Innovative trends

With the growth of blockchain, several ideas have emerged that make use of the decentralized property of blockchain to provide more user centric and fully decentralized services. Some of the key ideas in this space are decentralized web, decentralized identity, and decentralized finance. We will explore these ideas one by one as follows.

Decentralized web

Decentralized web is a term that's used to describe a vision of the web where no central authority or set of authorities will be in control. The original intention of the Internet was indeed decentralized, and the development of open protocols such HTTP, SMTP, and DNS meant that any individual could use these protocols freely, and immediately become part of the Internet. This is still true; however, with the emergence of a layer above these protocols called the Web layer introduced a more service-oriented infrastructure, which inevitably led to large profit-seeking companies taking over. This is evident from the rise of Facebook, Google, Twitter, and Amazon, which of course provide excellent user services but at the cost of a more controlled, centralized, and closed system.

Once intended and developed as decentralized, open and free protocols are now being dominated by powerful commercial entities around the world, which has resulted in major concerns around privacy and data protection. These types of business models do work well and are quite popular due to the high level of standardization and services provided, but they pose a threat to privacy and decentralization due to the dominance of only a handful of entities on the entire Internet.

With blockchain, it is envisioned that this situation will change as it will allow development of the decentralized Internet, or the decentralized web, or Web 3 for short, which was the original intention of the Internet.

We can review the evolution of the Web over the last few decades by dividing the major developments into three key stages, Web 1, Web 2, and Web 3.

Web 1

This is the original World Wide Web, which was developed in 1989. This was the era when static web pages were hosted on servers and usually only allowed read actions from a user's point of view.

Web 2

This is the era when more service-oriented and web-hosted applications started to emerge. E-commerce websites, social networking, social media, blogs, multimedia sharing, mash-ups, and web applications are the main features of this period. The current Web is Web 2, and even though we have a richer and more interactive Internet, all of these services are still centralized. Web 2 has generated massive economic value and provides services that are essential for day-to-day business, personal use, social interactions, and almost every walk of life, but privacy concerns, the need for trusted third parties, and data breaches are genuine issues that need to be addressed. Common examples of centralized Web 2 services include Twitter, Facebook, Google Docs, and email services such Gmail and Hotmail.

Web 3

This is the vision of the decentralized internet or web that will revolutionize the way we use the internet today. This is the era that will be fully user-centric and decentralized without any single authority or a large organization or internet company in control. Some examples of Web 3 are as follows:

• Steemit: This is a social media platform based on the Steem blockchain and STEEM cryptocurrency. This cryptocurrency is awarded to contributors for the content they have shared, and the more votes they get, the more tokens they earn. More information is available at https://steemit.com.
• Status: This is a decentralized multipurpose communication platform providing secure and private communication. More information is available at https://status.im.
• IPFS: This is a peer-to-peer hypermedia/storage protocol that allows storage and sharing of data in a decentralized fashion across a peer-to-peer network. More information is available at https://ipfs.io.

Other fast-growing trends include decentralized identity and decentralized finance, which we introduce next.

Decentralized identity

Another trend that has gained massive popularity recently is decentralized identity. Identity is a sensitive and difficult problem to solve. Currently, due to the dominance of large Internet companies and other similar organizations, the identity of a user is not in control of the identity holder and this often leads to privacy issues. Decentralized identity gives control of identity credentials back to identity holders and enables them to control when and how they share their credentials and with whom.

A prime example of such an initiative is that Microsoft has built a decentralized identity network called Identity Overlay Network (ION) on top of Bitcoin blockchain. This infrastructure is based on work done for decentralized identity at W3C and the Decentralized Identity Foundation. Similar initiatives have also been taken by IBM and other organizations around the world.

More information regarding ION is available at https://github.com/decentralized-identity/ion.

Information regarding the Decentralized Identify Foundation is available at https://identity.foundation.

Information regarding decentralized identifiers (DIDs) is available at https://www.w3.org/TR/did-core/#dfn-decentralized-identifiers.

Decentralized finance (DeFi)

DeFi could be the killer app of the decentralized revolution that everyone has been waiting for. Traditionally, finance is a business that is almost impossible to do without the involvement of a trusted third party. It can either be a bank or some other financial firm; consumers have to trust a central authority to do business on their behalf and provide the services.

There are rules, policies, procedures, and strict regulations that govern this ecosystem. This control and management is of paramount importance for the integrity of the entire financial ecosystem. Still, since there is always a central party that is required in every single transaction consumers do, this approach has some disadvantages.

Some main disadvantages are listed as follows:

• Access barrier: Access to financial services and banking requires a rigorous onboarding process involving KYC and other relevant checks and procedures. Even though this is extremely important for the integrity of the existing financial system, it can become a barrier at times for millions of unbanked people all around the world, especially in third world countries.
• High cost: Financial services can be costly in some scenarios, especially investment-related activities, and could be seen as a barrier toward entering the financial services industry.
• Transparency issues: There are concerns around transparency and trust due to the proprietary nature of the financial industry.
• Siloed: Most current financial industry solutions are proprietary and are owned by their respective organization. This results in interoperability issues where systems from one organization are unable to talk with another.

DeFi comes with a number of advantages, such as inclusion, easy access, and cheaper services; however, it has its own challenges. These drawbacks must be addressed for further adoption of this novel paradigm of financial services:

• Underdeveloped ecosystem: This ecosystem is still developing and requires more effort to improve usability and adoption.
• Too technical: As some users may find understanding and handling all financial transactions and jargon a bit daunting, adopting a DeFi platform may take some time and educational effort.
• Lack of regulation: This is a genuine and clear concern because without the existence of any regulatory framework, this ecosystem can be used for illegal activities. Moreover, trusting the code alone, instead of traditional paper contracts with established financial institutions, is seen as a major problem, especially by consumers who are used to traditional financial systems.
• Human error: On a blockchain, human errors can result in serious implications. Especially on DeFi systems or cryptocurrency blockchains, any human negligence can result in serious implications, such as financial loss. Moreover, due to the lack of regulation (relative to traditional finance), such an issue can have an even greater detrimental impact.

  Note that human error can occur in any system, and blockchain is not immune either. Generally, a blockchain is regarded as a tamper-proof, all-secure, and decentralized platform due to its security promises. However, this perception can give the wrong impression. For example, for a general user who perhaps doesn't understand the underlying technology and associated limitations, human errors may go unnoticed, and users may innocently accept everything as accurate, due to blockchain being the source of ultimate truth! Therefore, human errors must be minimized as much as possible. It is essential to perform validation checks in DApps, especially on user interfaces where users might be entering different types of data. For example, it should be ensured at the user interface level that account details (addresses) are correct (at least the format of the address) to reduce the possibility of loss of funds. Not much can be done afterward, for example, if funds are sent to the wrong address.

  Other types of human errors might include, but are not limited to, sending funds to incompatible wallets, not appropriately protecting account information, and not understanding how to use DApps' frontends correctly.

DeFi applications are used in a broad spectrum of use cases, including loans, decentralized exchanges (DEXs), derivatives, payments, insurance, and assets. All of these use cases have one thing in common, which is that there is no central authority in control and participants (that is, users) on DeFi platforms conduct business directly with each other without the involvement of any intermediaries. This may sound like a utopian fantasy, but the DeFi revolution is happening right now and there is almost 5 billion USD (at the time of writing) of value locked in the DeFi system. This large amount of locked value is a clear indication that the usage of DeFi applications is quite significant and is expected to only increase.

You can find the latest rankings and analytics of the DeFi protocol on this excellent website: https://defipulse.com.

Uses cases of all these developments and further details will be introduced later in Chapter 19, Blockchain—Outside of Currencies.

In this section, we discussed some innovative trends, including decentralized web and DeFi; however, these are not the only applications of blockchain technology. Some other emerging trends include the convergence of different technologies with blockchain, which can open new vistas for further innovation such as artificial intelligence and the Internet of Things (IoT). We will cover these topics in Chapter 22, Current Landscape and What's Next.