Get ready for users taking back control of their data on the heels of Distributed Ledger Technology and the emergence of web3 services

What is web3?

Web1 refers to today’s global, interoperable network, built on standards and increasingly with services and platforms we all connect and engage with (web2).

With Distributed Ledger Technology (DLT), and especially the blockchain technology, the idea of a web3 has emerged.

Where web2 has given birth to multinational behemoths, amassing enormous amounts of user data (forcing regulators to react with regulation such as GDPR), web3 seeks to leverage the features of DLT and especially the blockchain and provide services where data security and privacy is assured for financial-, personal- and business data.

What sets web3 apart from web2 is ownership and control of data.

With the blockchain’s fully decentralized ledger, records managed by users themselves without a central authority or intermediary - and combined with blockchains' unique use of tokenized data, we are indeed witnessing the birth of the next IT revolution. A revolution that will undoubtedly and dramatically disrupt many, many areas of our daily lives.

Even as there are many current and emerging examples of web3 services, there are still many outstanding areas to cover. Why, how, and ultimately when individual industries and societies will be affected is an open question and work in progress.

However, undoubtedly some industries and areas are already showing the contours of disruption and potential seismic shifts for their entire value chain.

Impact on the financial sector and banks

Cryptocurrencies, and especially Bitcoin, is probably the most known use of blockchain technology falling under the web3 service umbrella.

But the Bitcoin blockchain is but one of many, many public as well as private, blockchains. The open-source Ethereum platform supporting many different blockchains, has been particularly popular amongst developers. And aside for the platform’s native Ether cryptocurrency, there are thousands of cryptocurrencies on the platform. In total, there are between 6,000 and 13,000 cryptocurrencies (as well as stable coins) on various independent and open DLT and blockchain platforms.

The entire market is hyped these years to say the least, resulting in a market capitalization with a supposed value the equivalent of a mind-boggling 2.2 tUSD (at time of writing).

Being open, the Ethereum platform has also given rise to a myriad of especially financial applications other than cryptocurrencies. Notably the Ethereum blockchain’s use of token standards (ERC-XXX) and its ability to support a variety of so-called smart contracts has nurtured this development. Smart contracts are a small piece of very simple “if this, then that” code which that can trigger a tokenized asset to perform certain actions.

With smart contracts, the applications for managing digital asset have grown into both simple (credit/lending) but also the trading of complex financial products, be it derivatives, flash loans, shorting, etc. All taking place using cryptocurrencies and assets - and outside the realm of the traditional financial industry (and for now, its regulative constraints). Collectively, this is referred to as Decentralized Finance (or DeFi) and is quoted to encompass the equivalent of 160 bUSD in market value (at time of writing).

Also, with smart contracts, Non-Fungible Tokens, or NFTs, have emerged. NFTs are powered by smart contracts which handle the transferability and verification of ownership of anything digitized. In 2020, a digital work of art by the artist Beeple, fetched a price the equivalent of 69.3 mUSD!

The incumbents and regulators are reacting

The application and use of the blockchain has not gone unnoticed by neither the incumbents nor regulators.

The EU is currently advancing the MiCa directive (Markets in Crypto-Assets). ETA end 2022. MiCa covers crypto all assets with “representation of value or rights that may be transferred and stored electronically, using DLT or similar technology"…

Mid-November 2021, the European Parliament announced an agreement with the European Council on a 3-year sandbox pilot program to allow financial markets to tokenize conventional financial instruments such as stocks and bonds using blockchain technology.

And within payments, most central banks around the world are engaged in a digital form of their physical Fiat currencies - known collectively as Central Bank Digital Currencies (CBDCs). And although central banks’ motivating factors vary, the idea and thoughts on design of a CBDC seems heavily inspired by DLT, especially blockchain. Private and public platforms such as R3s, Corda, Stellar, eCurrency, Hyperledger, G+Ds Filia, and SETL are just a few in play for CBDCs. And in a CBDC challenge organized by the Monetary Authority of Singapore (MAS), Citi-backed SETL, even put forth a vision of a CBDC network being able to support more than CBDCs. An idea that could leverage and provide an even stronger argument to regulators and governments to allow for a CBDC network.

Want to know more?

This op-ed is a personal point of view, but I would remiss if I didn’t add that CBDCs is a special focus of mine. If you’d like to know more about CBDCs, I welcome you to read this August 2021 blog post.