> For the complete documentation index, see [llms.txt](https://money.web3economy.io/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://money.web3economy.io/web3-networks/from-physical-exchange-to-web3-exchange.md). # From physical exchange to Web3 exchange The mechanisms used to transfer money have changed substantially over time. Physical money can be exchanged directly between two people, while digital exchange generally requires a system that records changes in ownership on a ledger. Digital fiat payments rely predominantly on banks and payment providers to maintain these ledgers. Web3 networks introduce a different model in which a distributed group of participants maintains a shared ledger according to the rules of a network protocol. This changes how transactions are recorded, who is responsible for facilitating them and what kinds of assets can be exchanged. It also creates a distinction between the infrastructure that processes an exchange and the asset that the participants choose to exchange. ## **Physical exchange** Historically, many monetary exchanges involved the physical transfer of an asset from one participant to another. Commodity money, coins and banknotes are examples of physical instruments that can be handed directly to another person. Suppose Alice wants to purchase bread from Bob for £2. Alice gives Bob a £2 coin, and Bob gives Alice the bread. The change in ownership is represented by the physical movement of the coin. Alice no longer possesses the money, and Bob now does. No separate ledger needs to be updated to record this change. Possession of the physical instrument provides the practical evidence of ownership. The exchange can be completed without a bank or payment processor becoming involved. Alice and Bob must agree that the coin is acceptable, and Bob may need to trust that it is genuine, but they do not require a third party to authorise or record the transaction. The participants must normally meet physically or arrange for the money to be transported. This can make physical exchange inconvenient across long distances. Physical money can also be lost, stolen, damaged or counterfeited, and transferring large amounts may require substantial security. However, once the participants are in the same place and agree to the exchange, the monetary transfer itself can be immediate and direct. ## **Physical money and final settlement** A physical cash transaction normally provides immediate settlement. Once Alice hands the coin to Bob and receives the bread, the monetary part of the exchange is complete. The payment does not remain dependent on Alice’s bank balance, a payment provider or a later reconciliation process. Alice cannot ordinarily reverse the transaction remotely after Bob has accepted the coin. This directness is one of the distinctive characteristics of physical cash. The instrument used as money and the mechanism used to transfer it are closely connected. Transferring possession of the physical money completes the payment. This does not mean that every physical monetary system operates without institutions. Commodity-backed money may depend on authorities that standardise coins or maintain reserves, while banknotes depend on the institutions that issue them. The individual cash transaction can nevertheless occur directly between the participants without those institutions processing each transfer. ## **Digital fiat exchange** Digital money cannot be transferred through the physical movement of an instrument. Instead, ownership is represented by records held within a ledger or account system. Suppose Alice has £2 in her bank account and Bob accepts card payments. When Alice uses her debit card, she does not physically transfer money to Bob. She sends an instruction asking the relevant financial institutions to update their records. Alice’s bank must determine whether she has access to sufficient funds and whether the transaction is permitted. Bob’s payment provider and bank must process the corresponding information so that Bob’s account is credited. The institutions involved reconcile their records through the wider payment and banking system. The exchange therefore depends on one or more intermediaries. These may include Alice’s bank, Bob’s bank, a card network, a payment processor and other financial infrastructure. The exact number of institutions involved depends on the payment method. A transfer between accounts at the same bank may be handled internally, while a card payment between different banks may pass through several systems. ## **Account-based ownership** In a digital fiat system, Alice and Bob do not directly possess identifiable digital pounds in the same way that they might possess particular physical coins. Their balances are claims recorded by their financial institutions. If Alice’s account shows £100, the bank’s ledger records an obligation to provide or transfer that value according to the terms of the account. A payment changes these ledger entries. Alice’s available balance decreases, and Bob’s balance increases after the transaction is processed and settled. This account-based structure makes digital exchange possible across long distances and without the physical transport of money. It supports online commerce, recurring payments and rapid transfers between large numbers of participants. However, it also means that users depend on institutions responsible for maintaining and updating the records. ## **Authorisation and access** Banks and payment providers determine who can use their services and under what conditions. Customers commonly need to complete identity and know-your-customer processes so that institutions can comply with legal and regulatory requirements. The institutions may block or delay transactions when they detect suspected fraud, sanctions violations, insufficient funds or other risks. They may also close or restrict accounts when a customer no longer meets their requirements. This ability can protect users and the financial system from fraud and illegal activity, but it also gives intermediaries substantial influence over access to digital exchange. A person may possess sufficient funds and still be unable to complete a transaction if their bank, payment provider or another institution refuses to process it. Digital fiat money is therefore not always transferable solely according to the wishes of its holder. The practical ability to use the money depends on continued access to the account and payment infrastructure. ## **Transaction fees** Banks and payment providers incur costs when operating digital payment systems. These include the costs of technical infrastructure, administration, customer service, fraud prevention, compliance and dispute resolution. Consumers do not always see a direct fee for each payment. A bank may offer account holders apparently free card transactions while generating revenue through lending, account fees and other financial services. Businesses are more likely to pay fees for accepting digital payments. These may take the form of a fixed amount, a percentage of the transaction or a combination of the two. If Alice pays Bob £2 and the payment service charges Bob 1 per cent, the fee is £0.02. Bob receives £1.98 after the charge. The same currency is used both for the economic exchange and for paying the cost of the payment service. Alice pays Bob in pounds, and the provider also takes its fee in pounds. This arrangement is simple for users, but it connects access to the payment system with the institutions that operate it. ## **Centralised ledgers** A digital fiat payment system relies on ledgers controlled by particular institutions. Alice’s bank is responsible for her account, while Bob’s bank is responsible for his. The wider banking and payment system coordinates these separate records so that transfers between institutions can be settled correctly. This structure is centralised in the sense that authorised institutions control the relevant ledgers and determine which transactions they will accept. Customers can inspect their own account records, but they do not ordinarily participate directly in maintaining the banking system’s ledger. The institutions are responsible for correcting errors, managing disputes and protecting the integrity of their records. Users must trust that these institutions will maintain accurate balances and continue honouring their obligations. Centralisation can provide clear responsibility and efficient administration, but it can also produce problems involving access, transparency, fees and delays, particularly when payments cross institutional or national boundaries. ## **International digital payments** Digital fiat payments are highly effective within established domestic banking systems, but international transfers can involve additional complexity. A payment may need to pass through multiple banks, correspondent relationships and currency-conversion services. Each intermediary may add processing time, fees and compliance requirements. The sender and recipient may have limited visibility into where a payment is being held or why a delay has occurred. The institutions involved may also operate according to different regulations, settlement schedules and technical standards. These limitations have created interest in digital systems that can transfer value across national and institutional boundaries using a shared ledger. ## **Web3 exchange** Web3 networks provide an alternative way to record and process digital transactions. Instead of relying on a single bank or payment company to maintain the authoritative ledger, multiple network participants maintain and verify a shared record. These participants are commonly known as node operators. They run software that applies the network’s rules, verifies submitted transactions and stores information about the state of the ledger. When Alice sends a digital asset to Bob through a Web3 network, she creates and authorises a transaction using her wallet. The transaction is submitted to the network, where it is verified and included in the shared ledger according to the network’s consensus process. Bob does not need to use the same bank as Alice. Both participants interact with the same network protocol. The network replaces the central ledger operator with a protocol and a distributed set of operators. This does not remove every intermediary from the wider exchange process. Users may still rely on wallets, exchanges, internet providers and other services. However, the underlying transfer does not require a bank or payment provider to maintain the definitive record of ownership. ## **Wallet based control** Web3 assets are commonly controlled through digital wallets. A wallet allows its user to create and authorise transactions using cryptographic credentials. The ledger records which addresses control particular assets. A valid transaction changes the recorded state by moving an asset from one address to another or by executing instructions within a smart contract. The wallet itself does not necessarily hold the asset in the same way that a physical wallet contains banknotes. The asset exists as part of the network’s ledger state, while the wallet manages the credentials needed to control it. This gives users a more direct relationship with the ledger. They do not necessarily require an institution to maintain an account in their name and approve every transfer. However, direct control also creates responsibility. If users lose access to their credentials, there may be no central institution capable of restoring access. Transactions may also be difficult or impossible to reverse after the network has confirmed them. ## **Permissionless access** Many Web3 networks are designed to be open and permissionless. A user can create a wallet and interact with the network without first opening an account with a bank or receiving approval from the network’s operators. Permissionless access does not mean that every application or service built on the network is unrestricted. Individual interfaces, exchanges and businesses may impose identity requirements or limit access according to applicable laws. It means that the underlying protocol does not ordinarily require each user to enter a direct customer relationship with a central network administrator. Node operators must follow the network’s consensus rules when processing transactions. A single operator generally cannot unilaterally change a user’s balance or permanently prevent a valid transaction from being submitted. Censorship becomes more difficult when control is distributed across many independent operators, although it may still occur if sufficient participants coordinate or if access becomes concentrated. The degree of openness and decentralisation differs between networks. Some distribute control broadly, while others depend more heavily on a small number of operators or organisations. ## **The asset and the exchange infrastructure** Web3 networks create an important distinction between the infrastructure that facilitates exchange and the asset being exchanged. In a conventional fiat payment, Alice might pay Bob in pounds, and the banking system might also charge its fees in pounds. The medium of exchange and the asset used to pay for the infrastructure are commonly the same currency. A programmable Web3 network can support many different digital assets. Alice and Bob may agree to exchange a token representing money, a commodity, ownership or another form of value. The network processes the transaction regardless of the particular reason the participants value the asset. The network may require its own native coin to pay for processing and recording the transaction. Alice could therefore transfer one asset to Bob while using a different asset to pay the network. For example, Alice might transfer a token representing a fiat currency while paying the transaction cost with the network’s native coin. The token is the asset exchanged between Alice and Bob, while the network coin compensates the infrastructure that processes the transfer. This separation is one of the principal differences between conventional digital banking and programmable Web3 networks. ## **Network coins** A network coin is a digital asset native to a Web3 network. It commonly plays a role in paying for network usage and compensating the operators who verify, process and store transactions. Examples include ETH on Ethereum, SOL on Solana and ADA on Cardano. The coin helps create an internal economic relationship between users and network operators. Users create demand for network resources by submitting transactions. Node operators provide the hardware, software and operational effort required to maintain the ledger. The network coin can transfer value between these participants. The coin may also be involved in securing or governing the network, depending on its design. A network coin can be used as money, but that does not necessarily need to be its principal function. Its defining characteristic is that it is native to the network and connected to the operation of the underlying infrastructure. ## **Tokens** Many Web3 networks also allow users and developers to create tokens. Tokens are digital assets implemented through the network’s programmable functionality rather than as the native coin of the protocol. A token can represent a wide range of things, including a form of money, a financial claim, ownership of an asset, membership, access or participation. Stablecoins such as USDC and USDT are examples of tokens designed to maintain a value connected to a fiat currency. Other tokens may represent commodities, property, application-specific rights or entirely digital assets. Because many tokens can exist on the same network, Alice and Bob have greater flexibility in deciding what they will exchange. They are not necessarily limited to a national currency or to the network’s native coin. A token only functions as money when people are willing to accept and use it in that role. Creating a token does not automatically give it value or make it a medium of exchange. ## **Programmable exchange** Web3 networks can also support smart contracts. A smart contract is a program deployed on the network that executes according to predefined rules. Instead of transferring an asset directly from Alice to Bob, the participants may place assets into a smart contract. The contract can then transfer them when specified conditions are satisfied. This makes it possible for the network to facilitate more than a simple payment. It can support exchanges, loans, collateral arrangements and other agreements involving digital assets. The rules are executed by the network rather than by a single payment provider. This can reduce reliance on central intermediaries, but it also creates technical risks. Errors in the contract may produce unintended outcomes, and changing a deployed contract can be difficult. The operation of smart contracts and the distinction between native network coins and user-created tokens depend on the underlying structure of the Web3 network.