As we rapidly enter the web3 and metaverse eras, emerging technologies and business models have the potential to revolutionize the way banks operate. The application of Web 3.0 in banking has extensive repercussions. It entails improved assistance for retail bank clients, institutional investors, and businesses. Incorporating AI modules into metaverse avatars enables enhanced interactivity, which benefits users. Unsurprisingly, the financial sector benefits from the new and advanced capabilities enabled by web3 technologies, such as blockchain, smart contracts, and non-financial tokens.
As web3 takes center stage in banking, intermediaries will become obsolete. Future asset swaps, remittances, insurance, and trade finance will rely heavily on smart contracts. Users will reap the benefits of increased automation as a result.
This article will illustrate the significance of web3 in banking, focusing on lending, borrowing, and other banking industry applications.
Why Web3 Could Change the Game
Web3 ushers in the era of decentralization, which is the defining characteristic of the Internet’s third generation (hence the name). Web3, the most recent version of the web, can alter this power structure by putting users at the center of attention again through the use of open protocols and standards. Through decentralized “permissionless” smart contracts and blockchains, power is being redistributed away from centralized platforms. The most difficult aspect of web3 governance is conducted publicly, not behind closed doors. With the right incentives, revenue can be returned to creators and users to fund user acquisition and expansion.
How significant is this matter? This strategy, which incorporates disintermediation as a central tenet, has the potential to usher in a new era of digital application-based business models. There may no longer be a need for data, functionality, and value intermediaries. Both developers and consumers will emerge victorious. The use of open-source software is preferable to proprietary software. This incentive would encourage developers to create, experiment, scale, and develop new applications.
Web3’s revolutionary concept is based on blockchain storage, asset ownership data, and transaction records. In the web3 architecture, the primary function of smart contracts is the autonomous execution of app instructions.
What Impact Does Web3 Have on Banks?
Web 3.0 naturally complements decentralized financial systems. Increasingly, the two are being combined in innovative new projects. They believe that people can save and spend money without banks. These creative new resources are now compatible with mobile devices. By 2022, 83% of the global population will possess a smartphone. For proponents of stablecoins and DeFi, a substantial portion of the worldwide population can access traditional banking services, such as borrowing, spending, and using digital currency, without providing proof of identity or meet other stringent requirements. Neither does the anonymity of Web3 accounts prevent this.
How well are conventional banks able to adapt to the present? Web3 banking allows users and creators direct access to the monetary system. These innovators must protect their finances, secure their property, and build an emergency cushion. The Office of the Comptroller of Currency (OCC) has proposed that banks in the United States provide custody services for cryptocurrencies. This includes the availability of “cold” wallets, which store cryptocurrency away from prying eyes in a secure environment.
A bank with digital capabilities and a modern data infrastructure will thrive, whereas a conventional bank will struggle. For Web3 marketplace development, cloud-based, decentralized technology driven by application programming interfaces was utilized. Our new global economy requires a state-of-the-art payment system compatible with multiple cryptocurrencies.
The Benefits of Web3 Online Banking
Rapid Currency Exchange
In banking history, instantaneous funds transfers and settlement times have never been possible. Clearing a settlement, which can take multiple business days, will take less time. The countdown will begin and end in seconds, day or night. It will be significantly less expensive to send money abroad, as transaction and settlement fees will be drastically reduced. These enhancements are implemented invisibly, so the user is never exposed to the blockchain.
Credit Reports Using Blockchain
Customers’ credit histories can have a substantial impact on their financial well-being. Traditional, centralized credit reporting may affect customers’ finances more than blockchain-based credit reporting. In addition, it permits companies to employ novel criteria for determining credit worthiness.
Compliance at a Reduced Price
Blockchain solutions provide regulatory bodies with the same degree of transparency, auditability, and timeliness as stakeholders. All US banks with a valid banking license are required by federal law to report any suspicious activity to FinCEN (Financial Crimes Enforcement Network). Regulators entrust the banking industry to handle fraudulent financial transactions. Because blockchain solutions enable the incorporation of comprehensive financial metadata into a transaction, financial institutions can monitor potentially fraudulent activity better.
What Benefits Will Web3 Provide Regular Bank Customers?
The banking and finance industries are already experiencing a small but noticeable impact from blockchain technology. You can use the services of certain fintech companies to buy, sell, and send cryptocurrencies. These virtual currencies are compatible with traditional paper currency. In countries with advanced financial systems, bank transfers that are easy to initiate, settle quickly, and charge minimal fees for international transfers are on the horizon. This is the first time blockchain technology will have a tangible impact on the everyday banking practices of the general public. Blockchain solutions can offer a new financial foundation in regions without a traditional banking system. If these individuals in countries without a robust banking system have access to the Internet, they will be more likely to embrace new financial services markets, regulations, and ideas.
Smart contracts and Web3 in Banking: How Do They Help?
Web3 depositors would prefer to profit from their funds, but how this occurs will vary. Rather than relying on banks or unregulated platforms, web3 customers will store their funds in a non-custodial wallet, essentially a blockchain account. In this configuration, ownership and transaction records are stored in the distributed ledger instead of a bank or other unreliable institution. Customers can obtain loans from other customers directly, eliminating the need for intermediaries such as banks. Instead, they can secure their funds with smart contracts. The smart contract holds these funds in escrow until predetermined conditions are met. People can still apply for loans through web3 lending, but smart contracts will only release funds upon receipt of adequate collateral.
The interest rate, loan-to-value ratio, and liquidation threshold are all parameters that are predetermined by the smart contract’s logic and play an important role here. All users have open and honest access to these. However, the interest is not distributed to executives or stockholders. Instead, it is managed by a decentralized autonomous organization (DAO) with no profit motive. The initial depositors are repaid interest on loans through smart contracts created by the borrowers.
Endnote
Implementing web3 technologies is highly advantageous for banks. If banks use Web3 for banking, they can expand their customer base beyond conventional channels. Customers can access essential services by integrating online platforms, digital wallets, and digital currencies. Digital collectibles, video game virtual currency, and NFTs can be secured through institutional vaulting. Banks can establish a trustworthy community of collectors, merchants, exchanges, and service providers by leveraging web3’s interconnected web network. Such actions strengthen the bank’s reputation as a haven for customer funds and a dependable ally in their financial growth.
