THE SCEPTICS have plenty of fodder. The earliest adopters of bitcoin, the original cryptocurrency, used it to buy drugs, while cyber-hackers now demand their ransom in it. Hundreds of millions of dollars of ether, another digital money, were stolen this year after hackers found a bug in some code. Many “believers” are in reality trying to get rich quick from the global mania that has seen the value of cryptoassets reach $2.2trn. Others are freakishly devoted. The entrepreneur who announced in June that El Salvador was adopting bitcoin as an official currency sobbed on stage, claiming it would save the nation.Listen to this storyYour browser does not support the <audio> element.
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The crooks, fools and proselytisers are off-putting. Nevertheless, the rise of an ecosystem of financial services, known as decentralised finance, or “DeFi”, deserves sober consideration. It has the potential to rewire how the financial system works, with all the promise and perils that entails. The proliferation of innovation in DeFi is akin to the frenzy of invention in the early phase of the web. At a time when people live ever more of their lives online, the crypto-revolution could even remake the architecture of the digital economy.
DeFi is one of three tech trends disrupting finance. Tech “platform” firms are muscling in on payments and banks. Governments are launching digital currencies, or govcoins. DeFi offers an alternative path which aims to spread power, not concentrate it. To understand how, start with blockchains, vast networks of computers that keep an open, incorruptible common record and update it without the need for a central authority.
Bitcoin, the first big blockchain, created in 2009, is now a distraction. Instead, Ethereum, a blockchain network created in 2015, upon which most DeFi applications are built, is reaching critical mass. Its developers view finance as a juic...