The battle between DeFi, CeFi and the old guard

We aren’t taught real economics in school. We learn, instead, voodoo economics. For example, rarely — if ever — do professors present us with the valuable insights highlighted by the Austrian school of economics. 

Individuals, therefore, need to break their conditioning to understand how the financial world works. The truth of how the financial system was built, how it works, who controls it, and so on is a whole new world to them.

If you really dig into the truth and start to see how it all works, you might make certain connections, such as why Jesus expelled the money changers from the Temple, how Britain became a great Empire, and why the U.S. dollar has been losing its purchasing power. So many people use money on a daily basis but don’t question the system behind it.

I ponder two theories about the future of the financial world. One theory is that smart tech nerds have created blockchain technology, decentralized finance and all these technologies that are taking over the world. The other theory is that big financial institutions or governments have experimented with similar technologies and are today perhaps 10 years ahead of the publicly available DeFi movement. Either way, the elites behind The Great Reset at the World Economic Forum, who seek to remake the global economy, obviously have a plan and a new financial system ready to go.

While the elites work to reset the global economy for their benefit, crypto startups are developing services that compete with the most powerful Wall Street firms and central banks. Entrepreneurs and developers have begun building what they call decentralized finance, which represents an entirely new system where users can lend money in a decentralized manner, among other options. A few years ago, your only choice was doing so through a bank.

Although only central banks could print money not so long ago, DeFi is creating technologies where people are able to code their own transactional currencies in the form of tokens or cryptocurrencies. The internet decentralized the process of creating and distributing content; for example, anyone could then have a YouTube channel. DeFi does the same for finance.

DeFi is the next evolution of the financial system

We once used gold as a universal currency because it was scarce. Bitcoin (BTC) copied this scarcity model. The Medici were behind the first banks that encouraged people to store gold with them in exchange for a piece of paper representing a claim to your gold. They realized no one would ever claim all the gold at once and started making loans against their assets — similar to some of the DeFi technology of today. In a sense, by looking back at the history of banking, you can predict the future of DeFi.

The most promising DeFi apps today include protocols for decentralized interest rates, liquidity pools, stablecoins, etc. For instance, let’s say you have $10,000 in your bank, and the bank gives you 0% interest or negative interest on that money. DeFi platforms offer solutions where you can earn 3%–4% on that same $10,000.

The big banks are threatened by DeFi. They were anti-Bitcoin while behind the scenes experimenting with the blockchain technology underpinning it. They suspected Bitcoin could shift the balance in the financial world. Now, they are launching their own stablecoins and distributed ledger infrastructures.

If you look at JPMorgan Chase, it has recently launched its own distributed ledger with the Singapore government. As is generally the case, innovators at the grassroots level were two to three years ahead of these giants. For that reason, I don’t see big banks making any groundbreaking moves into DeFi just yet. The big banks will first focus on proven distributed ledger solutions, such as cross border payment solutions, replacing internet cloud systems with distributed ledger cloud systems, and so on.

The future of decentralized finance

Many factors today affect the future of DeFi. One, for example, is Ethereum 2.0 and its attempt at solving Ethereum’s scalability. Its success or failure will affect everything related to the Ethereum blockchain.

Another factor is how banks and regulators react to the phenomenon of DeFi. For now, it must regulate itself as an industry. We must behave ethically and develop solutions, such as insurance, which give people safeguards. Unless we develop and meet such criteria, DeFi will not be able to compete with the traditional banking system.

Crypto entrepreneurs should educate the public about DeFi to help them understand why this new technology could benefit people’s everyday lives. Furthermore, the mass adoption of DeFi alone is unlikely. Some people simply don’t want to deal with a technology that is completely decentralized.

The DeFi industry would benefit by incorporating certain aspects of the old financial world into their business model. That’s where the combination of DeFi and centralized finance, or CeFi, comes into play.

Centralized and decentralized apps can be combined to create new types of economies and to encourage more people to use DeFi. At the end of the day, you shouldn’t just trust smart contracts with all of your savings. The industry is not that advanced yet.

New digital economies can spring from anywhere in the world and take many forms, creating opportunities for everybody. DeFi does not exist in a vacuum. For instance, it depends on the evolution and decentralization of technology in general, including internet and security practices.

In addition, the old-fashioned financial system is stiff competition. As an industry, we must be honest with where we can improve, and better understanding the public is one of those areas. By combining DeFi and CeFi, we can make the transition from a centralized world to a decentralized world more smoothly and, ultimately, win the age-old battle between DeFi and CeFi.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.