re: P2P DeFi

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Lex Sokolin writes an insightful opinion piece titled How DeFi Can Avoid the Irrelevance of P2P Lending and Crowdfunding, reflecting on past examples of peer-to-peer technology that inspired Libertarian visions of peer-to-peer economies and the stark reality that more centralized solutions have succeeded in those markets. Sokolin gives an example of the music industry and filesharing as well as LendingClub in finance.  Will it end up that traditional finance monopolies continue to reign, new centralized tech monopolies emerge or will peer-to-peer decentralized finance (DeFi) technologies finally move mainstream?

Sokolin gives an example of how the music industry has moved on from the phase of free music downloads with the advent of streaming services and correctly points out a better user-experience bundled with the law has made streaming much more popular.  Perhaps another important point to keep in mind is that part of digital rights management (DRM) was to protect the content creators, musicians and the producers who always had more inherent rights to how music should be distributed and monetized.  The streaming services just served as a better distribution mechanism for  music creators to support.  In contrast most people don’t believe governments or anyone has inherent rights to the creation of money and Bitcoin is the prime example of an independent peer-to-peer money. 

Sokolin next describes the story of Lending Club that started out as a peer-to-peer lending platform, but eventually ended up acquiring and integrating with a bank.   He highlighted the problems with peer-to-peer lending including: 1) adverse selection and the lemons problem where there are riskier borrowers in peer-to-peer lending 2) investors are hard to find because they have to do the difficult research of evaluating credit risk.  Although these problems are valid, the regulatory hurdle in the financial industry is by far the greatest challenge and likely prevents many from even attempting to solve the adverse selection or research problem. 

Sokolin also describes the problems of crowdfunding due to low commitment investors, adverse selection and a small market and how in the UK despite regulatory success the top equity crowdfunding arch-rival platforms eventually merged.  He points out:  “Who really cares about putting money into a local small business and facing 100% loss when you can buy Amazon stock and watch it go to $2 trillion?”  He does point out the benefits of crypto due to global reach and recognizes the $20 billion raised in ICOs, but states: “Crowdfunding works not when there is “access” but when there is something to achieve by participation.”  This is an insightful statement about the importance of participation and Sokolin rightly points out the challenges with crowdfunding, but downplays the significance of truly democratizing capital formation.  ICOs disrupted the venture capital model, at least temporarily before regulatory bodies started to crack down on the practice.  ICOs provided startups higher valuations and easier capital access while providing retail investors the opportunity to purchase the next generation technology platform.  ICOs solved numerous startup founder fundraising pain points and founders  were no longer beholden to VC sharks that often took advantage of them.  Retail investors finally had access to some of the high quality projects that normally VCs only would have access to, albeit most were raw experimental projects with just a vision, a whitepaper and very little chance of success. The global reach of  blockchain technology is also critical.  Anyone could startup a project anywhere around the world and anyone could securely send funding from anyone around the world because of the technology.  The core value proposition of ICOs should not be minimized.   Also although it’s great for retail investors to look for the next big mega tech company like Amazon, it doesn’t mean people shouldn’t diversify their portfolio with smaller local projects with good cash flows.  Those could be just as solid an investment for retail investors or perhaps even having the opportunity to invest in growth projects in emerging markets like Southeast Asia, South America and Africa.  Finally I do agree with Sokolin that incumbents may very well have an advantage because it “won’t be an easy win against human nature and our collective resistance to change.”  But perhaps because we have a new crypto money system that’s distinct and inherently more valuable than the old fiat system, a mainstream DeFi solution can be successful with just a little bit more focus on the user experience.  

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