The Defi Revolution is Economy 3.0
There is a global revolution happening right now and it’s happening so fast that unless you are explicitly told about it, it will very likely remain entirely invisible to you. The only inklings you may have that something is happening is headlines mentioning Bitcoin and another COVID-19 stimulus package. This revolution didn’t start this year or even last but it has accelerated so dramatically the past three months that it is clear that we have approached a tipping point. This global revolution that I speak of concerns the very nature and mechanics of the worldwide economy. This revolution is being fueled by digital assets, programmable money, and distributed autonomous organizations. What we are witnessing unfold before our very eyes is nothing less than the complete reimagining of human organization, industry, and trade. What we are witnessing is the birth of Economy 3.0.
Convergence
At the macro scale, this revolution was inevitable if the trend line of human industry and innovation was to continue along the line it was traversing. Old companies like Harley-Davidson, Prada, and Whirlpool took almost a century to reach the 1 billion dollar valuation. More modern companies like Mattel, Nike, and Starbucks did it in a quarter of the time. Then we saw the emergence of internet companies like Evernote and PayPal do that in less than ten years. As the Internet got more established and the network effect took a stronger hold, purely digital companies like Pinterest, Instagram, and YouTube reached billion-dollar valuations in less than 2 years. Then Jet.com, a shopping website, did that in four months because of its unique pricing algorithm. Now, with the advent of blockchain, cryptocurrency, and tokenized organizations we are seeing companies reach unimaginable valuations on the scale of hours, minutes, and seconds.
- Bancor: $153 million in 3 hours
- Aragon: $25 million in 15 minutes
- Gnosis: $12 million in 10 minutes
- SingularityNet: $36 million in 60 seconds
- Brave: $35 million raised in 30 seconds
Genesis
Let’s take a few steps back and see how we got here because if you understand the pattern, none of what is happening is a surprise. As soon as anything becomes digital and programmatic, will begin to accelerate in its development at exponential speeds. Ray Kurzweil has talked about and documented this at length. Seen is this way, the genesis of this economic digital metamorphosis started in the late ‘80s.
As soon as anything becomes digital and programmatic, will begin to accelerate in its development at exponential speeds.
In 1987 the world had its first electronic stock exchange, the NASDAQ terminal. Traders could now type orders directly into a computer. A trader named Thomas Peterffy didn’t want to type in the orders so he and his engineers hacked into the NASDAQ terminal such that it could be wired directly to their own computer, which traded automatically based on algorithms. A senior NASDAQ official saw Peterffy’s setup and said Peterffy was breaking the rules: All orders had to be entered through the keyboard. He gave Petterfy’s group one week to fix the problem.
Peterffy and his engineers came up with a solution. They built a mechanical robot with rubber fingers that typed entries into the keyboard. It’s reported that the inspector stormed out of the room upon seeing the hulking machine but it technically satisfied the NASDAQ rules. Traders said that on active trading days, the robot typed so fast that it sounded like a machine gun. Peterffy became the father of digital trading and this in turn would pave the way for algorithmic and high-frequency trading. He would write code in his head during the trading day and then apply his ideas to computerized trading models after hours. See: The Man Behind Computerized Stock Trading
In the following years, the stock market would become dominated by algorithmic trading and the majority of all currency would have its existence in digital form. But the key differentiator here that cannot be missed is this. What was being traded were records of ownership, not the actual assets themselves. But all that would change in the next advent of this saga in 2009 with the invention of the world’s first digitally scarce resource, Bitcoin.
Digital Currency
The fundamental innovation that occurred with the invention of Bitcoin was the invention of digital scarcity. The very notion that I could have something digital and send some of it to you suck that my supply is reduced is so entirely novel and unthinkable that the vast majority of the world doesn’t even realize that such a thing exists. In fact, the world is only in the past few months waking up to the reality of cryptocurrency while the actual crypto ecosystem has already moved far beyond that.
“I think the internet will be one of the major forces for reducing the role of government. The one thing that’s missing, but that will soon be developed, is a reliable e-cash. A method whereby on the internet you can transfer funds from A to B, without A knowing b or B knowing A.” — Milton Friedman, Nobel Memorial Prize in Economic Sciences
In the past three months, politicians, big tech, banks, credit cards, Penn stock exchanges are feverishly jumping on the bandwagon with the Model T of cryptocurrency, Bitcoin. All the publicity and institutional investments have driven the price of Bitcoin up but it’s nothing compared to what’s happening at the bleeding edge of the 3.0 Economy. And this is nowhere near the height of where things are going. It’s just getting started and the difference between this revolution and the revolution that was the internet is that this one can’t be controlled.
“In terms of adoption, Bitcoin has roughly the same users as the internet had in 1997. The big ones growing faster. Next four years on the current path will bring Bitcoin users to 1b people, that’s the equivalent of 2005 for the Internet” — Willy Woo, Twitter
Decentralized Finance
Some very smart people realized that if you could have a decentralized currency, why not decentralized programs, and why not use those programs to move cryptocurrency around according to programmable rules called smart contracts? And why not create all the same instruments and entities that exist in the classical world of finance within these smart contracts? What I just described is what’s happening in Decentralized Finance (Defi) and it has grown to 40B just during the pandemic and it shows no signs of slowing. In fact, a person can barely keep track of the proliferation of new competing and complementary Defi protocols and instruments. Far from losing steam, Ethereum, the most active of the blockchains being used for Defi is readying an update that will dramatically reduce transaction fees thus inviting even more participants in the ecosystem.
A new wave of financial innovation is upon us. Decentralized Finance (DeFi) provides the solid foundation for new financial services that are so powerful and advantageous that we will soon look back on them and question how we ever operated without them. — Nasdaq
Governments will surely flex their muscles and attempt to regulate the 3.0 Economy, but the question is whether they will outpace the technical development of this ecosystem. The UK government has said that it’s going to release rules for how cryptocurrencies will be governed in 2022 but that might as well be 20 years in Defi time. Technologies like decentralized exchanges, the interplanetary file system, and the Ethereum naming system are being used to rebuild the internet in decentralized and censorship-resistant ways. There is a fundamental shift in power happening and this shift can’t be stopped or mitigated with new laws or physical weapons. The information economy is broken free from the nation-state economy and the genie can’t be put back in the bottle. The efforts of those who opposed this revolution will be found to be as futile as a child impotently stamping its foot in protest. Those who recognize this movement for what it is and take the time to educate themselves and become active participants will find themselves the digital wizards of a new world. Atlas is shrugging and the ancient and lumbering nation-states are on track to being no more or less relevant than any other player in a free market.
Read: The Sovereign Individual: Mastering the Transition to the Information Age
