How Decentralized Finance Is Democratizing The Global Investment Landscape

We are in a time of global financial change — a "zeitenwende," to borrow a trending term. Inflation persists at levels not seen for close to 40 years. A rolling banking crisis, geopolitical turmoil and worries about high debt levels raise uncertainty around the soundness of longstanding economic practices.

A casual observer could be forgiven for thinking of crypto as an exemplar of, rather than an antidote to, these angsty times. It's true that highly visible segments of the Web3 industry were part of the "everything bubble" that emerged in the wake of the pandemic. This period saw sky-high prices for digital "assets," such as meme coins and one-of-a-kind jpegs of little intrinsic value. But these excesses obscure the true promise of blockchains: a new financial architecture that can rewire large segments of the economy to be more efficient, more innovative and crucially, much more inclusive.

Finance for All

DeFi is a contraction of decentralized finance — but it could just as easily stand for democratized finance.

Legacy financial systems depend on central gatekeepers to operate. These intermediaries take the form of banks, asset managers, rating agencies, credit card companies and other entities that provide financial services to customers.

The issue isn't the services themselves. Access to efficient financial markets is crucial both to economic growth and individual well-being. It's almost impossible to establish a stable life or livelihood without a bank account and the ability to borrow. And in order to truly thrive, people need to be able to intelligently invest their wealth in promising assets. But many of the most promising investments, like art and early-stage companies, are tightly ring-fenced by current financial and regulatory frameworks.

Traditional finance excludes vast numbers of people from its services. This is glaringly true in the developing world, but it also reinforces inequality in wealthy countries. Millions of Americans are unbanked, and nearly half have been denied access to financial products due to their credit scores. The fact is that the legacy financial system blocks vast numbers of people from accessing basic finance.

This exclusion is partly intentional, and partly a side effect of an old system's inefficiencies. Why, in 2023, does it take two days for a bank transfer to clear? Traditional finance requires new entrants to jump through hoops that can be debilitating for those lacking documentation or unfamiliar with navigating corporate bureaucracy. DeFi has none of this baggage. Anyone with an internet connection can use DeFi, and transfers are immediate.

The recent failures of traditional finance are setting DeFi up for success. Bank collapses and turbulent equity markets are only the latest in a string of calamities. The first blockchain, Bitcoin, was developed in the shadow of the Great Recession, which brought down not just banks and asset values, but an entire generation of economic certainties. That recession was followed by a 13-year bull market for assets that contrasted with a slow, grinding jobs recovery.

From the official end of the recession in 2009 to the end of 2022, Harvard's endowment doubled from $26 billion to more than $50 billion. During roughly the same period, the median American's personal wealth rose much less, from approximately $33,000 to $37,000. Why this vast divergence? Ordinary people are not privy to the investments and opportunities that enable Harvard and other large institutions and wealthy individuals to outperform the market year after year. For the world's unbanked, the picture is even bleaker.

It's no surprise, then, that people are looking for a better system. The past couple of years have seen rapid adoption of DeFi. Even accounting for the frothy markets of 2021 and subsequent fall in valuations and activity, major DeFi projects today have up to 10 times the market capitalization they did less than three years ago.

The reason is simple: Underlying blockchain technology makes possible innovative financial concepts while eliminating the institutional barriers to entry that have served to corral the choicest opportunities into the hands of the already rich and connected.

And DeFi's user experience is getting better all the time. It's easy to forget, given the rapid turns of today's tech cycles, that the entire Web3 space is still in its infancy. User experience is improving with a speed reminiscent of the early days of the internet. Decentralized exchanges — known as DEXes — have been rapidly rolling out new versions of their products, designed to allow for affordable, easy-to-use trading that's as widely accessible as possible.

DeFi's time has come. It puts sophisticated financial tools into the hands of everyone, regardless of where they came from or where they live in the world. It leverages powerful, fast-evolving technology to deliver new kinds of innovation. And it represents a long-overdue democratization of finance that stands to make the global economy larger, more efficient and most importantly, open to all.

(Tommy Johnson is the co-founder of PsyFi, which is building a suite of open, accessible, best-in-class financial tools and products that allow users to tailor investment strategies to their risk/reward appetites.)