Web3

Web3 represents the next stage of the internet, where individuals control and own their data, online relationships, and user profiles—collectively known as "social capital." In today's web2 landscape, major companies like Amazon, Facebook, and Google control this social capital by storing user data on private servers and selling it to advertisers in exchange for free services. While this model offers users accessible and user-friendly applications, it also creates challenges such as privacy concerns, data manipulation, and limited monetization options.

Web3 addresses these challenges by leveraging blockchain technology, which ensures that users own their data. This ownership allows individuals to monetize their information as they see fit, retain their digital profiles and content when switching platforms, and promotes a more balanced ecosystem where users and developers share equal footing.

To appreciate the difference between web2 and web3, consider the early days of the internet. Web1 was built on open, public protocols—such as TCP, IP, SMTP, and HTTP—that anyone could use to develop applications. This openness allowed for the creation of user-friendly services like email and online marketplaces without requiring permission from any central authority. In contrast, the modern internet often locks users into platforms that control their data, a situation that Web3 seeks to change by restoring data ownership to the individual.

Blockchain

A blockchain is a decentralized, distributed ledger system engineered to record and verify transactions across a network of computers. No single entity controls the network; instead, every participant—referred to as a node—maintains a full copy of the ledger. Unlike conventional databases that rely on central authorities to set rules and make decisions, blockchains operate on a peer-to-peer basis, ensuring that the information is shared among multiple nodes. This design bolsters security and transparency, as every transaction is visible to all participants and cannot be altered without the network's consensus.

At the heart of blockchain technology is its decentralized structure. Transactions are compiled into units known as "blocks." Each block contains a series of validated transactions agreed upon by the network. Once a block reaches its capacity, it is added sequentially to the existing chain with a timestamp, forming a continuous and unalterable record. Every block references the previous one, creating a chronological sequence that makes altering any single block—and all subsequent blocks—extremely difficult without the agreement of the majority of the network.

Smart Contracts

Smart contracts are self-executing programs that run in a deterministic manner. When an address interacts with a smart contract, it automatically carries out predetermined actions—such as transferring assets or updating internal records—without the need for intermediaries. This automation streamlines transactions and minimizes the risk of human error or manipulation, establishing a trustless and transparent process that all parties can rely on.

These contracts play a critical role in numerous blockchain applications. They are executed on blockchain networks, like Ethereum, which serve as global computer networks processing and validating the contract conditions with every new block added to the chain. This decentralized execution ensures that smart contracts operate exactly as programmed, free from external interference. The inherent immutability and public auditability of these contracts foster a high level of trust and security, making them fundamental to the development of decentralized applications across sectors such as identity management, finance, and beyond.

DeFi

Decentralized Finance (DeFi) harnesses blockchain technology and smart contracts to build an open, transparent, and decentralized financial ecosystem. Its primary goal is to enhance traditional financial systems by eliminating the need for centralized institutions like banks, brokers, and other intermediaries. This innovative approach offers users increased accessibility, transparency, and control over their financial activities.

DeFi applications are built on blockchain networks, with Ethereum being the pioneering and most widely adopted platform. Recently, many of these applications have also been deployed on Layer 2 blockchains, such as Arbitrum, Optimism, and ZKSync. By relying on decentralized networks for transaction processing and verification, DeFi removes traditional intermediaries, thereby lowering costs, reducing entry barriers, and boosting the efficiency of financial transactions.

Stablecoin

Stablecoins are digital assets engineered to maintain a constant value relative to a reference asset, typically fiat currencies such as the U.S. dollar, euro, or yen. Unlike cryptocurrencies like Bitcoin or Ethereum, which experience significant price fluctuations, stablecoins offer predictability and stability. This makes them ideal for everyday transactions, remittances, and as a secure store of value during periods of market volatility.

Stablecoins effectively bridge the gap between traditional finance and the crypto ecosystem by enabling global value transfers without the risk of substantial price changes. Key applications include:

• Remittances: Facilitating faster and more cost-effective cross-border money transfers.

• DeFi (Decentralized Finance): Serving as a core asset in lending, borrowing, and interest-earning platforms.

• Hedging: Allowing traders and investors to exit volatile positions without reverting to fiat currencies.

• Payments: Enabling merchants to accept digital payments with minimal price volatility.

Stability in stablecoins is achieved through several mechanisms:

• Fiat-Collateralized Stablecoins: These are supported by fiat currency reserves held in banks, ensuring that each stablecoin issued is backed by an equivalent amount of fiat. Examples include Tether (USDT) and USD Coin (USDC).

• Decentralized Stablecoins: Managed by smart contracts on the blockchain without central oversight, these stablecoins govern issuance, redemption, and collateral requirements through predefined, transparent rules. An example is Nexus' USDOX.

• Algorithmic Stablecoins: Relying on smart contracts and algorithms, these stablecoins maintain their peg by dynamically adjusting supply through minting and burning mechanisms, rather than through fiat reserves.

This diverse range of mechanisms underlines the versatility and importance of stablecoins in modern financial applications, ensuring a stable and efficient means of value transfer across the globe.