Let’s say they are right. Let’s imagine that crypto-protagonists and the DeFi community is broadly correct with their overall thesis. That crypto will become properly mainstream, significantly so, as a store of value, means of payment, tool of governance, and mechanism for allocating and managing resources.
After all, more than $2 trillion is held in crypto assets today. And the gross value locked in the Ethereum DeFi ecosystem has increased about 250 times in 18 months. Even a slower growth of 35% per annum (a few hundred times slower than the recent rate), would see the DeFi ecosystem valued at $40 trillion in a decade. Growth of 50% per annum over ten years would put this value at over $100 trillion. (Total net wealth in the world is around $431 trillion today according to BCG, rising to about $544 trillion by 2025.)
It is worth asking why DeFi has so much attention from both excellent developers and people within the traditional finance industry.
What does the transition from traditional finance to a DeFi crypto-world look like? During the transition, when crypto starts to be used for non-crypto things, how does the world behave?
El Salvador’s dollarized economy provides one lesson on day one of its transition:
The government’s app for facilitating transactions — its “digital wallet” — went offline temporarily, protesters took to the streets of the capital to denounce the move, and the price of Bitcoin dropped sharply, demonstrating the volatility of the cryptocurrency market.
Those may just be day one teething troubles.
When Swedes changed the side of the road on which they drove in 1967, their was chaos. A “brief but monumental traffic jam.” Sweden today has amongst the safest roads in the world (traffic deaths per km driven about half that of the US.)
In the 1990s and early noughties when telecoms companies moved from Bell-era circuit switching to packet-switched networks, largely dominated by the internet protocol, the transition was essentially better than seamless for most consumers. Product quality improved and prices came down.
But we were shielded from that sausage factory but several layers of abstraction and encapsulation. Seems like this will be less the case with crypto.
So for today’s discussion, let’s be Einstein and dive into a Gedankenexperiment.
- What are the conditions under which a “transition” to crypto might occur broadly in our economies?
- What competing technologies or approaches to defi or trad-fi exist that address the limitations of traditional finance in a world of deep shifts (sustainability, demography, technology)?
- How might the transition actually occur? What would it mean practically for who participates, how we manage volatility, what the products (like wallets, payment rails, even tokens) look like?
- How will traditional finance and fintechs manage the transition?
- What will the steady-state after transition look like? A co-existence between trad finance and DeFi? Or will DeFi replace tradfi like packet-switching replaced circuit-switching? Which communities or special interests would gain from a transition? Which would lose?
- For the purposes of this Gedankenexperiment please assume that within the next few years, electricity provision for data centres will move almost entirely to renewables. (In other words, let’s use the experiment to consider the transition scenario rather than get lost down the polarising rabbit hole of energy use.)
Love to hear your thoughts.
Given crypto is an emotive topic, please stay within the realms of the thought experiment above. Thanks to Dave Goldblatt for help with the problem definition.
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