Cryptocurrency, Decentralized Finance, and the Evolution of Exchange: A Transaction Costs Approach

We leverage a transaction costs narrative to provide a theoretically unified presentation of the evolution of exchange, with the latest evolutionary frontier being cryptocurrency and decentralized finance. We show that with each new development in the evolution of money, the new form or medium of exchange must reduce transaction costs relative to relevant alternatives. The development of blockchain and cryptocurrency reduced the cost of transfering currency by removing the need for a trusted third party to intermediate funds while also providing the benefit of anonymity/pseudonymity. Likewise, decentralized finance does not require a third party to intermediate savings and investment and can provide contingent anonymity to borrowers. While these innovations have attracted investment in the economically developed world, they appear to have significantly reduced transaction costs for transactors who might otherwise be defrauded of funds by corrupt governments that extort third parties responsible for intermediating funds.