FinTech is a colossal disappointment. DeFi fixes it.


Let’s face it: FinTech is a colossal disappointment.

When the word “fintech” was coined in the early 1990s, bringing together “finance” and “technology”, venture capitalists peddled great stories from the future. Money is said to be flowing around the world at the speed of light, with consumers riding a wave of user-friendly apps, falling fees and financial inclusion.

Instead, we got… Zelle.

While technology has transformed almost every industry in America, finance has remained largely intact. Sure, we have ATMs and credit cards, but inventory always settles in two days, bill payments take five days, and mortgages almost two months.

This shocking lack of progress hit me recently while reading a new book on decentralized finance, or “DeFi”. DeFi is an emerging industry that uses blockchain technology and crypto-assets like bitcoin to build an alternative financial system.

The book contains a copy of an old “money telegram” sent by Western Union in 1873. (You can see it here.) The telegram shows “CC Antoine” sending $ 300 to “Jason Ingraham” on August 25 of the same year. The flat fee at the time was $ 9.73, or just over 3%.

Western Union is still with us today, so I went to their website to find out how much that same service would cost now. The company has a fun tool on their homepage that lets you “send money 24/7 around the world” with the push of a button. I used their tool to test the cost of sending $ 300 to someone else in the US, like CC Antoine did in 1873. The all-inclusive package today? $ 39.

To imagine!

Despite nearly 150 years of technological advancement – highways and planes, computers and the Internet – the cost of sending $ 300 across the country via Western Union has quadrupled!

Once you start looking, these signs of technological stagnation are everywhere. Why does it cost 2.5% every time I use my Visa card? Why do international transfers take two (or more!) Business days? And where is the Amazon / Tesla / Google of finance?

It’s like we’re always paying $ 1 / minute for long distance calls, or getting 56k dial-up access to the internet.

What caused the great stagnation?

There are many reasons for this “great stagnation”: regulations, tradition, and so on. (Consider the average age of the ten largest financial firms in the United States to be 126.) But the main one is simple: Money never entered the digital age. .

Of course, we have online bank accounts and mobile apps, but the backdrop to our financial system is stuck in the age of paper.

You can understand why if you think about how checks work. If I send you a check for $ 10,000 and you deposit it in your bank, your bank will not allow you to withdraw that money until the check is “cleared”.

It’s logic. If your bank let you walk away with $ 10,000 immediately and I didn’t have $ 10,000 in my account, it would be stuck with the bill. The process of checking with my bank to make sure I have $ 10,000, that I haven’t written multiple checks on the same account, etc., takes time.

This sclerotic process has doomed most fintech attempts. Despite our best efforts, fiat currency keeps pace with first-class mail.

Crypto solves this.

The Bitcoin blockchain – and all subsequent blockchains, like Ethereum – are built on a fundamental advancement in computing that allows money to flow and settle at internet speed and at a fraction of the cost of existing systems. Now you can transfer any amount of money, anywhere in the world, and pay for it almost instantly, for a low fee.

(here is an example: This $ 1.1 billion bitcoin transaction took place outside of bank hours, settled in 10 minutes, and the fee was 0.00001%.)

Recently, developers have leveraged this new breakthrough to create a whole new financial ecosystem called DeFi, or decentralized finance. DeFi uses blockchain technology and networks like Ethereum to enable financial innovators to program money like software. The programs operate on a stand-alone basis, with no traditional overheads.

It’s early, but the things people are doing are mind boggling. Today, there are DeFi protocols that allow you to:

  • Take out secured loans worth hundreds of millions of dollars in seconds, while traditional loan programs take weeks.
  • Trade 24/7 tokenized stocks and settle those stocks instantly, while traditional stocks trade 9:30 am to 4:00 pm, five days a week, and settle within two business days.
  • Send money to anyone in the world instantly (even via Twitter!) And receive it immediately for virtually no fees.
  • Invest in a yield research account that seeks income with no human intervention required.

These capabilities are crude, but some are already working on a large scale. The largest DeFi protocol, Uniswap – a decentralized competitor of Coinbase – processed $ 52 billion in transaction volume last month, all without a single employee (Source: Le Bloc).

The risks are of course massive, foremost among which are technological and regulatory concerns. But DeFi is already proving that it can do a lot of the things the old financial system did, but faster, cheaper, and better, and it’s attracting a huge wave of venture capital investment and human talent. (Venture capitalists paid a record $ 17 billion in space in the first semester of this year.)

It fills me with great hope. After years of waiting, fintech is finally here. It just has a different name: DeFi.

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