All kidding aside but when I see all these crypto plays “Defi”ing gravity I really don’t know who to call. Is there something paranormal about this underworld called Decentralized Finance (DeFi)?
Maybe we should dig into this whole concept of decentralized finance and why it seems to be the new craze or at least the latest in financial myth busters.
In its broadest sense the idea of creating less friction in capital flows and allowing more people access to capital and ease of use of that capital is a great idea. However, this is a complex and rich history of a network of entities, public and private, including regulatory and enforcement.
That history starts with Alexander Hamilton. It could be said that he birthed this concept of decentralized finance with creation of the US Mint and The Bank of the United States.
Wait…or is that centralized finance? At that time, 1790s, other countries coins were being circulated, the Spanish dollar being the most widely used.
Traditionally this access and flow has been “centralized” around large entities and companies who interact in a way that ensures the finance “highway” runs smoothly and justly. Imagine, the network of real freeways, highways and streets that crisscross our nation, asphalt and concrete and all. Imagine the chaos if there weren’t parties responsible for the maintenance, safety, and operations of these highways? Add on to that also the rules and regulations that the users are bound by, not to mention the legal aspects and responsibilities. Think speed limits, safety requirements, traffic signals and insurance claims.
As an aside, the US Federal and State governments own and control 98% of our highways and interstate.
Clearly, there are many things that can be upgraded on our highways, and upgrades have been made throughout time. Now imagine, a whole new set of roads, not maintained “centrally” but decentralized through a network of independent and autonomous organizations or people. Anyone can participate in creating these better faster routes but generally every aspect of that journey is “run” by someone else.
With that in your mind, let’s tackle “decentralized finance” or DeFi. Let’s also look back at history, Hamilton to now, and know that advancements in technology have already decentralized and democratized our financial industry. Just look at the ATM, or the credit card, or your smart phone banking apps.
Sure, we have had our high points and low points, think S&L crisis or 2008 financial crisis. But my point is that we have two things going on here 1) the advent of technology that creates a more inclusive and friction free access to financial products and services and 2) the large “financial” entities and institutions that control, administer, and police, or are policed by the people, “you can call”. Federal agencies like the FDIC, FED, IRS, SEC, FTC and the CFTC, not to mention Congress and the Courts.
It is clear to me that innovation will thrive, particularly if there is a buck or two at the end of that road but imagine Google Maps sending you off the main well-traveled and well experienced road to take some smaller, side roads. Each small road connected to a private toll road, owned but connected by separate entities with different “contracts” and responsibilities.
My understanding is this is the world of DeFi. A world with smart contracts executing different parts of the digital highway and workflow. Mostly technology based, almost always digital and based on certitude and absoluteness. A programmers delight!
Obviously much more complex than this but essentially an ever growing and expanding set of applications designed to democratize and decentralize the breadth of products and offerings today offered by banks, insurance companies and other financial institutions. Today’s current financial freeway is a well-traveled partnership with a “centralized” collection of entities and regulators, balancing the public good with the financial good.
Isn’t that the real question? Have we lost faith in our largest financial institutions and our government to promote and protect the very financial engine first conceived by Alexander Hamilton and now we want to “decentralize?”
Or is it about strengthening that very highway and undoubtedly successful “fiat” currency that uses it but to create a system of “on ramps and off ramps”, as explained by Niall Ferguson, into the digital universe or metaverse, that expands our financial ingenuity and innovation without killing the golden goose.
I submit that DeFi, decentralized finance, is the sandbox of innovation that creates trust and transparency to enhance the great history that has been the US Dollar. It’s not a replacement, spurred by misplaced fears against our centralized banking entities and regulators. Better to use the technology and innovation to protect the integrity of our financial well being and make it stronger.
Think of DeFi as the new power grid for finance and financial services. Think of DeFi as the infrastructure for our US dollar highway to thrive and grow.
It’s not so much about who are you going to call, it may just be about who are you going to Trust!
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