What decentralised finance can teach the world of business and geopolitics

The crises stemming from the Covid-19 pandemic and Russia’s invasion of Ukraine show the world is sorely in need of greater resilience
Balancing decentralisation with authority is becoming critical for success in new models of investment, business continuity and national security

Brian P. Klein

Published: 1:30am, 2 May 2022

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A global paradigm shift towards decentralisation is under way. What started in the world of finance is becoming increasingly relevant to how businesses become more resilient as well as to the broader world of geopolitics.

With decentralisation comes resilience, a much-needed characteristic that avoids the danger of relying too much on single points of failure or control. The previously underground, alternative cryptocurrency world was among the first to embrace this new system, introducing the concept of decentralised finance.

Despite the many headlines of scams and meme coin mania, assets that are not controlled by nation states or banks are becoming more mainstream. At its core, decentralised finance celebrates the power of peer-to-peer transactions, lending and even algorithms determining a currency’s supply.

At their best, decentralised systems depend on the reliability of millions of geographically dispersed nodes across multiple routes that cannot be arbitrarily shut down. Value can then be transferred in automated ways. Even contracts are becoming “smart” in the sense that two or more parties can engage in transactions that are mediated by software rather than meeting to sign physical documents.

Major investment firms are taking this so seriously that Fidelity, which has more than US$4 trillion in assets under management, is allowing customers to deposit bitcoin into their retirement accounts. Major international exchanges offer spot and futures exchange-traded cryptocurrency funds.

Lending and trading platforms outside the traditional finance sector are beginning to gain more traction. This is something traditional banks and brokerages have noticed with increasing alarm and interest.

The physical world of supply chain management can learn a great deal from this burgeoning technology. China’s Covid-19 shutdowns, Russian President Vladimir Putin’s war in Ukraine and the global pandemic have shown how companies are still dangerously reliant on a few suppliers of critical goods and services.

That reliance is an unintended consequence of traditional cost-benefit analysis where risk is weighed against the likelihood of an adverse event happening – low chance means little reason to change. Few analysts would have rated a Russian-provoked war in Europe high in their analyses.

So it is no surprise that Europe is woefully dependent on Russian energy. It was even doubling down on a new pipeline, the Nord Stream 2, despite Moscow’s penchant for rebuilding its empire with war in Chechnya, Georgia, Crimea and Ukraine’s Donbas region.

The problem was inertia, and it continues to be so. Once connected, supply chains become increasingly difficult to change. In this case, the path of least resistance runs straight into a disaster.

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Modern industrialised nations are also heavily reliant on Taiwan’s advanced semiconductor chips and the few countries that refine rare earth minerals. Whether it be natural disasters such as earthquakes or political and military crises, these sourcing arrangements are highly vulnerable to disruption.

Companies have not increased their resilience because it has been more economical and efficient to keep operating the way they have been. Relying heavily on limited suppliers of critical goods might have been cost-effective, but costs skyrocket when supply chains are stressed. When auto manufacturers are short on critical chips, they end up missing out on millions of vehicle sales.

Boardrooms will need to start holding corporate executives accountable to more than the demands of shareholders and profits but also for the longer-term viability of the business itself. That means a sober accounting of just how dependent their businesses have become. It also requires putting a monetary value on diversified sourcing.

At the geopolitical level, the world is also moving towards decentralisation. Gone are the days of empires which ruled vast swathes of physical territory, forcing the conquered to pay fealty to those that ruled from afar.

While Russia is currently trying to remake the world in this image, it is unlikely to succeed. And despite claims the US still has the role of unipolar power, its inability to dictate outcomes in Afghanistan and Iraq show how dispersed power has become.

The same goes for India’s dependence on Russian weapons. Rather than diversify with better-made but more expensive European or US-made systems, New Delhi has stuck with what it has done for decades and relied on Russia.

The problem is that its reluctance to criticise Putin’s atrocities does not make it more independent in the spirit of non-alignment. Rather, it makes India more isolated when it faces increasing regional security pressures that could rely on the help of other countries.

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What is less clear is how far this paradigm shift will go. The exploitation of cryptocurrency services for money laundering and other serious crimes is a real concern. Companies need to value resiliency and multi-sourcing supplies, but that still has to be balanced by the need for profit, which means staying in business.

Other areas also benefit from some centralised authority. Fighting dangerous drugs, counterfeiting and human trafficking require coordination. Enforcing aircraft and food safety standards benefit the public good.

Nations still need to defend their borders, though some modern militaries have decentralised a measure of decision-making to troops on the ground who better understand the wartime conditions they are facing. Even some weapons systems are becoming more autonomous, though the ethical and pragmatic considerations of this development have yet to be fully explored.

Nevertheless, appropriately balancing decentralisation with authority when warranted is becoming a critical feature for success in new models of investment, business continuity and national security. While this new paradigm is not a panacea for all that ails society, it is becoming a core feature for resiliency.

Brian P. Klein is founder of RidgePoint | Global, a strategic advisory firm. He is a former US diplomat