The rise of Web3 technology is bringing about a revolution in the lending and banking industry. Web3 technology, or “blockchain-based distributed ledger technology,” is poised to ultimately transform how we conduct financial transactions. With Web3, banks are no longer needed to facilitate loans and payments.
Instead, lenders, borrowers, and service providers can connect and transact directly with each other without any third-party involvement. This shift presents an excellent opportunity for people to access loans quickly, securely, and with reduced fees.
The initial version of the Internet, established in the 1980s, was comprised of open protocols that allowed anyone to build on them and accumulate minimal user data. However, that web form would soon transform into a more concentrated model, which saw user information, such as identity, payment history, and credit ratings, harvested, gathered, and often sold.
Applications were developed, distributed, and monetized in a closed-off manner; a few people managed the decisions about the apps and their implementation, and the profits were split between the executives and shareholders.
With the arrival of Web3, this power structure could be overthrown with a return to open standards and protocols. This shift would mean that control would not be concentrated in several large platforms and aggregators but instead spread across numerous “unrestricted” decentralized blockchains and smart contracts.
This article will examine how Web3 is revolutionizing lending and skipping banks. We will explore the advantages that Web3 provides, such as decreased transaction costs, increased speed of transactions, and improved security.
We will also discuss the potential implications of this shift, including the possibility of the disintermediation of banks and the emergence of new lending models.
Learn More:
- Fintech in India: How Fintech Is Transforming Lending in India
- How Fintech Is Revolutionising the Indian Lending Space: A Comprehensive Guide
- Exploring the Lending Ecosystem Under RBI Scrutiny
How does banking work today?
As a customer, when you apply for a loan, you are asking the bank to loan you money. You repay the loan to the bank with interest. The bank uses your money to make more money. The bank generates revenue on your loan by charging you interest on the amount being loaned to you. The higher the interest rate, the more money the bank makes.
The bank also has some risk — that you won’t be able to repay the loan and that it will lose money. Banks make money by taking a percentage of every transaction that takes place through the bank. This is called a “swipe fee” because your card is swiped through the machine at the store. Banks also charge interest on the amount being borrowed.
For example, if you take out a $10,000 loan, you might have to pay $500 to $1000 in interest each month until the loan is paid off. Some banks charge high-interest rates on loans because they take on more risk by lending money to people who might not be able to pay it back.
Different Ways Web3 Is Revolutionising Lending
Web3 will remove the need for banks to facilitate loans in the traditional sense. Instead, lenders, borrowers, and service providers can transact directly with each other without any third-party involvement. This will make the lending process faster, more secure, and less costly. For example, you can find a lender on a peer-to-peer lending platform if you want to get a loan.
You can then use an app to provide the necessary information about your loans, such as the loan amount, interest rate, nature of the loan, and amount of collateral if required. After this, your loan request is sent to other lenders, who can choose to accept or decline your loan request.
The transaction is recorded on the blockchain via smart contracts if someone receives your loan request. As the loan terms are pre-determined, the terms of the loan are stored on the blockchain.
Advantages of Web3 for lending
– Increased speed of transactions
– The lending process is much faster when everything is automated and on the blockchain. This is especially true compared to the traditional banking system, which is still slow and paper-based. — Improved security and privacy
– With everything on the blockchain, there is no need to share sensitive information with a third-party institution or a centralized database. This means that the data is kept private and secure.
– Reduced transaction costs — Unlike traditional banking transactions, there are no fees involved when conducting peer-to-peer lending via Web3.
– Disintermediation of banks — Traditional banks are no longer needed to facilitate loans. This means that banks are less critical and less relevant as trusted intermediaries. — Emergence of new lending models
– With Web3, new lending models will emerge, such as peer-to-peer lending and marketplace lending. This will change the lending landscape, and traditional banks may need to adapt to survive.
Potential implications of Web3 for the banking industry
– Decreased transaction volume and revenue for banks
– As banks are no longer facilitating loans, the volume and revenue from this sector will decrease. Banks will need to look for other revenue sources.
– Risk for banks — Banks will increase as they will not be as involved in the lending process. This could be problematic if banks don’t adapt and evolve.
– Increased competition between banks and fintech companies — Banks will need to innovate and invest in technology or lose market share to fintech companies, who have been at the forefront of digital transformation.
– New lending models — New lending models will emerge, and disintermediation will become more prominent. This will change the lending landscape and force banks to find new ways to generate revenue.
– Emergence of new blockchain platforms — New companies will emerge and launch their blockchain platforms. They will attempt to disrupt the banking industry via Web3 technology.
Conclusion
The rise of Web3 technology is bringing about a revolution in the lending and banking industry. Web3 is poised to transform the way we conduct financial transactions entirely. With Web3, banks are no longer needed to facilitate loans and payments. Instead, lenders, borrowers, and service providers can connect and transact directly with each other without any third-party involvement.
This shift presents an excellent opportunity for people to access loans quickly, securely, and with reduced fees. We may shift towards a more decentralized lending landscape with new lending models and platforms in the future.
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