Don’t Fear The Efficiency of Defi, Expert Says
By: Farha El Serogy
Campbell Harvey envisions a world of nearly zero financial transaction costs and thinks he has the system to do it.
The Duke University Professor of Finance recently gave a webinar hosted by AUC to correct common misunderstandings about decentralized finance (DeFi) and how it has the potential to solve global financial
DeFi is an evolving field that uses technology to remove third parties from financial transactions. It attempts to solve problems such as inefficiency, limited access, opacity, and centralized control.
In the webinar “DeFi Myths and Facts” Harvey said this technology eliminates fees that banks and financial institutions charge for using their services.
“DeFi users interact via decentralized apps where there is no middle man, allowing for an efficient and transparent operation where there are no delays and costs to transfer money, there’s no need to have a bank account, all you need is a phone and an internet connection, and there is complete transparency,” said Harvey.
Harvey served as President of the American Finance Association in 2016. In 2021, he published his book “DeFi and the Future of Finance”.
Just like all new technologies, DeFi will take some time to grow on people until the day it becomes seamless; that’s how Harvey addressed the first myth about how DeFi never achieved widespread adaptation.
“The interface for email and file transfer was terrible, but then the World Wide Web launched in the mid-1990s and the experience improved and continues to improve,” says Harvey.
Harvey then moved on to another novel, if not controversial technology – cryptocurrency (cryptos), which some believed is used primarily for illegal activities. Harvey explained that cryptos are not completely anonymous, and that’s why people who engage in illegal activities to use cash. Even though people don’t carry $100 bills because most retail stores refuse to accept them, 79 percent of the value of US currency is in $100 bills.
“When the authorities captured El Chapo, the Mexican drug lord, they seized $200 million in cash. Almost all of it was $100 bills,” said Harvey.
Another misconception about cryptos is the idea that they are too volatile to be useful. Volatility in finance is the measure of how
much the price of an asset has moved up or down over time, Harvey said.
Volatility is tricky because there is no tangible value here, so-referred to as intangible value.
“There are two leading factors driving that volatility. One is the uncertainty over what the value actually is. Two is relative illiquidity which means that a large sale could drive the price down and a large buy could drive the price up temporarily,” said Harvey.
The main problem with DeFi is the custodial and regulatory issues. A custodian is a financial institution that holds customers’
securities to prevent them from being stolen. Regulatory issues are concerned with cybersecurity and consumer data privacy.
A custodial risk is when the private key is lost. A private key is a long random number that guarantees the ownership and is used to sign transactions. Some individuals delegate custody of their private keys by placing them on either a drive not connected to the Internet or keeping a hard copy in a physical vault.
“Don’t ever reveal your private key, it is equivalent to revealing your bank account number and PIN,” said Harvey.
When it comes to regulatory issues, it is important to understand that DeFi is a new and complex technology that makes it difficult for regulators to recruit talent that understands the space.
“This technology is difficult to master, and even if you do, the depreciation is substantial. DeFi is evolving very quickly, so you
need to constantly be investing in human capital, which is hard to do,” says Harvey.
There are many pros and cons with new technological advances, but the difficulties are worth it when the goal is of great importance.
“My vision for the future is for us to have efficiency and security in our transactions,” said Harvey.
