Tokenized Networks: Web3, the Stateful Web

The content of this page has evolved over the years (check wayback machine for previous iterations) and was last updated in July 2019, with an excerpt from the book Token Economy which builds – among others – on the educational blogposts that have been published on this website since 2015.

If we assume that the WWW has revolutionized information and the Web2 revolutionizes interactions, the Web3 has the potential to revolutionize agreements and value exchange. It changes the data struc- tures in the backend of the Internet, introducing a universal state layer, o en by incentivizing network actors with a token.

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 stand-alone computers, 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. Even though we live in a connected world, with more and more devices getting connected with the Internet – including our watches, cars, TVs, and fridges – our data is still centrally stored: on our computers or other devices, on the USB stick, and even in the cloud. 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?

Each time we interact over the Internet, copies of our lives are made and sent to the other computer, and when this happens, we lose control over our data on the other end of the Web, behind the walled gardens of a server. This is not only an issue when it comes to the privacy of our personal data, but it also produces a lot of inefficiencies in the backend of operations along the supply chain of goods and services. The current Internet – with its client-server-based data infrastructure and centralized data management – has many unique points of failure, as we can see from the recurring data breaches of online service providers. It furthermore produces high costs of document handling, as well as non-transparencies along the supply chain of goods and services.

How are client servers used over the Internet

There are historic roots to these issues. We first had the computer, then the Internet was invented, which connected these stand-alone computers with each other through a data transmission protocol. In the early days of personal computers, we used to save data on a floppy disc, eject it, walk over to the person who needed the le, and copy the le onto their computer so they could use it. If that person was in another country, you would need to mail the oppy disc to them. The Internet and the emergence of the WWW put an end to this by providing a data transmission protocol – TCP/IP – that made the transfer of data faster and massively reduced the transaction costs of information exchange. Ten years later, the Internet became more mature and programmable. We saw the rise of the so-called Web2, which brought us social media and e-commerce platforms. The Web2 revolutionized social interactions, bringing producers and consumers of information, goods, and services closer together, and allowed us to enjoy 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 platforms have done a fantastic job of creating a P2P economy, with a sophisticated content discovery and value settlement layer, they also dictate all rules of the transactions, and they control all data of their users.

The Internet we use today predominantly builds on the idea of the stand-alone computer. Data is centrally stored and managed on servers of trusted institutions. The data on these servers is protected by firewalls, and system administrators are needed to manage these servers and their firewalls. Trying to manipulate data on a server resembles breaking into a house, where security is provided by a fence and an alarm system.

Centralized versus Decentralized Infographic

In this context, blockchain seems to be a driving force of the next-generation Internet, what some refer to as the Web3. Blockchain reinvents the way data is stored and managed. It provides a unique set of data (a universal state layer) that is collectively managed. This unique state layer for the first time enables a value settlement layer for the Internet. It allows us to send files in a copy-protected way, enabling true P2P transactions without intermediaries, and it all started with the emergence of Bitcoin.

The Bitcoin blockchain and similar protocols are 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, in order to breach them. This is possible but prohibitively expensive. In the Web3, data is stored in multiple copies of a P2P network. The management rules are formalized in the protocol and secured by majority consensus of all network participants, who are incentivized with a native network token for their activities. Blockchain, as the backbone of the Web3, redefines the data structures in the backend of the Web, now that we live in a connected world. It introduces a governance layer that runs on top of the current Internet, that allows for two people who do not know or trust each other to reach and settle agreements over the Web.

History of the Web Infographic: Web1, Web2, Web3.

However, nothing much will change on the surface of the Internet for the average user. While the Web2 was a frontend revolution, the Web3 is a backend revolution. It is a set of protocols led by blockchain, that intends to reinvent how the Internet is wired in the backend, combining the logic of the Internet with the logic of the computer. This is why some refer to blockchain as a distributed world computer. It is possibly the next big step in the development of computers and the Internet.

Stateful Protocols

The Internet we use today doesn’t have a native mechanism to transfer what computer science refers to as state – the status of who is who, who owns what, and who has the right to do what. State, however, is a key property for managing values. The ability to easily and efficiently transfer value P2P is at the heart of nance and e client markets. If you can’t hold the state of the Internet, you can’t transfer value without centralized institutions acting as clearing entities. While today’s Internet has facilitated information transfer by orders of magnitude of what was possible before, creating products and services at lower costs, and higher throughput rates, we need Internet platforms 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 as the data transmission protocol called TCP/IP, and a subsequent protocol stack of related technologies, like SMTP for the transmission of emails, or HTTP for the transmission of Hypertext. This family of protocols regulates the transmission of data, not how data is stored. Data could be stored centrally, or decentrally, but for many reasons, centralized data storage became mainstream, often for settling payments between two untrusted parties.

Difference between data stored on a server and data stored on a P2P network

Bitcoin and similar blockchains introduced a method for each participant in a network to hold and transfer value in a digitally native format, without the need for trusted intermediaries. The consensus protocol is designed in a way that the network can collectively remember preceding events or user interactions. Bitcoin, therefore, resolved the problem of double-spending by providing a single source of reference for who received what and when. Bitcoin and its underlying blockchain protocol can, therefore, be seen as a game-changer, paving the way to a more decentralized Web. A nine-page white paper in 2008 initiated an open and public infrastructure, with a market valuation of around 150 billion EUR at the time of writing this book. This number only accounts for the market value of Bitcoin tokens; it does not take into account the myriad of industries that build on top of the Bitcoin payment network. Nor does it account for the diverse ecosystems of developers, users, and companies, and other public and private tokenized networks that have emerged since.

Full text and high-resolution graphics available as paperback & ebook: Token Economy, by Shermin Voshmgir, 2020

Token Economy Book - Web3, Blockchain, Smart Contracts, CryptocurrenciesAbout the Author: Shermin Voshmgir is the Author of the Book “Token Economythe founder of Token Kitchen and BlockchainHub Berlin. In the past she was the director of the Research Institute for Cryptoeconomics at the Vienna University of Economics which she also co-founded. She was a curator of TheDAO (Decentralized Investment Fund), an advisor to Jolocom (Web3 Identity), Wunder (Tokenized Art) and the Estonian E-residency program. Shermin studied Information Systems Management at the Vienna University of Economics and film-making in Madrid. She is Austrian, with Iranian roots, and works on the intersection of technology, art & social science.

About the Book: This is the second edition of the book Token Economy originally published in June 2019. The basic structure of this second edition is the same as the first edition, with slightly updated content of existing chapters and four additional chapters: “User-Centric Identities,” “Privacy Tokens,” “Lending Tokens,” and How to Design a Token System and more focus on the Web3. Blockchains & smart contracts have made it easy for anyone to create a token with just a few lines of code. They can represent anything from an asset to an access right, like gold, diamonds, a fraction of a Picasso painting or an entry ticket to a concert. Tokens could also be used to reward social media contributions, incentivize the reduction of CO2 emissions, or even ones attention for watching an ad. While it has become easy to create a token, which is collectively managed by a public infrastructure like a blockchain, the understanding of how to apply these tokens is still vague.

The book refers to tokens, instead of cryptocurrencies, and explains why the term “token” is the more accurate term, as many of the tokens have never been designed with the purpose to represent a currency. This book gives an overview of the mechanisms and state of blockchain, the socio-economic implications of tokens, and deep dives into selected tokens use cases: Basic Attention Token, Steemit, Token Curated Registries (TCRs), purpose-driven tokens, stable tokens, asset tokens, fractional ownership tokens, Libra & Calibra (Facebook), and many more.