The Grip of Centralization
We find ourselves in a curious place in history. From feudal kingdoms to industrial empires, money has always represented the bloodline of power. Today, it is quite difficult to draw the line between governance and moneyed interests. Whoever is publicly seen as a decision-maker is more often than not merely a vehicle for moneyed interests. In the United States, this system of corporate governance is a well-oiled machine.
Moreover, the commercial choices offered to us are shrinking at a rapid pace. From Amazon to Google and Facebook, a few dozen top operatives hold such a concentration of power we have never seen in history. Amazon, representing over 80% of book market share, maintains the power to ban any book for any reason it deems necessary.
Dire Consequences of Centralization
It seems the dream of free internet is being systematically extinguished. This is not a small thing to lose. Free exchange of information can literally prevent wars, as it happened with Syria.
However, prior to powerful centralization finding a home in the internet, a period of internet freedom took place — and blockchain was born. This now could represent the next evolutionary stage of the internet: financial decentralization on top of informational decentralization. In essence, DeFi represents a minor step towards the decentralization of certain aspects of the world’s current financial system.
DeFi Emerges From the Crypto Bubble
Eleven years after blockchain birthed Bitcoin (BTC) as an alternative to fiat money, we arrive at the next stage of financial decentralization – Decentralized Finance or DeFi. Bitcoin may have served the function of digital gold and borderless transfer of money with drastically lower fees. Importantly however, it has yet to find its natural ecosystem — and continues to suffer from severe volatility.
Yet for the first time in financial history, DeFi offers financial instruments of borrowing and lending without the oversight and mediation of banks and governments. Anyone with internet access and a crypto wallet can start borrowing or lending money, which has been the primary role of the banking system since its inception.
As one would expect from such a revolutionary development, the DeFi space exploded across Ethereum-powered platforms like Compound, Aave, InstaDApp, Maker, Synthetix, Uniswap, and many others. Not only did the market cap of DeFi go from $1 billion in June to over $10 billion, but it also exploded the use of stablecoins as the most convenient way to interface with the DeFi space.
Currently, thanks in large part to DeFi, stablecoins surpassed the $20 billion market cap. To those keeping track, this was the total value of all cryptocurrencies in 2017. Part of why this has happened includes broader — and regulated — access to crypto. Even the top forex brokers now offer access to popular cryptocurrencies and stablecoins led by Tether (USDT).
CBDCs on a Collision Course with DeFi?
As DeFi continues its volcanic eruption, it is still immature, providing many avenues of hacking, exploits and bubble-like trends. While this is to be expected as DeFi platforms and their governance tokens mature, it leaves an opening: a demand for guarantees and stability. Surprisingly enough, this demand could be supplied by governments.
Money begets power, and power seeks consolidation. Big Tech demonstrated this to us clearly. Likewise, the government seeks to utilize that power and look out for forces that have the potential to curtail its own power. One of such forces is DeFi, and one of the government’s responses to DeFi comes in the form of Central Bank Digital Currencies (CBDCs).
CBDCs, as a digitally tokenized form of fiat money, would compete with both cryptocurrencies and DeFi. It is no secret that most people flock to security first, rather than wait for something to mature. Moreover, DeFi, as a decentralized force of financial disruption, would directly collide with the entrenched power of the Federal Reserve, one of the few truly sovereign entities remaining.
The Pros and Cons of CBDCs
Cryptocurrency greatly expanded our perception of money. In a predictable transition towards a cashless society, with its many benefits, cryptocurrency spurred governments to develop digital currency as complementary to the existing financial system.
As a result, national CBDCs could easily take the wind out of DeFi’s sails, by providing:
- Insured deposits
- Near-equal level of transaction fees
- Efficiency and frictionless of cryptocurrency
- Crypto-wallet-like convenience and speed
- Lack of legal gray area
Unfortunately, by removing uncertainty from the digital finance ecosystem, CBDCs would also exert control like never before. With digital currency under the purview of governments, privacy has the potential to become infringed.
In the meantime, DeFi would still be powered by smart-contracts and P2P transactions. Such infrastructure would inherently offer lower transaction costs, superior privacy, and better interest rates. It seems a possibility then, that improved self-governance protocols, insurance, and other innovations in the DeFi space are still ahead of us.
In the end, the current cryptocurrency adoption rate teaches us that younger people would be more amenable to using an alternative financial infrastructure. Of that, only a portion would venture out to fully exploit the new frontier of decentralized finance, and some would be satisfied with hybrid, licensed solutions like ArbiSmart.
However, as is the case with information, the majority of the population follows the line of least resistance, tapping into what is put in front of them by central entities. Accordingly, this tendency would be a CBDC’s strongest hand in perpetuating the centralized model of finance.