Decentralised finance is booming, but it has yet to find its purpose

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There are three plausible paths for marrying up the DeFi economy with a real one WorldAhead

, 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.

Collectively, this array of functions is known as decentralised finance, or “DeFi”—and it is booming. From less than $10bn in early 2020, some $100bn-worth of tokens are now locked up in financial smart contracts for use on decentralised exchanges or deposited to earn yields. Demand for DeFi apps is driving up usage of the Ethereum blockchain. It settled $116bn-worth of transactions in early 2020, but that boomed to $2.

The barriers to entry are low by comparison with traditional finance, so DeFi has quickly become the arena where the most exciting innovation is occurring. For example, an entirely on-blockchain stablecoin called dai lets anyone create new dai tokens by depositing collateral in a smart contract. If the value of the collateral drops below the minimum threshold of 150% of the value of the outstanding dai, the smart contract automatically auctions the collateral to cancel the debt.

 

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