Summary:
Web3 is used to describe the next iteration of the internet in which decentralized services are automated on blockchains. This paper describes the elements of Web3 including blockchains and tokens. It describes the largest decentralized finance protocols and some specific services where blockchain and tokens can be used. The paper concludes with a brief discussion of some regulatory challenges.
Key findings:
- Web3 seeks to replace an internet based on centralized intermediaries with one that is not. The term Web3 refers to the use of blockchains and cryptocurrencies or tokens.
- Tokens are a piece of code that signify ownership or control of an asset. Many different token designs are possible.
- Decentralized finance has developed novel ways to trade assets, make collateralized loans, and make payments.
- Blockchains and tokenization could be used to improve efficiency and provide new services in currency exchange, trade finance, remittances, making assets such as real estate more liquid, and improving domestic payments.
- A regulatory challenge is updating regulation to accommodate the changes in infrastructure.
Center Affiliation: Center for Financial Innovation and Stability
JEL classification: D23, D26, F24, G10, G11, G15, G19, G23, G28, L14, L86
Key words: Web3, tokenization, blockchain, cryptocurrency, financial services, efficiency, innovation
https://doi.org/10.29338/ph2023-3