Why Crypto Isn’t Going Anywhere: A Simple Explanation
Why isn’t crypto going anywhere? Because banking services aren’t going anywhere. And at a functional level, decentralized finance platforms can provide the same value with a lower level of risk. Consider the simplest example of a bank’s primary function – a loan with basic credit card rates.
How Bank Loans Work
Person A wants to grow their $100K savings.
Person B wants a $100K loan to better his family by starting a small business.
If only there were a market connecting them!
Player ‘Traditional Bank’ Enters the Game
Banks play this precise role. They go to Person A and Person B matching them up as creditor and debtor.
The Traditional Bank Loan In Its Simplest Form
The bank offers each party a deal.
Bank to Person A:
“We’ll give you $2K for every year you let us hold your $100K!”
Bank to Person B:
“We’ll give you $100K right now, so long as you pay us $12K extra over the next year as interest.”
The Shakedown
A deal is struck! As shown in Figure 6, the traditional bank:
Receives $100K from Person A.
Gives the $100K to Person B.
Waits 1 year.
Takes $12K from Person B.
Gives only $2K out of the $12K to Person A.
Enriches themselves with $10K (five times Person A who supplied the capital!)
Figure 6: A Bank Loan In Its Simplest Form
Life is good. Celebrations are had. Abstract earnings pdfs are released, complete with super trustworthy, dark magic incantations like ‘Off-Balance-Sheet Arrangements’. (Bear Stearns circa 2007. A story for another time…). .
The World:
“That’s a real business, providing real value worth investing in! In fact, I’m willing to gamble on it by “buying stock”. Should the bank inject my stock purchases into earnings pdfs as ‘income’, it’s even more real! (And totally not gambling).
The World, caught up in a ‘suits + pdf = real’ psychosis.
Person A:
“This is way better than letting my $100K savings waste away with inflation!”
Person A. Don’t tell them the $2% interest won’t cover inflation. Let them be happy.
Person B:
“What the hell just happened?!”
Person B, when the 12% interest is due.
Traditional banks:
“We’re the smartest people in the room! Think of how much more we could gamble – *cough* – I mean, “over-leverage” and “mismanage credit risk” with other people’s money!”
Traditional Banks, calculating how much higher than 12 cents on the dollar they can go.
Good Questions Never Go Unpunished
Left behind in this process are those of us that reason from first principles and ask questions.
Who supplied the capital for Person B to purchase a home? Person A.
Who worked a grueling job to pay the loan interest that the banks are claiming as ‘income’? Person B.
Who was the rent-seeker that obtained 5x greater profit than the actual supplier of capital? The Traditional Bank.
“But that’s just the way it is.”
What If I Told You…
You’re welcome to fund the 1% that way, but there are other options.
A technology called blockchain exists that allows Person A and Person B to transact on their own, without having to pay 10% to a random third party.
Imagine:
Person A loans Person B $100K.
Every year until it’s paid back, Person B pays $6K in interest to Person A.
Person A and Person B are both better off.
Person A:
“So this whole time, my savings could have been earning 6% instead of 2%? Not only that, I’m helping out my fellow Person B!
Person B:
“So this whole time, I could have had a 6% interest loan instead of 12%? Not only that, I’m helping out my fellow Person A!
Traditional Banks:
“This is a Ponzi scheme, and you need us.”
Traditional Banks, government ratings agencies, and the other “we are the trustworthy experts” profiteers.
Do we, though?
Just for a minute, imagine that a group of rent-seeking institutions allowed their greed and gambling to literally wreck the world economy. Yes, that’s still glaringly atop the ole’ legacy finance resumé.
One might think such a history of poor ethics and incompetence might cause people to reconsider trusting them.
One would be wrong. Along with the Kardashians, the World chooses to focus its passion for the dramatic on blockchain endeavors:
It’s a scam! That’s not a real business! It provides no real value – certainly not a service exactly like a regular bank! It’s entirely speculation!
The World, parroting legacy media, funded by legacy finance.
The Naysayers Say Nay
When not attacking cryptocurrencies and blockchains, humans occasionally attempt to frame legacy banks’ value as inherently unique or somehow irreplaceable.
“Yes, but what if there are thousands or millions of People As and Bs? Traditional banks can match creditors and debtors at scale.”
No, technology can match creditors and debtors at scale. And where are the premier technologists? Within legacy banking systems or emerging blockchain products?
“Yes, but you can’t just assume Person A and Person B can trust each other! What if Person B never pays the money back? A traditional bank needs to act as an intermediary.”
No, some trusted process needs to act as an intermediary. And this is exactly what blockchain does, as shown mathematically in academic literature. It’s easily attainable information for those claiming to be experts on counterparty risk.
Figure 7: Ethereum: An Example Blockchain that Solves the Trust Problem
Blockchain provides a more elegant solution to the problem of trust by bypassing all of the human risks we’re unfortunately known for – greed, self-interest, bad incentive structures, tribal abstraction, and coercion.
So, Why Isn’t Crypto Going Anywhere?
Eventually, all of us – the Person As and Person Bs of the world – are going to choose to do what’s in our personal and collective best interest.
Collectively, Person A would rather help out Person B and vice versa. And they’d both rather watch the Monopoly banker move their money above the table.
But the more compelling reason cryptocurrency is here to stay lies in a timeless truth of human nature: people are going to choose what personally benefits them.
Peer-to-peer banking on the blockchain moves people’s money more quickly and at a significantly lower cost than a traditional bank.
To bet against blockchain finance and cryptocurrency is to make a long-term bet against self-interest.
People will choose to pay 5-10% less for the same fundamental banking services – ‘storing’ and ‘moving’ money, giving loans, and generating interest on investments.
People will choose convenience in a bank that never closes.
People will trust mathematics over politicians, lawyers, and banking CEOs.
Transparency over abstraction. Convenience over complacency. Mathematics over human bias.
All it takes is the collective realization the choices exist.
* Illustrations provided by the talented Zdenek Sasek
