These are automatically enforced and cannot be tampered with. That makes it possible to construct smart contracts-self-executing agreements in which a chain of actions follows when certain conditions are met. This stores and records lines of computer code, including entire programs, which are visible to all. Its potential to facilitate more than payments became clearer with the creation in 2015 of the Ethereum blockchain (see chart 1). That shift is distributed consensus-the ability for many “decentralised” participants in a network to establish trust. “Crypto represents an architectural shift in how technology works and therefore how the world works.” People “seize on the money part, and either glorify it as a new kind of monetary system…or crucify it as a danger to economic stability,” writes Marc Andreessen of Andreessen Horowitz, a venture-capital firm that has raised some $3bn to invest in crypto-technology. But technology has evolved since then, and Bitcoin is now largely a distraction. The first instance of such a decentralised system was Bitcoin, a digital-payments network verified by a blockchain, which was created in 2009 with the aim of replacing centrally issued money. Each takes the lion’s share of the profits associated with their networks.ĭecentralisation offers an alternative: interoperable, transparent, often efficient systems that, by distributing control over software, guard against the concentration of power. Apple changed how its platform worked with third parties to stop Facebook tracking users Facebook itself alters its content-delivery algorithms as it pleases YouTube “demonetises” content creators on a whim. Tech giants can wield their market power anti-competitively, or in ways their users dislike. Card-network operators like Mastercard and Visa make gross profit margins of 60-80%. The Fed’s adoption of an instant-payments system, for instance, has proceeded at a glacial pace. Private networks can tend towards monopoly, encouraging anti-competitive behaviour and rent extraction. True, it is cheaper to build a financial-settlement system run by an entity everyone trusts, such as the Federal Reserve, than to get a diffuse group of individuals to verify transactions. But there are plenty of pitfalls in the way, not least the huge amount of speculation taking place in the world of DeFi and the risk that it becomes colonised by dirty money or sullied by blockchains’ vast energy use.ĭeFi’s opportunity comes about because centralisation brings problems. It could also underpin a digital economy that is less dominated by a handful of tech giants. The promise of DeFi is that it could lead to a better kind of finance: a system that is quicker, cheaper, more transparent and less reliant on powerful centralised institutions. Innovations, such as automated marketmakers, arbitrage systems and self-stabilising currency regimes, are already pushing the boundaries of financial technology. More than half is held in the five most popular DeFi applications, but developers are working on more than a hundred others, dozens of which are rapidly amassing assets. (Visa, a payments giant, settled about the same amount in the same period Nasdaq, a stock exchange, traded six times as much.) Around $90bn of collateral is being used for various DeFi functions, compared with less than $1bn in early 2018. The Ethereum blockchain, which underpins much of DeFi activity, settled $2.5trn-worth of transactions in the second quarter of 2021, including payments and transactions to facilitate trading and lending. Each addition makes it more likely that the whole will amount to something meaningful and powerfully disruptive.ĭeFi has grown tremendously in scale and scope in recent years. But piece by piece a new kind of economy is being built through applications on various blockchains. The success of this nascent technology is, indeed, far from guaranteed. Talk of blockchains, DAOs and metaverses sounds so utterly bewildering and far-fetched that it might be tempting to give up listening to the DeFi crowd. “In the end, it is mostly about how you contribute, not who you are.” “I will be just a regular community member,” says Rune Christensen, the founder of Maker DAO, a DeFi organisation. Applications and functions are run not by a single centralised entity or company, but by user-operated “decentralised autonomous organisations” ( DAOs). Far from the self-aggrandising ambition of Wall Street, decentralised finance (DeFi) instead seeks Utopian-sounding crowdsourced control. Of all digital activities, it is efforts towards decentralising finance that are most advanced.