Beyond Bitcoin: DeFi the status quo – decentralised finance is not so impossible and not that far away

It was a question from the webinar audience that caught my attention: “What about the decentralisation of democracy? Do blockchain and decentralised finance offer solutions to the global failure of government?” 

It wasn’t a flippant question, and it was one that Steven Boykey Sidley, co-author with Simon Dingle of Decentralised Finance and the End of Banks, took seriously. “Ethan Buchman, the co-founder of Cosmos, an ecosystem of interoperable blockchains, has recently made the point that blockchain is the enabling technology for a whole new sociopolitical movement. And DAOs are just the beginning of this.” 

For those who don’t know, DAO stands for Decentralised Autonomous Organisation. The concept is a bit of a mind-bender, but essentially it’s a self-managed organisation underpinned by a transparent set of rules encoded as a computer program. What is unique about DAOs is that they reduce the need for managers or traditional hierarchies, since the rules are embedded into the code. This means members, participants or communities can make decisions collectively and autonomously. It’s profoundly different from traditional organisations as we know them, where executives and large shareholders often hold a disproportionate degree of control. (Or governments for that matter. Did the Russian people authorise Putin’s war?) 

There are already thousands of DAOs in existence, created for different reasons. In 2021, a blockchain-based organisation called ConstitutionDAO raised $40-million worth of Ethereum (ETH) to bid on a copy of the US constitution in a very traditional auction by Sotheby’s. Even though the organisation ultimately lost the bid, it gained worldwide attention. And for good reason. DAOs are changing the way we think about how organisations work, and how they may work in the future. “It’s early days, but if you extend this to a nation-state, you can see the beginnings of the effect that blockchain can have on the democratic process,” Sidley says. “Politics have also ossified. Perhaps there is a better way?” 

https://www.youtube.com/watch?v=WiNHpD0rRn8

Of course, this sounds like nirvana, and quite possibly it still is, but that didn’t really matter in the context of the conversation. Sidley and Dingle were in conversation with futurist, economist and strategist Bronwyn Williams about their recently launched book, which by its very title invites readers to imagine a future without banks. It’s an idea that until recently was quite unthinkable. But it’s a possibility that some of the heads of the world’s biggest banks don’t think is that unthinkable. For instance, Jamie Dimon, CEO of JPMorgan Chase, has warned his shareholders of the “enormous competitive threat” from new financial technologies. And executives from Bank of America have mused publicly about defending themselves from being “disintermediated by DeFi”. 

DeFi, the subject of Sidley and Dingle’s book, stands for decentralised finance, which offers financial instruments without relying on intermediaries such as brokerages, exchanges or banks by using smart contracts on a blockchain.

It is an exisitential threat, one that Dutch financial services firm ING compared to cloud computing in the 1990s – an interesting new innovation then, and the foundational deployment mechanism of the global internet now. 

“Look at the debate around open sources two decades ago,” says Dingle. “Mark Shuttleworth told us this was the future and Microsoft laughed. But not so hard, because they also spent millions on a ‘get the facts’ campaign. Now, Microsoft is the best place in the world to get Linux and is a big supporter of the technology.”

More sinister was American Express’s apparent involvement in a misinformation campaign around bitcoin mining, he added. Yet all of these companies, from Visa to American Express, are now investing in and experimenting with blockchain in one shape or form. 

It is a future that is coming at speed – in just 13 years since cryptocurrencies were introduced as a radical, fringe concept, they have moved closer to the mainstream of global finance, and now at least 80% of central banks are experimenting with digital currencies. Blockchain, non-fungible tokens, DeFi and many previously unheard-of terms are now entering the common lexicon. In their book, Sidley and Dingle chart this evolution and present future possibilities to readers. As far as they are concerned, it’s not a case of if, but when. “We might not see or even understand all of the possibilities,” says Dingle. “That’s the nature of innovation – first you discover stuff and then you apply it to useful things. DeFi is the same – we have some notion of what it’s useful for, but it’s the tip of the iceberg.” 

It comes down to trust and one-sided relationships. For decades, centuries even, financial service providers have asked their customers to trust them. To some extent, they have returned the favour and have mostly managed customers’ money judiciously. But it comes at a hefty price, with clients paying high fees, dealing with a great deal of bureaucracy, and being on the other side of what is an asymmetrical relationship. 

DeFi has the potential to upend this completely, says Dingle. Where previously one had to trust financial institutions to verify transactions – a process that is increasingly fraught with fraud – with the blockchain trust is implicit in the technology. “It’s a trustless mechanism.” 

DeFi alone, without adding in a discussion about crypto assets and blockchain, is a massive subject and one that clearly caught the attention of those on the webinar. There were many questions that the hosts did not have time to answer. Some of them may be answered in the book which tackles DeFi head-on. Read it if you want to delve deeper into this fascinating subject which has the potential to turn our world upside down. DM

 

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