Are You Independent Yet? Financial Self-Sovereignty and the Decentralized Exchange

“You own your money, but you have to be aware of the responsibilities of owning your own money. You have to be careful with that freedom.”

Helicopter parents. They never let their kids out of sight. They fret at the possibility of any potential danger, striving to protect their snowflake charges from harm, reassuring the child so they know just how special, precious and helpless they are… and that they can never, ever fail.

Of course, this backfires horrendously, resulting in what we see today: leaders who are entitled silver-spoon-fed adolescents conditioned to require constant coddling — not to mention the fact that their parental stimulus packages have taught them that everything in life is free. Including bailouts. Money please!

And who are they really “protecting” anyway? Kids are resilient. It’s adults who struggle with change.

As the United States celebrates Independence Day, I ask the question: Do you feel… independent? 

Or is your government a helicopter parent, standing over your shoulder and second-guessing every financial decision you make?

You’re reading Cointelegraph Magazine. So I’ll make an educated guess.

It’s time for a change in your relationship. It’s time your government allowed you to grow up. 

Adulting is hard

For Americans, Independence Day is supposed to be about hot dogs, fireworks, and the celebration of the birth of a new nation founded on principles of freedom and equality.

Obviously, that was pre-COVID. Now we’re asking to unhuddle our masses through social distancing, and while we may still yearn to breathe free, we’re on physical lockdown as well as suffering increasingly draconian financial oversight from a variety of acronymed bodies.

The tools of decentralized trade, however, may yet overcome the tyranny of our financial system, enabling a reformation of economic interaction that steers us away from centralization and toward more just and equitable means of controlling our own financial futures.

The first stage of this “growing up” process, Barney Mannerings, co-founder and CEO of decentralized derivatives exchange Vega Protocol explains, came about through the creation of Bitcoin: a peer-to-peer network that enables the permissionless and trustless exchange of value. 

This early step in the democratization of money was followed by the tokenization of assets and the decentralization of a range of financial tools. The next step, he feels, is the decentralized exchange. Such exchanges allow peer-to-peer trade without the need for any central intermediators to hold our hands and ensure our “safety.”

Get your DEX on

DEX (decentralized exchange) technology allows participation on equal footing with the bigwigs, Mannerings says. Users need no longer be railroaded into a prescribed batch of menu offerings from a select group of dominant companies; instead they can access a smorgasbord of investment choices to suit different appetites for risk and reward.

Mannerings explains that some centralized services allow users to take positions with low or no fees because they pick up money on the flipside for helping their clients to bet against the crowd. 

“Look at Robinhood,” he says. “They make money by selling your order flow to some hedge funds. They don’t even make money off charging you a fee, they make money because the hedge funds want to know what you’re doing so they can make money. That means you’re not playing the same game as everyone else and you’re not on an even footing.”

With a DEX, everyone gets the same information, the same tools for risk, and a range of tools that are normally hidden from people in traditional markets, Mannerings says. This theoretically offers a stronger guarantee of fairness without the possibility of front-running.

Mario Blacutt (often writing as “Berzeck”) is the founder of the Nerve Network and the decentralized exchange NDEX. He explains that DEXs can offer unique opportunities for new projects as well as investors. Small projects with strong potential can be listed on decentralized exchanges without having to wade through a slow application process, and without paying large entry fees that can be unreasonably demanding — especially in the early stages of a project’s development. 

“There are a lot of stories of smaller, good projects that do not maximize their potential because they never get the opportunity to be listed. We wanted to break that pattern and offer smaller projects the opportunity to be listed for free on our exchange.”

Financial self-sovereignty

It’s not just centralized exchanges that stand in the way of financial autonomy, either. Governments have been known to meddle in pocketbooks from time to time too. Mannerings explains that it’s “Like what happened in Europe after the financial crisis; some governments took money off some of the wealthiest people to help pay for things. When they decide that’s going to happen, or that you can’t spend it a certain way, or that they want to freeze your money, you suddenly discover it’s not really yours. You don’t really have that full control.”

The individual’s power over their own finances has essentially been granted (or withheld) at the whim of banks, financial institutions, and governments. Kain Warwick, founder of the Synthetix asset platform, explains that it’s only in the last few years that this has begun to change. “The promise of decentralized self-sovereign tech is being realized, which is exciting.”

If you have your funds in the bank, PayPal, Venmo or other centralized services and they decide they don’t like what you’re doing, they can just cut you off, Warwick says. “You’re guilty until proven innocent.” Censorship-resistance is a critical feature of decentralized platforms, he continues. “That’s one of the huge promises of Bitcoin originally… that you could make payments anywhere over the Internet and you didn’t need to rely on some third party as an intermediator.”

Loi Luu, co-founder and CEO of Kyber Network, seconds this message of financial independence. With Kyber, users can make connections on the blockchain that are fully transparent and permissionless. “Regardless of where you are, what’s your background, you can always interact with Kyber, because it’s fully powered by blockchain.” This has the added advantage of making trading safer, easier, and more accessible, he says.

And it’s all about user choice for Alex Wearn, co-founder and CEO of IDEX. The team’s goal is to build an exchange that has the same user experience as centralized offerings, but doesn’t require you to hand over control of your private keys. Users can choose their own custody solution, whether it be hardware wallets for retail clients or large-scale custodial solutions for institutional needs. “It’s really all about giving users that choice and catering to their needs rather than forcing them into a one-size-fits-all option of the exchange holding funds.”

Not your keys, not your coins

Warwick explains the problem of centralized crypto custody. “We see it every day. Someone puts value into a centralized service or to a custodial platform and they lose access to their coins. If you don’t have the private key to your assets, then you’re relying on someone else to keep them safe. In some cases that’s fine, but ultimately, the ability to have control of your own assets, to make that decision for yourself to have full self-sovereignty, is where the power comes from.”

It’s time for governments to treat us like adults, Mannerings says. Users should be able to evaluate their risks and choose products and services that offer freedom and control.

Loi Luu advises users to be their own advocates throughout this learning process and to approach the newfound tools with caution. “Controlling your own wealth is good if you know what you’re doing, as in, you know what is required to be fully in control of your wealth, you know how to keep your private keys safe, you know how to do a backup, and you know which site is a phishing site, so you’re not falling for scams. But if you don’t have enough knowledge or technical background, controlling your own wealth on blockchain might be risky.”

Berzeck explains it’s a pillar of the blockchain technology ethos: 

“You own your money, but you have to be aware of the responsibilities of owning your own money. You have to be careful with that freedom.”

This transition to greater individual monetary responsibility will take time, he says — probably more than we want to believe it will. He suggests it will take at least a generation to change society’s ingrained mindset about how banking and money works today.

What’s so great about the DEX model?

Mannerings worked in traditional finance, which he admits offers technologies that are incredibly useful but deeply inaccessible to those on the outside. In his line of work, managers would sell derivatives to small companies — but were buying them from a different desk, in a chain of buyers and sellers who all skimmed profits in additional layers of transactions. “The size of the difference between the market price and what these people were getting it for was huge. That was a problem but there wasn’t an obvious solution until the crypto stuff came along.”

Vega co-founder Tamlyn Rudolph witnessed this privilege of access during her time in traditional markets. When she was trading, she was able to register directly and trade on her own account, unlike most people. She saw the huge discrepancy between her own knowledge and access to the market compared to the paltry offerings her family and friends accessed.

A decentralized platform puts tools into the hands of the people, Rudolph says. With the Internet of Value, parcels of risk can now be swapped around, allowing users to “carve out risk” for themselves. “Own your own financial risk, be able to understand it, carve out what you don’t want, and take on other people’s risks that you want to help with.”

Berzeck speaks from an entirely different experience, having lived under what he describes as a corrupt regime in Bolivia until a recent coup began to change things for the better, he says. “Many bought the socialist dream,” he recalls, but it followed a catastrophic path similar to the one Venezuela faces now. “It works at first… but long term, it always fails. It’s been proven again and again in many different countries.” The president of Bolivia, Evo Morales, enforced the heavy centralization of markets, controlling every aspect of the financial system — ostensibly for the protection and safety of the people, Berzeck says.

Cryptocurrency offers the exact opposite of overbearing governments, he suggests. “Banks closed my accounts because they wanted to ‘protect me’… I’ve seen firsthand what total centralization and control can do to individuals. That’s why I value the kind of freedom that blockchain offers.”

All hands on DEX?

The future is looking very bright for the DEX movement, Loi Luu says. The Kyber Network has enjoyed an incredible eight to ten times growth year-over-year due to massive expansion in DeFi and related applications. “When DeFi grows, Kyber grows,” he says. The ease of use of decentralized applications has improved significantly in the last couple years, too. 

Both Luu and Berzeck caution that decentralized solutions won’t take over completely any time soon. Both solutions will co-exist, with centralized solutions remaining the main regulated on- and off-ramp for fiat to crypto interaction. Berzeck explains, “We should be aware that centralized exchanges and DEXs will coexist and probably complement each other. We should not try to artificially accelerate the process. The technology just isn’t there yet.”

Synthetix’s Warwick agrees. “It’s still very high friction to use a DEX,” he admits. A user may choose to use a DEX, but it’s not the solution for everyone. “I think that’s coming. With scaling and other things we’re seeing, we will get to a point where the status quo moves to DEXs.” 

Darren Liu, lead developer of Binance’s DEX solution, Binance Smart Chain, says technology tends to move in waves, with DeFi currently drawing the most attention and activity. The Binance Smart Chain offers new tools for DeFi that he says will enable more users to join the trend.

For true mass adoption to happen, Berzeck says it’s all about what works for users. If it reduces costs to clients, they will be interested in it. 

“That’s what companies want. They don’t care about dogmatic things. They don’t even care about decentralization. The only thing they care about is to reduce costs and increase income.” 

“So, we give them a way to reduce costs and prove that blockchain technology is able to reduce costs for them. That’s the way we should face this problem of how to increase mass adoption.”

Banks and financial institutions still hold the monetary keys in the form of liquidity, Mannerings explains. Money is controlled in just a few places, giving those parties the power to run the show. “That power is almost accidental. They were in the right place at the right time, they have support from regulators, but they’re fundamentally not doing anything super-special.”

It’s probably one of the reasons why finance has been less disrupted by the Internet than most other aspects of the modern economy, he suggests. “Yes, you can go on online banking, but the actual conduits of money have not changed much as a result of the Internet, just the way you present it to users.”

“It’s waiting for this decentralized technology where you can say, we no longer need a bank, we no longer need an exchange to sit in the middle as an organization controlling this. There’s a protocol that sits in the middle and satisfies all the different players, and now all the people who might want to trade can get together and say ‘hey this is a thing we want to trade now’ and they can trade. And they don’t have to trust each other, they can put up their margin on a decentralized protocol.” 

“They can do that without asking someone’s permission and without enriching those guys in the middle.”

Kyber’s Luu is excited to see this transition taking place. “You really feel the freedom. The fact you can do a loan and then contribute to some asset management protocol blockchain within one or two minutes without waiting for weeks to get approval from banks or financial institutions, it’s just mind-blowing.” 

Helicopter parents and helicopter money

We’re all familiar with the concept of helicopter money, in the wake of the massive economic stimulus packages (“bailouts”) of 2009 and 2020. Free markets aren’t free. They’re coddled by the Fed, given sugar by tax-cutting politicians, and only one billionaire — Chamath Palihapitiya — seems to have the adulting skills to suggest that we should just let the failing companies and executives learn by failing.

“Who cares? Let them get wiped out. Who cares? They don’t get to summer in the Hamptons? Who cares?”

It all traces back to those helicopter parents that end up doing their child a disservice in the name of safety. “There’s a tendency to assume people need to be protected from themselves.” Mannerings says. “The problem is the more you go down that route, the more it looks like they needed protecting.” 

When everyone is told that every financial product in the world is safe… and one turns out not to be safe… people will lose funds, resulting in the clamor to control and regulate even more, he says. It’s a well-worn road that leads to totalitarianism.

Mannerings compares a night out bowling to a day out skiing as an analogy for financial awareness. “You go bowling, you don’t expect it to be dangerous,” he says, you just go have fun and get drunk and it’s fine. “But if you go skiing, you know it’s dangerous, and so you treat it with the right respect.” You might take lessons, start easy and avoid difficult runs until you are ready.

“It’s not that the people who go skiing are smarter than the ones who go bowling, it’s that they understand what the risks are and because they know they are risks, the vast majority of them properly evaluate what they can do, and don’t do things they shouldn’t.”

The same is true, he says, of finance. “Stop treating people like babies” and educate users with greater access to information.

“I think you’ll find people don’t need anywhere near as much babying as some people like to make out, if you arm them with information.

Independence Day is a great time to reflect on that. America’s been founded on the very idea of freedom… You’ve got to trust your citizens and give people that freedom. And they won’t let you down.”