Web3 DeFi: What Is It and How Does It Work?

As a result of the increasing adoption of DeFi, DAOs, and NFTs, a new internet generation known as Web3 has formed. Currently, utilizing the internet entails accessing information in a highly centralized setting managed and monitored by businesses and governments. Web3 promises to change the internet by giving people more control and ownership over it.

Cryptocurrency advocates have already decentralized the financial system by allowing investors to hold and control their own assets. They are not compelled to use middlemen to send money or make payments. Web3 is now attempting to eliminate internet centralization as well. If done correctly, users will be able to access, write, and own material.

Web3: A Summary

Gavin Wood, a co-founder of Ethereum, first articulated the concept of a decentralized internet powered by blockchain technology in 2014, coining the term “Web3.” Decentralized Finance development company (DeFI), a new business focusing on the decentralization of traditional financial instruments, has evolved as a result of bitcoin market advancements in recent years.

DeFi experienced a spike in 2020 as traders progressively turned to decentralized exchanges (DEXs). Using a non-custodial wallet, investors can trade on DEXs. These wallets allow you to manage and transfer cryptocurrency assets on your own. The ability to communicate with dApps is the most significant game changer. As a result, non-custodial wallets allow us to avoid CEXs.

As more users learned about the benefits of asset self-management, they began to use DeFi. Because of the great popularity of NFT, many individuals now believe that other industries, like art, can be decentralized as well.

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The Evolution of the Internet

After Web1 and Web2, Web3 is the natural next step.

The World Wide Web was introduced in 1989 by Geneva scientists at CERN, where Web1 originated. The read-only mode was popular during the Web1 era, which lasted from 1989 until 2004. Why am I using the phrase “read-only”? Users were unable to contact with one another or collaborate on group projects. They could only access websites owned by businesses and governments.

Social networking websites distinguish the Web 2.0 era. Users may find themselves suddenly able to communicate and exchange content on a variety of social networking sites and forums. Social media users could share and create content, but they couldn’t own it, so corporations became extremely strong and monopolized it.

Web3 is the next natural stage in the evolution of the internet. Internet users should own in addition to reading and writing. Ideally, the community should own everything. Users should have a say in the development and ownership of a platform. Furthermore, they should be permitted to make money from their own content without having to pay anyone.

What Exactly Is Web3?

The following key ideas underpin Web3 (or Web 3.0):

  • Decentralization. Users and developers should govern and own platforms, rather than centralized bodies such as corporate businesses.
  • Trustless. Platforms create economic incentives for users to collaborate and trust one another instead of relying on third-party platforms.
  • Permissionless. Everyone, regardless of wealth, status, or skin color, should be able to participate in Web3.
  • A native financial ecosystem for Web3 is required, which replaces legacy financial systems with cryptocurrencies and decentralized technologies.

Each of the aforementioned features is supported by blockchain technology. Developers can build dApps on top of censorship-resistant, trustworthy, and decentralized networks. The primary difference between these dApps and modern internet platforms and applications is that they are decentralized.

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But who is in control of the development and ownership of the dApp? This is handled by a DAO.

What exactly is a DAO?

DAO stands for Decentralized Autonomous Organization. This category consists of dApp users and developers. Each cryptocurrency platform or application has its own community and DAO.

DAOs are distinguished by their decentralized governance. Active participants receive or acquire a token that represents their investment in the firm. Governance tokens also grant voting rights, allowing users to draft and approve governance proposals.

When a governance request is approved, governance portals use smart contracts to carry out certain tasks. For example, a community may opt to invest $100,000 USDT from the project’s treasury in another project. If the idea is approved, programmers will create a smart contract that will allow these monies to be exchanged on a decentralized exchange.

Explain NFTs

In Web3, ownership has a significant impact. Users want to be able to claim ownership of the content they create on a platform. To do so, you’ll need a one-of-a-kind token that can stand in for specific digital items.

Assume you’re playing a blockchain game. You finally get a rare blade after hours and hours of grinding XP. A regular game does not allow you to sell or transfer the sword to another account, whereas a blockchain game does.

The in-game object will be represented by a non-fungible token stored on the project’s private blockchain network. Because cryptocurrencies are fungible, the object cannot be any conventional token. One bitcoin is equivalent to all other bitcoins, and they can be swapped. NFTs are not interchangeable. Each token, like Bitcoin or Ethereum, is unique and cannot be exchanged for another NFT.

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Nobody, not even the team, can accept your NFT. If you no longer want to play the game, you can sell it or gift it to someone else. In addition, you can use the NFT to open a new account. Furthermore, if you are a creator, such as an artist or musician, you can sell your work utilizing the blockchain while avoiding any third-party platforms, fees, or rules.

Electronic Identification

Everyone has a digital record on the internet, whether they use their real identity or a false one. You’ve signed up for a slew of services, forums, and communities. However, because these platforms are not integrated, you must make adjustments to all of your accounts whenever you want to change your account in a single location.

Another issue with centralization is the potential of businesses to change your account, delete material, or ban you. Furthermore, if you insult someone you shouldn’t, you risk having all of your internet actions removed.

Such filtering is unsuitable for Web3. Users can create unified digital identities by combining ENS profiles and blockchain addresses. They can still access and manage the information associated with their individual accounts, and they can publish and share content without fear of restriction.

Is Decentralization the Way to Go?

If Bitcoin decentralized finance, second-generation blockchains powered by smart contracts would decentralize the internet. A Web3 internet must be decentralized, permissionless, trustless, and have its own financial economy.

Web3 is still in its early stages. Decentralizing the internet is an ongoing experiment for both developers and users. Things like centralized infrastructure, poor user experiences, and limited accessibility must still be eliminated. However, given enough time, blockchain developers will transform the internet into a shared resource that the general public owns, operates, and utilizes.