DeFi: the economy beyond finances.
While blockchain technology and DeFi does not have a large reach among the general public, some of their uses are reaching an ever-increasing audience.
The speculative use of DeFi is far from representing its most disruptive and innovative nature. The gap between the amount of information and interest in those uses described above and the most innovative aspect of DeFi arises from an old dispute over the purpose of economics.
While some economists believe that the essence of their work is to come up with new ways to fight specific problems such as inflation and exchange rate stability, others are busy offering alternatives to the system as a whole.
It is not a hierarchy of contributions, after all, someone has to be engaged in solving specific problems so that another can dedicate himself to the very long-term challenges.
As the Chinese saying goes: “it is necessary to plant rice and flowers, rice to live and flowers so you'll have something to live for.”
Both economics as a technical science (closer to mathematics) and as a speculative activity (closer to the other humanities and philosophy) are equally necessary for the process of improving humankind's sociability.
Then, it is important that our perceptions of events and objects within the economy are not restricted to an exclusively technical or speculative approach.
That being said we can move to the next part of the problem.
By observing the definitions that major media vehicles give to the DeFi topic, we can conclude that the disruptive aspect in the economic perspective is overshadowed by the exclusively financial perspective.
Let's look at some examples:
According to Forbes magazine, “DeFi aims to democratize finance by replacing legacy, centralized institutions with peer-to-peer relationships that can provide a full spectrum of financial services, from everyday banking, loans, and mortgages, to complicated contractual relationships and asset trading. ”
Coinbase says, “DeFi is the abbreviation for decentralized finance, an umbrella term that pertains to peer-to-peer financial services on public blockchains, primarily Ethereum.”
For Estadão “[…] DeFi is the application of smart contracts on the Ethereum network. Despite having the word “contract” in the name, nobody signs anything anywhere. Smart contracts, as they are also known, are electronic contracts whose execution is autonomous, that is, independent of any party.” [1]
The problem is not that these vehicles have chosen to define DeFi based on its financial aspect, but the scarcity of definitions that prioritizes the possibility of disruption in the economic sense as a whole.
To be able to find this type of definition, we have to distinguish the kind of disruption that DeFi allows in finance from the kind of disruption that they enable in productive arrangements.
As finance is a central part of the economy, this turns out to be a delicate operation.
In the financial aspect, DeFi is able to deepen p2p transactions, reducing the reach of public and private entities that today concentrate the power over the relation between money and value.
The financial potential of DeFi allows individuals to evade the traditional middlemen of the financial market and the state, paving the way for a Hayekian libertarian utopia.
On the other hand, DeFi allows us to reimagine production arrangements and the very relationship between use-value, financial value, and the abstract value of each product.
This is due to the fact that the possibility of tokenizing an item makes it optional for the owner to express the value of the item in a financial manner.
To exemplify this possibility, we are going to approach a typical product of the financial economy.
The choice to take a financial product as an example comes from the usual difficulty to express it outside financial terms.
So, if we can do it to a financial product, it will be much easier to imagine the same logistics of value being applied to products of the non-financial economy.
The value of credit in the traditional economy is defined by its financial cost, this cost is defined through calculations that involve the risk and cost of maintaining the banking structure and the processing of information.
Thus, sooner or later (earlier in the case of traditional credit and later in the case of microcredit) the value of the credit will be expressed in financial terms.
However, DeFi allows us to “de-financialize” credit by providing the opportunity to store value within units whose existence is defined by rules that are not subject to the value criteria of the traditional financial system.
One of the examples is the possibility of establishing rules that limit, or even eliminate, the possibility of accumulating the intermediate value (the unit used to represent the value of goods), which in itself reduces the activity of middlemen.
Another example is the possibility of establishing rules that define the utility value with a weight that is always bigger than the exchange value of certain goods.
It is important to point out that all these possibilities are the result of experiences of the economic imagination prior to the emergence of DeFi in the context of blockchain technology.
A practical example of DeFi initiatives unrelated to blockchain technology can be found in the case of the possibility of exchanging used cooking oil for food in some cities in Espírito Santo, Brazil.
Initiatives such as these still require the State to act as an intermediary and catalyst, providing the necessary structure for the logistics of value and offering incentives for small businesses and producers to engage in the process.
What DeFi, powered by blockchain technology, allows us to do is radically reduce the cost of the structure and even create incentive systems based on organic agreements between the parties involved.
The organic nature of these agreements should strengthen the social fabric, empowering society and its contracts, without threatening the power of the State and without vehemently intervening in the traditional institutions of the financial economy.
Because of this potential, we can say that DeFi gives us the opportunity to reclaim those good economic propositions that were considered unfeasible, either due to the cost of the consensus structure or the scalability of demand.
Experimentalism in relation to DeFi should not be restricted to the creation of more sophisticated versions of structures that already exist in the traditional financial economy, and the example that we gave should only serve to expand and not limit the horizon of possibilities.
If we look at DeFi from its economic point of view, we have the chance to reinterpret some of the main economic problems in order to overcome traditional dichotomies.
Such an overcoming will not come through naive and convenient centrism, but through an expansion of the range of possibilities in directions not yet imagined.
Don't matter the origin of those directions, if they came from socialist or libertarian views, the continuity of experimentalism should be the unique rule.
As Ronaldinho Gaucho, Aka The Wizard once said: “They are letting us dream!”
[1] The sampling of definitions may be small, but if the reader searches on other portals, he will find definitions similar to these.
This text was first published at Prensa.li