What is the current status of Web3? This is currently comparable to the early internet. The Web3 infrastructure is still in its infancy. This is also reflected in the sometimes less user-friendly presentation. However, what speaks in favor of Web3 is that this new world attracts top talent from the Web 2.0 world. Equally impressive are the massive investments made by venture capitalists.
A first trend concerns layer 1 blockchains and their scalability. The term “Layer 1” describes smart contract platforms, of which there are many different ones today. While Ethereum is still the largest and most prominent Layer 1 platform, alternatives such as Solana, Terra, Near or BNB Chain (formerly Binance Smart Chain) have also stood out. Layer 1 blockchains form the basis of various Web3 projects.
But as Ethereum shows, when layer 1 blockchains their limits, when demand is too high. This is reflected in the rising transaction fees (gas fees), which make a network like Ethereum expensive to use and therefore useless for simple applications. As a consequence, the alternative layer 1 blockchains have emerged.
At the same time, Ethereum is working on scaling its own platform. First, Ethereum wants to shift its consensus mechanism from Proof-of-Work (PoW) to Proof-of-Stake (PoS). Second, there are scaling solutions commonly known as Layer 2. This is where the second trend comes into play: blockchain applications migrate from layer 1 blockchains to layer 2 scaling solutions in order to scale better.
A third trend is interoperability. A current problem is that different layer 1 blockchains and thus also the applications based on them can not interact (communicate) with each other. They exist as closed silo systems. So-called interoperability solutions – often also called bridges – work to establish the connections between the individual blockchain systems. As a consequence, this means concretely: Thanks to interoperability, assets should be able to be transferred seamlessly from one blockchain to another.
A fourth trend is decentralized data storage. Currently, data is mainly stored by key cloud service providers such as AWS (Amazon). This also applies to various Web3 projects whose websites are hosted on central servers. In order to prevent such a central weakness in the Web3 services, decentralized storage solutions have been created. These are currently increasing because they constitute an important component.
Decentralized Finance (DeFi):
DeFi stands for “Decentralized Finance” and describes various financial solutions on the blockchain. Thanks to smart contract platforms, traditional financial services such as loans, payments, exchanges, insurance or asset management can be mapped decentrally on the blockchain using smart contracts.
DeFi applications have undergone their hype cycle in 2020. Today, the prices of various DeFi tokens are far from their record highs. On the other hand, the “Total Value Locked” indicator has risen. What is meant is how much value is added to these DeFi applications, which could be an indication that the basic demand for these applications continues to grow. The reason for this is probably the high return that DeFi protocols offer. This attracts not only private clients but also more and more institutional investors. A prominent example is Aave Arc. This solution gives institutional investors regulated access to DeFi applications.