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“[Hegel and Marx] posited an "end of history" … It meant there would be no further progress in the development of underlying principles and institutions, because all of the really big questions had been settled.”
― Francis Fukuyama, The End of History and The Last Man
The Return of History and DeFi’s Zero to One
The historian Francis Fukayama predicted an end to history in 1992, and he was right: The big questions in geopolitics had been settled in favor of Anglo-Saxon capitalism and all that was left was for its ideas to spread around the globe.
What followed was 30 years of globalization.
More than two billion people have been lifted out of poverty in that time, thanks largely to the equalizing effects of global trade, so it’s been a good run.
But with Russia’s invasion of Ukraine, the End of History is now itself coming to an end.
That is not to say that the Cold War is back. (The sides are too unequal this time.)
Instead, the era of measuring progress by how quickly the rest of the world can make itself look like America is over.
Which is probably for the best.
China and India were never going to reach Western standards of living by replicating the West’s development path — not without burning the planet to a crisp, at least.
In "Zero to One," Peter Thiel notes that, "In a world of scarce commodities, globalization without technology is unsustainable."
Progress does not have to stop with the end of globalization, however. It may even accelerate. It just has to go in another direction.
Thiel makes a distinction between horizontal and vertical progress.
Globalization is horizontal progress: It’s the US off-shoring manufacturing (and pollution) to factories in China powered by coal.
What would vertical progress be? On-shoring US manufacturing to robots operating 3D printers, for example.
Globalization has hit the wall, so further progress will have to be vertical.
Which is fine because going vertical is far more valuable.
Crypto and Web3 are well-placed to contribute to vertical growth, but I’m not sure we’ve made much progress in that direction as of yet.
In DeFi, for example, there is a lot of talk about supplanting traditional finance. But so far, all we seem to be doing is replicating it.
Uniswap is a stock exchange, but for crypto; AAVE is a bank, but for crypto; Yearn is a money market fund, but for crypto.
All of which are important and impressive and necessary…but not exactly world changing.
It’s also limiting: I don’t see much point, for example, in trying to move traditional lending on-chain. You can’t repo a car on-chain, so there’s no point having the loan on there.
Or real estate. Maybe it would be more efficient if house deeds were kept on-chain, but that is just an incremental improvement to something that works well enough already: It’s horizontal growth.
What would vertical growth be? If, say, business receivables were moved on-chain, they could be used as collateral to borrow against. And the lender could seize them via smart contract in case of default.
That is not possible in off-chain TradFi. It’s vertical growth.
But we can think bigger than cars, houses and receivables.
Instead of making DeFi more like TradFi, let’s lean into what it already is: A system of on-chain collateral where lenders rarely lose.
That, I think, could be the basis of a new financial system that is free of systemic risk.
Risk is inherent to finance. But systemic risk is not.
Instead, it’s a product of the fact that ~90% of bank capital is borrowed.
We take that strange state of affairs for granted because it’s always been that way. But not for any good reason.
No non-financial company ever borrows that much.
Banks do so simply because if they were to fund themselves like normal companies (with equity), they would struggle to make returns at a level that would attract investors.
So they juice returns by funding themselves primarily with debt.
Bond investors are happy to buy that debt because the government gives an implicit guarantee to bank lenders that they will be bailed out in times of crisis.
Equity investors generally do not get bailed out, but they buy bank stocks because the extreme leverage allows them to make acceptable returns in between getting wiped out every 20 years or so.
And if they get their timing right, they can be out of the stocks before the crisis hits. But, either way, when banks fail, all the rest of us suffer. (Except bondholders.)
So here’s the vertical growth opportunity for DeFi: Create a new financial system fully funded with equity. No debt.
Let losses cascade back to well-heeled investors who can afford it. Not highly leveraged banks who can't.
It won't be very profitable (bad for investors, good for users) but it will be free of systemic risk (good for investors, good for the world).
In Peter Theil’s terminology, it would take DeFi from zero to one.
The End of History is over. Which means the era of horizontal progress is over, as well.
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Mysten Labs Launches Blockchain Platform Sui — Blockworks
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