Why DeFi Will Eat Wall Street
Note: Data in this section last updated March 13th, 2022
What is Disruption?
The concept of “disruption” is overused and often misunderstood — many writers, consultants and researchers use the word to refer to any situation where a new player enters a market and starts to displace incumbents.
But the academic theory is much more nuanced — disruptive technology isn’t necessarily “better” (in fact, it’s often worse), it’s just so fundamentally different from the status quo that it can’t be replicated by incumbents or competitors. This gives it the ability to gain a foothold in an industry and, as technology improves, gradually eviscerate the market.
For a real-world example, we need to look no further than AT&T — one of the original disruptors.
In the late 1800s, Western Union dominated communications with a huge infrastructure of network cables and a massive consumer base. Although early telephones were largely inferior to the telegraph because their signals only traveled a few miles, the technology was much cheaper for short-distance communication and was therefore rapidly adopted by local businesses.
In a textbook case of disruption theory, Western Union couldn’t react because serving these local businesses would be unprofitable. This gave AT&T the niche they needed — as telephone technology gradually improved they were able to continue to take share from Western Union, eventually rendering the incumbent all but obsolete.
Why Wall Street Won’t Survive
I believe that DeFi represents a classic case of disruptive innovation and has the potential to change our lives in ways we can’t even imagine.
Like most disruptors, it definitely has a ton of problems today – such as smart contract risk, rug pulls, irreversibility and the potential for abuse. But it also has several advantages that traditional finance simply cannot replicate, such as:
Unmatchable Rates: The almost total elimination of intermediaries such as bankers, brokers, lawyers, regulators, accountants, etc… will allow DeFi to offer customers rates that are orders of magnitude greater than traditional banks.
Unprecedented Customer Experience: Instant, permissionless, 24/7 access to financial products and markets and the ability to remain completely anonymous create a banking experience that no one alive has ever seen. And while this compelling on its face, I believe that like smart phones, ATMs or the internet, we won’t truly understand the utility DeFi can bring to our lives until we’ve experienced it at scale.
New Sources of Innovation: Not only is DeFi unburdened by regulation, knowledge is freely shared and there’s an ability to crowdsource the ideas of millions of users to rapidly create and test better financial products. As such, it’s not inconceivable that DeFi could catalyze a user-driven financial “renaissance”. If you don’t think this is possible, consider how a bunch of kids recently used Reddit to beat world’s biggest hedge funds at their own game…
Perhaps most importantly, Wall Street can’t replicate DeFi without cannibalizing itself, and regulators can’t stop its progress due to its decentralized nature.
As such, like the telegraph industry in the 1800s, I simply don’t see how traditional banking can survive.
Almost Unmeasurable Potential
It’s difficult to describe the potential impact of disruptive technologies without sounding hyperbolic at best and insane at worst.
But at the time of writing, DeFi’s Total Value Locked of ~$200 Billion is a mere fraction of the ~$1.8 Quadrillion financial market.
As such, DeFi could grow 100x from here (to $20T) and still be a fraction of the stock market…
…it could grow 1,000x from here (to $200T) and be roughly equivalent to the global debt market…
…it could grow ~4,500x from here (to $866.9T) to match the World Economic Forum’s estimate for the DeFi space…
…it could grow 10,000x from here ($2.0Q) and be slightly larger than the market today...
…and while I’ll admit that 100,000x growth (to $20Q) is probably ludicrous, I’m sure that a telegraph operator in 1880 would say the same about the smartphone market today.
Wherever this thing ends up, it’s important to watch as it has the potential to be both an existential threat to Wall Street and a road to almost unlimited potential for investors.
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