The Financialization of Everything: DeFi-ning the Next Era of Financial Services

There are many misconceptions about DeFi (decentralized finance). Perhaps the most important is that Defi wants to replace traditional finance. That is not the case. Rather, DeFi is a way to exponentially expand the reach of existing financial services and must be seen as a complement to TradFi, not a replacement of it.

One way to think of it is to look at the development of mobile phones into smartphones. Before the development of apps, mobile phones did one or two things – they allowed you to make and receive calls on the go and send the occasional text message. But when the app store burst into life in 2005, it was like the Cambrian explosion and a million new applications came into being. The key to that explosion was that it wasn’t dictated from on high; it was transparent, and it was open to everyone.

DeFi is transparent and permissionless, and as such, it too will evolve quickly. No one really knows how it will end up, but it is already an unstoppable trend. One of the key elements of DeFi is that it can go into areas that aren’t covered by TradFi. One is that it can create an underlying value for assets that were previously untouched by finance. It can make these assets liquid and fungible and so be used for transactions in the traditional sense, such as collateral for loans or margins for trading.

By allowing finance to expand into a much broader set of categories, it allows a much broader set of assets to come with financial rights. This is what we mean by the term the financialization of everything.

We have seen this process before. The great Peruvian economist Hernando de Soto pioneered the study of expanding property rights and titles to the poor. His book, “The Mystery of Capital,” showed how extending property rights to even the smallest patch of land or informal dwelling gave the poor an asset that they could financialize by pledging it as collateral for loans to build businesses and to escape the poverty trap. DeFi has the same transformative potential.

There will be different rates of adoption of DeFi in this new era for financial services. It will naturally be better received in countries that have weak economies and poor financial infrastructure. Those poor countries have much greater incentives to find ways to increase the financial footprint of their economies. DeFi will allow them to broaden their asset base and remove the structural constraints of their existing financial systems. It is no surprise that there are already more people with MetaMask accounts in the Philippines than there are people with bank accounts.

The only thing that DeFi removes is barriers. But it is still at a very early stage of development. And as with all new technologies at early stages of development, it can be still complicated to operate and clunky in its user experience. It is complicated for general users to start entering smart contracts and writing protocols.

“People are willing to pay for what they need,” says John Ge, founder and CEO of Matrixport. “They also lack the skills to interact with smart contracts directly – it’s too complex. If we want to get more people into DeFi, it is necessary to make it as simple as possible.”

DeFi needs intermediaries. And we expect the next wave of activity in the DeFi sector to be on the customer-facing side, rather than the tech development side. Making DeFi as easy to use as the app store will be the next kicker in its development.

Matrixport provides just such a gateway to invest directly into DeFi within several taps in its app with full transparency on yields. Its centralized-DeFi offering pools a basket of liquidity mining projects from established players such as Uniswap, Cure and Compound. The ease of the platform is built on robust research, monitoring and security audits of the underlying data protocols. This has made Matrixport’s DeFi offering popular in market neutral periods when investors are looking for stable yields.