A letter to explain what is web3 to my younger brother
My younger brother’s favorite word is “why”. His second favorite phrase is “explain it to me like I’m 5”.
This letter is written for him because he asks me the same questions about web3.
- “What’s web3?”
- “What are NFTs?”
- “What is Ethereum?”
- “Why does it cost so much to send Ethereum from one person to another?”
- “What are gas fees?”
These are all good questions and I figured he’s not the only one with these questions. So I’m writing this letter to him. If you own no crypto at all, this letter might be a bit confusing. The intended audience here is someone who owns some crypto, like Bitcoin or Ethereum. You may have heard the term web3 before, but don’t have a clue for what it actually means.
Let’s start with some common web3 concepts — DeFi, NFTs, and ENS. That’s okay if that all sounds like gibberish at the moment.
What is DeFi?
DeFi is an abbreviation for decentralized finance. Decentralized finance is a catch-all term to describe crypto transactions that allow you to:
- earn interest
- buy and sell crypto that isn’t available on major exchanges like Coinbase or Binance.
The parallels here are if you were earning interest in a bank savings account or trading small stocks outside the S&P 500.
The main things that fall under DeFi are staking, decentralized exchanges, and something called yield farming.
Staking = providing your crypto to a blockchain network and earning interest in exchange for the security to that network. Binance Staking is a good example.
Decentralized exchange = swapping one crypto for another. Often you’re swapping for crypto tokens that aren’t available on major exchanges. See Uniswap.
Yield farming = buying tokens that earn an annual percentage yield (APY) in exchange for holding those tokens in a pool of assets. See curve.fi (note Curve is really complex and I barely understand it). This is also called entering into a liquidity pool.
Staking is often used a bit loosely to also mean anything generating interest on your crypto.
This stuff is really complex and this article isn’t going to be able to go into depth on these topics. This is just a high-level overview so if you see terms in the future like “yield farming”, or “staking”, you know that they refer to decentralized finance (DeFi).
What are NFTs?
NFTs are virtual assets on a blockchain, usually visual, that are unique digital assets (no two are identical). NFT stands for “non-fungible token”, in other words, each one is unique.
NFTs are bought and sold on marketplaces like OpenSea. There are something like 35 million NFTs on OpenSea. Only about 2 million right now are listed for sale. Those not listed for sale can still receive bids. Should the buyer and seller agree on a price, the transaction is completed. OpenSea is a bit like an eBay for web3.
What’s an ENS name?
Many folks in the web3 space use an ENS name. ENS stands for Ethereum Name Service. Think of this as a shorter name to make it easier to share your unique crypto address with people, or as a way to show off all the expensive NFTs you own. Many people on Twitter have changed their Twitter names to their ENS name (like cdixon.eth, Chris Dixon, a well-known venture capitalist).
Buying a name on the Ethereum Name Service is a transaction, really quite similar to registering a domain name for a website.
Once you know someone’s ENS name, you can look up what NFTs someone owns by going to a website, like Rainbow, and typing in their ENS name. So for example, you can see all the digital assets that Chris Dixon holds by going to a site like Rainbow and typing in “cdixon.eth” at the top.
What is web3?
Web3 is a catch-all term to describe all this stuff above — DeFi, NFTs, and ENS names. The term “on-chain” might also be used when describing web3. All on-chain means is that a transaction is public. If you buy an NFT on OpenSea, that’s an on-chain transaction. In fact we can see that Chris Dixon, bought something called a Forgotten Runes Wizard from Open Sea on January 8th, 2022. A site called Etherscan shows this specific transaction.
Etherscan is not the easiest site to understand, so that’s why sites like Rainbow.me that show what each address holds, is useful.
So you’re saying you can see the exact value of what someone holds?
Yes, if you know their crypto address. While Rainbow.me does a nice job showing the NFTs that Chris Dixon holds, there are better sites to see the total value of tokens held at an address. Much like Facebook made posting your family trip to Spain last year public information, apps do this for addresses on a blockchain. Zapper.fi shows the total value of assets at any address. Here, we see cdixon.eth holds just under $150,000 at current market prices of virtual currency.
It’s like walking down the hallway of a large hotel, where the walls of each room are made out of glass. You can see what’s inside everyone’s room, though you may not know who’s room it is. Just because you can see what’s inside their room, you don’t have the key to access what’s in their room, only what’s in yours. But you can make an offer or try to trade for assets in someone else’s room.
What’s a wallet?
A crypto wallet gives you access to crypto held at an address that’s yours.
Chris Dixon has a wallet that gives him access to the $150,000 of virtual currency and dozens of NFTs he owns.
It’s no different than an email address is a way for you to receive virtual mail unique to you, and your home address is a way to receive packages and letters unique to you.
- Physical address = send/receive letters and packages
- E-mail address = send/receive digital messages
- Wallet address = send/receive crypto assets
A wallet address is a series of 42 letters and numbers, that look like gibberish.
Much in the way the US Postal Service replaced, “send a letter to the town of Parksley, make the third left after city hall, walk up half a mile and drop off a letter there”, the ENS name we saw earlier (cdixon.eth) replaces the much longer 42 letters and numbers crypto wallet address.
By providing your crypto wallet address to someone, they can send you crypto there, much in the same way someone might ask for your mailing address to send you something like a birthday present.
Why do I need any of this stuff?
Today, you probably don’t.
Right now you could buy an ENS name for yourself for vanity or for investment, but in the future, it might be the way you send and receive money, the way Venmo or Paypal or Cash App have been in the last decade.
An NFT right now might not give you any direct value, but in the future it’s possible that holding certain NFTs will entitle you to future rewards that have real cash value to them. Maybe your favorite restaurant will issue NFTs and those who hold it, can get special priority to book reservations. There are conferences today where you can’t get in if you don’t hold a certain NFT.
DeFi today might be hard to navigate and understand, but with enough work, you could earn a rate of return on your investments higher than what you could earn at the bank (although there’s always associated risk).
For thousands of years humans have come up with systems to exchange value, collect items, and trade them with each other. This is the latest iteration. How early you get into it depends on your interest to embrace new technology. While it’s hard to say there’s a MUST right now for why you need to get into web3, in a couple years it may be such that it will be hard to navigate our lives without having knowledge and assets in the web3 space.
You can live today without a smartphone, but it makes everything from calling an Uber, to accessing your bank on the go, to playing your favorite games, much more difficult or impossible.
I hope this helps! If there are any other questions on web3, DeFi, NFTs, ENS names, or anything else you read, I will try to respond if you leave a comment.
Disclaimer: The views expressed here are my own. They don’t represent my employer, where I work on making web3 easier to use and access.
P.S. Part II is coming soon to explain things like gas fees, Ethereum, multichain, Polygon, tokens, and bridging.