Our previous article dealt with the Bitcoin cryptocurrency breakthrough and its connection to the 2008 economic crisis. But the first decentralized currency is only one part of a revolution that is already beginning to shake up the old economy. A revolution that threatens to overthrow the hegemony that has dominated our finances to this day.
First, before diving in, an example from another field. Up until 2001, knowledge was dominated mainly by one commercial company, Encyclopedia Britannica, and by academics from world-renowned universities. The decision on what was important information, how to write about it, and what was relevant, lay in the hands of a commercial entity, and a small elite group.
When Wikipedia burst into our lives, it gave power to the masses, and took knowledge out of the hands of the elites. Within two decades, this platform has turned from a dubious, error-filled resource to the world’s main repository of information. Knowledge was made available, free of charge, to the masses who became editors as well. Knowledge is power, and a combination of technological capability and active users managed to disrupt a prestigious, centralized field, and decentralized it.
Middle period of the decentralized economy
The same is true for the decentralized economy. Four million users, already managing about $200 billion, believe that the era of a centralized economy where corporations control the public's capital, must end. This will not happen all at once, but the decentralized financial world is already in its middle period. The Nokia generation, if you will.
In this period of the decentralized economy, more and more fintech companies will be established, bridging the gap between the centralized and decentralized generations. Israeli mobile insurance start-up Lemonade, is one example of another step along the way to this new economy, in which insurer and insured have a common interest. An ordinary insurance company’s interest is to dismiss claims, so as to increase the amount disbursed to shareholders. Lemonade charges a fixed service fee in advance, thus neutralizing the friction over rejection or approval of a claim. In doing so, it places itself on the decentralized continuum as a normal, centralized company - but whose financial model favors the end customer.
As things progress in the finance industry, decentralization will increase, and gradually we will see companies where users have more control. At one end of the continuum is the traditional financial world that relies on a direct link between centralized entities and themselves. At the other end is the distributed economy that adopts a user experience which puts the customer at the center, and is based on a distributed network. In the interim, the fintech industry has created a high-level user experience, but still relies on the traditional industry’s centralization.
Transferring funds without a third party
Bitcoin has proven that value can be transferred from person to person in a completely decentralized manner, at any time and from anywhere. A range of Decentralized Finance (DeFi) products aim to promote an accessible, transparent financial system. Using open source blockchain-based "smart contracts", sophisticated financial operations can be performed without a supervising third-party. Users access the technology through various apps, some of which look like the finance apps on our smartphones today. But there is one significant difference - there is no centralized company managing the activity. The company is replaced by a system of smart contracts that perform automated operations.
By eliminating third-party supervision, the decentralized economy makes possible drastic cost reductions: minimum system requirements for running code, record speed in transaction execution, and unlimited access. It threatens to beat any product offered by banks, insurance companies, investment managers, credit companies, stock exchanges, loan brokers, and more. Distributed technology provides customers with exclusive control of their assets, and active participation in organizational decision-making through Governance Tokens, which grant power over a protocol to users.
Looking at the products themselves, the new distributed economy makes it possible to take out a loan independently, directly from a private lender, without a bank or loan broker taking a fat commission. At the same time, the lender benefits from a direct return, all at the push of a button from anywhere, with no obligation or constraint, through a variety of digital wallets that can be downloaded for free.
Still a long way to go… but customers will benefit
The crypto market is not immune to hacking. To deal with threats to the blockchain network and/or hacking programming codes, a loan can also be secured through a distributed insurance company that is managed through a Distributed Autonomous Organization (DAO). This is an insurance company with no shareholders, no board of directors, and whose interests are aligned with the purchasers.
These and other products are controlled by the currencies of this decentralized organization. Each coin confers voting rights and control over the organization’s future. The variety of currencies circulating in the market can be purchased and sold through distributed exchanges like Uniswap, SushiSwap, Bancor, 1inch, or people can trade in derivatives and options without third-party supervision at decentralized platforms like Universal Market Access. (UMA) and dYdX. In addition, synthetic shares traded on the Nasdaq can be purchased from anywhere, and an investment portfolio can be managed through distributed investment houses that replace the usual deposit routes with automated yield farming aggregators like Indexed Finance and Yearn Finance.
The trust acquired by the banks and other financial entities took time to build, and relied mainly on the good name of the institution and its people. The decentralized economy’s big advantage is that one does not have to rely on these two parameters. Nonetheless, adoption by the masses is still in its infancy. The technology is relatively expensive and slow, hacks and scams create a "Wild West" atmosphere, and the inability to "know your customer" and a lack of anti-money laundering processes prevents institutional entities from entering.
The road to bridging the gaps is still long, but the fear of economic hegemony is justified and the main beneficiary, in the end, will be the customer. Get ready for processes where cash flows to crypto, and from there to loans, credit and more, all in a decentralized fashion, and neutralizing corporate involvement in all of these systems. Wikipedia was the first - it’s now economic capital’s turn.
The author is an entrepreneur and co-founder of Collider Ventures