I wrote this as a short introduction to a much longer essay (Monetary Wars) by my friend Daniel. You can read it here.

The Defi Matrix

Markets invariably emerge wherever money is found. Bitcoin has pioneered a form of money truly cryptographic in nature, and thus from Bitcoin there has emerged the first truly cryptographic markets, complete with all of the guarantees cryptographic money implies. Put differently, blockchain technology has mathematically recreated the trust infrastructure underpinning financial markets: every blockchain supporting tokenization has become an independent alternative for speculators to the NYSE, NASDAQ, The Moscow Stock Exchange, the NEO or the Frankfurt Exchange. To discuss tokenization we first articulate this, that blockchains have mathematically generated the trust to meaningfully enable the creation of permissionless and globalized token markets, or token exchanges. Blockchains are trustless, extensible, frictionless, constantly accessible, global, transparent, and completely permissionless by their cryptographic nature. Token markets, however, exploit a benefit of blockchains not discussed often – the generality of the strong guarantees of cryptographic trust. Tokenization is a form of digitization, unique in that it is digitizing assets specifically into the securely tradeable cryptographic form suitable for exchange in blockchain markets. Digitized assets necessarily inherit the trust properties and scope of the platform they are created upon. Thus, due to the generality of blockchain trust, tokenization is the most accessible and general form of meaningful asset digitization. Any market can be meaningfully bootstrapped via this process, in the same sense that the NASDAQ first meaningfully created a market for non-physically settled digitized stocks. A tokenized asset is distinctly different than a digitized asset in that it inherits the very broad trust infrastructure of a blockchain, whereas simply digitized assets are limited by the legal and infrastructural boundaries of the specific traditional market they are digitized to trade on top of. For instance, NASDAQ stocks cannot be meaningfully represented to trade on Amazon or other online retailers, but tokenized stocks could be traded against tokenized consumers goods, for example. Tokenization has the potential to connect a potentially unbounded array of digitizable assets.

So far, we have already seen this generality allow users to bootstrap markets de novo, such as “Defi”, NFTs, and the myriad attempts to produce digital real estate in so called meta verses. In time, the financial and trust guarantees provided by token markets will simply force the majority of digitized assets to be assimilated into these token markets – into what is effectively one unified cross chain global exchange and liquidity pool. Stocks, bonds, cars, real estate, fiat currencies, insurance etc. – all will be tradeable and ready to be programmatically morphed into the infinite array of other investments on this exchange at minimal to no cost. Balaji Srinivisan termed this global market “The Defi Matrix”. We like the name. The Defi Matrix is inevitable and has deep implications for the world.

The most relevant to our concerns is the minimization or possibly elimination of fiat as a medium of exchange. Every possible market will be bootstrapped, and every token (and thus every asset) will in time become a tradeable asset. What this means is there will exist a clean orderbook for any two tokens, controlled by decentralized and trustless aggregators that find cost minimizing routes through highly liquid intermediaries for investors and consumers alike. Markets that currently do not even exist today will exist with seemingly infinite liquidity (Mortgages/Starbucks Loyalty Points). The cost minimizing route will be defined, amongst other variables, by the deepest liquidity assets connecting the two trading pairs: there is no guarantee this would need to be through fiat currencies, and people would even get used to pricing assets in terms relative to other assets, or maybe in more concrete notions like terms of energy, or other commodities. Thus, there is strong possibility that investors and consumers will have virtually no requirement to buy fiat as a medium of exchange when participating in these token markets. The benefits of excising fiat from portfolios is of course familiar to investors. Without the burden of having to acquire fiat for liquidity, investors could hold their entire wealth in assets which appreciate in value, while never exposing themselves to the risk of inflation and degradation of value inherent to fiat currencies. Market volatility can be safely hedged against utilizing a wide array of cryptographically enabled stable coins or assets - fiat will even be facing fierce competition in the market for stability. In this future, assets will be synonymous with mediums of exchange. Consumers may even begin to forget the distinction between an asset and a consumer good as they are blurred together as mediums of exchange. Therefore, every asset will be in perpetual competition with every other asset to serve the purposes fiat once did. Historically banks, and now central banks, are the only entities capable of creating money because of government backing. These entities provided the trust layer for society to agree on the value of an otherwise intrinsically worthless piece of paper. With blockchain markets, trust is now a resource simply backed by mathematics and physics. Anyone can tap into this to generate a token, allowing for new and unique forms of money. This implies that just as nations compete for their currency to have dominance over others, various digital nation-states or companies will compete to have stronger tokens than others. We speculate on which assets could be most able to fill the void left by fiat in the wake of The Defi Matrix. Many will be useless, but some will generate a network effect due to unique properties. Bitcoin, for instance, is unparalleled in its proven censorship resistance and implementation of immutable scarcity. Ethereum 2.0 creates a bond-like fixed income instrument as nodes validate blocks in accordance with Ethereum’s consensus mechanism, providing the base layer for smart contract security. Chainlink, a decentralized oracle networks, provides all the services smart contracts need but that Ethereum can’t provide (such as external connectivity and off-chain computation), in turn providing immense value capture for node operators who contribute to the network.