The Role of Web3 in Financial Services

Web3 is an often misunderstood term. It’s sometimes coupled together with metaverse, perhaps some even consider them one in the same. Then there’s these lofty ideas of a futuristic digitalized world that seems very distant from today’s reality. Let’s put all of those ideas aside for a minute, and talk about what Web3 enables for financial services today, and in the near term.

Web3 is a fully digital experience, where both the frontend user experience and the backend operations are all digital.

Today, as consumers we all accustomed to “completing” tasks online, or at least that’s how it feels. In reality, there are complex back-office processes that add friction that often require intermediaries and manual interventions. These processes delay the “completion” of the task, while also amounting to big operating costs for financial firms. For example, you start a mortgage process online, and friction ladened processes result in the mortgage requiring 30-60 days for approval and funding.

What if the backend was like the frontend experience, and you could receive approval and funds for that mortgage application within minutes, if not seconds. This is particularly possible for any product or service that can be completely digitized. Most of the financial industry can be completely digital.

There’s clearly something coming as recent research conducted bybain.com found that private investments in Web3 technology have now surpassed $80 billion, with another $48 billion sent directly to financial-market infrastructure.

As Web3 would allude to, there have been three generations of the world wide web - Web1, Web2, and we’re entering Web3.

Web1 was the first basic version of the world wide web. This version was known as the “read only” version. A limited number of individuals created websites using HTML, tables and frames, hyperlinks and anchors to connect information, and hosted GIF buttons and images. Email was introduced in this phase, using HTML forms. This was a rudimentary form of the internet we know today. In financial services, Web1 websites were basic informational sites.

Today, our experiences are largely Web2, the social web, which is dominated by user generated content and more dynamic experiences. The connectivity of these experiences also bled beyond our desktop computers to mobile devices and other household internet-enabled devices. This phase has seen the introduction of social media platforms and improved user experiences - where the front-end of the experience is completely digital. Web2 leverages centralized data, where each company you interact with, whether its a financial institution or social media platform, centrally maintains and individually protects information about you and your service. With Web2, financial services transitioned many call center and in person services online - such as instructing your brokerage to make a trade, instructing your bank to wire money, or communicating to an insurance carrier or lender interest to open an account.

The third generation, Web3, is introducing a fully digital front-end and back-end experience, and deservingly so, Web3 is also referred to as the “read, write, and execute.” A key aspect of Web3 is that the frontend experience, the user interface, plugs into decentralized programmable blockchain technology and leverages digitally native assets, such as tokens, digital currency, and NFTs.

If you question the likelihood of individuals adopting digital currency and digital wallets, you may want to think again, there are approximately 300 million cryptocurrency owners globally, over 34 million in the U.S. as of April 2022.

To understand how Web3 works, we have to dive into its tech stack, which consists of four layers:

Layer 1: Programmable blockchains

Without them, there’s no Web3 development nor dApps (decentralized applications). This layer is responsible for distribution and interaction. There are many reputable available options depending on your sector of business. For financial services, Provenance is the leading open-source decentralized blockchain that enables real-world financial use cases.

Layer 2: Utilities

This layer of the Web3 stack comprises multi-signature, oracle, wallet, digital assets, smart contracts, digital identity, and distributed file storage.

Layer 3: Services

This layer contains tools to create and manage dApps. This layer usually includes data feeds, off-chain computing, governance, state channels, and side chains. For financial services, Provenance Blockchain has created many of the specialized tools required for regulated firms and the many specific financial assets and service lifecycles.

Layer 4: Applications

This layer includes the dApp, its browser, application hosting, and user interfaces. These are the websites and applications you use as a consumer to perform actions.

The Web3 tech stack comprises technologies and tools that are completely distinct from the Web2 stack. Web3 replaces databases and centralized technologies with open, decentralized technologies and provides an intrinsic transition from a client-server attribute to a decentralized Web.

This is the financial industry's 1998 moment. Earlier generations of the internet displaced incumbents. The media industry as an example, day-old print newspapers were replaced by up-to-the-minute digital media and Twitter, and go-to-the-store and find the video you wanted out-of-stock Blockbuster was replaced by on-demand Netflix. That didn’t happen overnight, though neither does the effort to transition the infrastructure and business model. Like these industries, there are new blockchain-enabled revenue streams being created, and there’s an early mover advantage to be had.

Here’s a brief sliver of what Web3 looks like across various financial sectors:

Capital Markets

Imagine using your digital wallet to buy 10-shares of company’s equity, and in a couple of clicks, the shares (now tokens) are in your digital wallet, and the necessary amount of digital currency is withdrawn from your wallet and deposited into the asset owner's digital wallet. In the background, the sale and the ownership of the tokens and digital currency are immutably recorded on the blockchain. All of that happening in a matter of seconds. For regulation CF, there’s a solution today already doing this.

Lending

There's a significant amount of back-office due diligence today, what if that information was all digitized, and the processing could happen within minutes, if not seconds. This is actually already happening today, made possible by Figure who are white-labeling the technology to help lending companies be earlier movers.

Insurance

Imagine if your premiums could be reduced and your claims paid out quicker. Today, roughly one third of premiums are attributed to frictional costs, nearly two-thirds are returned to clients as payouts on claims, and the small remaining balance is allocated to distributions and operational costs. Blockchain is expected to halve frictional costs. With digital currency, claims payout could happen in minutes, opposed to weeks. Major insurance careers such as Alliance are already running pilot programs, and there are Web3 applications already providing decentralized insurance products.

Blockchain technology is the foundation of enabling Web3 solutions. Provenance Blockchain is the leading public blockchain technology for financial services, supporting real-world use cases. Provenance Blockchain is purpose-built for financial services and brings an experienced team of industry veterans and blockchain technologists to help financial brands become an early mover.