Money and Value are Different Now
Press coverage of crypto and DeFi is a cluttery mess, and it’s a mess that obscures deeper and more penetrating truths. In this post, my plan is to take us beyond the fireworks of riches and scandals, and towards an understanding of how DeFi has inspired significant changes in the behaviour and representation of money and other assets. Money has changed. Assets have changed.
What do I mean by this? Let’s consider the nature of money. Historically, there have been many different types of it. If you want to get clever with it you can include things like commodity money, which is the use of goods or physical assets like gold, silver, salt, sea shells and tobacco as currency, all of which have been used at various junctures. However today, in most economies, money can pretty much be considered as physical or digital. To put a slightly different spin on this but to say the same thing, the Bank of England describes money in the UK as being held electronically as bank deposits or physically as banknotes and coins. For people who don’t spend their time looking at this sort of stuff it may be a surprise to learn that physical cash represents only 4% of the entire UK’s currency supply. The rest is digital.
Taking the reductive but more-or-less correct view that money has two forms, blockchains and smart contracts have arguably provided a third way, and let’s call that DeFi money. This money is still digital but is different to the conventional alternative for all sorts of reasons. Immediately, we might observe that the technology that spawned DeFi allows anyone to create and scale their own private, public, and/or decentralized currencies that don’t rely on central banks*. Similarly, it’s clear that DeFi enhances the digital capabilities of money, as the use of smart contracts helps money do things it couldn’t previously do. We should also acknowledge the role of blockchain, a record-keeping tool that allows transactions and wealth to be publicly and reliably recognised without the need for a centralized intermediary.
Is this ‘new way’ superior to its predecessors? There’s no definitive answer to this, primarily because there are countless forms it can take, though it’s reasonable to say that DeFi money is superior technologically. Nonetheless, every project is different (in both quality and intention) and the needs and perspectives of the people using them may differ considerably. The core development is that we now have money that can perform new tricks, which is exciting. And we can independently verify it, which is maybe less exciting but really, really important.
While writing Why DeFi Matters this is exactly the sort of thing that I wanted to make clear. The emergence of crypto, at least in the manner described by the likes of Vitalik Buterin and Satoshi Nakamoto, is far more than mere hype. Equally, there is a temptation to overstate things and present crypto as the answer to everything, so we need to be clear on how DeFi really advances our financial lives.
I would venture that DeFi makes the following four changes to the concept of money and value:
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I want to dwell on point four, because tokenization is a fundamental word in the DeFi conversation. On one level, all representations of money are tokens and you could argue that they always have been. Nothing especially new there, save for the fact that cryptocurrencies make it more explicit. To go a step further, however, blockchain is a very useful technology for demonstrating the value of any asset online. You could tokenize ownership of real estate, or the rights to a whisky barrel to be sold at a later date, or lots more. Additionally, you can tokenize the entirety of a thing or you can divide the thing up and distribute fractions of ownership to multiple parties. This could allow some fairly unique and exotic trades as usage becomes more widespread.
Let’s also highlight the ramifications of creating new types of money as this is highly consequential. As we’ve seen with Bitcoin and to a lesser extent Ether, it’s absolutely possible to create a new decentralized currency that people recognize across the globe. This is currency with no central bank attachment, no nation state oversight, and no banks and banknotes. It’s actually pretty wild in the context of recent history, and the fact that it can be done is worth mulling over.
Currency is inherently social and political, so when a new currency arises, even a popular one, we need to ask serious questions. Is the currency really decentralized? Is the distribution of wealth palatable? Is it safe? Is it better than what we’ve got now? What purpose does it serve? What will it do to our domestic and international economies? I could go on, but if you want to explore your own views perhaps start by checking out Meta’s failed Diem project, or for a more contemporary flavour look into Worldcoin, which appears to be picking up steam as I write. These projects give an insight into the capabilities, limitations and philosophies that might underpin a digital asset. Would you prefer them over your national currency? Would you want them alongside it?
This barely even scratches the surface but it speaks to several key points that I explore in Why DeFi Matters. Blockchain and smart contracts raise significant questions about the nature of money, value, and our relationship with it. Insofar as control of money grants control of society, the emergence of decentralized economies also spark serious thoughts on whether our economic systems are serving us as we would expect, and the criteria that would need to be met for a new system to be an advancement. I believe there is a circle to square here. As stated earlier, money and asset ownership are societal and political. DeFi offers a technological solution, but that alone is not enough. This is a core reason why I believe there should be clearer dialogue about what is happening in crypto and DeFi. The future needs to be built by people with a wide range of perspectives and backgrounds.
Thanks for reading New Adventures in DeFi. For 20% off Why DeFi Matters, click here and enter the code DEFI20.
*A counterpoint to this. The largest stablecoins, which play a vital role in the ecosystem, absolutely do have a relationship with the healthy functioning of central banks. Many of them are backed by treasury bills and currency.