Decentralized finance (DeFi) emerged as a movement with the promise of revolutionizing the global financial system based on a simple yet powerful premise — offering access to better solutions with its peer-to-peer asset transfer and smart contract-powered autonomy.
Since 2015, multiple sub-sectors like lending, trading, and automatic market-making quickly emerged, amassing US$175 billion in Total Value Locked (TVL) in just a few years. Like the rest of Web3, innovation and adoption in DeFi grew very fast.
Very fast, but very limited.
Putting aside its recent even faster descent, DeFi protocols’ reach outside its native early adopters remained limited due to its frequent security hacks, lack of risk disclosure, poor user experience and limited regulatory compliance.
Today, we are witnessing regulators stepping up their enforcement on DeFi almost daily, further contracting its reach, while established traditional finance (TradFi) players leverage decentralized technology, further diminishing its unique value.
Needless to say, DeFi protocols today are standing at an existential fork in the road.
With its bumpy ride to date, does DeFi still have a chance at fulfilling its promise of building a more inclusive financial system? Studying the dynamics of change on systems, Systems Theory gives us a framework and potentially a roadmap of how to think about the two diverging roads that DeFi is facing.
Two Diverging Roads
In a nutshell, systems theory stipulates that, to change a system, we need to first understand its component variables and how they relate to each other and to those of other systems. With that, we can then modify the right variables in relation to each other or add new ones to create a series of new relationships and outcomes, and over time a new system.
However, systems are not linear but rather dynamic neural organisms. For every change in the relationship between two variables creates a domino effect with other variables.
Coming back to DeFi and the question above, systems theory provides us with a roadmap of two likely outcomes.
Road 1: TradFi Wins
Choosing to go down the first road, DeFi does not adopt the minimum rules
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Author: Jason Dehni
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