A Biologist’s Perspective on Decentralized Finance (DeFi)

The Biologist Perspective

Such manmade networks are not unlike the reticulate capillary branches that span the infrastructure of our body’s circulatory system, or the dense web of neuronal connections that populate our brain. It is therefore unsurprising that artificial networks, from global supply chains to the financial transactional systems that run modern economies, are all conceptually similar to networks found in nature. There appears to be an economy of resources in their branching motif. And that is probably why networks are an ideal paradigm for efficiently engineering complex data processing systems.

Centralization vs. Decentralization

One way of categorizing networks is to topologically classify them as centralized or decentralized. A centralized system is hierarchical in nature, while an ideal decentralized network is essentially autonomous. For instance, in case of the former, power is inherently unequal in distribution because a central ‘authority’ bears primary control over other relatively ‘low-level’ components of the system. On the other hand, decentralized systems inherently lack such centrally concentrated power hierarchies and are instead based on equally ‘distributed’ control amongst all components of the system. Decentralized systems are therefore expected to allow for equilibrium, less discrimination, and encourage the possibility of novel emergent behaviours. These key features set decentralized networks apart from most traditional man-made institutions, which are often known to generate oppressive centralized hierarchies. A commonly expressed lament about such centralized entities is, ‘the system is rigged’. 

Decentralized Finance (DeFi)

It is in the context of these basic principles that the concept of Decentralized Finance (DeFi) becomes relevant to our discussion around cryptocurrency and computationally driven economies of the 21st century. In the simplest sense, DeFi represents a financial system that is built on top of existing blockchain technologies such as Bitcoin or Ethereum. The goal of DeFi systems is to leverage the potential of decentralized networks in order to engineer applications that facilitate financial transactions and processes without centralized controls or intermediaries to govern them. DeFi systems are thus positioned to globally provide users with complete control over their finances without having to rely too much on centralized authorities like banks and government. 

Any individual using the DeFi network can verify every transaction that occurs on the blockchain. Some DeFi applications also provide individuals with access to powerful analytics and asset management tools that can outperform the experience of using traditional centralized financial systems. Another advantage that is often cited in favour of DeFi is their amenability to tokenize assets, which could include anything from real estate to art work and intellectual property. The DeFi ecosystem is therefore often promoted for its capacity to overcome limitations of traditional systems in terms of speed, freedom, and accessibility. It is no secret that the advocates of cryptocurrency consider these traditional systems as insular and outdated. Moreover, DeFi’s emphasis on transparency and ‘permissionless’ accessibility to one’s assets is consistent with blockchain’s philosophy: Don’t trust. Verify.

It is therefore not surprising that today DeFi is one of the most rapidly growing aspects of cryptocurrency. The total value of assets locked in DeFi is estimated to be about $4 billion as of mid-2020, drawing a steadily increasing number of investors and entrepreneurs. In addition to financial control and agility, DeFi also promises a conducive framework for scalability when it comes to future creation and deployment of novel innovative technologies on the blockchain. It is important to note that these values of DeFi are not new. In fact decentralization has always been espoused as the cornerstone of cryptocurrency by its evangelists as well as blockchain advocates, and it would be considered rather shortsighted to restrict its significance to only a specific type of digital currency or application. 

But Every Coin has Two Sides

DeFi is still a fledgling concept and has a small but determined group of proponents. But regardless of all the exciting pros in its favour, it would be disingenuous to completely overlook the limitations and cons of this powerful concept. For starters, decentralization is not the most effective model in all cases. Sometimes centralized systems are preferred for actuating localized control mechanisms for better efficiency and maintenance. Furthermore, decentralized networks based on blockchain store information in an encoded form that disallows anyone to manipulate it, thereby eliminating the need for a custodial controlling authority. However, this very aspect has also been cited as a technical limitation of DeFi because such a system architecture makes it significantly difficult to write new code or fix bugs in existing code. Critics have pointed out that unless such limitations are overcome, it will be difficult for DeFi to ensure seamless security. Such criticisms are not unwarranted given that security flaws and vulnerabilities have already become evident with the more well known DeFi systems developed by Ethereum.

Providing an efficient user experience, standardized security features, and unwavering interoperability might be some of the biggest hurdles for DeFi at this stage. Nevertheless, these are precisely the kind of problems that drive innovation and force us to consider solutions by thinking outside the proverbial box. A good way to look at the landscape of DeFi moving forward is to consider the history of the Internet. As a technology, the worldwide web has also undergone massive transformations and phases of evolution as the focus has shifted from issues of security and reliability to speed and efficiency. Even today, the internet is in a constant state of user-empowered changes that drive towards a better experience. When we look back at biological systems, the principle of evolution through adaptation is also driven by pressures of natural selection. Keeping this in mind, perhaps we should also allow for some optimism when it comes to adapting to the hurdles and challenges of new concepts like DeFi, particularly if there are advantages to be acquired in the long run.