DeFi and Web3 are two commonly used terms in the blockchain world. But the majority of users cannot distinguish or clearly understand these two terms. So what are the differences between Web3 and DeFi? And how do DeFi and Web3 interact with each other? Let’s clear things out with Tokenize Xchange!
Understand DeFi
Decentralized Finance (DeFi) describes financial interactions between participants without the role of intermediaries by enabling peer-to-peer transactions for financial services, including lending, loans, mortgages, and other financial services, by employing blockchain technology.
The main goal of DeFi is to create an ecosystem that is open-source, transparent, and permissionless, devoid of any centralized control over transactions. Participants may quickly carry out peer-to-peer exchanges, manage their assets, and create decentralized applications (dApps).
Understanding Web3
Gavin Wood, a co-founder of Ethereum, came up with the concept of “Web 3.0” immediately after Ethereum launched in 2014. We are currently living in the era of Web2, where large tech corporations like Google, Amazon, Meta, and Twitter retain too much power. That leads to the core idea behind Web3, which is to return power to internet users in general. In order to materialize that idea, Web3 suggests constructing a decentralized internet without any power convergence.
>>> Read more: How Web3 Is Changing The Internet
The fundamental idea behind Web3’s blockchain and DAO platforms is to enable people to control their own data by connecting every action to a distinct, customized identity.
Users have complete control over their accounts and are not subject to any restrictions or interference from tech giants. It may be regarded as a made-up democracy. Although this kind of decentralized freedom could occasionally have problems, Web3’s advantages would likely outweigh any cons.
Is DeFi a part of Web3?
Both decentralized, Web3 and DeFi share the core value of blockchain technology. But if Web3 is a universe of a decentralized internet, DeFi seems to be a planet in that universe: finance. But the world can not develop without a solid financial foundation.
DeFi is working based on smart contracts which are blockchain-based algorithms that execute when certain criteria are met. They are often used to automate the implementation of an agreement so that all parties can be certain of the conclusion right away, without the need for an intermediary or additional delay.
The explosive growth of decentralized finance has accelerated the development of the blockchain and Web3 industries. In general, Web3 benefits from DeFi as follows:
- DeFi apps typically permit the user to keep control of the private keys. Without a reliable third party, the user has complete control over the digital assets. Web3 can take advantage of this to integrate user identity into the private key.
- Financial services such as lending, borrowing, staking, loans, trading, etc. are financial springs for the development of other aspects.
- DeFi contributes to network effects since layer 2 or even layer 3 applications can generate a lot of innovation by creatively merging several initiatives. This attracts users from the traditional market to the Defi market in particular and Web3 in general.
How does Web3 benefit Defi?
The number of individuals owning cryptocurrency has been skyrocketing in recent years due to its appeal. Some cryptocurrencies shot up tens, hundreds, or even thousands of times in price which has attracted a large number of investors to enter the crypto market. Not everyone who owns crypto assets understands DeFi and Web3. But cryptocurrency is the gateway for users to access DeFi and Web3.
While DeFi is predicted to reshape global finance, Web3 would help DeFi accelerate that process. According to Ourworldindata, the number of internet users increased more than 8 times from 2000 to 2016, from 400 million to 3.4 billion users, respectively. As of April 2022, this number is more than 5 billion people, accounting for 63% of the world’s population. Therefore, if a part of the above users switches to Web3 instead of Web2, the number of potential DeFi customers will increase significantly.
Young people are getting used to digital assets and payments in daily life. So we can believe that in the next one or two generations, people will considerably eliminate the use of cash. In spite of the unpredictable future, with the current rate of technology development, it is likely that Web3 and Defi will become mainstream in the future.