Financial innovation is DeFi, not only Bitcoin
In a recent Clubhouse in which I was honored to be a panelist, there was a discussion regarding investment in Bitcoin versus other tokens.
Bitcoin is the big daddy of all cryptocurrencies. It’s worth $650 billion comprising 46% of the entire crypto market capitalization. Since it was created to be a peer-to-peer electronic currency, its transaction volume is nearly $10 billion more than the second-largest crypto, Ethereum.
Bitcoin is the oldest, most dominant cryptocurrency. It is meant to be a form of cash transfer system without governments or banks. This is a great piece of technology, a true pioneer. But this does not mean other cryptocurrencies aren’t providing valuable use cases, and, thus, value.
For instance, stablecoins allow easy transfer of money using blockchain technology with stable prices. Ethereum is building a whole swath of financial use cases using decentralized finance or DeFi. Oracles, governance tokens, DEXs, lending protocols, liquidity farming, and more, DeFi creating an endless amount of financial innovation.
Some on the aforementioned panel disagreed with the usefulness of other cryptocurrencies. Another panelist was adamant that there were no other acceptable digital asset investments. In fact, he said that all other blockchain use cases are “fucking stupid.” Terming DeFi the same.
Naturally, I didn’t agree. Having made educational content and researched digital assets that provide governance, utility, accrual, and more, I countered. I told him we don’t need DeFi to be the safest, fastest, and easiest system right now. We just need it to be better than the current financial system and have the promise of supplanting the current system. The evidence for this is the evolution of the Internet.
The problem with DeFi: Centrality and speed
His argument was no other digital assets or chains were “sufficiently decentralized.” This made them, in his opinion, subject to criticism. The question of the degree of decentralization of a protocol or a cryptocurrency is important. In my opinion, what my adversary was getting at was projects are “decentralized” because most tokens are held in a few hands, the communities are small and closely knitted, and few people still wield a lot of power. This does not solve the problem of “centralization.”
Another claim he leveled was speed. He said DeFi protocols were unsafe and slow. Banks and current payment systems, the traditional finance equivalent of DeFi protocols were much faster and safer. DeFi isn’t an evolution of traditional finance, if traditional finance is faster than DeFi, he said.
These points – lack of sufficient decentralization, slow pace, vulnerability, and other inefficiencies are valid points. Are they enough to state DeFi coins have no use cases? Or everything other than Bitcoin is “fucking stupid”? I don’t think so.
Long road but the right road for DeFi
DeFi definitely has problems. It even has hurdles to adoption from technical and security perspectives. But like any good habit, investment, or technology, it takes time. The promise of DeFi is the long term overhaul of the traditional financial system. This will only happen once we innovate over these hurdles.
DeFi’s use cases will tie together the efficiency of capital markets with participation in the global economy.
These use cases are not just limited to investing and trading either. Actual everyday financial functions will be modeled in DeFi. This will help those who do not have access to banking. DeFi will help them access credit, earn yield, custody assets, insure goods, automate transactions, and more. This allows the unbanked access to the global economy. Until now, this participation was limited to local charities and international development programs. None of these systems were truly global, transparent, and efficient. With DeFi, they are.
I might be taking the long view. So, what will getting to this end goal take? For starters, it will take – time, trust, and innovation.
Bitcoin & DeFi: A Time Difference
Bitcoin was created in 2008. The innovation has been growing since then. When we realized what was possible with just a decentralized currency, we moved to decentralize other parts of technology. Next was the internet. This eventually led to the creation of a public and codable blockchain – Ethereum. This allowed technology and finance to develop beyond peer-to-peer transactions. This innovation is continuing at a break-neck pace.
Think of all the things DeFi and Ethereum have changed. Creating assets, lending assets, earning yield on idle assets, exchanging assets, insuring assets, and storing assets. All of this with no intermediary and very little fees. I trust this innovation will continue. This innovation will overcome the hurdles of security and pseudo-centralization.
This belief is not hollow. There is a reason for this is because human beings will ALWAYS innovate. Technical and financial innovation will never cease. What started with Bitcoin, eventually led to Ethereum, which gave birth to DeFi, NFTs, DAOs, and more. Tomorrow, there will be other functions made better on blockchain technology and digital assets.
From books to trillion-dollar companies
Let’s revisit a similar story about innovation. In the mid-’90s, a guy from Seattle started selling books on something called the World Wide Web. This was when there were less than 3.2 million users on the internet, and over 90% of them were Americans. That’s about 1.1% of the population of America at the time. Did the guy from Seattle think ‘Not a lot of people are on this internet thing?’ Did we think the internet would be what it is today, with over 4 billion users, a 1,300x growth from the 90s?
By 2030, estimates suggest the total number of internet users will be 7.5 billion. That’s 60% more users than there are today. How many of them do you think will buy a book from the internet? And pay for that book using electronic money? A few decades ago we didn’t think the internet would amount to anything. Now trillion-dollar companies are built on top of it.
Back then, people would look at the guy selling books on the internet with suspicion. In the same way, some people are looking at DeFi. Think about it. Back in the 90s, would you put your credit card information on a computer to get a book? What if the book you ordered didn’t arrive? Or worse, what if your credit card information was stolen?
The alternative was easier. Just go to a book store and buy it directly. If they didn’t have the book, place an order and wait. Pay by physical cash, and you have the book.
According to the 90s naysayers, this type of commerce would never work. People won’t trust computers. They wouldn’t trust code. The internet was only good for sending the occasional email or allowing researchers to chat.
From the internet to Bitcoin to DeFi
Mainstream e-commerce as we know it today started with things like Amazon. From books, people started buying and selling all kinds of things online. Now, we have video calls, social media, and countless entertainment options.
This evolved from ordering books. Now, I can order a car to pick me up from my exact location and take me to my destination. And I don’t even need to take out my wallet to pay.
Back then, the only forms of investment were a company’s stock or government or corporate debt. These were in physical forms. Now, you can invest in contractual gold, derivatives contracts, and Bitcoin.
Bitcoin is a great investment. In fact, I think it’s the best store of value to date.
But blockchain technology is more than just Bitcoin. Decentralized ledger technology has led to more innovation and improvement in the form of DeFi.
The beginning of financial innovation
How can I be confident that innovation to produce a better, more efficient, and inclusive financial system will continue? Because we always innovate. We said this with the internet and books, now we have the internet and blockchain technology. Similarly, saying Bitcoin is the only digital asset worth investing in is like saying – “Financial innovation ended in 2008.”
I can’t believe that, because that has NEVER been the case.
Think about how much financial innovation has happened. Double-entry bookkeeping, the gold standard, equity and debt markets, derivatives, fractional reserve banking…I could go on.
We will always adapt, innovate, and evolve. We have to. And DeFi is the evolution of finance.
Paul Tudor Jones said an investment in Bitcoin is an investment in human innovation.
Then, a dismissal of DeFi is a dismissal of human innovation.
If you spend time, money, or work in digital assets it is perfectly acceptable to look at the merits of DeFi in addition to Bitcoin.