Why is decentralized finance so important?

A lot of people fixate on the wrong things when it comes to decentralized finance.

Note: decentralized finance here is discussed as an umbrella term for the entire crypto assets industry.

If you surveyed a couple of crypto investors on their reasons for getting involved with the crypto markets, there's a high chance that the majority will cite reasons that only promote moving back onto traditional finance, at the end of the day.

This includes Bitcoin enthusiasts.

What is decentralized finance?

Decentralized finance, or DeFi, is a new, blockchain-based system for financial services that aims to create a more open, accessible, and transparent financial system. Unlike traditional finance, which relies on centralized institutions like banks and brokerages, DeFi operates on a peer-to-peer network, eliminating the need for intermediaries. – Gemini

Let me rephrase that.

Decentralized finance is what you get when you eliminate banks and governments, effectively bringing the control of money and economies to a point of shared governance.

When most people read these definitions, they don't get the big picture, even though it is simply staring right at them.

What are the characteristics of traditional finance?

We have the governance layer: this is where regulators are, functioning as a third-party influencing various aspects of finance.

Then we have the banks. By banks, we are looking at commercial, investment banks, central banks, and the various financial institutions and companies that offer similar or associated services.

Excluding the central banks, which can also be categorized under government/regulators, every other listed in the last paragraph are intermediaries within the flow of money, effectively a core structure for global economies.

The next layer is the business layer and finally, the consumer layer.

That's effectively 4 layers to traditional finance.

When you compare this to decentralized finance, you should immediately see how there's a significant difference.

If not so obvious, in the fundamental level, decentralized finance has just two layers, the first is the governance layer and the second is simply the flow layer, where everyone transacts through, in a peer-to-peer manner.

Technically, we can argue that it is simply one layer, but I had to make it two since we have to discuss governance separately.

Now this is where things really get interesting and it is what most people miss about decentralized finance.

If you ask anyone what they hate about their country's economies, many will say things like inflation. Businesses may cite other things, but since the majority are consumers, inflation will come up more frequently in these conversations.

The thing is, inflation isn't really the problem with TradFi. The governance design is. It is and always has been.

If governments are corrupt, the people will suffer.

Since everything boils down to money, decentralized finance aims to solve this by bringing governance to a layer where it can be decentralized.

When a system is designed to enable decentralization, there's already a significant chance it can evolve better because irrespective of how corrupt it is, there's always going to be the possibility for the majority to take power back.

Decentralized finance solves the governance problem by placing incentives and penalties across each other.

This means that good regulation = profits for the regulators just as much as bad regulation is bad for the regulators too.

With this system, being corrupt is shooting oneself in the leg and that is why it is so important.

Inflation is not the problem. It is who profits for it that is. If nobody profits from inflation, then we get better chances at solving it.

Decentralized finance is about ensuring that regulators have just as much to earn or lose from their actions because at the end of the day, there's just one layer with DeFi and every action affects the whole bunch, this is why this technology is so powerful and needs to be heavily pushed for mass adoption.