Today, I read an interesting paper titled Web 3.0 Tokenization & Decentralised Finance on decentralised finance(Defi) using blockchains and its implications on some real world usecases. This is not a very comprehensive paper on this subject, but it does do a good job of explaining the fundamentals in the Defi ecosystem & takes a very opinionated view on what are the components making up that ecosystem.
The main contribution of the paper is to summarize what's needed to make Defi a reality in the Web 3.0 space. Like all academic papers before, it draws a lot of inspiration from the work of others (see the references section in the paper), but it does provide a holistic view of how the authors see the whole Defi space taking off in the Web 3.0 world. They also provide two example real world use cases & draw parallels between current Web 2.0 implementations of the usecases and then draw out a blueprint for implementing them in the Web 3.0 realm.
Commenting on the style of paper, its very approachable for a topic this academic. It looks like the authors wrote this paper with business users in mind. I had a lot of fun reading this & it certainly does a very good job of presenting an overview of the current landscape & then draw parallels to how that could / most likely will evolve in the Web 3.0 realm. The paper is also very focussed on the Finance vertical & no other verticals or implications of Web 3.0 in those verticals are addressed here (& thats a good thing IMHO). With that in mind, lets jump right in.
This section mainly highlight the current landscape in the Fintech domain. It then proceeds to explain the evolutionary steps needed to take the current business capabilities in the Fintech world into the Web 3.0 realm.
The authors start off by giving a high level view of what Defi is capable of achieving from an economic impact perspective. They say
"DeFi Blockchain Tokens and Smart Contract infrastructure aims to ‘democratize’ finance by replacing legacy, centralized institutions with peer-to-peer relationships that can provide a full spectrum of financial services, from everyday banking, loans and mortgages, to complicated contractual relationships and asset trading (Forbes, 2021), This a paradigm shift from digital ‘oligarchies’ underpinned by fiat currencies to Web 3.0 digital ‘cooperatives’.
They then talk about what a new digital economy will look like when Defi is able to achieve whats mentioned in the previous paragraph. This is explained in section 1.1 of the paper. The authors also draw nice parallels between traditional finance and decentralised finance. See Figure 2 in this section. They also begin to define some of the main concepts in the Web 3.0 world such as ownership economy, cryptocurrencies, tokenisation, smart contracts, DAO, DeData & DApp.
Section 1.2 is all about how the authors see the financial services being evolved over time. They again do a good job of differentiating between different versions of Fintech / services revolutions. See FS 1.0, FS 2.0 & FS 3.0 in the paper in this section. Long story short, FS 1.0 is all about Hub & spoke model. This model is very intermdiated, full of centralized institutions acting as custodians and gatekeepers. FS 2.0, introduces some disintermediation through algorithms, but the services provided are largely the same - trading, lending, borrowing, banking etc. FS 3.0 (facilitated by Web 3.0 tech) takes this intermediation level to another level. Here smart contracts on blockchains play the role of trusted intermediaries of the FS 1.0 * 2.0 worlds.
Section 1.3 is focussed more on Defi. It starts off by defining Defi. As per the authors,
Defi is a system by which financial products become available to the public on a decentralized peer-to-peer network; removing intermediaries between transacting parties. Although DeFi is commonly associated with cryptocurrencies and the tokenization of traditional financial assets, its scope is much wider leveraging a decentralized Web 3.0 system where ‘assets’ can potentially be any digital or physical entity, and their transfer automated through smart contract execution. The authors then go on to talk about how they see different versions of Defi being evolved over time. See the paper for definitions of Defi 1.0, 2.0 and 3.0. I am not sure if this is delineation is accepted industry wide, but it does help provide a mental model of Defi evolution.
This is a techical section (& so are the next three) describing currencies, coins and tokens. It goes into some high level details of the differences between them.
Section 2.1 focusses on tokens, specifically crypto-tokens. It also explains how they can be categorized. The authors categorize tokens based on fungibility - NFTs & Fungible Tokens & they categorize tokens based on their role (although I think applicability is a better name IMHO) - Asset tokens, payment tokens, security tokens, utility tokens, governance tokens, reward tokens. See the paper for a definition or details of these.
This is another technical section focussing on different tech components needed to make / build the Web 3.0 products & services - DOIs, IPFS, Blockchains, Edge Compute etc. See the paper for a definition or details of these.
Again a very technical section talking about blockchains and tokens in a blockchains. It goes into high level details of different types of blockchains & some of the security considerations under blockchains - all easy fodder for someone steeped in this ecosystem. See the paper for a definition or details of these.
This is a very important section and we now get into the main contribution of the paper - here the authors talk about how Web 3.0 needs to evolve from a tech stack perspective, for Defi to materialize to its full promise. They talk about how Defi is not just about foundational tech products such as blockahins, IPFS etc, but Defi also needs better security primitives, protocols, assets & others offering higher level abstractions. See the paper for a definition or details of these.
This section * the next go talk about how algorithm trading can be tokenised & venture capital can be tokenised. Please see the paper for details of these, there is no way I can summarize that without sacrificing on readability.
All in all, a good introductory paper on Defi. All credit to the authors.