Of all the institutions that we see decaying today, our financial institutions are not one of them. In fact, the most common critique of the American economy is that we are over-financialized, not under. One can critique our government’s irresponsible fiscal and monetary policy as an area that needs reform, but that’s why Bitcoin exists. Not DeFi.

Getting a mortgage is a painfully long process sure, but it is mostly due to the nature of real estate as an asset and less so do with contractual inefficiencies. When we look at consumer lending, the problem is that American consumers have access to too much credit, not too little! These aren’t problems to be solved. So where does DeFi fit in?

The history and future of Web3 is one in which we capture new forms of value and then create infrastructure by which we can transform it to increase its utility. We started off with Bitcoin and then created exchanges by which one can more efficiently buy and sell it.

We got Ethereum which enabled the ICO and a group of new assets that ended up being named governance tokens [utility tokens more or less die out]. Upon the product-market fit of governance tokens as fundraising and protocol management tools, we saw the rise of DeFi protocols to let you do more with governance tokens. Uniswap let you create liquidity for your governance token and trade it. Does anyone remember UMA’s token launch? Compound and Aave let you borrow against. Not to mention ETH which enables this all.

The pattern to see here is one in which there is a new form of value tokenization that finds some product-market fit and infrastructure built after to support that new form. This is as it should be. Our goal should not be to apply technology to fix an old system, but rather it should be to create a new system altogether. This is where market-defining 10x improvements come from.

Every time you try to apply crypto towards trying to fix a problem with the old regime, you’re going to fail. So what can we expect in the future?

The new wave of value tokenization has come through NFTs. The next crop of giant DeFi protocols is being built to support getting liquidity for NFTs. This is currently super hard and not so useful to use, but as we explore the coming year or two we should see new primitives that provide breakthrough success here.

With Vitalik and others’ new Decentralized Society whitepaper, one can see Soulbound Tokens as another new primitive that unlocks utility and requisites infrastructure to be built around it. Personally, I am interested in personal/social Tokens - giving people access to capital that isn’t cash, as an incredibly interesting new area to explore and I’m excited to see DeFi infrastructure be built around it.

I will caveat this essay by saying most of my contentions here are built around Western institutions. It may be the case, as Goldfinch is exploring, that in other 3rd world nations where financial institutions are not working well, there is room for DeFi to provide value. I am skeptical though. Why couldn’t Web2 serve to modernize those institutions? I don’t think the story of technology is only one of globalization, it needs to be one of exponential improvement.

DeFi is infrastructure for applications, not the other way around.

This post is a part of a sequence of smaller articles I will be writing around ideas I have every day. They will not be as polished. Please forgive any typos and errors!

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