We’re still getting tons of the same questions related to DeFi and digital scarcity. While our views have not changed from 2-3 years ago (in terms of assets to own), the growth of DeFi has been remarkable and is a high-risk high-reward situation. The reason why we wouldn’t jump straight into it is due to a risk reward profile. If we know massive institutional money is going into the top two major coins, it reduces the risk. Now if someone is already financially set for life they can go ahead and go up the risk curve to look into DeFi related assets such as AAVE, LUNA and more.
What is DeFi Again? Pretty simple, you put up a crypto currency as collateral (BTC or ETH for example) and take a loan against this collateral. That loan comes with an interest rate. The person giving the loan is protected by the assets you put up for collateral (BTC or ETH), so if the prices drop and the loan is not repaid the BTC/ETH is sent to your address. We’ve simplified this quite a bit but it is an easy way to think about it. It is similar to you giving a pawn shop $10,000 worth of gold and taking a loan out from them. If you don’t pay back the loan they keep the gold at a certain agreed upon threshold.
Now, there are multiple DeFi platforms so it is unclear (at least to us) which one will succeed “for sure”. While we’d bet that at least a few survive, the exact winner isn ’t obvious to us. What is obvious is that ETH and BTC are being used as the collateral. So what you’ve done is you’ve made BTC/ETH a usable asset. Someone with $10,000 in BTC can now take a loan out for $1,000 without giving up their BTC. This is clearly beneficial for taxes as well. You wouldn’t realize a gain on the sale if you bought it at a lower price.
The Second Group – Digital Scarcity: We’ll be dabbling in digitally scarce items in the near-future. That said, the belief that these digital items are just screen caps is beyond crazy. You are not the owner of the asset. This would be similar to saying that a particular baseball card or art piece is worthless because you can make an exact replica. The reality is you cannot make an exact replica because it would not be the original.
Take a second angle to this. Over time, as technology develops these digital art pieces will be visible in the virtual world (VR/AR). As that develops one could lock the image and only allow certain people/individuals to enter their digital museum to view the work. It is quite logical to believe that a digital museum would be of interest particularly as digital art moves from two dimensional viewing to full 3D rendering and interaction.
The NBA has already started with this development through their “NBA Moments” initiative. Instead of packs of cards, they sell digital images/clips of particular moments in NBA history. You would own that “moment” in time and as it becomes a more and more popular the value of the moment would increase. Imagine owning the last shot that Michael Jordan made over the Utah Jazz to win his last ring. Or imagine owning the moment of any well known snapshot in sports history. While it may not be interested in owning these moments, sports fanatics would be interested (creates digital collectables).
The Third Aspect is Streaming Money: If we assume that musicians can lock their content, this makes music and art even more valuable. How? A famous Artist Named X wants to release a song. He knows that people will attempt to copy it and steal it quickly. Instead he locks this music song into a smart contract that says “XYZ dollars need to be sent to unlock the song”. This creates a guaranteed return to unlock it before it gets diluted by copies and massive spread.
In an ideal world, you could also have streaming money/content. Similar to a concert, you would charge people to attend your venue by the hour/minute instead of charging people for the entire segment. Say there was a concert with 3-4 people and you only wanted to see two of them. You could lock these individuals out of the VR concert and sell the ticket based on two shows. In fact, this is something that is occurring already in a more rudimentary form. Individuals buy expensive concert tickets at the front and they live stream it. The live stream paid for the tickets so they get to experience a front row concert without the front row cost.
Finance Without an Intermediary: If you’ve been following this blog/twitter, there is simply no excuse. You should be well versed on the basics of crypto currency. Effectively, you can now buy/sell digital assets, take out loans against digital assets and create smart contracts for agreements settled in digital assets. You’ve disabled the need for a middle man.
This is significant as it allows every individual to access complex financial instruments from their phone. Instead of being kicked on or off a system, you’ll simply act as another node on the system instead.
Security: Perhaps this sounds far fetched for those that are not keeping up with changes in technology (it is a significant issue if you do not understand what is occurring). So let us look at the security side. The argument is that Bitcoin can be shut down… Well how are they going to confiscate all of the Bitcoin?
If you look at the news there is an interesting story where a man stole $60M worth of BTC. He was sent to jail with a catch: he never gave up his passcode. So while he is serving out his sentence, the coins remain locked despite authorities hoping to recoup the assets.
This is a big story as it shows how secure the network is. Unlike gold (easy to physically recoup) there is no way to grab the assets without the security code/password.
Structural Decline for Regular Finance: Outside of M&A, it is hard to see why one would be positive on the outlook for financial services. If you can take software code and offer up the exact same services without the cost (fund raising can cost up to 7% in terms of fees) why wouldn’t you switch?
With interest rates at zero or negative in many cases (along with a guaranteed loss due to inflation), holding large amounts of cash is incredibly risky. You know the value will go down over time (purchasing power). So even if you were to add a small amount into a fixed supply asset like bitcoin, the price by definition goes up (there are more millionaires than there are bitcoins).
So you have two different issues here for regular finance: 1) you can’t offer a return to your customers at 0.01% interest or less and 2) you can no longer offer fundraising services at a high cost – either the costs come down or people fund raise in entirely decentralized way.
Newer Readers: For those that are unfamiliar with our blog we have three high quality products in order: 1) Efficiency, 2) Triangle Investing and 3) Spending for Maximum Return. In order, you learn how to make a good amount of money (a million liquid within 10 years or so), how to correctly invest it and finally how we’d avoid blowing it all with intelligent spending and PED use to improve quality of life. We hold Q&As 1x a month for purchasers only.
Interesting!!! How do you think this is impacting the 3rd world countries so far and in the near future? With Nigeria already clamping down on crypto transactions as we speak!!!
Great article. Do you have additional reading recommended for DeFi assets (like paintings etc)? I understand the concept but would love to learn more or read more examples.
It reminds me of the game second life a few years back, but with an additional layer of scarcity. Just need a second life or Oasis type to be working great.
I’m interested in using DeFi for acquisition capital. Think it would be great to get Access to cheaper funding than my local market banks, as well as being able to pursue fixed rates whereas only floating rates are offered here.
I’ve seen very low rates offered by lenders in the DeFi space, who would lend at <3%?
Celsius has quoted low rates (1% with 25% LTV for BTC/others as collateral). There are obviously other options in the DeFi ‘sphere but I found them to be more geared toward shorter term loans targeting active traders. Clearly BlockFi is the standout if you are used to traditional banking style options but their rates are higher than Celsius. Not a fan of the current app-only offering by Celsius.
When the time comes, would appreciate a primer on getting started with DeFi, NFTs, and other digitally proven assets. Or a book, don’t want to ask for invaluable knowledge for free!
Following Fewocious now.
Based on my research, it appears, like you said, that several DeFi platforms could emerge as viable candidates to lead the pack. LINK, AAVE, UNI, UMA, and others. Even Synthetix. Not easy to judge now.
Thanks WSPs.
One thing about DeFi platforms is that the majority of the big ones allow lending against all kinds of cryptocurrencies (down through the DeFi space, oddballs like XRP, and including stablecoins) so it’s not just BTC/ETH that are made into usable assets, it’s a whole slew of projects. Many of those smaller projects have higher potential risk/reward skews than BTC/ETH due to more uncertainties in terms of their success, but should they play out well they’ll attract a lot of interest from DeFi lending platforms.
It’s also important to note that many of these platforms will pay interest on your crypto holdings (BlockFi and Celsius are the two big players I’ve seen so far), which they generate through lending out the crypto in their holdings. That rehypothecation is driven largely by institutional and whale demand, which gives interesting clues as to which projects are in demand by big players.
I sell international travel group health insurance policies to institutions. It’s been a tough year or so!
What career jump would you make to keep up with these trends? Go to insurance company which incorporates decentralized blockchain technology?
Getting out of the military this year and getting my MBA with the GI Bill. Yep based on what I’m seeing with DeFi, in no small part due to the content you’ve put out, if I go into finance then it’ll be more along the lines of fintech and making a career within the blockchain space, rather than something more traditional like equity or fixed income capital markets. The old boys club in that industry is really behind the times in a number of ways.
I just want to take the time to thank you guys for putting this great content out there.
I had one of those crazy going down the rabbit hole moments last night, while reading into crypto, and decided to pull up some of your old posts where you first started to write about crypto. It’s funny to see how people were calling you crazy/deluded and all sorts of hate.
Ironically, I see the exact same pattern playing out right now on your views for NFT and digital art. I’m listening, and can’t wait to invest in the space.
By the way, not sure if you recall but you helped me land a scholarship for IB with a bulge bracket, they paid for my bschool and I have been making quite a decent amount of money.
I haven’t read any other free blogs out there that have had more of an impact in my life than yours in so many tangible ways, even though I may not agree with all of your views.
Gracias
Congrats!
Imagine an online school where you pay per minute of lectures watched.
Some professors charge 0.01 a minute others $1. Watch half a lecture if you want.
Cryptographically verifiable that you streamed the content and certain number of hours / online test gets you a degree.
Best professors will charge the most and will make the most. No need for university as a middleman.
These are some of your best articles.
Keep up the great work.
Was really hoping you’d share your input on DeFi.
Looking forward to more DeFi and Non-fungible information.
Also really enjoy when you guys delve into the virtual and augmented futures of reality.
This is light years ahead of anyone else.
No other content out there, from worthy sources, worth absorbing.
Great to see a lot of the same kinds of conclusions being come to.
I spend a lot of time thinking about what the augmented and decentralized reality of everyday life will be like, and invest accordingly.
Just locked in a fire domain name from one of your predictions. If I can execute I’ll only have you boys to thank! Respect.
The old adage of “HODL” will die once DeFi fully matures. Crypto is in desperate need of utility, and simply holding an asset in hopes of scarcity driven appreciation is NOT utility.
This is why DeFi is so promising; you can actually use the assets. Now with that said, the winner in the space won’t be the biggest market cap of a single blockchain and “coin”, instead the winner will be the blockchain(s) that can interoperate with OTHER blockchains, all while maintaining secuirty. The only project that has come up with this solution is Flare Networks/Flare Finance, going live May of 2021. Which took the EVM(Etherum Virtual Machine) and other aspects from good projects, and made it better. They have already announced that XRP, DOGE, and LTC will be supported, with more assets coming closer to mainnet launch.
Imagine finance in a TRUE turstless manner.
The implications of this are world-changing. The “Sovereign Individual” parallels the defi trend in bringing power to individuals rather than massive entities like governments. How do you still think US is worth it?
This is the only blog where lots of people who buy Google and Facebook ads get together.
I run ML for one of these platforms and was wondering how much you guys are loving our ad offerings in 2020/2021. We have customer feedback that says it’s going well but would love to hear from all of you affiliate marketers YoutTubers etc since it seems like y’all had a great year.
Been a reader since 18’
Originally from the Philippines, then migrated to U.S in 19’.
Bought all 3 of your books. They have been my guide in succeeding here in the states.
Thank you. God bless you and your team.
Thanks for mentioning bitcoin back in September.
Made money on that, but I can’t sell because I don’t have anywhere better to put the cash. Just going to keep piling extra money into it and tech stocks.
Such is life.