What Makes Decentralization the Best Hope for the West

Follow the Money

10 years in international finance and tech have taught me one thing: the western world is never going to be the same. The very foundation of our civilization has broken, and in a state of increasing systems failure, all of us are retreating into psychological comfort zones, echo chambers, and political short-sightedness. If we are to circumvent the catastrophe that awaits, we need to embrace old ways with new tools. The west's past success is the blueprint for a new decentralized world, we need to follow the money.

Where we are today

We live in a multi-polar world for the first time since the collapse of the USSR. In the form of the BRICS, Francis Fukuyama's end-of-history thesis has met a formidable challenger.

For decades, financiers and those born with a silver spoon in their mouths, sliced off every piece of flesh from the carcass that was the industrialized western economy. Sensing that something is wrong and that economic opportunity is ever more illusive, the general populace is confused, resentful, and aggrieved.

The fermenting anger leads to increasingly dangerous misdiagnosis by so-called experts across the proudly out-of-touch political class. China never became a liberal democracy, inflation wasn't transitory, it's a new world, and expectations around basic living standards need to be managed! Soft and fuzzy catchphrases such as democratic values and freedom attempt to make the shift to a less prosperous world more painless. But words aren't enough, truth hurts and so do higher prices!

Your average citizen isn't alone in their journey towards enlightenment either. Entire nations, from Türkiye to Indonesia, never entirely accepted into the western club, are waiting on the sidelines to see how the cards may fall. Indeed the BRICs application queue is growing and states from Israel to Saudi Arabia are keen to get their hands on some sweet, sweet RMB. Conversely, those at the core of the system - or who consider themselves at its core, even if they are not - are cutting their nose to spite their face - I'm looking at you Germany.

Crypto And The End Of The Dollar Empire

Much like the British Empire, the Western Empire, led by the United States is - as much as anything - a financial empire, and this is, as much as anything, a crisis rooted in financial mismanagement.

Unfortunately, being a financial empire requires complete faith in the systems within which we exist. After all, there isn’t any gold to back the currency, and in the absence of vast industrial might, the state can only tighten its cold hard fingers around its helpless subjects. Alas, those subjects have lost their dignity, and rather than exhibiting the stone-like resolve that underpins a great society, they are disintegrating into tiny pieces that slip through the closed fist of the desperate government organs.

Panicked and puzzled the powers that be an attempt to pick up all the pieces and put them all back together again. But the pieces don't fit. Politicians - who aren't sure what a blockchain is, or what it does - encourage ex-factory workers to learn to code. Technology is rarely understood. Governments are woefully ill-informed and under-qualified with respect to tech, much in the same way they have proven themselves to be incompetent, and therefore easy to bully around, in the field of finance.

Despite this, tech is a word hot on the lips of every western leader, especially when it comes to explaining the way out of this mess. Fortunately, some think to themselves, my term is up soon. But for those already all in, desperate times call for desperate measures, and so grandmother visits Taiwan in order to hopefully ignite some conflict abroad that will be both sufficiently large enough to distract the masses, and at the same time limited and contained enough to not fully expose that the emperor has no clothes.

Lessons From History

The three most successful major western economies - the USA, Japan, and Germany - all share some remarkable traits. All are decentralized, and in more ways than one. They all have multiple centers of economic gravity, lending to the distribution of material and financial prosperity across various regions, as opposed to being concentrated around any one single metropolis. In Germany, Volkswagen's headquarters sits in Lower Saxony, while Toyota's is in Toyota City. The fact that industry giants such as these auto manufacturers appeared far from the major cities was not the result of innocent luck.

Core to the development of all three of these economies were systems that consisted of local, community banks. That's right, not the $10,000 dollar suit wearing New York City banker variety, but rather the not-for-profit local savings society, never-needs-to-be-bailed-out type - in Germany these are known as Sparkassen. The USA and Japan had similar ecosystems. While such institutions might appear entirely unsexy to the aspiring finance graduate, this eco-system of local lending institutions - which in the case of Germany has existed, and remained intact, for more than 200 years - is a far more effective conduit for efficient capital allocation. Bankers actually have to know and understand the businesses into which they are deploying capital, and this is possible due to close physical proximity and the local community. Knowledge around the industries within which they have financial exposure is incubated over time so that the real risks are well understood. Furthermore, the money is created locally and circulates within the local economy so as to further promote economic prosperity.

The USA, Japan, and Germany proved that smaller financial intermediaries mean more economic prosperity. Conversely, from 1922 to 1991 the Soviet Union had exactly one bank. Because wealth in these three success cases was generated across a variety of regions, so too was political power and influence. Indeed most Sparkassen are chaired by elected politicians. From big tech owning our data to the ever more intrusive role of central banks to the consolidation and bailout of financial intermediaries, the decades leading up to our current predicament saw ever more centralization. Central bank digital currencies are just the next misstep on the journey to western irrelevance.

DeFi is Power

Local, not-for-profit banks were the most effective way to structure a financial system last century because they reduced the significance of any single financial intermediary and mitigated, at least to some extent, concentrations of wealth and power within economies. That was last century though, before the advent of cryptocurrencies, distributed ledger technology, and Decentralised Finance.

While the situation may seem dire - and it is -, DeFi represents a unique opportunity to remove third parties entirely and democratize the global financial system. Where the local banks underpinned broad-based industrialization across geographic regions within countries, DeFi can propel us into a new age of broad-based economic revival in a new digital world.

Want to anonymously transact with a vendor on the other side of the world without VISA, Mastercard, or the correspondent banking system? Have a new business idea and want to raise capital? Want to invest your savings in an industry you know like the back of your hand? All of this is entirely possible without the bank's approval or the existence of financial infrastructure and at a fraction of the cost with no risk exposure to any third party. It would also mean no more government bailouts and no more central banks.

DeFi could represent the abolishment of the entire rent-seeking financial class, and an economic renaissance in a post-globalized West. As the United States Dollar fades into the financial abyss, decentralization is the West's chance to stay relevant in changing world order. We need to follow the money!

Also published here.