When will DeFi be able to compete with traditional finance?

We all love to hit the underdog. Whether it’s the story of David and Goliath, the Mighty Ducks, or Eddie the Eagle, or the couple on the street running their startup in the garage. There is something about seeing someone outsmart competitors, outpace finance, outsmart them, and be overcome through intense focus, endless perseverance, and the sheer will to beat the odds.

Sometimes we see the real story, but more often than not we see the big guy crushing the little guy. We live in a world where huge corporations suck around, outperform in price through economies of scale, and occupy this niche by all means necessary. In some areas, this is easy to see, as is the case with giants like Amazon, Google, and Apple. It’s hard to see other monopolies because we’re used to it being our only option. One of the largest of these monopolies is traditional finance.

TradFi has such a grip on our society that until the advent of blockchain, few people saw any alternative to a centralized handful of companies, using government-backed currencies, forcing people to use their services for any cashless activities. Payments, transfers, loans, investments – all these are controlled by a small group of giant global companies. The problem is so widespread that it can be difficult to view it as a problem, but rather as “the way things are”. In just describing the situation, it could sound like a conspiracy theory. However, it is not, because these facts are not hidden, it is just the way the financial system has been for many decades.

Blockchain has changed the world in many ways, but it has shown more than anything that the cornerstone of TradFi should not be the only option. While this has resulted in impressive platforms and a growing ecosystem, David and Goliath’s scenario is not favored catching up with blockchain anytime soon. TradFi has long enjoyed its ability to charge high transfer fees and interest rates on loans, with little competition outside of a few players in the industry. In fact, this lack of competition has made the financial infrastructure terribly obsolete, with programming languages ​​such as COBOL and Fortran, over 60 years oldstill serves as the basis for the larger financial system.

With all that said, however, the DeFi of the blockchain has very little chance of catching up in its current state.

the problems

So why should the old, rickety establishment still be able to retain so much power over a younger, leaner methodology that is superior from a technical perspective? Well, TradFi has some very powerful things, and DeFi has some fatal flaws that will be very difficult to solve.

TradFi has the huge advantage of “the current situation”. With something as important to our society as the monetary system, the phrase “if it ain’t broke, don’t fix it” has never been true. Although it is clear that the system can fail at any time, and programmers who know these ancient languages ​​are decreasing more and more, there is simply too great a risk to develop something new, and then risk the economic lifeblood of the entire world to replace it. . Yes, it has to happen someday. But no one seems to want to be leading the way. Ironically, this irrational approach to risk is the same for other industries where risk tolerance is close to zero. This is why iterative vehicle and missile designs both occur in slow motion, with incredibly incremental adjustments. It’s not worth risking everything when it works now.

On the other hand, DeFi has moved and developed very quickly. In just a few years it has transformed into a major financial ecosystem. This has been astonishing and has filled many with hope who would like to see a decentralized, de-government, peer-to-peer financial system. Unfortunately, most of the development of DeFi platforms has been on a number of principles that were innovative at the time, but could not match the size of the global system. The smart contract as it operates today has several serious flaws: opportunities for security breaches, and the inability to scale with the speed and power to engage with a global system. With Ethereum, we see both issues at play. Any number of violations were caused by weaknesses in the smart contract, or from developers who didn’t understand the concept well enough to build a quality contract. In terms of scalability, Ethereum 1.0 quickly demonstrated how a system that could not be scalable would become unusable and unaffordable in most use cases. Ethereum 2.0 will improve in this regard, but it will still reach the limit before it becomes a global financial system. Looking beyond Ethereum, it is unfortunate that the vast majority of platforms are either built using this architecture, or one very similar.

elegant solution

There is good news, however. There are platforms out there that are looking to really solve these issues and provide a stable and scalable solution. However, one may in particular have a way of tracing the rapid evolution of the global financial system; It borrows tricks from both evolution and economics to make it happen. Platform rootand although completely reconstructed of the smart contract, consensus and scalability is radical ( WP Definitely worth a read), perhaps most intriguing is a key element in its development.

To solve the smart contract complexity – which resulted in too few individuals who could write a smart contract correctly – the team took an entirely different approach. Similar to the innovation of object-oriented programming, the team developed an asset-oriented language – Scrypto. This is important because it highlights the elements the developer uses the most: assets. By aligning the language on how the assets are affected, much of the confusion disappears. With this, the pool of capable developers is growing exponentially.

Assuming that Radix can solve some of the major problems in smart contract development, and that they have developed a method for true atomic synthesis (transacting insanely fast while maintaining reliability), the question becomes: How do we make the best of the best integrated and fully global financial system? TradFi did this by hiring armies of programmers out of top schools, then hoarding them as they developed proprietary software. Some parts of DeFi are doing this, developing platforms with some good ideas, some average ideas, and potentially some weaknesses. This does not expand globally unless you hire thousands of top programmers.

But what if instead of hiring, you simply created an open system that rewards excellent programming innovations? This is what Radix has planned, and it has the best of both worlds: first, when the programmer creates an innovative piece of code, he or she can present it for use; When someone uses it, the programmer takes ownership. Second, when the developer community gets free insight into the best innovations, it inspires new innovation at an exponential rate. And with the ranking system, the best innovations naturally rise to the top, and the system develops more quickly with a file “survival of the fittest” Prototype on the code itself (if someone finds a flaw in the existing design, they are incentivized to develop a fix and submit it to the community for equity).

looking forward

Existing TradFi is certainly on top today, and doesn’t seem to be concerned about any competitors on the horizon. However, with innovative technologies to motivate, unite, and inspire a global army of developers—especially when these technologies are self-sufficient, naturally rewarding, balanced, and create a mutual benefit for all—the underdog may just be worth rooting for.

#DeFi #compete #traditional #finance

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