Why DeFi has the Potential to be Better than Universal Basic Income
For about 100 something years, capitalism has been the defining economic model of our world, based on the FIAT framework. These two have been proven to be not sustainable and efficient.
FIAT is fundamentally a broken system that does nothing but print money when needed and bring inflation.
A major crisis? No problem, just print out literally tons of tons of money, and watch our currency crash in a couple of years, hoping it won’t do so.
Whereas Capitalism is just as ineffective, is based on continuous (infinite) growth, a concept that nature (and common sense) has proven to be unsustainable and broken.
These two systems will crash. There is not any doubt about that. The question is… when?
Why am I saying this?
Well, it’s just the law of nature. Infinite growth cannot exist. Even the Universe which is continuously expanding is supposed to crash/end at some point. We just don’t know when exactly.
The difference is, the Universe will end so far into the future that nobody will be around to see it (most likely), whereas our financial and economic systems are already starting to crumble before our eyes.
Plus, economic systems tend to crash up to the point of no return every 100 years or so. Do the math.
This may be one of the reasons why we see a higher rate of adoption of blockchain financial systems (which have been around for about 12 years only), even by governments, banks, and other institutions.
Before we proceed, I must admit that there is a variant of Capitalism that is called Stakeholder Capitalism. This alternative is a model in which companies prioritize the needs of all stakeholders. Customers, suppliers, workers, shareholders, and local communities are all important stakeholders.
The goal of a firm under this structure is to produce long-term value, not to maximize profits and increase shareholder wealth at the expense of other stakeholders.
Although it sounds like a more fair distribution of wealth, I never saw any company approach this model. However, some companies share profits equally between all the employees. Others just give you coupons though….
What is blockchain and when do you get to the point?
The fair point here.
There is a very good article explaining this here.
In short, blockchain is a technology that allows for any type of asset that holds value to be recorded as an unchangeable record of transactions that doesn’t count on a third party to verify the data’s legitimacy and integrity.
Although most transactions are commercial, the blocks can be used to hold any type of data. The data is stored on the, you guessed, blockchain, a sequence of groups of transactions that are linked (chained) together and distributed amongst all participants to validate.
What is DeFi?
In its most basic form, decentralized finance is a system in which financial goods are made available on a public decentralized blockchain network, making them accessible to anybody rather than going via intermediaries such as banks that would require a government-issued ID or proof of address. This is why it is called trustless.
DeFi is a system in which buyers, sellers, lenders, and borrowers engage peer to peer or with a solely software-based intermediary (via software developed on blockchains and smart contracts) rather than a corporation, government, or organization facilitating a transaction.
In order to meet the objective of decentralization, a variety of technologies and protocols are employed. A decentralized system could be made up of open-source projects, blockchain, and proprietary code or products.
These transactions are made feasible by smart contracts, which automate a contract (agreement and conditions of the agreement) between buyers and sellers or lenders and borrowers.
Basically, DeFi aims to exterminate intermediaries and make financial products open for anyone with access to the internet and a computer or smartphone. Plus, they have higher returns on investment and more attractive borrowing rates than traditional financial products.
Well, yes, but Capitalism is slowly introducing Universal Basic Income
Universal income is a term that is very popular right now. There are always both failed and successful initiatives and studies to prove the model right or wrong.
Finland did an expansive study on this, with… not so promising results. The United States is giving away Stimulus checks like crazy, implying it is not Universal Basic Income (just a twisted variant of it), and South Korea might have actually found a way to make it work by only allowing people to spend the money received from the government back in the local economy.
This is a good system, I believe, a system which has a lot of potential, and should be adopted worldwide. We only need to fine-tune it.
Maybe the answer is only spending government money on the local economy. Maybe it’s about both governments and corporations to combine and give people economic incentives.
This would be a combination between Universal Basic Income and Stakeholder Capitalism, which for me seems only fair, especially when corporations are bagging more money in one year than whole countries in 10 years.
Why would institutions and corporations give out free money?
Easy, the economy works when money is spent/circulated. In the past 12 months, people have been staying at home saving more money. The government gave people money to spend because the economy would have crashed otherwise. This is consumerism, this is capitalism.
You need to spend money, work and consume. You don’t have money? No problem, we’ll give you the money. Just consume! I believe the American government was thinking when it was at the peak of the crisis.
But we’re getting a bit further from the main idea than I first intended.
How can DeFi and Blockchain do these things better?
Well, DeFi and Blockchain are interlinked. If these two were a central road in a town, blockchain is the infrastructure or road, and DeFi is represented by the buildings on top of it.
DeFi apps (Dapps) are working based on smart contracts.
Smart contracts are pieces of code that automate various processes. You can automate transactions and other financial things based on this technology, but you cannot (yet) sign a smart contract to purchase a car or house or sign a real contract. There are legal issues and other challenges when it comes to this. The idea is that it is possible, but some things are needed to be worked out by governments for them to be implemented for these kinds of applications.
In DeFi, smart contracts are used for transactions. In brief, with the help of smart contracts, dapps can:
- Let you buy, sell, and exchange tokens via Decentralized Exchanges
- Let you supply liquidity to pools and farm (and remove it)
- Let you buy NFTs
- Authorize your wallet to receive rewards from pools and farms
- Organize votes for token holders
- Participate in lotteries, and other games and gambles
- Organize fund distribution.
These are most of the things you can do with smart contracts. There are limitless opportunities to these, but the examples above are the basis of what they can do. If you have a revolutionary idea of what smart contracts can do, it will most likely be derived from one of the things on the list.
How can Dapps use smart contracts to create a better economic system than UBI and Stakeholder Capitalism?
Well, it’s easy. It’s about building smart contracts. And there is a reason why I bolded the last item on the list. In short, defi automatizes wealth distribution (and makes it easier). Any dollar that enters the company can be automatically and instantly distributed amongst all stakeholders and operations.
This would not necessarily be a new revolutionary economic system, it just puts the existent one on steroids by providing efficient tools. In this way, such a system would not make Americans crumble because of “socialism”, nor would the inefficient Capitalistic system would have to go entirely.
This would mean that it would be a transitioning system, that will be able to evolve in time, and shift priorities. This is more like integrating DeFi with Capitalism to make a way in which Stakeholder Capitalism would work.
Wealth distribution is one of the biggest problems in our world right now. The wealthiest handful of people hold onto more riches than literally billions of other people.
I’m not saying this would help the situation, I’m saying it could. If governing bodies want to implement a system like this, it’s on them to decide how to distribute wealth.
A few things Blockchain, DeFi, and Smart Contracts can do as a governing system.
As I mentioned before, I believe economic change is not only in the hands of the people, governments, or corporations alone, but it’s a fine balance among this trinity we live in.
Governments tax people to make a better country and nation (basically), and corporations get money from people that buy their products and services to get more profits for shareholders. It’s how the system works in principle.
But, in order to tax people and keep thousands of operations and payments under control, there is a myriad of processes that need to be done. Smart contracts can help automatize these.
Let’s see a list of things about how this would work, shall we?
- People can be taxed per purchase/transaction instead of paying taxes once every month or year
- Funds will be automatically distributed amongst all stakeholders and processes of a company/government
- Each transaction is set in stone, not being able to be deleted or tampered with. Plus, anyone can check on it.
- People can be given cashback or personalized offers easier
- Companies could share profits with customers and employees easier
- Companies could distribute their funds to necessary operations instantly
There are a bunch more things to be added, but we would better get to a few examples. The examples below each deserve their own article, but I will be brief. I hope you get the idea.
Examples
1.A government
A government has mind-blowing economics. It gets funds from external bodies (loans from other countries or organizations, from citizens, from citizens in other countries, from various grants, from corporations having their headquarters there, etc). And they need to give back tons of money to various parties. And they have to tax people. And a bunch of other stuff.
Therefore, smart contracts could help them build an automated system in 2 ways.
They get an economic system coded from scratch, set accounts for various operations, and manage them semi-automatically.
They do this via transactions. They set a state budget. They set a few accounts that are for grants, loans, taxes, etc. When money comes from a China loan, it automatically goes somewhere. A corporation bought some land, you get the funds somewhere.
Here is the interesting thing about taxes. Instead of taking a percentage of your salary and paying more taxes when you buy stuff, taxes can be per transaction.
2. A company (that shares its profits with every stakeholder)
A company could use smart contracts so that every transaction (an item sold, a new partnership, a new acquisition, a new loan, etc.) is sent towards a specific account that manages certain processes.
A company got a loan of $3 million to build a new factory. The amount is put into the account for infrastructure investments for example. The money is redistributed to their clients who build the factory. The profit obtained from selling those items would be distributed amongst the executives, employees, partners, even customers.
3. Your life
You get your salary today. You just go to the grocery store to buy…well…groceries I guess. These would be from multiple brands across the world. You go to the cashier, pay for your items, then go home. On the way, you just buy a new Yoga Mat from Amazon because of reasons.
You get home, watch some Netflix, browse social media, maybe some YouTube, etc.
You just go into your bank account and notice something weird. You got a bunch of money from companies such as Amazon or Netflix and all those who own the brands you bought at the grocery store.
How did this happen?
Well, smart contracts. When you purchased an item, you paid $5 let’s say. Out of those $5, $1 went to the government for taxes, $1 got to the suppliers (cost of goods sold and packaging), $1 went to the accounts representing Sales and Marketing for the product, and $2 went in as profit. The profit was split in a certain way. Let’s say now, $1 went to shareholders, and $1 back to you because you purchased this item (or maybe the $1 for the sale was distributed equally to all customers).
When you use Netflix or Social Media, the companies also drive profit from their operations, mostly selling your data. You will get a payment from them because of this. Assuming they would adopt the Stakeholder Capitalism approach.
How did all of these happen?
Tokenomics are the answer
Tokenomics are the way in which someone manages a digital currency. Dapps do this in a certain way. For each transaction, someone pays a fee. Those fees are distributed among their operations and products (30% from the fee goes to liquidity, 30% gets burned, 20% goes to the team, 20% goes to charity).
The main idea is that you can build a system in which every transaction is handled in any way you want.
You are a business selling t-shirts. You usually make a 30% profit margin. A t-shirt is $100 for the sake of simplicity.
Someone buys the t-shirt. Instead of those $100 going to your company’s bank account, only $30 will do so. Why? Because the rest $70 were distributed according to how you set the system towards paying the company who makes your t-shirts (stock/cogs), towards advertising accounts, to salary accounts, taxes, etc. Or, only $10 would go or less, because you also use your profit to give back to your customers a part of the transaction, you pay for the expansion of your company, maybe, or set the amount to go to paying out a loan.
The same goes for a government. The idea is that for every dollar entering/being spent in/for a state or company, it could be automatically redistributed towards all the things necessary. So basically, you’ll not really need an accountant or more, just someone to maybe tweak, sorry, optimize the tokeomic system and its parameters for better efficiency.
Conclusion
Universal Basic Income and Stakeholder Capitalism are good systems. The bad thing is that we either don’t know if they would work, or it’s hard to build such a system, or our true capitalistic model is too good to be changed.
But, when looking through a different perspective, a system like this is buildable via blockchain and smart contracts. These would allow for any dollar a government or company receives, and any dollar you spend, to be redistributed towards all stakeholders and processes existing in the economic ecosystem. Why do your taxes when you are already taxed for each transaction you make? Why manage your funds when your banking app will do that for you? Why be broke when everything you do makes you money?
The economic system works on a very simple caveat: the money must move.
You can have a perfect economy, but if all the money you give people (via social security, salaries, or benefits) is not spent, it will break.
Maybe using smart contracts as the framework of our economic system is not the best way to make an economic model, but it will make sure that the money will be moved constantly, so it would lower some of the chances of the system crashing or be affected by inflation.
