The financial sector has always been a pioneer in adopting new technologies such as Web3. The daily amount of transactions executed on so-called decentralized finance exchanges has surpassed $10 billion. A McKinsey report stated that the biggest Web3 lending platforms disbursed more than $200 billion in loans in 2021. According to research by Bain, private investment in web3 technology has surpassed $80 billion, of which $48 billion was allocated specifically to financial market infrastructure.
The decentralization of business models is Web3’s primary unique characteristic. It upends the core tenet of web 2.0 centralization—that is, the assumption that user data should be viewed as a commodity that can be tracked, compiled, and sold—and returns authority to the user. The idea is for control to become widely distributed via “permissionless” decentralized blockchains and smart contracts, instead of being centralized in big platforms and aggregators.
The possibilities for Web 3.0 seem practically endless when paired with fintech. As web3-based banking gains traction, the bank’s functions as a central ledger and credit decision engine are becoming less important.
Web3 is based on three fundamentals: blockchain, smart contracts, and digital assets. The primary function of Blockchain is to record and store everything. Smart contracts automate the entire process by executing tasks independently. Digital assets represent anything of value, which then interact with smart contracts to become programmable. Smart contracts are being used by remittances, asset swaps, trade finance, and insurance to increase automation efficiency.
How is Web3 improving FinTech?
Here are 7 ways how Web 3 is improving FinTech
Decentralized Finance (DeFi)
Decentralized Finance, or DeFi for short, is the original application of Web3 in finance that revolutionized the way we handle money. To put it briefly, DeFi emerged as an inventive substitute for conventional financial procedures, such as borrowing and lending, trading, earning interest on deposits, and more.
Decentralized Exchange (DEXs)
Decentralized exchanges resemble cryptocurrency trading platforms offered by well-known sites like Binance and Coinbase, but they tend to be more decentralized. Decentralized exchanges are essential for smooth peer-to-peer trade. The enabling of direct trading between consumers embodies the principles of decentralization. DEXs improve security and lower counterparty risk by removing the idea of central authority. DEXs ensure transparency by providing an immutable record of every deal or transaction using blockchain technology.
Improved operations
All digital financial services, including payments, money transfers, loan sanctioning, lending, and investing will be processed faster with the introduction of Web3. Fintech companies can therefore provide a better customer experience by automating mundane operations.
Heightened Security
Using Web3, employing biometrics for improved security is possible. Financial organizations can therefore set higher levels of protection for all kinds of transactions.
Improved cost efficiency
Web3 promotes the best use of assets by encouraging data to be stored in decentralized locations. It optimizes data storage and fetching costs by increasing the accessibility of data nodes.
Tokenization
Tokens are already being used by investment banks to stand in for bonds, customized securities, and various other assets. The main advantages of tokenization are that you can issue bonds and securities in response to consumer’s specific requests for smooth trading and the asset can start auto trading thanks to smart contracts. This enables banks to develop an algorithm that maximizes profits while minimizing risks.
Interoperability
The use of open standards and protocols is encouraged by Web3. This standardizes and facilitates peer-to-peer trading on decentralized exchanges (DEXs). It also synchronizes the operation of a great deal of financial apps. The use of Web3 in a finance app creates a DeFi environment that permits interoperability, allowing you to contribute to a reduction in the time, effort, and money spent by app users.
