10 years before the introduction of Bitcoin, Nobel Prize winner Milton Friedman hinted at the possibility of an Internet-based financial system; a “reliable e-cash” that would allow funds to be anonymously sent and received.
Today, DeFi (decentralised finance) goes beyond the transfer of digital currencies. It’s rebellious and radical – an alternative financial system written entirely in computer code that disseminates power and data access. It removes the need for centralised institutions like banks and governments, creating a parallel and self-sustaining virtual economy.
While DeFi can be esoteric, it’s also deceptively attractive. Its terminologies may not make sense to the crypto illiterate, but the allure of obscenely high returns will entice even the most risk-averse investors. It’s estimated that the total value of crypto assets globally amounts to USD 2.2 trillion. The Ethereum network, where most DeFi platforms are built, has a market capitalisation of approximately USD 475 billion, making it the 14th largest “company” in the world.
DeFi will undoubtedly have its place in an increasingly digitised world. The ability to access a shared financial system regardless of location or social status allows for more inclusive access to financial services. A trustless environment where users can rely on automated contracts complements the online generation. Globalisation means interconnectedness, and an efficient financial infrastructure based on blockchain’s borderless nature will only accelerate growth.
The Detriment Of Decentralisation
But DeFi’s biggest draw also exposes its inherent flaws. The lack of a centralised authority creates a dangerous environment; a saturated market filled with individuals and organisations that are simply in it for the “easy money”. It’s akin to a network of online casinos, each flashing colourful billboards promising attractive rewards and sky-high returns. Because anyone can access and develop DeFi platforms, it becomes an almost anarchistic democracy where immense profits can be quickly realised without sacrificing anonymity.
“Passionate” about blockchain? Or just passionate about quick cash? More often than not, so-called crypto enthusiasts tout the returns one can gain from investing in DeFi. While the lack of intermediaries reduces costs and increases profits to some extent, DeFi isn’t meant to be a gamified financial system where players earn rainbow-coloured tokens for participating.
Blockchains have mechanisms in place to ensure security and immutability. Decentralisation combats the vulnerabilities of centralised systems and ensures universal access to data. But DeFi is at risk of becoming a virtual playground for gamblers and unqualified developers looking to capitalise on the human nature of greed. It’s democratic and accessible, but also callow and untamed.
A centralised authority is not the solution. Blockchains and smart contracts were developed to facilitate the transfer of data without relying on centralised infrastructures. But a set of guidelines should be collectively developed to ensure that DeFi continues to function as an equitable, efficient, and transparent global financial system accessible to all.
Governance And Human Nature
DAOs (Decentralised Autonomous Organisations) are one such way to implement a collective standard for DeFi. Prominent DeFi applications like Aave and Compound are examples of platforms that allow token holders to vote on changes to the platform, therefore creating a decentralised form of governance that isn’t backed by a central bank or government. Members are guided by the platform’s governing principles (written in code) and every action is recorded on the blockchain.
But a DAO form of governance is only limited to individual DeFi platforms. It’s difficult to envision a DAO that governs the entire DeFi ecosystem as shared sentiments cannot be guaranteed. A global economy completely dependent on the actions of every single individual is not feasible. At least, not yet.
A democratic financial system looks good on paper. But human nature will inevitably exploit the lack of authority, creating an anarchistic environment where financial instruments become tools for causal manipulation. DeFi is already possible, but there is still much to achieve before the world is mature enough to completely democratise finance.