This is the second article in a five part series by Chadly McChief’s (@ChadMcchief). While not required, we recommend you read the first article here. Consider this an introductory text to traditional finance and the impetus for decentralized finance.
What does the current traditional finance landscape look like for the average consumer?
For the vast majority of the global population, their primary interface with what they perceive to be “their” money (see self-custody for more details on why this is at best partially true) is via financial intermediaries, or money middle men, to keep things simple.
These money middle-men exist purely to “handle” whatever financial assets are being provided to them by individuals. Their qualifications are generally granted to them as a consequence of elaborate education systems that gate-keep access to large sums of capital.
There are often strict governmental rules in place for financial sectors. The rationale for these rules is “to protect consumers”. The suggestion is that individuals are incapable of managing their own finances. This assessment is based on the presumption that the educational system does not do a good job of creating financially literate individuals.
The presence of these money middlemen and the lack of readily available, easy-to-understand educational models for the financial instruments that individuals need to navigate to not only acquire but to maintain and safeguard wealth, often results in hidden and shrouded monetary practices.
This is often done under the guise of protecting the consumer from complex, potentially confusing information – but it can also be a shield to prevent the prying individual eyes of a population from seeing the questionable actions of a sector beholden to no one.
The 2008 Financial Crisis and subsequent recession laid bare the failures of money middlemen and the cloaked practices of an industry that had no true accountability.
Despite this, the model today looks astonishingly similar to the model that was in place then. Consumers invest their time and talent to acquire fiat or something of distinguishable value, that they can then use to acquire other goods, such as food, water, shelter, general commodities, and discretionary items (things that people want, because they believe they will bring them some form of happiness or comfort).
Once they have acquired fiat, they then place it in the hands of money middlemen – be that banks, hedge funds, stock brokers, or pension funds. The value that they have acquired through their labor is then managed on their behalf, often in a relatively opaque way.
Consumers generally agree with this setup for three reasons – a lack of education, a desire for simplicity, and the scarcity of alternative models. It is this scarcity of alternatives that has resulted in the rapid emergence of decentralized finance, or DeFi for short.
If you\\\’d like to discuss, join the conversation on our Discord! Be sure to come back next week for the third article in this series: Decentralized Finance.