Professor Campbell Harvey of Duke University’s Fuqua School of Business believes all investors should be fluent in the potential of decentralized finance (DeFi) and Web3 – arguing that it is better to understand the implications now.
“We are at the beginning,” Harvey said. “If, as an investor, you think that the DeFi and Web3 space is still small and that it is not going anywhere, that’s the wrong way to look at it. It's small now, but the vector is very steep and positive,” he said.
Harvey, a professor of finance and author of the best-selling business book “DeFi and the Future of Finance,” discussed the potential disruptions of Web3 and Decentralized Finance, live on Fuqua’s LinkedIn Live.
Evolution of the web
In an overview of the three-part history of the web, Harvey defined Web 1.0 as “push information” technology. “Instead of getting a paper version of the New York Times, you could view it online,” Harvey said. He added the developers of the first web had actually built in the functionality for digital currencies, but the digital currency initiatives of the 1980s failed, because you could make perfect copies of the currency, in the same way that you can copy an image, audio, or video file.
Harvey said Web 2.0 saw the rise of social media and introduced the concept of community, where users contribute content, the platforms sell your data to advertisers and the advertisers pay the platforms. “You aren’t the customer of the social media platforms – the advertiser is. These platforms sell your data to advertisers and the user gets very little,” he said.
Web3 incorporates a secure and efficient payment functionality that has been missing. “There is no Web3 without DeFi,” Harvey said. DeFi allows a user to pay and be paid without having to share credit cards or bank accounts. The payments are immediate and can be micropayments. This mechanism by itself “is a vast disruption,” Harvey said, with potential implications for many existing businesses.
Potential of crypto
Harvey believes the collapse of FTX and the bankruptcy of several crypto lenders and exchanges has created a misunderstanding that crypto itself is the risk. Harvey believes instead those companies had flawed business practices such as absence of risk management programs. And this is independent of crypto.
“FTX is a centralized exchange. Like any centralized exchange, you call your broker, you want some stock, the broker holds that stock for you, and holds it in their name, not in your name,” Harvey said. “With FTX, it is the same story, you send some money to FTX, they buy some crypto. The crypto is defined by a private key or a password that you don't actually have. FTX holds the private key. And if FTX goes bankrupt, then you're just another creditor.”
Harvey said the potential in DeFi, is eliminating the middle layer. This reduces transactions costs. In the exchange example, you never delegate your private keys to anyone. However, this idea has broader applications. “Think of a retailer operating on a razor-thin margin having to pay a credit card company a 3% fee on every swipe – this is because of a thick middle layer. Why not just have the customer pay the retailer directly? That’s DeFi. It is peer to peer. It does not use the existing financial infrastructure which is essentially the same structure as a century ago.”
The potential impact for Web 2.0 companies
Harvey says investors who don’t have crypto investments in their portfolio may think they are not exposed to the risks of DeFi. However, he argues that anyone with traditional investments – especially tech stocks - are heavily exposed to DeFi – in a negative way.
“When investors tell me they don’t have exposure to crypto, I tell them that they actually have a negative exposure,” Harvey said, meaning that many of their prominent tech investments are vulnerable to Web3 disruption.
Other potential business implications
The potential applications of Web3 and DeFi are broad, Harvey said, particularly related to cutting out the “middle person”.
Harvey provided a long list of risks that existing companies face. Decentralized social media, for example, provides a way to directly reward a user for sharing content. Further, for any ad they view, users will get compensated with a crypto token by the advertiser. These tokens have a market and therefore a value. “Web3 creates a two-sided market for a crypto token. This means there are natural buyers and sellers of the token. Users get rewarded for viewing an ad with a token and the advertiser must buy the token to pay the user,” Harvey remarked.
Harvey also pointed to decentralized music and video streaming. He also predicted that decentralized computing and data storage will be major competitors to the existing companies. “You are not fully utilizing your computer both for CPU and storage. Why not rent it out? Why not get paid? This is Web3,” he said.
Harvey highlighted the example of ticketing to concerts. The current model, which is currently in the news, has very few powerful ticket sellers that extract a high margin from concertgoers. Furthermore, the artist has no connection with their fans. The fans are connected to the ticket seller. “The alternative model is that the ticket is a crypto token. It is unique for a date, location, and seat. The artist is connected to the fan. The artist gets a royalty if the ticket is resold,” Harvey said. “However, the Web3 aspect is even more interesting. Suppose the first 1,000 tickets sold had something extra –say you are investors in the concert. If it does well, you get paid a dividend. This changes your behavior. You will promote the concert to your friends, post on social media. This is Web3. You are not just a ticket holder, you are an investor,” he said.
Harvey believes decentralized finance “is changing the rulebook completely. Not renovating our financial system, but potentially rebuilding it from the bottom up”. His message, though, is more than that. “This is not just about finance,” he said. “Every industry will be impacted by Web3: It is better to invest the time now to understand what is going on. If you do not, you run the risk of being disrupted.”