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Broadly speaking, 2020 was the year of the COVID-19 pandemic. When the death toll from COVID-19 reached 1 million and more than 30 million people were diagnosed, people realized that the work of government alone was not enough. Our institutions were broken, leaders were too slow to respond, and all existing and newly established protection systems—health care, elderly care, testing, protective equipment supply chains, contact tracing, etc.—had collapsed. But 2020 was also very much the year of decentralized finance, or DeFi.
DeFi is crypto
To understand why DeFi has captured the imagination of the entire crypto space, it is necessary to understand that it means much more than the super high returns provided to yield farmers, but the future possibilities it brings.
Cryptocurrency , and the technology behind it, has always been about future possibilities.
In 2009, when Bitcoin was created, there was little fanfare and it was quickly recognized by those familiar with it as having the potential to become the currency of the future. 11 years later, Bitcoin has fulfilled its promise and more, with its decentralized global system of nodes and miners keeping the network running and secure.
It is not only a reliable and fast way for people to send money to each other without permission, but it has also become a real enterprise-level investment tool, and its investment value seems to be increasing. Large companies and business owners are holding it, expecting capital growth.
“Bitcoin as an investment vehicle” aside, it is still essentially money — new money for a new, hyper-connected world.
Bitcoin and/or DeFi
“Bitcoin as money” still operates like money in that it still relies on the financial ecosystem around it to keep it alive. But that ecosystem is limited and consists of those who secure the network for transactions to be transmitted (miners and node operators), wallets, and exchanges where it can be exchanged for other digital assets and, increasingly, monetary assets.
But the financial services architecture as we know it encompasses much more in terms of functionality: lending, earning interest, paying interest, investing, etc. Bitcoin was never intended to cater to all of these mechanisms — but DeFi is.
In the evolution of crypto gradually taking on the role played by traditional finance, the growing Ethereum -based decentralized finance ecosystem has taken the next logical step .
DeFi, in many ways, is Bitcoin 2.0. As such, DeFi — while built on Ethereum’s composability and smart contract capabilities — advances the Bitcoin narrative into the future that Bitcoin originally led us to believe in. With every new DeFi protocol, that future is coming closer to us: a world without banks.
DeFi demonstrates the complementary nature of Ethereum and Bitcoin. By reinventing the financial system not from the inside but from the outside, Ethereum is leading a movement that completes the circle started by Bitcoin.
Even worse than vampires
Our banking system is as broken as our ability to respond to the coronavirus, but can DeFi really replace it? The DeFi subsector’s most pointed critics will point to the emergence of SushiSwap, Cream, and Yam, among many other protocols, as suggesting that the movement is more like a circus than a legitimate threat to a huge financial services sector.
These protocols are considered vampire forks, which are forks of existing protocols designed to suck liquidity from them. If vampire forks are destructive — and it’s not certain that they are — then a seminal Rolling Stone article helps put them into perspective. While running through Goldman Sachs’ central role in nearly every financial collapse of the last century, Matt Taibbi called the giant:
"It's a giant vampire squid wrapped in a human face, tirelessly sticking its tentacles into anything that smells of money to suck blood."
DeFi’s vampires may be furthering the development of the ecosystem through stress testing. The vampires of the legacy financial system have only one function: to take money from others to grow themselves.
From the Great Depression, to the dot-com bubble and bust, to the housing crisis, the “Giant Vampire Squid” has contemplated selfish financial destruction, with its tentacles reaching for nearly every lever that produced those catastrophic events in our recent economic history.
The entire financial industry has long ceased to meet most of our needs. Checking accounts no longer pay interest, it costs money to access capital, large businesses find it easy to raise capital while small and medium businesses struggle. Try getting a mortgage as an independent contractor with no benefits or job security.
Bitcoin democratized money by liberating us from legacy forms of money. Now, DeFi has captured the imagination of the crypto world as a natural extension of the crypto world — not just the democratization of money, but the democratization of finance, promising a seismic shift in the way people bank in the future.
This seismic shift will endow society with benefits we could only dream of a decade ago.
Entering an era of large-scale de-banking. |
