The practical case for DeFi

• Traditional banking systems remain foundational but are plagued by systemic risk, regulatory failures, and conflicts of interest.
• DeFi enables permissionless access to financial tools - offering censorship resistance, borderless stablecoin usage, and transparent yield generation.
• The future of finance will emerge from a pragmatic convergence between legacy institutions and decentralized infrastructure.

The global financial system is built on a dense web of intermediaries that handle trillions of dollars in daily transactions. While this architecture has historically supported worldwide trade and capital movement, it also creates bottlenecks, inefficiencies, and systemic risks.

Technology has evolved, but legacy institutions remain entrenched, not just operationally, but politically and socially. Some are deemed too big to fail and others are quietly allowed to collapse. Although many are reputable, their track records are marred by regulatory violations and unresolved conflicts of interest.

These numbers reflect a deep, systemic problem. Not just regulatory oversight, but a design flaw.

To make matters worse, the lines between regulator and regulated are often blurry. Former SEC Chairman Gary Gensler spent 18 years at Goldman Sachs before overseeing Wall Street. Fed Chair Jerome Powell built his wealth in investment banking before setting monetary policy. Janet Yellen earned over $7 million in speaking fees from the very firms she would later regulate as Treasury Secretary.

While acknowledging that expertise may be compatible across the public and private sectors, the so-called “revolving door” between Wall Street and Washington is not new; it’s the norm.

Central Banking Mandates and Mechanics

The Federal Reserve was formed in 1913 after a series of bank runs. Designed by financiers like J.P. Morgan, the Fed is a quasi-governmental institution: accountable to Congress in theory, but operationally independent in practice.

Its dual mandate was formalized in 1977:

• Maximize employment
• Maintain price stability, currently interpreted as ~2% inflation

While monetary policy has evolved, its tools have remained consistent: interest rate adjustments, balance sheet expansion, and open market operations.

Since 2012, the Fed has explicitly targeted 2% annual inflation, and this goal has widespread implications for asset values and the purchasing power of the U.S. dollar. Over the longer arc of history, interest rates have followed a steady downward trend.

As financial systems became more sophisticated and interconnected, the cost of borrowing has decreased.

Value and Perception

Since 2008, the Fed’s balance sheet and the S&P 500 have become increasingly correlated, raising questions about the long-term impact of monetary expansion.

Some argue that U.S. dominance allows it to print freely with less consequence than elsewhere and that the dollar’s reserve status and global trust in American institutions are an adequate buffer against inflationary decay, but not every country enjoys that privilege. In many parts of the world - particularly where goods and services are not denominated by major currencies like USD or EUR - DeFi isn’t an alternative, it’s a necessity.

While citizens in developed economies debate the theoretical benefits of decentralization, billions of people face immediate problems that traditional banking either can’t or won’t solve. Currency devaluation, capital controls, lack of banking infrastructure, and political instability create daily financial challenges that demand solutions beyond the reach of conventional institutions.

Stablecoins and Inflation Hedges

Between 2021 and 2022, Turkey experienced severe economic turmoil with inflation reaching 78.6% year-over-year.

For citizens, local banks offered no effective recourse, but DeFi did. With stablecoins and non-custodial wallets, people could secure value, transact globally, and bypass unfair capital controls, all with open-source tools accessible to anyone.

These wallets required no bank account, no paperwork, just a private key or mnemonic phrase, which granted access to the on-chain accounts.

Censorship Resistance

In early 2022, China froze $1.5 billion in customer deposits across rural banks in Henan. When protestors gathered, officials turned their COVID health passes from green to red, restricting travel and blocking dissent. By July, over 400,000 were locked out of their funds.

Financial autonomy isn’t guaranteed in centralized systems, but DeFi offers a different model: one built on open infrastructure and governed by code instead of regional policy.

Yield and Innovation

DeFi protocols have reimagined financial primitives: lending, borrowing, trading, insurance, and more, but this innovation comes with new risks.

While some protocols have collapsed and bad actors have been exposed, the market is naturally selecting for sustainable innovations. The survivors, like Automated Market Makers (AMMs) and liquidity pools, represent what DeFi does best: creating transparent, permissionless infrastructure that distributes trading fees to liquidity providers rather than concentrating market-making profits among gatekeepers.

https://coincentral.com/defi-liquidity-pool-guide/

This is a drastic departure from traditional finance, where market access, and especially market-making, is gated and opaque.

A Balanced Future

At least in the short term, the future of finance won’t be fully decentralized or fully centralized. It’ll be a hybrid because DeFi isn’t a wholesale replacement for traditional finance, but it does address gaps that legacy systems ignore: accessibility, censorship resistance, and transparency. In economies hampered by regional inflation or financial repression, DeFi is already solving day-to-day problems.

In countries like the US, where banking systems are more secure, their value propositions are valid - but in practice, they become more theoretical. For most people in stable economies, traditional banking offers superior convenience, consumer protections, and reliability that DeFi hasn’t fully matched yet. Once legacy rails upgrade to use blockchains as their settlement layers, this theory will become more of a reality for everyone.

Until then, there’s a mixture of individuals seeking financial sovereignty, founders building at the frontier, and smart money using the primitives to earn higher risk-adjusted yields than elsewhere - alongside a lot of memecoining and airdrop hunting.

Some Quotes

“The goal of DeFi isn’t to oppose traditional finance, but to create an open, accessible financial system that complements existing infrastructure.”

— Vitalik Buterin, Ethereum Co-founder

“DeFi protocols represent a paradigm shift in financial infrastructure, offering programmable and transparent alternatives to traditional financial services.”

— Dr. Fabian Schär, Professor of DLT, University of Basel

“While DeFi platforms may offer promising technological innovations, they still need to operate within a framework that protects investors and maintains market integrity.”

— Gary Gensler, Former SEC Chairman

Why DeFi Matters

In a world of economic volatility and institutional mistrust, decentralized systems are beginning to offer the ability to enhance legacy payment rails and financial operations using novel blockchain attributes.

DeFi’s architecture - permissionless, global, and transparent - unlocks new financial freedoms. It removes barriers of geography, status, and institutional gatekeeping. Smart contracts automate complexity, cut costs, and eliminate friction in ways legacy infrastructure simply can’t.

There are risks, but there’s also progress.

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