How DeFi is catalysing change, progress and innovation.
Since the emergence of Bitcoin in 2008, many early adopters of cryptocurrencies went on to acquire life-changing wealth. Today, the market cap of crypto is over $2.6 trillion and places it’s economic value within the realms of companies like Apple & Google despite the space only existing for a little over 10 years. Interestingly, according to current prices, Cryptocurrency is also valued on par with the banking industry by society in economic terms too.
Crypto is a product of computer science, a subproduct of one of the many inventions that stem from the rapid progress that began at the turn of the 20th century; the time of the industrial revolution through science & progress. An outcome of tech, science & invention is that many of the world’s most pressing problems have been solved and as a result, tremendous wealth has been created for the pioneers, early adopters and investors.
Below is a chart showing some of the most world-changing inventions of the last 300 years and demonstrates the acceleration of adoption rates:
Quantitative easing, the printing press and blockchain technology as a catalyst for change
As covered in our last article, many central banks have been printing money at a rate never before seen. Across the western nations of the USA, UK & Europe, rising inflation poses a real threat to the wealth and opulence people acquired for themselves through saving money & hard work. In the UK, inflation hit a near three-year high in June and quantitative easing has recently resulted in the biggest hike in inflation rates since records began. Using quantitative easing the Bank of England has bought, in real terms, nearly all the net debt issued by the government to pay for the coronavirus crisis.
In the United States, the U.S. Dollar is being perpetually devalued due to the digital printing of trillions of new dollars; these dollars are largely issued through loans acquired by the top 1% and contribute directly to growing wealth inequality in the country.
Historically, all major currencies have been devalued and lost their purchasing power relative to goods & services - but this isn’t the primary driver of wealth loss. In fact, it is financial asset inflation that devalues purchasing power the most. This is especially true in today’s economic environment and the following link shows an example of this, highlighting how the stock price of the S&P500 has increased at a much faster rate than its earnings over the last 10 years. The 2008 crash was the catalyst for this rapid increase of central bank printing within the US.
High Price to earning (PE) ratios is a sign that markets are predicting rapid growth in future cash flows and that PE ratios will soon reach equilibrium. But will this ever happen given how large PE ratios have changed? Indeed, it is likely cash flows will grow across the major companies of western economies during the return to post-pandemic living & spending. But, considering that wages have not increased for decades and employment across western nations is considerably down, where will this extra capital come from to increase cash flows across major companies of the west? Some say it will be from people’s savings. It is broadly true that consumption and spending have been reduced during pandemic times and therefore there is a latent demand yet to be unlocked as the world returns to normal living & spending. That said, this latent demand alone cannot make up for the future income growth companies require for PE ratios to re-balance.
Another example of asset inflation is in the housing markets, “today just 1 in 10 twenty-five to thirty-four year olds earn enough to own a home in the UK”. Of those that can afford a home in the UK, 64% were helped out through inheritance — the have and have not divide is large with homeownership among UK millennials. This is a stark difference to the previous generation where 6 in 10 people could earn enough income to own a home in the UK - and this is without inheritance! Below is a graph showing a similar trend of housing price increases and yet incomes or “cash flows” not increasing at the same pace, a similar economic trend as PE ratios:
When accounting for income growth inequality, the figures for Europe and USA show similar trends to the housing crisis in the UK. Land shortage, slow house building, increasing material costs all do contribute to the shortage of housing and major price increases. But they are small factors when compared to central bank printing & lending out of capital. Retail banks in the past two decades have been more able to lend capital due to the printing of money & lowering of interest rates from central banks; this has driven major increases in house prices as more people are able to take out mortgages that are larger and can be paid off over longer spans of time. The outcome is the average UK millennial’s wage will fully purchase the average house by the time of retirement, that’s roughly 40 years of work to own a home outright.
Housing & stocks are just two examples among many showing that money printing & asset inflation creates a wealth divide and warps the price of markets.
In the name of returning economic growth and stability, central banks will continue printing. Historically, re-stabilising an economy after major downturns have occurred through lending capital to governments that then spend the capital on programs or projects that increase employment and commerce among businesses. The green deal was an example of this in the US during Roosevelt’s presidency and was America’s way of bouncing back from an economic depression. Currently, similar measures are being taken across the west with central banks printing and investing into their economies via government programmes. While it’s true these initiatives appear to be on track with their objectives, the consequence is the centralisation of economic power in the hands of the un-elected central bank officials and government.
In the past, major currencies of the world all went on to devalue and lose their power & ability to move the global economy, that is to say, governments & banks wield less power. In place of fiat currency, stores of wealth have gone on to hold purchasing power, an asset mostly owned by the rich, thereby giving them more wealth & power.
The graph below depicts the long term reality of Fiat currencies devaluing against gold:
Currency devaluation is cyclical. The transfer of wealth from people to the government and then to the rich is cyclical. Could it be that this cycle is broken for the very first time? DeFi might just do it…
Modern money is just data. The records of this data are kept and controlled by banks & influenced in large measure by government policy. With public blockchains on the other hand, these databases are with no single person or entity in control, they rely not on laws or government policy to function, but instead, trust is enabled through code & economic incentives. With no single actor or entity possessing autonomy, this allows for the emergence of financial systems that operate outside the control of governments & banks. This opens up a totally new approach to exchanging goods, services & financial assets within economies. Blockchain makes crypto possible, this offers a credible alternative to fiat currency, a form of money that history shows will devalue & create wealth divides over time. Crypto economies that are fixed in supply or designed to be deflationary, Bitcoin or Ethereum as an example, could be considered stores of wealth; they have so far shown low correlation to fiat devaluation cycles and function in very different ways. Many of these established crypto networks are showing further utility and benefits beyond a store of value too.
Crypto is a wealth creator. How? The token economies accelerate innovation. Or, said another way, hyper-coordinate the movement of labour, capital and entrepreneurship in a way that is free, democratised, global, transparent & unstoppable. Token economies are liquid stock for innovation, start-ups & tech entrepreneurs. While it’s true that current token projects are mostly financial products, the token economy will, someday, bring capital to every industry across the globe. It’s the accessible nature of token economies that allows capital to chase more bold & pioneering ideas than it ever could before; the birth of rapid & global innovation.
DeFi is a core building block for token economies to begin creating tremendous wealth & innovation. It evolves upon many of the building blocks conceptualized by traditional finance and has reimagined the power structures in a way that is much more efficient and prosperous for all. With these improvements, many retail and institutional participants are beginning to accept DeFi as a viable alternative to traditional finance. DeFi enables anyone around the globe to access previously unattainable financial services & assets. Through the power of blockchain technology, where there is internet, there is money.
Unlocking rapid innovation
I believe what took a hundred years to invent previously will be achieved in approximately half or maybe even a third of the time. As written earlier, this is due to DeFi’s ability to hyper-coordinate the movement of capital, labour & entrepreneurship.
My optimism is also based on two other factors, the adoption rate of innovation this past 300 years accelerating & the fact that now, for the first time in human history, we can build financial and data systems that are powered by protocols with the following qualities:
● They are censorship-resistant; no one can stop them.
● They are decentralized; no one controls them.
● They are permissionless; anyone can use them.
● They are secure; bad actors can never abuse them.
● They are programmable; trust is enabled through code.
● They are transparent; data is accessible and easy to use.
● They are immutable; protocols never change.
● They are progressive; innovation is rapid & open source.
Historically it has been the people that invent; the labour markets and capitalists that come together in solving hard problems with technology and in the process, profit hugely further down the line. With DeFi, given the qualities said above, there is a basis for a capitalism that is much more free, one where it is possible to invest in pioneering innovations through global & unstoppable token economies — the foundations for tremendous wealth creation.
In Summary
The adoption curve of innovation is becoming steeper and steeper, innovation is changing the way people live & work at an accelerating pace. Crypto is not just a hedge against devaluing fiat currency, Crypto is a wealth creator. The token economies hyper-coordinate the world’s resources & hyper accelerate innovation. The way people live and work is about to change faster than most might think.
About Nova Finance
Nova is a programmable asset framework that allows people to access DeFi without having to learn complex financial management skills. Within the product, users can create a portfolio of assets that auto-generate returns through yield strategies while auto-executing on investment strategies such as dollar-cost averaging, take profit calls and much more.
