Decentralisation, in the simplest terms, ensures that no single entity holds centralised control or influence over an ecosystem, its financial controls or its protocols. This concept is at the heart of DeFi (Decentralised Finance). DeFi represents a financial renaissance, breaking the stronghold of traditional centralised finance and eliminating its opacity. In essence, it levels the playing field, allowing even the commoner to dine at the king’s table. This shift is particularly significant in a world that is increasingly embracing decentralisation, exemplified by the rise of figures like Donald J. Trump, dubbed the “Crypto President” in the USA.
DeFi Apps
DeFi apps are modular by nature, designed to be interchangeable and executed via smart contracts on trusted and robust blockchains such as Ethereum. Their flexibility enables a more open, less restrictive financial landscape, removing innovation blockers and granting developers greater autonomy to integrate the best DeFi applications. Think of DeFi apps as plug-and-play enablers within broader ecosystems, enhancing functionality beyond the base ecosystem’s code. This adaptability creates a more seamless and efficient user experience.
Key Differences Between DeFi and CeFi (Centralised Finance)
- Autonomous and Automated Execution:
- CeFi: Transactions rely on intermediaries such as banks, exchanges and financial institutions, often requiring manual oversight and approval.
- DeFi: Utilising smart contracts (self-executing agreements coded on blockchain networks, e.g., Ethereum), DeFi automates transactions without human intervention as long as predefined conditions are met. However, governance and technical maintenance still require some level of manual oversight.
- Transparency:
- CeFi: While regulated, traditional financial transactions are not typically recorded on a publicly accessible ledger. Financial institutions operate within compliance frameworks but do not offer real-time, open visibility into transactions.
- DeFi: Transactions occur on public blockchains, making them accessible to anyone using blockchain explorers (e.g., Etherscan). However, privacy-focused DeFi solutions and permissioned blockchains can restrict visibility when necessary.
- Interoperability and Flexibility:
- CeFi: Financial institutions typically operate within specific regulatory environments, restricting transactions to approved banking networks and conventional financial systems.
- DeFi: Offers greater flexibility, with protocols that can function across multiple blockchain ecosystems. While some DeFi solutions choose to remain on a single blockchain, they are not inherently limited and can be adapted for broader compatibility.
The Incubation Period: From Centralised to Decentralised
While DeFi apps are designed to provide decentralised solutions, many go through an incubation period before reaching full decentralisation. Until they achieve a critical mass of users, they may still exhibit elements of centralisation. A truly decentralised app should not be influenced by centralised forces. However, some projects remain susceptible to centralisation risks, especially if the founder or development team retains a significant amount of governance tokens (tokens that grant voting power over updates and changes). This can create a centralised control, allowing a small group to exert great power over decision-making.
Barriers to Adoption
- Control Issues: Traditional finance institutions are often reluctant to embrace decentralised systems due to a need for control. The analogue nature of centralised finance offers more direct oversight and there’s less trust in technology, particularly from the older generations. This unspoken barrier, especially within the Baby Boomer cohort, can stifle growth and innovation in the DeFi space.
- Need for Dynamism: Smart contracts are inherently immutable, meaning they are set in code and difficult to adjust once executed. In an ever-evolving financial world, where fund locations can change rapidly due to shifting regulations or unexpected changes in financial institutions, this lack of flexibility can be a limitation for DeFi solutions. Reacting to sudden changes and adapting swiftly to new circumstances becomes harder when transactions are locked into preset conditions.
- Education: As Prime Minister Tony Blair once said, “Education, education, education.” Widespread education and awareness are key to helping firms adopt DeFi options. Many still struggle to understand the complexities of blockchain technology, smart contracts, and how decentralisation can enhance financial systems.
Conclusion
Although these barriers may seem significant, they are surmountable. The younger generations, particularly Millennials, are leading the charge for decentralised finance. We are rapidly reaching a critical tipping point, where wealth and decision-making power are increasingly concentrated in these younger groups. While Baby Boomers still control the majority of wealth, Gen X is increasingly leading the charge in decision-making power across tech, finance, and investments, particularly in emerging fields like DeFi. As they inherit wealth from Baby Boomers and continue to shape industry trends, their influence is set to expand.