How a DeFi Future Will Look Like

In the wake of the 2008 economic meltdown, a lot of people asked one basic question: is traditional finance inherently flawed? The crisis had exposed, yet again, that traditional finance was somewhat like a carefully constructed house of cards glued together by nothing but the assurances of dodgy bankers and their partners.

In 2008, a history of bad loans blew the entire system apart, and revealed the global financial system for what it was; a moving wrecked train held together by duct tape.

However, at the time, there was no feasible alternative to traditional finance. Even though it was clear that the system, due to its highly centralized nature, was prone to falling apart due to these sorts of shocks, governments could do little more than send some bankers to jail, approve some bail-out funds from money printed out of thin air, and call it a day.

After the crisis, an anonymous person named Satoshi Nakamoto sent an email to a cryptography mailing list. The message simply said this; "I have been working on a new electronic cash system that is fully peer-to-peer, with no trusted party. The paper is available at bitcoin.org/bitcoin.pdf".

He later argued that one of the reasons he created Bitcoin was because the traditional financial system was held together by trust in centralized authority and that often led to disasters, such as the 2008 economic crisis.

TradFi Successor

This means that Bitcoin, and crypto really, was envisaged as a killer of central banks and traditional finance in general. It’s been over a decade now, and the DeFi space is growing at an unprecedented rate. Every day, people are reaping the benefits of a trustless system, and a lot of people are seeing just how dangerous centralized financial systems can be.

However, there have also been a few setbacks for DeFi. Rogue players, for one, are attempting to poison the well for selfish reasons. While a lot of these rogue players are never successful, a few eventually strike gold and achieve their selfish goals.

There are also several technical problems that DeFi needs to solve if it is truly going to get ahead of the curve and replace TradFi. Over-collateralization and liquidity, for example, are all pressing issues that many DeFi founders today are trying to solve or at least innovate around.

In any case, we can now seriously begin to envision a world where TradFi is dead and DeFi reigns supreme. What would such a world look like? What things would we be able to do then that we cannot do now? How differently would DeFi allow us to relate to our finances? Simply put; we’ve killed TradFi. Now what?

More Innovation

There are a lot of dangers of an unregulated industry. People who favor centralized DeFi argue that this lack of regulation is why TradFi, despite having so many inherent flaws, is better than DeFi. And that’s true – there are indeed a few dangers associated with deregulation. However, there are also a lot of dangers with overregulation, as is obtainable in centralized finance today.

Since players in that industry have a limited set of tools and a very strict rulebook, there is a limit to how far they can innovate. There are simply services that banks, no matter how flexible, can provide. DeFi protocols, on the other hand, can provide these services with little or no issues.

With more reputable players coming into DeFi, there will be a lot more innovative financial solutions coming to common people.

Market Supremacy

There is a lot of talk about the free market, and how it runs today's world. But here’s the thing; the financial market is certainly not free. Central banks and governments are God-emperors of the market, and they decide what goes. Everyone in the industry serves at their behest, and that's that.

This situation is even more insidious because very few countries have bills of rights that codify financial rights. Most constitutions merely argue that citizens have a right to own property and say absolutely nothing about how that extends to the financial systems.

They say nothing about limits for governments when it comes to financial policy, and many governments and central banks have the right to simply do whatever they want with a country’s finances and monetary policies.

And, of course, they mostly use these extraordinary powers to bail out failing institutions and artificially prop up falling systems.

However, with DeFi, there will be true market supremacy. The market will decide everything, and the people will be truly financially sovereign. It also means that dodgy governments and their cronies will be unable to bail themselves out of thorny situations.

They will eventually have to face the music and not paper over the cracks. Ironically, this might lead to more meritocracy in TradFi, as the industry would have to evolve to compete with DeFi — and it will have to do this without institutional backing.

With the erasure of institutional capacity to bail out traditional financial institutions, we may see TradFi stakeholders get more agile and finally start taking brave decisions to become sustainable outside governmental patronage.

Freedom

The core argument of DeFi is the freedom it brings. While a lot has been said about the financial freedom DeFi promises, there is also a lot to say about the political freedom it can offer. Over the past few years, many governments, from both the developed and developing world, have sought to control citizens' protests via financial tyranny. This includes efforts at freezing bank accounts and backlisting names in the centralized financial system.

With DeFi, this option suddenly becomes unavailable to most governments. All of a sudden, they have to actually face the substance of these movements and do the hard work of solving them through negotiations.

DeFi will have a far bigger effect on political behavior rather than financial ones when it becomes as widespread as TradFi is today. And the reason is simple, too; governments today have too much institutional backing to control financial markets however they please.

If there's one thing we can be certain about a DeFi future, it's this; DeFi will put an end to that — forever.