Merlin Egalite
During my studies, I learned about finance and the economy by watching YouTube videos and reading books. I was concerned that financial crises or instabilities would undermine entire economies or populations and broaden inequalities. While finance is supposed to support the economy, it fails at it, sometimes doing the exact opposite. It’s obvious that we must fix it.
Below are my criticisms of the old financial system.
If the economy is an engine, finance is the oil making it work smoothly. While useful, finance is too much about consolidating speculation and maintaining secondary markets than bootstrapping promising solutions to solve vital issues. For instance, in 2020, high-frequency trading represented 50% of the trading volume in US equity markets.
For now, the largest investments in the economy come from money creation through bank loans or the reinvestment of profits by companies themselves. Not finance.
Finance is opaque in various ways. It’s hard for someone outside this world to grasp what’s happening and why it’s useful. Because of their inherent complexity, finance, and economy are not like pure math, we can only build models that try to mimic reality.
Tax fraud and scandals are common in the banking sector. For instance, $150B has been stolen worldwide in the CumEx Files over 2 decades. $33.4B in France alone. Unfortunately, most governments prefer cutting their social expenses rather than chasing after those billions.
Bank customers are unaware of how banks manage their assets. Most major European banks are heavily invested in fossil fuels, which they continue to subsidize and conceal their behavior. This is despite the need to prioritize sustainable and cleaner energy.
Finance is not accessible to everyone. Too poor? Take the standard saving account and don’t ask too many questions. It’s supposed to protect customers from losing money. I’m not sure it is successful in doing so but it’s preventing them from accessing good yields, that’s for sure.
This close access tends to widen inequalities within countries. This is not a sustainable stand in the long run as it causes more instability overall. I’m not sure everyone wants to live through another French Revolution or a similar event.
1.4B unbanked adults in the world lack financial stability. The financial sector does not provide any relevant solutions to them and is not interested in doing so either.
Banks make a profit from the interest they generate through loans. The more loans, the juicier. But what happened in 2008? Banks and lenders in general generated so many risky loans that the system blew up. It degenerated into a global crisis where states must intervene to stop the bleeding. When a standard business crashes, it goes bankrupt. There’s no help from the state to solve it and natural selection applies. But that’s not true for banks. Banks are led to believe they are “too big to fail” when in reality, they’re just never held accountable.
The decisions of a few impact the many. Of course, I don’t expect my grandma to monitor her bank account like a trader on Wall Street would. Most people don’t (and it’s probably for the best). However, anyone who’s competent and interested in doing so should be allowed to contribute.
While I depicted a very bleak portrait of finance, it’s not all dark. Finance is necessary to sustain our current economy. But how do we keep the good parts? What’s the alternative?
While researching financial alternatives, I stumbled onto the blockchain world. And what a wonderful world! It revolves around common goods, open source, and decentralization of power. I found it so fascinating as it was questioning traditional finance’s legitimacy.
I thus decided to dive deeper into it by writing a newsletter about blockchain. Then I started contributing as a developer for different projects; Commons Stack, Giveth & Kleros. Slowly but surely it led me to discover the DeFi space and understand how to address the issues I mentioned earlier.
DeFi aims to create an alternative to the current financial system by leveraging public blockchain technology. The DeFi ethos is to build decentralized and open-source financial infrastructures (protocols) as common goods with which anybody can interact.
Protocols are (or should be) based on the key principles below.
Protocol’s code is open source and transactions are public. Any developer in the world can actually audit what’s happening under the hood. This is much better than current banks and financial institutions whose code is close-source.
If you don’t like how a project is managed works (perhaps you don’t like its treasury management), you can move to another one that suits your values. You’re sovereign of your money and choice.
Also, it’s much easier to study information and conduct analysis when data is widely available. Thus political decisions can be taken on more tangible facts.
Protocols are not gate kept by a privileged few. Anyone in the world can access them. Anyone in the world can build alternatives. Of course, you need to be technical enough to start a protocol but the barrier to entry is much lower than in legacy finance. We had no financial background when we kickstarted Morpho (as students by the way).
Also, protocols tend to give much more ownership and decision power to their contributors and users. Governance experiments are still in their infancy, but DeFi is relentlessly trying to find the best way to orchestrate people and resources. Most of the time, decisions are taken through token-based votes.
Protocols are built to be resilient because they must operate in every condition with minimal management. Hacks indeed happen, mechanisms fail and some users get scammed, but this is the necessary learning phase before DeFi becomes mature enough. Meanwhile, it will strengthen its ability to face unexpected events.
All those arguments push me to work in this space; this is what I’ve done for the past 4 years. Even though a lot happened, DeFi is still a drop in the ocean of finance. Of course, DeFi won’t replace banks entirely. My grandma will still use her normal bank account to go to the grocery store and banks will still collapse. But DeFi will replace a huge part of the financial stack. And what will not be replaced will greatly evolve. Each step in this direction is a step further toward a more transparent, open, and resilient financial system.
The internet was created in the eighties. It took decades to become a standard in our life. We must be patient before DeFi brings social progress. How long will it take?
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