The term Web3 describes the transition of today’s centralised networks to a decentralised network based on a Crypto based value exchange model. It’s a rapidly evolving system where blockchain technology forms the foundation of financial applications. Now looking at how Crypto became popular across the world – the traditional financial system is intertwined as was apparent during the collapse of the global financial markets. This led people to lose faith in the system and the safety of their investments. So when the alternative was suggested in the form of Crypto which was free of the constraints of the old system, people started experimenting in it. And why not? This new system eliminates the need for a third party to get involved in the process of your money management and promises complete transparency.
Fast forward to 2022, the Crypto market size reached a peak of USD 3 trillion. It is expected to grow at a CAGR of 12.8 percent from 2021 to 2030. The migration of the centralized systems of transaction, investment and asset management to a decentralized form promises the economic growth of developing countries and has the potential to empower communities with no access to traditional banking systems (TradFi). This, coupled with errorless transactions, no exorbitant charges for remittances and ease of exchange as a token makes it a no-brainer for communities who have not benefited from TradFi. The Crypto led Web3 economy strives to create vibrant models which encourages a decentralised peer to peer system. Similar to Game Theory, community members are independent decision makers and get incentivised for contributing to and securing the network.
According to Chris Larsen and Jed McCaleb’s theory of Internet of Value, the transfer of assets is something that is already taking place in the world. However, the money leaving from source A and traveling to source B, loses some of its value in transit. Why? Transaction fees, unreliable networks, slow movement of assets and a margin of error. Crypto solves this problem. Due to blockchain’s intrinsic character, the security of the network is stabilized and movement of assets is instantaneous and traceable. Thus value is transferred from one source to another with ease without losing its inherent property. This could be money, an artwork, a new music album, whitepaper of new business models or anything that the community thinks of as valuable. This is giving rise to the creator economy.
Traditional financial systems have been historically slow, capricious, unreliable and expensive. This opens the door wide to various communities who have access to digital devices but remain underserved till date. According to the World Bank Group, 31 percent of the adult population were unbanked as of 2017. A 2016 report by McKinsey had predicted that financial services delivered via mobile phones, the internet or cards – has been estimated to boost the annual GDP of all emerging economies by USD 3.7 trillion. An analysis by PwC in 2020 shows Blockchain technology has the potential to boost global gross domestic product (GDP) by USD 1.76 trillion over the next decade. If you add the two predictions together, you realize that Crypto is the common factor in between and can bridge the access gaps that have been prevalent 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 middlemen.
Billions of individuals today have access to wealth due to Crypto and continue to make money through the incentive mechanism that Web3 supports. Mothers are investing in Crypto for intergenerational wealth creation for their children. Family Crypto wallets are emerging which provides children resources to Crypto education and lets families invest in digital assets as an investment. NFTs have the potential to transform the lives of artists by enabling them to retain a much bigger share of their earnings. The Play to Earn gaming industry which was worth over USD 20 billion in revenue for 2020 is another stellar example. Nearly 50 percent of crypto transactions today are related to gaming. Play to earn games allow players to earn and own digital assets which can be used outside of the game as well. Countries like the Philippines and Venezuela have seen an uptick in gamers since the onset of P2E gaming. The incentives they earn through games is more in value than their local currency or the money they are able to make otherwise. The old ownership models are being disrupted with power being given to the community who also act as decision-makers in the Web3 era.
Given how regulators globally are in two minds over Crypto becoming mainstream, it is important to make a few points. In order for Crypto to be adopted by masses, the design of the core blockchain system must be robust and infinitely scalable. This will be the first step towards ensuring that billions of people transacting at once does not lead to the system being compromised in terms of performance. In the absence of intermediaries such as banks, there needs to be a mechanism for market fluctuations to be stabilised. In the event that a stablecoin crashes taking down all investments, a network interoperability option must be brought in where assets can be transferred to a separate network. This will protect investor interest and also boost confidence in the system. Crypto as an investment option needs to be integrated by banks globally. We have seen all major Wall Street banks embrace Crypto after a period of skepticism. It’s time for private banks across the world to follow suit and recognize Crypto’s potential as an asset class.
From a regulatory standpoint, we need more policies that will lead investors to see value in Crypto rather than deterring them. Most countries leading the Crypto revolution have introduced investor-friendly policies. Germany for instance made the gains from Crypto assets tax-free after 1 year. In Rio De Janeiro, real estate taxes can be paid with Crypto. UAE and Singapore too are turning into major crypto hubs due to more relaxed regulations. Similarly, a framework needs to be established around risk management when it comes to Crypto. The introduction of CBDCs, how they will be implemented in the financial system, and its co-existence with stablecoins needs more clarity, besides how it will provide autonomy to investors and protect their identity. We have already established several use cases of Decentralised Finance benefiting the economy globally. All we need is clarity on how it can be adopted in a systematic manner, with mechanisms of risk aversion and a roadmap for it to become an economic growth booster.
The author Nischal Shetty is the Co-founder and CEO of WazirX. This is a partnered post.
(Edited by : Priyanka Deshpande)
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