Decentralized Finance for turbulent times

Uncategorized Apr 20, 2020

An alternative financial system emerges in turbulent times.

The COVID-19 epidemic keeps spreading throughout the planet. At the times of writing, we reach 2m confirmed infections in >180 countries and 120k deaths. And the concerns about the most severe economic recession since the Great Depression keep growing.

Governments worldwide have implemented unprecedented measures trying to control the spread: nationwide lockdowns, closing down schools, restaurants and businesses as well as national boarders.

Central Bank responses have been drastic, too. The Fed announced unprecedentet stimulus measures, such as pouring “unlimited cash” in the economy, buying corporate bonds, stocks and ETFs will be accompanied by corporate bail outs. All this will lead to a 20–30% increase in the monetary supply, only in the US.

However the costs of money printing can be very high. In case of monetary expansion, the ones that are “close to the money” ( banks, companies) will benefit first. If a central bank pumps money into the economy, the resulting increase in prices does not happen evenly. This is known as the “Cantillon Effect” and effectively redistributes wealth from the poor to the rich. Quantitative easing inflates asset values and effectively deflates wages of the middle class.

Besides, this, money printing risks the loss of credible neutrality. As Ryan Sean Adams points out, by giving liquidity to central banks the Fed favors certain countries over others; by buying corporate bonds the Fed favors large companies over small; by buying stocks the Fed favors the speculators over the prudent.

Taking into account these uncertainties, this is the best possible moment to learn about the new digital, open and transparent financial system currently being bootstrapped on top of the Ethereum blockchain: Enter Decentralized Finance. An alternative financial system, worth investigating in these turbulent times.

The main reason for it is its radical transparency. All transactions are recorded in a public, tamper-evident ledger. This permits full, time auditability.

This is in stark contrast with our current financial system! Actually, the blockchain industry emerged in 2008 as a response to the lack of transparency around toxic assets and manipulated risk ratings.

Money supply schedules are defined by open source code, also verifiable and not arbitrarily decided behind closed doors of unelected central banks. It can not be altered on manipulated by anyone. In other words, it is censorship resistant.

The transparency and auditability features gives reliability and trust in the system. Precisely the trust the current financial system is risking. It is neutral, practically immutable, not controllable by a specific set of persons, or serving specific interests. It is arguably fairer than fiat monetary supply mechanisms. Is one of the reasons why crypto financial systems can emerge stronger from the current crisis. It can evolve to a global, asset settlement layer, used by competing companies or event competing countries.

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