I have read up on many sites, but I am unable to confirm its actual purpose. Is it a new standard, something which we can follow like xhtml? Or is this a list of functionalities to bring websites into the new age making use of stuff like RSS, Ajax, Socialisation (Del.icio.us) ... etc? What is actually Web 2.0?

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Web 2.0 is not a set of standards or anything official. It was a theory put forward by the O'Reilly books a few years ago referring to social networking, collaboration and sharing among the Internet - using things like wikis and MySpace. People now have added all sorts of things to the definition - like Ajax, RSS, podcasts and vodcasts etc.

Wikipedia has a very interesting mindmap that explains what is currently meant by Web 2.0 and gives a few example websites.

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I just read wikipedia.

So in short, Web 2.0 is not anything definitive in the web. It is just a term used for the new age of websites, a theory if you will. It is just a way to enhance the experience of a visitor to a site, using things like podcast, rss ... etc

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