The Great Expansion: The way DeFi captures the future of the financial world
While most of us will prefer to forget the horrors of 2020, DeFi may well prove to be the guarantee of a better, more liberated future.
In a broad sense, 2020 has been the year of the COVID-19 pandemic. As it charges toward 1 million deaths and over 30 million infections, governments have been found wanting. Our institutions have crumbled, leaders reacted too slowly, and all of the systems both in place and newly created to protect us — healthcare, aged care, testing, protective equipment supply chains, contact tracing, etc. — have collapsed. But 2020 has also very much been the year of decentralized finance, which has come to be known as DeFi.
DeFi is crypto
To understand why DeFi has captured the imagination of the entire crypto landscape is to understand that it is less about the outrageous returns offered to yield farmers and more about the future possibilities it presents.
Cryptocurrency, and the technology behind it, has always been about future possibilities.
When Bitcoin (BTC) was born to little fanfare in 2009, it was quickly recognized by those familiar with it as having the potential to be the future of money. 11 years on, Bitcoin, with its decentralized global system of nodes and miners keeping the network operational and secure, has met its promise and more.
Not only is it a reliable and fast way for people to permissionlessly send money to each other, it has also become a genuine enterprise-grade investment vehicle, and its investment worthiness appears to be growing. Large and enterprise owners are holding onto it in anticipation of capital growth.
“Bitcoin as an investment vehicle” aside, it remains, in essence, money — a new currency for a new, hyper-connected world.
Bitcoin and/or DeFi
“Bitcoin as money” still works like money insofar as it still relies on a financial ecosystem around it to keep it alive. But that ecosystem is somewhat limited; it consists of those that secure the network on which transactions are transmitted (miners and node operators), wallets, and exchanges where it can be exchanged for other digital and, increasingly, fiat assets.
But a financial services architecture as we know it incorporates a whole lot more in terms of functionality: lending, borrowing, earning interest, paying interest, investing, etc. Bitcoin was never intended to cater to all those mechanisms — but DeFi is.
The next logical step in the evolution of crypto’s gradual assumption of the roles played by traditional finance is being taken by the growing Ethereum-based decentralized finance ecosystem.
DeFi, in many ways, is Bitcoin 2.0. And for that reason, DeFi — although based on Ethereum’s composability and smart contract functionality — furthers the Bitcoin narrative into the future that Bitcoin first allowed us to believe in. With each new DeFi protocol, that future is closing in on us: a world without banks as we have come to know them.
DeFi demonstrates the complementary nature of Ethereum to Bitcoin. By recreating the financial system not from within but from the outside, Ethereum is hosting a movement that completes the circle Bitcoin started.
DeFi captures the imagination of the crypto world
Our banking system is as broken as our COVID-19 response was, but can DeFi actually replace it? The DeFi subsector’s most vocal critics would point to the emergence of food-meme protocols SushiSwap, Cream and Yam, along with many others, to suggest the movement resembles more of a circus than a legitimate threat to a giant financial services sector.
Those protocols are considered vampire forks, which are forks of existing protocols, designed to suck liquidity from them. If vampire forks are destructive — and there is no certainty they are — a seminal Rolling Stone article helps put them into perspective. When running through the central role Goldman Sachs played in virtually every financial collapse of the last century, Matt Taibbi called the behemoth:
“The great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”
DeFi’s vampires probably serve to further the ecosystem by stress-testing it. Legacy finance’s vampires have had only one function: to take money from everyone else to strengthen themselves.
From the Great Depression, to the dot-com bubble and burst, to the housing crisis, the “great vampire squid” had self-serving financial destruction in mind and its tentacles on virtually every lever that produced those catastrophic episodes in our recent economic histories.
The sector as a whole has long since stopped serving most of our needs. Checking accounts no longer pay interest, accessing money costs money, and large enterprises find financing easy, while small and medium enterprises are left floundering. Try getting a mortgage as an independent contractor without benefits or job security.
The financial industry, as we know it is fully centralized. The power to manage and regulate the flow and supply of currencies, stocks, bonds, debt and interest is in the hands of a few institutions. Banks and financial entities have control over money and also dictate who can or cannot have access to financial services. Access to financial services is not open to everyone, and when someone can access them, they have to pay fees just for the right of using them. We are putting our money into banks, which they invest, keep the gains, and charge us fees for holding it. Besides, there are no guarantees banks will give back our money if they are in trouble. For example, experiences like Argentina’s default in 2001, there wasn’t any money for the population to make withdrawals of their money; or more recently, banks in Turkey froze three million accounts because they were in financial trouble.
Bitcoins and altcoins decentralize the issuance and storage of money, as well as the legitimation of financial transactions. Bitcoin democratized money by freeing us from it in its legacy form. Now, DeFi has captured the imagination of the crypto world as its natural extension — not just the democratization of money but the democratization of finance, promising a seismic shift in the way people bank in the future.
That seismic shift will confer benefits on society we could only have dreamed of a decade ago.