Innovating our way to the future
Don’t defy DeFi, innovation is all we got. Innovation is our way of changing the world around us. Technology is at the forefront of human innovation, often threading its way into unregulated spaces. It’s very hard for technology to change those regulated spaces, as companies like Uber and Airbnb have learned the hard way.
The reason why innovation prospers nevertheless is that it creates new frontiers. Most physical frontiers are explored and dissolved. The “Wild West” is no longer a place for outlaws, and the “New World” turned out to be pretty old. What’s left is the oceans and space, both very interesting, but damn hard to reach. A very niche and expensive frontier, only accessible for the few.
We have since created a whole new “space”, that doesn’t require rockets to reach. A digital frontier. Where one can create new things, free from interference and regulations, allowing for maximum creativity. Creativity is what we need to innovate and change the world, for the better.
One of the area’s that is least touched by disruptive innovation, and only improved upon with technological modernization, is banking and Wall Street. Another example of something that is only accessible for the few. A banking system that uses regulatory capture and bureaucracy, to ensure their role in the (financial) world, while hindering any real disruptive financial innovation. Instead, we are left with financial engineering and a Wall Street casino in favour of the few (whales). Of course, we have seen the FinTech boom. Resulting in easier ways of accessing Wall Street, think of apps like Robinhood. Though recent developments in the GME debacle, have shown us that this is not the solution. It only puts the existing problem in a better-looking jacket.
Money as a tool to defy
As we discussed in a previous article, money is a tool, a technology to serve humankind. Wall Street is built upon money, this is where it gets its power from. In that same article, we discussed that what we use as money is subjective but relies on certain principles for it to properly function. We showed that in the last 100 years we deviated from those principles, resulting in bad money.
Luckily, on the outskirts of the digital frontier, you’ll find cryptocurrencies. Blockchain technology, owned by no one, available for everyone. Sovereign resistant, designed to be completely decentralized. A way to get, not just around, but out of the system. It allows for truly trustless transactions between humans without some king, government or corporation that has to be in the middle. No need for the violent power of the state to enforce the value of a currency.
Today, the best version of cryptocurrency is Bitcoin, combining characteristics of digital gold, a swiss bank account, and internet money. Improving on gold in certain aspects. Mostly as a store of value due to its easy access and ability to be stored digitally. Making it hard to seize but easy to verify in terms of authenticity. Unlike gold, Bitcoin is easy to send across national boundaries using the internet. It is easily divisible and somewhat programmable, which allows for further innovation, like using it in smart contracts.
Due to its decentralized nature, it requires inherent trust for the system to work. With Bitcoin, this trust necessitates a certain amount of transparency. Parts are private, but not completely.
Bitcoin or cryptocurrencies as a concept is relatively new, especially looking at the long history of stores of value and money. Bitcoin is barely 12 years old, so some people are not sure if it’s going to be around forever. Others don’t understand Proof of Work, can it break or be hacked? Does it have bugs or flaws? But every year that Bitcoin survives, facing challenges along the way, it grows and becomes stronger. Demonstrating anti-fragility, and becoming more valuable as our trust in the ‘code’ grows.
Due to its price volatility, most people still view Bitcoin as a speculative asset. And those people are correct. There’s speculation on whether Bitcoin becomes money, digital gold or a store of value. At the same time, history has shown us that what we use as money is not permanent. Especially not if it is a government-sanctioned one. So in a sense, holding any form of fiat money is also speculation on the longevity of that authority and its monetary system. There is a long history of those failing. Even in recent years, Argentina and Venezuela (to name a few) have given us a glimpse of how it looks when they fail. One of our advisors has lived through this and showed how technology like Bitcoin, Ethereum and specifically DeFi can be a way out.
Decentralized Finance (DeFi)
A lot of the energy in the crypto space is now being centered around building a decentralized Wall Street, calling it Decentralized Finance (DeFi). A whole new (improved) financial system. Which, unlike Wall Street, is open 24/7, 365 days a year and available for everyone with an internet connection. Instead of relying on banks, users have a trustless relationship with the network, relying on the math and algorithms, i.e. code underneath it.
Cryptocurrencies are often called programmable money. DeFi is the programmable financial service that is built on top of that. Traditional services like lending, borrowing and insurance, but completely decentralized and transparent. If you want to learn more about DeFi, check out our website for more information.
Despite this enormous achievement, and its potential in terms of financial autonomy, there are still a lot of people who can’t or won’t participate. Mostly due to the price volatility of these cryptocurrencies. But the DeFi space has even overcome this problem. By introducing a specific type of cryptocurrency called stablecoins, which are often pegged to the US Dollar. Instead of having to use a certain cryptocurrency that is volatile, one can still partake in these financial services while doing so in dollar-denominated terms. This in itself is also a great accomplishment, due to the complexities of trying to track an asset in the real world. These stablecoins have come a long way in mimicking the USD dollar. The best known are USDT, USDC and Dai, but new versions of stable assets are constantly being developed.
The idea of a stablecoin might seem simple, but in practice, it’s very hard to achieve without incurring a certain cost or risk. The previously mentioned examples of the most well-known stablecoins each impose one of these costs.
Since its creation, USDT is surrounded by fraud risk allegations. Meaning that people are worried that the asset might not be (fully) backed by actual dollars. The transparency is very limited, and users kind of have to take their word for it. Recently they even had to comply with the New York Attorney General and put out a composition report. This report shows that USDT is backed by 49% of unspecified commercial paper. Which goes against the ethos of DeFi. You still put your trust in a third party and resembles some of the problems which exist in the traditional banking space.
USDC is a stablecoin created by Coinbase, a more trusted and regulated version, with full transparency. This is not much different from holding normal dollars and the risks that come with that. Namely censorship risk, meaning Coinbase would have to apply to the government’s bidding. This in terms means you no longer have a decentralized and sovereign asset like you do when holding Bitcoin.
Maker, the decentralized entity that created the DAI stablecoin, negates the aforementioned risks but comes with its own, blow-up risk. Using cryptocurrencies to collateralize its DAI while maintaining a peg to the US dollar. If the collateral prices take a sharp downward turn, the system must be strong enough to overcome that and maintain its peg and solvency. As of now, the system has prevailed even through extreme scenarios like the one that happened on Black Thursday. Despite the existing risks, we foresee these types of protocols to only become more resilient in the future, building on experience.
Bottom line, there is no such thing as a free lunch. It is impossible to create something stable, in what is inherently a very volatile space, without “paying” for it.
Educate to liberate
So why are people taking on this risk? Mostly due to the enormous potential that DeFi has, being faster, safer and without borders. It’s a domain of mathematicians, hackers, tech entrepreneurs. People who dig in and start building out new ideas, and maybe one day absorb the traditional financial world as we know it today.
For most people, it’s still hard to handle, and sometimes even dangerous to manage your own crypto. Especially when it involves large sums of capital or concerns publicly exposed individuals. These people should opt for using a custodian like Coinbase, BlockFi or DeFi Capital. Have it somewhere safe, where they professionally handle your money. Put it in a vault so to speak, with the Goldman Sachs’ of the DeFi space, who can safely hold it for you.
But we need to keep in mind that this is not the point of crypto and DeFi. The point is to own your own money, becoming your own bank. So that when the government comes to seize your money or print lots of it themselves, you can always withdraw your crypto from one of these custodians and carry it yourself, on a laptop, mobile, hardware wallet or even just by remembering your private passphrase.
It starts with understanding you are replacing the banking system. It is complicated, and you need conviction, understanding why Bitcoin and DeFi are important. Going down the crypto rabbit hole, read and learn, decide how much exposure you want and start participating.
Why should I DeFi?
Most importantly, you are realizing your financial autonomy in a new decentralized financial system. Are you worried about (hyper) inflation, when countries are trying to (money) print their way out of any problem? DeFi is the most practical hedge against it, it is a flight into harder assets. It’s a decision on how prepared you want to be for the possibility of our global economic system changing completely and facing a new Bretton Woods moment.
2020 was the year where a lot of people felt that certain risks that previously were inconceivable have suddenly become conceivable; think about negative oil prices or a trillion-dollar recovery. As long as the internet stays up, crypto and DeFi would do very well in these scenarios. But even without breaking, DeFi will nevertheless replace the traditional finance world. Due to its obvious improvements on a system that has stopped innovating for the many, but enriched the few.
What doesn’t kill it, makes it stronger
Don’t defy DeFi. Bitcoin, crypto and DeFi still have risks, as all new frontiers do. Mostly because a lot of these algorithms and idea’s are new, they are not perfected yet. There are always potential problems. Every time we face one of these issues and it gets resolved, the value of the entire innovation goes up and the story becomes stronger. So with these risks comes a new digital frontier to explore and improve upon, reinventing the world of finance. Striving for continuous improvement, instead of perfection.