Niall Ferguson, one of the most eminent living historians of finance, has called decentralized finance (defi) a true revolution.
“DeFi looks like a true financial revolution, taking advantage of new technological possibilities to reduce transaction costs in exciting ways,” Ferguson said.
He was not referring to mere transaction costs, but rather new trade finance capabilities, citing as an example the invention of the bill of exchange in the 1300s which he describes as “a simple piece of paper that extended the credit from one trader to another”. , usually 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.
The transfer of heavy money was time-consuming, costly and risky, so the merchant’s mere promise of payment “constituted a form of peer-to-peer credit which proved crucial to the development of late-19th-century European trade. medieval period until the 19th century. .”
His argument apparently being that finance is more than just currency in that a dollar or gold are also instruments that facilitate the movement of that currency or its allocation.
“DeFi challenges the skeptics to unleash a financial revolution as transformative as the Web 2.0 e-commerce revolution,” Ferguson said without providing many details on exactly how he expects it.
Its main purpose apparently being to provide a counter-voice to the cryptosceptic cries of doom of Paul Krugman or Nouriel Roubini. Declaring:
“Economists have generally been unreceptive to cryptocurrency, if not outright hostile. I suspect it’s because their discipline implicitly prefers that the structures of financial intermediation remain static, to avoid over-complicating the mathematical models they love so much. Financial history, on the other hand, allows one to discern both long-term price trends and revolutionary changes in markets.
Markets. His argument being that you have to look at both substance and form, that if gold is ‘money’, IOUs are also money, just a different kind. And so, although eth or bitcoin are not necessarily “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 offers something different: the ability to revamp the financial system based on ‘smart contracts.'”
Reengineering. So bringing us back to his example where the increased availability of cheap paper led to a new method of representing value which greatly benefited commerce.
The invention of code and code-based currency, which has significant advantages over paper, will also revolutionize finance, Ferguson says, with a potential key area being peer-to-peer value lending and borrowing with automatic, self-contained interest rates that fluctuate by the second based on the increase or decrease in borrowing or lending demand.
The creation of money pools or liquidity pools in Uniswap further enables the direct exchange of different assets which can gradually expand to other areas apart from crypto to lubricate general trading.
So while some economists talk about a crypto winter, Ferguson sees it as something more fundamental and says:
“Applying financial history to the future, I expect this crypto winter to pass soon. It will be followed by a source.