DeFi: Destroyer of Banks

by Jul 5, 2022Articles


Before 2018 a lot of the buzz around crypto was still speculation.

The technology was groundbreaking for sure…

But beyond Bitcoin there was nothing tangible, yet.

We weren’t paying for the weekly shop using crypto and there were no flying cars running off Ethereum.

To most people outside of the space it still felt like a world of grand theory, tech babble and gold rushes.

But in 2018 something incredible happened…

We saw the birth of DeFi…

And this changed everything.

Now before we get to what DeFi is (and why it’s so revolutionary) let’s dismantle the jargon.

TradFi is ‘traditional finance’ and it’s what we’ve had in place since around 2000 BC.

Merchants gave out grain loans to farmers and traders in Babylonia… and this evolved to something akin to the modern banking system in 14th century Florence.

Now we have HSBC, JP Morgan and the rest (lucky us).

These centralised banks and financial institutions still control the flow of money.

They hold your savings… they lend… they facilitate the movement of cash from A to B and so on.

But their primary objective is always this:

To make money for themselves and their shareholders.

DeFi changes the paradigm…

A way to trade, lend, borrow and send without the need for banks

DeFi is ‘decentralised finance’.

It’s a system built on crypto technology that runs on peer-to-peer financial networks.

If you’re new to crypto the term decentralisation may still sound alien (I’ll cover this in more detail in a future article) but the bottom line is this:

DeFi allows us – ordinary people – to connect directly with lenders, borrowers and other investors.

No banks, smooth talking brokers or clearing houses.

No central point of control…

In time DeFi could even mean the end of crypto companies like Coinbase, Binance or FTX as they exist in their current form.

(These companies come under the label of CeFi, or ‘Centralised Finance’ just to add some more jargon into the mix).

Binance, the world’s largest centralised crypto exchange (where you can trade £/$/€ for crypto) hit $7.7 trillion in volume in 2021.

Their profits that year were $20 billion.

Here’s what Binance’s CEO, Changpeng Zhao, has to say about DeFi:

“I think in 5 or 10 years, decentralized exchanges will be bigger than centralized exchanges [like Binance].”

Even though it threatens the very core of his business, and the bulk of his revenue, he knows the shift is inevitable and thinks this is a good thing.

True DeFi is secure and transparent. You can’t dismantle it or destroy it and in time it won’t require these centralised, financial intermediaries to exist.

And here’s why this is such a big deal.

1.7 billion people have no access to banking services (and the rest of us are getting ripped off)

According to the World Bank 1.7 billion people globally are ‘unbanked’.

The rest of us rely on banks and other centralised, self-interested financial bodies.

Once again, their goals revolve around profit and self-preservation.

And they have vast costs…

Paperwork costs, onboarding costs, compliance costs, staff costs, commercial properties, vomit inducing bonuses and other overheads.

(JP Morgan reportedly spent $1,350 to acquire each customer for its Chase Sapphire reserve card alone).

TradFi is expensive, limiting and lacks transparency… and it’s prone to manipulation

DeFi removes the need for all this.

Coming back to that term I love squawking, it automates trust.

It’s more efficient and more robust.

So many people band around phrases like DeFi without every truly explaining what it means.

But it’s one of the first massive game changers that we’ve seen in crypto which is why it’s worth our attention here.

But isn’t crypto too volatile for these types of transactions?

This is a key point…

Not everyone wants to transact with something that could leap up or down 10%… 20%+ in a single day.

Which leads us to another game changer.

One of the major developments in DeFi has been the creation of stablecoins.

Stablecoins are existing, real world, ‘stable’ assets reflected on the blockchain.

So, for example, the US dollar.

They give us a way to operate in the decentralised world of finance using dollars rather than Bitcoin, or any other rollercoaster crypto asset.

All the benefits of crypto, without the volatility.

There are two such versions of US dollar stablecoins worth knowing about today.

The first is called USDC and the second is called USDT (also known as Tether).

But how do they work, can’t they just make up the numbers?

How does 1 USDC = 1 USD?

Here’s how it works:

USDC has a circulating supply of 34.6 billion USDC.

They also have the equivalent supply in actual US dollars.

And they are regularly audited each month for full transparency.

(USDT has around $74 billion in circulation. They’ve been less forthcoming in the past about showing their books but recently agreed to auditing by a “top 12 firm” for transparency).

So what does all this mean?

It means you can transfer, stake, borrow, lend and invest a crypto version of the US dollar in DeFi and it’s redeemable at any time at a 1:1 (or close to it) at any time.

It’s a thrilling development and it’s just the start.

In the future virtually any existing real world asset could be reflected on the blockchain allowing us to take advantage of the benefits of open, transparent new DeFi applications.

DeFi is still young.

It’s not perfect and there are wrinkles to iron out (and more than a few dodgy projects to steer clear of) but it’s right at the bleeding edge of some truly world changing applications.

Most of the DeFi magic happened in the midst of a downturn

The major DeFi projects started coming into fruition in 2018 and beyond…

Slap bang in the middle of a bear market.

Newbie investors were panicking… selling at the bottom… losing their shirts.

Creators and innovators were building and creating.

That’s the thrilling thing about crypto.

No matter what the state of the markets when the rubble clears truly great ideas emerge and flourish.

And now that landscape is more fertile still…

For the first time crypto now has that bedrock of DeFi, a real world functioning use case to build on top of and attract new talent and new ideas.

So when people cry the death of Bitcoin and crypto for the umpteenth time (as they have done parrot-like since 2009) the bleating sounds increasingly hollow and ill informed.

These kinds of developments are great for early investors…

The opportunities for investors can be enormous.

During the DeFi boom of 2020 some tokens went up exponentially: 400%… 452%… 3,229%… 3,296% and 4,125% in the space of a year. (Source Messari, Aug 6 2020).

We are still early into DeFi…

We are still early into crypto…

And there are brand new use cases for crypto we haven’t even imagined yet.

Some of these are in development (we’ll talk about some of the more interesting ones in future eletters) others will come from left field, outside of finance.

That’s why this is such an exciting space.

Crypto has the potential to affect everything.

From finance and money to art and music and everything in-between.

To see what we’re investing in right now, where our head trader Michael sees the market heading and what we think are the best opportunities to look out for, take a look at the CTA Academy.

There’s a risk free trial for new members here.

The key takeaway

Crypto is no longer ‘speculation only’.

DeFi has seen crypto explode way beyond Bitcoin to thrilling new use cases.

Ordinary people can now send, borrow, lend, stake and invest…

And they are doing just that.

We’re seeing billions transacted every day in crypto without the need for a financial intermediatory…

And this is just the start.

Bear markets are where some of the greatest innovations are made and the best investment opportunities lie.

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