What is the current state of Web3? This can currently be compared to the early internet. Web3 infrastructure is still in its infancy. This is also reflected in the sometimes less user-friendly presentation. What speaks in favor of Web3, however, is that this new world attracts the best talent from the world of Web 2.0. Equally impressive are the huge investments made by venture capitalists.
Directions on the web 3:
The first trend relates to layer 1 blockchains and their scalability. The term “Layer 1” describes smart contract platforms, of which there are many different systems today. While Ethereum remains the largest and most prominent platform of the first layer, alternatives such as Solana, Terra, Near, or BNB Chain (formerly Binance Smart Chain) have also emerged. Layer 1 blockchain forms the basis for many Web3 projects.
However, as Ethereum shows, layer 1 blockchains reach their limits when demand is very high. This is reflected in higher transaction fees (gas fees), which makes a network like Ethereum expensive to use and therefore unusable for simple applications. As a result, alternative first layer blockchains have emerged.
At the same time, Ethereum is expanding its own platform. For example, Ethereum wants to switch its consensus mechanism from Proof-of-Work (PoW) to Proof-of-Stake (PoS). Secondly, there are scaling solutions known as layer two. This is where the second trend is expressed: blockchain applications are migrating from Layer 1 blockchains to Layer 2 scaling solutions in order to be better able to scale.
The third trend is interoperability. The current problem is that different Layer 1 blockchains, and therefore also applications based on them, cannot interact (communicate) with each other. They exist as closed silo systems. So-called interoperability solutions—often also called bridges—establish connections between individual blockchain systems. As a result, in concrete terms this means: thanks to interoperability, assets should be able to transfer seamlessly from one blockchain to another.
The fourth trend is decentralized data storage. At present, the data is mainly maintained by centralized cloud service providers such as AWS (Amazon). This also applies to many Web3 projects whose sites are hosted on central servers. In order to prevent such a centralization vulnerability in Web3 services, decentralized storage solutions have been created. These are currently on the rise as they are such 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, stock exchanges, insurance or asset management can be decentralized on the blockchain using smart contracts.
DeFi apps went through a hype cycle in 2020. Today, the prices of various DeFi tokens are far from all-time highs. On the other hand, the “Total Value Locked” indicator rose. What is meant is the amount of value that is being injected into these DeFi applications, which could be an indication of continued growth in underlying demand for these applications. This is likely due to the high returns offered by DeFi protocols. This not only attracts private clients, but also more and more institutional investors. A notable example is Aave Arc. This solution provides institutional investors with regulated access to DeFi applications.