With DeFi we’re building a financial system that currently exists in parallel to the existing system. Of course, DeFi is much smaller than traditional finance and basically inconsequential to it but I, of course, strongly believe this is not always going to be the case. One day, DeFi will just be called “finance”.
There are a lot of revolutionary and innovative products being built in DeFi using the various money legos that are available today but at the very core of it, much of what’s being built already has an existing implementation in TradFi. One obvious example here is payments as this use-case isn’t new and has been around for thousands of years. Though with Ethereum and DeFi, we can make payments programmable which is very hard if not impossible to do in the traditional system.
Going deeper, we can look at another large use-case that DeFi is recreating from scratch - exchanges/trading. Obviously with Ethereum we have the ability to build exchanges that are fully decentralized (like Uniswap) but it goes even further than that - Ethereum made it possible for the automated market maker (AMM) design to actually succeed. The concept of the AMM has been around for decades but was never used in TradFi because the CLOB model (aka order book model) is much more popular for a variety of reasons. Even within crypto we still see the heavy use of CLOBs by centralized exchanges but the AMM model currently dominates in DeFi.
Payments and exchanges are just 2 use-cases that have been greatly enhanced by the new financial rails being built on Ethereum and they represent a seismic shift that we are seeing play out very clearly. No longer are we limited to the old and rusty rails of TradFi where innovation is slow and there’s red tape everywhere - we now have new and shiny rails that can be used by anyone around the world to build both existing financial primitives and create entirely new ones that simply aren’t possible in TradFi. One last example here would be ‘flash loans’ - something that is exclusive to blockchains and enables a variety of new use-cases.
All of this culminates into what I like to call the “crypto 20’s” - that is, I believe the 2020’s will belong to crypto and we will see an enormous amount of adoption for Ethereum and DeFi similar to how we saw rapid adoption of the internet from 2000-2010. I’ll even go out on a limb and say that by 2030 I think it is very possible that much of the world’s financial infrastructure will actually be running on Ethereum and DeFi. After all, a lot can happen in 10 years.
Have a great day everyone,
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All information presented above is for educational purposes only and should not be taken as investment advice.