The Future of Finance is Decentralized

This op-ed from Peter Grosskopf first appeared on Der Bank Blog in German.

With the properties of being open, permissionless, decentralized, and non-manipulatable, Blockchain technology is powering the best and most transparent financial services ecosystem that ever existed in human history — it’s called Decentralized Finance, or DeFi. We are big believers.

The birth of the Internet became one of the most significant events of the past century, completely changing the way we transfer information. Now, blockchain and Web3 are revolutionizing the way we transfer value, which I believe is just as groundbreaking as the original web. With blockchain’s characteristics of being open, permissionless, and decentralized, we are on the cusp of the best and most transparent financial service ecosystem that has ever existed in human history. We call it Decentralized Finance, or DeFi.

In 2011, Marc Andreessen wrote that “software is eating the world”, correctly recognizing that the world was “in the middle of a dramatic and broad technological and economic shift, in which software companies are poised to take over large swathes of the economy.” As he predicted, over the following 10 years software disrupted and revolutionized a myriad of industries including retail, music, and movie rental, with services that were faster and cheaper than ever before. One industry, however, remained largely unchanged: financial services and banking.

Today, just like 10 years ago, financial services are delivered by legacy banks in a highly regulated industry.

The necessity of jurisdiction-specific compliance has led to a small number of players in retail banking, who still use technology from the 1990s. Realtime operation is not the default — indeed the emergence of FinTech can be explained by the finance industry’s failure to keep up with changing customer needs.

Regulations exist to prevent manipulation and fraud, but they can’t be everywhere all the time. Unfortunately, I believe that as long as humans are involved in the execution of processes, we can expect more episodes like Wirecard, Cum-Ex, Lehman, and international money laundering in the future.

DeFi is not just a technical invention, it’s a paradigm shift.

Decentralized Finance is a paradigm shift from traditional finance, because it runs on blockchain technology that uses mathematics and game theory to build trust. Bitcoin was the first blockchain to show that the concept works — anyone on earth could own, send, and receive a digital asset. This in itself was groundbreaking — by allowing for transfer of value and property rights outside of centralized authorities and governments, a global, decentralized, non-state money had the potential to replace fiat currencies and central banking. The Ethereum blockchain took this idea one step further by offering support for Smart Contracts, allowing developers to write self-executing code and logic. Programs could now be written on top of the blockchain, allowing for coordination of financial services and contracts outside the purview of traditional financial institutions. It wasn’t long before we saw the first decentralized applications for decentralized trading, lending, tokenized debt positions, and more.

Critically, DeFi is a user-owned web, with coordination of identity, reputation, and data happening totally outside of any centralized, corporate “big tech” platforms. Operations of DeFi services can not be manipulated by any institution or employee — instead the rules are written in code (smart contracts). Once smart contracts are deployed to the blockchain, DeFi applications run themselves with little to no human intervention. Users access financial services by interacting with smart contracts, with all transactions being settled on the blockchain. (This is about infrastructure for financial services, not cryptocurrencies!)

DeFi is permissionless, since anyone can create and access apps. It’s also transparent, with the code visible on the blockchain for anyone to audit. Transaction activity is also public for anyone to view. While this may raise privacy questions, transactions are pseudonymous by default, i.e. not tied directly to your real-life identity.

The access gateway into this decentralized economy are self-custodial wallets, which unlock access to DeFi by allowing users to directly interact with smart contracts, without going through a middleman or counterparty. Self-custodial means that the users hold their own private keys — no centralized party like Coinbase is needed to hold assets on the user’s behalf.

DeFi applications are in full bloom

Now that the DeFi “primitives” of trading and lending are well established, new DeFi applications are being built on top of existing ones like Lego pieces. The most widely used DeFi use cases include: stablecoins, crypto lending, decentralized exchanges, and derivatives. (Which can even include tokenized assets like stocks!) Other applications include staking (“Proof of Stake”), Non-fungible Tokens (NFTs), or play-to-earn games like Axie Infinity.

Many owners of crypto-assets started to take back ownership and control of their assets by moving them from centralized service providers to their decentralized counterparts. Incidents of insolvency around centralized players like Voyager and Celsius accelerated this trend. It only took 19 months (from March 2020 — October 2021) for the supply of Ethereum tokens on exchanges to halve from 27% to 12%, while the supply deposited in smart contracts doubled from 10% to 21%. For some tokens, it’s already common to see trading volumes on decentralized exchanges like Uniswap surpass trading volumes on centralized exchanges like Coinbase.

With the properties of being open, permissionless, decentralized, and non-manipulatable, Blockchain technology is powering the best and most transparent financial services ecosystem that ever existed in human history — it’s called Decentralized Finance, or DeFi. We are big believers. That’s why we’re building Ultimate.money, to bring DeFi to the masses.

About Ultimate

Ultimate is the first product developed and launched by Berlin-based Unstoppable Finance. It’s a multi-chain, fully non-custodial wallet that makes the emerging world of decentralized financial services truly accessible to the masses. Say goodbye to complexity. Say hi to DeFi.