How DeFi adds value

Coordination at scale

Andy Singleton
Sweepr
2 min readNov 2, 2023

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We need big companies to do complicated and useful things. On the other hand, those big companies can suppress competition, become bloated and inefficient, and lose loads of money while senior management feels no pain.

Why do we make this tradeoff? The analysis begins with a hot question of the 1930’s: Capitalism versus Communism. Economists argued that market economies were more efficient than centrally planned communist dictatorships. They observed that communist central planners were making a lot of mistakes.

An economist named Ronald Coase asked, “then why do companies run like communist dictatorships? Why do they contain thousands of employees that follow the commands of senior management?” A market approach would be more like a gig economy, with individual contractors that each make the most efficient deal for their parts of the supply chain.

Coase exposed the paradox inside “The Nature of the Firm”

He noted that firms with centralized management can reduce “coordination costs”. They can figure out how to coordinate work in cases where individual contractors would spend too much time and energy figuring it out.

Centralized management allows big companies to do big and important things. However, centralized managers find it harder and harder to track and direct people as their system gets bigger and bigger. People end up doing unproductive things.

There are some known solutions to the scaling problem.

  1. Automation, and ultimately, AI. Computers get better when they get more data. If a computer is managing your company, it might get better as it gets bigger. This tactic has allowed the FANGs to grow huge and dominate the stock market.
  2. Decentralization. If we can apply software to coordinate smart people working in a gig economy, we might get the best of both worlds.

DeFi and decentralized protocols exist to find solutions to the question that Ronald Coase exposed. How do we coordinate people that work together in complicated ways? And, how do we do it while preserving their ability to contribute their own decisions and resources? How do we combine the best features of a big company and a gig economy?

It’s difficult to figure out how to organize a decentralized system so that everyone has incentives to make a good contribution. On the other hand, it’s also difficult to design and run a big company with centralized management.

Sweep Protocol is figuring out how to coordinate cash management at scale. In our next article we will show how decentralized actors distribute, protect, price, invest, and return cash.

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Andy Singleton
Sweepr

Software entrepreneur/engineer. Building DeFi banking at Maxos — https://maxos.finance . Previously started Assembla, PowerSteering Software, SNL Financial.