Decentralization has become a rallying cry and a driving force behind everything that Web3 promises. But what is Web3, and why does it matter? It’s a buzzword in the media and a mantra for true believers. How will the next generation of the Internet be changed by decentralized infrastructure and design principles? How do decentralized finance (DeFi) and digital assets help the metaverse come into being? In this second article in a series about the metaverse, we’ll look at how these parts affect the opportunities and challenges for the financial services industry.
What Web3 Has To Offer
According to the Gartner Group, 25% of individuals will spend at least an hour every day in the metaverse by 2026. Additionally, they predict that 30% of companies will have offerings prepared for the metaverse. The web3 development company also serves as the platform for creating, storing, and exchanging value in the metaverse.
It can be hard to tell the difference between Web3 and the metaverse, but they are two different things. They don’t depend on each other, but if the true vision of the metaverse comes true, they will have to rely on each other. Where online identities and digital assets converge is where the metaverse and Web3 meet. Users are not only members of three-dimensional communities but also owners of a shared digital experience.
Web3 is both a technology and a way to build an internet that gives people and communities more power than centralized organizations want. Decentralized infrastructure, design, storage, and access are the foundation of this system. Blockchain and IPFS are examples of technology that support this notion (InterPlanetary File System). This decentralized model aims to create a digital experience that is more stable, more open, and less likely to be censored. It also gives peer-to-peer connections more weight than connections made by intermediaries. In Web3, brands and platform providers are not the only ones who can make, store, and trade value. In a decentralized storage model, users make and own digital assets, which they can use to create and trade value. Our identities are verified not only by the platform we use but also by tools like digital wallets that let us prove who we are.
Taking ideas from the open-source community, Web3 developers use open standards and public technologies like blockchain and distributed storage solutions to create cryptocurrencies, nonfungible tokens (NFTs), and decentralized autonomous organizations (DAOs) to build resilient peer-to-peer decentralized networks and applications.
Even though the previous versions of the Internet have helped us in many ways, Web3 is, in many ways, a reaction to how a few tech giants have been able to control it. Users don’t have much choice or control over how they trade personal information for services, and it’s hard for new companies to get into markets where big players control so much of how users access and use services. But is it bad that things are getting more centralized right now? Isn’t centralization a great way to keep things safe and useful? Centralization is convenient, but only until it isn’t.
To fully understand this vision and why it’s become so important for the future, it helps to know how we got to the Internet we have now.
How Did We Get Here?
In the 1990s, the Internet became one of the most important tools for getting work done in the modern world. Built first as a read-only resource, information was uploaded, cataloged, and accessed across the globe, much like an online version of an encyclopedia.
But this model of the Internet, which we now call Web1 when we look back, was limited because it only worked in one direction. Users used content that was made and served by providers, and the ways to make money were limited. Advertisers flocked to this new medium so they could put their ads next to content from new media giants. Search engines started to become the foremost authority on content creation, aggregation, and discovery, which is their most well-known use case, and their business model was based on ads.
Slowly, the Internet started to change into Web2, the next version. It went from being a content and search provider to a platform provider. “Free” services that offer social connections messaging, productivity apps, and other tools for making content have become the most popular ways to get online. E-commerce hubs were also built on platforms powered by artificial intelligence and built-in features and an impressive, but only 2D, user experience.
Users gave these “free” platforms permission, most of the time without realizing it, to collect data every time they logged in with their credentials, made a purchase, or used any content or service. Identity, social activity, preferences, and even basic financial information became centralized on fewer and fewer platforms. This gave a small number of companies a lot of power and put a lot of personal information in the hands of a small number of companies. This put a lot of security and privacy at risk because so much personal information was in the hands of so few.
A Decentralised Vision
In response to this trend toward centralization and the financial crisis of 2008, blockchain and its first application, bitcoin, came into being. With Web3 as their north star, blockchain believers came up with the idea of remaking the Internet and the financial system in a way that a single group does not control.
Web3 is based on what came before it and aims to spread control over the governance, infrastructure, and transactions that will make up our metaverse experience. Even though a decentralized internet is not required for the metaverse to exist, it is “philosophically inconvenient” to have a metaverse that is only based on a centralized internet where you can’t own a digital asset (like digital art, land or a movie) free and clear like you can in the real world. The platform provider could shut down the server or ban the user from the platform.
But a lot of work must be done before this dream of communities and infrastructure running themselves becomes a reality. This new approach will give financial services firms new risks and challenges. These risks include brand risk for companies that set up and manage their presence in a Web3-powered metaverse and how they’ll protect the security and identity of users. Users will want to be able to do business on Web3 in both familiar and new ways, taking advantage of the fact that it is decentralized to give consumers and creators more power.
What Does it Mean For Something to Be Decentralized?
Decentralization implies that no person or group is in charge of how people talk to each other, how they get their information, or how they do business with each other. For Web3, true decentralization would mean building important parts of the infrastructure, like storage, in a resilient global network that no one person or group could shut down or use to control access. This is one of the most important ideas behind public blockchain infrastructure and Web3.
This direction is very different from what we are doing now, and it will greatly impact the financial services companies that will build and support the Web3 commerce rails. For a decentralized model, everything from identity to security to basic infrastructure needs to be rethought. This includes how financial services firms find and serve customers.
The Metaverse is Made Up of Digital Assets And User-Driven Economies.
Digital assets are the building blocks of a decentralized financial world. In some ways, the trading of these new assets, like cryptocurrencies and NFT, has taken attention away from what Web3 is worth. But digital assets are still the most important way value can be made and traded in the metaverse.
Developers and their projects can use blockchain to tokenize value and make digital assets. This can be done with a cryptocurrency, a utility token for transactions on a blockchain network, stablecoins tied to the value of a sovereign currency, or an NFT that represents digital art or real-world benefits like membership in an organization. The ability to be changed is a key difference between these assets. Can they be traded like tokens (cryptocurrencies), or are they one-of-a-kind like NFTs?
These digital assets show how much they are worth based on the economics of the blockchain and how much the market thinks they are worth. No central authority issues these assets or tries to control how many are out there or how much they are worth. In a metaverse powered by Web3, people can trade assets freely and directly with each other without the need for intermediaries. Proof of ownership of the asset is spread out across the blockchain. This makes the system more secure, private, and reliable. Smart contracts can be written into assets to make financial transactions happen automatically.
Web3 developers want to change how our financial system works so that this decentralized approach can be used in the economy. The current model is being challenged by DeFi, which stands for “decentralized finance.” DeFi (digital finance) and TradFi (traditional finance) have become nicknames for cross-town competitors. DeFi is the future of finance, while TradFi is the status quo. We’ve also seen companies pop up in the space between the two. These companies are often called CeFi, which stands for “centralised finance.” They combine parts of both models to give users secure access to Web3 financial rails and more traditional financial controls. The best example of this is Coinbase, which is a centralized cryptocurrency exchange.
Smart contracts are an important part of understanding DeFi as a whole. Smart contracts write down shared business logic that runs on its own on a blockchain network. To do their job, they only need a transaction. Because smart contracts are automated, blockchain builders can use them to code “trust” into the blockchain and set up if-then transactions. A smart contract automatically adds the new owner to the blockchain when you sign a contract to sell your home.
When Ethereum came out, smart contracts were made possible. At first, standard value representations were made possible as tokenized assets, whether fungible like stablecoins or unique like NFTs. This became a key part of how digital assets were created.
This combination and linkage of smart contracts and digital assets make the next step forward possible and lets us use different financial models with these assets. Builders of DeFi started by putting traditional financial models like exchanging and lending on the blockchain. Now, they are making completely new economic models and instruments (like perpetual) that aren’t possible in traditional finance. Internet access is global, public, and available 24 hours a day, 7 days a week, 365 days a year from anywhere. It also has a very different way of working than traditional finance.
A decentralized payment and transaction infrastructure, for example, would let people control their assets in digital wallets, move around the metaverse with a secure online digital identity recognized across the network, and do business directly with other users without the need for a middleman. It would also mean that storage and access to content would be spread out, with multiple parties validating transactions and helping people get to the content. Some people see this as a complete break from the old financial system, but it’s more likely to mix the old and the new. Web3 operators have adopted and will continue adopting “know your customer” policies to ensure they know who they are doing business with. These policies are based on regulations and the need to protect consumers and businesses.
DeFi providers want to get people off of relying on intermediaries and give them more control over their lives. This model of decentralized finance gives financial services companies both opportunities and challenges. How will companies that provide financial services make money now that just being in the middle of a transaction isn’t enough? Which banking services will still be needed if sovereigns issue digital money? Will trust in blockchain technology replace trust in institutions built up over hundreds of years? And how will the government control all of this in the end?
How Does This Make The Metaverse Possible?
For many skeptics, the metaverse is just a way to make online experiences more immersive using game technology. Some truth is in that statement. Virtual reality, augmented reality, and extended reality all make it possible to interact with brands and people in much more interesting ways than with two-dimensional images. But the full value of the metaverse as envisioned by metaverse visionaries may depend on Metaverse development company or even be sped up by it. For example, the value of digital land in the metaverse depends on the ownership rights given to the owner through smart contracts on the blockchain. Because Decentraland and The Sandbox are user-driven, they create rich and varied experiences, but there isn’t a governing body to monitor or censor them yet. In the future, smart contracts will power a mesh of blockchain networks that will make it easy for digital assets to move between metaverses.
Web3’s open-source, collaborative, and use of public infrastructure will boost innovation and speed up the spread of the metaverse at a much faster rate than Web2’s model of centralized development. Decentralized Web3-based metaverse platforms are more resistant to outages than centralized systems because they are more stable and don’t crash as often. Instead of relying on each platform provider, security and resilience can be built into open-source infrastructure to benefit the whole ecosystem.
This makes it possible for many financial services to help users get the most out of their money. In the end, the real value of the metaverse may be that Web3 makes user-driven economies easier rather than a curated, centralized experience that intermediaries control.