Ethereum and the New Era of the Internet Part I

✨ Hi, I’m Sara Tortoli and this is the June edition of The Plunge Club, a monthly newsletter dedicated to product and human tinkering.

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This is the second issue of the “🕳 🐇 Down the rabbit hole” series, in which I deep dive into different topics. This rabbit hole is dedicated to Ethereum and the Internet. If you have no idea why those two things are connected, and why Ethereum could mean a new era for the Internet, this article is for you.

This is part I of a two-part edition.

Part I will focus on the Internet and its evolution, what’s Ethereum and why it could be the herald of a new era for the Internet. We will explore what is the impact for the Web as we know it and possibly on some of our favorite apps.

Part II will focus on the economic value of Ethereum, its coin Ether as the Internet native payment system, and the current use cases. Finally, we take a look at what the future looks like, including risks and adoption.

🛑 Important: this article is not in any form or shape financial advice. Always do your own research. A good place to start, it’s from the resources I used to prepare for this article. You can find the links with all the references at the end. 🛑

How much is the Internet worth?

Today almost 60% of the global population worldwide is an active internet user. How much would have been its value today if you had the chance to invest back then?

This is the same question I ask myself when it comes to Ethereum. Ethereum is building a new internet, one in which the value is distributed among the users, rather than captured by a few companies.

And yet, this is rarely advertised. The problem with Ethereum is that its narrative is caged in that of the cryptocurrencies, with their endless market ups and downs. When decoupled from that of the crypto market, the Ethereum narrative ends up being complex and full of technicism. This might attract developers that fully understand the revolutionary implications, but it's difficult to comprehend for a wider audience. And yet, if Ethereum is successful in fulfilling its vision, it can change the Internet as we know it.

This two-part article wants to demystify Ethereum, decoupling its narrative from that of the crypto market, and making it accessible also to a non-technical audience.

How the Internet works, explained simply

To understand Ethereum and why it can revolutionize the Internet, we need to first understand how the Internet works today.

The Internet is a worldwide computer network that transmits a variety of data. Also, even though we used it interchangeably, the Internet and the Web are not the same things.

Internet is made by a series of protocols stack on top of each other, with the Web being a service that sits on top of it. The Internet has a physical hardware layer, made of cables and connections, that encompasses the entire globe, going from your neighborhood to the bottom of the ocean, and allows computers to connect and exchange information with each other. The data sent over the Internet through those cables are broken down into packets, that travel from one source to the next using Internet Protocol (IP) and Transport Control Protocol (TCP) to understand what and where they need to go.It works similarly to the traditional mailing system, only parts of the same message can take different routes to optimize the network to reach their destination, before assembling again into one full message when it reaches your computer.

The application layer (HTTP, DNS, www, etc.) sits on top of the other protocols. This set of architecture is known today as Web 1.0 and it’s open-source, free for everyone to use.

While free, the user experience left a lot of room for improvement. Web 1.0 was a compilation of static web pages that had mostly text and images. This was because the information was physically distributed and it took quite a bit of time for it to reach the consumer. For those who remember, this was the Internet of MSN Messenger, where downloading a video could take days (and in the case of movies even a month).

Even with its obvious limitation, it was based on open protocols rules that were transparent for everyone to see. Over time, the fact that those rules couldn’t be changed later on, incentivized people and organizations to start building things on top of the application layer. This is how companies like Google and Amazon came about.

Web 2.0 started replacing the slow Internet with broadband connection, and that in turn paved the way for online interactions. All these changes were built upon the same technology, Internet Protocols that consistently sought the host to retrieve and deliver information. With the improved velocity and technology, suddenly you could do much more than surfing the web. You could interact with other people, stream videos and execute transactions, something that Web 1.0 failed to implement.

Web 2.0 established itself as a mobile-first, social and cloud-based type of internet, the home of all our favorite apps, from Spotify, to Google and Airbnb, all of which are built on top of the free and open-source Internet. Also notably, with Web 2.0 the Internet got significantly prettier : )

What is Ethereum and what it has to do with this?

Because of this, I tend to agree with David Hoffman when he writes that "attempting to define Ethereum feels a bit like defining the Internet in the ’80s: no one really knows what is coming."

Technically, Ethereum is often described as a new world computer, “the world's programmable blockchain”, according to the Ethereum foundation

What this means is that Ethereum is based on the Internet but doesn’t need any server to operate, in fact, it is not hosted in any server or cloud. It’s fully decentralized because it runs on a network of distributed computers.

I have talked about blockchain and how it works in my article on Bitcoin. Without Bitcoin, Ethereum would not have been possible. Bitcoin is the first blockchain to successfully solve the trust issue, aligning the incentives of third parties, and eliminating the need for a middle man to execute transactions (like another company or a bank).

While Bitcoin is great as a digital store of value and has opened the world to a new era for money, as far as technology goes, it has very limited programmability. Bitcoin blockchain does nothing except record all transactions from the beginning of its history and mint new coins until max supply is reached. Not so Ethereum.

You can think of Bitcoin as a simple calculator that can do only simple operations (plus, minus, etc). Ethereum is usually compared to a vending machine: you put in 1 dollar, and in return, you can buy anything for the equivalent or inferior amount and receive some spare change in return.

Ethereum founder Vitalik Buterin (who for the record was 19 when he published the Ethereum whitepaper, picture that), created it to be a general-purpose blockchain, as opposed to Bitcoin. To do that, he and his co-founders made Ethereum programmable, with the ability to understand and implement any future agreements (known as smart contracts), even the ones that have not been thought about yet.

Enter the Web 3.0

What does it mean that Ethereum is the backbone of a decentralized internet, this Web 3.0, and why should we care? Weren’t we all just fine with Web 2.0? Not quite.

In Web 2.0 information is stored in servers owned by different companies, and every time you want to fetch and display this information, you make a call to this server.

This is not for free, and if it is, it only seems so on the surface.

You either pay for this service outright (e.g. your Netflix subscription) or you pay indirectly by giving away your own data that companies monetize through advertisements (like most social media do). Information is, for all intent and purpose, siloed, and belongs to the company that offers the service.

If you are a product manager, you know this well, as most of our metrics are designed to measure some level or other of addictiveness. Case in point, see what all your favourite social medias are asking as a consequence of the most recent IOS update:

Web 3.0 uses parts of Web 1.0 and aims to replicate Web 2.0 but in a decentralized way, by substituting the server/hosting system of Web 2.0 with blockchain technologies like Ethereum, plus some other complementary systems for file and data storage.

What makes Web 3.0 unique?

Because it’s decentralized, Web 3.0 has some very unique aspects.

• It’s community-driven rather than company-driven. Decisions and governance are taken by open communities of distributed individuals that come together to decide the update of the network

• It gives back to users ownership of data. Because data are not centralized on a server but are spread across the blockchain, no one company can control and imprison them in silos

• It’s secure because data are encrypted and distributed. To steal data or reverse transactions, you would have to temper with the entire blockchain. As a consequence, the more decentralized the blockchain is, the more secure

• It’s trustless because you don’t need any third party to mediate as the network regulates itself through smart contracts. In Web 3.0 for example, you don’t need any bank to process transactions or to certify that you own a property

• It’s (or will be) interoperable, applications will be easy to customize and device-agnostic

• It’s permissionless, as both users and suppliers, can participate without authorization from a governing body. Nobody can lock you out of your account

Much like Web 1.0, Web 3.0 is open-source and accessible by anyone.

This is not the same as the open-source software we know in Web 2.0. The fundamental difference is in the blockchain you get one canonical instance that multiple parties converge on, wherein in the open-source Web 2.0 everything is fractured in its own silos and needs to be redeployed.

Traditional open source software is like a blueprint that describes how to do something. For example, if you were to build a city, it would be like having a blueprint of how to build roads and power grids before you get to build houses. You know how to do it, but you still have to build your city from scratch. In blockchain roads are already built by someone else, you don’t have to build your own to create a brand new city, you could reuse what was done already and built immediately houses on it.

The final and peraphs biggest implication of Web 3.0 is that it solves what Marc Andressen, co-founder of Netscape, calls “the original sin” of Web 1.0:

The consequences for the financial system and the economy as we know it of this last sentence will be explained in much greater detail in Part II of this article.

Do we really need a decentralized Web?

Dr. Gavin Wood, the founder of Polkadot and co-founder of Ethereum, illustrates why we need decentralization with a simple example:

“Take how we pay for things online. On Web 2.0, you are not empowered to make payments per se. In reality, you must contact your financial institution to do it on your behalf. You are not trusted to do something as innocuous as pay your water bill. You are treated like a child appealing to a parent. If you wish to contact your friend online, then likely you will need to appeal to Facebook to relay your message.”

More, you cannot build real innovation on top of the centralized Internet. Every time you have to build from scratch, rather than on top. When you try to build on top, we now have decades of evidence that doing so ends likely in disappointment. Think about every time a public API has been switched off and sent out of business the startups that were basing their business model on that.

In addition, we users give up our privacy to companies that than can sell our information. They are in control of our data, and we become vulnerable to security breaches.

All these problems with centralized platforms will likely become even more pronounced in the future.

Aside from the technological implications, there are also huge upsides on economic returns, as we shift from a proprietary centralized internet to a decentralized one.

Value is spread across communities, rather than converging on the hands of a selected few, captured and distributed through tokens which users can hold almost from inception, without having to wait for a company to get listed on stock exchanges (more on the economics of the Web 3.0 in part II).

Conclusion to Part I

Web 3.0 is trying to replicate many of the positive aspects of Web 1.0 and 2.0 and improve on the negative ones.

It is a completely open-source and decentralized Internet, a shared and reusable universe that allows developers to build value directly on the Internet. This universe is still a work in progress, both the network itself and what you can build on top of it. Many use cases are still being figured out and there is a lot of experimentation in the space, not all successful.

One of the most popular use cases is that of recreating copies of the most famous apps on Ethereum, known as Dapps (decentralized application). Dapps look exactly the same as normal Web 2.0 app on the surface, however, the backend is completely different, a revolution in the way information is shared, owned, delivered, and stored.

Suddenly the relationship between users and technology is not anymore many-to-one, meaning many users pointing to a single server, but many-to-many.

Ethereum is not the only technology trying to win the race of building a new era of the Internet. Others, like Cardano, Polkadot, or EOS, are also competing, and although some look more promising than others, they are still behind Ethereum.

From a user perspective, Ethereum and Web 3.0 give back control to users of their own data, making the Internet more secure, and giving individuals the ability to trust complete strangers without any middlemen in between, thanks to its open-source smart contract governance.

Most notably, Web 3.0 redistributes the value creation of the internet from a few companies back to single users and community. We will see how this is possible and it is actually already happening in part II.

👉 📚 All materials and references I used for this article can be found here

The “Now” section

🎧 What I am listening: Marc Andreessen, co-founder of Netscape, talking at the a16 podcast about how the Internet came about from the perspective of someone who had a front-row seat. Short and fun, it shows how in hindsight many things seem obvious and how change is anything but a trial and error process.

📚 What I am reading: Reasons to stay alive by Matt Haig, a really touching biography of the author descends into depression and anxiety and how he came back to appreciate life after attempting suicide.

🥁 What I am doing: Researching mainly into the blockchain/decentralized space and wondering about how Web 3.0 will change our society and the way companies and startups rise and fall.

🧐 Question I am asking myself:

What does the future look like?