Crypto enthusiasts are bursting with excitement at the potential of blockchain-based ledgers to decentralise the finance sector and the web – phenomena known as DeFi and web3 respectively. There are many critiques of these two visions, including a recent study that found that supposedly anonymous transactions could be linked to personally identifiable information. But a new wave of blockchain platforms and protocols seeks to bolster privacy in what many believe is the next paradigm in computing.
What are web3 and DeFi?
Enthusiasm for blockchain technology may have cooled but in certain quarters of the technology industry, expectations are as high as they’ve ever been. Proponents see blockchains as the basis of a new system of finance (decentralised finance, or DeFi) and a new paradigm for the web (web3, one of the breakout technology buzzwords of 2021). In both cases, they argue, the transparency and immutability of distributed ledgers will eliminate gatekeepers and bolster individual liberty.
Both web3 and DeFi have their doubters. Earlier this month, the Bank of International Settlements described DeFi’s decentralisation as illusory – “some form of centralisation is inevitable” – and said it currently has “few real-world applications”. And in a widely cited blog post, developer and blogger Stephen Diehl eviscerated web3 as “a vapid marketing campaign that attempts to reframe the public’s negative associations of crypto assets into a false narrative about disruption of legacy tech company hegemony”.
These criticisms haven’t stopped some users voting with their wallets. From 2019 to 2020, the value of digital assets locked in DeFi smart contracts grew by 1800%, from $670m to $13bn, according to a report from the World Economic Forum. The combined value of DeFi tokens reached $152bn this quarter. And around $27bn worth of cryptocurrency has been used to buy NFTs, a cornerstone of web3, so far this year.
Investors are excited. In November, Conensys – the blockchain software vendor behind the ‘MetaMask’ wallet – raised $200m from investors including HSBC, at a valuation of $3.2bn, not long after a $65m raise from JP Morgan, Mastercard and UBS. In October, web3 infrastructure provider Alchemy raised $250m at a $3.5bn valuation.
But there are at least two significant issues that must be addressed if web3 and DeFi are to gain public – and regulatory – approval. The first is the woeful environmental impact of ‘proof-of-work’ systems that underpin most distributed ledgers. This is already thwarting some companies’ web3 ambitions: plans by fundraising site Kickstarter and chat app Discord to adopt blockchain-based infrastructure were met with a backlash by users citing environmental concerns. Ethereum, the blockchain that underpins many web3 applications, plans to switch to a…
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