The term Web3 describes the transition from today’s centralized networks to a decentralized network based on a crypto-based value exchange model. It is a rapidly evolving system where blockchain technology forms the basis for financial applications. Looking now at how Crypto has become popular across the world – the traditional financial system is intertwined, as was evident during the collapse of global financial markets. This led people to lose faith in the system and the security of their investments. So when the alternative was suggested in the form of Crypto which was free from the constraints of the old system, people started experimenting with it. And why not? This new system eliminates the need for a third party to get involved in the process of managing your money and promises full transparency.
Fast forward to 2022, the size of the crypto market peaked at $3 trillion. It is expected to grow at a CAGR of 12.8% from 2021 to 2030. Migration from centralized transaction, investment and asset management systems to a decentralized form promises economic growth in developing countries and has the potential to empower communities without access. traditional banking systems (TradFi). This, coupled with error-free transactions, no exorbitant remittance fees, and ease of exchange as a token, makes it a no-brainer for communities that haven’t benefited from TradFi. The Crypto-led Web3 economy strives to create dynamic models that encourage a decentralized peer to peer system. Similar to game theory, community members are independent decision makers and are incentivized to contribute and secure the network.
According to Chris Larsen and Jed McCaleb’s Internet Theory of Value, asset transfer is already happening around the world. However, money leaving source A and traveling to source B loses some of its value in transit. Why? Transaction fees, unreliable networks, slow asset movement and margin of error. Crypto solves this problem. Due to the intrinsic nature of the blockchain, the security of the network is stabilized and the movement of assets is instantaneous and traceable. Thus, value is easily transferred from one source to another without losing its inherent property. It can be money, a work of art, a new music album, a white paper of new business models, or anything the community considers valuable. This gives rise to the economy of creators.
Traditional financial systems have always been slow, capricious, unreliable and expensive. This opens the door to diverse communities that have access to digital devices but remain underserved to this day. According to the World Bank Group, 31% of the adult population was unbanked in 2017. A 2016 McKinsey report predicted that financial services delivered via mobile phones, the internet or cards – were estimated to boost the annual GDP of all emerging countries. savings of $3.7 trillion. A 2020 PwC analysis shows Blockchain technology has the potential to increase global gross domestic product (GDP) by $1.76 trillion over the next decade. If you add the two predictions together, you realize that Crypto is the common factor between the two and can close the access gaps that have prevailed for ages. The “decentralized system” that the Crypto community is ushering in, also promises to incentivize end users and beneficiaries rather than a handful of intermediaries.
Billions of individuals today have access to wealth through Crypto and continue to earn money through the incentive mechanism supported by Web3. Mothers are investing in Crypto for intergenerational wealth creation for their children. Family Crypto wallets are emerging, which provides kids with resources for Crypto education and allows families to invest in digital assets as an investment. NFTs have the potential to transform the lives of artists by allowing them to retain a much larger share of their income. Another shining example is the Play to Earn gaming industry, which was worth over $20 billion in revenue in 2020. Today, almost 50% of crypto transactions are related to games. Playing to win games allows players to earn and own digital assets that can also be used outside of the game. Countries like the Philippines and Venezuela have seen an increase in player numbers since the start of P2E games. The incentives they earn through games are more valuable than their local currency or the money they are able to earn otherwise. Old ownership models are being disrupted, with the power given to the community which also acts as the decision maker in the age of Web3.
Since regulators around the world are hesitant about mainstreaming crypto, it’s important to highlight a few points. For Crypto to be adopted by the masses, the design of the core blockchain system must be robust and infinitely scalable. This will be the first step in ensuring that billions of people transacting at the same time do not compromise the system in terms of performance. In the absence of intermediaries such as banks, a mechanism for stabilizing market fluctuations is needed. In the event that a stablecoin fails removing all investments, a network interoperability option should be introduced where assets can be transferred to a separate network. This will protect the interests of investors and also build trust in the system. Crypto as an investment option needs to be mainstreamed by banks around the world. We’ve seen every major Wall Street bank embrace Crypto after a period of skepticism. It is time for private banks around the world to follow suit and recognize the potential of Crypto as an asset class.
From a regulatory perspective, we need more policies that will get investors to see the value in Crypto rather than deter them. Most countries leading the Crypto revolution have investor-friendly policies in place. Germany, for example, made gains from Crypto assets tax-free after 1 year. In Rio De Janeiro, property taxes can be paid with Crypto. The United Arab Emirates and Singapore are also becoming major crypto hubs due to looser regulations. Likewise, a framework needs to be established around risk management as it relates to crypto. The introduction of CBDCs, how they will be implemented in the financial system and its coexistence with stablecoins needs more clarity, in addition to how they will empower investors and protect their identity. We have already established several use cases of decentralized finance benefiting the global economy. All we need is clarity on how it can be adopted in a systematic way, with risk aversion mechanisms and a roadmap for it to become an engine of economic growth.
Author Nischal Shetty is the co-founder and CEO of WazirX. This is a partnership position.
(Edited by : Priyanka Deshpande)