Author: Shreenath Iyer, Chief Marketing Officer, D24 Fintech Group
The rise of Web3 has disrupted many global industries with its decentralization supported by blockchain technology. One such industry is finance. Web3 in fintech plays a crucial role in its development and adoption for many reasons:
- Decentralization
Because Web3 utilizes blockchain technology, it is decentralized, i.e., without any governing entity or central authority. This gives users complete ownership of their digital data, increased privacy, efficiency, and financial inclusivity.
- Technology innovation
Fintech, at its core, is all about making financial services easier, cheaper, and safer through innovative technology. Current financial systems rely heavily on centralized authorities to deliver services, slowing down processes and making them costly. Web3 development for fintech is a game-changer and minimizes these hurdles.
- Transparency
Since Web3 is decentralized and based on DLT (Distributed Ledger Technology), it provides users with complete transparency and control over their digital assets, reducing the risks of fraud and increasing accountability.
- Reducing costs
Web3 crypto integration in fintech helps automate various financial processes that would otherwise be present with traditional financial systems that rely on other central authorities. Web3 helps remove interference from intermediaries so transactions can occur seamlessly between users and entities, reducing costs and increasing efficiency.
- User-owned data
Traditional service providers often retain users’ data, which can be used for various purposes and poses risks of theft and privacy. Web3 helps increase users’ privacy and security by providing full control, enabling them to choose when, where, and with whom to share their data.
Web3 applications in fintech
Web3, primarily driven by blockchain technology, is already disrupting financial services and redefining fintech with real-world applications and solutions. Let’s explore some of these fintech solutions and use cases that Web3 provides in today’s day and age:
- Decentralized finance (DeFi)
DeFi (short for Decentralized Finance) is probably one of the most well-known applications in fintech today. It is a network of blockchain-powered services that function without relying on a central authority such as banks and financial institutions. In DeFi, users can access financial services, like borrowing, trading, lending, etc., without intermediaries, resulting in cheaper and faster transactions, transparency, and improved accessibility to global financial services.
- Digital wallets and Web3 integration
Digital wallets in Web3 are unlike traditional wallets that primarily store users’ details and data like payment information and fiat currency. Web3 digital wallets can hold various digital assets, like cryptocurrencies, NFTs, and other digital tokens, and allow direct participation in the Web3 ecosystem. This grants users access to various decentralized applications (dApps) and services without requiring an account or an intermediary financial institution.
- Smart contracts in fintech
Smart contracts are one of the best tools in fintech that streamline transactions and financial processes. Smart contracts are digital protocols or programs that automatically execute agreements once certain terms and conditions are met on a blockchain. Smart contracts remove the need for intermediary governance and streamline digital transactions, reducing costs and improving efficiency. Once a smart contract is completed, the transaction becomes irreversible and can be viewed by anyone.
- Tokenized assets
Traditionally, access to certain financial assets such as real estate, bonds, art, etc., required individuals to have high liquidity and net worth, along with other requirements. However, Web3 changes this by tokenizing real-world and digital assets using blockchain technology and breaking them down digitally into smaller quantities of investments. This helps users have easier access and trading of high-value assets through tokenized investments.
- Stablecoins
Volatility has always been the kryptonite for cryptocurrencies, limiting their stability and widespread adoption. To get a gist, Bitcoin averaged around $10,000 in 2020 and around $50,000 in 2021! As a result, a more stable and less volatile digital currency was developed, known as stablecoins. Stablecoins are pegged to fiat currencies or commodities, such as the US Dollar or gold, and are less volatile than traditional cryptocurrencies. Stablecoins are important alternatives to fiat currencies and, since they are decentralized, facilitate peer-to-peer transactions without value volatility, intermediaries, and additional fees.
Impact of Web3 on finance
Despite still being in its initial stage, Web3 has had a profound impact on fintech, particularly in financial transactions and digital banking. From improving international transactions to providing secure and efficient solutions, Web3 is redefining the future of fintech.
- Traditional and international transactions
In traditional transactions, particularly cross-border payments, users face high fees and delays due to intermediaries such as banks and currency exchanges. Since Web3 is based on blockchain and is decentralized, it removes the middlemen from transactions, resulting in lower costs and fast transactions.
- Web3 for digital banking
Due to blockchain technologies, transactions processed in Web3 are transparent, secure, and automated. This reduces the risk of fraud and increases transaction speed and security, essential components of digital banking. Since no intermediaries are involved in verifying transactions, and smart contracts automate processes, Web3 makes digital banking faster, more efficient, and more secure.
- Financial inclusivity
One crucial aspect of Web3 integration in fintech is promoting financial inclusivity. With traditional banking methods, certain individuals can sometimes be excluded from banking services due to financial limitations or access restrictions. With Web3 and DeFi applications, these individuals bypass banking and credit requirements and get access to financial services without location or status limitations.
- Diversified portfolios
The use of Web3 in fintech applications also paves the way for new forms of digital assets to be made available beyond traditional currencies, such as cryptocurrencies, NFTs, and digitally tokenized real-world assets. This gives users exposure to various options to diversify their portfolios
The future of fintech with Web3
Web3 seems promising in the future of fintech. Institutions all over the world are constantly exploring and implementing Web3 technologies into their systems and infrastructures to streamline financial processes and modernize legacy systems. Nevertheless, Web3’s venture in fintech is still in its early stages, and certain obstacles need to be addressed alongside exploration and research before Web3 implementation becomes widespread.
- To begin with, Web3 must tackle regulatory hurdles, specifically Anti-Money Laundering (AML) and Know-Your-Customer (KYC) requirements. Since Web3 promotes decentralization and anonymity, there are security concerns related to illegal activities.
- Blockchain developers need to address the blockchain trilemma and come up with innovations that deliver secure, scalable, and decentralized results.
- Finally, for Web3 to become popular in fintech, users need to have a basic knowledge of blockchain technologies and a different approach in comparison to traditional methods of financing. By providing fundamentals of Web3 technologies alongside user-friendly and easy-to-understand platforms, fintech firms and institutions can help build the trust and confidence of users in Web3.
Evolution of fintech with Web3
Web3 is more than a technology discovery; it is an evolution in fintech, transforming the world of finance. When it comes to fintech, Web3 brings decentralization, transparency, security, efficiency, and much more to enhance and empower users and their experience. Not only this, but Web3 also increases financial inclusivity so users can access financial services without having a bank account.
However, reaching the stage where Web3 is widely accepted will take further exploration and development, including overcoming regulatory and technical hurdles.