What is Decentralized Finance (DeFi) and How Should Christians View It?
For the last decade or so there’s been an interesting development in the finance sector that’s unlike anything we’ve ever seen. This recent development is decentralized finance, or DeFi for short. This is drastically different from traditional finance that we’ve come to accept as the norm.
As advisors, it’s important to stay informed about the relevant topics that affect our clients, our practices, and Christians in general.
As CFAN advisors, this is a topic that we’re continually receiving more and more questions about. This is a new space with its inception coming from Bitcoin in 2009, so the majority of individuals are still unaware of what to make of it. I get it, it’s complex and is unlike anything we’ve dealt with in the financial arena.
Now, this topic may or may not be of interest to you, but regardless it’s likely going to change the landscape of the financial industry forever, so it’s good to at least be informed about what it is and how it may potentially affect you or your family.
Although we can go down a rabbit hole on the specifics, I’d like to address the basics and how we as Christians need to view and think about DeFi.
A Brief Review of Traditional (Centralized) Finance
Banks, in some form, have existed for thousands of years acting as depository and lenders.
The early modern period of history saw the development of the “central bank” concept being used within many countries.
Wikipedia defines a central bank as such:
“A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a state or formal monetary union, and oversees their commercial banking system.”
If you remember back to your history class, Alexander Hamilton was one of the first proponents of a centralized national bank at the genesis of the United States. In 1791, the First Bank of the United States was chartered for 20 years, but its charter wasn’t renewed after the initial charter. However, it lacked some of the core functions that our modern banks serve today.
Most of the 1800s existed without a functioning central bank within the United States but that changed in 1907. In 1907, the Bank Panic of 1907 occurred in which J.P. Morgan and other prominent financiers were called on to bail out Wall Street and furthermore the United States.
Because of this, we saw the re-introduction of the Federal Reserve System through the 1913 Federal Reserve Act which was crafted after years of researching European central banking from high-ranking officials.
The rest is history. For over a century, the United States Federal Reserve System has had a hand in managing interest rates, unemployment, inflation, and the health of the economy through monetary policy.
The Fundamentals of DeFi
DeFi Explained
Decentralized Finance (DeFi) functions in the exact opposite manner of Traditional, or Centralized, Finance.
According to Investopedia, the goal of DeFi is for finance to exist outside of the control of governments and central authorities (i.e. banks, financial institutions, and more).
As you can imagine, this is rare within the modern era because almost every government wants, and aims, to extend some sort of control over its population’s financial structure.
So this is where tension exists.
Under DeFi, no one organization, intermediary, or government retains sole control over the entire financial framework.
“A ledger is a book or collection of accounts in which account transactions are recorded. ”
Instead, DeFi uses Decentralized Apps (also known as DApps) that perform various financial functions on distributed ledgers, called blockchains (blockchain technology was made popular by Bitcoin in 2009).
Fluree defines a blockchain as, “A distributed ledger that uses peer-to-peer consensus within a decentralized network to validate transactions and a hashing algorithm to cryptographically link them in a chronological “chain” of records.”
In short, no one person or organization has control but rather the power is distributed and lies in the collective.
Functionally, DeFi platforms allow people to:
Lend or borrow funds from others
Speculate on price movements of assets using derivatives
Trade cryptocurrencies
Insure against risk
Earn interest in savings-like accounts
This is a huge shift in power and control which is why it’s potentially revolutionary.
This is an oversimplification of DeFi but the gist.
Value & Real World Application
Okay, so I’m betting that you’re beginning to wonder what exactly the “actual” benefits are outside of separation from governments and central authorities.
Great question.
Blockchain technology, as mentioned above, creates a host of benefits for decentralized finance.
Transparency
Every transaction appears on a public ledger and displays the parties (a string of letters and numbers as an ID) involved for all to see. Currently, traditional finance transactions mostly occur behind a “veil”, non-public, and can be subject to fraud, error, or more.
Immutability
In short, information integrity is baked into the blockchain process. The data can’t be tampered with or the blockchain will break and the reason will be immediately identified. This is important because it creates data integrity and increased efficiency.
Interoperability
Interoperability is still developing BUT the goal is for communication and data sharing to exist across blockchains.
Permissionless
A significant feature of DeFi is that it’s permissionless. The networks are open and available to everyone to participate in the consensus process that blockchains use to validate transactions and data. This protocol, coupled with the next point, is empowering an unbanked population across the globe.
Self-custody
Self-custody is the ability to fully be in control of your digital assets. In traditional finance, a “custodian” is in charge of holding your assets and doing the record-keeping. For self-custody, you have the keys (i.e. cryptographic keys) to access your digital assets and only you can determine how they are used.
These are just a handful of the general benefits of DeFi. However, there are more granular benefits that exist that are just as exciting such as a finite supply of some crypto coins and tokens, smart contracts, fast and cheap cross-border payments, real estate processing, etc.
I’m guessing that it doesn’t stop here. I believe we’ve only seen the tip of the iceberg when it comes to the innovation that will come from DeFi.
Christian Perspective
So what does all this mean for us as Christians? What should our stance be? How should we view this decentralized finance?
Submitting to Authority
First, as Christians, we need to remember that we should always live above reproach.
For DeFi, this means submitting to the laws and regulations that the government and other authorities have put in place despite maybe having a good reason to subvert such authorities.
“Let every person be subject to the governing authorities. For there is no authority except from God, and those that exist have been instituted by God. Therefore whoever resists the authorities resists what God has appointed, and those who resist will incur judgment.”
I’m all for innovation, disruption, and for the status quo to be challenged, especially where injustice or oppression exists, BUT I also believe that as Christians we need to submit to the proper authorities.
As of now, Congress is taking the path to regulate aspects of decentralized finance (i.e. trading of cryptocurrency and assets, taxation of digital assets, etc.) rather than outlaw it like some other countries. Even though this is contrary to the whole purpose of DeFi.
Robert Cohen, Chief of the SEC Cyber Unit, had these statements to say during the SEC vs EtherDelta (an unregulated & unlicensed decentralized exchange) lawsuit:
“Using any blockchain to create an exchange without central operations doesn’t remove the original creator’s responsibility.”
“The focus is not on the label you put on something or the technology you’re using. The focus is on the function, and what the platform is doing. Whether it’s decentralized or not, whether it’s on a smart contract or not, what matters is it’s an exchange.”
There are still a lot of unknowns about what the future will look like for DeFi and regulatory environment but we should be ready to follow the law of the land.
Lead with Wisdom
It’s pretty apparent that DeFi is still very young AND very much still the wild wild west. This means that we should approach it with caution. Even though it’s created capacity for a lot of good things, there’s still been a lot of bad players in the space that have taken advantage of individuals in one way or another (i.e. theft, pump and dump schemes, etc.).
DeFi, as a concept, may be new but the dangers are old as time. As King Solomon said in Ecclesiastes, “What has been is what will be, and what has been done is what will be done, and there is nothing new under the sun.”
“Without counsel plans fail, but with many advisers they succeed.”
We, at the Christian Financial Advisors Network, are big on having the proper counsel in life and this is no different. If you’re interested in exploring DeFi then it’s of utmost importance that you have someone in your corner that can speak wisdom into your situation.
A Christian financial advisor is ideal because they can address the needs of your personal finances but can also add the biblical wisdom that's needed for discussing DeFi.
As with traditional investing, it’s important to only invest in what you understand and only take the risk that’s appropriate for your profile.
Guard Your Heart
Something I’ve seen pretty consistently within the DeFi space is greed and the notion of “get rich quick”. Some people are making life-changing money. This isn’t to say that their decisions don’t carry any risk because they often carry significant risk.
“Above all else, guard your heart, for everything you do flows from it.”
This is probably one of the most dangerous aspects of this new frontier. It’s also something that looks pretty familiar to the dot-com bubble for older individuals that may recall.
The FOMO (fear of missing out), accessibility, and lax regulation create the perfect storm for hearts to be vulnerable.
Proverbs 13:11 warns about the danger acquiring wealth quickly (typically done through significant risk),
“Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.”
Proverbs 13:11 (ESV)
Greed and idolatry can easily creep into our hearts in the most subtle way if we aren’t constantly protecting them.
I’m a financial professional and I've even felt the FOMO and unhealthy stirrings at times. I’ve also seen other Christians battle obsession and idolatry.
This is another reason it’s so important to have accountability and counsel to guide you on your stewardship journey. We can’t and shouldn’t go at it alone.
And we must constantly remember that God owns it all and that we’re stewards of what He’s entrusted to us. This should continue to calibrate our hearts and minds to His will and desire for us.
DeFi is already revolutionizing so much within the financial arena. But, no matter what we think or believe about DeFi, we must view it through a biblical lens to maintain a proper perspective, just like everything else.
If you wish to proactively participate in DeFi then it’s important to be above reproach, rely on wisdom (including third party wisdom), and guard your heart.
If you wish to be more reactive to DeFi then it’s important to stay informed of how it can potentially affect you.
Feel free to reach out to our advisors to talk more about how we can assist you.
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