DeFi (Decentralized Finance) promised to revolutionize finance by cutting out banks, lawyers, and intermediaries. And it’s made incredible strides: we can now trade tokens, swap assets, and even borrow and lend—all on-chain, all without middlemen.

But here’s the reality check: DeFi still falls short of TradFi (traditional finance) in handling complex financial transactions. 

Need to buy a commercial property? Launch a startup with convertible equity? Fund a business acquisition with multiple financing components? DeFi just can’t do it—yet.

Why? Let’s get into it. And what I think is the answer.

The Limitations of Smart Contracts

Smart contracts are self-executing agreements coded on the blockchain. They’re trustless, transparent, and eliminate intermediaries. But they have serious limitations when it comes to complex finance:

  1. Not Legally Binding:
    Smart contracts aren’t recognized by courts. There is ZERO legal prose for a court to even review. If something goes wrong, you’re out of luck.
  2. Hard to Understand:
    They’re written in code, making them inaccessible to most people. And it’s pretty easy to hide malicious code in there where 99% of people won’t see it.
  3. Too Simple:
    Great for straightforward tasks (like trading or lending), but can’t handle deals with multiple financing layers, legal terms, or contingencies.

If DeFi wants to compete with TradFi, it needs to solve these issues.

Enter the “Ricardian Contract”

Ricardian contracts are a hybrid solution. They’re both:

  • Machine-Readable: Can be executed like smart contracts.
  • Human-Readable: Contain legal terms written in plain language.
  • Legally Enforceable: Courts can recognize them as valid contracts.

But here’s the catch: Ricardian contracts are complex. They require expertise in both legal language and blockchain code. This makes them difficult and expensive to create, limiting their adoption. Now…

Imagine a future where AI assists you in creating these contracts.

The Missing Piece: AI-Assisted Ricardian Smart Contracts

Let’s envision the capabilities DeFi needs to truly rival TradFi:

  1. Legal Clarity:
    Contracts that are legally enforceable and transparent.
  2. Automated Execution:
    Deals that execute automatically when conditions are met.
  3. Ease of Use:
    Simplified interfaces that allow anyone to create complex contracts without coding or legal expertise.

This is the potential of AI-assisted Ricardian smart contracts. AI could analyze the conversations during a negotiation and assist with codifying every aspect of the agreement between parties.

AI could then translate that into legal and financial terms for both parties to execute. At the same time, the AI could generate machine-executable smart contract code. And to keep things on the rails, human-in-the-loop systems sanity check (and train) the AI.

Though this technology doesn’t exist yet, it represents a likely future innovation that could unlock the full potential of DeFi. 

Now, let’s see how it could transform financial transactions.

Complex Deals, Simplified — Tokenizing the “Deal Pie”

In traditional finance, large deals rely on a “deal pie”. 

Each slice of the pie represents a different type of financing. Debt, preferred equity, mortgage, FF&E (Furniture, Fixtures & Equipment), cash flow lending, etc. 

Together, these slices fund 100% of the transaction.

With next-gen smart contracts, each slice of the financing pie could be tokenized and automated on-chain. This unlocks:

  • Secondary Market Liquidity: Trade tokens representing different parts of the financing pie.
  • Derivative Products: Create new financial instruments based on these tokens.
  • Efficiency and Accessibility: Simplify deals and reduce costs by eliminating intermediaries.

Let’s break this down with three examples.

Commercial Real Estate Syndication:
Tokenize equity, and debt. Automated profit and fee distributions. AI-driven Ricardian smart contracts define and enforce waterfall payouts. Tokenized debt and equity assets can be traded in secondary markets. Derivative products like CMBS’s can be created by pooling debt assets that are tied back to specific asset-backed tokens. This could democratize large-scale real estate investing, eliminate intermediaries, and wipe-out “off balance sheet risk” for derivatives.

Venture Capital Funding:
Automate preferred equity, convertible equity, options, and warrants using AI-assisted Ricardian smart contracts. These contracts ensure accurate, enforceable equity structures, automate vesting schedules, and simplify compliance. Investors can trade tokenized equity on DeFi platforms after hard coded lock-up periods expire, enabling liquidity and new financial instruments like equity swaps or options-based hedges.

Middle Market M&A Deals:
Tokenize FF&E, real estate, receivables, inventory, and cash flow lending enable LBO acquisitions. AI-powered smart contracts handle the legal structures, financing terms, and performance-based payouts. The traditionally-illiquid, now-tokenized assets are also tradeable on secondary markets. And derivatives are on the table.

The Big Picture — DeFi’s Path to True Financial Freedom

DeFi has the potential to revolutionize how we buy, borrow, and invest. But to truly compete with TradFi, it needs to evolve. One of the major missing pieces is a solution like AI-assisted Ricardian smart contracts.

This isn’t science fiction. It’s the next logical step for DeFi. If we build this capability, DeFi won’t just match TradFi—it will surpass it.

The Future of Finance is Waiting

DeFi has come a long way, but the best is yet to come. The ability to handle complex, legally enforceable transactions will unlock the full power of decentralized finance.

The future of financial freedom is within reach. Now it’s up to the innovators and builders to create it.

Are you ready to be part of the revolution?

Over the next few days, I’m going to nerd out and dive deep into the shortcomings in a sector of crypto that could replace the financial empire of the current world order. 

The missing pieces will come. And when they arrive, the financial kingdoms of this world will never be the same.

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Michael Hearne

I’m a serial entrepreneur, and I’ve spent the last 15 years taking companies to new levels, breaking the boundaries of innovation, and triumphing over adversity. My wife, Victoria, and I started our first business in a 2-bed/1-bath apartment with 4 kids, next to a crackhouse. We pushed through setbacks and failures to lift our family out of poverty. Along the way, I’ve learned that my struggles make me stronger. And that being the best version of me is the greatest contribution I can give to the world. It makes me a better husband, and father. It improves my health, energy, and my capacity to serve others. And it has allowed me to build businesses that make the world a better place. Today, I work for passion, to make a difference, and solve real problems in the real world through my business ventures. This little site is where I share the things I’ve learned, and am still learning, on my journey.