DeFi, Generational Theory, and the Fourth Turning

November 29, 2023 - 11 min read

A look at the timing of DeFi’s emergence through the lens of Strauss-Howe’s generational cycle framework.

Introduction

We often think of time as a linear concept, moving forward and making progress perpetually. We only look back to reminisce about the old times and marvel at how much more knowledgeable we are now with our technological advancements and the accompanying gadgets churned out at scale.

Casting aside these distractions, however, it is clear that time is not linear at all, but it is cyclical. We measure years by how frequently our planet rotates around the sun, and hours by how long it takes to spin around completely on its axis. Time is clearly all about cycles. This is why history doesn’t repeat, but it seems to rhyme when you zoom out and observe patterns.

Cycles are all around us: it is the reason we experience day and night, sunsets and sunrises, and the weather patterns of Spring, Summer, Autumn, and Winter. We recognize the patterns of these cycles in our own lives because they’re small and observable to us on smaller timescales.

What about the patterns which take place on broader timescales much longer than our own lifetimes, or even that of several generations? Certainly, there are lessons to be learned and insights to be gleaned. Even before the ancient Romans, intellectuals had been tracking these cycles, called saeculum, which were thought to be roughly a century or so.

Within each of these grand cycles comes four seasons, marked by a sort of archetype that each generation acts out. They are collectively shaped by the time and place in which they are born and thus share certain characteristics: there’s the Prophet, the Nomad, the Hero, and the Artist each taking their turns to come of age.

Through this lens we can analyze how different generations are affected by major events, and how their views of the world and their roles in it play into the decisions they make during critical turning points in history, and why tumultuous times seem to happen with rhythmic repetition. It may be as consistent as a heartbeat throughout the chapters of human history.

Strauss–Howe Generational Theory

Well, that’s where historians Neil Howe and William Strauss come into the picture. Their analysis resulted in a book on generational theory, aptly named The Fourth Turning. The Fourth Turning framework primarily focuses on generational cycles and recurring patterns of crisis and renewal.

These Turnings last about 20-25 years and are each identifiable by recognizable patterns in human action, broad social phenomena, and changes in the popular zeitgeist. These Turnings are but parts of larger cycles, and are often marked by crises and sociopolitical upheavals (or wars and depressions).

As they wrote in an American context, they highlighted Fourth Turning events in US history like the Great Depression and subsequent New Deal policies, the American Civil War and Reconstruction, and the American Revolution with its Constitution. These were major turning points which marked discernable paradigm shifts in the established norms of the time.

Characteristics of the Four Turnings

Now, before we get too far ahead of ourselves, let’s cover some context on the four cycles, or Turnings. The First Turning is when everything is being built, or let’s say rebuilt from a major event from the previous fourth turning that this generation went through. From a global financial perspective, let’s say that this took place around WWII when the Bretton Woods financial system was agreed upon.

This was a period of socio-cultural and economic renewal. Institutions felt generally unified in their missions as builders, and were overall optimistic in their collective outlook. This built many of the norms, values and institutions which persist to this day – and perhaps even beyond.

Next is the Second Turning. During this period, there is a growing focus on cultural and spiritual exploration, and individuals begin to find themselves more divided as they either find flaws in the status quo of established norms and values, or become staunch believers and defenders of the traditional systems in place. We demarcate the 1970’s as a defining moment of the Second Turning, as US President Nixon effectively defaulted on the nation’s debt by abandoning the dollar’s link to gold altogether.

In the Third Turning, institutions and societal values weaken further, and unravel until to the point where individualism and vocal rebellion to traditions are more commonly seen. This generation continues the momentum of the one before it, and becomes complacent in its affluence.

Individualism flourishes and equality grows, and trust in institutions begins to erode as they become bureaucratic, sclerotic, and expand outside the scope of their original intended roles. Looking back, the Third Turning reached its peak in 2008 as a financial crisis catalyzed a n i n t e r v e n t i o n b y t h e n President Obama to save banks which were “too big to fail.” The ensuing protests of Occupy Wall Street demonstrated a further erosion of trust in institutions as it seemed unfair to many regular folks who would never enjoy the same largesse.

Finally, the Fourth Turning is marked for a major crisis that forces society to get creative about solving problems that have been accumulating long since their births. During these times, people have no choice but to come together and address serious challenges. Was the pandemic and ensuing bout of inflation our Fourth Turning, or are we in for more action?

The Fourth Turning crisis could still take the form of a major war theater opening up or a larger debt crisis and economic depression. Only time will tell how this Fourth Turning will play out, but there will almost certainly be an economic event which shakes the foundations we stand upon.

Following the crisis, which in many cases lasts for years or even decades, the healing process takes hold. At this time, institutions are often rebuilt and strengthened which demarcates the end of the last cycle and the start of a new one. Every system needs a reboot and an upgrade every now and then, after all.

Is DeFi Part of this Fourth Turning?

As for the present day, Howe’s most recent analysis in The Fourth Turning is Here reveals that from roughly 2007-2030, the world is going through a Fourth Turning marked by populism, social division, war and conflict, and eventually economic collapse. These brewing conflicts are supposed to reach their zenith in the early 2030s.

Though the times are perilous, they also offer hope. Who doesn’t want to be the hero of one’s own life story? Well, passing through the fires of conflict in the face of adversity and then rebuilding anew is what heroes are made of.

Having said that, Fourth Turnings are about events and not just the passage of time — it will likely involve some terrible things like sovereign debt crises and massive economic disruptions. We will leave talk of warfare or civil conflict for other venues to discuss in favor of digital assets and the trend of decentralization.

While neither authors have explicitly addressed crypto assets or the emergence of DeFi, yet we can still see how DeFi fits into the broader context of generational cycles and societal changes described by the Fourth Turning Framework. First, it is a movement which at its core distrusts the centralized structures which have established themselves all around us. “Don’t trust, verify” is perhaps one of the most classic and recognizable memes in the crypto space.

With debt levels and real estate prices at historical highs, arguably brought on by interest rates being set and remaining at historical lows in previous decades, young people feel a sense of crisis far more than their elders. The same generation who endure the oncoming Fourth Turning will be the ones founding the institutions for the next greater cycle, and it seems obvious that DeFi is to be a part of it.

Innovation in Response to Crisis

Following Strauss-Howe Generational theory, we should expect that during Fourth Turnings, societies face significant crises that require innovative solutions to seemingly irreconcilable problems. DeFi is one such innovation, emerging as a response to the obvious weaknesses and inefficiencies of traditional, centralized finance.

The 2008 financial crisis demonstrated that no matter how irresponsible the fiduciary’s behavior, if an institution was deemed favorable by a central bank then it would receive freshly-conjured money in response to a dire need for liquidity. Many argued that irresponsible behavior shouldn’t have been rewarded, reflecting a further degradation of institutional trust. Throughout history, our responses to major catalysts are what truly drives change and brings the reforms needed to keep humanity from spiraling out of control indefinitely.

As such, cypherpunks like Satoshi Nakamoto released the Bitcoin whitepaper which leveraged blockchain technology to create a peer-to-peer, open-sourced, global payments system. This marked a revolution with regards to concepts of the nature of money, and ultimately led to the development of automated if-then smart contracts, NFTs, and what we now call DeFi.

Transformation and Rebuilding of Institutions

During Fourth Turnings, both economic calamity and institutional transformations are common. DeFi is already disrupting traditional finance, and only picking up momentum. It isn’t just Dubai, Singapore, and Hong Kong leading the way in adoption anymore. Financial giants like J.P. Morgan Chase Bank and Blackrock are already tokenizing US Treasuries and using them as collateral for loans on a private Ethereum blockchain ledger.

By enabling peer-to-peer transactions, automated smart contracts, and decentralized money markets, DeFi offers alternatives to traditional banking and financial services without the need for centralized intermediaries. This presents opportunities for individuals to accumulate capital and improve their lives by reducing friction and productivity, not to mention reducing the cost of transacting.

In past Fourth Turning crises, institutions were brought down, rebuilt, and restructured. People protested in the streets, and bitter arguments resulted in radical changes. DeFi, with its focus on decentralization and automation, challenges the banking and financial establishment in ways not previously possible.

The Internet was always about sending information back and forth. Value was not easily transferred without using one or several intermediaries, who we need to trust and more importantly pay fees, to transact. Without knowing exactly what specific events will play out, it seems certain that the concept of transparency and decentralization will be a part of how financial institutions are restructured in response to this Fourth Turning’s crisis.

DeFi relies on distributed ledger blockchain technology and the cold, hard coding of smart contracts. These concepts are often open-sourced, and require only that users trust in mathematics and the software’s code rather than the goodwill of intermediaries who have proven time and again they don’t deserve it. The concept of trust in technology is aligned with the Fourth Turning theory’s discussion of a loss of trust in established institutions.

Final Thoughts

DeFi’s emergence and growth is an example of how societal and generational changes can drive innovation during a time of crisis and transformation, which is classic of Fourth Turnings. It reflects a changing popular attitude toward legacy institutions which has shaken people to their cores, and is the reason why DeFi is a key part of the current Fourth Turning’s narrative.

Some governments have taken hostile positions or have been unclear about regulating digital assets, perhaps as a natural reaction against a challenger to the status quo of fiat currency and centralized banking. Fortunately, digital assets can easily cross borders, and jurisdictions are incentivized to compete with one another for financial, intellectual, and human capital. Anywhere that decides to ban crypto creates opportunities for others to attract foreign investment and the accompanying economic benefits that follow.

As for governments, countries both large and small are somewhere along the way in implementing their own CBDCs. It is entirely possible that a new financial system based on a few major and a few minor regional CBDCs will replace SWIFT settlements in US dollars.

An earnest return to any gold standard is unlikely, because few governments voluntarily submit to austerity. No, gold settlements may take place, but almost certainly no gold standard will be put in place which might impede government largesse. This is perhaps one of the most potent arguments in favor or holding Bitcoin as an escape from excessive monetary inflation.

DeFi protects individuals from abuses of power, censorship, or discrimination that centralized financial institutions have shown themselves capable of time and again. Access to decentralized, permissionless financial tools and the ability to transact freely are fundamental to human dignity, liberty, and self-determination.

Unfortunately, technological barriers still need to be addressed to fully realize these ideals. Among them is scalability limitations, but even more dire is the security guarantees required for cross-chain interoperability. You see, DeFi platforms operate on decentralized, yet isolated ledgers, limiting interoperability between different protocols. This can impede the seamless transfer of assets and data across platforms.

This is where Supra Oracles (DORA) and the cross-chain, bridgeless interoperability protocol HyperNova comes in to do the heavy lifting. as the sophistication of its node architecture and built-in entropy provide the same or better security guarantees as any blockchains which pull price-feed data from its network. By facilitating the secure interoperability of digital assets across platforms, Supra offers hope to the future of DeFi through raw, cutting edge innovation. See the Moonshot Consensus algorithm for further reading.

Though treacherous, this Fourth Turning presents a once-in-a-lifetime opportunity to reshape the institutions of society. The global power struggle between centralized finance and decentralized finance will play a major role in shaping the human experience for at least a century to come.

Strap in for volatility now, and take steps to make your voices heard in defending your rights to own and transact using DeFi, before the opportunity is captured by centralized stakeholders. DeFi represents the freedom to truly own the fruits of one’s labors without asking permission. Our right to transact peer to peer using decentralized money must be defended and preserved, and knowledge is power; so spread the word.