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.
This will improve our knowledge and understanding of finance, as well as how we can use it for the betterment of our lives, in how we live, work or play, and so on. This is what we mean when we talk about DeFi leading the “financialisation of everything”, a term describing the move to ascribe financial rights to a broader set of assets.
This process is not new. Renowned economist Hernando de Soto pioneered the application of property rights towards alleviating poverty in his book, The Mystery Of Capital. He highlighted how extending property rights to even the smallest parcel of land or dwelling could give impoverished individuals an asset which they could financialise and pledge as collateral for loans to build businesses and escape the poverty trap. DeFi works with this same transformative power.
Globally, we see varying rates of DeFi adoption. Naturally, it is better received in countries with less-developed economies and poorer regulatory and financial standards. After all, these countries have much greater incentives to find ways to improve the financial infrastructure within their economies.
DeFi can broaden their asset base and remove the structural constraints of existing financial systems. It is no surprise that, as more people have opened MetaMask accounts in the Philippines in the past year, this has also led to substantial growth in the number of people with bank accounts.
It is still early days for DeFi and, as with all new technologies, there are growing pains. DeFi interfaces are still complicated and clunky, and it is also difficult to explain the concept to the layperson, let alone impoverished farmers in Third World agrarian economies. How does one begin to espouse the use of smart contracts or finance-based protocols?
DeFi needs intermediaries and we can expect the next surge of activity to be focused on enhancing customer experiences. Making DeFi products and services as easy to use as downloading an app will lead to a major boost in adoption.
Currently, only a few companies can provide such a user-friendly and focused gateway for users to come directly into DeFi, using only a few taps or keystrokes to see with full transparency all potential yield-generating products.
However, many milestones are constantly being reached in the industry and we will see an integrated DeFI world within our lifetimes, where everything is financialised and whose value is ultimately in the direct hands of owners and users.
In Singapore, the mobile phone penetration rate was only 13.6 per cent in 1992 and by 2006, a mere 14 years later, it had crossed the 100 per cent threshold. Can we not perhaps expect a similar trend for DeFi adoption?
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