Things That Don't Change

Level 2 - Value Investor

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A recent video clip from Jeff Bezos went viral again on Twitter.

In it, he says:

“I frequently get the question ‘what’s going to change in 10 years’ and rarely get the question ‘what’s not going to change in the next 10 years’”

His view is that you can build a business strategy around the things that are stable in time.

Businesses are essentially vehicles that give customers what they want. Few other people on this planet have proven they can deliver on what customers want as well as Jeff Bezos and Amazon.

The core foundations of consumers wanting products cheaper and faster are not just specific to Amazon.

DeFi is founded on many of the same principles.

A cheaper, faster, 24/7, global financial system accessible by anyone from the comforts of their home or on the go.

Whether it’s 10 years or 100 years from now, there is no world in which people will want their transactions to be more expensive, slower, or more limited by geography or time of day.

The pain points DeFi solves are never going to change. The promises upon which DeFi is built are as strong, if not stronger than what Amazon delivers.

We’re not saying the problems are solved today. DeFi can still get cheaper and faster (ETH transaction fees spiked to $100 last week!). It’s still too complex to be considered accessible to all.

But the transition from snail mail to email didn’t happen overnight. It took decades for email to reach mainstream dominance. DeFi is only a few years old (although we will admit that one year in crypto feels like ten). Today's DeFi users, much like early email adopters, are tech-savvy and value efficiency, transparency, and accessibility, which DeFi provides.

Remember the Big Picture

Whether prices go up or down we make sure to keep an eye on the big picture. This ensures we never get emotional whether prices are good or bad in the short-term.

Smart contracts already have the capability to replace the vast majority of transactions. You can take out a collateralized loan, automate payments, pay for goods and services, and receive “receipts” for all your transactions.

Image source: Sably

DeFi goes far beyond just a digital alternative to traditional banking; it represents a fundamental shift in the way we think about financial systems. This transformation is largely driven by a key feature of DeFi known as "composability," often likened to the concept of "Legos”.

In essence, composability in DeFi allows for the creation of complex financial services by combining simpler, modular components. Each of these components, or "DeFi Legos," can interact seamlessly with one another due to the interoperable nature of the tech. This is a stark contrast to the siloed and rigid structures of conventional financial systems.

Developers can build new financial products by repurposing and integrating existing ones. This approach has led to the rapid evolution of a diverse range of financial services in the DeFi space, from relatively simple lending and borrowing platforms to complex automated investment strategies. It also allows for continuous improvement and adaptation of services, as components can be upgraded or replaced without disrupting the entire system.

Moreover, composability in DeFi democratizes financial innovation. In TradFi, creating a new financial product often requires substantial capital and regulatory navigation, limiting innovation to well-funded institutions (i.e. banks and asset managers). DeFi levels the playing field. Small teams and even individual developers contribute meaningfully to the space.

DeFi embodies the fact that good ideas can come from anywhere. And while there is a long way to go to provide cheap and accessible financial services to everyone, anyone can build in DeFi if they learn to code.

Betting on DeFi is betting that human ingenuity will improve upon “stable problems” — cheaper, faster, more accessible finance.

Where It’s All Going

Banks have traditionally benefitted from their “one-stop shop” model where they provide all your financial services needs (whether that’s consumers or institutions). This, along with regulations, have allowed them to accumulate huge sums of capital and solidify their influence in global economies.

Banks operate within a highly regulated, centralized framework, functioning as the primary intermediaries in financial transactions. Their business model revolves around deposit-taking and lending, generating revenue through interest rate spreads.

These banks have huge operational costs, including extensive physical branch networks and staff, which often translate into higher service fees and interest rates for customers. Their global operations are impeded by cross-border transaction inefficiencies and regulatory complexities.

As a result, banks have failed to adapt to the rapid changes in tech that consumers have become accustomed to. Banks didn’t evolve into cheap and fast operators like Amazon because, frankly, they can’t. They’re too darn slow.

Financial services is largely a middleman industry. Would you rather have your middleman be waiting at the end of a half hour line-up that is only open until 5pm or available to you from wherever, whenever, as long as you have an internet connection?

DeFi:

• Reduces friction costs - gas fees will eventually come down

• Reduces overhead costs as there are no physical locations, just code

• Reduces human overhead as you’ve replaced thousands of bankers with 100 coders

• Lets anyone provide financial services (such as lending and market making)

DeFi’s lean operational model can offer more competitive interest rates on deposits and loans, potentially diverting customers from traditional banks. Crypto more broadly is likely to seize a substantial market share in international transactions by facilitating faster, cheaper, and more efficient cross-border payments.

The agility of DeFi in product development and customization is a heavily overlooked point in most discussions.

Banks can continue to optimize their costs and invest in new “fintech ventures” but DeFi is a fundamentally better solution. It’s not possible for banks to go DeFi because that would crater their existing businesses entirely.

What banks can do is improve their existing services to be cheaper, faster, global, and run 24/7. They can compete for the consumer. Of course, that would require enough organizational mobility to uproot decades of banking sector rigidity. Regulations would also have to change to allow for more seamless international transfers. This is extremely unlikely due to existing KYC/AML regulations.

What to Do

Over the years, DeFi (and crypto more broadly) has captured the attention of millions of people not just because of the tech, but also because anyone can buy tokens that represent utility or value for the underlying project.

The result? Huge, often sudden, financial windfalls to those who stuck around. In relation to real development, we find that crypto gets way ahead of itself, time and time again. This is due to the seemingly limitless opportunities for financial gain. To solve this will require 1) development and 2) adoption. There are a lot of smart people working on crypto’s problems, but the problems are hard. These factors combined means crypto’s speculative booms are inevitable.

Here’s how to best take advantage.

1. Education and Continuous Learning

• Basics: Start by gaining a thorough understanding of crypto and how DeFi platforms operate.

• Staying updated: The sector is rapidly evolving, so stay informed about the latest developments, technologies, and trends.

Since you’re reading this, you’re already doing well on this front. Become a paid subscriber to go deeper down the rabbit hole.

2. Technical Skills

• Developers: For those looking to actively participate in DeFi development, strong technical skills in blockchain / smart contract development are essential.

• Non-developers: Non-developers should familiarize themselves with the use of DeFi platforms and tools, understanding their interfaces and functionalities.

3. Invest and Experiment

• Invest strategically: Focus on one or two areas of crypto and get acclimated

• Experiment: Small-scale experimentation with new projects and protocols is the best way to learn. You may also get an airdrop.

4. Risk Management

• Prioritize security: Given the decentralized nature of DeFi, personal and operational cybersecurity should be a top priority.

• Understand the risks: Acknowledge the risks inherent in DeFi, including market volatility, regulatory uncertainties, and technological vulnerabilities.

The final point is a mental one — exercise patience. Booms and busts in crypto are inevitable. Avoid FOMO when it runs, avoid panic when it deflates. By recognizing that these cycles are inevitable, you can rest assured the crypto is not dead when everyone says it is.

Until next time..

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Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are opinions from an anonymous group of cartoon animals with Wall Street and Software backgrounds.

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