Web3 and Digital Currencies: The Connection Explained

The terms "Web3" and "digital currencies" or "cryptocurrencies" often intersect, raising the question of their connection. This relationship is foundational. Digital currencies serve as the native economic layer of Web3, offering the incentives, assets, and payment systems necessary for a decentralized internet.

Web3 envisions a user-owned internet built on blockchain technology. Digital currencies fuel this new approach. This article outlines the essential ways in which Web3 and digital currencies are intertwined.

Digital Currencies as an Incentive for Decentralization

Decentralization stands as a core principle of Web3. Instead of being controlled by a single entity, Web3 applications operate on a distributed network of independent computers, known as nodes. The question arises: why would these node operators contribute their resources?

• The Connection: The network's native digital currency acts as the incentive.
• In a Proof-of-Work system like Bitcoin, miners receive BTC as a reward for securing the network.
• In a Proof-of-Stake system such as Ethereum, validators earn ETH for staking their resources and confirming transactions.
• The Importance: Without a native digital currency to reward these participants, the network would lack an economic model to sustain its security and functionality in a decentralized manner.

Digital Currencies as the "Gas" for Computation

Every action on a smart contract platform, like Ethereum, incurs a computational cost known as "gas."

• The Connection: This gas fee is paid in the blockchain's native digital currency, such as ETH on Ethereum.
• The Importance: This payment structure creates a market for computational services, preventing spam and efficiently allocating the network's resources. Digital currency serves as the only accepted payment method for these actions.

Digital Currencies as Native Assets in the Ownership Economy

Web3 builds an "ownership economy" wherein users can genuinely own their digital assets. Digital currencies embody these assets.

• Fungible Tokens: These represent interchangeable currencies and governance tokens within Web3. They allow users to not only use a protocol but also to possess a stake in its future, such as Uniswap's UNI token.
• Non-Fungible Tokens (NFTs): These unique digital currencies signify ownership of specific items, including artwork, in-game assets, or digital identities. They serve as the deeds and titles of the digital area.

Digital Currencies as a Global Payment System

Web3 applications are inherently global and permissionless. They require an equally open payment system.

• The Connection: Digital currencies, particularly stablecoins, can be transmitted globally within seconds for minimal fees, circumventing the slow and costly traditional banking system.
• The Importance: This creates a simple, internet-native economic layer essential for global decentralized applications (dApps), spanning e-commerce to gaming.

Web3 represents the vision of a decentralized internet, while digital currencies act as the mechanism that actualizes this vision. They are not merely an application of Web3; they are integral to its economic structure.