We have seen this story before. It is amazing how things repeat themselves.

The traditional financial system was built in the physical world. If you will, it was analog based. Then we saw the formation of FinTech and this started us in a new direction. The challenge was that it was basically another layer over the analog system. Yes, finance became digitized yet it was still operating within the confines of the old system created.

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Where did we see this happen before? Why the internet of course.

We started with the pre-internet days where everything was analog. When the internet showed up, companies started to slowly embrace that. Applications were built on in-house servers. Essentially, we saw things that were 'internet enabled". Yet, none of this was new architecture.

That all changed with the introduction of cloud. Here we saw the entire system shift with white paper design. Companies like Amazon (AWS) and Apple built brand new architecture that radically altered the way we interacted with data. Their systems did not seek to adjunct what was in operation but create a platform which something completely new could be erected.

DeFi Is The "Cloud" Moment For Finance

Decentralized Finance (DeFi) is approaching this sector the same way cloud altered the internet. By operating in a completely different manner, the operations are extending in many directions.

The advantage is that DeFi started in the digital world. It does not reside within the framework of the existing financial system. This is completely outside its bounds.

Software moves at a much quicker pace. There is no board approval needed, no permits to file, nor regulatory environment to navigate. People simple code what is needed, test, and then release it.

This is identical to what we witnessed the last 30 years as internet-based companies appeared. Instead of adding to their business using software, their entire business was built upon it. Think of Spotify and the music industry as an example.

The biggest advantage is cost. Cloud-based companies are not only quicker, they can do things for less money. In the retail world, physical stores have to consider shelf space and who is occupying it. With a company like Amazon, they simply add another webpage. Instantly, for near zero cost, they added a new product to their offering.

Adapt Or Die

Yesterday, I wrote an article how a couple of analysts at JPMorgan posed an optimistic view of cryptocurrency staking once Ethereum switches over to Proof-of-Stake. This shows how some of these institutions are starting to see the potential.

There will come a day where they have to integrate in. The reason being is they cannot remain the same. What was once their domain is being threatened by something faster, less expensive, global, and with few points of vulnerability. Stopping this is akin to trying to stop the internet.

Ironic that over the last quarter century, we did see many companies that failed to adapt. Where are they today? Many are dead with a host of others on life support. This is the lesson that all need to carry with them. Sadly, for most, they will not learn it.

What started out as a small leak in the financial bucket is now flowing. In a couple years, it will be like a geyser, eating the majority of the present financial system. Hence, whatever is in the way will get swallowed up.

At the moment, infrastructure is the main focus.

Amazon Web Services was launched almost 20 years ago. However, it started its cloud about 15. That said, it took some time to build out the infrastructure needed to host services such as Spotify­, Netflix, and Disney. It was not an overnight process but look at what it did to those companies that were operating in the physical (analog) world.

The ones that went under simply did not adapt, hence they died off.

Innovation

Crypto Networks are hotbeds of innovation. Whereas what was mentioned discusses companies that provide infrastructure, we are seeing an entirely new model develop.

Blockchains and the protocols built upon them are primarily at the individual/group level. Since they are open, anyone is free to join. Thousands of developers are already working on different projects, pumping out applications and features that previously did not exist.

As it pertains to DeFi, probably the biggest feature we see is the ability to provide microservices. Since the cost to entry is enormous in the present financial system, companies have to focus upon a large ROI. At the same time, their ongoing costs mean that smaller transactions are simply not feasible.

This is not the case with DeFi. Even FinTech has the issue of high server costs associated with running their operations.

With decentralized blockchains, the network is open and running. Hence, DeFi can easily offer server-less microservices due to the lower operating costs.

We can see how this is added to when we consider the cost of regulation. Existing financial systems spend large sums of money trying to remain in compliance. When they step out of line, there are usually hefty fines (a cost of doing business to many of them).

In the world of DeFi, this all disappears. Smart contracts are what drives everything and once that is coded, they are what runs the show.

The system innovates by adding new smart contracts to the blockchains, further expanding the offerings. This gets enhances as more entrepreneurs and innovators use that contract.

As much as the existing entities want to stop what is taking place, they cannot. There is a force much bigger than they are brewing. When something is faster, wider spread, and less costly, it simply will win. There is no other way around it.

Defi is in that position. The existing financial system was constructed in a different time meaning they are going at a snail's pace. With this world, the pace is relegated to how quickly developers can push the code out. This is a radical difference.

The track record with this is getting extensive. The last 30 years showed us how this plays out. We see more industries joining the likes of newspapers, record companies, video rental, and retail. The carnage is there for all to see.

As Marc Andreeson said, software is eating the world. The financial network is about to experience what that feels like.

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