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This is the subject of my last Bloomberg column, let me give you just a segment from the end:
And if the question is whether crypto is good for anything, there is now at least one clear answer: crypto enables DeFi. You don’t have to love all the consequences of this reality, but it is a reality.
You could say that crypto is a Trojan horse of a new and very different financial system. If you’ve ever dealt with US banks and suffered from their bureaucracy and mediocre software, you might conclude that they’re ripe for disruption. Banks in other countries can be even more vulnerable.
Obviously, as DeFi grows, issues of government oversight and control will come to the fore. Still, it seems unlikely that DeFi institutions will be regulated and disappear. DeFi can be run on platforms outside of the US, and US and EU regulators can’t shut it down any more than they can stop me from placing an online bet on a Mexican soccer game.
Keep in mind that much of the developing world currently uses microcredit, where interest rates on loans are often 50% or 100% on an annualized basis. It is likely that some of these countries will experiment with DeFi as an alternative method of credit allocation, whether or not these new institutions satisfy US regulators in all respects.
If you’re confused by a lot of DeFi, welcome to the club. The confusing and ever-changing nature of DeFi is why crypto asset prices are so volatile. While DeFi is partly behind the demand for crypto, and you don’t know exactly where DeFi is heading, the future of crypto is also very uncertain. It’s very unusual to have such a visible window into what is essentially the value of a bunch of startups.
Recommended, and here are some previous posts from Alex on DeFi. And here’s a new test on DeFi.
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