Introducing the decentralized money stack

This week, when the MIT Technology Review team put me in a fireside chat with reporter Charlotte Jee at their Emtech MIT talk, the session’s title – “Demystifying Decentralized Finance” – m ‘ made you think.

It occurred to me that before we can demystify DeFi, or for that matter the larger ecosystem of blockchains and digital assets, we must first demystify traditional finance (TradFi).

Most people do not have a solid understanding of how our capitalist system of payments, credits, and asset transfers works. To achieve this understanding, I believe, one must examine the deep historical roots of money and the social system of trust that has developed around it. Only then can we develop a framework for talking about the traditional financial system and how the crypto industry seeks to disrupt it.

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This is what I will try to do with this column. First, I will categorize what I consider to be the architectural components of the traditional financial, centralized, fiduciary and banking system, explaining how each came into being and what it is used for. Then I will map these components to their equivalents in the new decentralized system, based on crypto and smart contracts.

One caveat: this is only one way to approach this issue. There will inevitably be inconsistencies and contradictions. Please feel free to email me with your comments, especially if some of my analogies and explanations are wrong.

The stack of money

This framework begins with what I call the “stack of money” – no, not a stack of money, but an analog to the idea of ​​a stack of software.

Let’s look at each part of the stack, its historical background, and its role in the financial system.

The ledger

Historically, the accounting profession has been the butt of jokes, synonymous with “boring.” But the humble accountant is actually the foundation of human society.

It is no coincidence that the earliest known examples of writing are the cuneiform records displayed on clay tablets from the ledger of ancient Mesopotamia, the cradle of civilization. One of these tablets includes what is believed to be the very first name on record: that of a Sumerian accountant by the name of Kushim.

To create a functioning exchange system, in which the inhabitants of a community larger than a simple village could enter into contracts to exchange goods and services, companies needed a reliable system of record keeping for track the delivery and settlement of these agreements. This is what these old tablets allowed.

The technology for recording and storing these transactions has, of course, evolved dramatically from clay tablets to giant data farms. But in TradFi, the basic principle governing the creation and maintenance of this reliable record has not changed: it is centralized, maintained by a trusted third party. It used to be Sumerian accountants like Kushim. These are now institutions such as banks, Internet platforms and applications, or government agencies.


The real “money” part of the money stack emerged alongside the accounting tablets, at least in the form we now recognize: currencies. Currencies have given people a medium of exchange, a commonly recognized unit of account with which to measure the value of a good or service, and a store of value that can be converted into those things of value in the future. real.

For me, money is best understood as social technology. It is a system that we all believe collectively, a system that requires a shared basis of trust in the commonly recognized value of money. Getting that trust to spread to large communities required coordination. Thus, in the absence of a decentralized governance system to achieve this, the state has seized this role. The relationship between government and money was formed very early on.

A big leap in money technology came at the end of the 15th century when the Medici family adopted double-entry bookkeeping, a version of the old bookkeeping first developed in Arabia, and the applied to the bank. This allowed for a massive scaling up of payments and the currency exchange function, as it no longer relied on transfers from the underlying physical currency. It also forged a deep symbiotic relationship between the banks and the issuers of this physical currency, creating two sides of a centralized monetary system.


These same banks have fueled the development of credit. As they became essential to monetary systems, they began to accumulate society’s savings, amassing from those with excess funds a giant stash of otherwise dormant cash to reuse as loans for those who have. a shortfall in funds.

From there arose a complex machine for generating credit, a system of interlocking institutions that stimulate economic activity and inject value back into the banking system in the form of savings. It is the fractional reserve feedback loop that is the basis of most of the money that circulates in our economy. This system now includes a wide range of investors, lenders and other non-bank institutions that fuel global credit.

Unchecked, this machine inevitably fueled crises as investment bubbles developed and then burst, leading to the formation of central banks and a complex financial regulatory framework that imposes rules on centralized entities that profit from this system.


The evolution of a more complex economy also required a more complex legal framework for how human beings defined ownership, first, of goods, land and other physical goods, then of contractual rights to services and financial claims.

Property rights were formalized in the form of certificates and deeds in which a certifying authority – such as a land titles office – certified a person’s ownership of the property in question. An important extension of this was the creation of share certificates, which certified an investor’s claim of partial ownership in a limited liability company and their rights to future distributions of profits.

Defining rights in this way gave early public limited companies such as the Dutch East India Co. and the British East India Co. the ability to raise vast amounts of capital.

Nowadays, electronic records are used rather than paper certificates, and they are usually managed by custodian banks on behalf of investment institutions.

The decentralized money stack

The central problem with the TradFi money stack is that all of its components require system participants to trust a centralized entity. You have to trust someone or an institution to keep the ledger, issue change, coordinate the conversion of short-term savings into longer-term loans, and certify people’s property rights.

This imperative of trust implies that the centralized entity has the capacity to act in its own interest against those of the users of the system. For this reason, the company has developed a complex set of laws, regulations, accounting and auditing procedures to give people the confidence they need to use these services. All of this adds friction to our transactions and ultimately weighs on the economy with huge costs.

This is where the decentralizing and disintermediating promise of cryptocurrencies, blockchains, digital assets and smart contracts comes in.

These technologies come together to forge a decentralized version of the money stack. Here’s how it looks:

Ledger = blockchains like Bitcoin and Ethereum

Currency = bitcoin the currency, ether and / or other cryptocurrency payment vehicles

Debt = DeFi

Property = non-fungible tokens (NFT)

We still have a long way to go before this system can fully integrate and evolve to the point of becoming the default model of global capitalism.

One step to solving this problem will be to determine which parts of the system will still require the engagement of new or traditional centralized entities, and which parts can be managed by unauthorized tokens, blockchains, and smart contracts. Determining the role that governments and regulation should play is also difficult work in progress.

However, if we can come to a common understanding of how this new system uses different methods to achieve results similar to the old system, this development process will be less torturous. The decentralized money stack is my modest attempt to help in this effort.

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