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2022 was a rough year in Web3, with the collapse of some of the biggest centralized platforms and the SEC winning suits against some of the most popular decentralized platforms. Let’s not talk about the hacks worth over $3 billion. Despite these drawbacks, Web3 and DeFi may still be the future of finance, as you shall learn in this article.
An Overview of Web3
Web3 is an exciting new evolution of the internet that has the potential to revolutionize the way we interact with the internet and our data. It is a successor of Web2, expressed through a shift from the old static Web1 and Web2 to an immersive and highly interactive internet made possible by blockchain technology, AR, VR, and IoT. It is often touted as the direct future of the web, but is it?
There are several advantages to Web3 technology, such as its censorship-resistant nature and the absence of a single point of failure. It also has the potential to improve the user experience and reduce costs for companies.
Additionally, Web3 allows us to use blockchain technology to process transactions and store data in a secure, immutable way. However, there are some drawbacks to Web3. For example, some technology infrastructure in Web3, like the proof-of-work or PoW, requires a lot of computing power and can be difficult to implement into existing business systems.
Equally, there is a widespread lack of understanding of the technology, which can lead to difficulty in adoption. Such difficulties in understanding Web3 exist among individuals, organizations, and governments. Efforts by the parties mentioned above to learn about these technologies are crucial to the continuity and innovation of Web3.
Notwithstanding, Web3 remains an exciting development in the evolution of the internet. It has the potential to revolutionize the way we interact with the internet and our data and could have far-reaching implications for businesses.
Although there are still some challenges to overcome, the future looks bright for Web3. It has the potential to create a more secure, efficient, and transparent digital environment for users, and its decentralized nature could lead to a more equitable internet.
With the development of new tools and services, like blockchain and token standards innovations such as the composable E1155, Web3 looks set to play an increasingly important role in the future of the web. As more businesses and organizations adopt Web3 technology, it could soon become the standard for online interactions.
The Boom and Hype of DeFi and Web3
The hype of Web3 began in late 2020 with the rise of decentralized finance (DeFi) projects such as Uniswap, Bancor, Compound, and Aave. These projects disrupted traditional financial services, allowing users to access financial services without needing a third party. This revolutionary concept attracted investors’ money, driving up the prices of these projects and creating a vibrant DeFi ecosystem.
In early 2021, DeFi continued to grow and evolve, with new projects such as Yearn Finance entering the market. Yearn Finance brought a novel concept of “yield farming” to the DeFi market, allowing users to earn rewards for providing liquidity to the network. This further drove up the prices of DeFi projects, and the market capitalization of the DeFi sector reached an all-time high.
The hype of Web3 continued in the first quarter of 2022, with the emergence of Non-Fungible Tokens (NFTs). NFTs are tokens that represent unique digital assets such as art, music, and collectibles.
These asset classes quickly gained traction, with demand for NFTs driving their prices. The NFT market also spawned new projects such as SuperRare, Rarible, and OpenSea. As the NFT market grew, so did the demand for decentralized exchanges that could support the trading of NFTs. This led to the emergence of platforms such as 0x, NFTX, and Kyber Network.
A Continued Bull Run
In addition to NFTs, the first quarter of 2022 also saw the launch of several new decentralized finance (DeFi) projects. These included decentralized insurance platforms such as Nexus Mutual and decentralized lending platforms such as MakerDAO. The launch of these projects further increased the interest in DeFi and helped to solidify its position as the leading sector in Web3. The launch of Yearn Finance further bolstered the Web3 movement in the first quarter of 2022. Yearn Finance was an automated yield optimizer for DeFi that allowed users to earn higher investment returns.
The success of Yearn Finance led to a surge in the popularity of yield farming, which was quickly adopted by other DeFi protocols such as Compound, Aave, and Bancor. The first quarter of 2022 saw the Web3 movement peak in terms of hype. The combination of NFTs, DeFi, and yield farming created a frenzy of activity among retail and institutional investors alike. NFTs, or Non-Fungible Tokens, offered a unique way to own and trade digital assets, and the technology quickly gained mainstream recognition.
The Leading DeFi Platforms
At the same time, DeFi, or Decentralized Finance, advanced rapidly. Projects like Uniswap, Bancor, Compound, and Aave allowed investors to access a wide range of financial products and services without a middleman or centralized authority. Yield farming was the latest DeFi craze, allowing users to earn rewards by providing liquidity to decentralized exchanges.
The combination of NFTs and DeFi created a perfect combo for the hype in the Web3 space, with investors flocking to new projects and platforms. This created a virtuous cycle of investment and growth, as each new project and platform attracted more users and investments.
The Web3 craze also spilled into other aspects of the crypto space. Companies like Uphold, Coinbase, and Kraken began offering their DeFi-based products and services. The Web3 movement continued into the first quarter of 2022, with new projects and protocols appearing regularly.
A multitude of platforms launched to facilitate the minting, trading, and managing of non-fungible tokens, and the number of NFTs being created and traded continued to grow daily. The DeFi space also saw a surge in activity as more people became interested in yield farming and automated lending protocols.
These resulted in a flurry of new platforms, protocols, and products that have made it easier for users to get involved in the DeFi space. Popular projects like Uniswap, Bancor, Compound, Aave and Yearn Finance became household names, and users have been flocking to these protocols to take advantage of the lucrative yields.
The Tech Innovations
The Web3 movement has also pushed the boundaries of what is possible with blockchain technology. Projects like Near Protocol and Solana have been at the forefront of scaling solutions. With the launch of Layer 2 solutions such as Optimism, users can enjoy faster transaction times and lower fees. The Web3 movement has been an exciting and transformative journey, and it’s only just beginning.
With the rise of DeFi, NFTs, and other emerging technologies, Web3 is becoming an increasingly important part of the global financial system. Since the first quarter of 2022, NFTs, the unique digital assets representing anything from art to sports memorabilia, has been used to power new gaming experiences.
NFTs have also been a major driver in Web3, as it allows the creation of decentralized applications and platforms, allowing users to create and trade pieces of history securely. The Web3 movement has also seen the emergence of projects like Yearn Finance, a decentralized finance (DeFi) protocol that allows users to optimize their portfolios through automated yield farming.
Yearn Finance has been a major success, allowing users to access high-yield returns with little effort. As the Web3 movement continues to grow, we can expect to see more emerging technologies and projects pushing the boundaries of blockchain technology. With the growth of DeFi, NFTs, and other technologies, the Web3 movement is creating a new layer of innovation and creativity in the world of finance.
The Crashes and Collapses in DeFi and Web3
The crash of big DeFi projects like Luna, Celcius, Voyager, and FTX marked the burst of the hype cycle created around Web3 and DeFi projects. As more investors and users got involved in the space, the market became saturated with poorly designed projects backed by well-managed funds.
Consequently, the value of the projects crashed as investors began to lose confidence in the space. The crash was exacerbated by the fall in the prices of NFTs, which became a major trend in the first quarter of 2022. As more projects collapsed in the NFT space, the market became oversaturated, and the value of Web3 projects began to plummet.
In either case, the crash of these projects was further exacerbated by the lack of liquidity and regulatory oversight. Many DeFi and NFT projects were not properly regulated, so investors were unprotected. Most of these investors lost a huge amount of money due to these projects’ failure. The ensuing events left many users feeling betrayed and frustrated with the state of the industry.
Additionally, these projects’ collapse had a ripple effect on the entire crypto market due to investment ties to the larger crypto ecosystem. Their failure led to a decrease in overall sentiment and trust in the crypto space, causing many investors to become more cautious and decrease their exposure to the crypto market.
For this reason, many DeFi projects are now taking steps to improve their governance models and ensure that their projects are secure and reliable. Doing this will help restore confidence in the DeFi space and create a more sustainable environment.
The Current State of DeFi and Web3
The DeFi and Web3 industry is experiencing a period of slow growth. At the beginning of 2021, the total value locked in DeFi protocols surpassed $50 billion, representing a 500% increase in the past year. The amount locked in DeFi further surpassed $200 billion at the beginning of 2022. The emergence of innovative DeFi protocols and the increased adoption of Ethereum and other blockchain networks fueled the growth.
Nonetheless, the amount locked has since reduced to around $38 billion by the first half of 2023. The reason for this is the hack suffered by many projects in the space coupled with the crashes of big centralized and decentralized projects. These projects suffered mostly from liquidity crises due to the overall downtrend. Some failed Web3 projects applied little risk management in their dealings leading to their eventual downfall.
DeFi has also seen an influx of new projects and protocols, such as Optimism, Arbitrum, ZkSync, Aptos, and SUI, paving the way for a more open and affordable financial system. The growth in DeFi has been enabled by the emergence of DeFi-specific tokens such as OP, APT, and SFP, which have enabled investors to gain exposure to the DeFi sector.
At the same time, the Web3 ecosystem is maturing and is becoming increasingly viable for developers. The emergence of decentralized storage solutions such as Filecoin and Storj and the integration of Web3-based protocols such as IPFS and Ethereum into mainstream applications has enabled this. This has allowed developers to create and deploy decentralized applications (DApps) on the Web3 stack.
By and large, the Web3 ecosystem is also growing as more developers are adopting the technology. This is partially due to the emergence of new tools such as MetaMask and Uniswap, which make it easier for developers to create and deploy decentralized applications.
Overall, the DeFi and Web3 space is quickly becoming one of the most exciting areas of blockchain technology. With the emergence of new projects and more developers adopting the technology, the industry is set to experience even more growth in the coming years.
The Future of DeFi and Web3
2022 was the craziest year in the history of the cryptocurrency space, and the unprecedented events ranged from billions of dollars in hacks to multi-billion dollar platform collapse. However, the crypto bear market could bottom during the first quarter of 2023.
When that happens, BTC could reach around $10,000 low, following a halt in the FED’s interest rate hike. With the halt in interest rate hikes, more money will be put into the market, and a new upward momentum will start to build up. BTC could also go lower than $10,000 due to further mining crackdowns or a combination of liquidations and low liquidity.
Besides a significant fall in the price of BTC, we may also see the SEC going after some of the top cryptocurrency projects. The chairman of the US regulatory body has clearly stated that only BTC is immune following the rules defined in the—Howey Test—a test used to ascertain whether an asset is a security.
2023 will also be marked by a spike in regulations, although the rules may vary across countries. The EU is already working towards clear regulations for the Web3 industry.
Regulations will positively affect the crypto industry and encourage the mainstream adoption of DeFi projects like Pandora. Since centralized institutions mostly exist to extract rents, the move towards DeFi will pull them into DeFi as they struggle to maintain their spot in the global financial industry.
There will also be more layer2-based payment solutions due to increased liquidity, scalability, and a better front end. Layer2 scaling solutions will be preferred for global payment due to the lower fees. Building payment solutions on top of these networks will enable people from third-world countries to access payment solutions easily. DeFi services and applications like DNS will also become more popular due to better fees.
Web3 is an exciting space, and like everything else related to finance, there are often uptrends and downtrends. The most significant events in the past couple of years are DeFi, popularized in 2020, alongside yield farming, insurance, and layer2 scaling solutions.
A downturn also came despite the boom and market uptrend following these events. The downturn started with hacks that drained all or part of the liquidity from DeFi platforms. Regulatory oversight through the SEC further diminished investors’ confidence.
The SEC called many crypto tokens securities, while the CFTC forbade Americans from interacting with some DeFi platforms marked for abetting criminal activities in the crypto industry. Besides sanctions by these US-based regulatory bodies, there were also cases of mismanagement of funds by project founders that led to the collapse of some of the biggest platforms.
Nevertheless, Web3 and DeFi continue to wax stronger as projects like Pandora build exciting products like the NFT Securities in partnership with traditional finance. In the future, we may see more countries adopting Bitcoin as a legal tender, payments based on layer2 solutions, and better market conditions after a further decline.
These materials are for general information purposes only. They are not investment advice, a recommendation, or solicitation to buy, sell, or hold any digital asset or engage in any specific trading strategy. Some crypto products and markets are unregulated, and you may not be protected by government compensation and/or regulatory protection schemes. The unpredictable nature of the crypto asset markets can lead to loss of funds. Tax may be payable on any return and/or on any increase in the value of your crypto assets, and you should seek independent advice on your taxation position.
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