To ask a different question of traditional banks - where can you do what you can do in DeFi today in traditional finance - without either being an investment bank or a HNW individual?
Does that help? You cannot walk into a bank and ask to put your money to work in the same way that they are already putting your money to work just by holding it in an account with them. At least, not for average people.
You can't act as an "automated market maker" in traditional finance, I'll give you that (to pick one example of something possible in DeFi).
What I really mean is what can do you in DeFi that is connected with the real world? In other words, what can you do other that doesn't fall into the category of using your money to make more money with no effect on the material world?
Examples of things that traditional finance enables that connect to the real world:
- Get a student loan (you get an education)
- Get a car loan (you get a car)
- Get a home loan (you get a house)
- Insure your car or home (perhaps including insurance in finance is a bit broad, but I think it's appropriate)
- Have some claim on the future cash flows of a company that makes real things (public equities)
Obviously traditional finance isn't some bastion of providing "real world" value and resistance to over-financialization. But DeFi seems like pure financialization so far. I suppose the first step is to enable payments (arguably the definition of money is a payment system), but it doesn't seem like that has caught on very much either.
> Examples of things that traditional finance enables that connect to the real world:
An end goal of crypto is to have all financial and ownership services exist on-chain. To conceptualize the real world as somehow forever separate is going to lead to the correct conclusion that DeFi doesn't seem to affect "the real world".
> - Get a student loan (you get an education)
Requires identification.
> - Get a car loan (you get a car)
Requires identification.
> - Get a home loan (you get a house)
Requires identification.
> - Insure your car or home (perhaps including insurance in finance is a bit broad, but I think it's appropriate)
Requires identification.
> - Have some claim on the future cash flows of a company that makes real things (public equities)
Doesn't necessarily require identification. There are cryptos looking to tokenize and fractionalize public/private equities. The equity would exist on chain, not on the private ledgers of banks/clearing houses/brokers/the NASDAQ. You would own your equity via a private key, and not by the say so of Fidelity (e.g.) and the government.
You've listed three types of loans that require you to have some form of identity which allows for the existence of credit/reputation. Until crypto has a functional decentralized identity ((which is being worked on by many)[1], and even has a (W3C draft)[2]) and government recognition, you will likely not see traditional lending products. Doesn't mean it isn't possible.
Insurance also requires identification for reputational purposes, but less for enforcing payments and more for measuring risk.
Crop insurance is a popular use case being investigated for poor rural areas to get insurance. Remember, traditional finance requires massive human capital infrastructure, general civil infrastructure, and minimized governmental corruption to ensure debt repayment occurs. It's may be easier bootstrap insurance from a decentralized network/blockchain + satellite internet, for certain communities.
> An end goal of crypto is to have all financial and ownership services exist on-chain. To conceptualize the real world as somehow forever separate is going to lead to the correct conclusion that DeFi doesn't seem to affect "the real world".
I get this, and I definitely am not suggesting the real world is forever separate. I am somewhat suggesting it currently is though.
> There are cryptos looking to tokenize and fractionalize public/private equities.
Yes, but the ones I'm aware of are entirely doing it on the backs of traditional finance equities.
> Requires identification.
This is a good point and I almost explicitly called it out myself - traditional finance is valuable much because it acknowledges the existence of the individual in society, not as an abstract entity with cash flows.
Solving the identification problem is a goldmine for society at large, not just DeFi. I just find it hard to imagine a suitable solution that doesn't involve trust in the government and other institutions.
I want to make it clear that I am not anti-crypto/DeFi. I think most payment will one day be distributed/trustless at its lowest layer. But I also think that true value (in the "real world") will come when all of the trust built into the rest of society is layered on top.
