Early 2021, in the darkness of lockdown, and flailing around for a creative project to distract the anxious psyche, co-writer Simon Dingle and I decided to write a book. Bitcoin had been all over the news for years, but something else had been bubbling below the surface, something based on similar technology, but perhaps more transformative.
It is known as Defi, Decentralised Finance, and our book, just published, is titled Beyond Bitcoin: Decentralised Finance at the End of Banks.
The story turned out to be bigger than we had imagined when we started, even though we had both been in the crypto space for a long time. The speed of change started to accelerate vertiginously during the 2021 year. We had made a bold statement — “The End of Banks”. Certain to raise sceptical eyebrows — we knew this. But we believed we had a convincing case to make.
Of course, the statement is somewhat metaphorical, it will no more be the end of banks than the influential Francis Fukuyama book The End of History and the Last Man was intended to predict the actual end of history.
But as we rolled out the parts of this burgeoning revolution and assembled it into a narrative whole it became evident that a tidal wave was bearing down on the financial institutions and a painful re-invention would be required of them to maintain relevance. And now, a year later, with the book on shelves around the world, our thesis is vindicated, even more strongly than we had imagined.
Defi’s promise is to use blockchain architectures to replace most of the services offered by traditional finance. To be better, faster, cheaper and more trustworthy than that which we have known for millennia. Even a brief scan of business news now, a year after we wrote the first paragraph, will find an increasing scramble of Defi studies, advisory papers, announcements, quiet back-office projects, new hires and strategy papers being borne and nurtured in almost every major financial institution in the world, from the great commercial banks to central banks, to investment powerhouses, to public exchanges, to fast-moving new fintech interests.
During the writing of this book, we wanted to go deep in a way that an intellectually curious reader would find accessible. We explain in simple terms what happened in 2009 with the birth of Bitcoin, and how one remarkable nine-page document by a pseudonymous cryptographer Satoshi Nakamoto solved a slew of problems that had bedevilled researchers for decades.
And then, in 2014, how a skinny Russian-Canadian teenager named Vitalik Buterin added a single technology layer to a Bitcoin-like ecosystem which opened the floodgates to Defi, to say nothing of NFTs and other new creatures still emerging from this fertile Cambrian swamp.
When we started writing, Defi had already stumbled in, bruised and bloodied by software bugs, grifts, hacks, scams, and uncertain regulation. But by the end of 2021, it had started to grow armour and wield formidable weaponry. And now nearly $200-billion is locked into hundreds of different Defi projects. It is growing exponentially, and it is a number that can no longer be ignored.
The year we spent writing the book is a long time at the birth of a combustive industry such as this. Thirteen years ago, there was no Bitcoin. Defi only really started to blossom in the last five years. NFTs were an eccentric corner of the field a mere two years ago.
Such has been the disruptive impact of innovations in such a short time that we now have emotions running high, zealotry and haters and believers going at each other with startling aggression on every forum imaginable. All of crypto together now represents about $2-trillion in value — the fastest and largest creation of a new asset class in human history. Off its late 2021 highs to be sure, but still a startling cut of the financial corpus. Anyone still talking about this as a “bubble” has not been paying attention.
And so as the mandarins of all the world’s great financial institutions, central banks and legislators have started to realise and react to what is now a real and present threat, small skirmishes are metastasising into great battles. Some will change their view — they will sniff an opportunity, and accept change, as has been the case with Goldman Sachs, El Salvador, Portugal and others. Others will lose ground, and we predict those will be the banks and government who try to stem this flow.
The number of people who have crypto wallets is approaching 200 million, and it is estimated that 50 million US citizens will boast some exposure to cryptocurrency by the end of this year, turning it from a new technology into a political juggernaut with deep pockets and fierce lobbying power.
Peripheral arguments about energy usage (now becoming history under the weight of new approaches and green implementations), criminal activity (as the underlying security of ecosystem components continue to harden) and difficulty-of-use (a solvable user-experience problem) will quiet to a background hum as the benefits to the “rest of us” become ever clearer.
And Defi will sit at the centre, helping to crumble the foundations of an ossified financial industry whose misalignment of interests have led, since the first “modern” banks of the Medicis in Italy in the 1300s, to the current time where asymmetries between the financially powerful and financially powerless go largely unnoticed.
Banks will have to change or risk hearing the whoosh of assets fleeing to greener pastures. DM
Beyond Bitcoin: Decentralised Finance and the End of Banks by Steven Boykey Sidley and Simon Dingle, is published by Icon Books and distributed by Jonathan Ball in South Africa.