3 keys open the era of Web3

Chainalysis’ “State of the Web3 Report” outlines how blockchains will change the internet. Web3 is the path for all businesses to become a crypto business.

Courtesy of Chainalysis, we publish the introduction to the State of Web3 report, published in June 2022.

In the 1990s, many thought the idea that all businesses would one day become Internet companies was crazy. Today we see similar bears on cryptocurrency – or as many in our industry call it, “FUD” which stands for Fear, Uncertainty and Doubt. So, damn FUDders, allow us to make a bold prediction:

“One day, in the near future, all businesses will become crypto businesses, with a ‘connect wallet’ button on their homepages. And Web3 is the way they will get there.

This will happen for several reasons. Above all, more and more people entering the world of cryptocurrencies need a transparent way to use their funds for day-to-day financial activities without converting them into fiat currency. Cryptocurrencies are still niche in many ways, with around 8% of Americans currently owning crypto assets. However, that number is growing every year — not just in the United States, but around the world — and may soon reach a tipping point where adoption reaches mass levels.

New use cases in finance

As more and more people invest a higher percentage of their net worth in cryptocurrencies, they will want to be able to use cryptocurrencies for any transactions they can currently make with fiat currencies, such as buying and sale. B. Loans and Borrowings, Business Assets and Payments. Web3 will allow them to do this faster and easier than today with cryptocurrencies. Let’s take mortgage approval as an example. Today, borrowers must go through a cumbersome mortgage application process that relies heavily on human judgment – ​​judgment that studies show often reflects human bias and unfairly penalizes marginalized communities. In a Web3 world, this process will be faster and fairer. Borrowers would simply connect their wallets and an algorithm could instantly give them a yes or a no based solely on their financial profile and transaction history represented on the blockchain.

However, Web3 will not just streamline existing financial activities. It also opens up new use cases in finance that are currently not possible due to the illiquidity of traditional assets. Imagine a world where you could sell co-ownership of tangible assets like real estate or vehicles. Sellers would have access to capital that is not available to them today, while co-ownership would allow buyers to invest in these assets at a lower cost. Web3 can make this possible.

Web3 and intermediates

Web3 can also cut out the middleman and encourage more direct relationships between vendors and customers. We see this most clearly in the arts and entertainment industries, where artists and creators connect directly with their fans through social media and content hosting platforms like Twitter, YouTube and Substack, rather than rely on mass media platforms like newspapers and broadcasters. Yet these Web2 platforms, and other much more basic ones like payment processors and web hosts, can exercise control over the artist-fan relationship through censorship, traffic throttling, and the like. Web3 can completely eliminate the middleman from the equation and even opens up the possibility for fans to buy the works of their favorite artists, rather than essentially renting them as they currently do with content providers like Netflix. NFTs already enable a lot of this, especially static digital art. But the rule could easily apply to music, film and other media.

Finally, Web3 can bring decentralization to the business world by enabling community ownership of businesses instead of the current top-down corporate control. We see this now with DAOs – Decentralized Autonomous Organizations – where anyone who buys can have a say in the direction of a company or project through an asynchronous voting process. DAOs already control some of DeFi’s biggest protocols, such as Uniswap and AAVE, and as Web3 takes hold, we expect them to make waves in other industries.

Where are we now and what will happen next

The growing transaction volumes related to the DeFi protocols that form the backbone of the Web3 ecosystem show that the Web3 transformation is in full swing.

DeFi activity exploded in 2021, peaking in the second quarter with almost $4 trillion in transaction volume. Since then, growth has stabilized, in part due to the decline in the price of Ethereum and other assets. The number of unique transfers remained the same and even increased in some quarters, indicating that more individual investors are still entering the ecosystem.

DeFi transaction volume and number of remittances by quarter, Q1 2020-Q1 2022
Figure 1: DeFi transaction volume and number of remittances by quarter, Q1 2020- Q1 2022 (Source Chainalysis)

The growth of DeFi is also reflected in how the use of different crypto assets has changed. Total transaction volume – once dominated by Bitcoin – now includes a variety of smart contract-enabled coins like Ethereum.

As late as 2016 Bitcoin accounted for the majority of crypto trading volume, by 2022 it will be just over 10%. Stablecoins make up the majority, but cryptocurrencies with smart contract functionality that power DeFi and Web3 now account for 45%.

on-chain analysis
Figure 2: Total value received, number of transfers and number of services by type of DeFi service (source Chainalysis)

Economic activities on the web3

We’ve only just begun to scratch the surface of what Web3 can enable, but we’re already seeing a variety of use cases driving significant business:

  • Invest. Users trade and speculate on DEXs and use staking and lending platforms to generate more stable and consistent returns
  • Borrow and lend. On the other side of these loan agreements are borrowers who use their existing cryptocurrency as collateral to receive capital.
  • arts, entertainment and culture. NFT collectors have spent billions to own the art they love, while in the nascent Web3 gaming space, users are monetizing their free time with games by playing to win.
  • Infrastructure. Protocols that connect different parts of the Web3 ecosystem and set the stage for future growth fetch billions of dollars.
  • CAD. Many of the protocols underlying the use cases described above are governed by DAOs, which in turn receive billions in exchange for governance tokens separate from the funds received by the protocols themselves. As we will see later, many DAOs may not deliver on their promise of decentralization due to the concentration of governance tokens and therefore decision-making power. In the longer term, however, as cryptocurrency adoption increases and more users participate in DAOs, organizations competing in the Web3 economy can be democratized.

It’s a promising start, but for now these use cases are primarily aimed at users who already own cryptocurrencies – when in theory anyone could buy their first cryptocurrency and start trading. trading on DEXs or using it in liquidity pools, the interfaces of these protocols can be difficult for new users to understand, and our data shows that DeFi adopters tend to be established cryptocurrency users. A notable exception is for use cases related to arts, entertainment, and culture, as these are common industries that most people are already getting into. And indeed, our data suggests that the rise of NFTs has attracted many users who have not yet engaged with the cryptocurrency ecosystem.

Chain analysis 3
Image 3: Those who buy their 1st NFT (turquoise line) usually only have their wallet for a few days; Crypto traders (Decentralized EXchange DEX) hold onto their wallets much longer (source Chainalysis)

3 keys open the era of Web3

Figure 3 shows that wallets making their first NFT transaction are generally younger than wallets making transactions through other DeFi protocols. This suggests that new NFT users are more likely to be new to cryptocurrencies.

So how can our industry capitalize on this momentum and build on the ultimate vision of Web3 – a world where anyone can connect to any business with their wallet and mortgage on the blockchain? We think it boils down to three things:

  • In general, more new users are enthusiastic about cryptocurrency. This would increase the pool of people willing to adopt Web3 tools.
  • Better user experience for cryptocurrencies and Web3 tools. Currently, the interfaces of many DeFi protocols are complex, intimidating, and difficult to use. Fixing this issue would make newbies more likely to get into Web3.
  • Introduce use cases that are important to non-crypto natives. NFTs grew because they attracted people who did not own cryptocurrency but were interested in arts and entertainment. Web3 operators should follow suit and develop protocols that meet a wider range of market needs.

Overcoming these three challenges is essential to ushering in the Web3 era, and we believe the cryptocurrency community is up to the challenge. In the meantime, read the original data and research on the current status of travel in Web3.

(This text was created using the deepl.com translation tool.)

You can download the whole thing here Web3 Channel Analysis Status Report (109 pages) download.

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