DeFi and the Future of Commerce
Talk, talk, talk, and more talk. Where's the action?
We’re still learning how to crawl through the digital economy.
This is an edited version of a DeFi talk I gave during NFT Boston 2022 at the new Odessa NFT Artspace - thanks to everyone who made that event awesome!
Decentralized Finance is a Set of New Tools to Align Incentives
Decentralized Finance (DeFi) lets us move capital faster and more precisely than we've ever been able to do in the history of Finance.
That’s a doozey of a sentence.
The cost of moving bits is cheap (certainly not 3%+), but the cost of moving bits precisely where we want them to go with high confidence with inherent fraud protection isn’t that cheap (or at least it wasn’t until recently).
Most new applications using DeFi tools have focused on using programmable money to replicate traditional finance (tradfi) - just with better, faster, and more trustless protocols.
This is awesome, empirically robust, and absolutely necessary for the continued advancement of the digital economy.
I think we can do more though.
I think we can take anywhere there is a normal transaction - a credit, debit, AP, AR, an invoice, a handshake deal - and replace it with something that feels the same except under the hood it’s powered by an escrow-like primitive.
Then I think we can use those assets in transit to generate yield, rather than charge a flat transaction fee like payment companies do today.
This lets us unlock new ways to buy things, new ways to pay for them, new ways to coordinate with others, and new ways to build relationships between companies, creators, and even States with consumers - all because you've thoughtfully extended the lifecycle time of their interactions.
You can align incentives without adding friction and that’s the power of DeFi.
Commerce and DeFi
The short version is we don’t know what is going to change, but we do know things are going to change.
We can zoom out to see how rapidly we’ve gotten ourselves into uncharted territory.
We've had thousands of years of practice purchasing physical items in a store.
We’ve had a century of practice purchasing physical items from big retail chains.
We’ve only had 20 years of practice with buying from online marketplaces.
We’ve had less than a decade of practice of buying everything with our phones.
And we’ve had much less time than that to practice true P2P and B2B digital payments.
And we’ve basically had zero time to practice buying digitally native assets of any kind, much less how to understand what a P2P sale means in that context.
I believe commerce is inherently P2P and literally every other mechanism that has been built up to facilitate commercial endeavors is just working towards reducing the transaction costs of those P2P sales.
And if you can abstract away all the complexity, you’re once again back to two parties haggling with each other about the things they need.
And that’s why we’re building tools to frictionlessly support that root problem of earnestly exchanging value in asymmetric trust environments.
Some Howey Test Thoughts (Audience Question)
It gives a stamp of approval to those wary about the new thing and it (should) strike fear into the heart of the scammer. Naturally (because complex things take more time to figure out), the cycle time of government - and especially the judiciary - is much slower than the rate of change of technology.
I think it should be faster than it is today, but I get not wanting to rush the process - especially when it takes so long to change things once they’re “decided”.
The Howey Test is a focal point for crypto folks, mostly because it affects how they get taxed and if they can participate in the novel fundraising mechanisms floating around today. It’s the set of conditions that has to be met to either be considered, by law, a “security” or not a “security”. Improper classification can lead to legal consequences (mostly for issuers rather than participants).
There's a lot of misconception about what the Howey test actually is though.
Under the Howey Test, a transaction qualifies as a security if it involves the following four elements:
An investment of money
In a common enterprise
A reasonable expectation of profit
Derived from the efforts of others
I think it’s easy to see how this makes gut "sense", but also there's a lot of wiggle room in there when you start poking at it.
Is a painting a security? Mostly no, but also sometimes yes.
Are fractional shares in a painting a security? Usually yes.
Is a digital piece of 1:1 art a security? Potentially.
Is a digital token as part of a series with art attached to it a security? Probably yes
Is that same token a security when it gives me access to a community and ongoing benefits and maybe a stream of cash flows? Almost for sure yes.
Is a car with permanent online connection that’s sold with a predefined software and hardware upgrade cycle and product roadmap a security?
This last one (and a ton of other similar scenarios we can imagine) shows how the integration of software inverts our conception of buying and reselling things at a gain or loss.
And how the definition of a security probably needs to get revamped in the age of the internet.
That’s okay though. Court decisions are a feature, not a bug.
And when they don’t go the technologists’ way, they just end up creating the future in a more…creative process.
So I’m paying attention, but perpetually optimistic.
I hope this added value to your day.
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