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WEB 3 -THE DECENTRALIZED FUTURE

Thesis · October 2022

DOI: 10.13140/RG.2.2.20599.09129

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 UNIVERSITÀ DEGLI STUDI DI ROMA
TOR VERGATA

FACULTY OF ENGINEERING

Bachelors Degree in Engineering science k-73

GRADUATION THESIS IN

WEB 3 - THE DECENTRALIZED FUTURE

Supervisor:
Prof.
Walter Liguori
Director of Cybersecurity at Consiglio Nazionale delle Ricerche (CNR)

Candidate:
Pulukottil Trinith Johny
Matr. 0257236

Anno Accademico 2021/2022

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2|Page
 INTRODUCTION

The world as we have now is currently evolving and has been evolving
for decades and centuries. Communication is the most important tool
for the progress of this world and its mankind. We have seen leaps in
generations of communication technology in the last two decades
alone. With such exponential growth in such a limited time brings out
many challenges to overcome.

The internet we use today is a network of networks connected

and synchronized in real-time all over the world. This guarantees the
proper functioning of various industries we use every single day, This
leads to a very complex problem- The Centralization of the internet;
which is both a boon and a bane. The good side is that the big tech
companies who control the internet guarantee the service side of
things ranging all the way from research, development, quality control,
implementation, and maintenance and the competition among these
big tech can keep the prices fairly competitive, However, this comes at
a price, the price of not having privacy over your own data. These big
corporations run ads as a way to remain profitable but they usually do
that by accessing, analyzing, storing, and selling users' data to other
companies that need them.

Data is considered as the ‘New Gold’ in this modern day and age,
data not only allows us to predict markets but also to manipulate
them. This violates the privacy of the users of the internet around the
globe ultimately profiting the big tech corporations. Here comes the
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new internet revolution which would act as a solution to just that but
at the same time guaranteeing the services listed above and also
incentivizing them for regular users.

WEB3 removes the dominance by the big tech corporations by

bringing in the concept of decentralization using blockchain
technology, This, in turn, has many new breakthroughs as a result of
it, like digitalized decentralized currency(cryptocurrency) which is not
connected to any centralized banks, Non-Fungible Tokens(NFT’s)
which guarantee the ownership part of the property, Decentralized
Finance(Defi), just to name a few

In cryptography and Network Security, we follow a baseline

model of the CIA triad (confidentiality, Integrity, and Authentication)
to assess the level of security of the network. With web3 however, we
guarantee all three aspects and also add another layer to guarantee
the ownership of the data along the various blocks of the chain.

In this thesis, my objective would be to better understand the

inner workings of the web3 ecosystem and the various protocols it
encompasses within thus allowing me to gain a profound knowledge
to be ready for the future in sight.

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Table of Contents
Chapter 1 Introduction ................................................................................................9
Evolution of the World Wide Web 3.0 ..........................................................................11
Web 1.0 [1990 – 2000]:.............................................................................................11
Web 2.0 [from mid-2000s]: .......................................................................................11
Web 3.0 : ...................................................................................................................12
WHY WE NEED WEB 3.0? .................................................................................................12
Chapter 2 What is the WEB 3.0? ...............................................................................16
Introduction to Web3 ...................................................................................................17
Web 1.0: Read-Only (1990-2004)..............................................................................17
Web 2.0: Read-Write (2004-now) .............................................................................18
Web 3.0: Read-Write-Own ........................................................................................18
What is Web3? ..............................................................................................................19
Why is Web3 important? ..............................................................................................19
Ownership .................................................................................................................20
What's an NFT? .............................................................................................................20
NFT Internet ..............................................................................................................21
Internet Today ..........................................................................................................22
Ethereum and NFTs.......................................................................................................22
Chapter 3 What is a blockchain? ...............................................................................25
Proof of Work vs Proof of Stake ....................................................................................27
What is proof of stake? .............................................................................................29
What are some differences between proof of work and proof of stake? ................31
Blockchain in Detail .......................................................................................................33
How Does a Blockchain Work? .................................................................................34
Blockchain Decentralization ......................................................................................35
Transparency.............................................................................................................35
Blockchain Security ...................................................................................................35
How Are Blockchains Used? ..........................................................................................36
Benefits of Blockchains .................................................................................................39
Accuracy of the Blockchain .......................................................................................39
Chapter 4 WHY DO WE NEED DECENTRALIZATION? ......................................................41
Three types of Decentralization ....................................................................................41
Characteristics of a Decentralized Application/System (Service) .................................42
What Is a Blockchain Platform? ................................................................................44
Chapter 5 DECENTRALIZATION .................................................................................46
DECENTRALIZED AUTONOMOUS ORGANIZATIONS (DAOS) ....................................................46

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 Membership in a DAO is granted through one of these 2 ways: ..................................47
Token-based membership ........................................................................................47
Shared Based membership .......................................................................................47
Traditional Organizations VS. DAOs ..............................................................................48
Chapter 6 TOKEN ECONOMICS .................................................................................49
Chapter 7 FUTURE IN-SIGHT .....................................................................................52
Decentralized Finance (DeFi): Toward a Digital Barter Economy (11) ..........................52
Chapter 8 CONCLUSION ............................................................................................56
Chapter 9 BIBLIOGRAPHY ..........................................................................................58

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Table of Figures
1 EVOLUTION OF INTERNET ........................................................................................... 7

2 EVOLUTION OF WEB ................................................................................................. 9

3 DIFFERENCE BETWEEN WEB2 AND WEB3 ................................................................... 11

4 EVOLUTION OF WEB - A COMPARATIVE ANALYSIS ........................................................ 12

5 BLOCKCHAIN.......................................................................................................... 22

6 BLOCKCHAIN APPLICATION ....................................................................................... 23

7 DISTRIBUTED LEDGER TECHNOLOGY - DLT ................................................................... 24

8 PROOF OF WORK AND STAKE - DIFFERENCE ................................................................. 25

9 PROOF OF WORK AND STAKE - PROS AND CONS ........................................................... 29

10 BLOCKCHAIN TRANSACTION .................................................................................... 32

11 TOKENOMICS ....................................................................................................... 46

12 HISTORY OF WEB................................................................................................. 48

13 FUTURE OF WEB3 ............................................................................................... 49

14 CENTRALIZED AND DECENTRALIZED FINANCE .............................................................. 52

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Chapter 1 Introduction

World over, mankind is racing against time, and to compliment the

speed, the advent of Internet, technologies have emerged in helping
further, the rapid development and transformation, enhancing the
quality of life. Today, Internet has become ever increasing part of
everyone’s life, the world over, in retrieving information and
communication.

Internet is a global network of computers, interconnected, all over the

world, a network of Networks, using the Internet protocol
suite (TCP/IP) to communicate between networks and devices. There
are companies, who provide the internet service into our homes and
offices, called the Internet Service Providers (ISPs), offering several
tiers of service with different internet speeds, usually measured in
Mbps (megabits per second). Depending upon the Internet access
requirement, one can connect to the internet using Modem. A router
is used to connect a network (multiple computers and devices
connected to form a wired or wireless network) to the internet.

The World Wide Web (WWW), has become very prominent in Internet
Technologies, supporting the development. It has collection of
documents, that can be retrieved by a web browser, formatted in a
language called the HTML (Hypertext Markup Language) and HTTP
protocol to transmit and share information.

Web1 was read-only static web page, with no visual elements, limited
user interaction, and the users were just consumers of the information.

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Web2 is defined as read-write web. With the advancement of web
technologies like HTML, CSS, JavaScript, & Ajax opened a whole lot of
possibilities to build Dynamic Websites, giving rich user experience.
This led to the Social Media (Facebook) and Web Platforms (Google &
Amazon) era, which eventually made users more addictive, and
companies started monetizing on user data. The lack of user privacy,
Data breaches, Single point of failure, risk of censorship and security
led to Web3.

Web3 is defined as 'read, write and execute', using decentralized

blockchain-based platforms that give control to users. This means that
no one can gain access to private user data or remove users’ content,
while avoiding the risk of hacking. The shift to blockchain technology
will make it open, transparent, decentralized and peer-to-peer
network .

1 Evolution of Internet

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There is shift from cloud storage to IPFS, the centralized operating
system to EOS and Ethereum, decentralized social networks, and
growth of DAOs. You can notice how web3 is indeed the future with
transitions from centralized systems and processes towards
decentralized blockchain networks.

Evolution of the World Wide Web 3.0

Tim Berners-Lee, the inventor of the World Wide Web, intended that
the internet would be a collaborative medium, a place where all meet
and read and write. But today, its has evolved entirely opposite, with
big tech companies acting as gatekeepers to all that’s on the World
Wide Web

Web 1.0 [1990 – 2000]:

It is regarded as the first generation of the World Wide Web. Also

known as the Syntactic web or Read only web. Mostly, Web 1.0 was
limited to searching the info and reading what’s already there. There
was very little in the way of user interaction or content contribution.
It was pretty disorganized and overwhelming, and soon it came to be
dominated by AOL, Compuserve, early Yahoo and other portals. These
online service providers were the gateway to Web 1.0. Web 1.0 was
with dialup with an average internet speed of 50 kbps, and email was
much used, cataloguing and e-commerce driven.

Web 2.0 [from mid-2000s]:

This phase was characterised by enhanced user experience and made

the W3 interactive. Also known as Social Web or read-write web. It
enabled users to participate in content creation on social networks,
blogs, sharing sites and more. Search engines (Google) and social

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media platforms (Facebook, Twitter) driven by user-generated content
disrupted the media, advertising and retail industries. Web 2.0’s
business model relies on user participation to create fresh content and
the resultant data being sold to third parties for marketing purposes.
The Web 2.0, had Broadband with an average internet speed of 1
Mbps, with XML, Web-services, Ajax, and growth of seamlessly
connecting applications, social web and entertainment driven.

Web 3.0 :

It is the next stage of the web evolution. It would make the internet
more intelligent, or process information with near-human-like
intelligence through the power of AI systems. The Web 3.0, we have
Mobile connectivity with 10 Mbps and Personalization driven.

2 Evolution of Web
WHY WE NEED WEB 3.0?

Loss of privacy: Presently, a huge amount of data is generated when

consumers search, shop or upload videos and pictures. All this data is
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stored in the servers of the companies that the people interact with.
This means that intermediaries become custodians of user data and
profit from it via advertising.

Data ownership: Presently, only centralized repositories are the ones

that own user data and profit from it. In Web 3.0, users can own and
be properly compensated for their time and data.

Plagiarism: Plagiarism is widespread online. It’s very easy to copy

original content and build a following around it on social media. Those
who copy content get compensated way more than the original
content creator. Plagiarism makes it harder for creators to get
adequately compensated. Web3 would be helpful in addressing the
issue. The transparent nature of blockchain makes it easy for anyone
to track the originator of content.

What are the key differences between Web 2.0 and Web 3.0?

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3 Differences between WEB2 and Web3

Any information that users share on Web 2.0 is stored with a cloud
service provider used by an online service, whether it is food delivery
or e-commerce, whereas, in Web3, all services are built on top of a
blockchain.

Cloud is controlled by giants such as Amazon, Google, and Microsoft,

and is centralized. In the case of blockchain, data is distributed across
networks and no single entity owns the information.

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4 Evolution of WEB - A Comparative Analysis

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Chapter 2 What is the WEB 3.0?
The world is always evolving and so is the internet. The internet is the
main key factor that holds communication intact in this day of our
generation. The internet has, is, and will be evolving to make this world
a faster and safer place for all of us to exist. The internet in its earlier
stages was first created as a means of connection of network among
networks. With the creation of ARPANET, the scientists in the
computer world discovered the importance of communication and the
extent to which it could be developed and paved the way for WEB1.0.

The internet is composed of 5 main layers, the physical layer, the link
layer, the network layer, the transport layer, and the application layer.
There have been many noticeable developments in the application
and physical layers respectively, but the very concept of the internet
first introduced did not have security in the main structure

WEB1.0 simply put was a means of loading and viewing static web
pages, having its own limitations and vulnerabilities in the realm there
came the WEB2.0. The WEB2.0 however brought up a rapid adoption
of internet and internet services all around the globe rapidly increasing
the active users in the space. This technology added multiple layers of
services through enhancements in the application layer. A few of the
many breakthroughs include social media services
(Facebook/Instagram), e-commerce websites(amazon/eBay), and
media and entertainment streaming services
(Netflix/YouTube/twitch). The web 2.0 however has many limitations
although given its wide adoption creates a realm of vulnerabilities and
concerns to be addressed

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Here comes WEB3.0. This new platform is based on the blockchain
technology which results in a much more secure and decentralized
enclave. This gives an added advantage for the token based
economics. As with the previous generations of the internet

Introduction to Web3

Centralization has helped onboard billions of people to the World

Wide Web and created the stable, robust infrastructure on which it
lives. At the same time, a handful of centralized entities have a
stronghold on large swathes of the World Wide Web, unilaterally
deciding what should and should not be allowed.

Web3 is the answer to this dilemma. Instead of a Web monopolized by

large technology companies, Web3 embraces decentralization and is
being built, operated, and owned by its users. Web3 puts power in the
hands of individuals rather than corporations. Before we talk about
Web3, let's explore how we got here.

The early Web

Most people think of the Web as a continuous pillar of modern life—it

was invented and has just existed since. However, the Web most of us
know today is quite different from originally imagined. To understand
this better, it's helpful to break the Web's short history into loose
periods—Web 1.0 and Web 2.0.

Web 1.0: Read-Only (1990-2004)

In 1989, at CERN, Geneva, Tim Berners-Lee was busy developing the

protocols that would become the World Wide Web. His idea? To

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create open, decentralized protocols that allowed information-sharing
from anywhere on Earth.

The first inception of Berners-Lee's creation, now known as 'Web 1.0',

occurred roughly between 1990 to 2004. Web 1.0 was mainly static
websites owned by companies, and there was close to zero interaction
between users - individuals seldom produced content - leading to it
being known as the read-only web.

Web 2.0: Read-Write (2004-now)

The Web 2.0 period began in 2004 with the emergence of social media
platforms. Instead of a read-only, the web evolved to be read-write.
Instead of companies providing content to users, they also began to
provide platforms to share user-generated content and engage in
user-to-user interactions. As more people came online, a handful of
top companies began to control a disproportionate amount of the
traffic and value generated on the web. Web 2.0 also birthed the
advertising-driven revenue model. While users could create content,
they didn't own it or benefit from its monetization.

Web 3.0: Read-Write-Own

The premise of 'Web 3.0' was coined by Ethereum co-founder Gavin

Wood shortly after Ethereum launched in 2014. Gavin put into words
a solution for a problem that many early crypto adopters felt: the Web
required too much trust. That is, most of the Web that people know
and use today relies on trusting a handful of private companies to act
in the public's best interests.

Decentralized node architecture, representing Web3

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What is Web3?

Web3 has become a catch-all term for the vision of a new, better
internet. At its core, Web3 uses blockchains, cryptocurrencies, and
NFTs to give power back to the users in the form of ownership. A 2020
post on Twitter said it best: Web1 was read-only, Web2 is read-write,
Web3 will be read-write-own.

Core ideas of Web3

Although it's challenging to provide a rigid definition of what Web3 is,

a few core principles guide its creation.

Web3 is decentralized: instead of large swathes of the internet

controlled and owned by centralized entities, ownership gets
distributed amongst its builders and users.

Web3 is permissionless: everyone has equal access to participate in

Web3, and no one gets excluded.

Web3 has native payments: it uses cryptocurrency for spending and

sending money online instead of relying on the outdated
infrastructure of banks and payment processors.

Web3 is trustless: it operates using incentives and economic

mechanisms instead of relying on trusted third-parties.

Why is Web3 important?

Although Web3's killer features aren't isolated and don't fit into neat
categories, for simplicity we've tried to separate them to make them
easier to understand.

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Ownership

Web3 gives you ownership of your digital assets in an unprecedented

way. For example, say you're playing a web2 game. If you purchase an
in-game item, it is tied directly to your account. If the game creators
delete your account, you will lose these items. Or, if you stop playing
the game, you lose the value you invested into your in-game items.

Web3 allows for direct ownership through non-fungible tokens (NFTs).

No one, not even the game's creators, has the power to take away your
ownership. And, if you stop playing, you can sell or trade your in-game
items on open markets and recoup their value.

What's an NFT?

NFTs are tokens that we can use to represent ownership of unique

items. They let us tokenize things like art, collectibles, even real estate.
Ownership of an asset is secured by the Ethereum blockchain – no one
can modify the record of ownership or copy/paste a new NFT into
existence.

NFT stands for non-fungible token. Non-fungible is an economic term

that you could use to describe things like your furniture, a song file, or
your computer. These things are not interchangeable for other items
because they have unique properties.

Fungible items, on the other hand, can be exchanged because their

value defines them rather than their unique properties. For example,
ETH or dollars are fungible because 1 ETH / $1 USD is exchangeable for
another 1 ETH / $1 USD.

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A comparison between an NFT internet and the internet today
(https://ethereum.org/en/nft/)

NFT Internet

NFTs are digitally unique, no two NFTs are the same.

Every NFT must have an owner and this is of public record and easy for
anyone to verify.

NFTs are compatible with anything built using Ethereum. An NFT ticket
for an event can be traded on every Ethereum marketplace, for an
entirely different NFT. You could trade a piece of art for a ticket!

Content creators can sell their work anywhere and can access a global
market.

Creators can retain ownership rights over their own work, and claim
resale royalties directly.

Items can be used in surprising ways. For example, you can use digital
artwork as collateral in a decentralised loan.

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Internet Today

A copy of a file, like an .mp3 or .jpg, is the same as the original.

Ownership records of digital items are stored on servers controlled by

institutions – you must take their word for it.

Companies with digital items must build their own infrastructure. For
example an app that issues digital tickets for events would have to
build their own ticket exchange.

Creators rely on the infrastructure and distribution of the platforms

they use. These are often subject to terms of use and geographical
restrictions.

Ethereum and NFTs

Ethereum makes it possible for NFTs to work for a number of reasons:

Transaction history and token metadata is publicly verifiable – it's

simple to prove ownership history.

Once a transaction is confirmed, it's nearly impossible to manipulate

that data to "steal" ownership.

Trading NFTs can happen peer-to-peer without needing platforms that

can take large cuts as compensation.

All Ethereum products share the same "backend". Put another way, all
Ethereum products can easily understand each other – this makes
NFTs portable across products. You can buy an NFT on one product

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and sell it on another easily. As a creator you can list your NFTs on
multiple products at the same time – every product will have the most
up-to-date ownership information.

Ethereum never goes down, meaning your tokens will always be

available to sell.

NFT security

Ethereum's security comes from proof-of-stake. The system is

designed to economically disincentivize malicious actions, making
Ethereum tamper-proof. This is what makes NFTs possible. Once the
block containing your NFT transaction becomes finalized it would cost
an attacker millions of ETH to change it. Anyone running Ethereum
software would immediately be able to detect dishonest tampering
with an NFT, and the bad actor would be economically penalized and
ejected.

Security issues relating to NFTs are most often related to phishing

scams, smart contract vulnerabilities or user errors (such as
inadvertently exposing private keys), making good wallet security
critical for NFT owners.

A blockchain is a database of transactions that is updated and shared

across many computers in a network. Every time a new set of
transactions is added, its called a “block” - hence the name blockchain.
Most blockchains are public, and you can only add data, not remove.
If someone wanted to alter any of the information or cheat the system,
they’d need to do so on the majority of computers on the network.

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That is a lot! This makes established blockchains like Ethereum highly
secure

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Chapter 3 What is a blockchain?
Blockchain1 is a system of recording information in a way that makes
it difficult or impossible to change, hack, or cheat the system.

5 Blockchain

A blockchain is essentially a digital ledger of transactions that is

duplicated and distributed across the entire network of computer
systems on the blockchain. Each block in the chain contains a number
of transactions, and every time a new transaction occurs on the
blockchain, a record of that transaction is added to every participant’s
ledger. The decentralised database managed by multiple participants
is known as Distributed Ledger Technology (DLT).

Blockchain is a type of DLT in which transactions are recorded with an

immutable cryptographic signature called a hash.

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This means if one block in one chain was changed, it would be
immediately apparent it had been tampered with. If hackers wanted
to corrupt a blockchain system, they would have to change every block
in the chain, across all of the distributed versions of the chain.

6 Blockchain Application

Blockchains such as Bitcoin and Ethereum are constantly and

continually growing as blocks are being added to the chain, which
significantly adds to the security of the ledger.

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7 Distributed Ledger Technology - DLT

Proof of Work vs Proof of Stake

“Proof of work” and “proof of stake” are the two major consensus
mechanisms cryptocurrencies use to verify new transactions, add
them to the blockchain, and create new tokens. Proof of work, first
pioneered by Bitcoin, uses mining to achieve those goals. Proof of
stake — which is employed by Cardano, the ETH2 blockchain, and
others — uses staking to achieve the same things.

Decentralized cryptocurrency networks need to make sure that

nobody spends the same money twice without a central authority like
Visa or PayPal in the middle. To accomplish this, networks use
something called a “consensus mechanism,” which is a system that
allows all the computers in a crypto network to agree about which
transactions are legitimate.

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8 Proof of Work and Stake - Difference
What is proof of work?

Proof of work is the original crypto consensus mechanism, first used

by Bitcoin. Proof of work and mining are closely related ideas. The
reason it’s called “proof of work” is because the network requires a
huge amount of processing power. Proof-of-work blockchains are
secured and verified by virtual miners around the world racing to be
the first to solve a math puzzle. The winner gets to update the
blockchain with the latest verified transactions and is rewarded by the
network with a predetermined amount of crypto.

Proof of work has some powerful advantages, especially for a relatively

simple but hugely valuable cryptocurrency like Bitcoin (learn more
about how Bitcoin works). It’s a proven, robust way of maintaining a

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secure decentralized blockchain. As the value of a cryptocurrency
grows, more miners are incentivized to join the network, increasing its
power and security. Because of the amount of processing power
involved, it becomes impractical for any individual or group to meddle
with a valuable cryptocurrency’s blockchain.

On the flip side, it’s an energy-intensive process that can have trouble
scaling to accommodate the vast number of transactions smart-
contract compatible blockchains like Ethereum can generate. And so
alternatives have been developed, the most popular of which is called
proof of stake.

What is proof of stake?

Ethereum’s developers understood from the beginning that proof of

work would present limitations in scalability that would eventually
need to be overcome — and, indeed, as Ethereum-powered
decentralized finance (or DeFi) protocols have surged in popularity,
the blockchain has struggled to keep up, causing fees to spike.

While the Bitcoin blockchain mostly just has to process incoming and
outgoing bitcoin transactions, much like a vast check book, Ethereum’s
blockchain also has to process a vast array of DeFi transactions,
stablecoin smart contracts, NFT minting and sales, and whatever
innovations developers come up with in the future.

Their solution has been to build an entirely new ETH2 blockchain —

which began rolling out in December 2020 and should be finished in
2022. The upgraded version of Ethereum will employ a faster and less
resource intensive consensus mechanism called proof of stake.

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Cryptocurrencies including Cardano, Tezos, and Atmos all use proof-
of-stake consensus mechanisms — with the goal being to maximize
speed and efficiency while lowering fees.

In a proof of stake system, staking serves a similar function to proof of

work’s mining, in that it’s the process by which a network participant
gets selected to add the latest batch of transactions to the blockchain
and earn some crypto in exchange.

The exact details vary by project, but in general proof of stake

blockchains employ a network of “validators” who contribute — or
“stake” — their own crypto in exchange for a chance of getting to
validate new transaction, update the blockchain, and earn a reward.

The network selects a winner based on the amount of crypto each

validator has in the pool and the length of time they’ve had it there —
literally rewarding the most invested participants.

Once the winner has validated the latest block of transactions, other
validators can attest that the block is accurate. When a threshold
number of attestations have been made, the network updates the
blockchain.

All participating validators receive a reward in the native

cryptocurrency, which is generally distributed by the network in
proportion to each validator’s stake.

Becoming a validator is a major responsibility and requires a fairly high

level of technical knowledge. The minimum amount of crypto that
validators are required to stake is often relatively high (for ETH2, for

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example, it’s 32 ETH) and validators can lose some of their stake via a
process called slashing if their node goes offline or if they validate a
“bad” block of transactions.

But even if that sounds like too much responsibility, you can still
participate in staking by joining a staking pool run by someone else —
and earn rewards for crypto that would otherwise be sitting around.
This process is often referred to as delegating, and tools offered by
exchanges by Coinbase can make it simple and seamless.

What are some differences between proof of work and proof of stake?

Energy consumption is one major difference between the two

consensus mechanisms. Because proof-of-stake blockchains don’t
require miners to spend electricity on duplicative processes
(competing to solve the same puzzle), proof of stake allows networks
to operate with substantially lower resource consumption.

Both consensus mechanisms have economic consequences that

penalize network disruptions and thwart malicious actors. In proof of
work, the penalty for miners submitting invalid information, or blocks,
is the sunk cost of computing power, energy, and time. In proof of
stake, the validators’ staked crypto funds serve as an economic
incentive to act in the network’s best interests. In the case that a
validator accepts a bad block, a portion of their staked funds will be
“slashed” as a penalty. The amount that a validator can be slashed
depends on the network.

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9 Proof of Work and Stake - Pros and Cons

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Blockchain in Detail

Blockchain technology was first outlined in 1991 by Stuart Haber and

W. Scott Stornetta, two researchers who wanted to implement a
system where document timestamps could not be tampered with. But
it wasn’t until almost two decades later, with the launch of Bitcoin in
January 2009, that blockchain had its first real-world application.

A blockchain is a distributed database or ledger that is shared among

the nodes of a computer network. As a database, a blockchain stores
information electronically in a digital format. Blockchains are best
known for their crucial role in cryptocurrency systems, such as Bitcoin,
for maintaining a secure and decentralized record of transactions. The
innovation of a blockchain is that it guarantees the fidelity and security
of a record of data and generates trust without the need for a trusted
third party.

One key difference between a typical database and a blockchain is how

the data is structured. A blockchain collects information together in
groups, known as blocks, that hold sets of information. Blocks have
certain storage capacities and, when filled, are closed and linked to the
previously filled block, forming a chain of data known as the
blockchain. All new information that follows that freshly added block
is compiled into a newly formed block that will then also be added to
the chain once filled.

A database usually structures its data into tables, whereas a

blockchain, as its name implies, structures its data into chunks (blocks)
that are strung together. This data structure inherently makes an
irreversible timeline of data when implemented in a decentralized
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nature. When a block is filled, it is set in stone and becomes a part of
this timeline. Each block in the chain is given an exact timestamp when
it is added to the chain.

How Does a Blockchain Work?

The goal of blockchain is to allow digital information to be recorded

and distributed, but not edited. In this way, a blockchain is the
foundation for immutable ledgers, or records of transactions that
cannot be altered, deleted, or destroyed. This is why blockchains are
also known as a distributed ledger technology (DLT).

10 Blockchain transaction

34 | P a g e
Blockchain Decentralization

What a blockchain does is to allow the data held in that database to

be spread out among several network nodes at various locations. This
not only creates redundancy but also maintains the fidelity of the data
stored therein—if somebody tries to alter a record at one instance of
the database, the other nodes would not be altered and thus would
prevent a bad actor from doing so. This system helps to establish an
exact and transparent order of events. This way, no single node within
the network can alter information held within it.

To validate new entries or records to a block, a majority of the

decentralized network’s computing power would need to agree to it.
To prevent bad actors from validating bad transactions or double
spends, blockchains are secured by a consensus mechanism such as
proof of work (PoW) or proof of stake (PoS). These mechanisms allow
for agreement even when no single node is in charge.

Transparency

all transactions can be transparently viewed by either having a

personal node or using blockchain explorers that allow anyone to see
transactions occurring live. Each node has its own copy of the chain
that gets updated as fresh blocks are confirmed and added.

Blockchain Security

Blockchain technology achieves decentralized security and trust in

several ways. To begin with, new blocks are always stored linearly and
chronologically. That is, they are always added to the “end” of the
blockchain. After a block has been added to the end of the blockchain,
it is extremely difficult to go back and alter the contents of the block

35 | P a g e
unless a majority of the network has reached a consensus to do so.
That’s because each block contains its own hash, along with the hash
of the block before it, as well as the previously mentioned timestamp.
Hash codes are created by a mathematical function that turns digital
information into a string of numbers and letters. If that information is
edited in any way, then the hash code changes as well.

How Are Blockchains Used?

Some companies that have already incorporated blockchain include

Walmart, Pfizer, AIG, Siemens, Unilever, and a host of others. For
example, IBM has created its Food Trust blockchain to trace the
journey that food products take to get to their locations.

Why do this? The food industry has seen countless outbreaks of E. coli,
salmonella, and listeria, as well as hazardous materials being
accidentally introduced to foods. In the past, it has taken weeks to find
the source of these outbreaks or the cause of sickness from what
people are eating. Using blockchain gives brands the ability to track a
food product’s route from its origin, through each stop it makes, and
finally, its delivery. If a food is found to be contaminated, then it can
be traced all the way back through each stop to its origin. Not only
that, but these companies can also now see everything else it may
have come in contact with, allowing the identification of the problem
to occur far sooner and potentially saving lives. This is one example of
blockchain in practice, but there are many other forms of blockchain
implementation.

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Banking and Finance

Financial institutions stand to benefit from integrating blockchain into

its business operations more than any other industry. By integrating
blockchain into banks, consumers can see their transactions processed
in very little time—basically the time it takes to add a block to the
blockchain, regardless of holidays or the time of day or week. The
banks also can exchange funds between institutions more quickly and
securely. In the stock trading business, for example, the settlement
and clearing process can take up to three days (or longer, if trading
internationally), meaning that the money and shares are frozen for
that period of time. Given the size of the sums involved, even the few
days that the money is in transit can carry significant costs and risks
for Institution.

Currency

Blockchain forms the bedrock for cryptocurrencies like Bitcoin. The

blockchain allows Bitcoin and other cryptocurrencies to operate
without the need for a central authority. This not only reduces risk but
also eliminates many of the processing and transaction fees. Using
cryptocurrency wallets for savings accounts.

Healthcare

Healthcare providers can leverage blockchain to securely store their

patients’ medical records. When a medical record is generated and
signed, it can be written into the blockchain, which provides patients
with the proof and confidence that the record cannot be changed.
These personal health records could be encoded and stored on the
blockchain with a private key, so that they are only accessible by
certain individuals, thereby ensuring privacy.
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Property Records

Blockchain has the potential to eliminate the need for scanning

documents and tracking down physical files in a local recording office.
If property ownership is stored and verified on the blockchain, owners
can trust that their deed is accurate and permanently recorded.

Smart Contracts

A smart contract is a computer code that can be built into the

blockchain to facilitate, verify, or negotiate a contract agreement.
Smart contracts operate under a set of conditions to which users
agree. When those conditions are met, the terms of the agreement are
automatically carried out.

Supply Chains

As in the IBM Food Trust example, suppliers can use blockchain to

record the origins of materials that they have purchased. This would
allow companies to verify the authenticity of not only their products
but also common labels such as “Organic,” “Local,” and “Fair Trade.”
As reported by Forbes, the food industry is increasingly adopting the
use of blockchain to track the path and safety of food throughout the
farm-to-user journey.

Voting

Voting with blockchain carries the potential to eliminate election fraud

and boost voter turnout, as was tested in the November 2018 midterm
elections in West Virginia.

Using blockchain in this way would make votes nearly impossible to

tamper with. The blockchain protocol would also maintain
transparency in the electoral process, reducing the personnel needed

38 | P a g e
to conduct an election and providing officials with nearly instant
results. This would eliminate the need for recounts or any real concern
that fraud might threaten the election.

Benefits of Blockchains
Accuracy of the Blockchain

Transactions on the blockchain network are approved by a network of

thousands of computers. This removes almost all human involvement
in the verification process, resulting in less human error and an
accurate record of information. Even if a computer on the network
were to make a computational mistake, the error would only be made
to one copy of the blockchain. For that error to spread to the rest of
the blockchain, it would need to be made by at least 51% of the
network’s computers—a near impossibility for a large and growing
network the size of Bitcoin.

Cost Reductions

Typically, consumers pay a bank to verify a transaction, a notary to sign

a document, or a minister to perform a marriage. Blockchain
eliminates the need for third-party verification—and, with it, their
associated costs. For example, business owners incur a small fee
whenever they accept payments using credit cards, because banks and
payment-processing companies have to process those transactions.
Bitcoin, on the other hand, does not have a central authority and has
limited transaction fees.

Decentralization

Blockchain does not store any of its information in a central location.

Instead, the blockchain is copied and spread across a network of
computers. Whenever a new block is added to the blockchain, every
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computer on the network updates its blockchain to reflect the change.
By spreading that information across a network, rather than storing it
in one central database, blockchain becomes more difficult to tamper
with. If a copy of the blockchain fell into the hands of a hacker, only a
single copy of the information, rather than the entire network, would
be compromised.

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Chapter 4 WHY DO WE NEED DECENTRALIZATION?
Fault tolerance - Decentralized systems are less likely to fail
accidentally because they rely on many separate components that are
not likely.

Attack resistance - Decentralized systems are more expensive to attack

and destroy or manipulate because they lack sensitive central points
that can be attacked at much lower cost than the economic size of the
surrounding system.

Collusion resistance - It is much harder for participants in decentralized

systems to collude to act in ways that benefit them at the expense of
other participants, whereas the leaderships of corporations and
governments collude in ways that benefit themselves but harm less
well-coordinated citizens, customers, employees, and the general
public all the time.

Three types of Decentralization

Decentralization isn't simply how many nodes a blockchain network

has, or how many validators are online at a specific hour. Vitalik divides
decentralization into three different forms.

Architectural (de)centralization — how many physical computers is a

system made up of? How many of those computers can it tolerate
breaking down at any single time?

Political (de)centralization — how many individuals or organizations

ultimately control the computers that the system is made up of?

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Logical (de)centralization — does the interface and data structures
that the system presents and maintains look more like a single
monolithic object, or an amorphous swarm? One simple heuristic is: if
you cut the system in half, including both providers and users, will both
halves continue to fully operate as independent units?

https://medium.com/@VitalikButerin/the-meaning-of-
decentralization-a0c92b76a274.

Characteristics of a Decentralized Application/System (Service)

Read + Write + Own.

Permission-less: anyone can use the Service

Open, transparent: the source code is available, and the user can verify
every part of the Service

Censorship-resistant: no company, entity, or government can suppress

your actions because they don't have control over the Service, hence
can't exercise the control

Cryptocurrency (optional): you can make payments. There can be a

decentralized protocol like Hyperledger without a native token. Still, I
believe Money is such a fundamental concept in life that I am adding
it as a characteristic. People must have a way to exchange value
without giving up control to a centralized entity like a Big Tech
Monopoly or a Government controlled bank

Web3 architecture may seem complex at first look as it requires a lot

of independent components to achieve the decentralized concepts.

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Efficient Transactions

Transactions placed through a central authority can take up to a few

days to settle. If you attempt to deposit a check on Friday evening, for
example, you may not actually see funds in your account until Monday
morning. Whereas financial institutions operate during business
hours, usually five days a week, blockchain is working 24 hours a day,
seven days a week, and 365 days a year. Transactions can be
completed in as little as 10 minutes and can be considered secure after
just a few hours. This is particularly useful for cross-border trades,
which usually take much longer because of time zone issues and the
fact that all parties must confirm payment processing.

Private Transactions

Many blockchain networks operate as public databases, meaning that

anyone with an Internet connection can view a list of the network’s
transaction history. Although users can access details about
transactions, they cannot access identifying information about the
users making those transactions. It is a common misperception that
blockchain networks like bitcoin are anonymous, when in fact they are
only confidential.

When a user makes a public transaction, their unique code—called a

public key, as mentioned earlier—is recorded on the blockchain. Their
personal information is not. If a person has made a Bitcoin purchase
on an exchange that requires identification, then the person’s identity
is still linked to their blockchain address—but a transaction, even when
tied to a person’s name, does not reveal any personal information.

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Secure Transactions

Once a transaction is recorded, its authenticity must be verified by the

blockchain network. Thousands of computers on the blockchain rush
to confirm that the details of the purchase are correct. After a
computer has validated the transaction, it is added to the blockchain
block. Each block on the blockchain contains its own unique hash,
along with the unique hash of the block before it. When the
information on a block is edited in any way, that block’s hash code
changes—however, the hash code on the block after it would not. This
discrepancy makes it extremely difficult for information on the
blockchain to be changed without notice.

Transparency

Most blockchains are entirely open-source software. This means that

anyone and everyone can view its code. This gives auditors the ability
to review cryptocurrencies like Bitcoin for security. This also means
that there is no real authority on who controls Bitcoin’s code or how it
is edited. Because of this, anyone can suggest changes or upgrades to
the system. If a majority of the network users agree that the new
version of the code with the upgrade is sound and worthwhile, then
Bitcoin can be updated.

What Is a Blockchain Platform?

A blockchain platform allows users and developers to create novel

uses on top of an existing blockchain infrastructure. One example is
Ethereum, which has a native cryptocurrency known as ether (ETH).

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The Bottom Line

With many practical applications for the technology already being

implemented and explored, blockchain is finally making a name for
itself and stands to make business and government operations more
accurate, efficient, secure, and cheap, with fewer middlemen.

45 | P a g e
Chapter 5 DECENTRALIZATION
Key principles of Web3

(5)Although, it's challenging to provide a rigid definition of what Web3

is, a few core principles guide its creation.

Web3 is decentralized: instead of large swathes of the internet

controlled and owned by centralized entities, ownership gets
distributed amongst its builders and users.

Web3 is permissionless: everyone has equal access to participate in

Web3, and no one gets excluded.

Web3 has native payments: it uses cryptocurrency for spending and

sending money online instead of relying on the outdated
infrastructure of banks and payment processors.

Web3 is trustless: it operates using incentives and economic

mechanisms instead of relying on trusted third parties.

DECENTRALIZED AUTONOMOUS ORGANIZATIONS (DAOS)

As well as owning your data in Web3, you can own the platform as a
collective, using tokens that act like shares in a company. DAOs let you
coordinate decentralized ownership of a platform and make decisions
about its future.

DAOs are defined technically as agreed-upon smart contracts that

automate decentralized decision-making over a pool of resources
(tokens). Users with tokens vote on how resources get spent, and the
code automatically performs the voting outcome.

46 | P a g e
However, people define many Web3 communities as DAOs. These
communities all have different levels of decentralization and
automation by code. Currently, we are exploring what DAOs are and
how they might evolve in the future.

(6)DAOs transform the same organization into a decentralized one.

Instead of a hierarchical structure managed by a set of humans
interacting in person and controlling property via a legal system, DAOs
have a set of humans interacting with each other according to a
protocol specified in code, enforced on the blockchain Membership

Membership in a DAO is granted through one of these 2 ways:

Token-based membership

In a token-based membership system, certain tokens are granted to

members, that grant the members voting rights proportionate to their
token holdings. Any member could be granted certain tokens in a DAO
if they invest as part of a coin offering, or if they provide liquidity or
any other proof of work. These are automatic and do not need any
permission. Leaving the DAO would be easy by just selling the tokens
in the open market.

Shared Based membership

This particular concept is new and not quite common in the sphere. It
needs the person to provide a proposal, offering tribute in terms of
money or work. Similar to the shares in a conventional corporation,
shares represent the voting power and ownership in the organization.
Both the types are not the same as in shared based membership may
be redeemed upon exit and the exiting member can receive the
proportionate share of the treasury

47 | P a g e
Traditional Organizations VS. DAOs

In traditional companies, all agents of a company have employment

contracts that regulate their relationship with the organization and
with each other. Their rights and obligations are regulated by legal
contracts and enforced by a legal system which is subject to the
underlying governing law of the country they reside in. If anything goes
wrong, or someone does not stick to their end of the bargain, the legal
contract will define who can be sued for what in a court of law.

DAOs, on the other hand, involve a set of people interacting with each
other according to a self-enforcing open-source protocol. Keeping the
network safe and performing other network tasks is rewarded with the
native network tokens. Blockchains and smart contracts hereby reduce
transaction costs of management at higher levels of transparency,
aligning the interests of all stakeholders by the consensus rules tied to
the native token. Individual behaviour is incentivized with a token to
collectively contribute to a common goal.

48 | P a g e
Chapter 6 TOKEN ECONOMICS
“A token contract is a special type of smart contract that defines a
bundle of conditional rights assigned to the token holder. They are
rights management tools that can represent any existing digital or
physical asset, or access rights to assets someone else owns. Tokens
can represent anything from a store of value to a set of permissions in
the physical, digital, and legal world. They facilitate collaboration
across markets and jurisdictions and allow more transparent, efficient,
and fair interactions between market participants, at low costs. Tokens
can also incentivize an autonomous group of people to individually
contribute to a collective goal”

Excerpt From

Token Economy: How the Web3 reinvents the Internet

Shermin Voshmgir

11 Tokenomics

49 | P a g e
(9) The first blockchain tokens were the native tokens of public and
permissionless blockchain networks. These native tokens—also
referred to as protocol tokens—are part of the incentive scheme of
blockchain infrastructure. With the advent of Ethereum, however,
tokens have moved up the technology stack and can now be issued on
the application layer. Such application tokens can have simple or
complex behaviors attached to them. Ethereum made it particularly
easy to issue tokens with a few lines of code. Standardized smart
contracts like the “ERC-20” standard define a common list of rules for
Ethereum tokens, including how the tokens are transferred from one
Ethereum address to another and how data within each token is
accessed. These token contracts manage the logic and maintain a list
of all issued tokens, and can represent any asset that has features of a
fungible commodity. A vast majority of early tokens issued on the
Ethereum network have been ERC-20 compliant fungible tokens.
Fungibility refers to the fact that every token has an identical value
with any other token of the same kind and can be easily traded.

50 | P a g e
12 History of WEB

51 | P a g e
Chapter 7 FUTURE IN-SIGHT
Decentralized Finance (DeFi): Toward a Digital Barter Economy (11)

Cryptographic tokens represent a new heterogenous asset class that

can fulfill a diverse range of economic functions. Their frictionless
issuance and settlement process could potentially convert many assets
or access rights of the real world into “bankable funds.” Tokenizing
economic activities, from real assets to digital assets and all types of
access rights, could impact the role of central bank money as a
geographical monopolist providing a medium of exchange, once mass
adoption of the Web3 manifests and necessary network effects kick in.
The speed at which these tokens are being issued is an indicator that
a new tokenized economic system is emerging. Such tokenization of
the real economy could gradually lead to the merging of the money
system, with the financial system and the real economy.

13 Future of WEB3

52 | P a g e
A range of easy-to-use decentralized financial (DeFi) applications have
been emerging beyond simple payments networks that facilitate
frictional and P2P asset issuance, trading, lending and hedging. The
term “DeFi” encompasses any decentralized and permissionless
financial application that builds on top of distributed ledgers, including
privacy-preserving payment systems (privacy tokens), stability
preserving payment systems (stable tokens), P2P exchanges (token
exchanges), P2P fundraising (token sales), and P2P credit and lending
(decentralized lending), P2P insurance, and a growing list of P2P
derivatives. These Web3-based DeFi applications could, potentially,
open traditional financial services to the general public, mitigating
current inefficiencies of financial markets.

The current financial system, even in it’s electronic form, requires a

range of intermediary services for (i) mitigating counterparty risk, (ii)
market making, and (iii) securing funds from being stolen. This is a
result of the server-centric nature of the current Internet. In a
tokenized economy, however, distributed ledgers and user-centric
identity solutions could increase ecosystem transparency,
accountability, and market efficiency:

Due to the public nature of distributed ledgers, DeFi applications are

designed to be globally accessible by anyone around the world with an
Internet connection and a Web3 wallet. Once the smart contract is
deployed, DeFi applications self-execute with little institutional
intervention except for code upgrades, bug fixes, and dispute
resolution.

53 | P a g e
If users choose “non-custodial” wallet solutions, they remain in
possession of the private keys and in full control of the funds,
potentially disintermediating many financial services that currently
provide services to mitigate counterparty risk, act as market makers,
or secure funds from being stolen.

Any smart contract code can be audited by anyone and is subject to

collective loophole fixing, which is the basis for the rapidly evolving
DeFi ecosystem.

All token transactions are publicly verifiable, reducing market friction

and increasing the interoperability of financial services. As a result of
such interoperability, DeFi applications can be built in a modular way,
which is why many refer to them as “money legos.”

54 | P a g e
14 Centralized and Decentralized Finance

Combining various DeFi solutions, such as “stable tokens,”

“decentralized exchanges,” and “decentralized lending,” can produce
completely new products available to retail investors and the general
public. Any private person could, in such a setup, tokenize their real
assets and use them as collateral for P2P lending solutions without
bureaucracy by using a combination of simple DeFi applications . Such
new services could, in the long run, change the dynamics of our
economic system and contribute to the merging of the real economy
and the financial system, making their distinction increasingly
impossible.

55 | P a g e
Chapter 8 CONCLUSION
Web 3.0 has sprung as a technology for the new generation, with great
solutions and capability, as the future of the Internet. The user will
have more control of their data and switch around various social
media, using a single personalized account, creating a public record on
the blockchain of all the activity. The benefits of Web3 technology will
easily be adaptable for an average person to use in their daily life, a
boon to society, as the growth is exponential.

It will be permissionless and truly democratic. All data will be

interconnected in a decentralized way, unlike the current generation
of the internet (Web 2.0), where data is mostly stored in centralized
repositories.

Web3 is close to becoming mainstream. The industry has emerged,

centred around decentralized applications (dApps), built on blockchain
technology, which could significantly impact daily lives for many
people to happier computing, secured Data with greater control of
their data and actions by replacing the current centralized
monopolies(web2) and more intelligent Internet. Thus, paving a road
to more safe, secure computing with Artificial intelligence techniques
to mime human behaviour and Personalization driven.

56 | P a g e
The web3 space is a whole new playground for many more new
innovations to come, it is a doorway to the unknown, I am very grateful
for the time spent compiling this thesis, learning new topics addressing
problems with a very precise and comprehensive resolution. I am very
delighted and enthusiastic to live in this age to witness this digital
transformation

Last but not the least, I take this opportunity to thank Prof.
Walter Liguori, who is currently the acting director for cybersecurity at
the Consiglio Nazionale Delle Ricerche (CNR) for this wonderful
opportunity he has given to complete my thesis under his supervision,
guidance, and support. Without whose support it would have been
very tiring and difficult to make this to the end of my graduation.
Thanking you again

57 | P a g e
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