If you happen to fall in the bottom half of Americans in terms of net worth, you’re part of a group that collectively owns about 2% of the country. To put it another way, if the nation’s wealth was a nine-inch pie, about 165 million citizens could claim a piece about the size of an IKEA meatball.
One might argue that we’re overdue for a systemic correction. Decentralized Finance (DeFi) has emerged on a cultural tailwind powered by growing discontent with a system that heavily favors those at the top. Could DeFi be the solution society needs to level the playing field?
It would seem an ambitious expectation, but there is cause to believe that DeFi might tip the scales back a bit, if not overturn them altogether. Below, we’ll examine how this could happen.
The Capital Revolution
We often think of technological innovation as a force that has transformed our lives through the power of connection. Yet, the tools that connect us are the same ones that have made it easier for the powers-that-be to gather immense hoards of valuable data and build systems that in many cases entrench, rather than mitigate inequality.
If the first waves of technological innovation were a boon for the wealthy, DeFi – under the banner of democratizing the financial services machine – could be the answer for the common people. In a world where you need scale and organization to compete, DeFi has the potential to provide just that to the masses.
In an ideal version of a DeFi future, there will be significantly fewer structural disadvantages to being a small player. Rather than flowing through largely institutional channels like traditional equity and debt markets, capital will be spread across a much wider spectrum shaped by more dynamic forces – this is already evident in the transfer of assets into cryptocurrency and NFT markets.
DeFi is making it easier for anyone with an idea to raise capital quickly and efficiently in support of it. We can point to the recent ConstitutionDAO episode as an example of what a population mobilized by DeFi is capable of in terms of flash capital mobilization (the results notwithstanding).
The potential transformation of the retail investing sector from a disparate group of independent actors into organized blocks backed by DeFi infrastructure has huge implications for the whole financial sector. A persistent driver of inequality is lack of access to markets – worldwide, 31% of the population are still unbanked, and in the U.S. only 56% of people own stock of any kind.
The ability of DeFi to cost-effectively scale and organize capital markets can be a game changer for the underserved.
The digital communication revolution worked largely to the benefit of the wealthy, in economic terms. The capital deployment revolution, backed by DeFi, might see the next round of wealth creation shake out much differently.
Changing the Stakes
Follow the money. In terms of the direction of societal advancement, it’s a maxim that generally holds true. Where we decide to invest capital resources – whether it be in education, healthcare, the building of pyramids, or elsewhere – DeFines the shape of our future.
Combined, the global bond and equity markets totaled nearly $230 trillion in 2020. This is no surprise – almost all of our goods and services are provided by corporate or government entities which overwhelmingly choose to raise capital through debt or equity offerings.
In comparison, the size of the DeFi market stood at $85 billion as of September 2021. Relatively speaking, DeFi is a single (but growing) bloom of algae in a massive lake of assets. And it has taken hold for a reason: because certain conditions have made growth prospects favorable.
It’s been noted that low interest rates have created a fertile environment for entry into digital assets. There may, in fact, be an even larger paradigm shift at play, driven by a collective thirst for yield beyond what traditional finance can deliver.
The concept of a stakeholder is now evolving into something more dynamic; rather than just owning a share of an enterprise, productive assets like The Graph (GRT) and Algorand (Algo) allow for token-holders to participate directly in making the market itself.
For DeFi to succeed where traditional finance has faltered, incentives must be aligned not just toward enriching small groups of individuals, but toward creating a healthy and functioning ecosystem. The optimal environment built around DeFi would incentivize building systems that work, rather than simply rewarding those who are good at creating earnings.
We can look at professional sports leagues as a point of comparison. Fan interest is by definition split into competing factions, and without a regulating mechanism the balance of competition and resources tends to be skewed toward larger markets. But, with revenue-sharing policies, there are greater incentives to develop league-wide infrastructure that benefits the whole ecosystem. Thus, in a manner of speaking, DeFi can be the force that lets the equivalent of the Milwaukee Brewers fanbase enjoy the same in-system privileges as that of the New York Yankees.
The DeFi Generation
Growth and adoption of DeFi has accelerated at time when the greatest wealth transfer in human history is unfolding. As Millennials begin to assume stewardship of the systems of institutional control, they will begin the process of reimagining them in different forms – almost certainly some will be digital.
A tremendous opportunity lies therein, to not just recreate the systems of old under a different guise, but to build better and more equitable ones that extend the promise of a technology-driven progress to all members of society. Whether DeFi can fulfill that vision will go a long way toward determining its ultimate value to the world.
