Authors
Arnav Kumar
Web 3.0 Onboarding
In previous editions of FinTech in Focus, we’ve talked a lot about Web 3.0 and some of its components, like decentralized finance, non-fungible tokens (NFTs), metaverse real estate, and decentralized autonomous organizations. And as we continue to write about these innovations, venture capital firms are assembling billion-dollar funds dedicated to fueling the next batch of Web 3.0 startups. Two weeks after Sequoia Capital debuted its $600 million crypto fund, Electric Capital made headlines with the announcement of its $1 billion capital raise earmarked for investing in Web 3.0 startups. But if you’re anything like me, you might be wondering how so much money is being dedicated to projects you don’t even know how to access. I figured it would be helpful to provide a few steps for Web 3.0 adoption and shed some more light on what we’ve been writing about. For simplicity, we will focus on the journey for the Ethereum blockchain.
Step 1: Fiat On-Ramp
The basic first step is to buy Ether on a traditional centralized exchange like Coinbase, Gemini, Kraken, FTX, Binance, Robinhood, and others. These exchanges create a custodial wallet to store your purchased Ether and maintain the private key, which is what proves wallet ownership and enables asset recovery. To facilitate a more seamless and frictionless experience, these exchanges maintain the private keys to wallets and secure users’ assets to decrease risks. Peer-to-peer transfers of your Ether are usually enabled after the purchase settles and clears, which can take up to a week.
Step 2: Transfer to Decentralized Wallet
This is where most people get lost and end their Web 3.0 journey. Web 3.0 decentralized applications (dApps) usually require users to have non-custodial browser-extension, software, or hardware wallets. Hardware wallets are generally considered the safer option, as they store assets offline; however, browser-extension options like Metamask have gained popularity for their ease of use. This wallet will have a unique address that can be added as the transfer destination for your funds on the exchange used for the initial cryptocurrency purchase.
The key difference with these wallets is that they are decentralized, meaning the individual maintains sole access to the private key and no third party exerts any control over purchased assets. The private key is often encoded in a simple seed recovery phrase, which is a string of words that serves as the ultimate password of sorts.
There are pros and cons to this model. While you get full ownership and control of your digital assets, you also sacrifice the security of a wallet backed by an exchange. If you lose the seed recovery phrase or accidentally give it to an untrusted party, your assets are gone and can’t be recovered.
Step 3: Connect Wallet to Decentralized Applications
Popular dApps like OpenSea, Uniswap, Decentraland, and Aaave all feature some iteration of a “Connect Wallet” button that prompts you to link your wallet to the service. With one click, you can essentially log in to these dApps with just your wallet address. What’s confusing is that these applications are still being built through a Web 2.0 interface on browsers like Google Chrome, but we know they all really operate on Ethereum. The inability to visualize the blockchain can make it difficult to grasp, but a fundamental understanding of how decentralized wallets works is a great starting point for developing Web 3.0 knowledge.
It's easy to get lost in all the new buzzwords emerging in the discussion of Web 3.0, but these are the basic steps to start exploring the new dApps under construction on the blockchain. Despite all the hype and money flowing around, we should recognize that the idea of a new internet and financial system on the blockchain is still in its early stages. Laws have not yet caught up to the innovation happening in the space, and many of the dApps have yet to reach the scale needed to realize their missions of financial inclusion and institutional disintermediation. President Joe Biden’s recent crypto executive order recognizes the importance of fostering digital asset leadership at the government level, while also ensuring consumer protections and financial stability. This executive order lays the foundation for healthy regulation in the space that minimizes risk for individuals and pushes more Web 3.0 organizations to their lofty goals of financial democratization.
Crypto Aid
The Ukrainian government published its official wallet addresses on February 26, opening a significant stream of direct monetary aid to fund its stand against the Russian invasion. According to Elliptic, cryptocurrency donations topped $60 million as of March 8, the government has accepted six different cryptocurrencies. Even a Cryptopunk NFT last sold for over $44,000 in 2021 was transferred to Ukraine’s Ethereum wallet last week.
We are seeing one of the most prominent applications of cryptocurrencies’ real-time transfer capabilities. Humanitarian emergency funding would usually have to go through traditional cross-border bank transfers that would take more time, amass higher fees, and be closed off from the wider public. As Markets Insider reports, Ukrainian defense officials have thrown their weight behind facilitating cryptocurrency donations, as the two-to-three-day settlement period through legacy financial institutions limits the ability to finance resource expansion and respond to rapid military developments. This crypto focus has already shown its benefits: In almost a week after accepting donations, the Ukrainian government was able to purchase $15 million worth of military equipment, according to Bloomberg.
If this all sounds like a crypto version of another online crowdfunding initiative, you’re not wrong. But as The Washington Post notes, platforms like GoFundMe prohibit campaigns for military fundraising, and traditional crowdfunding mechanisms come with restrictions and less transparency. The decentralized, bureaucracy-free cryptocurrency model helps solve this with very few restrictions on transfers and an open-access public ledger recording all transactions, creating automatic documentation of how funds were sourced and used. For example, we can even verify that Ethereum Co-Founder Gavin Wood delivered on his promise to send $5 million to Ukraine if it accepted DOT coins, the native cryptocurrency of his new “blockchain of blockchains” Polkadot.
But this new model for war-time financial support is not perfect. Scammers took advantage of willing donors by posting false addresses across social media that linked to personal wallets rather than those posted officially by the Ukrainian government. For people who want to help, the wallet address “0x165CD37b4C644C2921454429E7F9358d18A45e14” wouldn’t seem all that different from the string of letters and numbers for the many other Ethereum wallets in the ecosystem. As a result, Ethereum founder Vitalik Buterin warned his followers to be “slow and careful when sending irreversible crypto transactions.” Scammers have also found other unique ways to capitalize on the war by creating new tokens purportedly marketed toward raising money for Ukraine. As The Wall Street Journal reports, a “Peaceful World” token tricked the public and amassed a market capitalization of over $50 million by claiming to be the official asset backed by the Ukrainian government.
It's also important to note that Russia can use cryptocurrencies to its advantage, as well. While oligarchs’ assets in banks are frozen, they are free to maintain crypto wallets outside of institutional purview and evade targeted sanctions. In response, Senators Elizabeth Warren and Mark Warner called upon the US Treasury Department to rethink how it can better monitor illicit cryptocurrency activities and enforce sanctions through the Office of Foreign Assets Control. However, there is one problem here that persists and that we’ve written about in the past: The whole ethos of the blockchain and cryptocurrency movement centers around disintermediation and building a network outside of government control. Would it be fair to impose a ban on all Russian wallet addresses, as the Ukrainian vice prime minister and minister of digital transformation suggested? The response from the crypto community has been a resounding “no.” Kraken CEO Jesse Powell publicly rejected the request and noted that his exchange wouldn’t take such an action without a formal legal requirement.
Consequently, we’ve ended up in an odd situation of both cooperation and disagreement between governments and the digital assets ecosystem. The Ukrainian government is embracing wallet technology and cryptocurrency transfers, but its requests to block Russian addresses have not gone over well in the community.
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