A Revolution in Motion — Finance 3.0
Finance 1.0 → Traditional Finance Finance 2.0 → Financial Technology
Finance 3.0 ? Lets have a look
TAPPING THE WILDFIRE
The future ARRIVED, faster than anyone could have imagined. The rapid growth in the convergence of Tech and Finance. We can actually see this convergence happening around us — Right from the Bull run of cryptocurrencies, Central Banks preparing to launch native digital currencies, usage of smart contracts for crypto assets, or the hype around DeFi, and Let’s not forget COVID-19 which added fuel to this wildfire and multiplied the growth rate of cryptocurrencies.
FINANCE & FLAWS
The need to get over past framed policies and methods of Finance was the need of the hour. We know that under the Finance 1.0 framework most of the world’s nations are tied to their central banks' policies, a system commonly known as “Traditional Finance.”
Surprisingly till now, nothing much has changed about Finance 1.0 and with time as things kept moving, this finance’s drawbacks have become more evident — Right from changes in government sanctions and regulations, complex cross-border transactions, slow transactions, high fees, and human errors. How can we not forget the consequences of this structure right from the Asian Crises of 1977 to the Global Financial Crises of 2007–08.
These flaws were overtaken by the event of the first convergence of Finance and Technology i.e. Finance 2.0
The growing power of the internet and better accessibility of technology-enabled money’s next major shift. In the era of finance 2.0, there are many types of payment networks processors like PayPal and MasterCard which are introduced making sending or receiving a payment easier and convenient. Finance 2.0 modernized Finance 1.0 by digitizing banking systems, giving user-friendly stock trading platforms and mobile services for BUT THERE IS A CATCH?
The financial system is still not open and is still controlled.
It still has painful flaws which include a central system so all the user’s data are get stored in the main server which leads to the risk of a data breach.
Users also pay a cost for convenience in the name of the various transaction fees and beyond the control of users. We also know how Banks anytime can invest or use this money for their business purpose.
We also recently saw a major event, which highlighted Finance 2.0’s structural flaws:
The GameStop Saga, where Reddit forum WSB members banded together to organize a short squeeze in Citadel’s short position in GameStop. This sequence of events caused several hedge funds to lose $19 billion dollars in total.
In, turn these huge losses caused Brokerage firms to sell information about their users’ stock market activities to the financial services giant Citadel Securities may have allowed hedge funds to front-run retailer investors.
A very clear sign that Finance 2.0’s goals of an independent and free system is flawed. This predictable nature caused huge losses to wealthy investors and institutions.
So, there is a need to adopt a stronger and efficient Financial System for the next generation i.e Finance 3.0 — The Next Big Thing
The 3 DRIVING FORCES behind FINANCE 3.0
1) Bitcoin with Blockchain
Recovering after the shock of the pandemic in March 2020, it's the tech and Pharma companies that have fuelled the recovery. At the same time, we saw Bitcoin take off. But what factors drove this run?
The primary reason is its limited supply and the secondary reason is it became the first use case of a new technology called blockchain that is known to be the next electricity and thus called as foundational as electricity and the 4th industrial revolution. Blockchain created a world where there would be no requirement for any centralized bodies like central banks to deal with each other.
With time we will see Blockchain become a commonplace solution to create implicit trust and data sharing between humans, corporations, machines.
2)Central Bank Digital Currency
Central Banks, the torch bearers of capitalism who have pushed the same old policies despite many a financial crisis, wars, and pandemics.
The massive technological explosion has helped the world become digital and presented one of the biggest disruptions to all institutions, and more so central banks, as money by definition is virtual, and hence can be digital far faster.
While Bitcoin has challenged central banks with high-level transparency and programmability accompanied by increasing adoption by the masses it also contends with technology companies as they become more powerful than banks and even Governments in some cases.
This opens up opportunities for countries that have low levels of financial inclusion as the CBDC could be the boon to rapidly empower citizens and small businesses who have either have no bank account or have an account with no ability to receive credit and improve their Financial Strength.
The Rise of Bitcoin and Ethereum has made automated transactions in the form of smart contracts possible. The adoption of DeFi is gaining a lot of traction thanks to the underlying rails of blockchain, commonly Ethereum.
Providing automated market making, liquidity, and earnings yields on underlying crypto-assets and rapidly evolving as carbon finance is where DeFi can be used and in all brings to life seamless global products and data sharing between machines and humans.
We have big events coming up that will help DeFi become more mainstream this year, with the launch of Ethereum 2.0 which speeds up the blockchain by sharding, listing on equity bourses of Coinbase, one of the major exchanges of crypto assets, and listing of Ethereum Futures contract at Chicago Mercantile Exchange.
Just as Traditional Finance and Fintech have their place in the system today and never replaced each other, the move to DeFi would require time and integration with existing online systems.