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Web3 Affordances & Potentials

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Web3 Primitives: A Deep Dive into Affordances and Potentials

This document provides a comprehensive list of each Ethereum and Web3 primitive, detailing its unique capabilities (affordances) and mapping its potential beneficial and detrimental applications.

The Ethereum Virtual Machine (EVM)

The Ethereum Virtual Machine (EVM) is the computational engine at the heart of the Ethereum protocol.1 It is a global, decentralized computer that executes smart contracts and manages the state of the Ethereum blockchain.1 The EVM is a sandboxed environment, meaning the code it runs is completely isolated from the host machine’s network or filesystem, which is crucial for security.4

Architecturally, the EVM is a quasi-Turing-complete state machine.1 “Turing-complete” signifies its ability to run any program, given enough resources.2 The “quasi” qualifier is critical: all execution processes are finite, limited by a computational cost mechanism known as “gas”.1 This prevents infinite loops and denial-of-service attacks, making the execution of untrusted code safe for the network.7 The EVM operates on a stack-based architecture with three distinct data components: a volatile memory, a permanent storage that is part of the Ethereum state, and the stack for computations.1 Developers typically write smart contracts in high-level languages like Solidity or Vyper, which are then compiled into low-level machine instructions called bytecode. The EVM processes this bytecode using a set of instructions known as Opcodes.1

The core purpose of the EVM is to compute valid state transitions from one block to the next. This is formally described by the Ethereum state transition function: Y(S,T)=S′.1 In this function, S represents the current valid state of the blockchain, T is a set of new valid transactions, and S′ is the resulting new valid state. Every time a transaction is executed, the EVM processes this function to update the global state, which includes all account balances and smart contract data.1 This capability is what elevates Ethereum from a simple distributed ledger for value transfer, like Bitcoin, to a programmable “world computer” capable of supporting complex decentralized applications (dApps).9

The significance of the EVM extends far beyond Ethereum itself. It has become the de facto industry standard for smart contract execution. The proliferation of “EVM-compatible” Layer 1 and Layer 2 chains—such as Polygon, BNB Smart Chain, and Avalanche—is a testament to its immense network effects.1 This standardization fosters a high degree of interoperability and composability, allowing developers to port their dApps across numerous chains with minimal changes, thereby creating a vast, interconnected ecosystem of smart contract-enabled platforms.1

Affordances and Potentials of the EVM

  • Affordances: The EVM’s primary affordance is providing a deterministic, sandboxed, and quasi-Turing-complete environment for computation. This enables developers to write and deploy arbitrary code (smart contracts) that will execute predictably and securely across a decentralized network of nodes, with its operations metered by gas to prevent abuse. 2
  • Beneficial Potentials:
    • Decentralized Applications (dApps): The EVM is the engine that powers the entire ecosystem of dApps, from finance to gaming. 2
    • Complex Financial Instruments: It enables the creation of sophisticated DeFi protocols, DAOs, and other complex systems that require verifiable and automated logic. 2
    • Interoperability: Its status as an industry standard allows for dApps to be easily ported across a multitude of EVM-compatible blockchains, fostering a larger, interconnected ecosystem. 140
    • Project Management: In a broader sense, the principles of tracking and forecasting inherent in blockchain state management can be applied to project management for objective progress measurement and resource planning. 142
  • Detrimental Potentials:
    • Exploitable Code: Because the EVM executes code as written, any flaws, bugs, or vulnerabilities in a smart contract’s logic can be exploited by malicious actors, potentially leading to significant financial loss. 7
    • Computational Limits: While quasi-Turing-complete, the EVM is limited by gas. Complex computations can become prohibitively expensive, and poorly designed contracts can lead to “out of gas” errors, where a user loses transaction fees without the transaction succeeding. 7

Smart Contracts

Smart contracts are the primitive that enables programmability on the blockchain. They are self-executing computer programs where the terms of an agreement between parties are written directly into lines of code.11 Stored and replicated on the blockchain, these contracts automatically execute predefined actions when specific conditions are met, following simple “if/when…then…” logic.11 For example, a smart contract could be programmed to automatically release funds to a seller once a buyer confirms receipt of a product.13

By running on the blockchain, smart contracts inherit several key properties that make them powerful. They are immutable, meaning that once a contract is deployed, its code cannot be altered or tampered with by any party.5 They are also transparent and globally distributed; the contract’s code is publicly verifiable, and its execution is validated by every node in the decentralized network.5 This combination of features removes the need for trusted intermediaries like banks or legal systems to enforce agreements, allowing for secure, automated, and trustless transactions between anonymous parties.11

The deployment process begins with a developer writing the contract in a high-level language such as Solidity.5 This code is then compiled into EVM-readable bytecode. The developer deploys the contract by sending a transaction to the Ethereum network containing this bytecode. Upon successful validation, the contract is stored on the blockchain and assigned a unique, permanent address.5 From that point on, users can interact with the contract by sending transactions to its address, which triggers the execution of its functions within the EVM.9 Smart contracts form the foundational logic layer for nearly all higher-level Web3 primitives, including tokens, DAOs, and the entire suite of DeFi applications.12

Affordances and Potentials of Smart Contracts

  • Affordances: The core affordances of smart contracts are automation, immutability, and transparency. They enable the creation of self-executing agreements that operate without intermediaries, with rules that are enforced by code and publicly verifiable on the blockchain. 146
  • Beneficial Potentials:
    • Automated Finance (DeFi): Enables the creation of decentralized lending platforms, exchanges, insurance protocols, and asset management systems. 146
    • Supply Chain Management: Can be used to track goods, verify authenticity, and automate payments upon delivery, increasing transparency and efficiency. 148
    • Digital Identity: Can manage digital identity systems, giving users more control over their personal data. 146
    • Governance: Forms the backbone of DAOs, automating voting processes and treasury management according to community-approved rules. 146
    • Real-World Asset Tokenization: Can represent ownership of real-world assets like real estate or art, enabling fractional ownership and easier transfer. 146
  • Detrimental Potentials:
    • Exploits and Hacks: Bugs or vulnerabilities in the code (e.g., reentrancy, integer overflows) can be exploited by attackers, leading to catastrophic financial losses. Since the code is immutable, these bugs cannot be easily fixed once deployed. 148
    • Rigidity: The inability to alter a contract after deployment means that it cannot adapt to unforeseen circumstances or correct simple errors without complex and costly workarounds. 148
    • Misuse in Illicit Activities: The automation and pseudo-anonymity can be leveraged to create sophisticated Ponzi schemes, fraudulent investment platforms, or other financial scams that operate without human intervention. 148

The Account Model: Externally Owned Accounts (EOAs) vs. Contract Accounts (CAs)

The Ethereum protocol features two distinct types of accounts, which are fundamental to how users and programs interact with the network.18

First are Externally Owned Accounts (EOAs). These are the accounts controlled by users and are what people commonly refer to as a “wallet”.18 An EOA is defined and controlled by a cryptographic key pair: a public key and a private key.21 The public key generates the public address (e.g.,

0xd8dA6BF26964aF9D7eEd9e03E53415D37aA96045), which is used to receive funds and can be shared freely. The private key must be kept secret, as it is used to sign and authorize transactions, granting control over the account’s assets.18 The creation of an EOA key pair is a simple cryptographic process that happens off-chain and costs nothing.18 EOAs are the only account type that can initiate transactions, such as sending ETH or calling a function on a smart contract.18

Second are Contract Accounts (CAs), also known as Smart Contract Accounts (SCAs). Unlike EOAs, these accounts do not have a private key. Instead, they are controlled by the EVM code—the smart contract—that is stored within them.18 A CA can perform any action an EOA can, such as sending and receiving ETH, but it can only act when it is triggered by a transaction sent from an EOA or another CA.18 Because they contain arbitrary logic, CAs can execute complex functions like creating tokens, implementing multi-signature security schemes, or running a decentralized exchange.18 Creating a CA requires deploying a smart contract to the blockchain, which is an on-chain transaction that costs gas.18

The key distinction lies in the source of control: private keys for EOAs versus code for CAs. This fundamental difference defines their roles in the ecosystem. An address can be identified as a CA if a eth_getCode call returns non-empty bytecode; otherwise, it is an EOA.18

Affordances and Potentials of the Account Model

  • Affordances: The dual-account model provides two distinct modes of interaction with the network. EOAs offer direct, user-driven control via private keys, serving as the entry point for initiating actions. CAs afford programmable, autonomous control, where actions are dictated by code, enabling complex and automated behaviors. 154
  • Beneficial Potentials:
    • User Wallets (EOAs): Provide a simple and direct way for individuals to hold assets, send funds, and interact with dApps. 154
    • Programmable Wallets (CAs/Account Abstraction): Enable advanced features like social recovery, multi-signature security, spending limits, and paying gas fees with tokens other than ETH, significantly improving user experience and security. 156
    • Automated Systems (CAs): Power the core logic of DAOs, DeFi protocols, and other dApps that need to hold funds and execute functions autonomously based on predefined rules. 155
    • Global Accessibility: Allow anyone to create an account and participate in global financial markets and digital economies without permission from traditional gatekeepers. 158
  • Detrimental Potentials:
    • Theft via Key Compromise (EOAs): If an EOA’s private key is lost or stolen, the attacker gains complete and irreversible control over all associated assets. 157
    • Illicit Activities: The pseudo-anonymous nature of accounts can be exploited for malicious purposes, including money laundering, ransomware payments, fraud, and financing terrorism. 158
    • Smart Contract Exploits (CAs): A vulnerability in a Contract Account’s code can be exploited to drain its funds or manipulate its behavior, as seen in numerous DeFi hacks. 160
    • Phishing and Scams: Malicious actors use social engineering and other tactics to trick users into signing transactions that grant attackers control over their account’s assets. 158

Gas and the Transaction Fee Market

Gas is a foundational economic primitive in Ethereum, serving as the unit of measurement for the computational work required to execute operations on the network.8 Every operation, from a simple ETH transfer to a complex smart contract interaction, has a fixed cost in gas units. The final transaction cost, known as the gas fee, is paid by the user in ETH to compensate the network’s validators for the computational resources they expend to process and validate the transaction.23

The gas mechanism serves two critical functions. First, it acts as an incentive for validators to secure the network. The fees they collect are a reward for their work in maintaining the blockchain’s integrity.23 Second, and equally important, it is a security mechanism that prevents network abuse. By attaching a real-world cost to every computational step, the gas system makes it prohibitively expensive for malicious actors to spam the network with transactions or execute infinite loops in smart contracts, thus protecting the EVM from being overwhelmed.7

Following the London network upgrade and the implementation of EIP-1559, the calculation of gas fees became more predictable. The total fee is determined by the formula: Gas Fee = Gas Units (Limit) * (Base Fee + Priority Fee).22

  • Gas Limit: The maximum amount of gas a user is willing to spend on a transaction.8
  • Base Fee: A mandatory fee, algorithmically determined by the network based on how full the previous block was relative to a target size. This fee is burned (destroyed) rather than paid to the validator, creating a deflationary pressure on the supply of ETH.25
  • Priority Fee (Tip): An optional fee paid directly to the validator to incentivize them to include the transaction in the next block, especially during times of high network congestion.22

This mechanism creates a dynamic fee market that responds to network demand while making costs more predictable for users.25

Affordances and Potentials of Gas

  • Affordances: Gas provides a mechanism for metering computational resources, creating a direct economic cost for every operation on the network. This affords the network two key capabilities: incentivizing validators to process transactions and securing the network against spam and denial-of-service attacks. 23
  • Beneficial Potentials:
    • Network Security: By making computational work costly, gas prevents malicious actors from overloading the network with infinite loops or spam transactions, ensuring its stability and availability. 23
    • Validator Incentivization: Gas fees (specifically the priority fee) reward validators for their work in processing transactions and securing the blockchain, creating a sustainable economic model for network operation. 23
    • Resource Allocation: The fee market allows the network to prioritize transactions based on economic demand. Users who need faster confirmation can pay a higher priority fee to incentivize validators. 162
    • Economic Stability (via EIP-1559): The burning of the base fee introduces a deflationary pressure on ETH, which can contribute to its long-term economic sustainability. 23
  • Detrimental Potentials:
    • High Transaction Costs: During periods of high network congestion, the base fee and priority fees can skyrocket, making transactions prohibitively expensive for many users and use cases, effectively pricing out smaller participants. 165
    • User Experience Issues: The complexity of gas limits and fees can be confusing for new users. Setting a gas limit too low can cause a transaction to fail with an “out of gas” error, resulting in the loss of the fee paid without the transaction being completed. 165
    • Barrier to Adoption: Consistently high gas fees can deter developers and users from building on or using the network, pushing them towards alternative, lower-cost blockchains. 165

Proof-of-Stake (PoS)

Proof-of-Stake (PoS) is the consensus mechanism that Ethereum uses to agree upon the state of the ledger and add new blocks to the chain.26 It replaced the prior, energy-intensive Proof-of-Work (PoW) system in an event known as “The Merge”.26 In a PoS system, network security is maintained through economic incentives rather than raw computational power.29

The mechanism works by having participants, known as validators, lock up a specific amount of the native cryptocurrency—32 ETH in Ethereum’s case—as collateral. This process is called “staking”.29 In return for staking their capital, validators are given the responsibility to participate in the consensus process. The protocol randomly selects validators to propose new blocks of transactions and forms committees of other validators to vote on (or “attest” to) the validity of these proposed blocks.26

Honest and active participation is rewarded with additional ETH, providing a return on the staked capital.30 Conversely, dishonest behavior, such as proposing multiple blocks in a single slot or submitting conflicting attestations, is severely punished. This penalty, known as “slashing,” involves the partial or total destruction of the validator’s staked 32 ETH.30 This “something of value…that can be destroyed” is the core security principle of PoS.30 It makes attacks on the network, such as a 51% attack, extraordinarily expensive, as an attacker would not only need to acquire a majority of all staked ETH but would also risk having that massive capital investment destroyed through slashing by the honest validators in the network.29 PoS is therefore considered a more energy-efficient and economically secure consensus primitive than its PoW predecessor.26

Affordances and Potentials of Proof-of-Stake

  • Affordances: PoS provides a highly energy-efficient and economically secure method for achieving decentralized consensus. Its core affordance is securing the network by requiring validators to stake capital, which can be forfeited (slashed) for malicious behavior, thus aligning their incentives with the long-term health of the network.
  • Beneficial Potentials:
    • Energy Efficiency: Drastically reduces the energy consumption of the blockchain by over 99% compared to Proof-of-Work, making it environmentally sustainable.
    • Enhanced Security: Makes a 51% attack extremely expensive, as an attacker would need to acquire a majority of all staked assets and risks having that capital destroyed through slashing.
    • Lower Barrier to Entry: Reduces the need for specialized, high-powered mining hardware, potentially allowing more participants to become validators and further decentralize the network.
    • Foundation for Scalability: The design of PoS is more conducive to implementing future scaling solutions like sharding.
  • Detrimental Potentials:
    • Centralization Risk: The “rich get richer” dynamic can emerge, where entities with large amounts of capital can stake more, earn more rewards, and accumulate a larger share of the network’s voting power over time.
    • Long-Range Attacks: A theoretical attack where a malicious actor could try to create a long alternative chain from a very early point in the blockchain’s history. This is largely mitigated by mechanisms like finality checkpoints.
    • Stakeholder Apathy: If a large portion of staked assets is held by passive investors who do not actively participate in governance or validation, it could potentially weaken the network’s security and responsiveness.

Zero-Knowledge Proofs (ZKPs)

A Zero-Knowledge Proof (ZKP) is a powerful cryptographic method that allows one party, the prover, to prove to another party, the verifier, that a given statement is true, without revealing any information beyond the validity of the statement itself.32 This concept is built on three fundamental properties that every ZKP system must satisfy 33:

  1. Completeness: If the statement is true, an honest prover will always be able to convince an honest verifier.
  2. Soundness: If the statement is false, a dishonest prover has a negligible probability of convincing an honest verifier that it is true.
  3. Zero-Knowledge: The verifier learns nothing from the interaction except for the fact that the statement is true. No secret information is leaked.

There are various types of ZKPs, which can be broadly categorized as either interactive (requiring back-and-forth communication between prover and verifier) or non-interactive (where the proof is a single message that can be verified by anyone).32 Within the non-interactive category, two constructions have become particularly prominent in the blockchain space:

zk-SNARKs (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge) and zk-STARKs (Zero-Knowledge Scalable Transparent Argument of Knowledge).33 zk-SNARKs are known for their small proof sizes, making them efficient to verify on-chain, while zk-STARKs do not require a trusted setup phase and are considered more resistant to quantum computing attacks.36

The applications of ZKPs as a Web3 primitive are vast and transformative. They are the cornerstone of privacy-preserving cryptocurrencies like Zcash, which use them to shield transaction details.32 Beyond simple transactions, ZKPs enable verifiable computation, allowing for complex calculations to be performed off-chain with a succinct proof of correctness submitted on-chain. This is the basis for ZK-Rollups, a leading scalability solution.37 They are also a critical primitive for identity and authentication, enabling a user to prove they meet certain criteria (e.g., are over 18, have a certain credit score, or hold a specific NFT) without revealing the underlying sensitive data.33 Furthermore, ZKPs can be used to embed “fairness” directly into applications by enabling verifiable randomness or allowing players in a game to prove they followed the rules without revealing their hidden strategies.37

Affordances and Potentials of Zero-Knowledge Proofs

  • Affordances: The unique capability of ZKPs is to enable verifiable proof without disclosure. This allows for the separation of validation from information, affording systems the ability to confirm the truth of a statement (e.g., a transaction’s validity, a user’s eligibility) while keeping the underlying data completely private. 168
  • Beneficial Potentials:
    • Privacy-Preserving Transactions: Enable confidential transactions on public blockchains, hiding sender, receiver, and amount details. 168
    • Scalability (ZK-Rollups): Allow for the verification of thousands of off-chain transactions with a single, small proof on-chain, dramatically increasing throughput. 170
    • Decentralized Identity: Allow users to prove attributes about themselves (e.g., “I am over 18,” “I am a citizen of X country”) to services without revealing their actual personal data. 168
    • Secure Voting: Facilitate anonymous and verifiable voting systems where a voter can prove their eligibility without revealing their identity or vote. 171
    • Compliance: Help organizations demonstrate regulatory compliance without exposing sensitive business or customer data. 168
    • Fair Gaming: Can be used to prove that a game’s randomness was not manipulated or that a player followed the rules without revealing their strategy. 169
  • Detrimental Potentials:
    • Obfuscation of Illicit Activity: The privacy features can be exploited to launder money, evade sanctions, or finance illegal activities, making it difficult for authorities to track criminal funds. 172
    • Complexity and Vulnerability: The underlying cryptography is highly complex, and implementation errors can lead to critical security vulnerabilities that are difficult to detect.
    • Regulatory Challenges: The strong privacy guarantees can conflict with regulatory requirements like AML/CFT, potentially leading to platforms that use them being delisted from major exchanges or facing legal action. 169

Layer 2 Rollups

Rollups are a class of Layer 2 (L2) scaling solutions designed to increase transaction throughput and reduce costs on a Layer 1 (L1) blockchain like Ethereum.40 The core idea is to execute transactions off-chain, on the L2, but to post the transaction data back to the L1. By doing this, rollups inherit the security and data availability of the underlying L1 while offloading the computationally expensive task of transaction execution.42 They “roll up” hundreds or thousands of transactions into a single batch that is submitted to the mainnet, amortizing the L1 transaction fee across all users in the batch.41 Two primary types of rollups have emerged, distinguished by their method of ensuring the validity of off-chain transactions.

Affordances and Potentials of Layer 2 Rollups

  • Affordances: The primary affordance of rollups is scalability through off-chain execution. By processing transactions on a separate layer and posting only compressed data or proofs to the main chain, they dramatically increase transaction throughput and reduce fees while still inheriting the security of the underlying L1.
  • Beneficial Potentials:
    • Lower Transaction Costs: Reduce gas fees by 10-100x, making dApps more affordable and enabling use cases like micropayments. 173
    • Increased Throughput: Boost transaction speeds from Ethereum’s ~15 TPS to thousands of TPS, supporting high-volume applications. 175
    • Improved User Experience: Faster transaction confirmations and lower costs lead to a smoother and more accessible experience for users of DeFi, gaming, and NFT platforms. 175
    • Enterprise Adoption: Provide a scalable and private environment for enterprise applications that require high performance and data confidentiality. 173
    • Application-Specific Chains: Enable the creation of customized “app-chains” tailored to the specific needs of an application, such as a high-frequency trading platform or a game. 173
  • Detrimental Potentials:
    • Centralization Risks: Many current rollups rely on a single entity (the sequencer) to order and execute transactions, creating a central point of failure and a potential vector for censorship or manipulation. 175
    • Security Vulnerabilities: The complexity of rollup technology, including the bridge contracts that connect to L1, introduces new potential attack vectors that could put user funds at risk. 173
    • Liveness Failures: Rollups can be vulnerable to Denial of Service (DoS) attacks, where an attacker floods the network with transactions that are cheap for them but expensive for the protocol to process, potentially stalling the chain or delaying finality. 173
    • Fragmentation: The proliferation of many different L2s can fragment liquidity and the user base, creating a more complex and less seamless user experience compared to a single L1. 173

ERC-20 Standard

The ERC-20 (Ethereum Request for Comment 20) standard is the technical blueprint for creating fungible tokens on Ethereum.44 Fungibility means that each unit of a token is identical to and interchangeable with every other unit, much like how one US dollar is equal in value to any other US dollar.45 This property makes ERC-20 tokens ideal for representing currencies, voting rights, or shares in a project.47

The standard mandates that a compliant smart contract must implement a specific set of six functions and two events.48 The core functions include:

  • totalSupply(): Returns the total number of tokens in circulation.
  • balanceOf(address owner): Returns the token balance of a specific address.
  • transfer(address to, uint256 value): Transfers a specified number of tokens to a recipient address.
  • approve(address spender, uint256 value): Allows a spender (e.g., a decentralized exchange) to withdraw up to a certain number of tokens from the owner’s account.
  • allowance(address owner, address spender): Checks the remaining number of tokens a spender is allowed to withdraw.
  • transferFrom(address from, address to, uint256 value): Used by a spender to execute an approved transfer on behalf of the owner.

The significance of the ERC-20 standard cannot be overstated. Before its adoption in 2017, tokens were created with unique interfaces, hindering their interaction with other applications.46 ERC-20 created a universal language for fungible tokens, ensuring that any wallet, exchange, or dApp could support any ERC-20 token without needing custom integration. This primitive unlocked the Initial Coin Offering (ICO) boom and laid the foundational groundwork for the entire DeFi ecosystem by enabling the seamless composability of tokenized assets.46

Affordances and Potentials of ERC-20 Tokens

  • Affordances: The ERC-20 standard affords fungibility and interoperability for on-chain assets. It provides a universal, standardized blueprint that allows any application on the Ethereum network (wallets, exchanges, DeFi protocols) to seamlessly interact with any token that follows the standard.
  • Beneficial Potentials:
    • Decentralized Finance (DeFi): Serves as the backbone for DeFi, enabling the creation of stablecoins (USDC, USDT), lending and borrowing platforms (Aave, Compound), and decentralized exchanges. 45
    • Governance: Used to create governance tokens (UNI, AAVE) that grant holders voting rights in DAOs, enabling community-led management of protocols. 177
    • Fundraising (ICOs): Provides a simple framework for startups and projects to raise capital by issuing their own tokens to a global audience. 45
    • Loyalty and Reward Programs: Companies can issue ERC-20 tokens as loyalty points or rewards, creating more engaging and interactive customer experiences. 45
    • Asset Tokenization: Can represent fractional ownership of real-world assets, such as shares in a company. 176
  • Detrimental Potentials:
    • Scams and Fraud: The low barrier to creating an ERC-20 token makes it a common tool for “pump and dump” schemes, where creators hype a worthless token to inflate its price before selling their holdings. 48
    • Phishing Attacks: Design flaws and user confusion around the approve function are frequently exploited in phishing scams, tricking users into signing transactions that allow attackers to drain their wallets. 48
    • Security Vulnerabilities: Bugs in the token’s smart contract code can be exploited, leading to financial loss. The standard itself has known issues, such as tokens getting permanently stuck in contracts that cannot handle them. 178
    • Regulatory Risk: Many tokens created via ICOs have been deemed unregistered securities by regulators, leading to legal action against the creators. 48

ERC-721 Standard (NFTs)

The ERC-721 standard provides the framework for non-fungible tokens (NFTs), where each token is unique, has a distinct value, and is not interchangeable with any other token.50 This primitive allows for the on-chain representation of ownership for one-of-a-kind digital or physical assets, such as digital art, collectibles, event tickets, or real estate titles.51

Unlike ERC-20, which tracks the quantity of tokens an address holds, ERC-721 tracks the ownership of individual, unique tokens. Each ERC-721 token is identified by a unique tokenId.50 The core of the standard includes functions like

ownerOf(uint256 tokenId), which returns the address of the owner of a specific token, and safeTransferFrom, which handles the secure transfer of ownership.50

A critical feature of the ERC-721 standard is the tokenURI(uint256 tokenId) function.53 This function returns a Uniform Resource Identifier (URI) that points to a JSON file containing the token’s metadata. This metadata describes the unique properties of the asset, such as its name, description, image, and other attributes.50 This mechanism is what gives each NFT its distinct identity and value. The ERC-721 primitive was revolutionary because it established the concept of provable digital scarcity and ownership, creating the technical foundation for the multi-billion dollar digital art and collectibles markets.50

Affordances and Potentials of ERC-721 Tokens (NFTs)

  • Affordances: The ERC-721 standard affords digital uniqueness and provable ownership. It provides a standardized way to create and manage one-of-a-kind, non-interchangeable assets on the blockchain, each with its own distinct identity and verifiable history.
  • Beneficial Potentials:
    • Digital Art and Collectibles: Allows artists and creators to issue verifiably scarce digital artwork, ensuring authenticity and enabling them to earn royalties on secondary sales. 180
    • Gaming: Represents unique in-game items (like swords, skins, or characters) that players can truly own, trade, and potentially use across different games. 181
    • Virtual Real Estate: Tokenizes parcels of land and assets in virtual worlds and metaverses, creating digital property markets. 183
    • Ticketing and Memberships: Creates fraud-proof tickets for events or exclusive memberships for clubs, where each token is a unique pass. 183
    • Identity and Certification: Can be used to represent digital identities, educational degrees, or professional licenses in a secure and tamper-proof manner. 183
    • Fractional Ownership: Enables the division of high-value physical or digital assets into smaller, tradable shares. 183
  • Detrimental Potentials:
    • Fraud and Impersonation: Malicious actors can mint NFTs of artwork they don’t own, impersonating famous artists and defrauding collectors. 184
    • Money Laundering: The high-value and subjective nature of NFT art makes it a potential vehicle for laundering illicit funds. 185
    • Market Manipulation: Scammers can engage in “wash trading” (repeatedly buying and selling an NFT between their own wallets) to artificially inflate its price and trading history. 184
    • Securities Violations: NFTs marketed with the promise of profit from the efforts of the creators can be classified as unregistered securities, leading to legal action from regulators. 185
    • Environmental Concerns: NFTs minted on Proof-of-Work blockchains contribute to high energy consumption, raising environmental concerns. 184

ERC-1155 Multi-Token Standard

The ERC-1155 standard is a more advanced and efficient primitive that combines the features of both ERC-20 and ERC-721. It is a multi-token standard, meaning a single smart contract can manage an infinite number of different token types, which can be either fungible or non-fungible.55

The mechanism works by using a unique id to distinguish each token type within the contract. The contract tracks the balance of each id for each user address. If a token id is minted with a supply of one, it functions as a non-fungible token (like ERC-721). If it is minted with a supply greater than one, it functions as a fungible token (like ERC-20).56

The primary advantage of ERC-1155 is its efficiency, particularly in reducing transaction costs. The standard includes functions like safeBatchTransferFrom, which allows for the transfer of multiple different token types (e.g., sending 100 gold coins, one unique sword, and five magic potions) in a single, atomic transaction.55 This is a significant improvement over the older standards, which would require a separate transaction for each token transfer, incurring much higher gas fees.55 This efficiency makes ERC-1155 the ideal primitive for applications that manage a large variety of assets, such as blockchain-based games and NFT marketplaces.55

Affordances and Potentials of ERC-1155 Tokens

  • Affordances: The ERC-1155 standard affords efficiency and versatility. Its key capabilities are managing multiple token types (both fungible and non-fungible) within a single contract and enabling batch operations, which allows for the transfer of many different assets in a single, gas-efficient transaction. 58
  • Beneficial Potentials:
    • Gaming Ecosystems: Ideal for complex games that require both fungible items (like in-game currency, potions) and non-fungible items (like unique weapons, skins) by managing them all in one contract. 58
    • NFT Marketplaces: Allows artists and creators to mint collections with multiple editions (semi-fungible) or varied assets more efficiently and at a lower cost. 58
    • Efficient Asset Management: Streamlines the management of diverse digital assets for DeFi protocols, DAOs, or enterprise applications, reducing operational complexity and transaction costs. 60
    • Digital Ticketing: Enables event organizers to issue different tiers of tickets (e.g., fungible general admission, non-fungible VIP passes) from a single contract. 58
    • Atomic Swaps: Facilitates the trustless exchange of bundles of different tokens in a single, all-or-nothing transaction. 60
  • Detrimental Potentials:
    • Increased Complexity: The multi-token nature of the standard can make the smart contract logic more complex, potentially increasing the surface area for bugs and security vulnerabilities if not implemented carefully.
    • Combined Illicit Uses: Can be used to facilitate the same detrimental activities as ERC-20 and ERC-721 tokens (fraud, money laundering, scams), but its batching capabilities could enable more complex or large-scale fraudulent schemes. 58
    • User Error: While it includes a safe transfer mechanism, the ability to handle many different assets in one transaction could lead to user errors, such as sending the wrong bundle of items.

Automated Market Makers (AMMs)

Automated Market Makers (AMMs) are a cornerstone primitive of DeFi, forming the basis for most decentralized exchanges (DEXs).59 Unlike traditional exchanges that use an order book to match individual buyers and sellers, AMMs use algorithms and pools of assets to facilitate trades automatically and permissionlessly.61

The core component of an AMM is the liquidity pool. This is a smart contract that holds reserves of two or more tokens, creating a trading pair (e.g., ETH/USDC).64 These pools are crowdsourced; users, known as

Liquidity Providers (LPs), can deposit an equivalent value of each token into the pool to provide liquidity.59 In return for their contribution, LPs receive

LP tokens, which represent their proportional share of the pool. They are incentivized to provide liquidity by earning a share of the trading fees generated by the pool.59

The pricing mechanism for most AMMs, as pioneered by Uniswap, is governed by a constant product formula, expressed as x×y=k.61 In this formula,

x and y represent the quantities of the two tokens in the liquidity pool, and k is a constant. When a trader wants to swap one token for another, they trade directly with the pool. For example, to buy ETH with USDC, a trader adds USDC to the pool and removes ETH. This action changes the ratio of the tokens: the supply of ETH (x) decreases while the supply of USDC (y) increases. To maintain the constant k, the price of ETH relative to USDC must increase algorithmically.61 This elegant mechanism ensures that liquidity is always available, regardless of trade size, though larger trades will experience more “slippage” (a change in price).66 AMMs have democratized market-making, allowing anyone to become a liquidity provider and enabling permissionless token swaps 24/7.59

Affordances and Potentials of AMMs

  • Affordances: AMMs afford automated, permissionless, and continuous liquidity for digital assets. By replacing traditional order books with algorithmically-managed liquidity pools, they enable anyone to become a market maker and allow for 24/7 trading without the need for centralized intermediaries. 60
  • Beneficial Potentials:
    • Decentralized Trading: Power decentralized exchanges (DEXs), allowing users to swap a vast range of tokens directly from their wallets without KYC or trusting a central entity. 68
    • Democratized Market Making: Enables any token holder to provide liquidity to a pool and earn a share of the trading fees, a role traditionally reserved for large financial institutions. 188
    • Long-Tail Asset Liquidity: Makes it easy to create a market for new or niche tokens that would not be listed on centralized exchanges, fostering innovation. 68
    • Improved Capital Efficiency: Advanced AMM designs (like concentrated liquidity) allow liquidity providers to allocate their capital more effectively to earn higher returns. 60
  • Detrimental Potentials:
    • Impermanent Loss: Liquidity providers risk losing value compared to simply holding their assets if the relative prices of the tokens in the pool diverge significantly. 188
    • Front-Running and Sandwich Attacks: The transparent nature of blockchain transactions allows sophisticated traders (MEV bots) to see pending trades and place their own orders before and after to extract profit, resulting in a worse price for the original trader. 188
    • Smart Contract Risk: As with all DeFi protocols, a bug in the AMM’s smart contract code can be exploited, potentially leading to the draining of all assets in the liquidity pool. 189
    • Price Slippage: Large trades relative to the size of the liquidity pool can cause a significant change in the asset’s price, leading to the trader receiving a worse execution price than expected. 188

Decentralized Lending and Borrowing Protocols

Decentralized lending and borrowing protocols, such as Aave and Compound, create autonomous money markets on the blockchain.17 These platforms allow users to lend their crypto assets to earn interest or borrow assets against collateral in a trustless manner.75

The mechanism is centered around liquidity pools for each asset. Lenders supply their tokens to a pool and, in return, receive interest-bearing tokens that represent their deposit (e.g., cTokens in Compound or aTokens in Aave).77 These tokens accrue interest in real-time as borrowers pay fees to the protocol. Borrowers, on the other hand, can take out loans from these pools but must first deposit collateral of a different asset.77

Several key primitives ensure the stability and security of these protocols:

  • Over-collateralization: This is a crucial risk management primitive. To mitigate the risk of default in a volatile market, borrowers are required to lock up collateral that is worth significantly more than the value of their loan.76 For example, to borrow 100 worth of ETH.
  • Liquidation: If the value of a borrower’s collateral drops below a predetermined “liquidation threshold” (due to market price changes), their position becomes under-collateralized and is at risk. The protocol then allows third-party users, known as liquidators, to repay a portion of the borrower’s debt in exchange for being able to purchase the collateral at a discount. This automated process ensures that lenders are always made whole and the protocol remains solvent.76
  • Algorithmic Interest Rates: Interest rates for both lending and borrowing are not fixed but are determined algorithmically. They dynamically adjust based on the supply and demand within each asset pool, measured by the “utilization rate” (the percentage of supplied assets that are currently being borrowed). High utilization leads to higher interest rates to incentivize more supply, while low utilization results in lower rates to encourage borrowing.76

Affordances and Potentials of Decentralized Lending

  • Affordances: This primitive affords the creation of autonomous, transparent, and permissionless money markets. It enables peer-to-protocol lending and borrowing, governed by smart contracts that automate interest rates, collateral management, and liquidations without traditional financial intermediaries. 191
  • Beneficial Potentials:
    • Financial Inclusion: Provides access to lending and borrowing services for anyone with an internet connection and crypto assets, regardless of their geographic location or credit history. 191
    • Passive Income: Allows asset holders to lend their crypto and earn higher yields than are typically available in traditional savings accounts. 192
    • Capital Efficiency: Enables borrowers to access liquidity by using their crypto holdings as collateral, without needing to sell them. 192
    • Transparency and Efficiency: All loan terms, collateral ratios, and interest rates are managed by open-source code and are publicly auditable on the blockchain, reducing operational costs and increasing trust. 191
  • Detrimental Potentials:
    • Smart Contract Risk: A bug or vulnerability in the protocol’s smart contracts can be exploited, potentially leading to the loss of all user funds locked in the protocol. 193
    • Liquidation Risk: The high volatility of crypto assets means that a sudden market crash can cause a borrower’s collateral to be liquidated, often at a significant loss.
    • Systemic Risk: The interconnectedness of DeFi protocols means that a failure or exploit in a major lending platform could have cascading effects across the entire ecosystem, undermining financial stability. 194
    • Illicit Finance: The permissionless nature of these protocols can be exploited for money laundering and financing illicit activities like ransomware attacks. 194
    • Centralization Issues: Despite the “decentralized” label, many protocols have centralized points of control (e.g., admin keys, governance held by a few “whales”) that can be abused. 193

Yield Farming and Liquidity Mining

Yield farming is a meta-strategy built on top of other DeFi primitives, where users actively move their capital between different protocols to maximize their total returns, or “yield”.82 A yield farmer might, for example, supply assets to a lending protocol to earn interest, then use the interest-bearing tokens they receive as collateral to borrow another asset, which they then supply to a different liquidity pool to earn trading fees.83

A specific and highly influential form of yield farming is liquidity mining. This is a mechanism where a DeFi protocol incentivizes users to provide liquidity by rewarding them not only with the standard fees (from lending or trading) but also with an additional reward in the form of the protocol’s own native governance token.83

This primitive, popularized by Compound in the “DeFi Summer” of 2020, proved to be a powerful tool for bootstrapping new protocols.17 By distributing its governance token (COMP) to the earliest users who supplied and borrowed assets, Compound was able to rapidly attract a large amount of liquidity and simultaneously decentralize its governance, handing control over to its community of users.79 Liquidity mining created a powerful incentive for capital to flow throughout the DeFi ecosystem, accelerating its growth and innovation.83

Affordances and Potentials of Yield Farming

  • Affordances: Yield farming and liquidity mining afford a powerful incentive mechanism for bootstrapping liquidity in DeFi protocols. By rewarding users with governance tokens and other fees for providing capital, these strategies enable new projects to rapidly attract the liquidity needed to become functional and decentralized. 83
  • Beneficial Potentials:
    • Passive Income Generation: Allows crypto holders to earn potentially high returns on their assets by lending them or providing liquidity to various protocols. 83
    • Protocol Growth and Decentralization: Liquidity mining helps new DeFi projects attract a critical mass of users and capital, while distributing governance tokens to the community to foster decentralized control. 83
    • Increased Market Liquidity: By incentivizing users to lock up their assets, yield farming deepens liquidity across the DeFi ecosystem, leading to more efficient trading and lending markets. 83
    • Community Building: Creates a community of users who are financially invested in a protocol’s success, encouraging active participation and engagement. 195
  • Detrimental Potentials:
    • High Risk of Financial Loss: Yield farming is a high-risk activity due to market volatility, the risk of impermanent loss in liquidity pools, and the potential for smart contract exploits. 196
    • Scams and “Rug Pulls”: The hype around high yields attracts scammers who create fraudulent protocols designed to steal users’ deposited funds. 197
    • Complexity: Successful yield farming requires significant technical knowledge and active management, creating a high barrier to entry for beginners and increasing the risk of costly mistakes. 196
    • Market Manipulation: “Whales” can manipulate markets by providing and withdrawing large amounts of liquidity, or by using their large governance token holdings to influence protocol decisions for their own short-term gain. 195

Flash Loans

Flash loans are a uniquely DeFi primitive that enables uncollateralized lending.87 They allow a user to borrow a vast amount of assets without providing any collateral, but with one strict condition: the loan must be borrowed and fully repaid within the exact same blockchain transaction.87

This seemingly impossible feat is made possible by the atomic nature of blockchain transactions. A transaction on Ethereum is an “all-or-nothing” operation. A smart contract can be programmed to execute a series of steps: 1) lend assets to the borrower, 2) allow the borrower to perform a set of actions with those assets, and 3) check if the loan (plus a small fee) has been returned. If the loan is not repaid by the end of the transaction’s execution, the smart contract simply reverts, and the entire transaction—including the initial loan—is cancelled as if it never occurred.88 This makes the loan completely risk-free for the lending protocol.

Flash loans are a powerful tool for developers and traders to perform capital-intensive operations that can be completed within a single transaction. Common use cases include 87:

  • Arbitrage: A trader can borrow millions of dollars to exploit a price discrepancy for an asset between two different DEXs, buying low on one and selling high on the other, repaying the loan, and pocketing the difference, all in one atomic transaction.87
  • Collateral Swaps: A user can instantly swap the collateral backing their loan in a lending protocol without having to first repay the loan.87
  • Liquidations: Flash loans provide the necessary capital for liquidators to repay a borrower’s debt and claim the discounted collateral.89

While the flash loan primitive itself is secure for lenders, it has also become a notorious tool for attackers. By providing temporary access to massive amounts of capital, flash loans enable malicious actors to manipulate markets or exploit economic vulnerabilities in other DeFi protocols, leading to what are known as “flash loan attacks”.87

Affordances and Potentials of Flash Loans

  • Affordances: The unique affordance of a flash loan is atomic, uncollateralized borrowing. It enables a user to access vast amounts of capital for the duration of a single transaction, with the cryptographic guarantee that the loan is either repaid by the end of the transaction or the entire operation is reverted as if it never happened.
  • Beneficial Potentials:
    • Arbitrage: Allows traders to instantly capitalize on price differences between exchanges without needing large amounts of upfront capital, which helps make markets more efficient. 198
    • Collateral Swaps: Enables users to seamlessly swap the collateral in their lending positions from one asset to another in a single transaction. 198
    • Liquidations: Provides the necessary capital for liquidators to repay undercollateralized loans in other DeFi protocols, helping to keep those protocols solvent.
    • Market Making: Can be used to provide temporary liquidity to facilitate large trades on decentralized exchanges. 198
  • Detrimental Potentials:
    • Funding Protocol Exploits: Flash loans are a primary tool for malicious actors to fund attacks on DeFi protocols. They provide the massive capital needed to manipulate prices, exploit oracle vulnerabilities, or take advantage of other economic design flaws, often resulting in the draining of a protocol’s funds.
    • Market Manipulation: The ability to wield huge amounts of temporary capital can be used to manipulate the price of assets on decentralized exchanges, causing cascading liquidations or other forms of market disruption.
    • Lowering the Bar for Attackers: Because a failed flash loan attack simply reverts and costs the attacker only the transaction fee, it dramatically lowers the economic risk and barrier to entry for attempting large-scale financial exploits.

Decentralized Autonomous Organizations (DAOs)

A Decentralized Autonomous Organization (DAO) is a novel organizational structure that is community-owned and managed, operating on a blockchain according to rules encoded in smart contracts.91 DAOs are often described as “internet-native entities” that function without a central governing body or traditional hierarchical management.14 Instead, decisions are made collectively by their members, typically through a token-based voting system.93

The core components of a DAO are built upon the foundational primitives of Web3. They are constructed on public blockchain infrastructures like Ethereum, their governance is intended to be decentralized, and their operations are mediated by a combination of on-chain smart contracts and off-chain communication platforms (like forums and chat servers).92 The smart contracts define the fundamental rules of the organization: how to become a member, how to submit proposals, how to vote, and how to manage the organization’s treasury. These rules are self-executing and transparently enforced by the blockchain.94

The significance of the DAO as a primitive lies in its potential to reinvent human coordination. It enables global, pseudonymous communities to collaborate on shared goals, collectively manage treasuries that can be worth billions of dollars, and govern complex software protocols without relying on traditional corporate structures, legal agreements, or geographic jurisdictions.94 They are being used for a wide variety of purposes, from governing DeFi protocols and managing investment funds to funding public goods and organizing social clubs.92

Affordances and Potentials of DAOs

  • Affordances: A DAO’s primary affordance is decentralized coordination at scale. It provides a framework for global, internet-native communities to collectively manage resources and make decisions based on transparent, automated rules encoded in smart contracts, without relying on traditional hierarchical structures or legal intermediaries. 96
  • Beneficial Potentials:
    • Democratic Governance: Enables community-led governance of DeFi protocols, dApps, and other Web3 projects, giving users a direct say in their evolution. 200
    • Decentralized Investment: Allows groups to pool capital and act as decentralized venture funds, collectively deciding on investments. 200
    • Public Goods Funding: Creates transparent mechanisms for funding open-source software, scientific research, and other public goods. 200
    • Global Collaboration: Breaks down geographical barriers, allowing people from all over the world to collaborate on shared projects and goals. 199
    • Creator and Social Communities: Empowers creators and communities to collectively own and manage platforms, from publishing houses to social clubs. 201
  • Detrimental Potentials:
    • Security Vulnerabilities: Flaws in a DAO’s smart contracts can be exploited, leading to the theft of the entire treasury, as famously happened with “The DAO” in 2016. 96
    • Governance Attacks: Malicious actors can acquire a majority of governance tokens (either through purchase or flash loans) to pass self-serving proposals, such as draining the treasury. 202
    • Plutocracy and Centralization: In token-based voting systems, power can become concentrated in the hands of a few wealthy “whales,” undermining the goal of decentralization. 96
    • Inefficiency and Voter Apathy: Decision-making can be slow and cumbersome, and low voter turnout can lead to governance gridlock or capture by a small, active minority. 202
    • Regulatory Uncertainty: DAOs operate in a legal gray area in most jurisdictions, potentially exposing members to legal liability. 96

DAO Voting Mechanisms

The primary mechanism for decision-making within a DAO is voting, which is facilitated by governance tokens and a variety of voting systems.

Governance Tokens are typically ERC-20 tokens that grant their holders the right to participate in the DAO’s governance process.98 By holding the token, a member gains the ability to create proposals and vote on issues affecting the protocol, such as software upgrades, treasury allocations, or changes to governance parameters themselves.98 This model aligns the incentives of the protocol’s users and stakeholders with its long-term success, as they are empowered to collectively steer its direction.86

Affordances and Potentials of DAO Voting Mechanisms

  • Affordances: DAO voting mechanisms afford a way to translate collective will into on-chain action. They provide structured, transparent, and often automated processes for a decentralized community to make binding decisions on proposals, from simple fund allocations to complex protocol upgrades. 204
  • Beneficial Potentials:
    • Democratic Decision-Making: Enables all members of a community to have a voice in governance, fostering a more inclusive and equitable organizational structure. 204
    • Transparency and Auditability: All proposals and votes are recorded on the blockchain, creating a permanent and publicly verifiable record of the decision-making process. 206
    • Flexibility: Different voting models (e.g., quadratic, conviction, delegated) can be chosen to suit the specific needs of a DAO, such as protecting minority interests or encouraging long-term thinking. 206
    • Efficiency: Can streamline operations by automating decisions and reducing the need for traditional bureaucratic processes. 204
  • Detrimental Potentials:
    • Plutocracy (1-token-1-vote): Standard token-based voting allows wealthy individuals or “whales” to dominate decision-making, potentially acting against the interests of the broader community.
    • Voter Apathy: Low participation rates are a common problem, which can lead to governance gridlock or allow a small, motivated minority to pass proposals without broad consensus.
    • Vote Buying and Collusion: The liquid nature of governance tokens makes them susceptible to vote-buying schemes or collusion among large holders to manipulate outcomes. 207
    • Governance Attacks: Malicious actors can use flash loans to temporarily acquire a large number of governance tokens to pass a self-serving proposal, such as draining the treasury.

DAO Treasury Management

The DAO treasury is the collective pool of financial resources owned and controlled by the organization’s members.101 These funds, typically consisting of the DAO’s native governance token, stablecoins, and other crypto-assets, are held in on-chain accounts and are used to finance operations, fund development grants, invest in strategic initiatives, and ensure the long-term sustainability of the project.102 Effective treasury management is a critical function for any successful DAO.

Several key primitives and strategies are employed for secure and effective treasury management:

  • Multi-Signature (Multisig) Wallets: A fundamental security primitive for DAOs. A multisig wallet is a smart contract that requires multiple pre-approved members (keyholders) to sign off on a transaction before it can be executed.102 This prevents a single individual from having unilateral control over the funds and protects against theft or loss of a single private key, distributing trust across a committee.102
  • Diversification: A core risk management strategy. Many DAOs make the mistake of holding the majority of their treasury in their own volatile native token.104 A prudent treasury management strategy involves diversifying the treasury into a portfolio of assets, including less volatile stablecoins (like USDC or DAI) and other established cryptocurrencies (like ETH), to preserve capital and ensure the DAO can meet its operational expenses regardless of market conditions.102
  • Governance-Driven Allocation: The ultimate control over the treasury rests with the DAO members. All decisions regarding spending, investments, and diversification strategies are subject to the DAO’s formal governance process. Proposals are made, debated by the community, and voted on by token holders, ensuring that the management of the collective’s funds is transparent, democratic, and aligned with the organization’s stated mission.101

Blockchain Oracles

Blockchains, by design, are deterministic and isolated systems. They can execute code with verifiable certainty but have no native capability to access data from the outside world, such as real-world asset prices, weather information, or the results of a sports game.105 This fundamental limitation is known as the

oracle problem.107 Without a way to bridge this gap, the utility of smart contracts would be severely limited to on-chain-native applications.

Blockchain oracles are the middleware primitive designed to solve this problem. They act as a secure bridge, fetching external, off-chain data and delivering it onto the blockchain for smart contracts to consume.106 However, using a single, centralized oracle reintroduces a single point of failure and trust into a trustless system, undermining the core value proposition of the blockchain.106

To solve this, decentralized oracle networks (DONs), such as Chainlink, were developed.109 A DON consists of a network of multiple, independent oracle nodes. When a smart contract requests data, multiple nodes in the network fetch the information from various high-quality off-chain sources. They then come to a consensus on the correct value before it is aggregated and delivered on-chain.105 This decentralized approach ensures that the data is highly available, accurate, and resistant to manipulation, as an attacker would need to compromise a significant number of independent nodes and data sources simultaneously.106 Oracles are a critical infrastructure primitive that makes smart contracts truly “smart” by connecting them to the vast data of the real world, enabling the entire DeFi ecosystem, which relies heavily on real-time price feeds for functions like managing collateral and executing liquidations.105

Decentralized Data Storage Networks

Storing large amounts of data, such as images, videos, or extensive datasets, directly on a Layer 1 blockchain like Ethereum is technically possible but prohibitively expensive due to the cost of gas for every byte of data. The conventional alternative, centralized cloud storage services like Amazon Web Services (AWS) or Google Drive, reintroduces centralization, creating single points of failure, censorship risks, and giving control of the data to a third-party corporation.111

Decentralized storage networks have emerged as a primitive to solve this issue. These networks distribute and store data across a global, peer-to-peer network of nodes, with no single entity in control.111 This approach provides enhanced security, censorship resistance, and data redundancy.112 Two prominent examples of this primitive are:

  • IPFS (InterPlanetary File System): IPFS is a peer-to-peer hypermedia protocol for storing and sharing files. Its core innovation is content addressing. Instead of identifying a file by its location (like a URL), IPFS identifies a file by a unique cryptographic hash of its content, known as a Content Identifier (CID).114 This means that the content itself is the address. This makes data verifiable (you can check if the content matches the hash) and inherently censorship-resistant (as long as one node on the network is hosting the content, it remains accessible). When a user requests a file via its CID, the network uses a
    Distributed Hash Table (DHT) to find the nearest peers hosting that content and retrieves it from them.117
  • Arweave: Arweave is a decentralized storage network specifically designed for permanent data storage. It introduces a novel blockchain-like data structure called the blockweave and a unique consensus mechanism called Proof of Access (PoA).119 In the PoA system, to mine a new block, a miner must prove they have access to a randomly selected previous block from the network’s history. Since miners cannot predict which block they will need, they are incentivized to store as much of the network’s data as possible.119 Arweave’s economic model is also unique: users pay a single, upfront fee to store data. This fee is used to create a storage endowment that is designed to pay for the cost of storing that data in perpetuity, based on the assumption that the cost of data storage will continue to decline over time.119

Decentralized Data Indexing Protocols

While blockchains are excellent at storing data immutably, they are notoriously inefficient to query. Data is stored chronologically in a sequence of blocks, not in a structured, indexed database that can be easily searched.125 A dApp needing to display a user’s transaction history or all the NFTs they own would have to scan the entire blockchain from the beginning, which is impractical for any real-time application.126

Decentralized indexing protocols like The Graph have emerged as a crucial middleware primitive to solve this data accessibility problem.127 The Graph acts as an indexing layer that organizes blockchain data and makes it easily queryable via standard APIs.128

The mechanism involves several key roles within a decentralized network 127:

  • Subgraph Developers create open APIs called “subgraphs,” which define what data to index from a specific smart contract and how to structure it.
  • Indexers are node operators who stake The Graph’s native token (GRT) and run the software to process these subgraphs, indexing the specified blockchain data.
  • Curators are participants who signal which subgraphs are of high quality and should be indexed by staking GRT on them.
  • Delegators stake their GRT on existing Indexers to help secure the network without running a node themselves, earning a portion of the Indexer’s rewards.
  • Consumers (dApps, analysts, etc.) pay query fees in GRT to the Indexers to retrieve the indexed data using the simple and widely adopted GraphQL query language.128

This primitive is essential for the usability of the Web3 ecosystem, providing the fast and efficient data retrieval necessary to build performant dApps, effectively abstracting away the immense complexity of directly querying raw blockchain data.133

Identity and Social Primitives

A significant and rapidly developing category of primitives is focused on identity and social interaction. This layer aims to fundamentally restructure the Web2 model, where user identity and social data are controlled and monetized by centralized platforms like Facebook and Google, and instead give ownership and control back to the user.135

The key primitives in this space include:

  • Decentralized Identifiers (DIDs): DIDs are a new type of globally unique identifier that enables verifiable, decentralized digital identity. A DID is controlled by the user themselves (making it “self-sovereign”) and does not depend on any centralized registry, identity provider, or certificate authority.136 This allows users to create and manage their own digital identities that are portable across different applications and services.
  • Social Graphs: These are protocols that represent a user’s social connections, content, and followers as user-owned, portable data structures.135 Instead of a social graph being locked within a single platform’s database, it can be stored on a decentralized network or represented as on-chain assets (e.g., NFTs), allowing the user to take their network with them from one application to another.139 The ability for users to “truly own their own online profile, including all of the content they’ve produced and their following/follower social graphs” has been described as a powerful and foundational Web3 primitive.135

These identity and social primitives are the building blocks for a new generation of decentralized social media, reputation systems, and a more open, interoperable social internet where users are no longer locked into walled gardens but are free to move and interact across a diverse ecosystem of applications.

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