In Azeem Azhar’s insightful Davos 2023 wrap-up, he concludes by suggesting that the world may be undergoing a “phase transition.”
As he writes:
“In my book, I postulated that we might be approaching a phase change.
‘Complexity scientists refer to moments of radical change within a system as a ‘phase transition.’
When liquid water turns into steam, it is the same chemical, yet its behavior is radically different. Societies, too, can undergo phase changes. Some moments feel abrupt, discontinuous, and world-changing. Think of the arrival of Columbus in the Americas or the fall of the Berlin Wall.
The rapid reorganization of our society today is just such a phase transition. A phase transition has been reached, and we are witnessing our systems transforming before our very eyes.
Water is becoming steam.’”
Azeem doesn’t explicitly mention DeFi as a topic of Davos 2023, but he makes a critical point at the very beginning of the piece.
Davos attendees have a mixed record of seeing what is right in front of them.
“One of the difficulties with understanding global risks is that most people tend to be more comfortable looking in the rearview mirror than speculating about uncertain outcomes. The Annual Meeting has been caught on the hop in two of the last three years.
Back in 2020, the Forum did not discuss the prospects of a global pandemic, yet only a couple of months later, one would be declared. War in Europe was not mentioned in the Forum’s 2022 Risk Report, which was published just a month before Putin’s folly began.”
This brings us to the confluence of two forces: the “phase transition” and the inability of global power brokers to see the “blinding glimpse of the obvious” associated with the risks of today’s financial infrastructure.
The “Big Miss” of Davos 2023
Over the seven centuries since the foundation for the modern global financial system was laid by accountants in 14th-century Venice, we have seen incredible improvements in size, speed, and scale. What we have not seen is an upgrade – a ‘phase transition’ – in the underlying architecture.
Today, just like in Venice long ago, we place our trust in human-based, emotionally-vulnerable institutions which spread shared beliefs about what constitutes value, a concept that Yuval Harari explored deeply in Sapiens.
Those beliefs (based on 14th-century paradigms), however, are starting to come under increased scrutiny for the simple reason that when they encounter the reality of modern life, they don’t hold water.
For an extreme example, thanks to the maneuvering of the US Federal Reserve, the poorest people in Sierra Leone have had their access to government services cut off.
It gets worse. Not only is damage being done, but those at the top are starting to appear clueless.
Look no further than the Fed’s infamous “inflation is transitory” comment or the recent tone-deaf tweet about inflation by Nobel-prize-winning economist Paul Krugman that “the truth is striking. Here’s 3-month “supercore” excluding food energy shelter and used cars.”
Essentially, if you take away the three things that everyone needs, there’s no inflation. As some might say, WTF?
Then to add insult to injury, the people that control the financial levers are quick to dismiss any other (and potentially better) paradigm that could erode their positions of power.
Witness JP Morgan CEO Jamie Dimon’s off-hand dismissal of Bitcoin. Fourteen consecutive years of increasing global awareness and adoption of cryptocurrencies might be compelling evidence that a new shared global belief about value and money is emerging for some people, but Dimon can’t –or won’t – see what is right in front of his nose.
But hey, that’s Davos.
The Phase Transition of Finance
Meanwhile, the world is experiencing the emergence, resilience, and improving capabilities of decentralized financial systems. The innovation of purpose-built networks for finance that do not require institutions to create shared beliefs is exactly the kind of “phase transition” Azhar imagines. It’s a fundamental shift in the mental paradigm of how value is perceived and exchanged.
Add in the global nature, 24/7 accessibility, open-source, size of the TAM of the financial market ($400 trillion), the cost-benefits, and the new business models, and one is reminded of Craigslist taking down newspaper classifieds, Netflix v. Blockbuster, and Amazon vs. well, everybody.
As Pantera co-CIO Joey Krug wrote, “it seems fairly evident that the historical arc of the world’s financial rails will end up as blockchain-based systems using smart contracts.”
It is evident to some, that is for sure.
What is also evident is that the smart contract platforms are not enterprise-grade… yet.
However, the way that DeFi protocols firmly withstood the tumult of the FTX collapse represents another pin on the chest of an increasingly battle-tested industry.
When fully mature, the water of traditional finance is going to turn into the steam of decentralized finance.
Too bad the Davos crowd is blinded by the snow.