Web3 represents the next big evolutionary leap for the internet, one powered by blockchain, NFTs, and cryptocurrencies. This future Internet will become increasingly decentralized. This means users will increasingly interact and transact without the need for a third party to oversee or authenticate their interactions. Therefore, any business that acts as an intermediary service or intermediary may be threatened by this new decentralized vision of the Internet. If I were a financial services provider, I would be especially concerned.
Let’s take a look at how Web3, and blockchain in particular, will impact the financial sector.
The era of decentralized finance
One of the major achievements of Web3 is that it has enabled an entirely new banking model that bypasses traditional banks and other financial institutions. And with this, decentralized finance Or the DeFi movement.
DeFi describes a new internet-native, crypto-based financial system where traditional intermediary services are replaced by smart contracts and blockchain in a peer-to-peer system. Essentially, people can send and receive money to and from digital wallets and transact directly with each other without the help of centralized banks or other financial authorities. But DeFi doesn’t just mean sending and receiving money; it’s an umbrella term that encompasses all types of financial transactions, including loans and stock trading. Think of DeFi as a cryptographic version of traditional financial products. However, it is not regulated or monitored like traditional finance.
This lack of regulation is both good and bad. This is a good thing because it frees you from the hassles and inefficiencies associated with traditional finance. This is usually not a good thing, as it doesn’t provide the same kind of consumer protections you would enjoy when dealing with a “regular” bank.
But looking at the positives, DeFi has the potential to solve many of the problems of the traditional banking system. First, DeFi increases access to banking services for people around the world who currently cannot access or are turned away by traditional banking providers. With DeFi, all you need is access to the internet. This is why many believe that DeFi can create a better and fairer financial system that serves everyone.
And from a technology perspective, the DeFi movement is actually an internet-native system built for the Web3 era, as opposed to the existing banking system, which largely relies on very outdated technology. It represents the financial system.
Isn’t this all great? Well, not so much if you’re one of the traditional financial service providers whose very existence may be threatened by the DeFi movement. If banks want to survive in the Web3 era, they need to rethink their services and operations to deliver maximum value to their customers. Blockchain could also be a part of that. the result…
Blockchain and everyday banking
Blockchain technology is ideal for banking. After all, it was originally designed to store transaction data, facilitate secure transactions, and create a tamper-proof transaction history. All of this is very familiar to banks.
We believe that blockchain will enable banks to add value to their customers and remain relevant in the Web3 era. As an example, blockchain allows customers to move funds quickly, easily, and with lower transaction fees. This includes transferring between different currencies (including cryptocurrencies) anywhere in the world. Ripple, a blockchain-based money transfer network, is a great example. Ripple has its own cryptocurrency, XRP, but it can facilitate transfers between various government-backed currencies, cryptocurrencies, and even assets such as gold. As such, it processes transactions around the world and acts as a trusted intermediary for transactions between two parties, built for Web3, similar to traditional financial service providers. In this respect, it is similar to the SWIFT money transfer network, which is the equivalent of Web3.
The main benefits for consumers are that transactions typically take just seconds, compared to days for traditional bank wire transfers, and the fees are small (for each transaction, Ripple subtract a tiny amount of XRP, equivalent to a fraction of a penny at current rates). . Some traditional banks such as Santander Bank, Axis Bank, and PNC Bank have started using the Ripple network, and more banks will probably follow suit.
Blockchain could lead to a complete overhaul of lending
In the traditional lending model, the money we deposit in a bank account is used to fund loans issued by banks, and in return we receive a small amount of interest on the money we deposit with the bank. . Banks are responsible for screening borrowers, maintaining records, and collecting funds.
Web3 and blockchain-based lending have the potential to challenge this traditional model and put consumers in the driver’s seat. With Web3, depositors no longer have to deposit their money with a bank and have the bank lend it to them. Instead, you can use smart contracts to deposit funds into blockchain-based wallets. A smart contract then acts like an escrow account, holding the money and disbursing funds to the borrower if certain conditions are met (such as providing collateral). All terms of the loan (such as interest rates) are visible to all participants within the smart contract. The smart contract also manages loan repayments, with interest being paid back to the original depositor.
This is already happening. According to McKinsey, more than $200 billion in loans were made. Paid by Web3 lending platform And it’s all done without banks facilitating the transactions. This is basically his Web3 version of the peer-to-peer lending and crowdfunding platform that came out a few years ago.
But just because blockchain lending is part of the DeFi movement doesn’t mean banks shouldn’t consider using blockchain themselves to improve their lending processes. In other words, while Web3 does pose a threat to the financial sector, it also presents incredible opportunities.