, or video appear on our computer screens.
Back in the old days (as I understand it), the web 1.0 days, companies who owned websites needed their own servers for their websites to be live.
A server is just a group of computers.
These computers connect to the internet and store the data on their servers. Anybody old enough to remember the days before Netflix and YouTube video streaming remembers how, in order to watch a video on your computer, you had to download it onto your own computer.
Essentially, downloading a video onto your computer transfers the data from a server somewhere into your computer, which is then stored on your computer (or a CD). That’s how you had to access it.
During the progression of web 2.0, it all changed.
Because of this magical thing called “the cloud”, servers became much more powerful. Now companies could share servers rather than needing their own.
Servers became like a shared pool.
What these shared pools of servers did was bring down the costs of hosting websites, and thus data, dramatically.
Picture yourself starting a new business with a website before the cloud. You had to buy all of these expensive computers and turn them into servers.
Today, cloud companies (like Amazon AWS or Microsoft Azure) buy all of the expensive computers, and essentially rent them out to companies who need them—at a fraction of the cost.
The cloud caused an explosion of apps and websites, with countless developers creating an endless stream of useful websites and apps, that we can access pretty much anywhere.
With web 3.0, the data starts to live not on a cloud computing company’s servers (like Microsoft Azure’s), but on the computers of the users (crypto miners).
Remember how web 2.0 apps are controlled by one company.
Web 3.0 apps are controlled by its users, through cryptocurrency.
Instead of the data essentially living on servers that companies control (either with their own servers or servers on the cloud), the data lives on the blockchain, freely accessible to all and “owned” by the holders of the blockchain (which would be the crypto holders).
What makes it confusing is that blockchain is not just one thing, like the internet, but rather there can be an infinite number of blockchains.
A new web 3.0 app could make its own blockchain and cryptocurrency, or have its own cryptocurrency which is built on someone else’s blockchain, or simply build on-top of someone’s blockchain and cryptocurrency.
Examples of New Blockchain Websites and Apps
Alright, this is a whole lot of technology speak but not a tangible idea yet.
Let’s take these blockchain ideas into the real world with some real examples.
Say that we wanted to make a web 3.0 version of YouTube. In fact there are many; one example is a website called odysee.com.
Remember in web 2.0, all of the content on YouTube is owned by YouTube. Its data housed on servers that YouTube controls, and YouTube has the discretion to delete any video which violates its rules. Of course, YouTube also controls the profits generated by the website through serving ads.
But in web 3.0, all of the data is controlled by its users.
This means all of its profits also goes to its users.
The way that the profits go to its users is through a cryptocurrency. In the case of Odysee, their cryptocurrency of choice is called LBRY Credits (LBC).
Just thinking about the profits side, any ads served on Odysee are distributed in a split between whoever controls the website, and its content creators.
The content creators are paid through LBRY Credits, so in theory if the content creators own a majority of LBRY Credits then they also control that website.
Because anyone can buy LBRY Credits, through a cryptocurrency exchange, anybody can choose to take a majority stake by buying up a bunch of LBRY Credits.
I’m vastly oversimplifying—every crypto (and blockchain) has its own rules.
But this central concept shows you how the web 3.0 idea works.
- The videos for Odysee are not hosted by one company, like a Facebook or Apple. They are hosted on Odysee’s blockchain of choice.
- The profits from the advertising on the website to not accrue to one company, but rather to the holders of the LBRY crypto.
- Anybody can join the Odysee website as a content creator, and start to earn LBRY Credits.
- In theory, anybody can buy lots of LBRY Credits, and influence the future of the website.
It’s very similar to a democracy in that—just like pretty much anybody can run for office, pretty much anybody can make an effort to influence a web 3.0 property (through owning its crypto).
You also have the power to walk away.
If you don’t like the direction that a web 3.0 app or website, you can choose not to visit that website. Content creators can choose not to upload on that website.
And if enough users choose to walk away from the website, that website’s cryptocurrency becomes less valuable.
But the users are very incentivized to keep the web 3.0 website from collapsing, because they usually have that ownership stake through the crypto.
Contrast that to web 2.0—users could mass exit a platform like Facebook, with the consequences completely borne by Facebook instead of its users who might have large stakes in the platform.
Let’s take another example of a web 3.0 app.
This time let’s look at another place the blockchain and crypto could play a huge role: gaming.
There’s a game at Splinterlands.com which is essentially controlled by the holders of the SPS cryptocurrency. Anybody can choose to earn SPS by playing Splinterlands and completing challenges, or can “pay to play” and buy SPS crypto outright.
This SPS cryptocurrency generally helps the gamer find better/faster results in their game, usually making it a more fun and enjoyable experience.
If you’ve ever played a game like Candy Crush, where you can spend $1 or $2 to beat the levels faster, then you should be able to understand the concept of profits generated in a game.
Compare the web 2.0 and web 3.0 versions of a game like this.
In web 2.0, users can also buy items to make their game experience more enjoyable. The profits of these purchases goes to the game developer—whoever built and controls the data.
As a user, your purchases are stuck in the game.
In a new world of blockchains and crypto, web 3.0, the profits of purchases go to the owners of whatever crypto controls the game. For Splinterlands, the profits essentially go to owners of SPS, which is one of the game’s cryptocurrencies.
The more people that play this game, generally, the more profits generated and the higher this pushes up the value of the SPS crypto.
To recap, for this gaming example…
- The data for Splinterlands is stored on the blockchain running the Splinterlands game.
- This blockchain is controlled by the SPS crypto holders.
- The SPS crypto holders receive the profits generated from the game.
- Players of the game can earn SPS crypto by completing challenges.
- Anybody can buy-in to play this game, and effectively vote on the direction of the game through their crypto ownership.
One last idea which can show how a web 3.0 game can be better than web 2.0 games:
Since control of the game is with the democracy instead of a company, and the democracy tends to made up of users (players) of the game, decisions about the game’s direction might lean towards making the game more fun to play, rather than solely maximizing profits.
Which should be better for the game over the long run, as really fun games are likely to attract new players, making the value of the game’s crypto more valuable and benefiting players and owners (who might or might not be the same people).
How Does Blockchain Work
So how the heck can data be controlled by users (web 3.0) instead of a company (web 2.0)?
The blockchain.
I’m going to try and describe the general concept of the blockchain as I best describe it. Keep in mind that there can be countless blockchains, which can all be run in a different way with different rules. And also I’m not an expert.
Let’s just understand the gist of a good blockchain.
Remember that in web 3.0 the data is controlled by groups of servers instead of a single company’s servers.
The blockchain is just the network of these servers.
Generally, anybody can plug-in to a particular blockchain and use their own computer as a server, storing the data which makes the web 3.0 website or app able to stay up on the internet.
The users who plug-in to the blockchain are called miners.
Miners who are plugged into the blockchain are monetarily rewarded for participating in the blockchain, by being awarded cryptocurrency.
Remember how a crypto and its blockchain are necessarily linked.
Basically the miners provide the computing power which is necessary to store and transfer the data for a web 3.0 website or app. The decisions on this data are determined by the cryptocurrency which is linked to a particular blockchain.
This means that anybody can build a web 3.0 website or app with basically zero computing costs.
All you need it to build a good blockchain, which is built through computer code.
And anybody can participate in a blockchain/ crypto ecosystem, by choosing to use the application (whether that’s browsing a website, uploading content, playing a game, etc), or by choosing to support the infrastructure of the blockchain (by mining its crypto).
You can also choose to participate in an ecosystem by voting on decisions about the blockchain (through ownership of the crypto), or by making improvements to the blockchain (through coding).
All you need for an effective blockchain is enough computers connected to its network.
This is why many people think crypto is here to stay.
If the mining for a blockchain is banned in a country like China, as long as you have other miners connected to that network in other countries, the blockchain lives.
As long as you have access to the internet, and power (to run the computer), you can support a blockchain.
The bottleneck is those two things—energy and (internet) connectivity.
And with solar power becoming more and more cost efficient, the control of the energy needed to mine different cryptos is shifting to users—another factor adding to this layer of decentralization that web 3.0 is bringing.
So Are Non-Blockchain Companies Dead?
It can be easy to get into doomsday scenarios around blockchain and web 3.0.
But really that’s a poor understanding of the technology.
In order for a web 3.0 website or app to succeed, it must be such a great product that people want to use it. So for a particular blockchain and its crypto to succeed, it probably needs a great product(s) built on it.
Going back to the Odysee video streaming and Splinterlands gaming examples—for those completely topple (kill) video streaming websites like YouTube or video game developers like Electronic Arts, the products/platforms would have to be so much better to attract users off YouTube and into Odysee, or off games like BattleForge and into Splinterlands.
But as we know about the internet today—users have a wide range of tastes.
And needs. And reasons for using a particular platform.
There are really pros and cons to web 2.0 and web 3.0 platforms, and so different applications (no pun intended) will probably be better served on web 2.0, while others will probably be better on web 3.0.
Pros of Web 2.0 (Examples)
- Centralized
- Someone could be directly brought to bear the consequences of what happens on their platform.
- They could be held clearly accountable to these consequences. They can’t hide from this accountability, because (most) websites and data can be located.
- And of course, many other benefits
Cons of Web 2.0 (Examples)
- Centralized
- They have full control of the platform.
- If you don’t like it as a user, tough luck.
- As a user, you are the product, or you pay to use the platform—and all profits go straight to the centralized controller.
- And of course, many other cons
Pros of Web 3.0 (Examples)
- Decentralized
- Control of the platform more determined like a democracy.
- Users of the platform can participate in the profits through its cryptocurrency.
- And of course, many other benefits
Cons of Web 3.0 (Examples)
- Decentralized
- It could be very difficult to hold individuals or companies responsible for what happens on these platforms.
- This is so new, and the future uncertain, that there’s lots of room for bad actors.
- And of course, many other cons
One last important technical detail to remember in all of this.
Much of the crypto and blockchain community is built on “open source” code. This basically means that the code which runs the blockchain is freely publicly available. Similar information is also available about the governance of its cryptocurrency.
Anybody should be able to improve on the open source code, and hold it to a vote to improve that blockchain.
It’s a very crowd sourced structure.
That’s another thing that makes a lot of people excited about the possibilities and potential of web 3.0.
The open source nature of blockchain allows people to constantly improve on, and innovate on top of, this technology—with very low barriers to entry (learn some blockchain code).
Where we’ve really started to see pickup in the blockchain and crypto world is people building their own ecosystems, blockchains, and cryptocurrencies on top of the established blockchains (such as Ethereum).
This has the potential to create huge network effects for the main blockchains being built on.
Say that a better web 3.0 video streaming website was built on the Ethereum blockchain, and then the best, most popular game of all-time was also built on-top of the Ethereum blockchain.
Imagine of all the jobs enabled there.
Imagine all of the users happily served there.
That would be a lot of political influence wanting to keep a blockchain like Ethereum running, and we’re just talking about two successful web 3.0 platforms built on a single blockchain.
In theory there could be endless web 3.0 platforms built on a major blockchain, blockchains on a blockchain, etc.
I never understood the whole “have fun staying poor” mentality of crypto people until now.
Just the idea of blockchain seems really hard to kill.
The cat is out of the bag.
Should I Invest in Blockchain and Crypto?
Here’s where we need to depart from the hype and potential around blockchain and go back to the basics of economics.
The web 3.0 world is like the wild, wild west right now.
Crypto and digital assets are just starting to get the attention of governments, and the ideas around this technology seem to be incredibly misunderstood, with good reason. These are abstract concepts with endless varieties.
What happens when you have a wild, wild west is massive uncertainty.
There’s so many moving pieces to one blockchain—the code, governance, usage and demand, price fluctuations, regulations surrounding it—where it’s hard to see anyone having the ability to perceive its future and all of the aftermath to follow it.
Not to mention the seemingly countless blockchains and cryptos that have been popping up and are likely to continue to pop up around it and on-top of it.
In other words, there’s massive uncertainty, which means massive risks for investing in it.
As an investor since 2012, writing for beginners to investing since 2013, I know that risk is part of the game with investing. You can’t get around that.
But I also know that risks can be greatly mitigated with investing through some basic knowledge.
It’s much easier to evaluate the risks of large corporations with steady cash flows versus something as wild as cryptocurrency.
It’s much easier to see Visa and Mastercard around in the next 5 years than any random crypto, if you really understand the business model of Visa (which is much more concrete than abstract).
Likewise, you’re bound to have better results, statistically, in managing your risks for investing in large corporations (through the stock market) than the endless cryptos out there.
That all said…
One of the biggest things we preach on this blog and our Investing for Beginners Podcast is the idea of a circle of competence, which means the area in which you are an expert.
You are bound to have much better results in investing if you really understand what you are investing in, and what the risks and uncertainties are.
That requires being honest about how much you really know.
So be humble, and always stay curious. Look for your passions, and research and investigate the heck out of them. Once you have that solid base, which starts with the principles of investing, then the world becomes your oyster for the wealth and potential that your future may bring.
