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The Economist Magazine 24th September 2021 The sceptics have plenty of fodder . The earliest adopters of bitcoin, the original cryptocurrency , used it to buy drugs , while cyber hackers now demand their ransom in it. Hundreds of millions of dollars of ether, another digital money, were stolen this year after hackers found a bug in some code. Many “believers” are in reality trying to get rich quick from the global mania that has seen the value of crypto assets reach $2.2trn. Others are freakishly devoted. The entrepreneur who announced in June that El Salvador was adopting bitcoin as an official currency sobbed on stage, claiming it would save the nation.

The crooks, fools and proselytisers are offputting. Nevertheless, the rise of an ecosystem of financial services, known as decentralised finance, or “DeFi”, deserves sober consideration (see Briefing). It has the potential to rewire how the financial system works, with all the promise and perils that entails. The proliferation of innovation in DeFi is akin to the frenzy of invention in the early phase of the web. At a time when people live ever more of their lives online , the cryptorevolution could even remak e the architecture of the digital economy.

DeFi is one of three tech trends disrupting financ e. T ech “platform” firms are muscling in on payments and banks . Governments are launching digital currencies, orgovcoins. DeFi offers an alternative path which aims to spread power, not concentrate it. T o understand how , start with blockchains, vast networks of computers that k eep an open, incorruptible common record and update it without the need for a central authority.

Bitcoin, the first big block chain, created in 2009, is now a distraction. Instead, Ethereum, a block chain network created in 20 15, upon which most DeFi applications are built, is reaching critical mass . Its developers view finance as a juicy target. Conventional banking requires a huge infrastructure to maintain trust between strangers, from clearing houses and compliance to capital rules and courts . It is expensive and often captured by insiders: think of creditcard fees and bankers’ yachts. By contrast, transactions on a block chain are trustworthy, cheap, transparent and quick—at least in theory. The Economist Magazine 24th September 2021

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