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.
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