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Web 3

Published on 16/11/2022

Web 3; Decentralised Finance (defi) vs Centralised Finance (cefi), Cryptocurrency, NFTs, the Metaverse.....

All this jargon can feel quite overwhelming and everyone appears to understand it better than you?

Well in this blog, we wanted to unpack Web3 and what it means. We will touch on the criticisms, the use cases and the future (is there one?)

Web 3, a term coined by Andreesen and Horowitz, at its heart is about ownership and control. If we look at the path the world wide web has taken since its inception, it went from searching for data (read only, web 1), to interactivity (read and write, web 2) - but always based on mega platforms (twitter, facebook, microsoft) to ownership (web 3).

It is a good thing, if handled properly, but like all things relies on good actors and good protocols and policing. It is still in its infancy however and like the dotcom era, the lag between idea, hype and value can be large and long and painful.

A DLT (ditributed ledger) is nothing more glamourous than a spreadsheet with extra functions. It allows records to be kept of....well almost anything. The 'cool' part is the way in which the transaction is secured and stored. The way it operates is the protocol.

Looking a little deeper into the current use cases (or visions of use cases) of this technology we have two cryptocurrencies that are worth exploring as illustration.

Bitcoin, is a protocol that operates on something called proof of work, in english - this is the idea that for every transaction to be approved >50% of the network users must approve it. Its rules were determined by a mythical figure called Satoshi, and in his pre-set rules he enshried the maximum number of bitcoins (21mm) and the mechanism by which they would be released. Bitcoin sits somewhat on its own, as its function is hard coded and while people can build on it, its purpose was to provide a non-governmental money. Something you might imagine governments do not like, and are highly likely to regulate. Its elegance is its simplicity. It has value because we say it has value. Its rules say it will be fixed supply.

Ethereum on the other hand is (now) operating as a proof of stake, a more efficient form of validation, but less secure (perhaps). Essentially it lowers the bar for tranasction approval, but increases the speed and in so doing uses less energy. Now while Ethereum (Eth) is similar to Bitcoin in size, it was designed as a layer 1 - or base layer on which other applications maybe built. Kind of like an app store. So for believers in the technology rather than the 'money' Eth is a firm favourite. However it has its sceptics too, it is - for example - a direct threat to CBDCs (or central bank digital currencies) particularly the RMB (China), and so faces its own headwinds.

Still with us? ok, lets plough on.

An NFT is simply a non-fungible transaction - ie a house vs a share in apple. No two houses are the same, so each transaction must be unit specific, whereas a share in apple is like any other share in apple.

Now the issue of centralisation versus decentralisation. This comes down to the issue of trust. If you centralise a system, then you place your trust with the 'centre', if you decentralise it, you trust no-one, or you trust the cryptography.

There are benefits to both, and weaknesses to both and the outcome result will probably be a hybrid and case by case. There is no way the Bank of China or Bank of England will transfer issuing authority of their currency to a series of random nodes, but we might prefer our property to be trustless and not able to be taken by any single authority. It is a balance.

Now, to the world of crypto. 2022 has been a watershed moment, no doubt. We have seen the implosion of Luna (a stable coin, that turned out to be less stable), which set of a cascade of accidents and exposure of bad acting. Starting with 3Arrows Capital and ending...well we still dont know, but taking out a number of players along the way. Most recently FTX and rumours today about Genesis.

Is this the end of crypto?

We dont think so. We think these tsunami of bad news is a function of hubris, excess liquidity and leverage. Nothing more. The implosion, oddly, will mark a new chapter for the various projects and perhaps with less hubris and more focus on use cases.

Finally, the metaverse - it seems clear to us that the digitisation of our lives is not going to slow. It is therefore obvious that the metaverse is going to become common place. What is less obvious is the medium of delivery and consumption, but the increased interaction between 'man and device' is not a reversing trend.

These are very exciting times, perhaps not for token prices, but for the next layer of innovation.

Check out our Bundles that focus on elements of this space if you want to learn more.

Good luck

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