Hedge Fund CIO On The DeFi Revolution
By Eric Peters, CIO of One River Asset Management. For those unfamiliar withe Decentralized Finance (DeFi), we urge you to read “Decentralized Finance (DeFi) 101” first.
“Revolutions are defined by the revolutionaries,” said Marcel Kasumovich, our head of research. “History may find them after the fact, but we are living with them in real time. It started with Satoshi’s anonymity. This is part of the revolutionary design. Components of the Bitcoin protocol were invented long before Satoshi brought it together in a single, stable protocol. Adam Back created hash-cash that is the currency unit of the Bitcoin protocol. Satoshi is the Picasso, the creative genius, transforming buckets of paint into an enduring philosophy. Perhaps Satoshi understood there was no timetable for success. It could take days, years, or decades to inspire a generation. The anonymity of Satoshi allows the group to live forever. We are all Satoshi.”
“It is not your average youth movement. It will not be defined by a noisy twitter debate or clever memes,” continued Marcel, placing this moment in historical context. “Vitalik Buterin was inspired by Satoshi, and the Ethereum protocol is going through its most profound transformation since its inception only a short six years ago. Would Satoshi have agreed with the Buterin fork? It is not the point. Splinters in the revolution are precisely part of the creative process; if you are not breaking things on the path to innovation, you are not doing it right. Then there is Stani Kulechov. A student of law in Helsinki Finland with an interest in programming who discovered the world of fintech through the lens of the Ethereum protocol and the smart contracts it could employ. ETHLend was created in 2017, and it is better known as the leading lending protocol of Aave.”
“Aave is now the leader in decentralized finance. There is $10bln of locked capital in Aave protocols. Almost half of the $15bln in DeFi lending happens on the Aave protocol. Of the interest paid through DeFi lending, 46% is done through Aave at an annualized rate of $245mm. It is tempting to trivialize the achievement. After all, total loans and leases in the US commercial banking system are more than $10trln. But keep in mind Stani Kulechov achieved his graduate degree in law in 2018 and his interest in computer programming was cultivated as a teenager. The revolutionaries are not chasing any traditional financial institution. They are chasing a desire to make things better, and a hope for getting closer to the truth. In Kulechov’s words, “DeFi might not replace all TradFi service providers, but it will replace the software and infrastructure that TradFi is based upon”. With no hint of irony, he observes that “TradFi becomes the gateway for DeFi.””
“Regulation. It is the word to put shivers in the spine of any traditional institution evaluating asset allocation in the digital ecosystem. Regulation will not stand for it. Regulation will slow growth. Regulation will redistribute profit. Regulation will force decentralized agencies to be on a level playing field with centralized ones – as though traditional institutions are somehow disadvantaged from capital-starved decentralized players. It is a term used to invoke fear, and it requires far more precision in its mention. The crypto economy is regulated. Ask anybody in the money service business who is registered with FinCEN and provides thousands of monthly reports on suspicious transactions, by regulatory decree. As the crypto economy enters the mainstream, it will blend with TradFi as a matter of practicality. It must and it will.”
“Regulation is the gateway for DeFi to enter the mainstream, and it is already happening. Last August, Aave received an Electronic Money Institution license from the UK Financial Conduct Authority, that allowed the protocol to trial services with UK citizens. Aave Pro will be released in this month, aimed at bringing institutions into the liquidity pool of decentralizing lending. Well-regarded smart contracts will add centralized tools such as whitelisting of addresses and know-your-customer provisions. These are precisely the steps that the FATF regulatory body would desire.”
“There is no turning back,” explained Marcel. “The technology is being tested, adopted, and admired. The revolution is happening from within institutions with leaders who see a better way. It will take time for users to see the value. After all, statues of revolutionaries are only mounted long after their work is done. But make no mistake – the people and firms who underestimate the intelligence, drive and creativity of those working on change are precisely the ones who will be, at best, left behind and, at worst, run-over by the technologies. These are not our parents’ revolutionaries.”
Each generation believes it can create a better world. Were it not so, we would still live in caves. Some generations thirst for change through revolution. That probably has to do with longer term economic and political cycles. But for whatever reason, amongst these revolutionary generations, some are more determined, effective. The 1960s-70s youth seemed radical, but they were far from French revolutionaries. Their actions failed to spark an inferno. My wife Mara grew up in a hippy enclave during that period. Her town sought to opt out of the system by going backward, living off the land, returning to simpler times.
But history rarely turns back the clock for long. That generation never had a credible plan to replace the system with something better. Nor did it have a new technology to amplify force. The establishment knew this. The youth back then presented no real threat, just the appearance of instability. Daisies and LSD.
But today’s youth have built the technologies to power revolution. Their protocols remain nascent, but if they’re allowed to flourish (or if they cannot be stopped), they will credibly replace incumbent industries that the masses have come to despise (retail banks, commercial banks, central banks, wall street, money transfer agents, credit card companies, social media companies, exchanges of every kind, censors, and the list has just started). Someday these technologies may threaten our notion of centralized government control.
In the 1960s-70s, incumbents knew the revolutionaries had no credible plan. This time, revolutionary technologies are already being rolled out. They are more efficient, cheaper, faster. They cut out the middlemen. And empower the individual. Today’s incumbents are threatened with extinction. In fact, if today’s business leaders were 30yrs younger, most would be racing to build their companies/wealth in this new field of blockchain. This is what a credible revolution looks like, waged by brilliant youth, impassioned, with fantastic ideas, immense wealth, and humanity’s most powerful technologies, applied in ways that incumbents can barely understand. And it is too early to tell exactly where this new generation will lead us, only that it is to a profoundly different future.
Sun, 07/11/2021 – 15:00