Web3 is a decentralized internet that is being built centered on the blockchain industry. The vision of its creators is an internet where users own their data and content and democratically develop, maintain, and manage their services.
Such an internet is not created by one person alone. Web3 relies on many components, including the virtual reality known as the metaverse, non-fungible tokens (NFTs) and cryptocurrencies, as well as decentralized finance (DeFi), decentralized autonomous organizations (DAO) and more.
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Metaverse, NFT, cryptocurrency
Metaverse refers to a 3D virtual reality in which users are mutually connected. It is a portmanteau of ‘meta’, which means virtual and transcendent, and ‘universe’.
At the core of the metaverse is a solid community and user-generated content. In the metaverse, users can directly create games and items, own and develop real estate, or participate in exhibitions and performances.
To allow users to not just communicate within the virtual world, but also create items, real estate and other added value, various technologies and business models come together: graphic technology such as artificial intelligence (AI), virtual reality (VR) and augmented reality (AR); cloud or other data processing technology; and ultra-high speed communication technology such as 5G.
The metaverse was a hot topic in 2021, but its growth continues. It is being built in many fields, from e-commerce to media, entertainment and real estate.
NFTs and cryptocurrencies are being used as a means of allowing participants to buy and sell their own content in the metaverse, as well as to take them to external exchanges, where they can be used for additional economic activities. The purpose of NFT is to provide exclusive ownership of game characters, items, real estate, and more within the metaverse by assigning them a unique number and creating a digital proof of ownership.
The metaverse, NFTs and cryptocurrencies are thus at the forefront of realizing Web3. This is because the metaverse is where decentralized economic activities take place, while NFTs and cryptocurrencies serve both as a digital currency within the metaverse economy and as a means of transferring assets from one metaverse to another. Through the metaverse, people can communicate in real time across the digital and physical worlds. Meanwhile, NFTs and cryptocurrencies can realize the user-owned internet envisaged by Web3.
DeFi and DAO
DeFi stands for Decentralized Finance. In the Web3 system, the metaverse is a space, while NFT and cryptocurrencies are both vehicles for economic activities within the metaverse as well as for taking their value outside. The role of DeFi is to approach NFT and cryptocurrencies as assets and apply them as a means to generate financial income.
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The reason DeFi can support Web3 – unlike other financial products – is because in decentralized financial services, financial service contracts can be executed by users.
Each DeFi service has a DAO. DAO is short for Decentralized Autonomous Organization, an entity for decentralized decision-making that is an important element of Web3. This is because in Web3, where power is distributed among users, DAO play the decision-making role taken by platforms in Web 2.0.
DAO’s ultimate aim is a system in which important decisions such as technology upgrades and financial decisions are managed by the suggestions and votes of individual community members. In this system, smart contracts created through blockchain technology are used to let the community propose, vote on, and set rules and then automatically enact them. The rules of the DAO cannot be arbitrarily modified, except by the votes of community users.
DAO token holders are usually given voting rights proportional to their holdings. By holding its tokens together, DAO members share a stake in the protocol’s success.
As Web3 continues to expand in its pursuit of a decentralized internet, the industry expects the key element DAO to keep growing with it. As Ivan Fartunov, Head of Ecosystem for Aragon, put it: “We believe the biggest trend is towards composability of DAO tooling and making sure that teams that want to build something can seamlessly utilize multiple products and services regardless of the framework they are using. Most DAO creators will be Web 3 natives and working with them will be essential for making useful and scalable services/products to set the stage for new entrants into web3.”
Dream of decentralized economy combines metaverse, NFT, DeFi and DAO
Metaverse, NFT, cryptocurrency, DeFi, and DAO are organically connected within the massive, decentralized internet called Web3. The metaverse provides a decentralized space for users to create and own content. NFTs and cryptocurrencies become currencies that create economic value within this space, while also enabling this value to be transferred to other metaverses.
DeFi, in turn, allows these cryptocurrencies and NFT to serve as assets once they have been pulled outside the metaverse. It is a way of gaining additional financial income by providing financial products based on smart contracts. Meanwhile, DAO exists in the metaverse and also in each cryptocurrency, NFT and DeFi project. It decentralizes decision-making for each service, becoming an indispensable core organization to ensure Web3’s value.
Scalar Capital Co-Founder Linda Xie tweeted that in 2020, DeFi grew within the blockchain ecosystem by enabling ‘unmanaged wallets’ and ‘permission-less trading’. Then, “NFTs provide on-chain identity and reputation to DAO contributors, DeFi provides DAO members massive capital liquidity”. Xie concluded that “the demand for DeFi and NFT has led to the development of layer 1 and layer 2 solutions, and these extended solutions enable on-chain governance such as DAO to be economically realized”.