The future of decentralized finance lies in leveraging digital technology to remove intermediaries, streamline operations, reduce costs, and increase transparency.
The emergence of digital currency systems will determine the future of finance and who controls the global monetary landscape.
The focus should be on leveraging digital technology to improve communication, settlement, and ownership identification in financial systems.
The rise of digital bearer assets challenges traditional custodianship, shifting the focus to self-sovereign identity and secure verification of digital credentials.
Deep dives
The Evolution of Finance and Capital Formation
The finance industry has evolved over time, driven by globalization, industrialization, and information technology. Middlemen, such as power brokers and intermediaries, played a crucial role in brokering capital between sources and users of capital. As the access to information increased and markets became more fragmented, the role of intermediaries changed. This led to the emergence of securities markets, which allowed for the fractionalization and securitization of capital. However, the settlement, clearing, and custody systems still rely on numerous intermediaries, resulting in fees and risk transfer. The goal is now to remove these intermediaries and collapse the settlement and custody systems by utilizing digital technology and decentralized finance (DeFi).
Opportunity to Re-Engineer the Financial System
Decentralized finance offers an opportunity to re-engineer fundamental aspects of the financial system. By leveraging digital bearer assets and eliminating middlemen, there is a potential to streamline operations, reduce costs, and increase transparency. For example, the triparty repo system, a vital component of institutional finance, could be replaced by a digital alternative. However, it is essential for experts in finance to embrace this transformation and become the architects of these innovative systems. Rather than viewing the technology as a threat, it presents an opportunity to revolutionize the financial industry on a global scale.
The Space Race for Digital Currency
A power struggle is emerging among governments, big tech companies, and the banking sector over the future of digital currency. Governments aim to protect their monetary sovereignty by considering the digital versions of their national currencies. Big banks seek to maintain dominance in the financial system, while big tech companies envision integrated digital currency systems connected to their platforms. This struggle highlights the importance of establishing a dominant digital currency that could replace the US dollar as the global reserve currency. The outcome of this race will shape the future of finance and determine who controls the monetary landscape.
Separating the Technology of Money and Communication/Settlement
It is crucial to differentiate between the technology of money and the technology of communication and settlement. While technologies like blockchain and Bitcoin enable secure communication and settlement, they are not synonymous with the concept of money itself. The focus should be on leveraging digital technology to improve communication, settlement, and ownership identification in financial systems. Meanwhile, the competition between digital currency systems encompasses the establishment of efficient communication channels, robust settlement infrastructures, and trustless ownership verification.
The Importance of Money and Currency
Money and currency are distinct concepts, with money serving as an economic technology and currency being a debt-based system. Money, whether in the form of gold, bitcoin, or a dollar bill, represents possession and finality in transactions. Currency, on the other hand, is a broad system of debt-based exchange, which involves the movement of fiat currency and power broking. Blockchain technology is interesting because it potentially allows for disintermediation in the fiat currency system itself, opening the possibility of real-time bartering and instantaneous settlement.
The Significance of Digital Bearer Assets
The rise of digital bearer assets, enabled by technologies like blockchain, challenges the traditional concept of custodianship. Possession of private keys becomes central to ownership, eliminating the need for intermediaries to validate transactions. While complete self-custody may not be practical for all assets, a system of multiple signatures and risk assessment can provide a more secure and efficient process. The focus shifts to identity insurance, where self-sovereign identity and secure verification of digital credentials play a crucial role.
The Role of Marketplaces and Interoperability
Marketplaces are central to the Defi ecosystem, allowing communities to interact in financial networks. By bridging the gap between different assets and enabling real-time exchange and interoperability, novel financial innovations can emerge. Companies like Block, Microsoft, and Mastercard are investing in self-sovereign identity and establishing the necessary infrastructure. The future lies in creating marketplaces that balance the needs of nation-states with the advantages of digital systems, fostering trust and enhancing user experience.
Investment Opportunities in the Defi Revolution
Investors can consider three broad areas within the Defi landscape: self-sovereign identity, custody solutions, and tools for managing data and metadata. Companies like Block, Microsoft, and Mastercard are exploring identity solutions and infrastructure. Marketplaces and bridges between traditional and decentralized systems offer opportunities for growth and diversification. Additionally, investment in machine learning, natural language processing, and artificial intelligence can enhance the management of data within the Defi ecosystem. While investing in this space requires careful evaluation, focusing on foundational technologies and marketplaces can provide exposure to potential winners in the long term.
MacroVoices Erik Townsend and this week's guest host Kevin Muir welcome Abaxx Technologies CEO Josh Crumb to the show to take a deep dive on the future of decentralized finance. https://bit.ly/3Firk5K
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