Over the past couple of years, like many others, I've watched as technologists have had a go at recreating the banking system. Smart people, they combined principles from economics with computer science to replicate ‘traditional finance’ structures in the crypto ecosystem. We’ve discussed some of their exploits here before: I went along for the ride in My Adventures in CryptoLand and, in Reinventing the Financial System, I explored some of the parallels.

The difficulty is that financial systems tend towards instability. That’s because finance is built on confidence, and confidence can be ephemeral. In traditional finance, a set of tools has accumulated over the years to support confidence, yet in the new ecosystem, similar tools can be lacking. That’s perhaps no surprise. Protections in traditional finance evolved over centuries of trial of error. Following the Napoleonic Wars in the second half of the 1810s, the UK economy was characterised by intense financial instability; it took un…