Disintermediation
The major innovation bitcoin provided was the elimination of intermediaries in financial transactions. Prior to bitcoin, there was no way to send funds to another person online without using some sort of intermediary.
When purchasing goods online, it was via a payment provider such as Visa or Mastercard. When sending funds directly to someone else it was via a bank account or Paypal.
When purchasing goods online, it was via a payment provider such as Visa or Mastercard. When sending funds directly to someone else it was via a bank account or Paypal.
Can Web3 eliminate the middleman?
These intermediaries existed to be the trusted party in a transaction where you didn't know or trust the recipient of the funds. Bitcoin provided another mechanism by moving the trust onto its decentralised, immutable ledger or blockchain, providing the potential to disintermediate these established mechanisms for sending cash online.
This idea of disintermediation is at the heart of many of the initiatives in web3. Cryptocurrencies, tokens, NFTs, DeFi protocols and DAOs all exist on-chain using the security guarantees provided by the underlying network to secure their offering. Proponents of web3 argue that this is better for everyone, as there are no bloated incumbents taking their slice of the pie, and end-users are empowered to have complete sovereignty over their own digital assets. However, whilst this model may work well for the technology-savvy adopters of crypto and web3, for the larger majority of users it may not be the panacea its proponents make out.
This being said, I believe it's a good thing that people can choose how they manage their digital assets. They are not tied to having them held by a specific institution on their behalf if they don't want to. However, the immutability guarantees offered by the underlying blockchain is both a blessing and a curse, with the potential to offer people a safety net from government interventions, but also leaving them incredibly vulnerable with few options should they lose their funds.
We're at a point in the evolution of crypto and blockchain technology where there is still a high bar to entry for the average person to engage with the ecosystem. A single-digit mistake can be the difference between a successful transaction and a loss of funds, with no recompense available.
Existing users are willing to put up with this complexity — likely because they're technologists, speculators are faced with the choice between a hyper-inflating local currency and learning the ropes of web3 in order to have an alternative, this investment is reasonable. But for those users who are used to a stable store of value in their local fiat currencies, the risk that they could lose their funds due to a trivial mistake is likely too high to embrace for everyday transacting.
This reduction of risk is where the opportunities for intermediaries can be attractive. One of the core services provided by banks is deposit-taking and ensuring the safe custody of their customer's funds. I find it strange that more banks are yet to offer crypto custody services, as this is a key service they have been offering for thousands of years.
Unless a mechanism can be built into blockchain protocols to provide insurance to users or community funds are available to compensate users, it's likely that intermediary services will remain attractive for users. Intermediary services don't just provide simplification or protections for users, but also can add financial value to their experience by leveraging economies of scale.
When someone uses a native web3 service such as a decentralised exchange (DEX) like Uniswap to exchange one token or digital currency for another, they have no idea who is on the other side of the trade. It's likely to be a professional trader or institution whose motivation is to maximise their profit. They will have a far larger position they are trading, so the retail investor gets the bad deal here.
Broking services can get end users superior price execution by bundling multiple orders together. These brokers could exist themselves as smart contracts, but the point is that as nice as self-custody and democratised access to financial services is, it has the potential to result in a worse overall end state for users. Where their funds are at greater risk due to self-custody challenges and the overall technical complexity of web3, but also on the price execution side because they simply don't have the economies of scale on their side to benefit from lower overall costs.
Even if we do end up with multiple layers of intermediaries again supporting the average web3 users — which we already have with crypto exchanges, there are still many ways that this is better than what existed before as:
- Users have an alternative to using these intermediaries if they choose
- There is an opportunity for greater transparency of how these intermediaries are benefiting their users' thanks to on-chain transparency
- Financial assets themselves will be represented in a tokenised form benefiting from faster settlement and greater liquidity than what is currently normal.
If the intermediaries aren't real-world entities in this new world, they will be codified in a protocol. The bigger question is how much of the activity that takes place in TradFi can be codified in a way that is better for the user, but also in a regulatory-compliant manner. Figuring out where this balance lies is where we are in the evolution of web3. In my view it's less about "code as law", but more about "code as intermediaries" and seeing just how far this can go.
