Evolution & Revolution: Understanding Web3 and Digital Assets
Having a foundational understanding of Web3 and emerging digital assets is essential in appreciating their impact on the future of the financial industry and society more widely. Franklin Templeton’s new digital assets primer provides in-depth information on these new concepts and terminologies. In this article, Sandy Kaul, Head of Digital Asset & Industry Advisory Services, summarizes each section in the primer.
The emerging Web31 space represents both an evolution in the development of Internet technologies and a revolution that introduces the new dynamics of a decentralized economy. Understanding how the ecosystem has developed since the introduction of Bitcoin back in 2009 is critical as more of the world’s economic activity is likely to shift into this new domain over the coming decade.2
Public layer 1 blockchains (L1 blockchains) are becoming something completely new in our world history—emerging digital nation-states. These blockchains have their own currency, their own governance, and their own economic rails on which entrepreneurs are building all sorts of businesses that are attracting a growing set of customers. Understanding the emergence of this ecosystem, its key building blocks and the various ways in which tokens are being used to facilitate interactions should allow investors to evaluate and capture emerging growth opportunities in this new frontier. Moreover, our hope is that obtaining a better understanding of the new innovations might also help existing businesses rethink their delivery and ability to utilize the new transaction rails.
Our new publication, “Understanding Web3—a primer on the emerging digital asset ecosystem,” tackles each of these topics. Below you will find an overview of each section in the primer that could be useful prior to reading the full document. Additionally, while some definitions of terminologies are included in this article, there is an extended, standalone glossary at the end of the primer that could serve as a helpful reference.
Foundational building blocks of Web3
This section focuses on the key building blocks being developed in Web3—blockchains, tokens, smart contracts and digital cryptocurrency wallets. It also explains how blockchains operate and rely on consensus mechanisms rather than centralized authorities to confirm transactions. It explores the various types of currency-related tokens—payment tokens, stablecoins and central bank digital currencies (CBDCs). It explains the purpose of and lays out use cases for non-payment related tokens—utility tokens, governance tokens, asset-backed tokens and investment tokens. The section further explains how these tokens are programmable through the use of smart contracts and how those smart contracts can support a wide variety of “if-then” scenarios that will self-execute when the right conditions are met. Finally, the section explores how cryptocurrency wallets differ from existing digital wallets and offer individuals and institutions the opportunity to transact in ways that preserve their personal and organizational information.
Understanding the Web3 digital asset ecosystem
This section looks at the evolution of the cryptocurrency ecosystem, starting with the emergence of Bitcoin’s payment network in 2009, the Ethereum blockchain in 2015, the subsequent proliferation of L1 blockchains, and in recent years, the emergence of layer 2 blockchains, oracle networks, and multi-chain bridges. These offerings represent the new infrastructure on which Web3 is being built. Unlike earlier innovations, the Web3 infrastructure is being deployed in real-time and operates 24 hours a day, 7 days a week, 365 days a year. Being open source, the infrastructure is benefiting from the ongoing efforts of thousands of developers. This allows for potential issues to be spotted and addressed more quickly and for fixes to be introduced in an iterative manner that enables the mechanics of Web3 to progress far more quickly than any comparable infrastructure.