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@ p2p fiat
2023-04-25 11:00:45Long time ago, finance was trustless - without counterparty risk. People would hold goods and barter or use valuable items such as metal coins as money.
Then came all sorts of banks and other trusted financial intermediaries - an important evolution that enabled international trade - based on several parties trusting banks to provide value in return for IOUs.
Trustless finance
Since 2010, a technology innovation, the digital p2p value transfer protocol - public infrastructure - enables digital p2p finance without counterparty risk. It is trustless - not requiring any trusted counterparties - instead many counterparties that do not have to be trusted guarantee the transaction.
This fundamentally changes finance. Regulation had been put in place to ensure trusted counterparties could indeed be trusted. Trustless finance makes such regulation redundant.
Role for banks
Banks may perceive trustless finance as a competition - the opposite is true. While trustless finance will drive several evolutions in the finance space, banks are uniquely positioned to support less tech savvy customers in the use of trustless finance - for example through the setup of custodial wallets, …
Therefore banks have an interest in embracing trustless finance asap - as already covered in a previous consideration, game theory is at play here - if certain banks are slow in embracing trustless finance (through their own will or due to inappropriate regulation), they will be eclipsed by other banks who are faster at adopting trustless finance.
Additionally, banks will have opportunity to play an important role in trustless finance liquidity management - this is somewhat technical - lightning network inbound liquidity is a scarce asset - banks can charge their clients fees for such liquidity. Additionally, over time, p2p peg solutions will emerge. Banks (or banks on behalf of their clients) can achieve a return on the long side of the p2p peg swaps.