• Yan Chen and Cristiano Bellavitis

Blockchain Disruption and Decentralized Finance

On June 18, 2019, Facebook announced its plan to create a decentralized payment platform, Libra, to leverage blockchain technology and a stable cryptocurrency to facilitate digital payments across the globe. According to the announcement, Facebook intends to integrate Libra into its family of apps, while relinquishing the control of the platform to the independent Libra Association. As a decentralized platform, Libra intends to help users across the globe gain access to low-cost digital payments as well as to enable innovators anywhere in the world to build new financial services on top of Libra. Since the announcement, the Libra project has generated heated debates. Enthusiasts argue that Libra can dramatically lower the cost of digital payments, while skeptics contend that Libra may allow Facebook to gain control over our financial lives.

In our recent paper, "Blockchain Disruption and Decentralized Finance: The Rise of Decentralized Business Models", we suggest that the best way to understand Libra is to consider it as part of a broader movement toward decentralized finance. This movement started with the launch of Bitcoin to create a decentralized currency and payment system that is open, permissionless, and borderless. This vision appealed to early adaptors in the 2008 financial crisis, during which people started to recognize that the existing financial system might have become too centralized and too opaque. Disenchanted people organized the Occupy Wall Street movement to voice their discontents, and regulators tried to enact new regulations to protect consumers. A small group of innovators, spearheaded by Satoshi Nakamoto, opted to create a new, decentralized financial system that is controlled not by centralized institutions but by people. They believed that such a decentralized financial system is the best way to counter the concentration of power and control in our financial system and to give people their fair share.

To propel this movement, they have invented blockchain technology and cryptocurrency, with the aim of creating a decentralized financial system. With blockchain technology, financial services can be built on top of decentralized platforms that are controlled not by any central authority but by the rule of code. As a result, users can freely carry out peer-to-peer transactions without going through a centralized institution, reducing the concentration of power on large financial institutions. Developers can freely build new services on top of decentralized platforms, encouraging innovation and competition. Furthermore, decentralized platforms often rely on collective governance, through which users, developers, and third-party businesses can take part in shaping rules governing decentralized financial ecosystems. By leveraging blockchain technology and decentralized platforms, the ​decentralized finance ​movement promises to create a new financial system that is more decentralized, innovative, interoperable, transparent, borderless, and open.

Over the past several years, decentralized financial services have flourished on the Bitcoin and Ethereum blockchains, and blockchain startups—such as Coinbase, Binance, Blockstream, Lightning Labs, MakerDao, Compound, and Uniswap—have pioneered this movement. Recently, the Libra project may have brought more public attention to this rapidly evolving movement. However, the public understanding of this movement has not kept pace with its rapid development. Our paper intends to fill this gap by providing a holistic view of decentralized finance. In this paper, we discuss what this movement is trying to accomplish, analyze existing business models, and pinpoint challenges and limits that it has to overcome to achieve its full potential. Overall, we hope that this paper can be a major step forward toward a better understanding of blockchain technology, cryptocurrency, and decentralized finance.

Nevertheless, it is true that this movement is still at a very early stage, and it may succeed—or fail. If it succeeds, it has the potential to reshape the structure of modern finance and create a decentralized financial system featuring open access, permissionless innovation, and the rule of code. If it fails, nevertheless, it can still play useful roles in revealing the fundamental problems with the existing financial system. No matter what may happen, decentralized finance can help showcase the potential benefits and challenges of decentralized business models. If we consider Libra as part of this movement, we believe ​that Libra deserves a fair chance. It is true that Libra is not yet as decentralized as other major projects in decentralized finance, and it is also true that there are still numerous challenges that it has to overcome. Yet, regulating Libra and other similar projects out of existence even before they start is probably not the best way forward.

Yan Chen - School of Business, Stevens Institute of Technology

Cristiano Bellavitis - Auckland Business School, University of Auckland

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