When you search the phrase ‘web3’ on google you’re not exactly overwhelmed with good answers.
Unless you’re in consulting, a startup or business technology you’re unlikely to have ever had a reason to talk about web 1.0 or web 2.0. Why should you care this time?
Web3 will enable your customers for the first time to comprehensively opt out of traditional financial services offerings. If you’re early to act though, web3 will also enable you to revolutionise your own company’s value proposition allowing you to compete head-on with these new models.
So what is web3 anyway?
Web 1.0 – Reading a post
Web 2.0 – Replying to the post
Web3 – Deleting your reply or moving the conversation somewhere else
Web3 was coined by Gavin Wood and describes a new economic paradigm that leverages a group of technologies that enable decentralised, permissionless, pseudo-anonymous and trustless transactions, interactions and communications.
Before we dive in and unpack these terms, lets start with the technology that you most likely associate with web3 right now, blockchain. A blockchain is a tamper-proof record of transactions, interactions and communications. It’s the tamper proof quality that offers so much potential for innovation when combined with other technologies.
When a blockchain is completely ‘decentralised‘ it’s publicly available to the whole world to use and every transaction, interaction and communication becomes verifiable by anyone. Bitcoin is the most prominent example of a decentralised blockchain but there are thousands of others and they’re growing exponentially. There are also many private ‘centralised’ blockchains that are being used within the financial services industry that are controlled by individual companies. The Australian Stock Exchange will deploy a private blockchain from 2023 to manage the settlement of all market trading.
My preferred definition for ‘decentralisation’ comes from Andresson Horowitz’s Crypto Glossary because it relates to blockchain technology and gives you a strong sense of the spectrum of possibilities:
Decentralisation is the degree to which control — power, resource allocation, etc. — over a given network is distributed across a large, representative base of independent actors.
You might recall Napster, the ‘peer-to-peer’ music sharing service created by Shawn Fanning in 1999. Napster used a central directory to track the music of each user who was online and allowed another user to search and download the song they wanted. A cool idea at the time to decentralise the distribution of music, but it was also against the law.
This idea was built on through the creation of BitTorrent in 2001 by Bram Cohen that transformed file sharing forever by allowing users to download pieces of a file from thousands of locations at the same time. The magic that made this work was a table that tracked where all of the copies of the files were located to be able to draw from to complete each download. This technology has been built on and is at the heart of the decentralised applications (better know as Dapps) that are being created on web3 today.
You’re probably thinking this is all very interesting but why does this matter for the financial services industry? Data that is now stored centrally will transition to being stored decentrally over the next 5-10 years for every industry and business model. That’s a profound change and will require massive investment in order to achieve it. What does this mean for all of us?
If your email or personal data has ever been hacked, you’ve been the victim of identity theft, or a company you worked for has suffered a ransom attack, or had to shut their systems down for days, then you’re going to be very excited about what web3 technologies has to offer. If you’ve also ever wanted to be able to delete 100% of the personal data you’ve shared with a company, like Facebook, and have the ability to do this whenever you like, you’re also in for good news.
Let’s move on to the next term. Public blockchains (or permissionless blockchains) are available to everyone to participate in without approval, provide full transparency of transactions to all users and all of the code that enables the blockchain to work can be reviewed and tested by anyone. This code is referred to as being ‘open source’. A few examples of popular open source software include the Firefox web browser and WordPress, the software that powers more than 60% of all websites globally. Instead of a single company being responsible for updating and managing the code of a piece of software, the whole ecosystem associated with that software (every user, customer, implementation partner and even professional hackers) can constantly check the software for errors that could be exploited to damage the entire ecosystem.
That’s interesting but how do I protect my identity? A user on a public blockchain transacts using a pseudo-anonymous public key that looks like a really long complicated password instead of a username and password that provides a level of privacy. No one knows who owns each public key but all of the transactions related to a public key are visible to anyone. The rollout of zero-knowledge proof systems will bring complete privacy by hiding the underlying data of transactions. You’ll also be able to provide proof of identity without the need to send your actual identity documents anywhere. That’s very exciting because so many people have been impacted by identity fraud, including myself.
Blockchain networks become trustless by agreeing to enforce a set of rules or agreements using a range of different consensus models that enable both public and private interactions without the need for a trusted third party (or ‘middleman’). Consensus is achieved by providing incentives to individuals and groups in each blockchain network to verify transaction data before each new block is created. These consensus models include being the first to solve a complex cryptographic puzzle (proof-of-work), providing a bond (proof-of-stake), providing storage capacity (proof-of-capacity), paying a fee (proof-of-burn) and many more. By being trustless, blockchains introduce the opportunity for game changing business models in every industry. For example, an insurance contract could be paid out automatically as soon as the data was available to verify the contract. Say goodbye to the insurance claims process!
We hope you’ve found a hook in at least one element of our explanation of web3 to grab your attention and start you on a path to considering how these technologies could be relevant for your customers.
In our next episode we’ll focus on the people and the networks that are bringing the web3 to life. I hope you can join us again.
Make your Move today.