Defi is a “Bona Fide Financial Revolution” Says Niall Ferguson
Niall Ferguson, one of the most prominent living historian of finance, has called decentralized finance (defi) a genuine revolution.
“DeFi looks like a bona fide financial revolution, taking advantage of new technological possibilities to reduce transaction costs in exciting ways,” Ferguson said.
He wasn’t referring to plain transaction costs, more to new capabilities to finance commerce, citing as an example the invention of the bill of exchange in the 1300s which he describes as “a simple piece of paper which extended credit from one merchant to another, typically for a period of several months, corresponding to the time it took for an item to be transported from port A to port B: in effect, an IOU.”
Transferring heavy cash was time consuming, expensive, and risky, so the simple merchant promise to pay “constituted a form of peer-to-peer credit that proved crucial to the development of European commerce from the late-medieval period down to the 19th century.”
His point seemingly being that finance is more than just currency in as far as it being a dollar or gold, it is also instruments that facilitate the movement of that currency or its attribution.
“DeFi defies the skeptics to unleash a financial revolution as transformative as the e-commerce revolution of Web 2.0,” Ferguson said without providing much detail on how exactly he expects it to do so.
His primary aim so seemingly being to provide a counter-voice to the doom shouting of Paul Krugman or Nouriel Roubini. Stating:
“Economists have generally been unreceptive to cryptocurrency, if not downright hostile to it. I suspect this is because their discipline implicitly prefers the structures of financial intermediation to remain static, to avoid overcomplicating the mathematical models they are so fond of. Financial history, by contrast, enables one to discern both long-term trends in prices and revolutionary changes in markets.”
Markets. His argument being that one has to look at both substance and form, that while gold is ‘money,’ IoUs are money too, just a different sort. And thus while eth or bitcoin might not necessarily be ‘money’ for coffee, they are a financial instrument for the market.
He calls bitcoin an option on gold, but ethereum seems to excite him more, stating that “ethereum offer something different: the possibility of re-engineering the financial system on the basis of ‘smart contracts.'”
Re-engineering. So bringing us back to his example where the increased availability of cheap paper led to a new method of representing value that greatly benefited commerce.
The invention of code, and code based money, which has significant advantages over paper, will likewise revolutionize finance, Ferguson says, with one potential key area being the peer to peer lending and borrowing of value with automatic and autonomous interest rates which fluctuate by the second based on the increase or decrease in demand on borrowing or lending.
The establishment of money pools or liquidity pools in Uniswap further allows for the direct exchange of different assets which gradually may extend to other areas outside of crypto to lubricate general commerce.
Thus while some economists speak of a crypto winter, Ferguson sees something more fundamental and say:
“Applying financial history to the future, I expect this crypto winter soon to pass. It will be followed by a spring.”
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