Web3, once just a simple concept, is now growing and evolving to be a major disruptive player in the finance industry. Some of the significant innovations driving this disruption in Web 3.0 are Decentralized Finance (DeFi), Blockchain, Cryptocurrencies, and Distributed Ledger Technology (DLT) integrated with artificial intelligence and machine learning, to name a few. 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 the wide adaptability of crypto. 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 that 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 from around the world to safely and effectively work together without the need for a layer of trust. This blockchain-inspired organizational structure has no governance structure of CEOs or CFOs, and members make every decision and drive the organization’s future. DAO organizations issue voting rights to users who hold 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 termed as 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 essentially makes decentralized automated organizations possible.
Smart contracts were first introduced by an American computer scientist and cryptographer named 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 a set of conditions. In other words, a smart contract can be set up on the blockchain to transfer ownership of a product between two parties. Once the transaction is complete, the smart contract executes itself issuing product ownership to the buyer instantly. 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, user data cannot be infringed, censored, or deleted due to its decentralized nature. And much 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.
Blockchain has been a disruptive 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.
DeFi, since its implementation, 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 over to DeFi services, they could potentially conduct their finances with complete autonomy, retaining 100% of their money without any surcharges.
DeFi technology is also being integrated as payment systems into several government-issued digital currencies. These government-issued currencies or Central bank digital currency (CBDC) are pegged against the country’s fiat currency value. These CBDCs, however, are not cryptocurrencies on account of being managed by a centralized body or, in this case, the government.
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 just 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 of being an assignable proof of ownership tool can be further used in trade finance and virtual real estate.
NFTs in trade finance help reduce fraudulent documentation and reduce third-party handlers tokenizing 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 undeniable that web3 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.