Ethereum is rising, and in great part it is doing so because decentralized finance (defi) is booming, and decentralized finance is booming because this is now beginning to become a proper real financial market.
Currently, hopefully many of the dapp devs won’t be offended if we say it’s a highly amateur one. There’s significant innovation, and some professionalism, but it’s not something you want your mum anywhere near.
This is the space for young kids with their lunch money playing about on farming grounds and it’s a new city really, even a new frontier.
Yet they’re not quite playing. It does feel like a game of online ping pong alongside others on a racing track with dum and smart bots flying above and below at the dawn of digital finance.
But it’s more a process of refining new capabilities with the aim of eventually getting them to a sufficient level of robustness for grandma.
For example, except for Defi and the Crypo one, the rest of the above pictured global money is estimates because no one really knows just how much gold is out there, or how many properties and how much they would be worth, and as we saw in 2008, no one has any clue about derivatives.
For stocks they could maybe get a better estimate, but we’re sure it does not include the stocks traded on some Albanian stock exchange for example, or some other exotic place.
By global, what they mean is more Europe and America really, and maybe China, and even there the market is significantly inefficient in as far as plenty have no clue about what’s going on in the market.
While for what’s going on in defi, it’s as easy as getting some coder to write some lines of code and put up a nice dashboard to very quickly tell us what’s going on.
This chart from Andrew Kang, a VC investor, hasn’t been authenticated by us so we cant vouch for its conclusions, but it makes the point that defi dapps are businesses, and therefore can be evaluated like a traditional business.
That’s because they have revenue, so unlike something like Dogecoin which primarily depends on whether someone else wants to buy it, defi dapps depend on the level of demand for their services.
Unlike Wirecard which symbolizes the general ease of fraud in traditional markets, the revenue in defi and what happens to that revenue is hard coded in the contract.
We can be certain for example of precisely how much YFI is received in fees or whatever other revenue source, like potentially a percentage of profits.
And we can see whether that was used to buy YFI in a dividend distribution of sorts if that is their chosen method of distribution with all this decided by token holders.
We can also see how much of this YFI is being lended say on Compound as well as who is borrowing it, how much, when, and potentially even why if for example he goes to Uniswap and converts it to eth and puts that on Compound.
Banks can also see much of this in traditional finance as we saw for example with credit cards moving to charge on cash basis bitcoin purchases in 2018, showing they know it is bitcoin being bought.
However, the system there is balkanized in as far as not only we can’t see it, or researchers, but other banks can’t see it either, or regulators.
So when banks collapsed, no one knew what was going on. They just demanded half a trillion or else the ATMs would stop working, the government on behalf of the taxpayers obliged.
The official report on what went wrong concluded everyone is to blame, showing again no one had a clue or has a clue even now years on about what went on.
Well, except Nakamoto presumably who concluded what went wrong is the entire trust based system, therefore a new one was needed that puts the trust on code and the only way it can do so is by the code being transparent.
Stocks on Code
The fundamental problem with traditional finance is that no one can know for certain just how much of something is out there.
That includes even cash itself. Some of you have probably heard of some missing $2 trillion in USD cash. Speculation, rumors, or maybe real, but even for things like how much is in circulation, one has to fall back on estimates.
The same applies for stocks and in both cases it applies even without bringing fraud into the equation.
Fraud must be brought in however because it’s far too easy to do. It is too easy because there is no real auditability as auditability relies on turtles all the way down that just decide to stop at the auditors who themselves have to be trusted and can very easily engage in fraud.
That fraud has huge costs both directly in the fraud itself but also indirectly in that vast systems have to be set up to make such fraud as hard as possible.
Thus you have all these disclosure requirements, expensive accounting firms, and still you get a Wirecard or Enron, with those being just the ones caught.
Then there’s the other sort of fraud, abuse of trust or fiduciary obligations as shown in the case of Pension Funds winning in a lawsuit against banks for the latter’s use of stocks deposited with them to lend to shortsellers.
It would be easy to say crypto sorts out all this, but that’s not true. You do still need custody, unless smart contracts reach the stage where they can be the custodian. You can’t put a semiconductor manufacturer on a smart contract for example, so that would be limited to just the stock bit and therefore there can still be fraud on the revenue part.
Yet one can easily say that crypto sorts out at least some of this, and that it does so is probably undeniable for its quality of a hardcoded contract that orders the asset a certain way is a simple factual matter.
Slow Lane to Venus?
So where are these e-stocks? Well, if you look above you can see some of them, they’re just called tokens instead of stocks.
They’re somewhat unique however in as far as they’re code based, so disclosure requirements here wouldn’t be needed because the code reveals things like revenue by the second.
For traditional companies like SpaceX, you’d still need disclosure, but for an SPX token stock, we can be certain at any time just how many SPXs there are.
If SPX was instead a traditional stock issued by a bank, we can be fairly sure how many SPXs there are, but not certain.
Not certain because the bank can change its ledger. It generally doesn’t, but it can. And if it doesn’t directly, it can somewhat indirectly manipulate supply by double or triple lending the same asset even if it doesn’t have the asset.
You can argue the same applies in defi with collateralization, but at least we can see what’s going on there and obviously there’s a limit to it because you need a base asset on which the rest ‘runs’ on top, while only the bank can see whether it has 3x or 100x lended the same thing.
The open nature of something like ethereum therefore is a paradigm shift for finance because it does disrupt it and fully, but naturally it does so fairly slowly as any such complex transition has to be gradual.
Moreover the tech needs to be strengthened to be able to handle world trade volumes, something balkanized databases can do easily, but one shared database gets into tradeoffs.
Meaning for some time there probably will continue to be different global databases as ethereum is pioneering the defi prototypes, but whether it can also be the one to next level, remains to be seen.
What is probably somewhat safe to say however is that within a decade, a shift will have occurred from traditional finance to new finance provided this generation can keep at bay the dogs of geopolitics which once more dare bark in distraction.