Comments and Discussion

COMMENT BY GARY GORTON Decentralized finance (DeFi) is a blockchain-based set of smart contracts that executes financial transactions without a centralized authority. It relies on member agents jointly making decisions. It is a large and growing sector of crypto space that has the potential to significantly disrupt the financial sector. “Disruptive” in the sense of Christensen (2011), it is a new technology that will reduce or eliminate the need for some set of skills or technologies. For example, the advent of personal computers disrupted the typewriter market. So, the question is: Will DeFi significantly disrupt banking? Regulators and academics need to understand this space because while DeFi is only embryonic currently, it will grow and morph. Makarov and Schoar clearly and comprehensively summarize the ongoing developments, giving us an introduction to this space. Their overview is important because there is bewildering terminology that is little understood by many. It is important to keep in mind that we are in the very early days of blockchain, DeFi, smart contracts, and stablecoins. These early days are somewhat like these two examples: in 1899, there were 30 American car companies, and by the end of the next decade an additional 485 had started up. But this number dropped from 253 in 1908 to only 44 by 1929 and three companies—Ford, General Motors, and Chrysler—accounted for