The world of cryptocurrency (crypto) and decentralized finance (DeFi) can be daunting and confusing, at least I certainly felt that way when I was first exposed to it. There is a lot of noise on social media, and it's hard to know what to trust or where to start. This is especially true during a bull run or when there's been a massive correction like we've seen the past couple weeks.
There's a lot of ground to cover, and the space is constantly changing. When I was first exploring this space, I would have liked to have a single information source to make sense of it all, which is what I'm trying to do with this blog.
Before I dive in, please let me know if there’s a topic that you'd like me to cover, or if you think I glazed over or missed something important! I'm always looking to learn something new.
OK, let's jump in.
Introduction
A lot of people who have been in the weeds with crypto and DeFi for years now, forget that the majority of the public has little more than a surface understanding of the space and even finance in general. A global financial literacy test conducted in 2015 found that only ~⅓ of the global population was financially literate, and even in the US only 57% of adults were considered financially literate. Many people I know either have no interest, believe it is without substance, or think that it's too radical or complicated to overtake our traditional financial system. I think it's always important to consider the opinions of both supporters and detractors. However, I'm going to cut straight to the conclusion and tell you that I firmly believe that crypto and DeFi are the future of finance. It has already begun, and will continue to pave the way for mass decentralization, uproot our traditional institutions (banks, schools, governments, etc.) and re-shape the way our economy functions.
These are the main reasons why crypto and DeFi are the future of finance:
Blockchain Technology
Decentralization
Global Adoption
Deflationary (mostly)
Each of these features deserves a separate blog post, but for now I'm only going to provide a high-level overview. (Note: This is not meant to be an exhaustive list, but feel free to add in the comments if you feel like I missed anything important)
Blockchain Technology
Simply put, the public blockchain is a decentralized system that contains a shared memory, which allows users to establish trust. It is the infrastructure on which crypto and DeFi operate and it lays the groundwork for all the other advantageous features listed above. Blockchain technology has evolved a lot over the last decade with the goal of scaling up and speeding up transactions, but the core concept hasn't changed: it is a permission-less network which uses a code-driven system to validate transactions, and has a number of decentralized nodes to record and verify transactions between users. In a public blockchain, anyone is allowed to join and participate in the consensus; it is fully decentralized, secured and immutable; and transactions are transparent but anonymous.
The blockchain paves the way for a decentralized, transparent and secure financial system that is outside of government or other third party control, putting the control firmly in the hands of its users. As the owner of a cryptocurrency or DeFi product, you are in full control of your asset and do not need permission from any third party or regulator in order to send, receive, or exchange that asset. In contrast, the traditional financial system is loaded with inefficiencies, misaligned objectives, and corruption. In my opinion, people should at least have the choice whether to trust a third party with their wealth, and with DeFi and crypto individuals are finally getting that choice.
Decentralization
Before the invention of bitcoin, we relied on banks and other third parties to act as trusted intermediaries to facilitate the transaction or storage of any type of financial product. Bitcoin first introduced the ground-breaking concept of an autonomous system run by computer code where no central governing body was involved. No company oversight, no shareholders to answer to, no bureaucracy. And yet, since its creation in 2009 bitcoin has been more resilient than most centrally-run organizations. It's proven itself to be a trustworthy, transparent, immutable system and people have taken note - its market cap has grown from just over $1B USD in 2013 to over $800B USD in 2021.
Source: https://www.statista.com/statistics/377382/bitcoin-market-capitalization/
With a decentralized system, there is no middleman organization so fees are greatly reduced, the 'rules' can't be changed overnight and without warning, and the system is more resilient to corruption and attacks.
However, there are some drawbacks to a decentralized network. Decentralized networks have faced scrutiny due to slow transaction speeds, high transaction costs, and disagreements within the user community, leading to forking of protocols, but I see those as short term hurdles that will be overcome and inevitably stabilize with time. As the industry matures, solutions to transaction speeds and costs will improve much in the same way that computing power increased over the last few decades, and the dominant protocols will begin to separate from the mediocre and useless protocols prior to reaching widespread adoption.
In my opinion, the main drawback of a decentralized system and hurdle to widespread adoption, is that the responsibility to understand the system lies with the individual. This is especially problematic today with so much misinformation everywhere. If you try to send bitcoin to an incorrect recipient address, it is lost forever. No one can help you - no institution will be able to recover it for you. There are a lot of scammers out there trying to trick you into sending them your crypto. People are also diving head-first into crypto and DeFi products without fully understanding it, and are gambling with their life savings. Unfortunately, it can be easy to fall into these traps if you're unfamiliar with crypto and DeFi due to the lack of regulation and protection from an overseeing body.
Not everyone has the time to learn about each cryptocurrency, each new innovation in blockchain technology, or each new DeFi product. At this point, a lot of personal research is required to understand the space well enough to use it safely and we will need to rely on big leaps in user interfaces to simplify the experience and bring down the learning curve if we hope to get extremely broad adoption.
Global Adoption
Cryptocurrencies present the first real possibility for global currencies. When cryptocurrencies reach widespread global adoption, people will be able to trade cryptocurrencies of their choosing with others across the world in seconds, in an anonymous, secure, verifiable, and reliable process. No middleman commissions and no discrimination based on ethnicity, age, gender, etc. The transaction is stripped of everything superficial and non-essential.
With this in mind, it's not difficult to see how cryptocurrencies and DeFi products can pave the way for a big shift in labour markets around the world. Globally adopted currencies facilitate sourcing work from around the globe. If work can be outsourced to anyone around the world based on nothing else but an agreed upon price and the quality of the work, it creates a level playing field.
For an example of this concept in action today, you can check out Balaji Srinivasan's website 1729.com. Balaji and other sponsors have created a pool of cryptocurrencies to fund and reward users from around the globe to participate in tasks involving topics such as cryptocurrencies, startup cities, mathematics, transhumanism, space travel, reverse aging, etc. Anyone can participate with an equal opportunity to succeed. Equal opportunity, but unequal results depending on the quality and success of the work.
Deflationary
Not all crypto is deflationary, but bitcoin certainly is and ethereum is trending in that direction and combined they make up over 60% of the total cryptocurrency market (by market capitalization) at the moment.
With bitcoin, we know that only 21 million coins will ever be mined. Approximately 18.5 million coins have been mined to-date, and current projections have the last coin mined by the year 2140. We also know that a significant chunk of coins have been lost forever due to lost private keys or coins sent to incorrect addresses. Some sources estimate that the number of bitcoins lost to-date could be as high as 3-4 million. Capped supply and high-probability that even more coins will be lost in the future - these are the reasons most consider bitcoin to be a deflationary currency, therefore increasing in value over time.
Ethereum (ether), unlike bitcoin, has no production cap so in theory, the number of ether in circulation could grow indefinitely. At launch in 2015, 72 million ether were created and today the circulating supply is around 116.1 million. However, growth has not been linear because it has become increasingly more difficult to mine. In the first year, 4.5 million ether were mined (a 4% increase in circulating supply). Furthermore, the implementation of EIP-1559 (Ethereum Improvement Proposal) in July 2021 is expected to result in a significant amount of ether being burned each year as transactions are conducted. The greater the number of transactions, the more ether is burned. The system is dynamic and difficult to estimate the exact point that ethereum becomes a deflationary cryptocurrency, but if the ethereum blockchain's popularity continues to increase it will inevitably become a deflationary currency over time.
Fiat currency is clearly inflationary but the extent to the inflation can sometimes be difficult to track. Most inflation data in the US relies on CPI (consumer price index), but there are reasons to be skeptical of using CPI as a proxy for inflation. Keep in mind, it is in the government's best interest to make interest rates appear to be consistent during unstable times to encourage a steady flow of money in the economy. Nevertheless, CPI-related inflation spiked to 4.2% following the COVID pandemic after a decade of relatively stable 2% annual inflation and there is widespread concern that inflation could be a long-term issue.
The worry with inflation is that if it spikes suddenly like it did this year, your buying power decreases significantly. Of course, all cryptocurrencies currently have price volatility far beyond current inflation rates, but crypto is still relatively young in terms of reach and adoption - it won't have the stability levels we have come to expect (~2% per year) until it reaches widespread global adoption. Nevertheless, what we've seen so far in terms of crypto being deflationary is promising and we've seen no signs that governments can offer that kind of value with their existing fiat currencies. Even gold has an inflation rate of ~1.5% per year due to additional gold being mined.
The question you have to ask yourself is, when you want to decide where to put your wealth, would you rather put it in an asset that will retain its value and possibly even increase in value over time, or would you rather put it in an asset that will steadily depreciate?
Conclusion
Crypto is not devoid of vulnerabilities or disadvantages. Some of the current drawbacks include limitations scaling, high transaction fees, forking of protocols, barriers to set up validation nodes and mining processors, etc. However, our existing financial system has many more inherent limitations and day-by-day more people are starting to realize that cryptocurrencies and DeFi products provide more value in terms of cost, security, reliability, and speed. And the gap is only widening.
Closing Thoughts
If you've stuck with me to the end, thank you. I hope you found some of this useful if you're new, and if you're experienced, please let me know if there is something you think I missed. Either way, I would really appreciate any comments or advice to help me improve. I want to cover a wide range of topics in this blog - if you have any recommendations, please let me know!
Thanks in advance and I hope you'll join me on this journey!
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