Today, so many questions are asked about Web3, from what is Web 3.0 and examples, to which crypto coin is Web3, how to make money in Web3 and what is Web3 wallet in Binance. The questions are many, in today’s article, we will look into the meaning of Web3, and DeFi, and point out the key difference between Web3 and DeFi.

The blockchain space has rapidly evolved, bringing with it new paradigms that promise to reshape industries across the globe. Two of the most talked-about innovations are Decentralized Finance (DeFi) and Web3. Both are rooted in the principles of decentralization and blockchain technology, but they have different scopes, goals, and uses.

Let’s dive in…

What is DeFi (Decentralized Finance)?

Decentralized Finance, or DeFi, refers to the transformation of traditional financial services into decentralized structures that operate on blockchain technology. Through smart contracts, DeFi enables anyone to access financial services such as lending, borrowing, trading, and asset management without relying on intermediaries like banks, brokers, or payment processors.

Key components of DeFi include:

• Decentralized Exchanges (DEXs): Platforms like Uniswap and Sushiswap that allow users to trade cryptocurrencies directly, without an intermediary.
• Lending/Borrowing Protocols: Services like Aave and Compound allow users to lend their assets and earn interest or borrow assets by putting up collateral.
• Stablecoins: Digital assets such as USDC or DAI that maintain a stable value by being pegged to a fiat currency.
• Yield Farming and Staking: Mechanisms that allow users to earn rewards for providing liquidity to protocols or staking tokens.

What is Web3?

Web3 refers to the evolution of the internet into a decentralized model, characterized by peer-to-peer networks, blockchain technology, and user-controlled data. Unlike the centralized model of Web2 (dominated by corporations like Google, Facebook, and Amazon), Web3 aims to give users more control over their data, identity, and digital interactions. Simply put, the technology that underpins web3 is blockchain technology, and this depicts decentralization.

Key components of Web3 include:

• Decentralized Applications (dApps): Applications that run on blockchain networks, eliminating the need for central servers. These include games, social platforms, and more.
• Cryptocurrencies and Tokenization: The native currencies of blockchain ecosystems (e.g., Ether on Ethereum), as well as the tokenization of real-world assets (e.g., NFTs).
• Smart Contracts: Self-executing contracts where the terms are written directly into code, enabling automation and transparency in Web3 interactions.
• Decentralized Identity (DID): A system that allows users to manage their digital identity without relying on centralized authorities, ensuring privacy and ownership of personal data.

Key Differences Between DeFi and Web3

DeFi Vs Web3 simplified

Deep Dive into differences between DeFi and Web3.0

Let’s further explain the key differences between Web3 and DeFi;

1. Scope and focus

DeFi is a subset of the broader Web3 ecosystem. While DeFi specifically focuses on recreating financial services like banking, loans, and trading without centralized institutions, Web3 encompasses a much wider vision that involves transforming all aspects of the Internet. Web3 is essentially a decentralized version of the internet, where users can interact with applications (dApps) without intermediaries and have full control over their data and identity.

2. Use cases

DeFi use cases are strictly financial. Users can earn interest on their crypto assets, take out loans, trade assets, and invest in synthetic assets. On the other hand, Web3 use cases are far-reaching. Apart from finance, Web3 involves decentralized social media, online gaming, decentralized autonomous organizations (DAOs), decentralized marketplaces, and digital identity solutions.

3. Financial instruments

The core functionality of DeFi revolves around financial instruments like lending, staking, borrowing, and derivatives. DeFi tokens often serve financial purposes, such as providing liquidity or acting as collateral. Meanwhile, in Web3, tokens have a wider range of utilities, such as governance in DAOs, facilitating digital identity, and proving ownership of digital assets (as in the case of NFTs).

4. Risks

DeFi faces unique risks related to smart contracts and price volatility. Smart contracts, which are integral to DeFi protocols, can have vulnerabilities, leading to hacks or bugs. Additionally, the volatility of cryptocurrencies makes borrowing and lending risky. In Web3, while smart contract risks still exist, there are other broader issues like scalability, user experience, and the challenge of balancing decentralization with performance.

5. Maturity level

DeFi has seen faster adoption, with established platforms like Uniswap, Aave, and Compound boasting billions in Total Value Locked (TVL). These services are highly functional and offer tangible financial benefits to users. Conversely, Web3 is still in its early phases, with many dApps and decentralized solutions still in development or their infancy. The full vision of Web3, with decentralized identity, complete user control, and Web2 replacement, is still years away from widespread adoption.

FAQs

What is a common use of “oracles” in web3?

In Web3, oracles are commonly used to bridge the gap between blockchain-based smart contracts and real-world data or external systems. Since blockchains are isolated systems that cannot directly access off-chain data (such as weather conditions, stock prices, or sports results), oracles act as intermediaries, bringing external information into the blockchain environment. This external data can then be used to trigger actions within smart contracts.

Which technology underpins web3?

The straight answer is blockchain technology. Web3 is powered by a robust combination of blockchain, cryptography, decentralized networks, smart contracts, and advanced cryptographic techniques like Zero-Knowledge Proofs. Together, these technologies create a decentralized, secure, and user-controlled version of the internet, promising to revolutionize the way we interact online and with digital assets.

What is the term for the digital collectibles bought and sold on web3 platforms?

The term for digital collectibles bought and sold on Web3 platforms is Non-Fungible Tokens (NFTs). NFTs are unique digital assets that represent ownership or proof of authenticity of items like art, music, videos, and other types of digital content on blockchain networks. Each NFT has a unique identifier, distinguishing it from other tokens, making it non-fungible, unlike cryptocurrencies like Bitcoin or Ethereum which are fungible.

What is the primary programming language for Ethereum smart contracts?

The primary programming language for Ethereum smart contracts is Solidity. It is a high-level, statically typed language designed specifically for writing smart contracts on the Ethereum blockchain. Solidity allows developers to implement self-executing contracts with terms written directly into lines of code, enabling decentralized applications (dApps) and token standards like ERC-20 and ERC-721.

Is Web3 wallet a DeFi wallet?

A Web3 wallet and a DeFi wallet are closely related, but they are not the same. A DeFi wallet is a subset of Web3 wallets focused on interacting with decentralized finance protocols, but not all Web3 wallets are necessarily specialized for DeFi.

What are some examples of DeFi?

Some prominent examples of DeFi applications include Uniswap, SushiSwap, Balancer, Aave, MakerDAO, PancakeSwap, Polymarket, etc.

What is a DeFi wallet?

A DeFi wallet is a type of digital wallet designed to interact with decentralized finance (DeFi) protocols and applications on the blockchain. Unlike traditional wallets associated with centralized exchanges or services, DeFi wallets offer users full control over their funds and the ability to engage directly with decentralized services.

Can DeFi exist without Web3?

DeFi can technically operate without the broader Web3 ecosystem, but Web3 provides the foundation (i.e., decentralized networks and smart contracts) that DeFi relies on.

Is Web3 only about cryptocurrencies?

No, Web3 is about decentralizing the internet. Cryptocurrencies are a component, but they also include decentralized applications, identity management, and data ownership.

How does governance work in DeFi and Web3?

Both DeFi and Web3 projects often use DAOs (Decentralized Autonomous Organizations) to govern protocols. In these, token holders can vote on proposals and decisions related to the future development of a platform.

What are the major risks in DeFi?

DeFi faces risks like smart contract vulnerabilities, regulatory uncertainty, and market volatility. However, these risks are slowly being mitigated as the ecosystem matures.

Conclusion

While DeFi and Web3 are both driven by the ethos of decentralization and blockchain technology, their purposes and implementations differ significantly. DeFi focuses solely on transforming financial services, providing users with ways to lend, borrow, and trade assets without intermediaries. On the other hand, Web3 is broader, aiming to decentralize the entire internet, ensuring that users control their data, identity, and online activities.

As Web3 matures, DeFi will likely remain a crucial component of its ecosystem. Together, they have the potential to redefine how we interact with the internet, transact value, and maintain our digital identities in a way that is more secure, transparent, and democratic.

The future of both is highly promising. DeFi is expected to bring greater financial inclusion, while Web3 aims to decentralize the broader internet and return control of data to users.