Decentralised finance is booming, but it has yet to find its purpose
DeFi is now the arena where the most exciting innovation is occurring
By Alice Fulwood: Wall Street correspondent, The Economist, New York
IT IS COMMON, in the minds of economists, academics and most regular folk, to think of the real economy and the financial economy as separate but interlinked spheres. This is the essence of the “classical dichotomy” at the heart of the neoclassical school of economics, which considers money “a mere veil” obscuring real underlying activities. Those labouring in the real economy grow wheat, write articles and build houses. Financiers simply shuffle money around on top of that. Yet at its best financialisation makes possible real activity that could not otherwise occur. This is apparent for a loan made to a startup, or a bond that enables the building of a new factory. But it is also often true of more complex areas of finance, such as exchanges and derivatives. It is here that 2022 will see exciting innovations.
Over the past two years, many of the functions of the financial system have been recreated as applications and protocols on the Ethereum blockchain, an open blockchain that can store and verify lines of code. Activities are mostly carried out via “smart contracts”, which self-execute according to predetermined conditions. Many things have been written into open-source code using smart contracts, including wallets and payment systems, deposit and lending applications, and even investment funds and systems to self-stabilise currency regimes.
