What Will Web3 Bring To The Finance Industry?
Web3 promises to take power and control out of the hands of big tech companies and give it to individuals. In this article you will find what benefits Web3 will have in the finance sector.
Over the past decade, we have seen some great changes in the global economy, such as the conceptualization of the first blockchain in 2008 by Satoshi Nakamoto.
While at first, Blockchain technology offered an alternative way of processing transactions, then now, it has evolved into a whole new economic framework and found its way into numerous operations outside of cryptocurrencies.
When talking about this framework today, we call it Web3.
Keep on reading to understand what exactly Web3 can bring to the finance industry and how everyone can benefit from it.
What is Web 3.0?
Naturally, the concept of Web 3.0 has developed over time due to the limitations offered by Web1.0 and Web 2.0. To help you get your head around the concept of Web3, let's quickly see what its predecessors had to offer.
- Web 1.0 stays roughly in the time period of 1990-2004. At the time, the internet was full of static websites owned by companies with very limited interaction between users meaning there was nearly no content creation by individuals. This is why Web 1.0 is often referred to as the “read-only web”.
- Web 2.0 era started in 2004 with the appearance of various social media platforms that introduced sharing of user-generated content and engagement and, therefore, turned the “read-only” web into a “read-write” web. With more people being online daily, some top companies got a very disproportionate control over the traffic and value generated on the web. Whereas people had the power to generate content, they themselves didn’t own it or benefit from it directly.
Enter Web 3.0 - an answer to the dilemma of the Web being monopolized by big corporations by giving the power to individuals in the form of ownership. To achieve this, Web3 uses blockchains, cryptocurrencies, and NFTs and will be the “read-write-own” web.
The main principles of Web3
Some of the core elements on Web3 can be outlined as follows:
- Decentralization. No longer will the internet be controlled by centralized institutions, but the ownership will be given to its builders and users alike.
- Unrestricted access. Access to Web3 will be available for everyone.
- Native payments. Sending and spending money online will be done via cryptocurrencies instead of relying on banks and other payment services.
- Trustless mechanics. By using incentives and economic mechanisms, there’s no need to place your trust in strangers, institutions, or third parties for the network or other applications to function.
When talking about finance, we can clearly see some new financial services and income opportunities that will evolve from Web3.
The new way forward that will bring the industry towards unrestricted access, privacy, low transaction costs, and independence from third-party involvement is known as DeFi - decentralized finance.
DeFI - Decentralized Finance
Traditional finance has been built to rely on intermediaries to hold control and process various financial services.
DeFi, on the other hand, is operated in a decentralized environment - on public blockchains that are available for everyone. All the services are usually encoded in open-source software protocols and smart contracts.
So let's see what the emerging trends that DeFi brings to the finance sector are.
Various cryptocurrencies like Bitcoin and Ethereum have the largest share of the digital asset space. However, digital assets are far more than just cryptocurrencies, especially with the rise of different types of NFTs.
Therefore, digital assets can be described as electronically created files of data that are owned by individuals and that can be used as a currency for transactions or as a way of storing intangible content - anything from artwork, music, memes, and social media posts, etc.
Top 10 Cryptocurrencies as of July 26, 2022
A smart contract is a computer code that executes transactions automatically once the conditions agreed between the buyer and seller are met. The code and agreement are run on a decentralized blockchain network, and the code itself controls the execution of the contract.
All the transactions made within the smart contract are trackable and irreversible, meaning they are tamper-resistant and don’t have the need for a central authority or a legal system (such as banks and brokers) to mediate the transactions.
For instance, smart contracts can be used to release funds, be it for loans, investments, etc, record property ownership, register a vehicle, issue a ticket, and more. Furthermore, smart contracts are also an important part of other Web3 ecosystems, like DAOs and distributed data storage, which will be covered below.
DAOs - Decentralized Autonomous Organisations
DAOs provide oversight as well as management of a community-led online entity similar to a corporation, but with one key difference - it has no central authority.
Instead, a group of people with the same goal come together and participate actively as the governing body, where each member has equal rights in making decisions.
All business-related matters such as decision making, voting, distribution of funds, and the execution of agreements are written down in self-executing smart contracts. This helps to avoid the risk of human error and the possibility of tampering with the votes as everything is publicly viewable.
For a better understanding of the possibilities of DAOs, check out the project of Metis Dao Token.
Distributed Data Storage
The difference between centralized data storage and distributed data storage is that instead of storing information in one server outside of the user’s control, distributed data storage uses multiple independent networks for storage.
Distributing data into multiple locations is more secure and allows users to manage their data, encrypt it to keep it private, authorize access to others, and backup the files.
dApps - Decentralized Applications
dApps are decentralized apps, which in nature are like regular apps offering similar functions. However, the main difference is that dApps are run on blockchain and make use of smart contracts.
Some benefits that dApps bring to the table:
- Censorship-resistant. As there’s no single entity controlling the dApp, it’s highly difficult for any individual or government to restrict access to the dApp.
- The open-source approach enables dApps to work towards extensive development of the dApp ecosystem. The developers are encouraged to build better dApps with new use cases and functionalities.
- Blockchain-based infrastructure running on smart contracts enables the integration of cryptocurrencies into different functionalities of the dApp.
If you’re interested in researching dApps then DappRadar is a great place to start as they have a database of thousands of dApps built on networks such as Ethereum, BNB Chain, and Polygon.
Although we are yet in the very beginning of creating a better web available for everyone, there are clear signs of how Web3 will benefit the future of finance.
With unrestricted access to the network, increased privacy, lower transaction costs and independence from third-party involvement, and ease of processes, there’s no doubt that DeFi will change the landscape of the finance industry in the years to come.