Between 2020 and early 2022, Web3 emerged as the much-heralded future of the internet, promising to revolutionise industries such as finance and logistics while democratising technology for the betterment of society. Its potential seemed boundless, generating immense enthusiasm and optimism. However, as we fast forward just a year later, this once-promising concept has largely receded from the limelight, leaving many to dismiss it as nothing more than a fleeting marketing buzzword for blockchain technology.
The initial surge and fervour surrounding Web3 were undoubtedly fueled by the meteoric rise of Bitcoin and cryptocurrencies. The blockchain's potential to revolutionise the financial sector was captivating, dominating much of the conversation. Unfortunately, other use cases were relegated to the periphery, overshadowed by the focus on finance. Consequently, when cryptocurrency values plummeted, so too did the discussions and excitement surrounding Web3.
But does this mean that Web3 is truly dead? The answer may not be so straightforward. While the initial hype has subsided, the underlying principles and ideas that gave birth to Web3 remain relevant and have the potential to evolve further.
"The world of cryptocurrency represents just a small part of Web3, although it tends to receive the most attention. The decentralised ecosystem offers numerous other practical applications that have been increasingly embraced by new participants in this space,” said Dilip Chenoy, Chairman, Bharat Web3 Association (BWA).
Chenoy shared that there are close to 600 startups in the Web3 space in India and even government departments are expressing interest in utilising blockchain and Web3 technology for activities like issuing certificates, managing land records, tracking pharmaceuticals, and more.
Weighing in on this, Sandeep Nailwal, Co-founder at Polygon Technology explained, "The amount of building that has happened this crypto winter has been incredible to see because it’s really the first time Web3 has laid the foundations to become the size of the internet. What I mean is that, in the last bull market, there was an almost feverish belief that mass adoption was right around the corner. And there was good reason to think that! Users were pouring into crypto even as institutional and brand adoption was ticking up."
"But what’s become clear in hindsight is that the technology hadn’t yet matured enough, both from a UX and protocol level," he added.
Asset Illiquidity
In a remarkable development in the past fortnight, the Telangana government took a decisive action to nurture the growth of the blockchain and Web3 ecosystem. It formulated a strategic alliance with renowned organisations including the World Economic Forum, C-DAC, IIIT-Hyderabad, Indian Blockchain Forum, European Crypto Initiative, Bharat Web3 Association, Open trade, and Sino Global Capital. Together, they aim to introduce a standardised framework for asset tokenisation.
The proposed asset tokenisation standard framework will establish a unified set of rules and guidelines for the tokenisation of assets. By doing so, it will offer essential safeguards for investors and consumers, while also promoting industry innovation and expansion.
“This framework will provide the much-needed clarity that businesses and investors need to adopt asset tokenisation. It will benefit the common man by making it easier for them to participate in the global economy and access new investment opportunities,” said Telangana ITE&C department principal secretary Jayesh Ranjan.
But why is asset tokenisation of concern? Asset tokenisation converts real-world assets into digital tokens on a blockchain, enabling fractional ownership and tradability. This process enhances liquidity by breaking down illiquid assets into smaller units, making them accessible to a broader range of investors, promoting financial democratisation. It could enable 24/7 trading on blockchain networks, which offers increased flexibility, facilitating prompt responses to market changes.
Moreover, tokenisation reduces transaction costs by eliminating intermediaries, paperwork, and administrative burdens. The decentralised and immutable nature of the blockchain ensures transparency, enabling all token holders to trace ownership and transaction history, fostering trust and reducing fraud risks. Additionally, diversification becomes easier, as investors can hold fractional ownership in multiple assets, mitigating risk. Global accessibility is another advantage, as tokenised assets can be accessed and traded internationally without intermediaries.
As per a report by BCG in 2022, the tokenisation of illiquid assets on a global scale is projected to present a massive business opportunity, reaching an estimated value of $16 trillion by the year 2030. This makes it pretty clear the potential held by Web3. Case in point, the ability to transform traditionally illiquid assets into digital tokens that can be traded and accessed more easily opens up unprecedented avenues for investment and financial inclusion.
Elephant In The Room
A conversation on Web3 would be incomplete without the mention of Bitcoin and cryptocurrencies. The advent of these digital assets undeniably thrust the concept of blockchain technology into the limelight, a notion that was once obscure to the majority. With the allure of potentially life-changing fortunes, numerous individuals were enticed to delve into the fascinating world of cryptocurrencies, captivated by the remarkable price volatility that offered enticing prospects for substantial profits, albeit with inherent risks. And why not? The decentralised nature of these digital assets, free from central authority control, was a revolutionary concept that resonated with tech enthusiasts, investors, and individuals seeking financial autonomy.
Bitcoin, as the pioneering cryptocurrency, has been playing a crucial role in this potential paradigm shift, setting the stage for an ever-evolving landscape of digital innovation and financial possibilities. Between December 2020 and 2022, its price experienced notable fluctuations. It surged to record highs, surpassing $60,000 in April 2021, primarily fueled by institutional interest. However, it later endured a 50 per cent drop in July 2021, plummeting to $29,796. Subsequent periods of bullish activity followed, with a spike to $52,693 in September 2021, only to dip to $40,710 two weeks later. In November 2021, another peak of $68,789 was achieved, but the price dwindled to $46,164 in December. Economic uncertainty and the emergence of the Omicron variant impacted its value. From January to May 2022, the price gradually declined, reaching a low of $28,305 in May, and by the end of 2022, it fell below $20,000.
Since early 2023, Bitcoin has shown signs of a positive trend, prompting increased optimism in the market. In July, Geoff Kendrick, Head of Crypto Strategy & Emerging Markets FX at Standard Chartered, made headlines with a noteworthy prediction. He revised his earlier forecast and now believes that Bitcoin could reach the $120,000 mark by the end of 2024, surpassing his previous estimate of $100,000 around the same time. Kendrick's updated outlook has garnered significant attention and adds to the growing anticipation surrounding Bitcoin's potential future performance.
But given the volatile nature of the crypto market, countries worldwide are increasingly turning their attention to central bank digital currencies (CBDCs) as a means to strike a delicate balance. These nations, including India, are looking to prevent over-regulation while remaining mindful of their citizens' best interests. But do CBDCs pose a threat to cryptocurrencies like Bitcoin? Kendrick sees the arrival of CBDCs as a positive indicator.
"CBDCs are a good idea, legitimising risk-free assets in the digital space. Stablecoins aren't entirely secure, as seen with Terra Luna's collapse. Having a risk-free equivalent would legitimise the low-risk end of the market. Like in bond markets, CBDCs would anchor the risk curve, reducing volatility in riskier assets like Bitcoin and altcoins. It's a positive for the crypto market, potentially lowering volatility when genuine risk-free assets are available," Kendrick said.
Beyond Crypto
Away from the spotlight, Web3 extends far beyond crypto in finance and markets through DeFi (Decentralised Finance). Leveraging blockchain and smart contracts, DeFi is disrupting traditional financial services, eliminating intermediaries and enabling peer-to-peer transactions, fostering financial inclusion globally. Users can lend assets, earn interest, borrow with collateral, and utilise stablecoins for fast, low-cost cross-border transactions. Why? Decentralised exchanges (DEXs) offer liquidity and control. And besides, they haven’t been as much in the news as their centralised exchange counterparts.
Innovative concepts like yield farming and synthetic assets broaden investment options. Though DeFi faces security, regulatory, and scalability challenges, its disruptive potential democratises finance, granting financial autonomy and diverse services to individuals.
“For the foreseeable future, DeFi is the most potent use-case of blockchain technology. That’s partly because, as using blockchain remains relatively expensive, user activity naturally migrates to the highest value activity,” said Polygon’s Nailwal.
Recently, Polygon Labs teamed up with crypto infrastructure provider Fireblocks and the Bank of Italy's innovation hub to introduce financial institutions in Italy to the world of DeFi and tokenised assets.
The project, aptly named "Institutional DeFi for Security Token Ecosystem," is expected to be a game-changer for traditional financial institutions in Italy seeking to harness the potential of DeFi while ensuring adherence to regulatory standards. With support from the Milano Hub, the Italian central bank's hub for innovative financial ideas, the initiative will receive backing for six months.
“We believe it is vitally important to create the conditions for DeFi to become a safe and open operating environment for supervised entities as well,” said Imanuel Baharier, general manager of Cetif Advisory, a consultancy group of the Milan university’s Cetif Research Centre.
The scope of the ambitious undertaking is worth mentioning due to the involvement of prominent Italian banks, asset managers, and financial institutions. Among the key participants is Intesa Sanpaolo, the country's largest banking group, boasting $1 trillion (€975 million) in total assets under management (AUM).
By now, banks around the world know the shortcomings of TradFi (Traditional Finance) which DeFi can address (such as reducing counterparty risk, promoting transparency, and enabling global accessibility). Decentralisation and automation through smart contracts are seen as huge solutions. In fact, this is prompting many to experiment. However, they also recognise the challenges it poses such as smart contract vulnerabilities and regulatory uncertainties.
Challenges
The allure of the crypto and blockchain sector led to a surge in investments, reaching its pinnacle in Q1 2022 with an impressive $13 billion injected into various projects and startups. However, this growth has been short-lived, as a recent report from Galaxy Digital reveals a concerning downward trend. In Q2 2023, total investments plummeted to a mere $2.32 billion, the lowest since Q4 2020. Even more worrisome is the fact that this sum represents the combined funds raised in the previous three quarters.
The decline in funding can have serious implications for the Web3 ecosystem. startups and projects that rely on financial backing to fuel research, development, and expansion may find themselves at a disadvantage. With limited access to capital, innovation might stagnate, and the realisation of groundbreaking ideas may be delayed.
Another pressing challenge facing the Web3 space is the scarcity of skilled professionals capable of understanding the intricate confluence of various technologies that form the foundation of Web3. “We (in India specifically) do not have enough talent that understands the confluence of various technologies, which is what Web3 is all about. Large companies are investing in training, but there are no proper training platforms,” says Pankaj Thakar, Angel Investor & Chief Mentor and Founder at PadUp Ventures.
Despite the presence of a good number of Web3 initiatives and programmes in India, without a sufficient pool of talented individuals well-versed in blockchain, decentralised technology, and smart contracts, the potential of Web3 may remain unrealised. Development and implementation of transformative applications and platforms may be hampered, hindering the overall progress of the ecosystem.
The Web3 space holds immense promise for revolutionising industries and empowering individuals with decentralised solutions. However, challenges concerning funding and talent gaps demand immediate attention and action. As the community strives to navigate these obstacles, collaboration, investment, and education will be key to unlocking the true potential of Web3 and shaping a future defined by decentralised innovation.
As Kunal Purohit, Chief Digital Services Officer, Tech Mahindra aptly puts it, "The unprecedented power of technology comes with some issues that need to be addressed." By addressing these issues head-on, India can pave the way for a more robust, inclusive, and successful Web3 ecosystem.