WEB3 101 New Tracks for

Banking and Payments

1
A letter to our readers 3
Web3 - So What? 4
Web1 - Dancing Babies, Screeching Modems 4
Web2.1 - Mobile, Social, Global, Fun! 5
Web2.2 - You Are The Product 5
Web3 - Taking Back Control 6
The Foundations of Web3 7
Blockchain 8
Smart Contracts 10
Cryptocurrencies and Crypto Tokens 12
Fungibility 13
Recap - Web2 vs. Web3 14
Advantages of Web3 14
Disadvantages of Web3 14
Web 3 Components & Financial Services 15
Conclusion - Evolution, not Revolution 16
Web3 Glossary 18
A letter to our readers
If you work in the financial services industry, there’s a good chance that you have come across
a plethora of exotic new terms and acronyms in the last couple of years – blockchain, DeFi,
NFTs, DAOs. For those of you who are minting your own NFTs, tracking gas fees for ETH,
debating the merits of stablecoins versus traditional cryptocurrencies, and dabbling with the
metaverse, this report is not for you. Sorry – there will be other reports that are more your cup
of crypto.

If, on the other hand, you are like many of us who nod knowingly at conversations at dinner
parties but don’t truly understand the subject, this is your crash course. Call it Web3 101. It’s
designed to get you up to speed and provide you with the foundation you need to add to the
conversation of what is to come.

In the following pages, we’ll guide you through Web1, 2, and 3, unpack how blockchain, smart
contracts, and tokens provide the architecture for a new form of internet, touch on how these
innovations are impacting traditional financial services via decentralized finance (DeFi), and
assess just how disruptive Web3 is likely to be, and when.

Money20/20 is the place where fintech conversations happen, and we invite you to
participate in this Web3 discussion via dialogue with the authors directly, as well as via our
social media channels (Twitter handles and email addresses at the end of the report). And, of
course, our shows are THE place to have the conversation in person. We truly welcome your
feedback and we look forward to being alongside you for the journey.

Read on to enter into the new frontier of a decentralized internet and all that that entails…

Best regards

Nick Holland
Global Head of Research
Money 20/20
 3
BEW WEB3
Web3 -
So What?
Already there are a myriad of
descriptions of Web3 and its
evolutionary path from Web1 and
2, but what were they, and how is
Web3 important enough to denote a

3
BEW
distinction from the previous iterations?
Here’s a brief history of how we

WEB3
got here…

Web1
Dancing Babies,
Screeching Modems
You may or may not remember a time when the
internet was accessed via a wheezy dial-up modem
on a bulky, creamy beige-colored desktop computer.
Depending on your connectivity, web pages loaded
painfully slowly, offering very much a read-only
environment, assuming you were prepared to wait that
long. Yes, you could write emails, but this was an era
where connectivity to the recipient in real time was far
from guaranteed - their connection was probably as
slow and sporadic as your own. Nonetheless, there was
a great deal of innovation at this time as companies
and entrepreneurs explored the radical changes
precipitated by having access to their peers all over the
world via an often censorship-free ecosystem. This was
Web1 and existed around 1990-2005. This internet
was “read-only”.
4
Web2.1 Web2.2
Mobile, Social, Global, Fun! You Are The Product
Around 2005, some radical changes began to reach the mainstream in the evolution of the In 2012, a number of events happened that could be considered as pivotal in the second
infrastructure and hardware of the internet. generation of Web2 –

Broadband internet access to the home and office increasingly became de facto, meaning / Amazon Prime began embedding video streaming as part of service – this telegraphed the
that there were some seismic shifts in the ways content could be delivered and monetized. shift from being an online retailer to an online ecosystem for all things digital and physical.
Around this time, many digital service providers began moving towards streaming content
since internet bandwidth could now (mostly) support this. In parallel, devices that could / Facebook launched its IPO, and hit its one billionth user – demonstrating the scale that the
access the internet began the process of becoming untethered from physical cables and wires network had reached, along with a renewed focus on delivering to shareholders.
via the explosion of WiFi networks. Combined with the emergence of touchscreen and truly
portable smartphones and tablets, the internet was now something that was likely to be with / Samsung began using Google Android OS – a development that cemented Google’s place
you 24/7 – the internet came to you, not vice versa. as the de facto operating system for non-Apple devices globally, and a duopoly for almost all
smartphones.
With this newfound connectivity and portability, users were equipped with the ability to not
just email and hope for a response when the recipient turned their computer on but could / Apple launched Siri, demonstrating a new and more simplistic form of device interaction.
explore real time messaging one to one via services such as MSN Messenger and AOL, and
with one to many platforms such as MySpace and the fledgling Harvard University startup, While these events may not seem that significant in their own right, they have had seismic
Facebook. implications for the way that the internet has developed over the last decade, placing control
into just a handful of organizations that we have come to know as “Big Tech”.
This could be considered a golden age of discovery for the internet – still highly anarchic and These behemoths, along with newcomers such as TikTok, have reached truly gargantuan
disruptive, but with the scale for people around the world to find their tribe, engage in new levels of adoption, building ecosystems that are mostly impenetrable without partnerships or
experiences, and to have fun. If Web1 was “read”, web2, part 1 was “read / write”, and lasted acquisitions with them.
until around 2012.
This takes us to the present day – as users we are linked to digital ecosystems that would
be hard to extricate ourselves from given how embedded these operating systems,
search engines, social networks, and digital devices are in our daily lives.
This is the era of “read / write / engage” (arguably, enrage?)

Surely there is a better way?

5
Web3
Taking Back Control
Enter Web3 as the antidote to the centralized, walled
gardens that have characterized the last decade of the
online experience. Web3’s rather lofty aims are to wrest the
ownership and therefore control of the internet back to the
end user. If web1 was “read”, and web2 was “read / write”,
followed by “read / write / engage”, then the central ethos
of Web3 is “read / write / own”.

The true potential of Web3 resides in the ability to cut out

intermediaries and therefore simplifying transactions and
interactions. We will get into the enabling technology in
the next section, but for now, imagine a Web2 business
such as a social network. The platform is the intermediary,
connecting individuals via a central portal (webpage, app).
The platform controls how you interact and with who, while
serving up content and advertising that it believes fits your
profile from data it is constantly harvesting about you. Web1 Web2 Web3
A Web3 social network would operate very differently.
/ Decentralized / Centralized / Decentralized
Instead of being centralized around a third party platform,
the network would now be based upon a decentralized
/ Built on open source / Built on closed platforms / Built on open source
web of users that directly connect to one another and
protocols blockchain based
collectively all own the social network. In many ways, this
/ Free to users in return for technologies
marks a return to the more egalitarian and open ethos
/ Open to all users personal data sharing
of Web1, but with far more advanced and user friendly
/ Open to all users,
technology.
/ 1 billion internet users / 2.3 billion users internet owned by users
in 2005 in 2012
/ Potentially 4.9 billion
/ 0.08 connected devices / 1.8 connected devices internet users in 2022
per human in 2003 per human in 2010
/ 6.5 connected devices
per human in 2020

Sources: Statista / Researchgate, 2022

6
The It would be impossible to discuss Web3 and its implications without some
basic understanding of the fabric of what makes decentralization possible,

Foundations the underlying technology – blockchain, smart contracts, and tokens (non
fungible and otherwise). Collectively these form the foundations of key
attributes that separate Web3 from previous versions – transparency,

of Web3
consensus, irrevocability, decentralization, and a system for monetization
and equitable payment of participants.

7
 Here are some other attributes of our blockchain railroad –

/ Track (blocks) can never be removed, only added to.

/ Each track has a unique number – as each additional section of track is added, the
sequence of these numbers is forever cemented one in front of the next.
/ The tracks and entire railroad are visible to all users of the network.
/ The track continues to grow to meet traffic requirements and new destinations.
/ The track has transparent rules for usage, such as standard rail gauges, timetables,
and clear fee structures.
Blockchain
While the term “blockchain” has become common in the fintech vernacular, its use
cases may be somewhat misunderstood due to its association with cryptocurrencies. And, most importantly…
While blockchain has become synonymous with Bitcoin, it is not the only blockchain. / All users of the rail network are owners, unlike previous technology where stagecoach
At the foundation layer of Web3, there are numerous blockchains designed to have companies were an intermediary that had to be negotiated with and paid.
purposes well beyond the minting of digital currencies.

So, what is a blockchain? Let’s start with a real world analogy – railways. Imagine a
railway that is being built – the very first pair of rails and sleeper represent a “block”,
and are laid on the ground and permanently secured. In front of this, the next set is laid
and again, secured to the ground. This is the beginning of our blockchain. In time, it
becomes a vast network of tracks (blocks).

8
So, what prevents someone from tampering with the rails and messing
up this unique sequence? In a word – decentralization. Every user Blockchain Spenders Worldwide
of our railroad has access to a real time map that displays the entire
network at that time, including precise details of every section of track.
Because everyone has a copy of this map, any changes made would be
immediately apparent to everyone.

A more relatable analogy? You have a really Banking 29.7%

embarrassing photo of yourself on social
media. Despite your numerous attempts to Process manufacturing 11.4%
delete the photo, it keeps coming back to
haunt you because all of your friends have Discrete manufacturing 10.9%
their own copy of the photo and they
relish the discomfort that this particular Professional services 6.6%
photo elicits from you every time it
appears in public. That’s the power of Retail 6.0%
decentralization – data lasts forever and
cannot be tampered with or erased. Source: IDC, 2020

$4.20
Local Man Billion

Forever Known Blockchain key attributes – $2.90

Billion
as “Hotdog Man” $1.90
/ Distributed - the blockchain railroad is accessible to all users and all users have ownership.
Billion $1.40
/ Global - our blockchain railroad traverses the entire globe, accessible to anyone,
Billion anywhere
with the means to connect to it via the internet. $0.75
Billion
/ Security through transparency - the railroad is tamper proof, given that all users have a
current map and tampering would be immediately apparent.
USA Western Others People’s Japan
/ Immutable - the blockchain railroad cannot ever be altered.
Europe Republic
of China
/ Always on - the blockchain railroad never goes out of service, and is available to all users
24 / 7 / 365.

9
Smart Contract
Another fundamental component of Web3 is smart contracts. Without getting into Should we want an engine to run, we have to pay for “gas” that is purchased using the
the weeds, a smart contract is a computer program that resides on a decentralized native currency for that specific blockchain railroad network. In a Web3 context, most smart
network, rather than a single computer. Combining these programs together forms contracts run on the Ethereum blockchain (there are also numerous other blockchains that
decentralized apps (Dapps), similar apps running on your phone or laptop. are designed for smart contracts such as Solana, Polygon and Avalanche), and the cost of
getting a smart contract to run is measured in “gas” that is purchased with Ethereum’s native
Let’s extend our railroad metaphor further – smart contracts could be considered cryptocurrency – ether (ETH).
the engines that pull rail cars around our blockchain railroad, they are what makes
Web3 happen. “Gas” fees represent payments made to the owners of the computers that are executing
the smart contracts. As with the internal combustion engine, should you want your smart
contract “engine” to perform faster, you may need to pay more for a higher octane fuel.

Unlike traditional contracts where there is typically a buyer, seller, and a broker in the
middle, smart contracts are decentralized, directly connecting the buyer and seller with
the blockchain acting as the broker by providing a permanent record of the transaction’s
occurrence.

10
 TITLE

Smart Contracts key attributes –

/ Autonomous - smart contracts can run without

$ any human intervention, continuously, until they
are turned off.
ALICE / Decentralized - running on the blockchain,
smart contracts are visible to all users, making
them tamper proof.
/ Direct - with no intermediary, smart contracts
BOB
directly connect users.
/ Equitable - as is the case with our blockchain
BUYER LAWYERS, BROKERS, SELLER railroad, everyone with access to the blockchain
can view the smart contract code.
INSURANCE
/ Revenue generating - smart contracts require
“gas” to execute.

TITLE

ALICE “CODE AS LAW”

BOB

BUYER SELLER

11
 So what’s the difference between coins and tokens? If a coin such as a penny or a bitcoin
represents the ability to own something via purchase, a token is evidence of ownership.
A physical world example of a token is a title for a car, or a deed to a property – it’s not
the actual car or the house, but proof that the car or house belongs to you, which can be
transferred to another person if sold. In the Web3 world, tokens are the same –
a representation of the ownership of an asset.

Cryptocurrencies The Rise and Rise of Cryptocurrency Value

and Crypto Tokens

Total Cryptocurrency Market Cap ($Billions)

2261
Completing our railroad metaphor, we should consider the cargo that our rail network
carries. Not all blockchain railroads are created the same – some are designed
specifically for carrying currencies, others are more universal in their design and can
carry currencies as well as digital tokens.

773

389
195
127
17.5

2017 2018 2019 2020 2021 2022

Source: Statista, 2022

12
Fungibility
An important concept to understand relative to Web3 and tokens
is that of fungibility and non-fungibility. Fungibility is the ability
of a good or asset to be interchanged with other individual goods
or assets of the same type. Fungible goods are items that are
interchangeable because they are identical to each other for
practical purposes. If exchanging two items would be meaningless,
they are fungible.

In the physical world, a good example is paper bank notes. If you

and I both give each other a dollar bill, the note is to all intents and
purposes the same – a dollar bill, carrying exactly the same value as
the one I previously had in my possession. In the Web3 world, this
would apply to cryptocurrencies such as Bitcoin – a bitcoin swapped
for another bitcoin has exactly the same value, one bitcoin.

Non-fungible goods have attributes that make them unique and

therefore not interchangeable. Physical world examples could be
diamonds, real estate, and collectibles such as signed baseball
cards. Until very recently, digital content has been fungible – an
MP3 recording or a JPEG image is not unique, being replicable and
interchangeable indefinitely. For instance, if I do a web search for a
famous painting, a Magritte maybe, I can copy and paste the image to
a document of my own that is identical to the one I found. This image
is fungible.

13
Recap - Web2 vs. Web3
Returning one last time to our railroad analogy, let’s compare
Web2 (horse and cart) to Web3 (rail network) …

Web3

Advantages of Web3 Disdvantages of Web3

Web2 / A decentralized ownership – every user has a vested interest in / It may not be the fastest route. Trains have specific timetables,
maintaining the integrity of the rail network and planning for its stops, and are bound by the tracks they run on. The “Pony Express”
future success. is directly A to B, and therefore faster.

/ The ever-expanding rail system encourages innovation and / Fuel (gas) costs can be very high at times, and the cost of crypto
exploration of new destinations. used to purchase gas can fluctuate wildly. Horse travel will require
buying tickets from, or giving favors to the stagecoach company, but
/ It’s universally accessible – anyone can take a train. Horse carriage the cost of horse feed isn’t necessary.
travel is somewhat more exclusive, possibly involving a fee to the
owners, or the owners giving you free travel in return for favors. / Bad workmanship (bad coding, inaccurate data) at any point on the
blockchain railroad is permanently recorded, potentially causing
/ It’s clear who and what is traveling for all to see, reducing derailment at a future date.
opportunities for nefarious activity.

/ Robust architecture – there are multiple routes and multiple trains.

There is no single point of failure, unlike horses that are less reliable
and more susceptible to highway robbery.

14
Web3 Components
& Financial Services
Given our new found knowledge and understanding of what Web3 is and how it works, let’s industry is built upon a trusted third party brokering an arrangement between two parties.
apply this to current financial services and assess where it can impact incumbent services. Web3 provides a construct for the broker to be removed.

Obvious areas of disruption are where there has been a traditional intermediary. Credit and The table below is by no means exhaustive, but designed as an idea board for where current
debit card networks are intermediaries between payment transactions, mortgage lenders financial services could be either disrupted or augmented with Web3 technologies.
are intermediaries between home buyers and sellers. In fact, much of the financial services

Banking Payments Lending Investing Insurance

/ Identity / Anytime, anywhere / Repayment automatically / Trading infrastructure / Certificate of

/ KYC & Fraud payments forms a transparent, / Centralized, low-cost, Insurance Storage
/ Interbank clearance and / Fraud mitigation public credit history transparent post-trade / Provenance management
settlement / Transparent transactions / Blockchain-enabled operations decrease the
Blockchain
lending data dovetails cost to trade for large &
with the aims of open small investors
banking

/ Loyalty & rewards / Streamline workflows / Asset-backed loans / Risk management / Crypto insurance
/ Interest accrual / settlement / Remittance / Supply chain financing / Smart contracts could / Claim Management /
Smart / P2P / Loan closing workflows automate many treasury Processing
/ Credit functions in institutional
Contracts trading

/ Cross border accounts / CBDCs / Payment tracking / Cryptocurrency / Certificare of Insurance

/ Stablecoins / Underlying asset / Fractional investing
Tokens / Identity management information and proof / NFTs
of ownership / Tokenized Securities

15
Conclusion -
Where disruption is most likely in financial services due to Web3 will be –

/ Networks that have overpriced transaction fees or exorbitant interest rates due to
the assumption of exclusivity. E.g. banks that charge a fee for recurring transactions

Evolution, not
would be seriously undercut.

/ Networks that have relied on opacity and hidden fee structures for revenue
generation. Interchange fees were built on the premise of scarcity of access,

Revolution whereas Web3 rails would enable direct connections and thus undermine the
rationale of scarcity for interchange.

/ Platforms with restrictive access requirements (credit score, proof of citizenship,

etc.). Opening a bank account often requires a smorgasbord of documentation to
prove identity. Web3 would not.
Web2 and Web3 will not be
mutually exclusive – there will / Networks where fund settlement is measured in hours or days. International
be middle ground, and degrees remittance gives large institutions the chance to profit from the float, which
reduces utility by lengthening the time to completion. In a Web3 world,
of decentralization befitting international remittances would be P2P, decentralized and auto-executed via smart
the required functions of the contracts. FIs could still make money from gas fees for processing the transaction
on their Dapp, but they couldn’t charge anachronistic fees or profit from the float.
network. However, while there
will be overlap and collaboration If your organization resembles any of the above, Web3 could be an existential threat.
between Web2 and Web3,
Eventually.
that does not inoculate
from disruption occurring to The transformation from Web2 to Web3 will be evolutionary, not revolutionary.
traditional financial services. Many Web3 initiatives in financial services thus far can be characterized as lacking in
fundamental user centric design principles that would make them accessible for most
people – just the participation in any Web3 activity involves the convoluted purchase
of the requisite cryptocurrencies. From here, the journey dives down a rabbit hole of
gas fees, metamasks, and transactions where the more “wild west” elements of crypto
come to the forefront.

There is unlikely to be a help desk number for transactions that are made in error –
the cryptoverse is designed to be irreversible and hence can be unforgiving when fat
fingered mistakes are made. Rookie missteps can have expensive consequences, with
each month another story surfacing of an NFT being sold for painfully discounted
prices due to pilot error1.

16
There is also the advantage of trust that incumbent systems have cultivated
over decades – people understand credit and debit cards, bank accounts, and
mortgage lenders. The 2008 financial crisis notwithstanding, people trust
financial institutions more than newcomers – according to a 2021 study, US
consumers trust banks 30 percentage points more than cryptocurrencies, and
probably with good reason – you can physically visit a bank branch and see the
Corinthian columns and steel doors. The actual presence of banks is analog
evidence that your money should be safe. By contrast, Web3 to most people
is somewhere between science fiction and science project, and hasn’t had the
longevity to cultivate trust, particularly for financial transactions where actual
money could disappear into the “ether” (pun intended)2.

64%
In summary
Web3 is coming, but won’t manifest into a decentralization revolution in a binary
switch from Web2. Instead, we will see elements of Web3 be implemented into Web2
platforms in ways that will enhance efficiencies, expand global opportunities, and
reduce costs.
34%
As highlighted, companies that have built businesses on opacity, obfuscation and
oligarchy will find Web3 particularly troublesome. Maybe not immediately, but Web3
could be as problematic for you as Voice over IP (VoIP) was for copper wire telephony.
Current rumors of your demise are not overstated should you choose not to recognize
the potential shifts from centralization to decentralization, and the power of smart
contracts to remove intermediaries.
Banks Cryptocurrencies
This will be a golden age of innovation in financial services as the latent potential of
US Trust Financial Services Sectors Web3 technologies (blockchain, smart contracts, tokens) cross pollinate with the
Source: Edelman Trust Barometer, 2021
ingenuity of the financial services industry. The true potential of decentralized finance
(DeFi) is just beginning to be realized, and will be the focus of further research and
Finally, despite a veneer of innovation, under the hood the financial services analysis by Money20/20.
industry is often heavily reliant on technologies that have been in place for
decades. Pull any payment card from your wallet and you’ll see an example of just
how bound we are to legacy systems – a magnetic stripe, technology that goes
back to the 1950s. This “if it works, don’t fix it” attitude pervades the financial
services industry, literally to the core. A 2021 report on mainframe computer
usage highlighted that that 67 Fortune 100 enterprises – which includes 45 of the
top 50 banks, still rely on such systems3. Displacement of the old with the new is
rarely something that happens overnight in financial services.

1. https://beincrypto.com/pricey-mistake-as-bored-ape-nft-sells-for-less-than-150/#:~:text=In%20November%2C%20a%20CryptoPunk%20NFT,a%20%20fraction%20
of%20their%20prices.
2. Source: Edelman Trust Barometer, 2021
3. https://www.computerweekly.com/feature/Why-post-pandemic-reskilling-must-focus-on-mainframes 17
Web3 Glossary
Bitcoin Ether
Bitcoin is a digital currency, or cryptocurrency, built on the bitcoin blockchain. While there Ether is the cryptocurrency or native transactional token that’s deployed on the ethereum
were cryptocurrencies before Bitcoin, it is the most widely known and owned cryptocurrency blockchain.
in operation today.
Ethereum
Blockchain Ethereum is the second most popular cryptocurrency after bitcoin, and like bitcoin functions
A blockchain is a decentralized public ledger of all transactions across a peer-to-peer network. as a digital currency. However, where it differs from bitcoin is in that the ethereum blockchain
Data in a blockchain is stored in groups of ‘blocks’, with each of these blocks strung to a also functions as a platform for building a range of decentralized applications (Dapps) and
previous block, hence forming a chain of blocks or a blockchain. The chaining of new blocks of deployment of codes (smart contracts) that leverage blockchain technology.
data to form ever longer chains of blocks means all transactions recorded on the blockchain
are unmodifiable (or immutable) and visible to all participants on that blockchain network.
NFT
NFTs or non-fungible tokens are unique data units that leverage blockchain technology to
Cryptocurrency represent unique digital content – be it videos and songs to art – and provide provenance for
Cryptocurrencies are currencies that only exist digitally and on a blockchain. Cryptocurrencies that digital content.
are characterized by the fact that transactions using them are verifiable and recorded on
blockchain, as opposed to centralized maintenance that’s a hallmark of traditional currencies.
Smart contracts
Stored on a blockchain, smart contracts are digital contracts that establish the terms of an
DAO agreement and are automatically executed when a set of predetermined conditions are met.
DAOs, or decentralized autonomous organizations, are organizations without a central Hence, smart contracts allow the execution of specified agreements between parties without
authority. In contrast to traditional organizational management structures, where limited the need for trusted intermediaries.
groups likes boards run them, DAOs leveragege smart contracts to execute
and enforce.
Web3
Web3 refers to the third iteration or era of the internet, defined in contrast to earlier versions
Dapp dubbed Web1 and Web2. Web2, the current version of the internet, is characterized by
Decentralized applications or Dapps are digital applications that are built and run on a closed-loop platforms owned by a handful of large corporations like Facebook and Google
blockchain. Because Dapps exist on a blockchain, they are not controlled by a single authority. that monetize user data and content. In contrast to this closed version of the internet, Web3,
built on blockchain technology, is a decentralized digital ecosystem owned by users, as
DeFi opposed to central gatekeepers.
Decentralized finance, typically dubbed DeFi, is an umbrella term applied to a wave of
financial services and products built on public blockchains, predominantly on Ethereum, with
the aim of disrupting traditional financial services. Because its foundation layer is blockchain
technology, core to DeFi is the immutable, public, and decentralized features of blockchain.
In theory, then, DeFi is antithetical to traditional financial services, where banks and other
third-party institutions are necessary intermediaries.
18
Meet the team

Nick Holland Scarlett Sieber Sanjib Kalita

Global Head of Research Chief Strategy and Editor in Chief
Money20/20 Growth Officer Money20/20
Money20/20

[email protected] [email protected] [email protected]

Twitter - @nickster2407 Twitter - @scarlettsieber Twitter - @paymentalist

Zachary Anderson Pettet Micky Tesfaye

Content Director, USA Fintech Journalist
Money20/20 Money20/20

[email protected] [email protected]
Twitter - @zachpettet