A new wave in crypto has begun and its buzzword is DeFi—which stands for decentralized finance. The idea of decentralized finance is that financial institutions can be created that are run by computers, blockchains and rules that anyone can access free of gaining permission or having to show trust or be trusted, and these cyber financial institutions run on a network of computers anywhere in the world along anarcho-capitalistic lines designed to resist outside interference.
A nice dream (perhaps), now a tangible thing that exists.
It takes forever to open a bank account and many a derriere has to be pecked. Then you can expect a regular flow of demands to prove you aren’t a drug lord or a insurgent, to carry on using their services. It took me much less than 30 minutes to buy some stablecoins and deposit them at compound.finance and have them earning me, well it’s not clear how much exactly, but let’s estimate 7% a year. I sent them no electricity bills, passport photos, drivers licenses and had no tedious forms to fill out or phone lines to queue on for 30 minutes or more to chat with someone in Bangalore to whom Mr Clem’s “phone call is very important to.”
Boom! Instantly I was earning interest and I could see it rolling up in real time. However, right now this technology is definitely version 1.0 (1. Ooooh!) and a messy thing. Interest rates move from one minute to the next; the stablecoins aren’t really stable when you are talking 7% a year and the stablecoins can oscillate around a 2% range in a day. The compound token, which you earn by participating, is a return booster but its value skids around all over the place and is impossible to predict and when it comes to knowing how much of it you will receive in the next year it is impossible to guess. Seven percent or whatever it will turn out to be, just doesn’t seem enough return for all the variables. It’s apparently safe, but like a theme park ride it feels as scary as hell when you have $10,000 locked up in it. Meanwhile Ethereum’s transaction costs have gone nuclear because of the runaway success of DeFi, so actually moving money around is prohibitively expensive unless you are dealing in say $30,000 or more.
But, it works. It’s a Model T and it sets the trajectory of a future of financial services run from blockchains via smart contracts that will cut down or morph financial institutions as Amazon AMZN cut down and is morphing retail.
If you wished you had caught Apple’s, Microsoft’s, Tesla TSLA ’s or Google’s GOOGL IPO then you have another chance at catching a world-changing wave extremely early. The bitcoin at 7 cents moment for DeFi was about six months ago, but it is still early days and that is why there is a bubble on, but one still only in its initial early stages.
My strategy is to be in on governance tokens now, just for a bit of fun in the initial run, then to buy (and trade if possible) the next series of bubbles and busts that always follows a tech revolution like this. Buy and hold is probably the best way to go. Buy and hold all the cool projects that you can actually play with. The scammers are undoubtedly on their way but the real deals amongst the oncoming cowpats will be a huge financial success and the only thing you need to do is skill up and separate the real from the scams.
Covid has changed the world and in the coming years the pace of change will be accelerated because of the dramatic aftermath brought about by the global shutdowns. The world will have to go “risk on” to recover and the winner of those races will undoubtedly grab onto the fastest and most dramatic technologies to try to drag themselves from the quicksand of economic depression. DeFi and crypto will undoubtedly be part of that and in the world that now talks in trillions of dollars, these developments will be hugely valuable.
Chambers won Journalist of the Year in the Business Market Commentary category in the State Street U.K. Institutional Press Awards in 2018.