The Wild West vs. Decentralized Finance (DeFi): Truth behind the Trope
“DeFi is the Wild West of finance, bro.”
A common trope in DeFi socials 👆; let’s see why, starting with some historical context 👇
The Wild West
The Wild West refers to the period in the 19th century when western territories of the United States were characterized by lawlessness, rugged frontiers, and rapid expansion. It was marked by cowboys, outlaws, and gold rushes.
DeFi (Decentralized Finance)
DeFi is the contemporary financial movement that emerged in the 2010s, enabled by blockchain technology. It aims to create a decentralized, permissionless financial system, which challenges traditional banking and finance based on transparency, individual control, and accessibility.
Now let’s compare the Wild West and DeFi in terms of my semi-arbitrary Similarity Spectrum™️, where 0 = no similarities whatsoever and 10 = they’re essentially the same thing.
Point of Comparison #1: Governance and Regulation
The Wild West: The Wild West had little to no centralized governance. Law and order were often established primarily by local militias or vigilantes. This sense of freedom from regulation led to both innovation and chaos.
DeFi: DeFi relies on decentralized governance through smart contracts and blockchain technology. It uses protocols and tokenomics to enforce rules and manage assets, providing a more transparent and automated system. As a whole though DeFi operates in a regulatory gray area, with centralized governments struggling to adapt.
Similarity Spectrum™️ Score: 9
Neither one features much centralized control and in essence a DAO could be considered a “local militia”, which could just as easily act for the betterment of the space or for its own exclusive benefits. When things went wrong in the Wild West, people cried out for better government control and intervention, and when things went well in the Wild West, people wanted the government’s hands out of their pockets. Same thing happens in DeFi today. Funds exploited? File a report with the FBI. 100x profit? High risk, so let me keep my reward.
Point of Comparison #2: Trust and Security
The Wild West
Trust was scarce in the Wild West due to rampant fraud, robberies, and disputes. People relied on personal relationships and physical assets for security.
DeFi
DeFi aims to create trust through code and transparency. Smart contracts and blockchain immutability provide security, and assets are held in decentralized wallets, reducing counterparty risk.
Similarity Spectrum™️ Score: 8
To put DeFi trust in terms of the Wild West, it’d be like putting your money in a safe in the middle of the desert with the promise that this safe can’t be broken and only you know the combination. You and other people can inspect the safe and see how secure it is, but there’s still going to be those gnawing doubts that 1) there’s a way for robbers to break that safe or just steal it altogether with your money inside, 2) the creator of the safe might still have the combination somewhere, or 3) someone directly steals the combination from you. Wild West required a bit more trust in the physical capabilities of 3rd parties or yourself to protect your funds — DeFi is just the digital version.
Point of Comparison #3: Risk and Reward
The Wild West
The risk-reward ratio in the Wild West was high. Prospectors could strike gold, but many faced danger, disease, and loss of life. Outlaws could make quick gains but faced the constant threat of being hunted.
DeFi
DeFi offers high potential rewards, with yield farming, liquidity provision, and decentralized exchanges. However, it also comes with risks like smart contract vulnerabilities, impermanent loss, and regulatory uncertainty.
Similarity Spectrum™️ Score: 9
The only reason this isn’t a 10 to me is that part about “loss of life” in the Wild West. In DeFi, you might lose a portion of your investment portfolio (max 10% if you’re doing it right), but at least you’re not dying of tuberculosis while getting buried alive out in the desert surrounded by snickering psychopaths…right?
Point of Comparison #4: Access and Inclusion
The Wild West
While no one needed “permission” to make the move, the Wild West was often considered “exclusive” as it primarily favored only those who could afford to venture westward — unless they found other more unpleasant means to migrate.
DeFi
DeFi has the potential to be more inclusive, offering financial services to anyone with an internet connection and a digital wallet. However, barriers to entry, such as technical knowledge and onboarding chokepoints, still exist.
Similarity Spectrum™️ Score: 5
Though the high-level concept is similar here, physical barriers and technological or knowledge-based barriers are too different to warrant a high similarity score. Accessing DeFi simply requires some signal bars and 30 minutes of time with your local friendly-but-sometimes-pedantic DeFi guide.
Point of Comparison #5: Evolution
The Wild West
The Wild West eventually transformed into a more regulated and settled society as the United States expanded westward.
DeFi
DeFi is an evolving ecosystem that continues to mature, with ongoing developments and improvements in blockchain technology and DeFi protocols. Exploits and phishing hacks are still irritatingly frequent, but security and awareness continues in its efforts to keep up.
Similarity Spectrum™️ Score: 8
In the name of “protecting civilians” (see: tapping into the revenue), I imagine the tendrils of real-world government powers will continue to creep into DeFi just as they did with the Wild West. Unlike with the Wild West, however, there will still remain large bastions of decentralized purists that will continue with their DAOs and metaverses away from the prying eyes and hands of the governments.
Final Thoughts
In the end, the survivors of the Wild West weren’t those simply looking for instant riches. The survivors were those that came for a new life with ideas of how to form new societies in an untamed land. They joined together with likeminded souls to innovate and build.
DeFi should be approached the same way. Come with an open mind and tempered greed. Look for likeminded frens to build a new community with. Find ways to build together, slowly and securely. Come humble and get ready to be humbled even more.
And as always, only invest what you’re willing to lose — something you’ll know you’re doing right for sure when you’ve lost a bit 🫠.
