How Web3 Technologies Are Modeling the Future of Finance?
A form of domination that is inevitable if Web3 technologies, such as NFTs, are to become truly mainstream one day.
The web3 has allowed a whole new ecosystem to emerge. Finance is one of the aspects impacted by web3 because the future of finance will be decentralized. Before web3, you would have to connect through your bank to make a transaction or to go to the bank to withdraw money. In the past, national banks borrowed money from central banks. Now, with web3, you can access your money from anywhere and anytime. You are your own bank so you can allow loans as well as borrow money by using web3.
The big four technologies in Web3 ecosystem: Wallet, Tokens, Smart Contract, Blockchain networks
Wallets
To navigate and exploit the possibilities of the blockchain, it is essential to have a wallet. This is a digital wallet that allows you to store, in a more or less secure way, cryptocurrencies, tokens and NFTs. Compared to traditional finance, a wallet is to cryptomoney, what a bank account is to euros, dollars and other fiat currencies.
A wallet is a digital software or hardware device. Software wallets are also called “hot wallets”, as they are connected to the internet. Hardware wallets are also known as “cold wallets”. For security reasons, it is recommended to store money mainly on “cold wallets”. The thing is that, if you keep all your money in a cold wallet, it is much harder to benefit from this money as well as to make this money work for you. Another category, not mainly used, are the “paper wallets”. It is possible to store your tokens of different crypto-currencies on paper. It is a QR code that gives access to the money and keys of the wallet. This code can only be deciphered by the owner. The risk of the paper getting damaged in some way is not negligible, so it must be taken care of. This solution is preferred by people who have a large amount of digital tokens and want to save them.
The best cold wallet, so good that it is regularly out of stock, is the Ledger Nano X. If its price is to be taken into account (149$), its advantages are not negligible. It can store the vast majority of existing crypto-currencies. Taking the form of a USB key, it is very easy to use and its complementary application is necessarily compatible with your computer or smartphone. The security it offers to your data is excellent. It can obviously be easy to lose it so be careful.
The best hot wallet, available as a browser extension and as a mobile app, is called MetaMask. It equips you with a key vault, secure login, token wallet, and token exchange—everything you need to manage your digital assets. MetaMask provides the simplest yet most secure way to connect to blockchain-based applications. You are always in control when interacting on the new decentralized web.
With MyEtherWallet, you can easily create a paper wallet as you have an option to “print”. To keep you paper wallet secure do store your paper wallet in a safe to protect from fire and theft:
You can laminate your paper wallet for durability and proof against water.
To protect your paper wallet against water or dampness you can store it in a sealed plastic bag.
You may store a wallet in several locations for added redundancy. Some bitcoiners use deposit boxes, others use trusted family members.
The paper wallet could be entrusted with a solicitor, e.g. the person who holds your last will and testament.
Tokens
While it's common to talk about a cryptocurrency in the broadest sense, there are two main asset classes: tokens and coins.
The terms are often used interchangeably, but do not mean exactly the same thing. A "coin" is a unit of value that is specific to a blockchain. A "token" is a unit of value of a digital asset that does not have its own blockchain. In concrete terms, we speak of a "coin" for Bitcoin (BTC), Cardano (ADA), Ether (ETH) or Avalanche (AVAX), and of a token for a cryptocurrency using one of these blockchains, for example, Tether (USDT), Shiba-Inu (SHIB), or Basic Attention Token (BAT), which are all based on the Ethereum blockchain.
Theoretically, it is much easier to create a token than a coin. Because in the case of a coin, it is necessary to create a whole technology which goes with it, and in particular an economic model. A token can theoretically be created in just a few minutes... Be careful not to take shortcuts, however: some tokens have a real purpose, like MATIC, which was created, for example, to reduce transaction fees on the Ethereum blockchain, or Tether, which is a stablecoin, a cryptocurrency whose price is based on that of a "real-world" asset, in this case the dollar.
The term "stablecoin" is, in this respect, partially erroneous because Tether (USDT) is indeed a token and not a coin. This adds to the confusion!
By nature, a token is designed to be exchanged on a particular blockchain and to be compatible with it. A coin is therefore technically a token, we will often speak of "ETH tokens". But the reverse is not true. A token is not a coin, even if this term appears in its name.
Smart-contracts
Smart contracts are digital contracts stored in a blockchain that are automatically executed when predetermined terms and conditions are met.
Smart contracts work by following simple if/when...then... statements written in code in a blockchain. A network of computers performs actions when predetermined conditions are met and verified. These actions may include releasing funds to the parties involved, registering a vehicle, sending notifications or issuing a ticket. The blockchain is then updated when the transaction is complete. This means that the transaction cannot be changed and only the parties who received the right granted can see the results.
In a smart contract, there can be as many stipulations as necessary to convince the participants that the task will be completed satisfactorily. To establish the stipulations, the participants must determine how the transactions and their data are represented in the blockchain, agree on the "if/when...then..." rules that govern those transactions, explore all possible exceptions, and define a dispute resolution framework.
Then, the smart contract can be programmed by a developer, although increasingly, organizations using blockchain for business are providing templates, web interfaces and other online tools to simplify the structuring of smart contracts.
Blockchain networks
Developed since 2008, blockchain is primarily a technology for storing and transmitting information. This technology offers high standards of transparency and security because it operates without a central control body.
More concretely, the blockchain allows its users - connected in a network - to share data without intermediaries.
Blockchain is a new way of storing data in a distributed ledger that allows multiple stakeholders to access the same information securely and with confidence. Blockchain technology offers a new infrastructure to develop the next applications beyond cryptocurrencies, leading to positive and profound changes in businesses, communities and society.
To discover the value of blockchain, please read our Bitget Academy article detailing that topic.
Well-known Web3 Use cases
The advent of decentralized finance is based on the observation that our access to financial services is often dependent on our social class or geographic location. However, financial inclusion is synonymous with social inclusion. Indeed, a person who does not have access to basic financial services (right to an account and credit) risks being socially excluded. If in France, the rate of bank penetration has been estimated at 99%, in many countries (especially in Africa and South America), populations are facing important issues such as monetary inflation, the inexistence of basic services and the obvious lack of financial institutions. In 2017, a Global Findex Database report estimated that 1.7 billion adults worldwide currently lack access to basic financial services.
In this light, DeFi appears to some as a financial revolution, a new cycle that is more inclusive and built on new foundations that are, in some aspects, quite different from the traditional financial system.
The characteristics of DeF
Public and open to all. Anyone with an Internet connection and an address on a compatible blockchain (e.g. Ethereum) can access it.
Interoperable. DeFi represents an ecosystem of protocols that are intended to work together. These are not always competing: in many cases, they evolve in symbiosis and reinforce each other.
Programmable. The smart contracts on which DeFi protocols are based can be coded by anyone and can execute themselves.
Resilient. The infrastructure of blockchain technologies, which are immutable and unfalsifiable, is more resilient in providing these financial services.
Stable tokens (stablecoins)
A stablecoin is a type of crypto-asset designed to hold a stable value in the crypto-asset and DeFi market. While the mechanisms vary for each stablecoin, these tokens are meant to be resistant to market volatility, and thus should not experience significan t price fluctuations.
Market capitalization of the 10 biggest stablecoins from Jan 2017 to Apr 2022. Source: Statista
There are currently three main categories of stablecoins:
Stablecoins backed by fiat currencies (fiat collateralized): such is the case with Tether or USD Coin, which are both backed by the dollar. Euro-backed stablecoins are also beginning to develop, although the vast majority of stablecoins are dollar-backed.
Crypto-collateralized stablecoins: These stablecoins have the particularity of having one or more crypto-assets such as ether as an underlying asset. Maker DAO's DAI is one of the most popular crypto-collateralized stablecoins. The DAI works through the CDP "Collateralized Debt Position" smart contract which allows the collateral to be locked into the contract in ether. The value of the DAI tracks the value of the dollar.
Non-collateralized stablecoin: governed by an algorithm that prompts market participants to buy or sell in order to keep the price of the asset stable. One of the best known algorithmic stablecoins is Anchor, issued by Terraform Labs.
Tips to capture the Web3 Opportunities
Decentralized finance tends to reshuffle the deck of the current financial system in many ways. Thanks to its inclusiveness, accessibility and decentralization, its still developing applications provide an interesting alternative to the financial services offered by traditional financial institutions. To date, more than 240 billion assets are under management in the various decentralized finance protocols, and this number is set to grow.
DeFi perfectly exploits the opportunities offered by blockchain networks, which ensure the traceability of past transactions (the register of transactions is public), mitigate counterparty risk (a user can only borrow if he has previously deposited collateral of a higher amount on the same protocol), and resist censorship (blockchains are based on a decentralized architecture and are accessible to anyone with an Internet connection).
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