In the Web 3 universe, there’s a crazy amount of jargon you need to know. NFTs, DApps, wallets, DAOs, smart contracts, the list goes on. In this episode, we’re going to rapid-fire define a few important terms. This quick rundown is for anyone new to the Web 3 world ready to join the conversation.
In the Web 3 universe, there’s a crazy amount of jargon you need to know. NFTs, DApps, wallets, DAOs, smart contracts, the list goes on. In this episode, we’re going to rapid-fire define a few important terms. This quick rundown is for anyone new to the Web 3 world looking to join the conversation.
George
In the first episode of this series, we talked through the concept of Web 1, Web 2, and now Web 3. The dawn of publishing pages mostly hosted on home or office computers, then the dawn of applications and cloud-based computing, now web 3 is a new type of computing in where our data is stored and how it’s decentralized.
We’re seeing a huge uptick in Twitter chatter around NFTs, crypto, DApps, etc. There’s a lot of jargon. This episode isn’t necessary for you if you’re very familiar with the Web 3 universe. It’s a bit of learning for us to do further research on jargon.
We’re going to hit the top terms of the Web 3 movement and rapid-fire define and explain. Building from the ground up starting with infrastructure vocabulary all the way up to buzzwords.
Dan
The escalation of all the news coverage that it’s getting is wild. Even though it’s not ubiquitous, the conversation seems ubiquitous and everyone is talking about it.
Tyler
CryptoPunks, blockchains, Ethereum, and other basic systems are a few years old. What happened earlier this year outside of that particular ecosystem, we had a lot of people not going to work. spending time at home quarantined. They were in a way bored and tied to their devices. Then the government started handing out checks because they needed to compensate people for lost wages. So people had disposable time and income which is closely tied to the rise in activity specifically in crypto and NFTS.
Certain events and changes in price coincide with that particular thing and so you get people talking about doubling or quadrupling on their money. It sucked a lot more people into this kind of ecosystem.
Dan
There’s something there around the concept of yield farming. There were a lot of individuals who made a ton. It’s essentially day trading but through different strategies and protocols. But you have to do it almost on a daily basis if not faster than that. It’s interesting that you make that point of people staying home and essentially day trading.
Tyler
Yield farming and staking. Staking is basically putting your money, instead of in a bank, in a stake pool, or some sort of a provider. And then you get a stake in rewards which is sort of like interest in a bank. Those are pretty easily 5 percent and up, where is a bank it’s 0.5% maybe? The reward is worth the risk if you put just a little money in to see what it does. The macro-economic factors of inflation and whatnot make it pretty appealing.
George
We need to take a step back. That’s the end goal. I was interested but didn’t really care until I had enough conversation with people. There was so much jargon and the analogies weren’t quite apples to apples. As easily as we can I want to march through some basic terms.
Let’s start at one of the lowest levels. I think we kind of have to start with blockchain. What do we mean when we say all of this technology exists on this thing called blockchain. What is it?
Tyler
A blockchain is a sort of database. That can only be read ad written to. It cannot be modified. And it lives usually on a bunch of different computers. How many depends on the protocol itself. But you’ll hear these words - things like immutable - which means it cannot be changed. You can’t edit the data in the database.
Dan
Okay, so even Tyler saying, “A database that is immutable depending on the protocol.” Every single aspect of what we are going to talk about is layers upon layers of understanding.
Tyler
Bitcoin is a protocol. Ethereum is a protocol. A lot of the big names that you’ll hear are protocols. That’s simply a way of building blockchains. It’s a set of code. To the bigger point, the struggle I’ve had in learning this is the analogies. We’ve got to hold these definitions loosely to the things we already understand. All of this is remapping the way we think about technology.
George
When we think about a blockchain it’s not storing large sets of data the same way that like an Amazon S3 server would be storing images or files. The blockchain is basically storing a ledger. Right?
Tyler
A blockchain is a series of blocks that are chained together in series. Building on one another. Each block contains data. Bitcoin is a ledger strictly. There are projects out there that store files. There are projects that store other kinds of data. The problems that they’re solving are different.
For an analogy, but if you think back to Napster those applications were peer to peer. They were stored on other people’s computers around the world. If I said download this file it would pull from those computers. It’s a loosely held metaphor, but it works.
There’s not yet a great case for blockchains to be used in every situation. It’s good for very specific types of ledgers and information, but we’re not about to replace Django or anything like that.
Nobody owns the blockchain in their idealized state. Nobody owns Bitcoin. There’s a group of people that get together to decide what happens to the chains. They start out centralized but then a community takes on the ownership of what we call nodes or computers that are running this particular blockchain.
It’s owned by the community and the community will decide what changes will need to be made to make this thing thrive. Ownership is a key component of blockchains.
George
What is a smart contract?
Dan
Smart contracts came along on Ethereum. When you’re making a commitment between two parties, typically you might have an intermediary that is verifying an event took place. If you have an insurance claim they have to verify with a third party that this happened so that compensation can be released or other certain factors.
Smart contract operates pretty much the exact same way except the contract is code-based and it will deliver on the promises as long as certain criteria are met that have been coded into the contract.
For example, in a real estate deal say George wants to buy a piece of property I own. There’s a selling price and he's the buyer. There has to be some level of verification - yes I own it and George is buying it. Funds will be released from his bank to mine.
What a smart contract will do, is all the stipulations are coded into the code. Once those stipulations happen there is no intermediary. It is a “trustless” system meaning we don’t have to bank on the trustworthiness of the person but the code. It can happen within a matter of minutes.
Tyler
Escrow is the key piece in that scenario. We use escrow because we don’t trust the third party. The contracts can be validated because they’re simply data. Anyone can look into them to ensure it’s going to do what it says it will.
George
Tyler I want to kick it to you. What is a gas fee?
Tyler
Gas fee is mostly on the Ethereum network. Other protocols might call it something else. Every network has a fee to use a network. In Ethereum, it’s called gas. It’s measured in a couple of different units that fluctuate with how busy the network is. The fees go to people running Ethereum nodes.
It’s a complicated system that functions like an auction. Where you say you want the network to run this transaction, then nodes will pick it up based on how much gas they get out of it. It’s an incentive for people to run the network.
George
DeFi! It’s a Web 3 term. It stands for decentralized finance. We saw more people interested in getting into this idea.
Tyler
Right now to buy my home, I need to go to a bank and have them approve me. This is a vast oversimplification, but I need to get money from someone in order to pay for this house. With DeFi that money can come from many, many people. There could be 100,000 people who are willing to loan money to people who fit this kind of criteria. It’s decentralized in that the supplier of funds is.
Something we glossed over early on and could be a good segue into tokens. Which is our next term. A smart contract lives at an address and I have an address as a user of the system. That’s where the data lives. And so when I create that address it’s public. How much money I have is public to any system.
It comes back to this trustless system, where if I apply for a loan through a particular DeFi service, they can look at the assets that I have in that address and know exactly how much money I have and if I’m a risk. It’s a part of the consensus of how it works.
Going into tokens there are NFTs. This is a token that says you own something. NFT stands for non-fungible token. Fungible meaning is readily exchanged with one another. Dollar bills are fungible because they are all the exact same value, but an NFT is non-fungible in that it represents ownership of one unique item that I alone can own.
There are tokens like governance tokens which say because I own this particular token I get a certain number of voting privileges or influence. When we get to DAOs those are often governed by governance-type tokens.
George
If anybody uses Robinhood or Coinbase or different exchanges where you can buy coins. Those are all different kinds of tokens that are usually tied back to a project or a protocol.
Tyler
Crytpo right now is super interesting from a birds-eye view but it’s super risky financially. A reminder that nothing here is financial advice. Because this is an unpaved territory, these organizations that are putting tokens out, some of them know what they’re doing and some don’t. There is a lot of opportunity for what we call rugs. Where you get somebody to invest and then you take all that money out and leave people hanging. It’s hard because crypto gives people a new responsibility for their finances and a lot of people aren’t prepared for that.
George
Thinking about my parent's generation, there were financially savvy folks with an education based on that. Now we’re moving into a totally different space where there’s very little regulation on any of this. People are creating value centers off of almost anything. And we have the technology to do it so there is no constraint holding us back for what it could be used for, yet.
Tyler
It’s exciting but there is a lot of risk because there are so many new entry opportunities, for new economic participation. People who don’t have access to traditional banks or the ability to bank safely without being taken advantage of. It’s another micro-factor that’s driving a lot of this adaption.
At some point, companies get big enough that they have to prioritize their own interests over those of potential customers or their own customers. That’s where DeFi starts to look really interesting. The interest of the tokens are fundamentally aligned with those who own it.
George
Let’s cover what is a DAO?
Tyler
A DAO is a decentralized autonomous organization. It’s basically a community of people who have a certain level of ownership or authority or privilege - whether it’s voting rights or just membership. It is that group that sometimes functions like a company, they make money for the services they provide. Sometimes like a nonprofit. It just depends on the smart contract that governs participation in this DAO.
Coming back to smart contracts, when I want to participate in a DAO I acquire tokens somehow. And in doing that I get benefits and have to behave consistently with it. There are a lot of models for what a DAO is anymore.
George
Dan, you talked about the parallels in your mind between DAOs and ESOPs. It’s not one-to-one because the smart contract has a slightly different governance model but there are some parallels.
An ESOP or an employee-owned organization is similar in the sense that depending on how long you’ve been there or your position you have different voting rights. And yet there is still an organizational structure to it. It’s being owned or held by something other than the original founders or private equity group. It’s a different ownership model.
Dan
Decisions are made from the bottom up governed by the community - there are parallels to that in an ESOP. If you are under traditional ownership or traditional LLC there's an ownership group. But if you move to an ESOP there is a fairly lengthy process or restructuring. It’s governed by rules. These “protocols” that are written into governing structures are very similar to a DAO.
Tyler
In contrast, an ESOP - those already exist. In terms of governing them, they are people. Those people can take time and fees for their work. We have to acknowledge the money we pay and the many lawyers we hire to form and manage these kinds of relationships... The question is how can more of that stay with the people actually doing the work than the people managing them.
George
Primarily I’ve been seeing DAOs happen the most around organizations that are formed to govern cypto-currencies. That’s where I’ve seen them the most personally.
What is a wallet?
This was probably the biggest barrier to entry for me to just try and touch the tool. Because you have to try and understand that you need a wallet to do anything. Very simply what is it?
Tyler
A wallet is a way to manage the various accounts that you have. Coinbase has a wallet, so when you create a user account or profile and you buy crypto you get a crypto address that is seen and managed from within your wallet.
Another wallet is MetaMask which is a browser extension. It’s a chrome extension because that’s how you interact with Web 3 websites. In order to buy something on the internet through Ethereum, I need to do that through a wallet like MetaMask.
One of the biggest opportunities is that for anyone moving into this space is to make the UX readily understood, easily accessible, and elegant. The biggest barrier is that it’s complicated and unclear. The UX of this whole ecosystem is making headlines but as soon as the UX starts to catch up to everybody's expectations that are rooted in web 2 experiences, that's when web 3 starts to really gain steam. That will be done in part because of DApps.
DApps are decentralized applications that run on the blockchain. Right now, when you download the Facebook app that goes through the app store it’s made by a centralized company - Facebook - and it goes through a centralized system. The data is stored practically in one place which is Facebook.
For DApps, the backend of a DApp is built on the blockchain. The front end are often written in react or whatever. The front end doesn’t matter because you have to have an interface that’s compatible with the devices we use day in and day out. But coming back full circle, the functionality and data exist on the blockchain and that’s why it’s decentralized.
George
The current way we build apps is going to be around a long time. There are special use cases where Web 3 is going to have a purpose. It’s very popular right now and so we’re all trying to get it. We are interested because there will be niche opportunities.
Tyler
This won’t be a technology shift. It’s not like moving from React to Angular. It’s a mindset shift in the way we work with teams, the way that we see our customers, the way we see their relationship with technology, and ownership.
George
As we go forward we’re going to take a lot of these topics. This was just an overview of the jargon. Take a look at our notes if they’re helpful. There are a lot of links we’re pulling from.