DeFi: revolution or evolution of the financial system?

Introduction

If someone had talked to us about DeFi fifteen years ago, we probably wouldn’t have taken the subject seriously.

The idea of a completely decentralized financial system, based on a technology then in its early stages of development like blockchain, would have seemed little more than a technological utopia, an exciting dream for visionaries and idealists. Yet today, we find ourselves on the dawn of what could be considered one of the most radical transformations of our financial system.

The numbers speak for themselves: according to DefiLlama, the current value of assets in decentralized protocols amounts to over $96.6 billion. These numbers are certainly much lower than those of the traditional financial system: according to a study by Visual Capitalist, the stock market alone was worth over $109 trillion in 2023.

But as a relatively recent system, the numbers of decentralized finance should be put into perspective. Consider that just 6 years ago, the value of DeFi protocols amounted to about $20,000!

DeFi is no longer a marginal concept but a growing reality that challenges our traditional notions of banks, investments, and everything related to money.

But how did we get to this point? Is it really possible that an idea, once relegated to the realms of imagination of a few, can now promise to rewrite the rules of the global financial game?

Far from wanting to address blockchain technology and decentralized finance in their entirety (a book wouldn’t be enough!), this article aims to explore DeFi as a catalyst for deeper change, asking whether we are witnessing a revolution or an evolution of our financial system.

Revolution or evolution of finance? Let’s start with definitions

A revolution is a rapid, radical, and often irreversible change that aims to overturn existing structures to make room for new realities. Revolutions feed on the will of the many, but are usually initiated by a few.

Evolution, on the other hand, could be considered a transition, from an old to a new paradigm, a gradual change that certainly does not disrupt previous systems, but has the same effects as a revolution.

The modes therefore make the difference. And where should decentralized finance be placed?

The answer is not simple, because in reality DeFi fits, in part, into both definitions.

If we consider its inclusive character, the rejection of control, and the fact that it is a system started by a few, we find the characteristics of a revolution. But if we look at how transactions are carried out and the technology that supports this new system, we can then say that DeFi represents a faster, less expensive, and limited evolution of the traditional financial system.

Decentralized finance therefore combines multiple concepts, lends itself to various interpretations, but certainly manages to unite the characteristics of a useful and complex system like finance, and the need people have for inclusivity, regardless of place of birth or past financial situation.

In conclusion, decentralized finance offers something that we really never expected – an alternative. The only question remaining is whether this alternative will become the norm.

Decentralized Finance – a word to understand it

Just to anticipate the writer’s thought, the answer is no. Or at least it shouldn’t. But let’s take it step by step.

If someone asked us to describe DeFi in one word, I would choose “control.”
The point is indeed here: in decentralized finance, control lies with individuals.

There are no barriers, not even geographical ones, and transactions can occur without revealing the identity of those who carry them out. All of this is supported by a technology referred to as tamper-proof, meaning resistant to tampering.

The security of blockchain technology lies in cryptography: since each block of transactions is associated with a unique hash consisting of the data itself on the chain, any tampering would be immediately evident and would be blocked by the participants of the network, who effectively control the reference blockchain.

However, this type of control differs from centralized control: each participant in the network makes decisions autonomously, not being subject to central control, but to a logic.

It is the complex underlying technology that allows everything to function, ensuring security and preventing transactions from being duplicated. Distributed control, in short.

And what about autonomy in such control? It’s not only possible to be an active member of a blockchain, but anyone wishing to distribute a new asset only needs to provide liquidity on a decentralized exchange for that asset to be used and become a new currency.

Is it then more appropriate to speak of distribution or dispersion in these cases? If we were to exaggerate possible future scenarios, we might wonder what would happen if anyone could normally distribute assets without any control – also considering the fact that each user is identified only by an address made up of numbers and letters.

Certainly, the consequences for the security of the financial system are too often emphasized – if we think about it, using circulating money in the form of pseudonyms is not much different from the exclusive use of cash. In the case of decentralized finance, the absence of control opens up future scenarios that are not necessarily positive.

In the traditional financial system, control is synonymous with centralized authorities such as banks, governments, and other financial institutions. These entities regulate everything, from money creation to transaction management, from credit allocation to the definition of monetary policies. The advantages of this system are clear: stability, regulated trust, consumer protection, and prevention of financial crime.

However, it is undeniable that a large portion of the world’s population is excluded from this type of system – which often creates the opposite effect, namely social instability.

In DeFi, control is in the hands of everyone, not just a few, thanks to a system not prone to human error, as regulated by complex technologies that promote total autonomy. People have total control over their financial destiny – after all, it’s no coincidence that cryptocurrencies were born after 2008.

Nevertheless, we must take into account the problems related to decentralization. In addition to volatility – a feature certainly loved by traders but perhaps less so by the rest of the population – there are security issues related to the lack of participation. The most vulnerable networks are those in which a small portion of participants can come into possession of resources so significant that they effectively control most of the assets of a protocol – thus leading to a centralized mechanism.

Market manipulation, in the absence of rules established by central authorities, is just one of the negative aspects to consider.

Conclusion

If everything is finance, and the traditional financial system is now an integral part of our countries’ lives, what would happen if control were completely eliminated? Would it really be an advantageous system for everyone?

According to the writer, DeFi should remain what it is today – a valuable alternative.

This would give everyone the opportunity to choose, especially based on the level of risk they are willing to accept and the technological skills they are able to develop.

Fortunately, we live in an era where knowledge is accessible, and the knowledge required to manage one’s financial instruments through blockchain technology is no exception.

The best way forward could therefore be one of evolution: a system as robust as the traditional one, but with the best features of decentralized finance, would certainly be a great achievement. The important thing is that everyone can choose.