Crypto Economics

DeFi has many advantages for real world assets, and is rebuilding financial services on blockchain.

Let’s address a concern I hear far too often from investors: are cryptos linked to the real economy? At some level, the question makes sense for a space that self-describes itself in opposition to the world of real assets. So, let’s get real on crypto and dig into the real economy behind it.

The main criticism is somewhat similar to how financial markets are perceived. A world of financial transactions for the transactions’ sake, where no tangible benefits trickle back to the layman. The likes of the Archegos’ excesses can only give ground to such interpretation, as well as the many examples of hubris in the financial sphere. However, at a basic level financial markets empower us to be more successful by unlocking the ability to borrow, lend, invest, spend, earn, trade, and bet (yes, this is human). Even though we’re talking about intangible products, the benefits are real. With no financial markets, no trade, no prosperity, and back to the pre-Medici era.

Cryptos, as seen in Defi protocols, are no different, with the essential added bonuses of (i) a trustless system, (ii) no potentially-biased centralization, and (iii) a genially scaleable ecosystem with no boundaries. These make adoption a lot easier and faster. Remember that Defi went from 0 to $51bn TVL (Total Value Locked) in just 9 months (!).

Defi is the infrastructure that supports most financial functions on blockchain. Ethereum is valued at $240bn, as the leading public blockchain for programmable, decentralized applications. ETH operates smart contracts on-chain that are processed in blocks thanks to miners. Miners get gas fees. Total fees on ETH are ~$20m a day. By this token, ETH is valued at 33x revenues compared to 500x for BTC. Most importantly, the token ecosystem allows the main DeFi protocols to accumulate a large treasury that they could use in turn to pay people who work for their decentralized organization.

We are not talking about pocket-money here, but rather $5bn for Uniswap, $1.7bn for Compound, of $1bn for Aave in treasury money. This translates into jobs, and investments into innovation. That’s what makes crypto a tangible vector of future developments to come.