Looking Ahead For Bitcoin – Bitcoin DEFI – 007
We are going to be looking forward over the horizon about what’s happening in the Bitcoin and cryptocurrency world, because Bitcoin at its core is a very simple layer one solution.
The analogy would be the internet. With just the TCP/ IP protocol, the one that sends packets back and forth, it’s very simple. It says, “You can send packets of information back and forth between computers.”
That very simple protocol allows everything else. Email, social media, Video streaming. It’s all built on the back of a very simple protocol.
Then people come along and build layer 2 solutions- which is YouTube, which is Netflix, which is Gmail, which is Google, et cetera. So, we are going to have a look at some of the layer 2 solutions.
Here in the world of cryptocurrency- and I’m going to focus specifically on DEFI now- there are literally a million different applications you can do with cryptocurrency.
It is entirely possible it just takes over almost every single industry. I think the most interesting part, well for me, the one that creates the most social change, the one that lifts way more people out of poverty and does the most exciting things, is what we call DEFI.
DEFI stands for “decentralized finance”. So, what this means is that it’s basically taking over everything that the banks do: hedge funds, insurance companies- you name it.
The entire Wall Street- all the financial services- we’ve got bitcoin doing a store of value, we’ve got it doing payment rails (that would be MasterCard and Visa card)- but NOW what does it allow?
Everything else. We’re going to get to that right now. So, I do want to define a few things.
So, “decentralized finance” as opposed to “centralized finance”.
Centralized finance is what you’re familiar with- banks and other things, third-party organizations that have CEOs and whatever else.
But the same way what now Bitcoin is decentralized (it’s just code) and you can look at it if you understand code or if you can’t, there’s millions of people who’ve looked at it you can trust that it does what it says it does, and it eliminates an enormous number of problems.
It creates a lot of robustness that comes to the network. It’s decentralized. We’ve talked about this in other sections- you can’t shut it down. You can’t stop it. It’s just out there. It works 24/7, no matter what. There are no outages.
When you use a third party, like a bank, there is potential that things can get stolen. There is potential that there is incompetence by the management team, and they might run the business into the ground and there could eventually be bail ins.
Like Enron, all these kinds of things can happen and like companies can collapse and that can’t happen in the world of DEFI.
So, it’s about swallowing up a whole industry and bringing forth the same level of safety and trust and security that we have with Bitcoin at layer one.
Well, now the entire financial services industry, with trillions upon trillions of dollars locked up in all these different financial services, we’re talking about taking that out of the hands that are riddled with potential fraud, corruption and theft- all those things- it all evaporates.
We get a true and honest money with Bitcoin. We can now have true and honest financial services. So that’s what layer two promises us. That’s what DEFI promises us and it’s here. We are here.
So, we’ve got Bitcoin being used as money.
We’ve got Bitcoin being used to send money around, so now we’ve got payment rails. One of the next things that you would want to do is the many people who have hundreds of millions in bitcoin or tens of millions in bitcoin, or even millions in bitcoin are just making a lot of people very rich.
They have all this money now. We can sell it and then go and buy your new car and your new house and go on vacation- but why in the world would you want to do that?
Bitcoin I the best performing asset, ever.
And it’s about to go through its massive inflection point and absolutely take off like a rocket.
So, why would you want to sell your Bitcoin? Maybe you’re a multi-millionaire (maybe even a billionaire) and you want to enjoy the fruits of your wise investment decisions over the last few years. How do you access that capital?
The answer is, you use it as collateral and borrow against it.
Now, this is something that’s in the normal world, the existing world, the legacy world of financial services. They have been doing this for everything.
For example, if Bill Gates wants to buy a house, he doesn’t sell his shares in Microsoft to go and do that. He borrows against his shares because he believes those shares are going to go up, fast.
So, it’s “Here, take these shares as collateral and you lend me some dollars and I’ll go buy my house or my Ferrari or whatever it is that Bill Gates wants to buy.
Well as of about two years ago, in the Bitcoin and in the cryptocurrency world, you’ve been able to do that in a very easy way, in a centralized version. Which means there is an actual company somewhere where that does this and there are several of them.
And they’ve got CEOs and they’ve got employees. You lend them your Bitcoin; you give them your Bitcoin and they pay you interest.
They go out to the marketplace and lend you a bitcoin on your behalf and they find someone paying them more interest and they make the arbitrage in the middle.
So who is borrowing my Bitcoin? In case you’re curious, it’s the biggest companies in the world. It is Fidelity, it’s the banking companies- and they’re all trying to figure out how to do this and make it work.
But they need capital if they want to open an exchange.
If they want to, they can open all different kinds of funds- there’s just so many different applications for these companies.
They go into the world, and they borrow my Bitcoin. Why don’t they just buy it? Personally, I think it’s silly but I’m not going to tell Fidelity how to manage their risk management scenario. Obviously, they have the best in the world doing that. So, there’s these big companies and they choose to borrow bitcoin instead of buying it, on some occasions. And there is a huge marketplace for it.
It surprises me, but there are a lot of people wanting to borrow Bitcoin. They pay interest for it, so they need to pay people like us interest. So, we have Bitcoin, and we can now go and use that as collateral and that gets lent to people, so there’s that side of it.
Also, we can go we can go and use the Bitcoin and we can borrow money against it. So, it’s a two-sided street. You can give them your Bitcoin and they can lend it out and you can earn interest. It’s like a savings account at the bank. Or you can go and you put your Bitcoin in there and someone will pay you interest.
Either way it goes, they’ll give you interest.
So, the two main things that we do in financial services, well guess what?
For the last two years or three years maybe, this has worked in a centralized version. However, as of this year there are several projects, several companies coming up and doing this in a decentralized way. So, the market cap of all of cryptocurrencies is in the order of about 2 trillion, as of right now. I think it’s going to set to hit over 10 trillion very soon.
There are trillions of dollars out there and suddenly you can, in a completely anonymous way, reap all the benefits of cryptocurrency in a – I shouldn’t say anonymous or in a pseudo-anonymous way, but in a private way, in a trustless way.
There is no fear of let’s say the IRS deciding that they hate you.
There is no fear of your government wanting to label you something and saying, “we are coming to confiscate all your stuff.”
If your money is in a bank, if your money is in a centralized institution, then that centralized institution is going to hand over your money to the government. But with these decentralized solutions- you have protection. No one can confiscate your stuff. It is a much more robust system. So, with that we’ve got these DEFI projects coming out.
And they are just at various levels of engagement and various levels of adoption and various levels of trust ability. So, right now, Bitcoin has been around for like 12 years. It is extremely trusted.
However, when Bitcoin was two years old, did we trust the protocol? Were we sure it does exactly what it says does? I know there’s been thousands of pairs of eyes look at it, but maybe a hacker can find a vulnerability. Well now, 11 or 12 years later, we know that’s not going to happen. But for these new projects that are young- that’s a risk.
So you lose a lot of different risks- corruption risk, fraud risk, incompetence risk, government risk, geopolitical risk- you lose all of those risks.
You gain one risk in the world of DEFI and decentralized currency. One risk- code risk. Is there a vulnerability that a hacker can steal the money, right? And over time and over millions of pairs of eyes looking at it, eventually it becomes extremely trustworthy.
But that process takes time. Bitcoin has been through that. These new DEFI projects are not there, yet.
But this is the exciting things that we must look forward to and this kind of plays into the investment thesis as well at the same time.
We are going to go through what we’ve been through with the adoption curve. You must understand the billions of people coming into Bitcoin.
Just to recap- by 2023/2024 we are expecting 1 billion users of Bitcoin. We are currently at 200 million and by 2028 there are going to be about three billion users for crypto.
So, there are all these people coming in at the same time. There are people who no longer need to sell their Bitcoin in order to get the houses and the Ferraris and the lifestyle.
In order to get the value of them being stupid rich, they don’t need to sell their Bitcoin. They can borrow against it and just go and buy those things and hoard the Bitcoin- which is what most of us are planning to do.
So, these billions of people are going to come in and they’re going to buy the Bitcoin- except no one’s selling. I shouldn’t say no one- fewer people are selling because there are now new options to access your wealth without selling. This is an important concept.
Okay, let’s go another step further to the concept of “smart contracts”.
Smart contracts are contracts that operate- again they’re decentralized- they are run by code. They’re not run by people, so everything becomes extremely trustworthy.
So, we’ve got digital money now and that means we can have programmable money. For example, we could have a wager. We could have a bet who wins the next football game. We both put the money into a separate wallet and if team “A” wins the money goes to you- if team “B” wins- the money goes to me. And well, I don’t have to trust that you’re going to pay me.
So we can do a peer-to-peer wager. I’ve never met you- you’re on the other side of the planet. I don’t know you. I don’t trust you. I don’t need to, because there is a code. There is a code acting as the arbiter of this bet, right? Smart contracts can be anything.
“Hey, I’m going to pay you for your widgets from your factory that you’re sending from China when FedEx says they’ve delivered it, release the money.” I pay up front- you have no fear that I’m not going to pay you. Once FedEx says it’s delivered- the money goes to you.
If FedEx doesn’t say it’s delivered, it comes to me. That is Smart contracts.
There are just millions upon millions of applications of smart contracts. This is right where the Cryptocurrency world kind of divides. Bitcoin has got a very simple elementary layer one solution.
Bitcoin is the money. It does nothing else, right? There are some advantages and disadvantages to that. A lot of the other altcoins (and we’ll get into this in later sections) like Ethereum and a lot of the others- they’ve chosen a different approach.
They thought, “Okay, well we’ve seen this Bitcoin. It’s got some cool features and applications but it’s hard to do stuff with it. Maybe we can add code into layer one so that you can do stuff with it.”
You can build smart contracts right into layer one. There are pros and cons to both of those approaches.
The more things that the code does- the greater likelihood that there’s going to be a vulnerability. That there is going to be some way people can get hacked and lose their money. But bad things can go wrong. The good side is that you get a lot of features, right there on layer one. The bad side of that is that you might get a layer one chain that is too bloated.
There are other solutions for that. So, this is an interesting world happening inside the cryptocurrency world. Bitcoin has chosen to go as a very simple layer one.
It’s like the internet TCP/IP. “We are going to send packets of information back and forth, that’s all. You guys go and build your solutions on layer 2. “
And these layer 2 solutions in DEFI, they’re coming through very quickly but they’re even more advanced in the other chains where DEFI is built in right into the base layer. There are pros and negatives of that but it’s good to understand that going into this world.
So, the summary of this section is that what it is doing, this world of DEFI is decentralizing the next layer of fintech- and in the next very short amount of time you’re just going to see banks, insurance companies, funds, just as a whole, just get gobbled up by cryptocurrency.
They will just gobble up entire institutions.
Western Union? Forget about it, right?
It’s just not needed. MasterCard, Visa- it’s not needed. The whole world is going to change. The entire fintech world is going to change and become obsolete as cryptocurrency completely takes over.
So, it’s so hard to imagine that’s the things that we can’t imagine.
It’s like when TCP/IP came out. It’s like 1997 and we’ve got the internet and hey- we can send an email (if you’re good at typing out code and instructions), right? I don’t know, could we have imagined social networks?
I think we probably could have imagined email. We probably could have imagined web browsing. We probably could have imagined streaming video. “Maybe one day, you know, once we are well past dial up and we’ll be able to send the packets of information fast enough that we can stream video.” I could see that. We would have anticipated that. Would we have anticipated the phenomenon of social media? I don’t think so.
Like I said, maybe some geniuses would have, but the vast majority, I don’t think would have. So, this is just the thing that we’re in, where it is right now.
It’s just kind of working out the kinks of DEFI. In the next couple of years this is just going to explode. What’s going to happen in five years after having programmable money? Who knows?
Who knows what can be achieved? We’ve got driverless cars coming. So, we’ve now got technology where you can have money that just kind of streams- you pay per mile. Through the Lightning Network. It just pays, like a dollar per mile. And you pay for what you use. It just it goes on forever and ever.
All your services. All the different ways this can go, is mind-blowing. You just can’t keep up. Every day I read an article about some new way to use cryptocurrency that the world has never thought of before. Like someone who had expertise in farming and came up with a way to integrate it in their world and now it makes their world better. And they’re probably five years away from actually building the applications and making it work- but that’s what entrepreneurs are doing right now.