Declining Bitcoin Price Records Record Weekly Outflows Of $ 21 Million
Bitcoin is not the harbinger of financial change, but DeFi is
By: Tim Fries The closer you are to the sun, the more blind you become. These words of wisdom can be found in one form or another, relaying a simple truth about human endeavor. The closer we get to the topic, the more likely we are to miss important concepts outside of our concentration – and engage in confused thinking. This applies to the complex and pioneering world of blockchain in several ways. Fortunately, after many steps taken, we can have a more objective view in the rearview mirror. Bitcoin has become mainstream – but is its usefulness future-proof? After hitting a trillion dollar market cap and being integrated into global payment processing flows like Square’s PayPal and CashApp, it’s safe to say that Bitcoin has broken many hurdles. In the past two months, Canada has approved four Ethereum ETFs while a Bitcoin ETF was launched in February by Purpose Investments on the Toronto Stock Exchange. In the US, we have yet to see a Bitcoin ETF on the NASDAQ or the NYSE, although Kryptoin BTC ETF is currently under review by the SEC. However, the United States has to boast of another kind of milestone. The Coinbase crypto exchange was listed on NASDAQ this month under COIN, following the movement of BTC bulk prices. Source: TradingView, Bitcoin (BTC) vs Coinbase (COIN) in April 2021. It can be said with certainty that Bitcoin has become the cryptocurrency of choice for large corporations, asset management groups and hedge funds. Michael Saylor convinced many at the “Bitcoin for Corporations” conference held on February 3. They now see Bitcoin as digital gold to preserve their wealth against the devaluation of the US dollar and possible negative interest rates, which some US economists have advocated. In the meantime, as the list of companies integrating Bitcoin grows day by day, even automated accounting software like Freshbooks is now accounting for balance sheets to include Bitcoin. To this end, Bitcoin’s tendency to become a cash reserve asset continues to accelerate. If it is positive that a decentralized asset has achieved such a status, we can no longer claim that Bitcoin is a means of payment, even if it could be used as such. We also cannot claim that Bitcoin is as revolutionary as it has been described. To be sure, it’s a more convenient way to store value. It also allows the world to tap into a self-sustaining currency – unrelated to any particular nation-state or economy. Likewise, Bitcoin is at the mercy of governments. If North America and the EU decide to impose more restrictions or even dismantle Bitcoin entirely as they deploy CBDCs, it’s hard not to see Bitcoin’s value plummet. As Allianz’s chief economic adviser El-Erian told CNN last month, “I tend to tell people, be really careful. It is an asset that wants to establish itself, but it can only be established if governments allow it. And that takes a lot away from governments. It is certainly not out of the question to conceive of governments banning Bitcoin. This has happened with physical gold in the United States. They can innovate this time around and decide to de-platform Bitcoin in the context of climate change. Since Tesla invested heavily in Bitcoin and even made more profit from it than selling electric vehicles in 2020, there has been an avalanche of headlines lamenting Bitcoin’s carbon footprint. This view would align perfectly with the already existing views of big banks such as Bank of America, citing Bitcoin’s low ESG rating (environmental, social and corporate governance). At the end of the day, whether or not Bitcoin survives is not that important. Its mission – in the eyes of many – has been accomplished: to demonstrate the concept of decentralized assets to the world. Most importantly, Bitcoin will be remembered as a project that drew a true revolutionary force behind it: smart contracts. The Dangers of Centralization Even if a BTC is worth $ 1 million one day, it won’t be as valuable as the disruptive force of smart contracts, driven by the Ethereum blockchain. To understand its value, we can quickly look at Citadel Securities, to better understand the existing system in place. The Citadel conglomerate holds a huge concentration of power. It includes: A market maker. A clearinghouse. A hedge fund that regularly engages in short selling. Citadel Securities, achieving almost as much trading volume as the NASDAQ, then buys order flows from brokerage houses, like Robinhood, while participating in the DTC – Depository Trust Company. DTC owns almost all titles as digital rights. The conflict of interest and the scope for greed, exploitation and corruption are enormous. DeFi Breaking Perpetual Oversight Lag When an entity is prompted to bend the rules, it will do so at a faster and more creative pace. They will become so creative that they will create a new phenomenon – regulatory capture – in which it is difficult to discern between regulators / policy makers and those they are supposed to regulate. While this arms race is not necessarily lost, it creates so much friction and instability as it could just as easily be. Unless of course the whole playing field is changed. For the first time in history, we can reorganize the way the financial world works. At its fundamental level, this world is currently based on contracts imposed by corruptible human spirits. It’s the whole story of banking and financial markets – from stock brokers like Robinhood to the major forex trading platforms. Instead of occupying a maze of institutions to make money in the flow of this arena, blockchain-powered smart contracts can take up this space. First proposed by cryptographer Nick Szabo in 1997, smart contracts now contain the key ingredient they initially needed: blockchain. As computer programs stored in a blockchain, they can automatically execute contracts without the risk of being tampered with. In other words, there are no longer any obstacles to override all the functions that an entity such as Citadel now performs: Market Maker in Automated Market Maker (AMM): smart contract without authorization – dApp – that uses pools cash instead of buyers and sellers. Clearinghouse in a distributed data store – blockchain. Centralized Exchange to Decentralized Exchange (DEX) – using AMM and liquidity provider tokens. Uniswap is just one such contender, removing from the equation the very need to have an arms race between the regulators and the corrupters. Likewise, centralized banking – lending and borrowing – can be decentralized using cryptocurrencies as collateral. Smart contracts can automatically scan a crypto wallet to “see” how much it is already being mined. In addition, existing traditional assets such as stocks can also be tokenized, inheriting ownership of the key blockchain of immutability. Binance, the world’s largest crypto exchange, already offers two stock tokens – Tesla (TSLA) and Coinbase (COIN) – on its Binance Smart Chain (BSC). DeFi is Inevitable Like the revolutionary printing press, smart contracts are the toothpaste that can’t be put back in the tube. The rate at which certain aspects of DeFi absorb corresponding parts of the legacy financial system depends on two factors: DeFi needs to be simplified so that it can be used by the lowest common denominator. This includes interoperability between different blockchains, so the end user doesn’t even have to think about what blockchain space their transactions are in. Many believe it will likely be Ethereum as it gets closer to upgrading to ETH 2.0, giving it much-needed scalability and eco-sustainability. Top to bottom imperative. Ironically, to avoid lingering on the fringes of the financial world, DeFi needs a top-down order to have space to thrive. On paper, a layer of governance above the banks are governments. It can be laughable to think that they will exert such pressure. However, there will likely be a time when it will be more laughable to ignore smart contracts, just as the idea of the printing press would be mocked because of the monks’ lobby. In conclusion, Bitcoin is in many ways a red herring in the crypto world. It’s big because it’s the first. And it is growing because of the weaknesses of central banks. The latter can still stop it in its tracks, but what it cannot stop is DeFi – a new framework for perceiving finance – including the way it is distributed and secure. While Bitcoin has played a pivotal role in merging this new crypto-perception, DeFi is the ecosystem that could be erected to create a less corrupt world. See more from BenzingaClick here for Benzinga options trades70% of millennials spend an hour each year comparing insurance quotes; If you think you’re paying too much for home and auto insurance, check this out © 2021 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.