Common Terms in Web3

If you are breaking into web3 software development, all the new vocabulary can be a little intimidating, just like it can be when getting into web2 software development. In this post, we will go over some common terminology used in the web3 community.

DLT: Distributed Ledger Technology

Distributed Ledger Technology(DLT) is the overarching category of web3. DLTs encompass any distributed network that works to achieve consensus on the information. Blockchains are distributed ledgers, but notably not the only kind. Other distributed ledgers don't use a chain-coded architecture. For example, some DLTs utilize Directed Acyclic Graph(DAG) architectures for their consensus mechanisms. Examples of distributed ledgers that utilize DAG architectures are Hedera Hashgraph and Filecoin. If you want a more in depth explanation take a look at this resource.

Custodial and non Custodial Wallets

At the core of every crypto wallet is a public and private key pair. Asymmetric cryptography is at the backbone of all distributed ledgers and web3 technologies; without it, no distributed ledgers would exist. If you want to learn more about it, I wrote about it here. Your private key is used to authorize your transactions and receive information. Whoever has the private key of a wallet can access funds and authorize transactions. The private key is critical. The public key is hashed and then used as your wallet address.

The distinction between a custodial and non-custodial wallet is who manages your private keys. If you manage your private keys, the wallet is referred to as a non-custodial wallet because no one has custody of your wallet except you. If a third party controls your private keys, then the wallet is a custodial wallet. If you are looking for some good Wallets, you can check some supported wallets Here and some great Ethereum wallets Here.

Smart Contracts

Smart contracts are programs deployed to distributed ledgers. They are viewable by anyone and commonly written in a language called solidity with file extension .sol. One advantage that smart contracts have is that they are composable. This means that they can interact with other smart contracts and create an ecosystem of decentralized protocols that make up a big part of web3. There are alternative decentralized services that can be utilized that have some advantages over smart contracts like the Hedera Consensus Service and the Hedera Token Services. Both of which have advantages in speed, finality, and security. An in depth article on smart contracts and there history can be found here.

Dapp: Decentralized Application

A decentralized application is a non-custodial application that allows a user to authorize preprogrammed functionality. Decentralized applications run on a distributed ledger with varying degrees of programmability. Decentralized applications are built with distributed protocols and a user interface, a combination of web2 and web3. These are the applications that support many of the use cases of distributed ledger technologies. Some examples are Decentralized Identity, Supply chain integrity, and Decentralized Finance (DeFi). If you want to understand more use cases, check out this resource.

CEX: Centralized Exchange

A centralized exchange is a centralized entity that allows users to buy, sell, and trade various crypto assets. Users assume some risk when using a centralized exchange because the exchange manages the private keys of its user's crypto wallets. While there may be a good reason to trust an insured exchange, no exchange is immune to a cyber attack that could compromise the user's private keys. Some examples of centralized exchanges are Coinbase, Binnance, and Bittrex.

DEX: Decentralized Exchange

A decentralized exchange is a Dapp that allows users to trade different crypto assets with each other. Trades on decentralized exchanges are peer-to-peer, so you interact with a network directly rather than through a middle man like a centralized exchange. Some examples of notable decentralized exchanges are Uniswap, sushiswap, and Pancakeswap.

DAO: Decentralized Autonomous Organization

A DAO is a governance structure for web3 projects. DAOs usually have a governance token that allows holders to anonymously vote on which direction a project should go and what developments will be made. Since decentralization is the name of the game in web3, some projects have forgone the traditional business models for DAOs. DAOs allow projects to pay their developers, give community incentives, and make critical decisions in a decentralized and democratic process.

NFT: Non Fungible Token

NFT stands for Non-Fungible token. The word fungible essentially means replaceable or interchangeable. So NFT’s are not interchangeable, nor are they replaceable. An NFT has a unique cryptographic signature as proof of its authenticity. Additional information is retained in the NFT, like the account ID of its creator and metadata associated with it. This is so people can store all sorts of digital information in the metadata, and you would be able to verify that the account ID matched that of the creator of the work.

As you can imagine, this creates a monumental amount of utility in the world of intellectual property. Artists have taken to this technology like a storm, leveraging it to produce irreplaceable unique digital artwork. Additionally, the digital aspect of the token’s metadata allows individuals to build a digital experience instead of a traditional static piece of art. Audio data with mp4 data will enable people to create multimedia artwork with a wide array of functionality.

Fungible tokens

Contrasting NFTs are Fungible tokens, which are not unique. Tokens like Bitcoin, ETH, and Hbar are all fungible tokens. These tokens often serve as network fuel to pay for network services like transaction fees. In some cases, Fungible tokens also serve as governance tokens for DAOs.

PoW: Proof of Work

Proof of work was the first consensus mechanism utilized in Distributed Ledgers. Proof of work is the consensus mechanism behind Bitcoin and Ethereum (although there is a discussion of Ethereum moving to Proof of Stake). The Mechanism requires validators referred to as miners, to expend computational effort to validate the network. This deters malicious actors from attacking the network in a game-theoretic model by requiring them to have enormous resources to attack the network.

Miners are entities who participate in the PoW consensus algorithm. Miners are rewarded network fees in exchange for validating and securing the network. Miners are often anonymous. Miners manage PoW mines which are special computers with many powerful Graphics Processing Units(GPUs). Because PoW mining is a computationally-intensive process, mining requires large amounts of electricity and raises discourse on its environmental impact.

PoS: Proof of stake

Proof of Stake is a category of consensus that requires validators on the network to hold an amount of cryptocurrency corresponding to the network they are validating. The more you hold, the more weight your validation has on the consensus of the network. There are varying PoS consensus mechanisms, but they all ensure a base level of network security by requiring validators to be invested in the network. This way, if a bad actor were to try and create a bad state of the network, they would have to be heavily invested in the network's native token and thus in the network's success. Some example of proof of stake networks are Hedera Hashgraph Algorand and Cardano.

Validators contrast PoW miners by participating in the validation of a PoS network through the network mechanisms. Since in PoS, you do not need to expend large amounts of computational resources, Validators don't need a lot of electricity.

I hope this brief overview of common terms makes navigating web3 technologies easier. If you have any questions feel free to leave them in the comments or @ me on twitter.