In solving real-world needs, decentralised finance can only continue to grow
By creating greater value and promoting financial accessibility to the masses, DeFi complements traditional banking, rather than replacing it
Its transparent and permissionless nature has also allowed it to evolve quickly
Two contrasting narratives on the future of digital assets are playing out. European Central Bank President Christine Lagarde recently restated her opinion that they are “worth nothing”. On the other hand, the Monetary Authority of Singapore last week launched Project Guardian, a pilot initiative to further explore the use of asset tokenisation and decentralised finance (DeFi).
While a multilateral consensus on the value-creation potential of digital assets isn’t on the horizon, there is a risk of not seeing the wood for the trees if an idea is grounded in absolutism rather than pragmatism.
DeFi is not a revolution, but an evolution. It is a new paradigm that exponentially expands the reach of existing financial services into the future and can only be seen as a complement to traditional finance systems, creating greater value and promoting financial accessibility to the masses.
We can draw comparisons to today’s crypto landscape by studying the development of the humble mobile phone over the years, into the widely prevalent smartphones that are used today. Before the development of apps, mobile phones were one-dimensional in purpose – they allowed you to make and receive calls on the go and send the occasional text message (and maybe more advanced versions would have the latest Snake or Space Invaders game as a fun add-on).
However, the advent of smartphones and the app store, since 2005, saw something akin to a telecommunications Big Bang. Millions of new applications suddenly became available or were being developed. Importantly, this change did not come about through a centralised initiative or as a grand plan decreed from individual genius. It was transparent, collaborative and accessible to all, allowing various entities to freely join in and opt out.
Similarly, DeFi today embodies this transparent and permissionless nature, which has allowed it to evolve seamlessly and quickly. There is no consensus on just how it might evolve further, but evolve it will. Its course is set and it will soon reach critical mass.
DeFi is both fluid and far-reaching. It can access areas previously untouched by traditional finance systems, helping to tokenise and financialise assets that may not previously have had a value, or were difficult to value.
Other concepts such as fungibility – the ability of a good or asset to be interchanged with others of the same type – are also comparatively new, but have demonstrated their incredible use in transactions beyond the traditional sense, such as in collateral for loans or margins for trading.
Therefore, the rapid growth of DeFi means we are at a watershed moment for financial services. By allowing the definition of finance to expand into a much broader set of categories, a much broader set of activities can correspondingly emerge and be utilised by today’s financial systems.
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