A review of the GEW: DeFi & Cryptocurrencies

The Investment Society, together with the Finance Club had the chance to welcome Swissborg Senior Investment Manager Marco Pagnini accompanied by Fanny Laradet, the Senior Product Manager. During the conference “DeFi & cryptocurrencies”, Fanny and Marco talked about different topics such as DeFi and the cryptocurrencies world. Let us dive into what the conference was all about.

WHAT IS DEFI?

DeFi, or Decentralized Finance is a different concept than Centralized Finance which is the system humanity has been using since the dawn of time. Decentralized Finance, Blockchain, Cryptocurrencies, these are all big topics of which we do not have very good understanding. The basic crypto geek will tell you “Buy Bitcoin it will be worth $500k in 10 years, don’t make the mistake we all made back in 2015”, “crypto is the future, governments are going to be using it just like El Salvador”. Okay thank you, I already heard that countless times, maybe if you illustrate how the blockchain and whole crypto market operates, I will be more open to it. Well, it is clearly not simple, and we cannot elucidate it this easily, but let us clear up what is Decentralized Finance as this innovation will help us decentralize core traditional financial use cases like trading, lending, wealth management, payment, insurance on the blockchain…

To understand Decentralized Finance, let us clarify what Centralized Finance is. The first trade that ever happened on earth is barter and for a very long time, we lived and prospered thanks to barter. Lots of evidence show that before we even settled down as early humans, we based our trades on exchanges of things we made or found. But as soon as we started to cultivate the earth and form societies, we started to specialize and that meant that trading became a necessity and was no longer a choice. Before focusing on “international” trade, let us first concentrate on local trade, because at one-point humans were very often in a situation called the coincidence of wants, meaning I have a good or service you crave, and you have a good or service that I crave. Let’s say I make clothes and you make food; I am hungry, and you need a shirt so that you can avoid the cold when you are cultivating your earth, this situation is ideal. Now what if I want your food but you already have a shirt, then maybe we will find a third party that can help us make our trade possible, the problem is that a lot of time will be consumed and if we do not find the third good that will make our trade possible, there will be complications, especially considering the lack of transportation and refrigeration at the time.

OUR JOURNEY TO THE CREATION OF A CENTRALIZED SYSTEM ~ CEFI

The situation of coincidence of wants is very ideal, so trades became a challenge that got more and more complicated thus a third external good was more and more needed. Wouldn’t it be convenient if there was a universal third good that everybody wants and would trade for, so that we wouldn’t have to make a long chain of bartering every time we wanted to make a deal? This is when money comes in. Throughout our history, we used different types of currencies: cattle (livestock) were very practical and durable, alcohol was used as a currency when Europeans arrived in America, cigarettes were used in prisons, tools and knives made of precious metal in ancient China were the first examples of money out of precious materials etc., but my favourite has to be in the Roman Empire when soldiers were paid in salt instead of money, hence the word ‘salary’. With our evolution and the creation of societies, from Babylon to New York, regulations had to be implemented and thus a centralized system that keeps the money of a state, controls the amount of money in circulation and lends money to particulars had to be installed. Banks got created half a millennium earlier and brought with them the regulated system we have been using since. In a society, we will find people that lend money to the bank as their savings, and people that borrow money for their investment. I will put in the bank an amount of CHF10 and get guaranteed a yearly return of 2%, which means that at the end of the year, I will have CHF10.20, but how does the bank get this increase of value? This is when you come in, by getting a loan at an interest rate that is higher than my return rate, 7% rate for instance, so at the end of year, you will give CHF10.70 back to the bank on a CHF10 loan. And this is how banks get money in a centralized, guided way. Of course, people could get a loan from particulars, but lots of externalities come from this kind of deals, such as Ponzi schemes (Bernard Madoff).

DEFI

We saw that throughout history, we used very different types of money, and this is far from changing. As of today, thanks to digitalization among others, our fortunes are literally a huge streak of 0 and 1. The Decentralized Finance system, like the salt system in the roman empire, is not very different from the banking system, it is a way to make trades between two particulars, except WITHOUT the intervention of a “superior entity”, a third party.

SWITCHING TO CRYPTO

Swissborg Senior Investment Manager Marco Pagnini pictures the crypto adoption like the World Wide Web adoption. Only in recent years, you are expected to have Wi-Fi wherever you go, so it took us approximately 20 years to completely adapt. As of today, while countries like Nigeria are banning Bitcoin, countries like El Salvador are even using it as a currency. As we know, the process of inclusion of a new technology in a market is composed of different groups of people: innovators (2.5%), early adopters (13.5%), early majority (34%), late majority (34%) and finally laggards (16%). Today, lots of SME (Small & Medium-sized Enterprises) are adopting Bitcoin and other crypto currencies as a valid payment method so this could be seen as the start of a new era, the era where even our assets are online, the era where Facebook decides to convert itself into Meta and thus starts the phase where digital matters more to us than physical. Is it a good or a bad thing though? Like Shaan Puri said, it is neither good nor bad, it is just a thing, a very different thing. Although I can say that with great innovation comes great destruction. Every time a new technology rises, the older technology must go, just like Spotify ended the iPod/MP3 reign. Cryptocurrencies and the blockchain are a huge step of our evolution, but since it is not regulated by a superior entity and most importantly as it is untraceable, crypto also comes with great challenges such as the use on black markets, dark web…

SHITCOINS AND THE INFLUENCE OF MEMES

While in the 70s and 80s, people were spending days reading books about the stock market to get a 7% year-return, kids today will “yolo” their savings on “shitcoins”. What are shitcoins? We could label them as the imposters of the crypto game. The most famous one has to be Dogecoin. Glauber Contessoto is a guy that became a millionaire in 69 days thanks to Doge, according to him, but why would anyone invest in a technology that is clearly a joke and still become a millionaire? The answer is memes. Memes are extremely powerful, but they are no more than short lived stories that are here today but gone tomorrow, short lived moments that we can use to make money, in other words, calculated gambling. Furthermore, no one can argue the influence of a tweet posted by Elon Musk on crypto markets. The crypto market is unstable without doubt and even if it went to $500k by 2030, it could also go to $10 in 2030 or even next year.

SHOULD I YOLO ALL OF MY SAVINGS ON SHIB?

The oversimplification of the crypto world we just saw is proof that crypto has its pros and cons. Cryptocurrencies are used on black markets thanks to their intractability, crypto’s mining is most of the time harmful to the environment, crypto markets are highly volatile but, they made lots of people rich and in the end, investors will put their money into the assets they believe would bring them the best return on investment. Crypto is a technology that brings value and wealth comes from creating value. If you want my point of view, we are on the phase of early adopters in the crypto adoption cycle and the fact that big companies like Tesla or countries like El Salvador are starting to consider it is evidence that the crypto market is not likely to collapse soon. Nevertheless, the volatility of the markets is something that we as particulars have no influence on and a crisis causing the blast of the bubble is not impossible. All things considered, I will end this by stating the golden rule, “Invest only what you are ready to use”.