Introducing the Decentralized Money Stack

Exploring the transformation of value in the digital age

By Michael J. Casey, Chief Content Officer

Oct. 1, 2021

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The confusion and fraught public conversation around crypto and its place in the world is often blamed on the fact that cryptography is extremely complicated and hard for the average person to understand. But there’s an even bigger problem, one that deals with old technologies, not new ones.

It’s that we human beings don’t have a common language for understanding and talking about money. This week’s column seeks to address that. It offers a framework for examining how our financial system has evolved over centuries and, by extension, how crypto is poised to disrupt it.

This week’s podcast marks the one-year anniversary of “Money Reimagined.” To celebrate it, we invited Jill Carlson of the Open Money Initiative and Raoul Pal of Real Vision back onto the show for a redux of the rich discussion they had on our show back in December. It was an opportunity to look back at all the incredible developments we’ve seen in this field over the past year from two quite different perspectives.

Have a listen after reading the newsletter.

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Understand TradFi First

Rachel Sun/CoinDesk

This week, when the team at MIT Technology Review put me into a fireside chat with journalist Charlotte Jee during their Emtech MIT conference, the assigned title for the session – “Demystifying Decentralized Finance” – got me thinking.

It occurred to me that before we demystify DeFi, or for that matter the wider ecosystem of blockchains and digital assets, we need to first demystify traditional finance (TradFi).

Most people don’t have a solid understanding of how our capitalist system of payments, credit and asset transfers works. Getting to that understanding, I believe, requires looking into the deep historical roots of money and the social system of trust that has evolved around it. Only then can we develop a framework for talking about the traditional financial system and how the crypto industry seeks to disrupt it.

That’s what I’ll attempt to do with this column. First, I’ll categorize what I see as the architectural components of the traditional, centralized, fiat- and banking-based financial system, explaining how each came into being and the purpose it serves. Then I’ll map those components to their equivalents in the new, decentralized, crypto- and smart contract-based system.

A caveat: This is just one way of looking at this issue. It inevitably will have inconsistencies and contradictions. Feel free to email me with feedback, especially if some of my analogies and explanations are off.

The Money Stack

This framework starts with what I’m calling the “money stack” – no, not a stack of money, but an analog to the idea of a software stack.

Let’s look at each part of the stack, its historical antecedents and its role in the financial system.

The Ledger

Historically, the accounting profession has been the butt of jokes, a byword for “boring.” But the humble ledger-keeper is actually the foundation of human society.

It is no coincidence that the very first known examples of writing are the cuneiform records displayed on clay ledger tablets from ancient Mesopotamia, the cradle of civilization. One of those tablets includes what is thought to be the very first name ever recorded: that of a Sumerian accountant by the name of Kushim.

To create a functioning system of exchange, one in which people across a larger community than just a small village could enter into contracts for trading goods and services, societies needed a trustworthy system of record-keeping to keep track of the delivery and settlement of those agreements. That’s what those ancient tablets enabled.

The technology for recording and storing those transactions has, of course, evolved tremendously from clay tablets to giant data farms. But in TradFi, the core governing principle for creating and keeping that trustworthy record hasn’t changed: it’s centralized, maintained by a trusted third party. Once it was Sumerian accountants like Kushim. Now it’s institutions such as banks, internet platforms and applications, or government agencies.
Continue reading this column here.

–Michael J. Casey

Off the Charts

Stable By Default

In the International Monetary Fund’s just released Global Financial Stability Report, there’s a chapter dedicated to risks that cryptocurrency markets may pose to the broader global economy, including recommendations for national policymakers on how to mitigate them. Among the areas of focus are stablecoins, with a discussion about the risk of “runs” on tokens perceived to be insufficiently backed to warrant their intended valuation.

With the U.S. currently working on stablecoin regulations, this is not an idle topic. Regulation is coming. So, given that total stablecoin market capitalization is now pushing $130 billion, according to CoinGecko, it’s worth exploring what the market is telling us about the risk perception of this growing pool of stablecoin users. One proxy for that is to look at how well the largest stablecoins, Tether’s USDT – now worth $70 billion in market cap – is holding to its one-to-one valuation in dollars.

Clearly, in its past, USDT was pretty volatile. Sometimes demand for a token that had become integral to many crypto exchanges’ operations was so high that people were willing to pay more than $1.30 for something that was supposed to be worth $1.00. Other times, buffeted by the New York attorney general’s $18.5 billion fine against Tether and partner company Bitfinex and by a hack of the latter, the price “broke the buck,” dropping as low as $0.92. At such times, the price likely did capture a degree of mistrust in the integrity of the underlying assets at Tether.

More recently, as the market has expanded, price variations have significantly declined, with the market more consistently hewing to the $1 level. That may reflect greater confidence in the asset integrity, now that the NYAG settlement has forced greater transparency around Tether’s reserve holdings. But it might also reflect network effects. There is so much more liquidity in the market, that as the turnover of USDT increases, traders and institutions that know they can easily offload the token happily accept the one-to-one valuation – almost as if the integrity is a moot point.

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The Conversation

DeFi Battles

Illustration: Rachel Sun/CoinDesk

Remember the block size war? Bitcoin purists in favor of small blocks framed it as a fight – which they ultimately won – between their interest in keeping the Bitcoin network decentralized and venture capital-backed Bitcoin businesses, which wanted to increase on-chain processing capacity to make more money. Well, if a recent Twitter battle is any indication, a similar sort of division may now have just opened up in the DeFi world.

(H/T to CoinDesk’s Andrew Thurman for pointing me toward this one.)

It started with an announcement from the folks at borrowing and lending platform Aave that they had received a proposal from custodial services provider Fireblocks for it to become a whitelister of participants in Aave Arc, a permissioned version of Aave’s otherwise open system. This, according to Fireblocks’ proposal, is part of its mission to “bring more institutional participants into DeFi” by “extending access to even our most compliance-conscious customers, who would otherwise avoid DeFi over compliance or regulatory concerns.” Fireblocks said it services “more than 600 customers and has secured over $1.25 trillion in digital assets.”

Twitter account @InvestRepeat neatly summed up how many of the “keep DeFi decentralized” crowd felt about this.

The fight got more intense after a core developer at competing protocol Yearn weighed in with a quote-tweet:

But then Jake Chervinksy, a lawyer for the team that developed competing lending protocol Compound, chipped in with support for the Fireblocks proposal, citing Aave founder Stani Kulechov.

Relevant Reads

NFTs IRL

Two stories this week showed that the traditional art world continues to be fascinated by the possibilities posed by NFTs, even if the bidding mania that led Beeple to sell a piece for $69 million earlier this year has subsided and even though the crypto world’s attention has gone to avatar-collecting communities such as the Bored Ape Yacht Club.

Meanwhile, Tanzeel Akhtar discovered that “a Czech royal family that traces its heritage to the 14th century...is conducting an NFT drop next month with a goal of ‘preserving cultural heritage.’”

Money Reimagined

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