Web3 and DeFi: the perfect example of technology changing paradigm
Web3 and DeFi are often described as having the potential to be disruptive and decentralized, but the reality is complicated. In the case of Metaverse, users often wonder how to draw the line between Web3 and non-Web3 projects? Why are some projects labelled Web3, developed by tech giants that ruled web2 for years, that seem to lack content to change their centralized governance model and data storage strategy? The distinctions between Web3, DeFi, and ordinary online businesses are sometimes blurred by media hype.
Definition of Web3
Web3 generally refers to a new generation of Internet powered by blockchain that provides users with more freedom of interaction. In a narrow sense, Web3 refers to the new vision of the Internet: decentralized, blockchain-powered, and capable of peer-to-peer transactions; in a broad sense, any project that aims to address the excessive constraints and risks that Web 2 imposes on its users can be labeled by web 3.
One of the most common criticisms of WEB2 is that it is effectively monopolized and controlled by tech giants like Google, Meta, and Amazon. These tech giants have absolute power to dictate to users the rules of their interactions, what they are allowed to post, what they have to pay, the data they provide, and more. Web 2 users have no choice but to accept the rules of the tech giants to interact on the web. At the same time, Web2 monopolies have complete discretion over user data, and they can sell user data, disclose it to third parties, or use it to manipulate consumer perceptions for advertising purposes at will.
The mission of Web3 is to address this power imbalance and break users’ reliance on tech giants. In the new environment provided by Web3, users can interact peer-to-peer without following third-party rules and have full control over their own data and identities.
Gavin Wood, one of the pioneers and leaders of Web3, described this new form of user interaction as “Web3 or the post-Snowden network,” a reimagining of everything that already uses the Web, but the interaction between parties Use a completely different model. Users can publish information they wish to make public, and information that is assumed to have been agreed upon can be placed in a consensus ledger. Information that the user considers private will be kept confidential and will not be disclosed.
So the Web3 means a new browser, a different user experience, a different way of communicating without having to adopt third-party terms and rules that are bad for users, or algorithms that risk being blocked by the platform. Users can set rules, drive interactions, and earn rewards without anyone’s permission or consent.
The technology behind Web3
There are four key technology foundations that make Web3 a reality:
1. Decentralized Blockchain Protocol
The public, interconnected and interoperable decentralized blockchain protocol is the foundation of Web3. The main work of the protocol is to ensure the trusted transactions between users, the privacy in the interaction, and the distributed and anti-censorship data storage.
2. Smart contracts
Smart contracts are the key enablers of blockchain protocols, which are automatically executed when certain conditions are met, and tamper-proof features ensure that any risk of interference or modification of their terms is excluded. In Web3, smart contracts also drive important elements of its ecosystem, such as DAOS and distributed data storage.
3. Decentralized Autonomous organizations
Decentralized Autonomous organizations (Daos) are community-led online entities with no central authority. Unlike traditional companies, Dao eliminates hierarchies in corporate governance and provides decentralized governance. Voting, decision-making, dividend distribution, execution of agreed decisions, and other business-related matters are governed by the rules laid down in the blockchain-based smart contracts, which are executed automatically. This eliminates any risk of human error or vote rigging. Neither project parties nor shareholders have the opportunity to manipulate the work of the entity for their benefit.
4. Distributed data storage
Distributed data storage ensures that the user’s information is stored on multiple independent network nodes, rather than on a server that is not under the user’s control. This distributed approach will provide high-quality data protection and enable users to manage their data, encrypt and encrypt the data, authorize access to the data, and back up storage.
Encrypted payment network
Cryptocurrencies pioneered the principles of decentralization and anonymity that are at the heart of Web3. In contrast to legal tender payments, cryptocurrencies offer an alternative financial paradigm — peer to peer trust and anonymous transactions that do not involve intermediaries — and bring with them the complexities and constraints of national borders and regulation. Web3 means a better framework for the sharing economy.
The concept of the sharing economy predates Web3 and represents an economic model Defined as the activity of gaining, providing, or sharing access to goods and services on a point to point basis, often facilitated by online community-based platforms. This sounds very similar to the services offered by Web3.
Uber and Airbnb are the most prominent examples of Web2 sharing economy projects, but they operate in ways that are far from sharing economy concepts. These projects act as intermediaries in so-called peer-to-peer transactions, leaving participants no choice but to comply with the terms and conditions offered. Moreover, the distribution of revenues generated by the various players on such platforms is often not in their best interests, which is clearly not what the “sharing economy” was intended to be.
In contrast, the Web3 sharing economy provides a real peer-to-peer environment in which users can Define their own business rules and interact directly with each other without having to share revenue with any third party. Currently, the most developed area of the Web3 sharing economy is decentralized finance (DeFi) .
DeFi is part of the Web 3 economy
DeFi is a blockchain-based alternative financial system designed to replace the traditional financial system. DeFi’s goal is to provide an open, non-licensing and tamper-resistant financial infrastructure that allows users to more easily access payment, lending, insurance, lending, trading and other financial services, at the same time, avoid the legal problems and limitations arising from national boundaries. As part of the Web3 economy, DeFi adheres to the same ideology of untrusted peer to peer transactions supported by blockchain technology without intermediaries, users have complete control over their money and personal data.
Through the use of open source code and the powerful availability of developer tools in DeFi, participants can experiment with more financial tools, upgrade old products and create new ones without having to seek regulatory approval.
The main differences between DeFi and the traditional financial system are the following:
1. Source of trust. In DeFi, the public chain acts as a source of trust, managing all operations in the financial sector. In traditional finance, by contrast, trust comes from the regulatory and licensing activities of authorized state institutions such as the Securities and Exchange Commission and central banks.
2. Threshold of entry. DeFi has no barriers to entry, and participants only need to understand how DeFi works and how it works, without official certification or KYC.
3. Freedom of financial engineering. In DeFi, anyone with programming skills can participate in building financial services and tools on top of the public chain, and newly created products do not require regulatory approval or permission.
4. Speed and cost of transaction. One of DeFi’s most important goals is to achieve seamless cross-border transactions at low cost. To achieve this, the DeFi project adopts a two-tier concept. This means that the blockchain protocol (L1) is paired with an L2 extension solution called a “state channel” that allows users to trade directly with each other under the chain.
In short, DeFi aims to revolutionize the financial industry by using a set of advanced technologies that offer additional functions in addition to reducing operational risk.
How do Web3 and DeFi interact?
As a technology in the financial field, Web3 has the following functions: ensuring seamless and unlicensed cross-border transactions in a low-cost and non-bureaucratic manner; transparency of user interaction; and tamper-proof records of transaction facts; Complete user control over privacy and financial data; a trust-free governance model based on intelligent contracts, eliminating any risk of third-party manipulation and interference, and eliminating the need for legal paperwork and compliance with regulatory requirements.
As an economic framework, Web3 has the following functions: no barriers to entry, democratizing access to finance and allowing everyone to participate; allowing people to creatively design multiple revenue streams; and eliminating dependence on banks, the globalization of finance has changed the overall macroeconomic paradigm.
The combination of Web3, which sets the technical and Economic Framework for DeFi, and DeFi, which will evolve as Web3 evolves, perfectly demonstrates how cutting edge technologies can radically change the existing order, and create more possibilities.