The Management Guide to Decentralized Finance (DeFi)

The Management Guide to Decentralized Finance (DeFi)

21 years ago, in 1999, Ethan Rasiel published The McKinsey Way. This book quickly became a "must-read" for business school students and anyone applying to work in the management consulting industry as it shares insider tips into what it is like to work for "The Firm."

21 years ago, in 1999, Ethan Rasiel published The McKinsey Way. This book quickly became a "must-read" for business school students and anyone applying to work in the management consulting industry as it shares insider tips into what it is like to work for "The Firm."

(Buy on Amazon)

Although the McKinsey Way very much demystifies the process of management consulting at McKinsey, I can't possibly claim this guide will do the same for the emerging industry known as Decentralized Finance *or *DeFi.

However, I will share with you my insider tips having worked 10+ years in finance and having advised many *Blockchain *and *FinTech *startups at the DeFi intersection point.

Let's first take a step back in time to October 31, 2008.

From Byzantine to Bitcoin

On this innocuous date, an entity going by the name of Satoshi Nakamoto published a paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System" that may be the most influential paper per word in recent memory.

For in a mere eight pages, Satoshi Nakamoto provided a solution to an unsolved problem known as the "Byzantine Generals Problem."

What in the world is the Byzantine Generals Problem?

More importantly, what does this have to do with Blockchain and DeFi?

Let me be brief without getting into the technical details.

The Byzantine Generals Problem is a fundamental problem faced by decentralized networks, which are networks (e.g, BitTorrent, insect colonies, and market economies) where there is no established *Trust *which can be found in say bank-to-consumer networks.

The Byzantine Generals Problem was first theorized by mathematicians Leslie Lamport, Marshall Pease, and Robert Shostak to find malfunctioning components that give conflicting information to other parts of a computer system.

The generals are a metaphor for nodes in a decentralized network, and the underlying idea is how to determine a peer-to-peer, distributed network with no central authority can make correct decisions, even if some of its nodes turn rogue.

In other words, can we make a distributed system that is “Trustless" and doesn’t automatically assume that the participants are going to act ethically, and work in the best interest of the group (an idea complementary to Adam Smith's "invisible hand")?

Solving this problem was the key hurdle to the creation of Bitcoin (and by extension, all other cryptocurrencies) and the exponential growth of Blockchain technology.

McKinsey and Company did extensive study of 90 use cases of across 14 different industries and found that Financial Services (i.e., Decentralized Finance) is one of just three industries (the other two being Retail and Utilities) where Blockchain will have an immediate impact across the key metrics (revenue, cost, capital, and social) they identified.

Source: McKinsey and Company; Blockchain Technology Value Across Industries.

Great, what is the role of Blockchain relative to Decentralization?

Blockchain as the Enabling Technology for Decentralization

Amidst all the noise of Bitcoin, ICOs, blockchain ventures like Consensys, and cryptocurrency investors like A16Z, I find it most helpful from a _management perspective _to think of Blockchain simply as an Enabling Technology.

For example, when Steve Jobs announced the launch of the iPhone in 2007, he timed it perfectly as he knew that the enabling cellular technology was then sufficiently matured to handle the data bandwidth of a Smartphone.

I would also point the reader to the fact that Decentralization is not just confined to any industry (say finance) but expands into many aspects of our society including the rise of Decentralization in the Workplace.

Source: Aidos Inc.; The Rise of Decentralization for Better Technology Adoption in the Workplace.

Although centralized, hierarchical organizations are the norm, I expect the emergence of decentralized companies like Illinois Tool Works, which was featured by Forbes in 1999 for leveraging autonomous units to help isolate production problems.

Indeed, with the COVID-19 pandemic, many tech companies like TwitterFacebookGoogle, and Uber have fully embraced remote working, which may lead to secular changes towards more *decentralized *corporate structures.

Let's now re-shift our focus to finance.

Since the inception of modern banking, developed nations like the U.S., U.K., Sweden, and Switzerland have relied on a number of well-capitalized financial institutions and regulatory bodies to serve as the foundational "trust layer."

Given the staggering importance of the financial services industry (representing $4.6 Trillion of the $21 Trillion US annual GDP ), many financial intermediaries have emerged in every conceivable layer whose roles have been to extract "rents" from the ecosystem, yet they lack incentives to innovate historically.

Contrary to popular opinion, the goal of DeFi is not to "replace" these financial intermediaries, but to provide users with a more competitive offering, which equates to lower transaction costs and prices.

Great, where do we start?

blockchain fintech startups defi defi-top-story defi-guide defi-in-developing-economies hackernoon-top-story

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