Blockchain technology has been making headlines in the last several months for various reasons — from the impact on climate change to the endless bulls vs bears debates, to changing regulations and the entry of major financial institutions into the world of cryptocurrency.
The last year has seen giants endorsing the use of blockchain technology such as Tesla and PayPal. Similarly, PayPal is adding new features in its platform to incorporate cryptocurrencies into its payment system. Underneath the news about the adoption of cryptocurrency by large institutions, there’s an even more important trend — the first stages of the growth of decentralized finance (DeFi).
DeFi technology replaces traditional centralized finance functions that are performed by banks or exchanges — like borrowing, lending and market making — with smart contracts. Replacing middlemen and brokers with code dramatically reduces fees and returns more money to the end users of the system — the providers or users of assets.
It’s probably no coincidence that this rise in interest around DeFi has arrived on the heels of the Wall Street Bets / Gamestop phenomenon, which proved that public stock markets have a serious double spend problem, and that two day settlement of trades simply won’t work in the modern world of finance.
Public blockchains naturally fix those problems. Trades clear in seconds or minutes, the ledger of who owns what is widely known and double spend problems are functionally impossible. This novel financial infrastructure provides open access and equal rights for all people, everywhere.
However, crypto markets, like any other market, have a risk of descending into oligarchy if its systems and governance aren’t carefully thought through.
The Need for Income Equality
As it stands, our global system prioritizes the well-being of privileged individuals by limiting access to the most profitable investments to accredited investors in high income markets, and providing easy access to cash for large companies and wealthy individuals. This unfairly distributes opportunities worldwide, and reinforces the already widening gaps between rich and poor.
The crypto industry can mitigate these disparities with public blockchains that allow anyone to invest, trade and effect transactions, promoting transnational social mobility and broader economic growth.
Unlike traditional financial platforms, public blockchains like Bitcoin, Ethereum and others welcome anyone to participate, regardless of users’ background, ethnicity, location or financial status (or access to financial means). Since DeFi projects operate on these blockchains, they almost always provide universal access to people all over the world.
This technology promises equality and inclusion, offering every member of the chain the same degree of privacy, data usage and access to speed. But these promises won’t necessarily become reality.
There are decades to go before DeFi platforms, currently holding tens of billions of dollars in assets, eclipse traditional banking, currently holding over one hundred trillion dollars in assets. A lot can happen in that time, and it’s up to us — the people in the industry — to build these new systems the right way from the beginning so that they don’t collapse into oligarchy or monopoly.
To learn how DeFi is bridging the gap for wealth inequality, stay tuned for part two of this discussion.
In the meantime, check out our other blog posts on DeFi.