Web3 Finance Guide: Use-Cases, Startups, Jobs, and More
Web3 is the next generation of the internet, where users are in control of their own data and apps run on a decentralized network. Web3 finance is part of this next generation, where financial applications are built on decentralized protocols, and peers can interact directly without going through a middleman.
In this guide, we'll look at 8 different areas where web3 finance is already being used or developed, including:
- Asset management
We'll also explore the opportunities for Web3 finance, how startups are building in this space, and where the jobs are. By the end of this guide, you'll have a better understanding of web3 finance and how it's changing the financial landscape.
What is Web3 Finance?
Web3 finance is any financial application that is built on decentralized protocols and peer-to-peer interactions. This includes DeFi (decentralized finance) applications such as yield farming, lending, and trading on decentralized exchanges (DEXes), as well as non-fungible tokens (NFTs) used for things like invoice factoring and digital asset ownership.
Additionally, the infrastructure that supports these applications - such as web3 invoicing and accounting - is also considered part of Web3 finance.
Web3 finance is powered by smart contracts, which are self-executing contracts that enforce the terms of an agreement between two parties. Smart contracts run on blockchain networks, which are decentralized and distributed ledgers that record transactions in a secure, tamper-proof way
Web3 Finance vs. Web2 Finance
Prior to the advent of computing, financial systems were based on paper records and human interactions. With the invention of the Internet, we saw the rise of digital financial infrastructure such as secure email, online banking, and e-commerce. This is Web2 finance.
In a Web2 system, financial institutions are centrally controlled and users must trust these institutions to keep their money safe and to make sure processes function securely snf smoothly. However, we've seen time and again that centralization leads to errors, security breaches, and fraud.
The 2008 financial crisis was a watershed moment that showed the world the dangers of trusting centralized institutions. In response, we've seen the rise of decentralized technologies like blockchain and the Web3 finance movement.
With Web3 finance, there is no need to trust a central party. Transactions are verified and secured by the network, and apps are built on open-source protocols that anyone can audit. This new generation of financial applications has the potential to be more efficient, transparent, and secure than their Web2 predecessors.
Web3 Finance Use Cases
There are already a number of ways that Web3 finance is being used or developed, including:
- Accounting: Bulla Network is using blockchain to power a decentralized triply-entry accounting system that is tamper-proof and transparent.
- Lending: AAVE and Compound are two protocols in the DeFi lending space, where users can deposit their crypto assets and earn interest on them.
- Payments: Bitcoin (BTC) is the most popular cryptocurrency and can be used for peer-to-peer payments without a bank or other third party.
- Trading: Uniswap is a decentralized exchange (DEX) where users can trade Ethereum (ETH) and ERC20 tokens without going through a centralized exchange.
- Insurance: Nexus Mutual is a decentralized insurance platform that allows users to insure against smart contract risks.
- Asset management: Tools like Melon and Set help users build digital asset portfolios.
- Currencies: MakerDAO and Dai are two of the leading projects in the space of stablecoins, which are cryptocurrencies that aim to maintain a stable value.
- Identity: uPort is a self-sovereign identity platform that allows users to control their own data and digital identity.
- Compliance: Blockpass is a digital identity verification platform that can be used for compliance purposes, such as Know Your Customer (KYC) and Anti-Money Laundering (AML).
Let's explore each of these use cases in more depth.
Web3 Accounting: Recording, reconciling, and auditing financial transactions on a blockchain
The traditional way of accounting is based on double-entry bookkeeping, where each transaction is recorded in two accounts. For example, when you buy a coffee with your credit card, the transaction would be recorded in your personal account (asset) and in the coffee shop's account (liability).
With blockchain, we can move to a triple-entry bookkeeping system, where each transaction is also recorded on a public ledger. This provides a third, tamper-proof record of each transaction that can be used for auditing and reconciliation purposes.
Bulla Network allows businesses to record, reconcile, and audit their financial transactions on a blockchain. This helps businesses save time and money on accounting costs and increases transparency and trust.
Bulla Network also powers tokenized invoices using the ERC-721 standard, which can be used for invoice factoring and supply chain finance. This could allow businesses to get financing against their unpaid invoices, without having to go through a bank or other financial institution.
Finally, Web3 payroll systems let businesses easily and securely pay their employees in cryptocurrency, including in batches.
Web3 Lending: Earning interest on your crypto assets
Typical savings accounts earn laughably low interest rates, with the national average being just 0.06% APY in the United States. This means that your money is losing significant value every year, due to inflation.
Throughout 2022, for instance, inflation exceeded 10% in many countries. In addition, many fiat currencies have lost tremendous value relative to the USD in recent years, including major currencies like the British Pound, the Japanese Yen, and the Turkish Lira.
With web3 lending, you can deposit your crypto assets and earn interest on them, without having to rely on a bank or government. Leading protocols in this space include AAVE and Compound.
Of course, the old saying holds true: "If you don't know where the yield is coming from, then you are the yield." With web3 lending, it's important to understand the risks involved before depositing your assets.
Generally speaking, the riskiest loans are those with the highest interest rates. These usually take advantage of low-quality collateral or have other red flags, such as a short loan term or a lack of transparency. Lending projects also typically "annualize" a current yield, which can give a false impression of profitability. In addition, the underlying token may be volatile, which could lead to losses even if the interest rate is high. In the worst cases, as we’ve seen with the likes of FTX, permanent loss of all funds is possible.
Web3 Payments: Sending and receiving money without needing a bank
One of the most popular use cases for cryptocurrency is peer-to-peer payments. After all, "digital cash" was the very first application of blockchain technology.
Even prior to Bitcoin (BTC), there were a number of projects trying to create digital cash, such as e-gold and Liberty Reserve. However, these projects were centralized and therefore subject to the same risks as traditional fiat currencies.
Chief among these risks is the fact that central authorities can print more money, leading to inflation and loss of value. We've seen this happen time and again, with most major central banks recently engaged in quantitative easing (QE). Not only that, but central authorities can also freeze or seize assets from political opponents, religious minorities, or other groups.
With Bitcoin, we had the first form of digital cash that was decentralized and therefore not subject to these risks. With BTC, there is a finite supply of 21 million coins, and no central authority can print more money or seize assets.
Since then, we've seen the rise of other digital payment systems, such as Ethereum (ETH), Litecoin (LTC), and Monero (XMR). These cryptocurrencies can be used for peer-to-peer payments, without needing a bank or other third party.
In addition, there are a number of projects working on Lightning Network and other Layer 2 solutions that aim to increase the scalability of cryptocurrency payments. This would allow for near-instant, low-cost payments with Bitcoin and other cryptocurrencies.
Stablecoins are a specific type of cryptocurrency that is usually pegged to a fiat currency or other asset, such as gold. This means that stablecoins can be used for payments, without having to worry about the volatility of crypto prices. The most popular stablecoin is USDT (tether), which aims to be pegged to the US Dollar. Algorithmic stablecoins, such as DAI, are also becoming popular, but these are more risky as they are not fully backed by one stable asset.
Web3 Trading: Decentralized exchanges (DEXes) and token trading
Cryptocurrency exchanges like Coinbase and Binance are central points of control in the crypto ecosystem. Not only do they hold users' assets, but they also control the price discovery process and often charge high fees.
In addition, these exchanges are subject to hacks and other security risks. For example, Mt. Gox was once the largest Bitcoin exchange, but it was hacked in 2014 and went bankrupt, losing 850,000 BTC.
In response to these risks, we've seen the rise of decentralized exchanges (DEXes), where users can trade cryptocurrencies without having to go through a centralized exchange. DEXes are built on blockchain protocols, which makes them more secure and decentralized.
The most popular DEX is Uniswap, which is built on the Ethereum blockchain. Uniswap allows users to trade ETH and ERC20 tokens without having to go through a centralized exchange. This means that there are no fees, no KYC (Know Your Customer) requirements, and no central points of control.
In addition, there are a number of projects working on cross-chain solutions that would allow users to trade assets on different blockchain protocols. This would further reduce the need for centralized exchanges and increase the liquidity of cryptocurrency markets.
Web3 Insurance: Protecting against risks in the digital world
In the physical world, we have insurance to protect us against a number of risks, such as car accidents, fire damage, and theft. However, in the digital world, we don't yet have a similar infrastructure to protect us against risks.
This is starting to change with the rise of Web3 insurance. Nexus Mutual is one of the leading projects in this space, which allows users to insure against smart contract risks.
With Nexus Mutual, users can deposit crypto assets as collateral and receive protection against losses from smart contract failures. This could help to reduce the risk of investing in DeFi protocols, as well as providing peace of mind for users.
Web3 Asset Management: Investing in and managing digital assets
In traditional finance, asset managers exist to help investors buy, sell, and manage their assets. This includes picking stocks, bonds, and other investments, as well as providing advice on when to buy and sell.
With the advent of blockchain, a whole host of new digital assets have been created, such as cryptocurrencies, tokens, and NFTs. There are also many ways to invest in these assets, such as through DEXes, protocols, and funds.
The traditional asset management industry has been slow to adapt to this new world, but there are a number of startups that are already bringing asset management into the Web3 age.
In addition, there are a number of decentralized asset management protocols, such as Melon and Set. These protocols allow users to create and manage their own digital asset portfolios in a decentralized way.
Web3 Identity: Self-sovereign identity and data management
When you sign up for a traditional financial service, you have to hand over a lot of personal data, such as your name, address, date of birth, and social security number. This data is then stored in centralized databases, which are vulnerable to hacks and data breaches.
In addition, these centralized databases give financial institutions a lot of power over our lives. They can use our data to track our spending, deny us credit, or even block us from accessing our own accounts.
With Web3 identity solutions, such as uPort, we can take control of our own data. uPort is a self-sovereign identity platform that allows users to control their own data and digital identity. This means that we no longer have to rely on centralized institutions to manage our data.
In addition, uPort can be used to sign digital documents, such as contracts, in a secure and tamper-proof way. This could help to reduce fraud and increase trust in the digital world.
Web3 Compliance: Managing financial regulations in the digital world
As the financial world moves increasingly online, there is a need for new compliance solutions that can manage regulations in the digital world.
Blockpass is one such solution, which is a digital identity verification platform that can be used for compliance purposes, such as Know Your Customer (KYC) and Anti-Money Laundering (AML)
With Blockpass, financial institutions can verify the identity of their customers in a secure and decentralized way. This would help to reduce fraud and increase trust in the financial system.
Further, Blockpass can be used to manage digital assets and comply with regulations such as the EU's GDPR (General Data Protection Regulation). This would give users more control over their data and increase trust in digital financial services.
This sort of compliance management is vital as we move more of our financial lives online. Without it, we risk opening up the financial system to fraud and abuse.
Top 15 Web3 finance startups
To help you get started with Web3 finance, here's a list of 15 leading startups in this space:
- Bulla Network
- Maker (MKR)
- Uniswap (UNI)
- Avalanche (AVAX)
- Chainlink (LINK)
- Aave (AAVE)
- PancakeSwap (CAKE)
- Synthetix (SNX)
- Curve (CRV)
- Lido (LDO)
- Compound (COMP)
- 1inch (1INCH)
- yearn.finance (YFI)
Let's take a look at each of these startups in turn.
Bulla Network: Decentralized accounting, invoicing, and payroll
As we've seen, Bulla Network is a full-scale Web3 business platform, with a dApp that facilitates Web3 invoicing, payments, payroll and accounting, as well as a Web3 protocol, a "plug-in" feature which can be easily added to a tech stack. Unlike Xero or Quickbooks, Bulla is built on a decentralized network, which makes it more secure and transparent.
This makes Bulla ideal for businesses that want to simplify their accounting and reduce costs, while increasing trust and transparency. In addition, Bulla's tokenized invoicing could be used for invoice factoring and supply chain finance.
dYdX: Decentralized exchange
dYdX is a decentralized exchange with a focus on derivatives trading. This includes perpetuals (similar to futures), as well as margin and spot trading. In addition, dYdX offers lending and borrowing services for a range of digital assets.
This makes dYdX a great platform for users who want to trade cryptocurrencies with leverage or borrow against their assets. However, it's important to note that leverage can lead to amplified losses, so this should only be done by experienced traders.
Rocketpool: Ethereum 2.0 staking pool with high returns and low fees
Rocketpool is an Ethereum 2.0 staking pool that allows users to earn interest on their ETH without having to run their own node. Rocketpool has high returns and low fees, making it a great option for users who want to earn interest on their ETH without much hassle.
Maker (MKR): decentralized stablecoin platform
Maker is a decentralized platform for creating and managing stablecoins. The most popular stablecoin on Maker is DAI, which is an algorithmic stablecoin that is pegged to the US Dollar.
DAI can be used for payments, trading, and other financial applications. In addition, DAI can be redeemed for MKR, which is the native token of the Maker platform. This makes MKR a great option for users who want exposure to both USD and crypto.
Uniswap (UNI): decentralized crypto exchange
As we've seen, Uniswap is a decentralized exchange (DEX) built on the Ethereum blockchain. Uniswap allows users to trade ETH and ERC20 tokens without having to go through a centralized exchange. This makes it a great platform for users who want to trade cryptocurrencies without fees or KYC requirements.
Avalanche (AVAX): DeFi-focused proof-of-stake blockchain
Avalanche is a DeFi-focused proof-of-stake (PoS) blockchain. This means that it is designed for running decentralized finance applications, such as lending, trading, and payments. In addition, Avalanche has high transaction throughput and low fees, making it a great platform for DeFi applications.
Chainlink (LINK): Decentralized oracle network
Chainlink is a decentralized oracle network that connects blockchain networks with data from the real world. This data can be used to trigger smart contracts, which helps to make them more reliable and secure. In addition, Chainlink has its own cryptocurrency, LINK, which can be used to pay for oracle services.
Aave (AAVE): DeFi lending protocol
Aave is a DeFi lending protocol that allows users to deposit their crypto assets and earn interest on them. Aave also offers flash loans, which are short-term loans that can be taken out and repaid in the same transaction. This makes Aave a great platform for users who want to earn interest on their crypto or take out short-term loans.
PancakeSwap (CAKE): Binance Smart Chain-based DEX
PancakeSwap is a Binance Smart Chain-based DEX that allows users to trade BEP2 and BEP20 tokens. PancakeSwap also has its own token, CAKE, which can be used to pay for transaction fees.
Web3 Finance Jobs
Despite the paradigm shift that Web3 has brought about, the job titles in the industry have not changed much. Developers, designers, customer success managers are still in high demand.
That said, the nature of these roles has changed dramatically. Take a Web2 developer, for example. They might use languages like Python, cloud providers like AWS or GCP, and databases like MySQL. On the other hand, a Web3 developer needs to be proficient in Solidity, be comfortable working with decentralized storage (IPFS, Swarm), and understand how to interact with smart contracts.
Similarly, a Web2 marketer is more likely to use paid advertising on channels like Google, Facebook, or LinkedIn, while these same channels often shun cryptocurrency projects. As a result, web3 marketers need to get creative and use earned media tactics, like influencer marketing or mindshare hacking, to get the word out about their project.
When it comes to creating a Web3 finance startup, such as a decentralized exchange (DEX) or a lending platform, a host of highly niche roles are required in order to get the project off the ground. These include liquidity providers, token economists, and community managers.
Web3 Finance Job Salaries
Web3 finance jobs offer some of the highest salaries in the tech industry. This is largely due to the nature of the work, which is often complex and technical, and the high demand for these skillsets.
For example, an entry-level Solidity developer makes around $100,000 a year, while a very experienced Solidity developer in a key market can make $200,000 a year, or even more.
Web3 Finance Trends For 2023
We've covered some of today's top Web3 finance use-cases, from payments and trading to accounting, insurance, identity, and more. But what trends will dominate Web3 finance in 2023 and beyond?
In this section, we'll take a look at some of the most important Web3 finance trends that are likely to impact the industry over the next few years.
1. On-chain lending and on-chain crowdfunding
Crypto lending has been around for a long time, but it's only recently that on-chain lending platforms have started to gain traction. These platforms allow users to lend or borrow cryptocurrencies using smart contracts, without the need for a third-party intermediary.
On-chain lending platforms offer several advantages over traditional lending services. For one, they're often much cheaper and faster to use. They also tend to be more transparent, since all transactions are recorded on the blockchain.
Beyond lending, on-chain crowdfunding is another promising use-case for Web3 finance. Platforms like Kickstarter and Indiegogo have already disrupted traditional venture capital, and on-chain crowdfunding could do the same for the crypto industry.
2. Security tokens build momentum
Security tokens, unlike utility tokens, represent a real asset (e.g. equity in a company, or a debt instrument). They're subject to regulations in most jurisdictions, which has made them slower to catch on than utility tokens.
However, that's starting to change. In 2019, we saw the first major security token offering (STO) from Blockstack, and 2023 is likely to be the year that STOs really take off.
For one, the regulatory environment is maturing. Several countries have already implemented specific regulations for security tokens, and more are expected to do so in the coming years.
Further, the infrastructure for security token trading is improving. Over the past year, several new exchanges have launched that specialize in security tokens, and traditional exchanges may start to list them as well.
3. NFTs see new financial utility
NFTs were popularized by playful applications like CryptoKitties, but they have the potential to revolutionize many other industries as well. In the world of Web3 finance, we're starting to see a few new applications for NFTs.
One promising use-case is fractional ownership of assets. For example, one could own a small percentage of a rare painting or piece of digital art. This could open up new opportunities for investing in expensive assets that were previously out of reach for most people.
Another potential use-case is NFT-based invoice factoring markets. In this setup, a business could sell its invoices for an NFT, which could then be traded on a secondary market. This would allow businesses to get paid faster, without having to wait for the customer to pay the invoice.
4. Web3 hedge funds take advantage of volatility
Amidst persistently high global inflation, an impending bond crisis, dismal equity markets, and cryptocurrency's notoriously high volatility, Web3 hedge funds are emerging to offer much-needed relief for risk-averse investors.
Traditional "hedging" strategies like long/short equity and market-neutral investing have failed to protect investors in recent years. However, Web3 hedge funds are using a new generation of financial instruments to hedge against macroeconomic trends.
Some of these new instruments include:
- Cryptocurrency derivatives: Futures, options, and swaps that allow investors to bet on the price of Bitcoin or other cryptocurrencies without having to actually own any tokens.
- Fiat-backed stablecoins: Stablecoins that are pegged to the value of fiat currencies like the US dollar or Euro. This allows investors to hedge against inflationary trends.
- Decentralized exchanges: Exchanges that are built on top of decentralized protocols like 0x, allowing for trustless trading of assets.
5. New DeFi yield opportunities emerge
Once seen as a way to get lucrative returns on idle crypto assets, DeFi yields have, in many cases, become lower than the virtually risk-free returns offered by government bonds.
As a CoinTelegraph article puts it, this owes to "tokenomics aimed at financing worthless models, rampant hacks, and a lack of real-world utility." In order for DeFi yields to take off again, DeFi will need to finance real-world economic activity and offer true utility to users. For instance, a BNPL (buy now, pay later) service for e-commerce powered by DeFi could spur real usage.
These five trends are just a few of the many that will shape the world of Web3 finance in the years to come. As the industry matures, we can expect to see even more innovation and adoption of these cutting-edge technologies.