The Future of DeFi we Should be Building

Today, crypto and the traditional financial system are two inherently separate and distinct systems. A future where the two are connectable has yet to materialise. There are three future scenarios, of which the third scenario is the most likely to occur. These three futures are described by Kenneth Bok[1] as the “Wild West”, “The Citadel”, and the “Bazaar”. This piece argues that the Bazaar is the future we need to start building towards today, where long-term rewards will be accrued for both the DeFi ecosystem and ethos as well as society on a broad scale.

The first scenario is one of crypto domination. We live in a world where meme coins are the standard currency of social media. Self-custodial wallets are the norm, and your grandmother is putting her money into a Morpho lending vault, while holding her coins in self custody. ICOs dominate fundraising, and payments are made through algorithmic stablecoins on ZK systems with integrated mixers. This scenario is theoretically great if one assumes we live in a tech-adapted society that is financially literate and technologically able to interact with all services. A society without protection of the least knowledgeable, a world of pure meritocracy. As much as I like financialisation and financial engineering and meritocracy, we must ensure that Crypto and DeFi continue to be more. I do not see a path where we end up in the Wild West. Law is one of humanity’s great inventions, and I do not see a reason for the ecosystem to come up with self-regulating rules that allow us to build a financial system enabling the global allocation of capital. We are good at building tech, but we lack much worldly wisdom.

The second option is one in which TradFi and regulation destroy crypto and DeFi over the next decade. We can already see the first signs: private permissioned blockchains and architectures of flows that resemble the traditional system. This is no wonder because these products are built by companies that profit from the traditional world and its structure. There is a real danger that we end up in this world through a combination of hiccups (FTX, Terra) and tight regulation, leading to a scenario where DeFi goes down in history as a short period of exuberance and experimentation that has led to little. I propose that this scenario is underestimated and not feared enough by people in the industry. Crypto is still insignificant today. There is no connection to the real economy, and there is no reason for the US government not to shut it down. Today, other than values and ideals like privacy and decentralisation, arguably little real economic value would be destroyed, as the fall of FTX shows. It is still an industry built on financialisation and little value-add in the real economy. If we can’t change it, we might end up in the Citadel because TradFi did a better job, and we were not up to it.

Lastly, there is the Bazaar, the future I believe we should all be building for and thinking about much more. This future is created because we study financial history and economics, take our lessons, and build systems that use the superior tech we built over the last decade and put it to use in the real economy, reducing our greed and refocusing on improving Finance. It is a future where we move capital markets on-chain and have regulated assets on public blockchains. Capital markets and money are built on decentralised technology but embedded in the real economy and law, connecting our real world. This scenario is one of open networks and financial instruments. It is a scenario where everyone can lend against their stock in a permissionless protocol without needing to sell it. This is a world of T+0 and global immediate money transfer. A world of privacy in finance and optimal capital allocation through AI-driven open networks. This is a future where traditional finance integrates into DeFi. One can imagine the structures.

To conclude, DeFi needs to start creating value in real economies and make itself indispensable in the world. This is the clearest path to regulatory acceptance and long-term success. As long as we build the technology, regulators won’t stop us; if we continue to provide little real value, there is a real danger we will end up in the Citadel. There are projects that give us hope: the first properly thought-through stablecoin design at M^0 and improved AMMs at Poolside from ButtonWood Finance. There are likely more I am unaware of, but we have a long way to go. There are too many financialisation projects, too much greed, and too little long-term thinking. I am optimistic that competition and the ruthlessness of DeFi’s openness and the free flow of money will make the real projects succeed. That is on us, on everyone who cares about how the financial system of tomorrow looks. We can live in the Bazaar, or we end up in the Citadel. The choice is ours.

If you want to contribute to building the Bazar, contact me at Torben@tau-finance.com.

[1] Digitalising Finance, Kenneth Bok, 2014