DeFi is not about rebuilding finance as we know it; it’s about building a better finance. History has shown that without appropriate rules, safeguards, and behavioral norms, financial markets become more prone to fraud, pro-cyclical excess, and crises. Occasionally, these crises take systemic proportions, threatening the stability of the economic system as a whole. A popular analogy for thinking about systemic risk in the financial sector is fire and building safety. While the analogy is far from perfect, perhaps there are lessons that today’s financial innovators can learn from the historical evolution of fire and building safety?

The ability to invent and use tools is a defining attribute of Homo sapiens that led to the emergence of civilization. An important concept for framing the subsequent effects of technology on society is automation: any technique that reduces the need for human assistance in performing a task or completing a process. The connection between automation and progress is well understood. Although formulated in a different context, a quote from more than a century ago by the philosopher and mathematician Alfred North Whitehead sums it up nicely: “Civilization advances by extending the number of important operations which we can perform without thinking of them.”

Based on my research over the past couple of years, I’ve put together a list of ten theses on decentralized network governance, including base layer public blockchain networks and applications (smart contracts) running on top of them. The ten ideas are listed from the more general and theoretical (descriptive) to the more specific and practical (prescriptive). The first five are revised summaries of my previous writing; the latter five are derived from more recent observations.

The principles of free and open source software (FOSS) are fundamental to the ethos of the communities building blockchain networks. While it is not uncommon for a single organization or small group of core developers to coordinate and deliver most of the work, the source code is generally open for everyone to inspect and improve upon. Control is maintained not by keeping software proprietary, but through social and institutional means, including ideological discourse, community management, and trademark license agreements. Despite the unique governance challenges from issuing network-specific assets to operators, investors, users, or other stakeholders, there are important similarities between blockchain networks and traditional FOSS projects. Existing research on FOSS governance may therefore prove helpful in designing blockchain governance systems.

Blockchain enthusiasts often criticize traditional institutions for their tendency to concentrate resources and decision-making authority. But token-weighted governance without system design features that counteract centralization are clearly open to similar criticisms. As a result, large token holders are faced with a dilemma: abstain from participation to stay true to the ethos of decentralization, or seek to govern in a way that doesn’t disproportionately benefit powerful actors at the expense of other stakeholders.

There are important patterns in the historical development of finance, most notably systemic crises associated with the collapse of asset prices or income flows and the recurring interplay between financial innovation and regulation. Understanding these relationships can help the architects of open and automated crypto-financial services, known as DeFi, to assess potential risks and prepare for different economic and regulatory scenarios. This article highlights some relevant historical precedents and considers the potential long-term implications of this latest wave of financial innovation.