Token Economy: How the Web3 reinvents the Internet

Imprint

Token Economy: How the Web3 reinvents the Internet

Second edition, June 2020.

The first edition was released in June 2019 under the title Token Economy: How Blockchain & Smart contracts revolutionize the Economy and had two amended editions.

Author: Shermin Voshmgir

Publisher: BlockchainHub Berlin

Alte Schönhauserstrasse 9, 10119 Berlin

https://blockchainhub.net

Design: Justyna Zubrycka

Production: Caroline Helbing

Copy edit: Paisley Prophet

Cover design: Carmen Fuchs

Ebook layout: Shermin Voshmgir

© Shermin Voshmgir, 2020

All rights reserved. No portion of this book may be reproduced in any form without permission from the publisher. For permissions contact: [email protected]

ISBN: 978-3-9821038-3-9

A print edition of this book is available. ISBN: 978-3-9821038-1-5

Table of Contents

Imprint

Table of Contents

About the Author

About the Book

How to Read This Book

Introduction

Part1: Web3 Basics

Tokenized Networks:  Web3, the Stateful Web

Blockchain: A Stateful Protocol

Other Web3 Protocols

Decentralized Applications in the Web3

Chapter Summary

Keeping Track of the Tokens:  Bitcoin, Blockchain, & Other Distributed Ledgers

Cryptoeconomics, Consensus & Proof-of-Work

Network Nodes

Network Attacks

Protocol Forks & Network Splits

Alternative Distributed Ledger Systems

Alternative Consensus Mechanisms to PoW

With or without a Token?

Use Cases & Applications

Chapter Summary

Token Security:  Cryptography

Public-Key Cryptography

Secure Algorithms

Hashing

Wallets & Digital Signatures

Types of Wallets & Key Management

Sending Tokens

Chapter Summary

Who Controls The Tokens?  User-Centric Identities

Server-Centric Identities

History of Digital Identity Management

User-Centric Identities

Outlook

Chapter Summary

Part 2: Web3 Applications

Smart Contracts

Self-Enforcing Agreements

Industry Use Cases

Oracles

Use Case of Buying a Second-Hand Car

History of Smart Contracts

Chapter Summary

Institutional Economics of Web3 Networks & other DAOs

DAOs vs. Traditional Organizations

Institutional Economics of DAOs

Monetary & Fiscal Policy of DAOs

Chapter Summary

Governance of Web3 Networks & Other DAOs

Checks & Balances in the Network

Off-Chain vs. On-Chain Governance

The Myth of Decentralization & Trustless Networks

Chapter Summary

Tokens

History of Tokens

Cryptographic Tokens

Properties of Tokens

Non-Fungible Tokens

Chapter Summary

Part3: Token Economics & Decentralized Finance

The Future of Money &  Decentralized Finance (DeFi)

Properties of Money

Types of Money

Money or Not?

Decentralized Finance (DeFi): Toward a Digital Barter Economy

Chapter Summary

Stable Tokens

Asset-Collateralized Stable Tokens

Crypto-Collateralized Stable Tokens

Central Bank Digital Currency

Algorithmic Stable Tokens

Challenges & Outlook

Chapter Summary

Privacy Tokens

Privacy of Blockchain Tokens

History of Privacy Tokens

Full Web3 Privacy

Legal & Political Aspects of Privacy

Chapter Summary

Trading Tokens, Atomic Swaps & DEX

Challenges of Centralized Exchanges

Atomic Swaps

Decentralized Exchanges

Chapter Summary

Lending Tokens - Decentralized Credit Systems

P2P Lending

P2P Borrowing

Flash Loans

P2P Lending Protocols

Flash Attacks

Chapter Summary

Token Sales: ICOs, ITOs, IEOs, STOs

History of Token Sales

Types of Token Sales

Challenges of Token Sales

Initial Exchange Offerings

Chapter Summary

Part 4: Token Use Cases

Asset Tokens & Fractional Ownership

Use Case 1: Security Tokens

Use Case 2: Tokenizing Real Estate

Use Case 3: Tokenizing Art

Use Case 4: Collective Fractional Ownership

Chapter Summary

Purpose-Driven Tokens

Public Goods & the Tragedy of the Commons

Positive & Negative Externalities

Behavioral Economics & Nudging

Cognitive Psychology & Behavioral Analysis

Behavioral Finance & Behavioral Game Theory

Mechanism Design & Token Engineering

Chapter Summary

Steemit, Hive & Reddit: Tokenized Social Networks

Problems in Social Media Today

Token Economics of Steemit

Criticism of Steemit

Steemit Hard Fork: Hive Network

Reddit: Tokenizing Web2 Platforms

Chapter Summary

Basic Attention Token: Advertising Reinvented

Attention Economy, Data Markets & Privacy

Basic Attention Token (BAT)

Outlook & Challenges

Chapter Summary

Token Curated Registries - The New Search?

How TCRs Work

Attack Vectors

Criticism of TCRs

Other Types of TCRs

Chapter Summary

How to Design a Token System

Technical Engineering

Legal Engineering

Economic Engineering

Ethical Engineering

Chapter Summary

Annex

Origins of Bitcoin & the Web3

Scalability Solutions

State Channels

Sidechains

Blockchain Interoperability

Sharding

Alternative Cryptographic Algorithms

Libra & Celo

Outlook

Tables & Figures

About the Author

~

Shermin Voshmgir is the founder of BlockchainHub in Berlin and the director of the Research Institute for Cryptoeconomics at the Vienna University of Economics. In the past, she was a curator of TheDAO and advisor to various Web3 startups like Jolocom, Wunder, and also the Estonian E-residency program. In addition to her studies at the Vienna University of Economics, she studied film and drama in Madrid. Her past work experience ranges from Internet startups and research to art. She is Austrian, with Iranian roots, and lives in both Vienna and Berlin.

About the Book

This book is an attempt to summarize existing knowledge about blockchain networks and other distributed ledgers as the backbone of the Web3, and contextualize the socio-economic implications of the Web3 applications, from smart contracts, tokens, DAOs to the concepts of money, economics, governance and decentralized finance (DeFi). It builds on the educational work that we started at BlockchainHub, an Info:Hub and Thinking:Hub based in Berlin, with the aim to make the Web3 accessible to a general audience.

Blockchainhub.net was the first website to systematically compile and disseminate blockchain and Web3 knowledge to a general audience and has been operational since 2015, first with a series of blog posts, which were later compiled and contextualized in the Blockchain Handbook, available for free.

Token Economy builds on the legacy of the past activities and goes one step beyond: The focus is now on tokens as the atomic unit of the Web3. The basic structure of the second edition of this book is the same as the first edition, with slightly updated content of existing chapters, minor corrections, revised terminology and four additional chapters: User-Centric Identities, Privacy Tokens, Lending Tokens, and How to Design a Token System.

How to Read This Book

While some readers might have a good understanding of blockchain networks and similar distributed ledgers, it is assumed that many readers still need an introduction to the topic. Without an understanding of the fundamental building blocks of blockchains, smart contracts, and the Web3, it will be hard for readers to assess how, when, and why token use cases might be a game changer. This book provides a general overview of the underlying technology and resulting socio-economic implications thereof, before deep-diving into the topic of tokens.

Chronological reading is recommended, especially for readers who are new to the topic. However, the book also works in a modular way, allowing for cross-reading between chapters. Certain sub-chapters of the first part might be considered to have too much detail for some readers and can easily be skipped. Some basic information on the cryptoeconomic mechanisms behind blockchain networks, and Bitcoin in particular, might be repeated over several chapters. Assuming that many readers will cross-read and might skip some chapters, this minimal repetition is intentional, as a basic understanding of the consensus mechanism behind public distributed ledgers is essential to the understanding of many of the other chapters.

In some cases, complementary technologies or the names of start-ups will be briefly mentioned to make the technology and its use cases more tangible, without describing them in detail. Certain topics can only be briefly explained on a high level, as a more thorough explanation would be beyond the scope of this book. In such cases, the references at the end of each chapter can help to deep-dive into the respective sections of interest.

Given the broad range and multidisciplinary nature of the topics discussed, it might be hard to please the needs of all readers, since not all specialist terms can be explained. It is assumed that the reader will conduct an independent Internet search in such cases.

The graphics in this book intend to visualize the core message of the topics discussed. They sometimes use metaphors or apply an intentional level of abstraction to allow for better understanding, especially for those who are new to the topic. Due to the emerging nature of token applications and their underlying Web3 networks, some details of the projects mentioned in this book might have become obsolete by the time of reading the book. The overall content of this book, however, is structured in a way that the general information will remain relevant.



Introduction

Tokens are to the Web3 what websites were to the Web1. With the emergence of the WWW in 1991, Tim Berner Lee introduced a new standard that allowed us to create visually appealing web pages with just a few lines of code, and surf the Internet following links, instead of using command-line interfaces. Back in the early 1990s, most people did not know how to code HTML, or how to create appealing, meaningful, user-friendly websites. It took us almost a decade to figure out how to use webpages beyond the scope of online directories and online billboards, and when we did, the Web2 emerged. Compared to those early days of the Web, we are at a very similar stage when it comes to understanding what we can potentially do with cryptographic tokens. While it has become easy to create a token with a few lines of code, the understanding of how to apply these tokens is still vague. Even though there are already more than 5400 publicly traded tokens listed on "Coinmarketcap" at the time of writing this book, most of these tokens still lack proper design; many of these might, therefore, soon fail simply because of that.

The technology is still in its early stages, rapidly evolving, with the potential to uproot many industries, in particular money and finance, including government and governance. However, we currently lack best practices, while simultaneously dealing with a myriad of technological and legal challenges. We also lack substantial education around the mechanisms, potentials, threats, and state of the technology, including its socio-economic implications.

Buzzwords like smart contracts, cryptocurrencies, and tokens add to the confusion of what is what. Partial and one-sided knowledge seem to be on the rise, but the big picture of why and how Web3 networks could prove to be one of the biggest game-changing innovations in the years to come is still vague. The media keeps referring to cryptocurrencies, even when talking of non-currency tokens, while reducing the underlying blockchain networks to objects of speculation, instead of focusing on the fact that they provide - first and foremost - a promising governance infrastructure that could resolve many problems of the Internet we use today, such as: (a) the fact that we have no control over what happens with our private data, (b) the lack of transparency along the supply chain of goods, services, and financial payments, or (c) the fact that the Internet lacks an inherent payment settlement layer, forcing us to rely on trusted Internet platforms such as Amazon, Airbnb, or Uber.

The industry keeps referring to Blockchain as different from Bitcoin, creating an artificial divide that is often misleading. There seems to be too little understanding about the fact that Bitcoin is a blockchain network, which is (a) globally managed by people who mostly do not know each other, and (b) enabled by the consensus protocol that (c) incentivizes all network actors for their contributions with a native token. The governance rules are tied to the minting of a native blockchain token. The Bitcoin token can, therefore, be seen as the currency of a distributed Internet tribe, called the Bitcoin network, where network actors are rewarded with Bitcoins, just as the Ether is the currency of the distributed Internet tribe Ethereum network, or Sia is the native currency of the Sia network. The Bitcoin network and other distributed ledgers all represent a collectively maintained public infrastructure and are the backbone of the next generation Internet, what the crypto community refers to as the Web3.

While early tokens were first only minted as part of the incentive scheme of the underlying blockchain protocols, with the advent of the Ethereum network, tokens have moved up the technology stack. Ethereum made it cheap and easy to issue a token with just a few lines of code, with a simple smart contract, and without the need to build your own blockchain infrastructure. The challenge, however, is that most people still don’t know what to do with these tokens, or how to properly design them. Other challenges are: technological challenges, sustainable mechanism design for purpose-driven tokens, unclear and balkanized legislation, and the lack of education about the potentials and threats of this emerging token economy.

The goal of this book is, therefore, to first give an overview of the fundamental building blocks of the Web3 (Part 1) and introduce the most important Web applications such as smart contracts, DAOs and Token with focus on their socio-economic implications (Part 2). Part 3 will deep dive into the implications on money, finance and the economy and explain how Web3 based decentralized financial applications - colloquially referred to as DeFi - lead to the merging of the concept of money, finance and the real economy. Part 4 will analyze selected use cases and conclude with a hands on guide to how to design your own token system.

~

I would like to express my gratitude to a few people who have inspired or supported me from the very beginning of the crypto journey, or who have contributed with input and feedback to this book: Peter Kaas, Valentin Kalinov, Alfred Taudes, Michael Zargham, Justyna Zubrycka, Caroline Helbing, Jakob Hackel, Kris Paruch, Susanne Guth, Guido Schäfer, Sofie Schock, Tom Fürstner, Robert Krimmer and all the advisors and collaborators of BlockchainHub, including my dear friends from Lunar Ventures in Berlin. I am also grateful for all the people who supported the creation of the Cryptoeconomics Research Lab at the Vienna University of Economics, and who believed in the necessity of dedicated interdisciplinary research on this topic.

I am especially grateful for the hospitality and open environment of the Ethereum Office in Berlin, who offered us shelter in their co-working space when setting up the BlockchainHub, and the open mind of all the people involved in post-TheDAO hack activities, working 24/7 to find a solution to recover depleted funds, which taught me a great deal about open-source software development and bug fixing in decentralized networks.

~

Shermin Voshmgir

June  2020

Part1: Web3 Basics

~

This part will explain the fundamental building blocks of the Web3. It will give an introduction to the basic principles of the Web3: Bitcoin and other blockchain networks including alternative distributed ledger systems, the role of cryptography and user-centric digital identities, but without going into all the details, as that would be far beyond the scope of this book. Any reader who is interested in learning more is advised to follow up on the sources cited at the end of each chapter.

Tokenized Networks:

Web3, the Stateful Web

If we assume that the WWW revolutionized information, and that the Web2 revolutionized interactions, the Web3 has the potential to revolutionize agreements and value exchange. The Web3 changes the data structures in the backend of the Internet, introducing a universal state layer, often by incentivizing network actors with a token. The backbone of this Web3 is represented by a series of blockchain networks or similar distributed ledgers.

~

The Internet we have today is broken. We do not control our data, nor do we have a native value settlement layer. Thirty years into mass adoption of the Internet, our data architectures are still based on the concept of the stand-alone computer, where data is centrally stored and managed on a server, and sent or retrieved by a client. Every time we interact over the Internet, copies of our data get sent to the server of a service provider, and every time that happens, we lose control over our data. As a result, and even though we live in an increasingly connected world, our data is mostly centrally stored: on local or remote servers, on our personal computers, mobile devices, flash drives, and increasingly also on our watches, cars, TVs, or fridges. This raises issues of trust. Can I trust those people and institutions that store and manage my data against any form of corruption—internally or externally, on purpose or by accident? Centralized data structures not only raise issues of security, privacy and control of personal data, but also produce many inefficiencies along the supply chain of goods and services.

There are historic roots to these issues since the computer preceded the Internet. In the early days of personal computers one could not send files from one computer to the other. You needed to save a file on a floppy disc, walk over to the person who needed the file, and copy the file onto their computer so they could use it. If that person was in another country, you would need to go to the post office and mail the floppy disc to them. The emergence of the Internet Protocol (IP) put an end to this, connecting all those stand-alone computers with a data transmission protocol that made the transfer of data faster, and slashed the transaction costs of information exchange. However, the Internet we use today is still predominantly built on the idea of the stand-alone computer, where most data is centrally stored and managed on the servers of trusted institutions. The data on these servers is protected by firewalls, and system administrators are needed to manage the security of the data stored on the servers.

The emergence of the WWW in the early 1990s increased the usability of the Internet with visually appealing and easy-to-navigate websites. Ten years later, the Internet became more mature, and programmable. We saw the rise of the so-called Web2, which brought us social media, e-commerce and knowledge platforms. The Web2 revolutionized social interactions, bringing producers and consumers of information, goods, and services closer together. The Web2 allowed us to enjoy peer-to-peer (P2P) interactions on a global scale, but always with a middleman: a platform acting as a trusted intermediary between two people who do not know or trust each other. While these Internet platforms have done a fantastic job of creating a P2P economy, they also dictate all the rules and they control the data of their users.

In this context, blockchain networks seem to be a driving force of the next-generation Internet, what some refer to as the Web3. They reinvent the way that data is stored and managed over the Internet, providing a unique set of data—a universal state layer—that is collectively managed by all nodes in the network. This unique state layer, for the first time, provides a native value settlement layer for the Internet in the absence of intermediaries. It enables true P2P transactions, and it all started with the emergence of Bitcoin.

While the Web2 was a front-end revolution, the Web3 is a backend revolution. The Web3 reinvents how the Internet is wired in the backend, combining the system functions of the Internet with the system functions of computers. However, nothing much will change on the front-end of the Internet for the average user. The Web3 represents a set of protocols, with distributed ledgers as their backbone. Data is collaboratively managed by a P2P network of computers. The management rules are formalized in the protocol and secured by majority consensus of all network participants, who are incentivized with a network token for their activities. The protocol formalizes the governance rules of the network and ensures that people who do not know or trust each other reach and settle agreements over the Web. While trying to manipulate data on a server resembles breaking into a house, where security is provided by a fence and an alarm system, the Web3 is designed in a way that you would need to break into multiple houses around the globe simultaneously, which each have their own fence and alarm system. This is possible but prohibitively expensive.





Blockchain: A Stateful Protocol

The Internet we use today is stateless. It doesn’t have a native mechanism to transfer what computer science refers to as state. State refers to information, or the status of Who is who?; Who owns what?; and Who has the right to do what? in a network. The ability to transfer value easily and P2P is essential for efficient markets, and state is a key property for managing and transfering values. In the Web3, values are represented by cryptographically secured tokens.

If you can’t hold state in the Internet, you cannot transfer value without centralized institutions acting as clearing entities. While today’s Internet has accelerated information transfer by orders of magnitude of what was possible before, we still need trusted institutions such as Internet platform providers to broker our actions as a workaround for this lack of state. Stateless protocols like the current Web only manage the transfer of information, where the sender or receiver of that information is unaware of the state of the other. This lack of state is based on the simplicity of the protocols that the Web is built on, such TCP/IP, SMTP, or HTTP. This family of protocols regulates the transmission of data, not how data is stored. Data could be stored centrally, or decentrally. For many reasons, centralized data storage became the mainstream form of data storage and management.

The introduction of session cookies and centralized service providers offered workarounds to this stateless Web. Session cookies were invented so web-based applications could preserve state on local devices. Before session cookies—in the early days of the WWW—we had no browsing history, no favorite sites saved, and no auto-complete, which meant that we had to resubmit our user information every time we were using a website. While session cookies provide better usability, these cookies are created and controlled by a service provider, such as Google, Amazon, Facebook, your bank, your university, etc., whose role is to provide and manage the state of their user.

Web2 platforms have introduced many beneficial services and created considerable social and economic value over the years. However, wealth was mostly accumulated by the companies offering the services, and less by the general public contributing content and value to those services. Instead of decentralizing the world, Web2 platforms contributed to a re-centralization of economic decision making, R&D decision making, and subsequently, to an enormous concentration of power around these platform providers. Furthermore, since the early Internet was created around the idea of free information, customers were often not willing to pay for online content with a recurring subscription fee, and micropayments are still not feasible, in most cases. Therefore, many of these Web2 platforms needed to find alternative ways to profit from the free services they provided, and this alternative was advertising. What followed was targeted advertizing based on user behavior and the commodification of private data. Business models have, therefore, developed around targeted advertising that builds on the data sets collected, which provide state for these platforms. As a result of this, users are paying for services with their private data.

The Bitcoin network introduced a mechanism for each node in a network to send and receive tokens, and record the state of tokens, in a digitally native format. The consensus protocol of the Bitcoin network is designed in a way that the network can collectively remember preceding events or user interactions, resolving the double-spending problem by providing a single source of reference for who received what and when. The Bitcoin protocol can, therefore, be seen as a game changer, paving the way to a more decentralized Web. The Bitcoin white paper of 2008 initiated a new form of public infrastructure where the state of all Bitcoin tokens are collectively maintained.

Blockchain networks, such as the Bitcoin network, are only the backbone, and the starting point, but not the only building block in this new decentralized Web. The Web3 architecture leverages the collectively maintained universal state for decentralized computing. Decentralized applications can manage some or all of their content and logic by a blockchain network or other distributed ledger. But other protocols are also needed. Many developers have started to build alternative blockchain networks, as well as complementary protocols for the Web3.

Other Web3 Protocols

Blockchain is not the only technology needed to decentralize the Web. A multitude of other protocols are required to create a decentralized application. However, the term blockchain seems to be used as a synonym for many Web3¹ protocols or the Web3 itself, at least by some journalists and the general public. Apart from computation we need file storage, messaging, identities, external data (oracles) and many other decentralized services. A blockchain network is simply the processor for decentralized applications that operate on top of the Web3. It serves as a distributed accounting machine recording all token transactions and performing computation.

Blockchain networks are not at all ideal for storing data, for two main reasons: (i) public blockchain networks are too slow and too expensive to store large data sets; and (ii) storing plain-text data blockchain networks doesn’t allow for privacy by design.² To create a decentralized YouTube, for example, decentralized file storage is needed to manage the video files. A range of different decentralized storage network solutions have been emerging, such as IPFS, Filecoin, Swarm, Storj, or Sia. Decentralized storage networks incentivize network nodes to share storage space with a native token, and turn cloud storage into algorithmic markets. They differ in their levels of decentralization, privacy and in their choice of incentive mechanisms. Some might not even have an incentive layer, like IPFS, for example. Protocols like Golem, on the other hand, provide decentralize rendering power by rewarding contributions in the network with their native protocol token.

The Web3 developer community has been evolving over the last years. Different teams are working on various components of this emergent Web; however, many of these protocols are still in development. Web3 applications typically communicate with peers that are unknown in the beginning, and have varying quality in terms of speed and reliability. New libraries and APIs are needed to navigate such complexities. It is unclear when they will achieve critical mass to possibly replace the current Web applications on a larger scale, or which standards will ultimately prevail. The transition from client-server Web to the decentralized Web will, therefore, be gradual rather than radical. It seems to be shifting from centralized to partially decentralized to fully decentralized.

One of the most pressing applied research questions when developing complementary technologies for the Web3 is the question of how to reward network participants with a token, so that the network stays attack resistant. Examples thereof would be incentive mechanisms for decentralized file storage solutions, decentralized computation, data analysis, or reputation. Many different consensus mechanisms are currently being experimented with, such as: Proof-of-Retrievability, Proof-of-Storage, and Proof-of-Spacetime. Fully decentralized solutions, such as IPFS and Swarm, are not functionally implemented yet.

While decentralized architectures are more resilient than their centralized Web2 predecessors, they are also slower. Speed, performance, and usability are bottlenecks in the Web3 that will very likely be resolved over time, once the core components of the Web3 are up and running (read more: Annex - Scalability). It is likely that the future of the Internet will be more decentralized, however, this does not mean that we will get rid of centralized systems altogether. Centralized systems have advantages and will likely prevail, at least for specific use cases.



Decentralized Applications in the Web3

As opposed to centralized applications that run on a single computer, decentralized applications run on a P2P network of computers. They have existed since the advent of P2P networks and don’t necessarily need to run on top of a blockchain network. Tor, BitTorrent, Popcorn Time, and BitMessage, are all examples of decentralized applications that run on a P2P network, but not on a blockchain network, which is a specific kind of P2P network (read more: Annex - Origins of Bitcoin and Web3).

Traditional applications use HTML, CSS, or javascript to render a webpage or a mobile app. The front-end of a webpage or a mobile application interacts with one or more centralized databases. When you use a service like Twitter, Facebook, Amazon, or Airbnb, for example, the webpage will call an API to process your personal data and other necessary information stored on their servers, to display them on the front-end. User ID and passwords are used for identification and authentication, with low levels of security, since personalized data is stored on the server of the service provider.

Decentralized applications do not look any different from current websites or mobile apps. The front-end represents what you see, and the backend of a decentralized application represents the entire business logic. A decentralized application is a blockchain client called wallet. It uses the same technologies to render a webpage or a mobile app (like HTML, CSS, Javascript) but communicates with a blockchain network instead of a server and, in the case of smart contract networks, also the smart contracts (read more: Part 2 - Smart Contracts). The wallet also manages the public-private key-pair and the blockchain address, to provide a unique identity for network nodes so they can securely interact with the network (read more: Part 1 - Token Security & User-Centric Identities). The smart contracts represent the core business logic of the decentralized application and processes data feeds from inside and outside the network to manage the state of all network actors (read more: Part 1 - Smart Contracts). If the blockchain-client is a full-node, it will also manage the full state of the ledger (read more: Part 1 - Bitcoin, Blockchain & other Distributed Ledgers). In this case, the blockchain-client performs the functions of an HTTP client and a server, as all data is stored client-side. The front-end data, including audio or video files and other documents, could be collectively stored on and managed by decentralized storage networks like Swarm or IPFS. At the time of writing this book such data is still, for the most part, stored on and managed by servers.

For the average user, decentralized applications need to look and feel the same as existing applications, which means that they need to be as easy and intuitive to use if they are to be adopted on a larger scale. Currently, wallet software and key management are difficult, which might be a bottleneck to the mass adoption of Web3 applications. Furthermore, wide-scale adoption can only happen if distrust of centralized solutions is high enough to warrant current trade-offs in usability.

Chapter Summary

~

The Internet we have today is broken. We do not control our data, nor do we have a native value settlement layer. Every time we interact over the Internet, copies of our data get sent to the server of a service provider, and every time that happens, we lose control over our data. This raises issues of trust.

~

The Internet we use today stores and manages data on the servers of trusted institutions. In the Web3 data is stored in multiple copies of a P2P network, and the management rules are formalized in the protocol, and secured by majority consensus of all network participants, often (but not always) incentivized with a network token for their activities.

~While the Web2 was a front-end revolution, the Web3 is a backend revolution, introducing a universal state layer. It is a set of protocols led by a blockchain network or similar distributed ledger, which intends to reinvent how the Internet is wired in the backend. The Web3 combines the system functions of the Internet with the system functions of computers.

~

As opposed to centralized applications that run on a single computer, decentralized applications run on a P2P network of computers. They have existed since the advent of P2P networks. Decentralized applications don’t necessarily need to run on top of a blockchain network.

~

A decentralized application is a blockchain client called wallet. It uses the same technologies to render a webpage or a mobile app (like HTML, CSS, Javascript) but communicates with a blockchain network instead of a server and, in the case of smart contract networks, also the smart contracts. The wallet also manages the public-private key-pair and the blockchain address, to provide a unique identity for network nodes and allow them to interact with the network.

~

Chapter References & Further Reading

* Benet, Juan: IPFS - Content Addressed, Versioned, P2P File System (DRAFT 3), retrieved, Sept 10, 2018: https://ipfs.io/ipfs/QmR7GSQM93Cx5eAg6a6yRzNde1FQv7uL6X1o4k7zrJa3LX/ipfs.draft3.pdf

* Ehrsam, Fred; The dApp Developer Stack: The Blockchain Industry Barometer, Apr 30, 2017, retrieved from: https://medium.com/@FEhrsam/the-dapp-developer-stack-the-blockchain-industry-barometer-8d55ec1c7d4

* Gaúcho Pereira Felipe Gaúcho: The Web3 Video Stack Charting the infrastructure for a decentralized mediaverse!Aug 16, 2018, retrieved from: https://tokeneconomy.co/web3videostack-c423481c32a5

* Gillies, James; Cailliau, Robert: How the Web was Born: The Story of the World Wide Web, Oxford University Press, 2000, retrieved from https://books.google.de/books?id=pIH-JijUNS0C&lpg=PA25&ots=MKZj0F7pJN&pg=PA25&redir_esc=y#v=onepage&q&f=false

* Koblitz, N.: „Elliptic curve cryptosystems". Mathematics of Computation. 48 (177): 203–209, 1987

* Laplante, Philip A.: Dictionary of Computer Science, Engineering and Technology, 2000, CRC Press. p. 466.

* McConaghy, Trent: Blockchain Infrastructure Landscape: A First Principles Framing Manifesting Storage, Computation, and Communications, Jul 15, 2017, retrieved from: https://medium.com/@trentmc0/blockchain-infrastructure-landscape-a-first-principles-framing-92cc5549bafe

* Miller, V.; Use of elliptic curves in cryptography. CRYPTO. Lecture Notes in Computer Science. 85. pp. 417–426, 1985

* Misra, Jayadev: A Discipline of Multiprogramming: Programming Theory for Distributed Applications Springer, 2001.

* Monegro, Joel: Fat Protocols, Aug 8, 2016, retrieved from: https://www.usv.com/blog/fat-protocols

* Nakamoto, Satoshi: „Bitcoin: A Peer-to-Peer Electronic Cash System," Bitcoin.org, 2008, Archived from the original on 20 March 2014, retrieved from: https://bitcoin.org/bitcoin.pdf

* N.N.: Web3 Foundation - Website, retrieved from: https://web3.foundation/

* N.N.: Comprehensive wiki of generalised Web3 stack, retrieved, Sept 10, 2018: https://github.com/w3f/Web3-wiki/wiki

* Pon, Bruce: Blockchain will usher in the era of decentralised computing, Apr 15, 2016, retrieved from: https://blog.bigchaindb.com/blockchain-will-usher-in-the-era-of-decentralised-computing-7f35e94af0b6

* Samani, Kyle: The Web3 Stack, July 10, 2018, retrieved from: https://multicoin.capital/2018/07/10/the-web3-stack/

* Stallings, W.: Computer Networking with Internet Protocols and Technology, Pearson Education, 2004.

* Tekisalp, Emre: Understanding Web 3 — A User Controlled Internet. Coinbase breaks down the motivation and technology behind the development of Web 3, Coinbase, Aug 29, 2018, retrieved from : https://blog.coinbase.com/understanding-web-3-a-user-controlled-internet-a39c21cf83f3

* Thomas, John; Mantri, Pam: Complex Adaptive Blockchain Governance, MATEC Web of Conferences 223, 01010 (2018) https://doi.org/10.1051/matecconf/201822301010 ICAD 2018, , retrieved from:  https://www.matec-conferences.org/articles/matecconf/pdf/2018/82/matecconf_icad2018_01010.pdf

* Tual, Stephan: Web 3.0 Revisited — Part One: Across Chains and Across Protocols", May 26, 2017: https://blog.stephantual.com/web-3-0-revisited-part-one-across-chains-and-across-protocols-4282b01054c5

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* Filecoin: https://filecoin.io/

* Golem: https://golem.netw

* IPFS: https://ipfs.io/

* SIA: https://sia.tech/

* Storj: https://storj.io

* Swarm: https://swarm-guide.readthedocs.io/en/latest/

Keeping Track of the Tokens:

Bitcoin, Blockchain, & Other Distributed Ledgers

Blockchain networks build on the idea of P2P networks, providing a universal data set that every actor can trust, even though they might not know or trust