What is Web 3.0 and How Does it Impact Financial Services?

January 6, 2022

The financial services world we know and understand is about to change.

If we were to offer a current state of the financial services world it would be to classify financial services as firstly, highly regulated, secondly, with relatively clearly defined roles and responsibilities and finally, harbouring a good degree of consumer protection.

Now let’s be clear, when we say that the current financial world is about to change we don’t mean that the current version will go away as a result of the changes we’re about to describe. Instead, the new world and the traditional world will sit alongside each other.

However, over time the size, both in terms of the number of services offered and the market capitalisation of those services, will increase dramatically.

What is this “new world”?

It helps to be careful how we define this new world as it’s packed full of terminology brimming with stigma and preconception.

In this article we’re going to define this new world under the banner “Web 3.0”. You may have heard that term before. If not, let us explain by diving deep into the new financial world that awaits.

People have hypothesised that Web 3.0 is a place of metaverses. Others feel that it simply represents a moment in time when our digital lives are worth more than our physical equivalents. And whilst we don’t disagree with the latter, importantly it’s also a place where users have control and ownership of the systems and programs and utilities hosted there.

What came before Web 3.0?

Web 1 (circa 1990 to 2005) was an open protocol (HTTP) that sat on top of the internet. No one owned or controlled it and any applications being built (for example early Google) were able to utilise that open protocol to create products without an owner coming along and demanding a % of revenue. It was a place that existed before corporate entities started to take over. Despite this, it wasn’t all positive. Why? Because it was read-only. As a user, you didn’t really have the ability to create content. Rather you browsed static pages of information, which were occasionally updated by their owner or author.

Web 2 (2005 to present) was a period where a lot of firms built closed protocols on top of the internet. Social network sites allowed users to create spaces for themselves – for instance Twitter which allowed you to create a profile on its site. Once you were done you could log in, see your friends and interact with them - without having to create a separate domain name for each user. By definition the internet became ‘read-write’.

Now to Web 3.0

The key improvement that Web 3 offers against Web 2 is ownership. In Web 2 your data is owned by the company whose application you use. Your rewards are limited to the application you’ve earned them on. Your user base is exclusive to the social network you’ve created it on.  So ingrained is this thinking that by default we assume that a computer program is an application run by a third party who controls the code, owns the data and the platform and the economic benefits. Meanwhile the user just gets some likes or retweets or maybe some small royalties (for example from sites like Spotify).

In Web 3 however, you own your data, your rewards, and your connections. You also get to own the application on which these things operate because to take part in the platform you are required to stake something – whether it be time, money, or processing power. In short, the ‘read-write’ of Web 2 becomes ‘read-write-own’.

Suddenly, we’re seeing a world where hundreds and thousands of people who use a particular application get to own it and have a say in how it runs by getting to vote on key operational changes. In effect, users control the future of the application.

The application can also be autonomous – i.e. just a series of smart contracts that execute their function based on pre-programmed information. Another name for that kind of application is a Decentralised Autonomous Organisation (or DAO).

Web 3.0 is built on tokens. They could be purely utility tokens (i.e. tokens that aren’t visible except in a balance on a wallet and which have one particular purpose such as allowing the user access to an application or giving them voting power) or they could be NFTs (which have unique identifiability and, at least in their current incarnation, are heavily associated with visual representation such as digital art).

What would an example of this look like?

Let’s say you’re a content creator who wants to collaborate with other creators on Friends With Benefits. First, assuming you don’t have any already, you convert your GBP into Ethereum (or ‘ETH’), the cryptocurrency on which Friends With Benefits is built. You would then swap your ETH for $FWB tokens, which are the native tokens on the Friends With Benefits application. Once that’s done, you’re free to join the FWB Discord channel to interact with other users, attend community calls, community events and be involved in collaborative programs. Doing all of this allows you to earn more $FWB tokens.

You then hear about a cool new project operated by Krause House, which is a members platform operating a DAO, whose ultimate goal is to buy and run an NBA basketball team. You want to get involved, so you take some of the $FWB tokens you earned at Friends With Benefits and swap them for $KRAUSE tokens. These tokens will allow you to join the Krause House community and ultimately (if the project is successful) own a % of an NBA team relative to your holding of total $KRAUSE tokens. Nice.

As KRAUSE operates the team and generates revenue (from ticket revenue, prize money, sponsorship deals etc) the profit is distributed to the $KRAUSE holders. Should you wish, you can take your earnings (or even your original stake) and find other interesting projects to get involved in.

Alternatively, you can take those earnings in $FWB and $KRAUSE and convert them back to ETH or GBP at an exchange and realise the gain, or loss – after all tokens are subject to market movements as much as the underlying assets..

But what does Web 3.0 have to do with financial services?

Let’s pause a second and reflect.

You have a token on a Web 3 application which you’ve bought from an exchange by converting GBP. That token has been staked in the application and as a result of that staking you’ve earned a reward paid out in tokens of the same denomination. From here you’re free to take your original staked tokens and reward tokens and convert them back to GBP.

The exchanging of fiat money (e.g. GBP, EUR, USD) to crypto assets is already a financial services use case all in itself – and one which is primarily governed by anti-money laundering regulation.

In the example above we talked about swapping between tokens (from $FWB to $KRAUSE). In order for that to happen there has to be liquidity; much like on any stock market or exchange. The way that exchanges create liquidity is by having token holders stake some of their tokens in each currency into a liquidity pool in return for rewards (or yield – which is exactly the same as in the traditional financial services market). There are already hundreds of such exchanges, but one of the more popular is Sushiswap. A brief scan of that exchange will show you examples of liquidity exchanges offering seemingly incredible “APR” or yield.  At the time of writing, if you offer liquidity between the trading pair of ATTR and WETH tokens you can aim for an annualised rate of return of 399%! Whether you actually realise that kind of gain is subject to a number of risk factors and this is not financial advice so don’t cash in your mortgage just yet!

Now, for the wildest part of all - the whole thing is mostly operating unregulated (save for any people who issue security tokens or e-money and anyone operating an exchange that facilitates transactions from fiat currency to crypto).

This isn’t because the regulations are old or the regulator hasn’t thought about it. It’s because, as far as the UK is concerned, the FCA has published documentation that expressly excludes “utility tokens” from being a regulated category of investment. Here it's worth noting, security tokens (i.e. tokens which amount to a "Specified Investment" under the Regulated Activities Order (RAO), excluding e-money, or tokens which provide rights such as ownership, repayment of a specific sum of money, or entitlement to a share in future profits) are regulated in the UK.

And that is why financial services are going to change. You have a traditional securities and investments market that’s heavily regulated and backed by insurance. But now you’ve also got a parallel infrastructure where the tokens have real-world value and which create real-world income, all the while giving users the power to own and control the applications they love using.

What’s even more incredible is that the financial rewards are merely a by-product of the primary purpose of the application. Once this new world is fully established, users won’t go to applications because they want to make money from them or because they offer the highest yield versus tokens staked. They will use applications they love and as a by-product will have some skin in the game.

What happens to intellectual property in Web 3.0?

Let’s think a bit more about the concept of ownership.

If users own the application and have skin in the game they will also become evangelists for their preferred applications which, let’s face it, is the best kind of marketing you could wish for.

But it’s also important to know that most of these applications don’t “reserve” their rights to any intellectual property they generate. The technical term is that they operate under a “CC0 licence”. That means that the owners of any rights created in the application waive those rights, and provide permission for others to  exploit the IP of the application.

Users are free to create and sell products based on their favourite applications. In the current world, if you created and sold a Twitter hat or a Meta mug not only would our Intellectual Property have a word or two to say, but you could probably expect a cease and desist letter from the relevant company. Not so in Web 3.0. Instead, IP exploitation is encouraged because it creates value for the original application. By creating Krause House hats and selling them online you’re generating interest in the product, which generates a larger user base, which generates more interest in $KRAUSE tokens, which increases the value of the $KRAUSE tokens, which benefits the users.

It makes sense that this permission-less intellectual property system couldn’t operate any other way. Web 3.0 applications are built to work alongside each other. Think of it like LEGO blocks. The programs all stack on top of each other. If one application in that stack was trying to protect its intellectual property, then such efficient and adaptable data transportability wouldn’t be possible and the whole stack would fall over.

Equally, there are hundreds or thousands of owners of the $KRAUSE token who will change over time as some people redeem their tokens and others buy them, which mean that there’s no single small group of people for whom the intellectual property needs to be protected.

All of which is to say that the obvious benefits to users across the board means, that adoption of Web 3 will be fast and will happen in the short term.

In fact, it’s already happening.

Are you ready?

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