This week, Chainlink Co-founder Sergey Nazarov joined host Azeem Azhar on the Exponential View podcast presented by Harvard Business Review to contemplate a world of “Banking without Banks.” Nazarov said the switch from financial agreements based primarily on brand reputation and “logos” to math-based agreements based on physics and encryption will be a “fundamental shift in how people agree, and trust each other, and interoperate globally.”
“For the typical person, this is something that might be hard to wrap their head around because we have lived our lives surrounded by brands,” Azhar said. However, Nazarov said he believes the global financial system will ultimately switch to decentralized finance (DeFi), because the guarantees and risk management DeFi provides is what the world wants.
He outlined four reasons why the shift to DeFi is not only likely, but inevitable.
Whereas traditional banks and financial institutions typically offer users less than 1% yield, DeFi protocols such as Aave offer up to 10% APR on the same dollar equivalent. “If the yield that’s made available by DeFi remains high while the inflationary worries continue to grow, then I think people will actually see banks plugging themselves into DeFi protocols to give that yield to their user base,” Nazarov said.
Nazarov pointed to the “seasonal value” of transparency in traditional financial markets, where transparency is undervalued during a boom “when everything is going well” and valued most during a bust like the 2008 financial crisis, when information asymmetries make understanding the underlying value of an asset the exclusive advantage of a select few.
Conversely, he argued, “You cannot build a smart contract that hides the information that was hidden during the 2008 financial crisis.” He described DeFi’s infrastructure as an “immune system” that “guarantees not only that the infrastructure is reliable but actually that the exact contract you’re using has been well reviewed and well used and is, in that way, much more reliable than somebody’s general promise.”
Nazarov sees control as another capability that has seasonal value in the traditional financial system. When the system works as it’s supposed to, people don’t worry about how much control they actually have over their assets. It takes an event like this year’s Robinhood debacle to show people how little control they have.
This, he said, is because centralized applications are built on code that is kept private from users. “So you’re trusting the brand to do what you hope it will do.” As these “flash in the pan failures” become more common, Nazarov said DeFi offers, “for the first time in history,” an alternative that’s not just another brand operating with the same opacity.
“People think they have what DeFi does, but they don’t,” Nazarov said, “because it’s in the interest of their counterparties to convince them of that.” Once people understand that the centralized system is not as reliable as they have been led to believe, he believes DeFi is going to be something that society demands.
“Society as a whole doesn’t care about making a small subset of counterparties richer because they have an asymmetry of information. It generally cares about managing risk, allowing globalization to succeed and enabling people to pursue their economic destiny – which is what all of this (DeFi) does.”
He put it even more simply: “What smart contracts do is what people want.”
Listen to Sergey Nazarov’s full conversation with Azeem Azhar on the Exponential View podcast.