Even so, the rise of the internet and a kind of all-pervasive atmosphere of information has not given us a similar atmosphere for *scarce* information, i.e. money and assets. Unlike the movement of information, the movement of money and assets over the web as we know it is still relatively slow, expensive and fragmented.
DeFi has innovated on traditional financial systems by minimizing the need for trust and automating previously manual functions with software. But unfortunately, since the blockchain is not local (see previous article), the developers of DeFi applications have no ability to customize their runtime environment. DeFi is also hamstrung by the fact that distrust is an assumed preference for all transactions from all users.
The combination of these factors has led DeFi alternatives to be far more limited in their functionality and less capital efficient than their traditional counterparts. In their current form, they simply cannot compete.
As we explored in our previous article, the web of the future will incorporate financial assets into its core design and enable what we describe as clopen finance, our vision for the financial system as it evolves in the coming years. Clopen finance weaves the best of traditional finance and DeFi. It combines the validity, transparency and censorship resistance properties that users inherit from DeFi with the customizability, autonomy and scale that developers enjoy in traditional finance and fintech.
The current global financial system is a patchwork of standards and technologies largely developed in the 20th century. Unlike the internet and the cloud, which we explored in the previous article, the traditional finance system does not live within a shared "spacetime". Moreover, much of the technology supporting the financial system today is antiquated. Take SWIFT: founded in 1973, transfers through the system can take up to five business days to reach their destination, and even today rely on manual processing. In fact, SWIFT is only a messaging system, often relying on intermediate, so-called correspondent banks to actually move the funds. The “money atmosphere” does not exist.
Additionally, the system is closed: Independent entities have no canonical way to integrate with each other. For the customer, moving between systems is painful at best. Stakeholders, such as customers and asset issuers, suffer due to the drag on market efficiency that results from using multiple independent service providers. The market is inhibited by the same friction as it allows archaic incumbents to dominate. The system is permissioned by default, it does not offer self-custody, and mismanaged, dishonest or corrupt service providers can sustain egregious failures.
On the other hand, one positive feature of closed systems is that they afford builders a lot of agency in designing applications that optimally satisfy their constraints and the usability demands of their customers.
Another more neutral observation is the powerful role that trust plays in the traditional finance system. In the absence of self custody and censorship resistance, customers must place trust in providers to act honestly on their behalf (e.g. to not steal or freeze assets). As a result, trustworthiness is an important axis on which providers in traditional finance compete. It can even trump cost and feature advantages when it comes to selecting a provider.
On one hand, this reality can favor incumbent providers who have earned trust through honest conduct, giving them, at times, an unfair advantage over new entrants with better products. By that logic, a system that removes trust from the equation puts all providers on a level playing field and can foster greater experimentation and innovation.
On the other hand, the consequences of breaking trust (e.g. reputational damage or legal implications) keeps providers in check and creates a strong incentive for them to act honestly. In some cases, customers may even have a preference to work with providers they can trust over trust-mitigated alternatives that have no consequences attached.
Largely a reaction to the trusted and permissioned nature of the traditional financial system, Decentralized Finance, or DeFi, offers alternative financial services based on smart contracts.
One of the main benefits of blockchain-based finance is the ability for customers to optionally self-custody. We consider this a core feature of any open financial system: individuals should be able to move their assets between providers within the system with ease, and the services themselves should have strong interoperability enabled by a single state machine they are all a part of. Moreover, blockchain-based finance is permissionless by default: it says that launching a new application does not require the approval of any central authority.
The open system of DeFi consists of providers which, by their nature, are vastly different from their TradFi counterparts. One such difference is that blockchain-based finance is non-agentic, as application software is simply code running in multiple independent, external nodes. It is built on opinionated blockchains that limit their expressivity. This cog-in-machine nature makes smart contract applications considerably less customizable relative to applications which run their own execution environment.
An homage to the pinnacle of topology terminology, the clopen financial system of the future combines the best of both closed and open finance. The properties of such a system include the following:
Desired Features from Open Finance
Desired Features from Closed Finance
The Result: Clopen Finance
Rather than keeping these features separate, our goal is to combine them to create a system where state is global but local execution customizability is preserved to avoid compromising on desired properties that arise from each.
The shared state leads to minimal barriers and switching costs for self custodying customers, meaning that they can easily opt out of a service without needing its permission. This necessitates providers to compete on the basis of product rather than on the basis of ideological factors or high switching costs. The agentic nature of the system in turn allows providers to compete on the basis of product and customize it such that some level of trust is required or no trust is required and allow the end user to choose the point on the spectrum they are most comfortable with.
The system’s shared state also includes programmable assets.This ensures that assets are fungible across locally customized applications, with no external security assumptions or dependencies needed for customers to move their assets between connected services.
Consider the real-time payment systems of the world. The EU has the SEPA Instant Credit Transfer scheme, the United States has FedNow, Denmark has Nets, Brazil has PIX and India has UPI, among others. While the regions have worked to enable real-time payments intra-country, real-time cross border connectivity is non-existent.
In the clopen system described above, each of these countries could maintain agency over their individual systems while establishing connectivity with one another by way of building on the minimal but shared state machine. Moreover, each customer of these systems is now an independent user of the network, with the ability to self-custody and choose providers with no risk of being locked in. They have the same real-time payments capabilities as provided by the systems above, globally. The all-permeating finance atmosphere now exists, just like the internet for information.
Similarly, superapps such as WeChat and WhatsApp could integrate with the clopen financial system. This would allow them to connect their users, who are currently siloed within their application, to users on other superapps as well as to the real time payments systems described above. Integrating into the system could even lower the barrier to building a global superapp like WeChat or WhatsApp -- as now, the movement of information and value is equally seamless.
The agentic, highly customizable providers in a clopen system can innovate and compete along many different axes. Together they can ultimately make up what is in sum a heterogeneous service offering, which allows end users to choose applications based on the trade offs they are comfortable making.
