Education

Contents

Introduction to Web 3 and Decentralisation

Evolution of Web (Web 1, Web 2, Web 3)

Decentralisation and its impacts (transparency, ownership)

Blockchain Fundamentals

Basics of Blockchain as a Technology

Consensus Mechanisms (PoW, PoS, etc.)

Types of Distributed Ledger Technology (DLT) and Blockchains

The Future of Blockchain

Cryptocurrencies and Tokens

The History of Cryptocurrencies

Smart Contract Platforms

The Rise of Alternative Blockchains

Blockchain Assets – Tokens

Tokens – Their Functionality and Uses

Smart Contracts and dApps

What is a smart contract and their role?

What is a dApp and how are they related to Web 3?

Potential Use Cases in Different Industries

Australian Platforms

DAOs and Governance

Security and Other Concerns

Privacy Challenges

Security Challenges

Centralisation vs. Decentralisation

Regulation and Different Countries’ Approaches

Smart Contract Auditing, Bug Bounties and Penetration Testing

Identity and Infrastructure

Decentralised Identifiers

Verifiable Credentials

Decentralised Data Storage

Thanks to Contributors

Introduction to Web 3 and Decentralisation

Evolution of Web (Web 1, Web 2, Web 3)

Web 1 was the earliest phase of the internet, featuring static websites that you could read but not interact with. Information flowed one way, from the website to the user, without easy ways for users to contribute their own content.

Web 2 is the next phase of the internet, characterised by interactive websites that allow users to not just read, but also contribute and share content. It paved the way for social media, blogs, and user-generated content, making the web a two-way street for information flow.

The “interactive” nature of Web 2, while revolutionary, has led to complex challenges around how information is managed, who profits from it, and how it impacts society. It’s a landscape where user data becomes a product, advertising can be overwhelming, copyright laws are frequently tested, and social responsibility often takes a backseat to profits. Additionally, the platform is rife with issues like misinformation, cyberbullying, and digital addiction, further complicating the ethical and social dynamics of the internet.

Web 3 is the next stage of the internet that aims to give you greater control over your own data, transparency in your online interactions, and even financial benefits. It’s designed to be more balanced, where you and not just a few powerful organisations have power.

Decentralisation and its impacts on society

Decentralisation is the transfer of power and authority from a central authority to a distributed network of participants. In the context of the internet, decentralisation means that there is no single entity that controls the internet or the data stored on it. Instead, the internet is maintained and governed by a consensus of participants.

Web 3 is the next generation of the internet, built on blockchain technology. Web 3 is designed to be more decentralised, open, and transparent than the current web.

Overall, decentralisation has the potential to make society more transparent, democratic, and equitable. However, it is important to note that decentralisation is still in its early stages of development, and there are some challenges that need to be addressed before it can be widely adopted. For example, decentralised systems can be more complex and difficult to use than traditional systems. Additionally, there are some risks associated with decentralised systems, such as the potential for fraud and hacking.

Blockchain Fundamentals

Basics of Blockchain as a Technology

What is Blockchain?

Blockchain technology is a groundbreaking digital ledger system that has transcended its origins in cryptocurrencies to revolutionise various industries.Its foundational role in underpinning cryptocurrencies like Bitcoin is just the beginning of its transformative potential.

At its core, it’s a unique type of database, but not the kind we typically think of. Unlike a traditional database controlled by a single entity, a blockchain is distributed across many computers connected via the Internet. Think of it as a shared digital ledger that records transactions.

Decentralised and Immutable

One key feature of blockchain is its decentralisation. Instead of being stored in a single place, it exists simultaneously on numerous computers worldwide. This decentralisation makes it extremely difficult for any one person or organisation to manipulate the data. Additionally, blockchain is immutable, meaning once information is added to it, it can’t be altered or erased. 

Public, Secure, and Private

For some blockchains, particularly public ones like Bitcoin and Ethereum, the data is accessible to anyone on the Internet. This transparency fosters trust because everyone can independently verify transactions. Moreover, blockchain is exceptionally secure due to its use of advanced cryptography, making it highly resistant to unauthorised access and tampering.

However, it’s important to note that while blockchain provides a high level of security in terms of data integrity and immutability, it doesn’t necessarily mean complete data privacy. The term “secure” in the context of blockchain primarily refers to the technology’s ability to protect data from being altered or manipulated, ensuring trust in the information stored on the ledger.

When it comes to using blockchain for sensitive or private data, such as a company’s internal records, additional considerations and privacy measures are needed to ensure that the data is not accessible to unauthorised parties. In these cases, private blockchains or hybrid solutions are often explored to strike a balance between security and privacy, and it’s crucial to implement robust access control and encryption mechanisms to safeguard sensitive information effectively. Blockchain’s security and privacy characteristics can be tailored to suit specific use cases, providing a versatile tool for different data management needs.

Consensus Mechanisms

In blockchain, a consensus mechanism is like a digital agreement that helps everyone in the network know what information is true without having to trust a single entity. Imagine a group of people who want to keep a shared ledger of transactions. Instead of trusting one person to record everything, they use a special rule, like a maths puzzle, that all agree on. When someone wants to add a transaction, they must solve this puzzle, which takes a lot of computing power and time. Once solved, everyone can quickly verify the answer, making it really hard for anyone to cheat. So, in essence, consensus mechanisms ensure that information on the blockchain is trustworthy because it’s been independently verified by many participants, following the principle of “Don’t trust, verify.”

This special rule was true for one of the first applications of blockchain, the first cryptocurrency, Bitcoin. It uses the “Proof of Work” consensus algorithm that has a number of advantages and disadvantages. 

There are other consensus mechanisms as well, just to name a few:

Proof of Stake (PoS): Instead of solving maths puzzles like in Proof of Work, Proof of Stake works by having participants “stake” or lock up some of their cryptocurrency as collateral. Those with more staked coins have a better chance of being chosen to validate transactions and create new blocks. Ethereum transitioned from PoW to PoS to reduce energy consumption.

Proof of History (PoH): PoH, used by Solana, adds an extra layer of security to Proof of Stake. It timestamps transactions before they’re added to a block, making it easier to verify the order of events. It’s like having a timestamp on each action in a shared journal, ensuring everyone agrees on the sequence of events.

Hedera Hashgraph (Gossip Protocol): Hedera uses a unique consensus mechanism known as the Gossip Protocol. Instead of miners, nodes in the network share information through “gossiping”. They spread transactions and events quickly, achieving consensus without the need for energy-intensive mining.

Algorand uses a consensus mechanism called “Pure Proof of Stake” (PPoS). It’s a variation of the Proof of Stake (PoS) mechanism. In Algorand’s PPoS, a randomly selected group of participants, known as the “committee,” is responsible for confirming transactions and adding them to the blockchain. The selection process is based on the amount of Algo (the native cryptocurrency of Algorand) participants hold and is done through cryptographic algorithms.

These are just a few examples of the diverse consensus mechanisms in the blockchain space, each with its own set of advantages and trade-offs.

In the world of blockchain, there’s no one-size-fits-all consensus mechanism, just like there’s no single key that unlocks all doors. Each mechanism, whether it’s Proof of Work (PoW), Proof of Stake (PoS), or others, has its own strengths and weaknesses. This diversity is a bit like a puzzle, and solving one part often means sacrificing something else.

Imagine trying to balance speed, security, and decentralisation – this is known as the “Blockchain Trilemma”. Achieving a perfect balance is a challenge, and different blockchains make different choices to find their sweet spot.

Types of Distributed Ledger Technology (DLT) and Blockchains

Understanding Distributed Ledger Technology (DLT)

As we continue our exploration of different blockchain technologies, it’s essential to introduce another critical concept known as Distributed Ledger Technology (DLT). DLT is the broader family of technologies that encompasses blockchain. While blockchain is a specific and well-known type of DLT, different forms of DLT exist, and understanding this distinction is crucial. DLT, in essence, is the overarching framework that enables decentralised, secure, and transparent record-keeping. DLTs find application in a wide range of sectors, including supply chain management, healthcare, financial services, identity verification, voting systems, real estate, education, energy trading, intellectual property protection, and legal services, offering enhanced security, transparency, and efficiency.

Public Blockchains

Public blockchains, such as those used for cryptocurrencies like Bitcoin and Ethereum, are openly accessible on the internet. They are maintained and validated by a distributed network of users, making them highly decentralised. These blockchains offer transparency as anyone can view the entire transaction history and participate in the network. Public blockchains are often used for applications that require trust in a trustless environment, and they are a specific form of DLT.

Private Blockchains

Private blockchains, in contrast, are more like restricted-access networks. They are often employed by businesses, consortia, or organisations for specific purposes. Unlike public blockchains, access is controlled, and participants are known entities. Examples include Hyperledger and Corda, which are used for enterprise-level applications, where privacy, scalability, and controlled access are paramount. These private blockchains are another variation of DLT.

Hybrid Blockchains

Hybrid blockchains combine elements of both public and private blockchains and represent another approach within the broader field of DLT. They are often used in supply chain management, where some data needs to be public for transparency while other information remains private for business reasons. These blockchains offer flexibility by allowing companies to decide which parts of their operations require decentralisation and which require controlled access, showcasing the adaptability of DLT in different contexts.

The Future of Blockchain

There are a few points that we can look at if we want to understand the future of blockchain: 

Blockchain Use Cases: In the real world, blockchain goes beyond cryptocurrencies. It’s being used for things like tracking products in supply chains, keeping medical records secure, improving voting systems, and safeguarding digital identities.

Blockchain Challenges: Challenges include dealing with government rules, making sure it can handle scalability issues, and teaching everyone what blockchain is, from individuals to the policy makers.

Interoperability: Blockchains need to talk to each other better. Think of it like different languages. Some projects, like Polkadot, aim to help them understand each other. Others are using bridges. 

Recent Developments: As one of the emerging technologies, things are always changing rapidly in the blockchain world. There are new ideas and ways to use it popping up all the time.

Crytocurrencies and Tokens

The History of Cryptocurrencies 

Before the term “Bitcoin” was a buzzword, the idea of cryptocurrency started as a series of experiments in digital money. During the 1980s, David Chaum, a researcher from US Berkeley, introduced ideas about secure digital transactions without banks – or eCash. Following on from his experiment, various digital tokens emerged, each trying to capture the stability of gold – although they didn’t gain much traction, they set the stage for what was to come.

Amidst the Global Financial Crisis, Satoshi Nakamoto unveiled Bitcoin in a whitepaper published during 2008. Imagined as a decentralised digital currency, it inspired a system where money could be sent directly between people over the internet, with no banks needed. Bitcoin’s supply was capped at 21 million coins and this scarcity mimicked precious resources like gold. 

A unique feature of Bitcoin was how transactions on its network were verified. People around the world, called “miners”, used computers to solve complex puzzles and earned Bitcoin as a reward. This system, known as proof-of-work, ensures that all transactions are genuine and immutable.

In 2009, the first Bitcoin transaction was performed and on the 22nd of May 2010, the real-world value of the currency was recognised when a man, Laszlo Hanyecz, purchased two pizzas for 10,000 Bitcoin. Despite this, in its early years, Bitcoin remained a niche interest with increased speculation and gradual mainstream recognition.

Smart Contract Platforms

While Bitcoin’s primary focus was peer-to-peer money transfers and a store of value, a new technology, Ethereum, arose, which had much grander ambitions – to decentralise the internet itself. 

Decentralising the internet aims to reduce the control of dominant entities, foster innovation, improve access and enhance data privacy and security for users.

Introduced by Vitalik Buterin in the Ethereum Whitepaper during 2014, Ethereum broadened the blockchain’s ability to host decentralised applications using “smart contracts”. These smart contracts enabled developers to code and execute contracts automatically on the blockchain, once predefined conditions were met. For example, a smart contract could be used to collect payments for a concert, store the funds in escrow, and release payment to performers once the event had finished. Smart contacts eliminated intermediaries, making transactions simpler, transparent and trustworthy.

The capability of the Ethereum blockchain fostered a wave of innovation – particularly in decentralised applications, or dApps. These dApps ranged from decentralised financial products and services (DeFi) – i.e. banking without banks – to games and everything in between. 

Over time, developers of many of these dApps realised the need for capital and funding to build and expand their products and services. They utilised Ethereum smart contracts to develop new cryptocurrency tokens and sold these to investors via Initial Coin Offerings, or ICOs – this ecosystem has resulted in the plethora of crypto businesses and innovations that you see today. 

The Rise of Alternative Blockchains

Emerging in the shadow of Ethereum, new Layer1 blockchains like Binance Smart Chain, Algorand, Cardano, Solana, and Cosmos sought to address perceived limitations of Ethereum such as transaction speed, energy efficiency, and customizability. While each carved their own niche, driven by unique designs and approaches, they all aimed to tackle the blockchain trilemma of scalability, security, and decentralisation. 

Alternative blockchains, like Chainlink, have facilitated transfer of live pricing data across various blockchain networks; allowing for real-time accurate valuation of assets and improving market efficiency. These “Oracles” allow prices and valuations for both cryptocurrency and real-world assets, like gold bullion, treasury and stocks, to be utilised on by blockchain protocols. 

Ultimately, the collective rise of alternate blockchains underscores the blockchain industry’s dynamic nature, driven by innovation and the pursuit of enhanced performance, inclusivity, and user experience.

Blockchain Assets – Tokens

Broadly speaking, there are three major types of transactions that are processed on Ethereum (and other blockchains):

• • Transfer of Ether from one party to another;
  • Creating a smart contract;
  • Transacting with a smart contract.

Tokens are fundamental to Ethereum, offering varied functionality, economic value, and utility. Governed by smart contracts, these tokens have specific behaviours, supply, and transfer guidelines. After being minted via their respective smart contracts, they can be traded, sold, or utilised on the blockchain. 

There are various types of tokens on Ethereum and this number is growing every day. New token types are added via a proposal and consensus process called Ethereum Improvement Proposals – once these are successfully approved, they are documented by the Ethereum Foundation in token standards. Here is a list of the most common token types used today:

• • ERC-20: Fungible or interchangeable tokens – like virtual currencies, voting and staking tokens;

• • ERC-721: Non-fungible tokens (or NFTs) which could be an artwork or song that has been tokenised on chain.

• • ERC-1155: A multi-token that allows for the creation and management of both fungible and non-fungible tokens within a single contract – for example a game token which entitles the owner to regular distributions of in-game coins (fungible) and rare in-game items (NFTs) as the player plays the game.

Alternative blockchain networks have their own standards which can vary significantly from Ethereum. Despite these differences, the core idea remains: to provide users with a standardised, secure, and flexible method for creating and managing digital assets.

Tokens – Their Functionality and Uses

Tokens have revolutionised the digital landscape, representing a fusion of technology and economics. Their applications and utilities create new avenues for financial and operational activities. The key use cases for tokens are as follows:

• Trading and holding: Tokens can be traded on a Decentralised Exchange (DEX), like Uniswap, or a Centralised Exchange (CEX), like Coinbase, allowing users to buy, sell, or hold them – much like other commodities.

• Staking and yield farming: Tokens can be locked up within a protocol and users can earn rewards or yield.

• Lending and borrowing: Decentralised Finance (DeFi) platforms enable users to lend their tokens for interest or borrow against their holdings.

• Voting and governance: Many tokens grant their holders the right to vote on project developments, giving them a voice in the protocol’s future direction.

• Invest in tokenised real-world assets: Tokens can be used to represent real-world assets – like gold bullion, artwork, music, real-estate title deeds, and treasury bonds. This allows for these assets to be readily traded, in a safe and immutable way. These assets can be valued using asset data from traditional financial markets and this service is facilitated by pricing oracles.

• Access and own rights to real-world services: NFTs can be used to represent, or tokenise, the rights to real-world services – like tickets to a concert, club memberships and digital subscriptions – on a blockchain. This allows providers of the service to track and engage with their membership in unique ways. 

Tokens are not a digital novelty; they are transformative instruments in the evolving digital economy. As the blockchain ecosystem evolves, the role and relevance of tokens will only become more pronounced.

Smart Contracts and dApps

What is a Smart Contract and Their Role?

In the context of blockchain applications, a smart contract is a self-executing contract with certain terms of the agreement between different parties directly written into lines of code. The code and the agreements contained therein exist across a distributed and ideally decentralised blockchain network, such as Ethereum.

When the blockchain is sufficiently decentralised and the smart contract on-chain, it is considered as immutable (as it becomes very difficult or impossible to change, or cheat the system), as well as transparent (because the blockchain is public, anyone can access and audit the code).

The fact that public blockchains are permissionless (anyone willing to interact and pay the required network fees can do so) and the smart contracts immutable, means that applications built on decentralised blockchains are trustless (participants in the network do not need to trust each other or a central authority, in order to interact and transact with each other). 

Therefore, and given the properties mentioned above, we can conclude that smart contracts play a vital role in decentralised applications, as they

• Can automate many of the tasks that are involved in traditional transactions, such as verification and execution. This can help to make transactions more efficient and less expensive.
• Allow developers to create secure, transparent, and efficient applications that can revolutionise many industries.

What is a dApp and how are they related to Web 3?

dApps are computer applications whose code is written in a series of related smart contracts. These contracts are often referred to collectively as “protocols.” What distinguishes dApps from regular applications is that they are typically permanent, as they will exist as long as the blockchain hosting the protocol exists and cannot be changed or manipulated by malicious actors. They are also open, meaning that any computer can participate in the network, and access is not limited to a single or pre-defined group.

In the context of web 3, the most popular use cases can be found across different verticals, such as:

• Decentralised Finance (DeFi): encompasses platforms and protocols that allow users to perform transactions and move value of digital assets and can be typically compared to the traditional services that the banking industry provides, such as:
  • • Lending: protocols that allow users to borrow and lend assets
    • (Decentralised) Exchanges -DEXes-: applications where you can swap/trade cryptocurrencies -> similar to Stock Exchanges
    • Yield: applications that pay you a reward for providing liquidity on their platform -> akin to term deposits or traditional money markets
    • Payments: Protocols that offer the ability to pay/send/receive cryptocurrency
    • Indexes: platforms that have a way to track the performance of a group of related assets, similar to ETFs.
    • Insurance: applications designed to provide monetary protections
    • Real world assets (RWAs): Tangible or physical assets (such as real estate or commodities), as well as non-tangible assets (such as securities and treasuries), that are represented and transacted in a blockchain-based decentralised application environment.
    • And many other services that are native to blockchains such as Liquid Staking or Bridges.
• Creator Economy: refers to emerging communities of creators (artists, musicians, game developers) who connect directly with their supporters and collaborate without intermediaries, enabling them to develop independent income streams. 
• Web 3 games: are games built on blockchain technology. A key difference from popular games such as Fortnite, Roblox, or Minecraft is that the games can be bona fide economies in which players actually own the objects they work hard to acquire, giving players the ability to buy or sell these objects, or take them to another game entirely. 

Potential Use Cases in Different Industries (Government, Business, etc.)

Aside from the use cases mentioned above, most of which are “web 3 native”, blockchain-enabled applications can deliver benefits to government organisations alike and traditional industries.

Government Use Cases

The blockchain technology has a wide range of potential use cases for governments such as:

• Identity management: Blockchain can be used to create a secure and tamper-proof digital identity system for citizens. This could help to reduce identity theft and fraud, and it could also make it easier for citizens to access government services.

• Land registry: Blockchain applications can be implemented to create a transparent and efficient land registry system. This could help to reduce property disputes and make it easier to transfer ownership of land. 

• Voting: Blockchain tech could be used to create a secure and transparent voting system. This could help to increase voter turnout and reduce voter fraud. 

• Tax collection: Blockchain could be used to create a more efficient and transparent tax collection system. This could help to reduce tax evasion and increase government revenue. 

• Public procurement: Blockchain could be used to make the public procurement process more efficient and transparent. This could help to reduce corruption and save governments money. 

• Social benefits: Blockchain could be used to distribute social benefits to citizens in a more efficient and transparent way. This could help to reduce fraud and ensure that benefits are distributed fairly.

Here are some examples of governments that are already exploring the use of blockchain technology: 

The United Arab Emirates: The UAE government is working on a number of blockchain-based initiatives, including a digital identity system and a land registry system. 

Estonia: Estonia is one of the most advanced countries in the world in terms of e-government. The Estonian government uses blockchain technology to power a number of its online services, including its voting system and its business registry. 

China: The Chinese government is heavily investing in blockchain technology. The Chinese government is developing its own central bank digital currency (CBDC) and is also promoting the use of blockchain in other sectors, such as supply chain management and finance.

Traditional Business Use Cases

• Supply Chain Management: Blockchain can be used to track the movement of goods and services through a supply chain. This can help businesses to improve efficiency, reduce fraud, and ensure the quality and provenance of their products.

• Financial services: as mentioned as part of the Decentralised Finance vertical, blockchain-enabled applications can be used to automate and streamline financial transactions. This can help businesses to save time and money, and it can also reduce the risk of errors and fraud. 

• Loyalty programs: Blockchain can be used to create more rewarding and engaging loyalty programs for customers. 

• Intellectual property protection: Blockchain can be used to protect intellectual property, such as copyrights and trademarks. This can help businesses to reduce piracy and counterfeiting. 

But this is just the tip of the iceberg, web 3 technologies will enable the creation of new business models and products. Blockchain is still a relatively new technology, but it has the potential to revolutionise the way that businesses operate. By making business processes more efficient, transparent, and secure, blockchain can help businesses to save money, increase revenue, and improve their competitive advantage. 

Here are some examples of established businesses that are already leveraging blockchain technology: 

Google: the company is continuing to explore more expansive ways to deploy blockchain technology, via Google in particular. At the end of 2022, Google Cloud announced Blockchain Node Engine, which aims to assist Web 3 developers build and deploy new products on blockchain-based platforms.

Walmart: Walmart is using blockchain to track the movement of food products through its supply chain. This helps Walmart to ensure the quality and safety of its food products.

Paypal: the payments juggernaut already launched its own USD stablecoin “PayPal USD” (PYUSD) is a stablecoin backed by secure and highly liquid assets. Their customers can buy, sell, hold, and transfer it in-app or on their site. Additionally, they have also announced On and Off Ramps for Web 3 Payments.

Additionally, retail companies such as Nike, LVMH and L’Oreal have launched loyalty programs for customers, often designed and marketed with the utilisation of NFTs.

These are just a few examples of the ways that traditional businesses can leverage blockchain technology. As blockchain technology continues to develop, we can expect to see even more innovative and transformative use cases emerge.

Australian Platforms

Rocket Pool

Founded in 2017 by David Rugendyke, Rocket Pool is the leading decentralised Ethereum staking platform which offers various methods of running Ethereum validator nodes with a minimum of 8 ETH, a quarter of the amount needed to run a solo validator node. Users just wanting to stake, can do so by depositing minimum of 0.01 ETH. At the time of writing, Rocket Pool boasts $1.715 billion USD of Total Value Locked (TVL)

Synthetix

Founded in 2017 by Kain Warwick, Synthetix is a derivatives liquidity protocol providing the backbone for derivatives trading in DeFi. At the time of writing, secures $371m USD in TVL.

Lyra Finance

Co-founded by University of Sydney graduates Nick Forster and Michael Spain in March 202, Lyra Finance is one of the leading decentralised options liquidity platforms. Users can buy and sell call and put options with various expiration dates and strikes. The interface offers both simple and advanced trading options. At the time of writing, its smart contracts secure $13m USD in TVL.

Maple Finance

Maple Finance is an institutional capital marketplace that provides a platform for credit professionals to manage lending businesses and syndicate capital to institutional borrowers for business growth and operations. Maple serves institutional and individual accredited investors with high-quality lending opportunities that match their liquidity, risk, and return requirements. The company offers transparent lending, a managed marketplace, and institutional focus, partnering with regulated service providers and leading institutions to ensure custody, wallet solutions, and KYC and AML checks.

DAOs and Governance

Decentralised Autonomous Organizations otherwise known as DAOs are online member-owned communities governed by the consensus of their members instead of centralised leadership. 

DAOs represent exactly what they’re called, because they are:

• Decentralised -> rules can’t be changed by a single individual or centralised party.
• Autonomous -> votes are tallied and decisions implemented based on logic written into a smart contract, without human intervention.
• Organisations -> entities that coordinate activity among a distributed community of stakeholders.

DAOs are examples of what is known as “on-chain governance.” In traditional corporate governance, companies have bylaws that dictate certain policies, such as how a board is elected. A DAO extends this concept into the digital world by encoding these policies into smart contracts.

DAOs are an emergent governance model for new kinds of organisations built around transparency and inclusion. The principles can be applied to a wide variety of organisations, including non-profits, collectives, cooperatives, and investment funds. 

Governance structures determine how an organisation makes decisions that align the interests of participants. The challenges with many existing organisational forms, such as corporations, are that decisions are not made in a transparent way and often stakeholders face high barriers to entry to participating in governance.

Security and Other Concerns

Introduction

Blockchain Technology comes with unique security considerations. As of most commonly-used blockchains, when something is deployed, it is added into an immutable ledger, meaning ongoing security is challenging, and security at deployment is critical. Also, funds are stored publicly and on one layer of the tech stack, giving any adversary a chance at attempting to exploit the technology and steal the funds.

Privacy Challenges

Blockchain’s transparency, a cornerstone of its success, presents privacy challenges. Public blockchains, in particular, expose transaction details to all participants, as well as all data stored within “the state”. Corporations must carefully evaluate the implications of such transparency on their business operations and data privacy.

Security Challenges

Blockchain systems are not immune to cyber threats. High-profile hacks and vulnerabilities have raised concerns. Corporate entities must stay vigilant, employ robust security measures, and continuously monitor and update their blockchain networks to mitigate risks.

This is particularly true when it comes to smart contracts, in which one layer in the tech stack is responsible for all holding, transferring, and utilisation of funds. This is a central attack vector that is essentially immutable after deployment, meaning developers only have one chance to deploy secure code that can potentially hold many millions of dollars.

Centralisation vs. Decentralisation

Understanding the trade-offs between centralization and decentralisation is crucial. While centralised systems offer control and ease of management, they are susceptible to single points of failure. Decentralised networks distribute trust and reduce the risk of manipulation but require careful consideration of consensus mechanisms. Full decentralisation also sacrifices upgradability and future additions and flexibility. Centralisation allows for more security controls and risk mitigations. The degree to which a network is decentralised, should not only be measured at the infrastructure level, but through to the applications and governance structures that reside on top of the network. 

Regulation and Different Countries’ Approaches

Blockchain regulation varies globally. Some countries embrace innovation with lenient regulations, while others impose strict rules. Corporate entities must navigate this regulatory landscape, ensuring compliance with relevant laws and adapting their blockchain strategies accordingly.

It is incredibly difficult to regulate security services and processes in the Blockchain Industry, because the technology is less standardised than traditional tech, and so each audit requires different methodologies, and it is still reliant on expert analysis

Smart Contract Auditing, Bug Bounties, and Penetration Testing

Smart contracts are the backbone of many blockchain applications. Corporate entities should prioritise thorough auditing of these contracts to identify vulnerabilities by proven experts. Implementing bug bounty programs can incentivize external experts to find and report security flaws. Regular penetration testing helps identify and address network weaknesses proactively, in layers beyond just the smart contracts.

Identity and Intrastructure

Web 2 identity systems are managed by centralised entities, creating a power imbalance where users are not in control. Web 3 shifts this control with the introduction of Decentralised Identifiers (DIDs), a new type of globally unique identifiers that are cryptographically verifiable.

In reality, an individual has many different identities. Some of these are digital representations of real world identity, while others are digitally native identities. In the Web 2 world, a user may have a personal email address, a work email, Twitter handle, Facebook account, passport, and many others. In the emerging Web 3 world, we are seeing blockchain addresses, Ethereum Name Service (ENS), verifiable credentials and even NFTs creating new types of digital native identities.

The ever-growing collection of identities in Web2 is riddled with never ending user experience and interoperability problems. It is critical that any new architecture around identity management acknowledges and addresses this changing dynamic.

Decentralised Identifiers

Decentralised Identifiers (DIDs) are similar to usernames in Web3, but with extra features. They are the basis for sharing public keys controlled by the DID holder, creating trusted connections, storing data and many other capabilities.

Here is an example DID using the “Ethereum” DID Method: did:ethr:0x690b9a9e9aa1c9db991c7721a92d351db4fac990

Given a DID, it’s possible to use a software library to lookup an associated DID Document (JSON) that provides lots of extra metadata. This document can define an unlimited number of public keys for different use cases, it supports key rotation and supports listing APIs or service endpoints where you can interact with the identity.

A Decentralized Identifier (DID) standard as defined by the W3C specification can be found at https://www.w3.org/TR/did-core/

Verifiable Credentials

Self-sovereignty is a key objective of Web3. “Not your keys, not your crypto” is a common mantra. Verifiable Credentials (VCs) are a way to bring this self-sovereignty to your identity and build digital attestations about oneself in order to access products and services.

VCs are digital representations of information, such as personal attributes or qualifications, that can be cryptographically verified. These attestations take the form of Verifiable Credentials (VCs) which involve a credential: Issuer, Holder and Verifier.

They enable individuals to securely share and prove their credentials without relying on a central authority. They empower users to control and selectively disclose their data. 

VCs include essential metadata, issuer signatures, and proof methods, ensuring their authenticity and tamper-resistant nature. VCs adhere to the W3C standard outlined in the Verifiable Credentials Data Model specification available at https://www.w3.org/TR/vc-data-model/.

By fostering trust and privacy in online interactions, Verifiable Credentials play a pivotal role in advancing digital identity systems, offering a more secure, interoperable, and user-centric approach to credentialing in diverse contexts, from education and employment to healthcare and beyond.

Decentralised Data Storage

In today’s digital world, data storage is a crucial component for all applications, regardless of their scope or complexity. While traditional Web2 offers a wealth of storage options tailored to various use cases, such as SQL, NoSQL, Filestorage, S3, and FTP, the transition to Web3 demands a similar expansion of storage infrastructure to accommodate its unique requirements.

Decentralised storage platforms store data on peer-to-peer distributed networks. They are alternate file storage solutions to existing cloud storage services like Amazon S3.

Internet file storage is simply the retention of data on a computer or device. We store files on a daily basis, whether on our phone, in social media accounts, email or in web apps at work.

Behind these applications we are using, the data we save and that which is collected, is now generally stored in the cloud for us. This is super convenient but the cloud is highly centralised.

According to Gartner, five companies currently control 80% of the global cloud infrastructure market — Amazon, Google, Microsoft, Alibaba and Tencent. These companies manage content delivery networks that provide companies the infrastructure to deliver everything from critical business applications to doge memes.

That’s a small number of individual companies who control the infrastructure for data storage on the Internet. This poses a number of risks that are driving people to develop decentralised alternatives. This includes:

Limited competition. You must trust these few companies with your data

• Data breaches are all too common.
• Data may be censored at the whim of the controller
• Transparency of data collected and how its managed is opaque
• Decentralised storage developers are seeking to challenge existing cloud service providers with open decentralised economic models.

Decentralised storage platforms are building trustless architectures with new economic models for the storage and retrieval of data on the internet.

Projects such as IPFS, Filecoin, Arweave and Storj are useful decentralized file storage networks for images, videos, and static content where public access is acceptable. Encrypted database networks like Verida, are suitable for the storage of personal private data that can be deleted and under the full control of the user.

Decentralised storage is a component of the emerging web 3 stack. Web 3 projects are creating an alternate open internet architecture where users own their data and identity. These shifts represent the emergence of a user-controlled internet away from the centralised web 2 model we are familiar with today.

Thanks to Contributors

Thanks to all the amazing Working Group contributors for their dedication and expertise. Their valuable insights and commitment to industry education significantly enrich our resources. They have been instrumental in creating this resource to inspire and empower learners. Thank you!