Change is the only constant. This applies to nearly everything in life and business, and the financial sector is no different. With the advent of Web3, finance is on the brink of an impactful transformation. But what exactly is Web3, and what are the technologies that can lead a formerly traditional system of transactions, into a future that’s open, transparent, and inclusive?
Web3, once a mere concept, has rapidly evolved into a major disruptive force reshaping the finance industry landscape. Powered by significant innovations like decentralized finance (DeFi), blockchain, cryptocurrencies, distributed ledger technology (DLT), and non-fungible tokens (NFTs), Web3 is ushering in a new era of decentralized, trustless, and transparent financial services.
The seamless interpolarity between these innovations has allowed cryptocurrency to cement itself as the primary form of commerce in the new web. In 2021, Bitcoin’s transaction volume exceeded PayPal’s by 62%, proving crypto’s wide adaptability. If you are a player or stakeholder in the finance industry, it would be beneficial to analyze the opportunities provided by Web3 for the future.
What is Web3?
Web3 or Web 3.0 refers to a concept in development, popularly known as the third iteration of the internet. Following Web 1.0 and 2.0, which we use, Web3 aims to be a more decentralized Internet powered by blockchain technology.
Web3 aims to create direct lines of communication between people and remove central figures or authorities to offer users a truly decentralized web. This idea of a decentralized web can be achieved by implementing an organizational structure called a decentralized autonomous organization or DAO.
Decentralized Autonomous Organization (DAO)
A DAO is a flat organizational structure that allows strangers and like-minded individuals worldwide to work safely and effectively without needing a layer of trust. This blockchain-inspired structure has no governance structure of CEOs or CFOs; members make every decision to drive the organization’s future.
DAO organizations issue voting rights to users with tokens or a stake in the DAO. One such crypto exchange using a DAO is Uniswap, where users can vote and participate if they own its DAO token UNI. Another working example of DAO is the crypto DASH, managed entirely by its token holders and termed master nodes. DAO is also used in venture funds and charity organizations. The DAO rules and regulations are programmed into executable computer code known as smart contracts. Smart contracts are the technology that makes decentralized automated organizations possible.
Smart Contracts
These were first introduced by American computer scientist and cryptographer Nick Szabo in 1995. However, it gained popularity only with the launch of Ethereum in 2015, featuring smart contract capability on its chain. Smart contracts are preprogrammed blockchain programs coded to self-execute upon meeting conditions. In other words, a smart contract can be set up on the blockchain to transfer product ownership between two parties. Once the transaction is complete, the smart contract executes itself, instantly issuing product ownership to the buyer. This reduces the risk of foul play or third-party charges subjected to the buyer and seller.
Smart contracts have made it possible to develop various decentralized apps on the blockchain. dApps are decentralized apps that act as a helpful platform to execute smart contracts through peer-to-peer (P2P) networks. This means that parties can transact securely through dAapps directly with each other. Furthermore, due to its decentralized nature, user data cannot be infringed, censored, or deleted. Like other blockchain-based innovations, they are governed by their users and coded to keep developing and improving. An example application of dApps in finance is MakerDAO, a decentralized credit service allowing users to create collateral debt positions (CDP) that lets users deposit an asset into a smart contract as collateral. By doing so, users can avail of a loan on the MakerDao platform in USD equivalency to spend however they wish with no regulatory body or third-party supervision.
DeFi Disruptions
Blockchain is a disruptive Web3 technology that has inspired DeFi, or decentralized finance. DeFi is a developing P2P assortment of financial tools built on blockchain to decentralize all Web3 financial services and products. In Web3, banks and other institutions will not control DeFi transactions. In other words, the system removes banks and institutions’ control over money, financial products, and financial services.
Since its implementation, DeFi has been a disruptive force in the established traditional finance industry. DeFi allows users to eliminate infrastructure fees and merchant and credit card network fees when conducting secure P2P transactions. If businesses and individuals switch to DeFi services, they could perform their finances with complete autonomy, retaining 100% of their money without surcharges.
DeFi technology is also being integrated into several government-issued digital currencies (CBDCs) as payment systems. These CBDCs are pegged against the country’s fiat currency value. However, they are not cryptocurrencies because they are managed by a centralized body, in this case, the government.
Decentralized Autonomous Corporations (DACs)
While DAOs revolutionized organizational governance, Decentralized Autonomous Corporations (DACs) are taking decentralization a step further by creating fully automated, self-governing businesses on the blockchain. DACs operate autonomously without hierarchical management structures, with their operations encoded into smart contracts. This model could create traditional corporate structures and enable truly decentralized and transparent businesses in the finance sector.
Their entire corporate rulebooks, operational workflows, decision-making hierarchies, and economic models are encoded as immutable smart contracts on platforms like Ethereum.
Unlike traditional corporations with boards and C-suites, DACs are decentralized entities that function autonomously. Their operations are executed based on predefined, transparent code without human intervention. Every aspect is programmatically determined through smart contracts, from fundraising and payroll to accounting, supply chain, and customer interactions.
Projects like Aragon and DAOStack provide robust frameworks for deploying DACs, handling the issuance of governance tokens, voting mechanisms, dispute resolution, compliance, and other core functions. Moloch DAO was an early pioneer in crowdfunding and incentivizing the development of critical Ethereum infrastructure in a decentralized manner.
By eliminating institutionalized management, DACs aim to operate as self-sustaining, perpetually operating organizational machines, disrupting conventional corporate structures. The potential applications of this model span DeFi services, asset management, consultancies, software development collectives, and beyond.
Decentralized Identity (DID)
In Web3 finance, secure and decentralized identity management is crucial. Decentralized Identity (DID) solutions leverage blockchain technology to provide individuals and entities with self-sovereign digital identities, enabling them to control and manage their data without relying on centralized authorities. This enhances privacy and security and streamlines processes like KYC (Know Your Customer) and AML (Anti-Money Laundering) compliance for financial institutions.
Implementations like Concordium’s identity layer leverage zero-knowledge proofs, allowing users to selectively disclose and verify claims about themselves (e.g., age, credentials) without revealing underlying personal data. Spherity creates decentralized identities tailored to financial institutions’ KYC/AML compliance needs.
Cross-Chain Interoperability
As the Web3 ecosystem grows, the need for seamless communication and value transfer across different blockchain networks becomes increasingly important, and the lack of cross-chain communication acts as a significant bottleneck. This fragmentation prevents seamless exchange of data and liquidity across the Web3 landscape. Cross-chain interoperability protocols solve this by enabling trustless interoperability between disparate distributed ledgers.
Cross-chain interoperability solutions, such as Polkadot, Cosmos, and Wormhole, enable the secure and trustless exchange of data and assets between disparate blockchains, unlocking new possibilities for decentralized finance and cross-chain applications.
These interoperability solutions open up possibilities for decentralized exchanges and money markets operating across chains, diversified crypto investment products utilizing liquidity from multiple ecosystems, and sophisticated DeFi applications built by composing protocols from different chains.
Decentralized Oracles
Smart contracts and decentralized applications interacting with real-world data require secure and reliable data feeds, known as oracles. However, oracles represent a crucial trust vector whose centralized points of failure can be exploited by adversaries seeking to feed DeFi applications corrupted data. Decentralized oracles, like Chainlink and Band Protocol, provide this critical infrastructure by sourcing and delivering off-chain data to on-chain systems in a decentralized and tamper-proof manner.
This innovation is essential for creating sophisticated finance products and services in the Web3 ecosystem as it eliminates single points of failure and provides connectivity to real-world data streams.
Algorithmic Stablecoins
While traditional stablecoins are pegged to fiat currencies, algorithmic stablecoins like Frax and ESD maintain their peg through algorithmic mechanisms and smart contracts without relying on centralized reserves. These innovative stablecoins aim to provide greater decentralization, transparency, and scalability, making them attractive for Web3 financial applications and DeFi protocols.
Say hello to NFTs
An NFT or Non-Fungible token is a blockchain-based digital asset that cannot be altered or changed, with its records permanently stored on the blockchain ledger. Users can buy, sell, and trade these NFTs for real-world cash. NFTs are more than collectibles; they represent tokenization or digital ownership of digital artwork, website domain, an audio clip, and more. For example, NFTs have become a unique way for artists to showcase and sell their artwork without losing money to brokers and auction houses. By digitizing and tokenizing their artwork, artists receive royalties for every trade of their NFT. An NFT is built on smart contract technology and is not limited to online art. Their financial applications are significant to the growth of web3.
Practical applications of NFT technology in finance
NFTs can also be used in financial contracts by tokenizing contractual agreements. Liability is digitized documentation proving that the owing party is, in fact, liable to the promisee for a sum of money, and asset NFT is digitized documental proof of asset ownership. Liability NFTs and Asset NFTs can be used as ownership proof of contract for the owing party to the promisee or receiving party. NFT’s prominent feature is that it is an assignable proof of ownership tool that can be further used in trade finance and virtual real estate.
NFTs in trade finance help reduce fraudulent documentation and third-party handlers’ tokenization of assets and documents to digital NFT tokens. This could be highly beneficial in better handling trade finance’s supply chain and regulatory problems. One such example of a blockchain network using NFT technology to improve global trade and finance is XinFin (XDC).
Virtual real estate NFTs
Virtual real estate is sold as NFTs where users can buy or sell property in Decentraland, Axie Infinity, and other crypto games. The ownership of these packets of land is verifiable with an assigned private key. An NFT marketplace is an effective platform for selling these virtual assets for financial gain.
Fractional ownership of NFTs
Purchasing NFTs can be excellent for your financial portfolio. Sadly, due to their rise in popularity and subsequent price increases, not everyone may be able to afford a whole NFT. This is where the introduction of fractional or fractal ownership plays a huge role in the future of NFTs. Fractional ownership is a new concept where NFT owners can create shares of fractions of their NFT for investors and fans who wish to buy a part of the NFT art rather than the entire thing. The price of its shares determines the overall NFT price. These shares are tradable on many decentralized exchanges like Uniswap and NFT marketplaces.
It is indisputable that Web 3.0 is gaining the infrastructure needed to revolutionize how future financial services will be conducted on the internet. It is essential to keep track of the innovations in Web 3.0, as they could be financially beneficial to you or your business.
The Road Ahead for Finance
As these innovations gain traction, Web3-led decentralization in finance is rapidly becoming mainstream. If you don’t jump on the bandwagon now, you will lose key opportunities and market share. To give you an idea, here are the opportunities that you can utilize by integrating Web3 into your business:
- Composing multi-chain DeFi apps via cross-chain bridges
- Privacy-preserving financial services
- Automated operations through DACs
- Mainstream NFT adoption
- Clear regulatory guidance fostering innovation
Kreatorverse facilitates this evolution by providing Web3-native solutions, enabling fintech firms to rapidly design, develop, and deploy cutting-edge DeFi protocols, cross-chain infrastructure, NFT platforms, and more. Book a call with us, and build offerings suitable for new-age consumers.
