How long does it take before people to realize a tsunami is brewing? The water is stirring long before the waves are causing catastrophic damage. When the 40 footers are bearing down upon one, it is way too late.
This is the situation that is brewing with the financial system yet few realize it. Decentralized Finance is becoming a major force, although that is not truly evident at this moment. However, a few simple projections and we can see how powerful this truly is. In fact, we are aligning ourselves for a complete paradigm shift.
The reason this is likely is because DeFi, Mark Cuban aside, is a much better system than we have now.
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Over the last 18 months, the industry saw incredible growth. Of course, this is just the beginning. Eventually we are going to see most every community offering DeFi services to their members. The code is available to anyone and that will cause replication as more structure is put in place.
DeFi allows anyone in the world to lend or borrow blockchain assets. It is done using simple downloadable wallets and can be done 24/7/365. The DeFi world never closes. At the same time, we are seeing the infrastructure being put in place to host more advanced financial activities. People are going to be able to invest in synthetic assets, engage in leverage trades, bet on futures, underwrite insurance, and become an automated market maker.
Obviously, we can see the opportunities that are available to individuals expanding rapidly.
The financial collapse in 2008 taught us something very valuable. While many talk about the importance of privacy, it can open up systemic risk. Since the banks were actually leveraging to a much greater degree than anyone realized, we saw the entire economy turned upside down. The fact that nobody was truly aware what the financial sector was up to resulted in losses of trillions of dollars.
DeFi is transparent, bringing a degree of safety to the entire economic system. Ironic when there are calls for regulation considering the fact that regulation (or regulators) did not work last time.
Another problem exposed, especially with AIG, was the fact that counter-party risk opened seemingly safe investments to a great deal of risk. Insurance is only as good as the party that is providing it. If that entity goes down, then the insurance policy is worthless. This is what the holders of billions in CDOs found out.
DeFi has no counterparty risk. All transactions occur based upon the code established in the smart contract. This means that not only is it transparent but is also executed based upon code and not individuals. This, according to many, is a step in the right direction.
We are literally watching the concept of "out with the old, in with the new". While it is not complete, this is the path that is being taken.
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Think for a moment about Bitcoin. It took a little over a decade to go from nothing to a trillion dollar asset. Here we see the march is not likely done as the role of "digital gold" is just getting started. However, it is not outrageous to think that this asset class, which was worth near nothing a decade ago, could rival a $10 trillion market. With the demographic shifts that are taking place, it is likely that Bitcoin is embraced by many Millennials as their "gold play". In fact, there are now publicly traded companies that are holding Bitcoin on their balance sheet. Who would have thought that circa 2013?
It looks like DeFi unfolding in a similar manner. Those who dismiss it do so at their own risk. We are already seeing trillions in settlements taking place each year, an amount that is only going to grow. The industry is working on some of its challenges at the moment which are hindering the growth. Ease of onboarding and scaling are two areas that jump out. When these two are resolved, we could see a massive explosion in this arena.
DeFi is not going away. This is something that will be available to anyone going forward. As much as the traditional segment wants to control things, the horse has already left the barn. What we need to do now is ensure decentralization.
There are a lot of advantages to DeFi. We do run the risk, however, of opening up the door for issues by building mostly on centralized chains that appear to be decentralized but are not. In the quest for lower fees and faster transactions, we are sacrificing decentralization. This could allow the major financial players to step in and replicate.
DeFi must be decentralized. If it is not, the entire structure is apt to be hijacked. Just like Bitcoin is starting to be taken over by the major money players, DeFi could head down the same path. One of the larger banks could set up a "DeFi platform" that is fully under their control and simply appears to be DeFi.
We must prepare for the day when some of the traditional players will be involved. All are not going to be eliminated. The banking sector consolidated over the last few decades, resulting in a few major entities who swallowed up a lot of their rivals. These companies are likely going to keep this up and expand into other areas. Certainly, there will be ones that disappear, just like happened with the newspapers. However, the ones that survive will do so through adaptation.
That said, most of the industry does not realize what is about to happen.
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It will not be long before all kinds of stuff is being traded on DeFi platforms. Concert tickets, stocks, futures contracts, collectibles, and even socks (anyone have any Unisocks?) are going to be available on these platforms. People will be able engage in these markets anytime they like.
The key will be where the liquidity is located. As more digital assets are produced, we see the opportunity for value to result. This is stimulated by the network effect. It is essentially what will skyrocket the entire DeFi market.
As more people get involved, the value of the existing assets increases. This creates more value to play with, serving as the basis for the entire ecosystem. Over time, to satisfy these people, more assets are developed. This, too, adds to the value basis. Of course, the entire process only serves to attract more individuals, sending the process on an upward spiral.
Another element we see is the attraction of thousands of developers and software engineers. As things keep growing, they are alerted to the potential and join the fray. Here we see the development accelerated as more code is being typed out each day. Hence, it all becomes a circular system moving in an upward direction.
It is vital that anyone involved in cryptocurrency start to explore the different DeFi offerings. This is a financial structure that will become a part of our everyday lives. Just like with cryptocurrency, it is better to learn about it early. Those that do so will be in a better position than those who come at a later date.
There is a lot of noise around cryptocurrency and DeFi. Do not buy into it. This is moving forward. The number of people involved dwarfs the total involved in governments around the world. The technological advancement that we will see over the next few years is going to really alter the financial landscape.
Cryptocurrency was a joke to many not too long ago. Now it is worth more than a trillion dollars. What was once novel is becoming a legitimate player on the global stage.
DeFi is going to be a major part of this. Those involved in it grasp this concept. It is something the establishment is struggling to figure out.
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