How DeFi Aims to Disrupt the Monopoly of Consent

The average American still doesn’t understand blockchain technology. Caution and concern have only increased recently as crypto investments and marketplaces have come crashing down due to poor management, inconsistent product security, or other reasons.

In December, 60% of people believed digital currency was a high-risk investment, up significantly from 2021. The failure of firms like FTX has caused some panic and confusion over what will come next.

But not all blockchain-based tech is fraudulent or propped up by influencers trying to make a quick buck. I was reminded recently of with Miko Matsumura of Gumi Ventures on what he considered the core tenet behind decentralized finance (DeFi):

Giving people a choice.

A lot has changed since I spoke with him for the Success Story podcast, but DeFi’s mission has endured.

In this week’s newsletter, I want to dig deeper into the idea of taking back the power of consent –the consent to play in a particular financial environment – and offering everyday people a different option from the traditional financial system.

The limitations of the traditional financial system

When it comes to managing our money, the traditional financial system has long been the only game in town. Banks, credit card companies, and investment firms have held a tight grip on the financial lives of millions, dictating the rules and setting the terms. For many, this has meant limited options, high fees, and frustrating barriers to entry.

No alternative options for consumers

One major issue with the current system is its monopolistic nature. With no alternative options for consumers, there's a sense of being trapped in a financial web with no way out.

This lack of choice leaves individuals at the mercy of these institutions, unable to remove their consent from a system that may not always work in their best interest.

Extractive nature of the traditional economy

Moreover, the traditional financial system is inherently extractive. Banks and other financial institutions profit from transaction fees, hidden charges, and the use of customers' deposited funds for their benefit.

This setup often leads to an imbalance of power and wealth, with a select few reaping the rewards at the expense of the many.

The need for change

Disruption was inevitable. As technology has advanced and the world has become more interconnected, the demand for a fairer, more accessible financial system has grown. Enter decentralized finance (DeFi), an innovative alternative that aims to level the playing field and give people the choice they've long been denied.

The emergence of decentralized finance (DeFi)

So, we've discussed the issues with the traditional financial system, but what's the alternative? DeFi is the new kid on the block that’s shaking things up, offering a fresh take on finance built on blockchain technology's backbone. It's all about giving power back to the people and creating a more level playing field for everyone.

The fight for consent

What makes DeFi stand out is its focus on consent. You see, by providing a genuine alternative to the usual financial suspects, DeFi lets people decide for themselves where and how they want to engage with financial services.

No more being stuck with the same old banks and investment firms – now you've got options. And with options comes the power to say "yes" or "no" to the system you want to be a part of.

Fork it and go

One of the coolest things about DeFi is the "fork it and go" mentality. Thanks to the open-source nature of blockchain technology, if there's an issue with a particular DeFi platform or service, someone can simply create a new version to address the problem.

This means the system constantly evolves to meet people's needs, and you're never stuck with a subpar solution. With DeFi, the power of innovation is in the hands of the community, allowing for continuous improvement and adaptation.

DeFi's impact on the existing financial system

This new approach means the traditional financial system can't just sit back and relax anymore. DeFi is turning up the heat, forcing the old guard to step up their game and compete for your consent.

They can no longer take their customers for granted, and they need to innovate and improve their services to stay relevant in this fast-evolving financial landscape. It's a financial revolution that puts you back in the driver's seat and fosters a more dynamic, responsive, and user-centered financial ecosystem.

Advantages of DeFi

That all sounds great, but also a little vague. How is DeFi actually supposed to accomplish those things? Well, let me break down some of the key advantages that would theoretically set DeFi apart from the traditional financial system:

Transparency

One of the main selling points of DeFi is its transparency. Built on blockchain technology, every transaction is recorded on a public ledger that anyone can access and verify.

This means no more hidden fees or questionable practices – you can see what's happening with your money and hold service providers accountable.

Pseudonymity

In the world of DeFi, you can enjoy a degree of privacy that's hard to come by in traditional finance. While transactions are publicly recorded on the blockchain, users can interact pseudonymously, meaning your personal identity isn't directly tied to your financial activities.

Automated liquidation

DeFi platforms often utilize smart contracts – self-executing agreements with the contract terms directly written into the code. This automation allows for streamlined processes, like liquidation, without intermediaries. This saves time and resources and minimizes the potential for human error or manipulation.

Potential for scalability

One of the most exciting aspects of DeFi is its potential to scale and grow beyond the limitations of traditional finance. As more people adopt DeFi platforms and services, the technology can evolve and expand to accommodate a larger user base.

This adaptability opens the door for financial innovation and the development of new financial products and services that cater to the ever-changing needs of the global population.

Transitioning to an ownership economy

DeFi isn't just about offering an alternative to traditional finance. It is also about fostering a shift towards greater ownership and control over their financial lives – something we should all be interested in.

This transition to an ownership economy encourages more people to engage with their money meaningfully and responsibly, ultimately leading to a more inclusive and equitable financial system.

At the core of this transition is the concept of participatory capitalism. Participatory capitalism encourages broader involvement and shared benefits, unlike the traditional financial system, where a select few hold the majority of power and wealth.

DeFi platforms and services enable users to actively participate in the financial ecosystem, from lending and borrowing to investing and staking. This democratization of finance empowers individuals to shape their financial futures and benefit from the growth of the DeFi ecosystem.

Hurdles DeFi still faces

Alright, so we've talked a lot about the good stuff, but it's only fair to address some of the challenges DeFi is facing. I mean, nothing’s perfect, right?

For DeFi to truly reach its potential, there are a few hurdles it needs to overcome.

Developing legitimate utility

One thing I've noticed is that for DeFi to take off, it needs to prove its worth to a wider audience.

To do that, DeFi platforms and services must offer practical, real-world solutions that can go head-to-head with what traditional financial institutions offer.

This means making their platforms user-friendly, developing new financial products, and ensuring they play nice with existing systems. Basically, DeFi has to show everyone that it's not just a cool concept but a genuinely viable alternative that can make a difference in our financial lives.

Ensuring security and trust

I don't know about you, but when it comes to my money, security and trust are pretty high on my priority list. Being a relatively new and rapidly evolving space, DeFi has had its share of growing pains, including security breaches and scams.

So, for DeFi to become mainstream, these platforms must put security front and center. That means investing in top-notch security measures and staying up-to-date with the latest developments, but most importantly, investing in customer education.

Nothing works unless consumers are familiar with the product and its technology.

Gaining widespread adoption

Let's face it, DeFi is still a niche market. For it to really make a dent in the traditional financial system, it needs to reach a much broader audience.

That's easier said than done, especially considering that many people are still skeptical about blockchain and cryptocurrency. To get more people on board, DeFi needs to work on raising awareness, dispelling misconceptions, and showcasing its real-world benefits.

Once people see how DeFi can improve their financial lives, they'll likely embrace it with open arms.

So, while DeFi has made fantastic progress, it still has a few mountains to climb. But you know what?

I'm optimistic.

With the passion and innovation driving the DeFi community, I have no doubt they'll tackle these challenges head-on and continue to push the boundaries of what's possible in finance.

Final thoughts

If you want to hear more about DeFi and its philosophy, check out my full conversation with Matsumura on the Success Story YouTube page.

It’s a fascinating look behind the curtain, so to speak, into one of the driving forces behind DeFi and blockchain.

If you enjoyed this article, I’d love to hear from you.

Write me at [email protected] or tweet at me @ScottDClary and I’ll do my best to get back to everyone!