It is interesting how those who have some idea about what cryptocurrency is doing still do not see the entire picture. Certainly, it is hard to see change as it is happening yet if we watch things long enough (and research), we can get a general idea of where things are going.
Hester Pierce is one of the more knowledgeable ones at the SEC when it comes to cryptocurrency. She has a fairly good idea what is taking place. On a couple of occasions, she put forth proposals that actually made some sense. Overall, she is a voice of reason in a realm of insanity.
That said, she still doesn't fully get it. It is not surprising since few do.
Here is what Pierce said recently:
“I think there is also a lot of promise in this industry, and the promise is not only in developing a sort of parallel financial system but also in integrating pieces of the crypto system into the traditional financial system, and I think that there’s a lot of interest in looking for ways that crypto can make our existing financial system serve more people, more effectively, and more safely, and frankly, more resiliently.”
Here we see how she gets part of it but is missing the entire picture.
Cryptocurrency Is The System
We often discuss the idea of an alternate financial system. This contrasts what we have in place today. For the moment, it is an accurate way to assess what is going on.
However, it is only a phase that we are in. This is evolutionary which results in things expanding. With more development, a larger portion of the present system will be replicated. At the same time, new innovations will arise that usurp what is offered right now.
The process is already under way. What will determine how things proceed is the shift in capital. We only need to watch the capital flows to grasp how things are changing.
This is evidenced by this chart from Defillama:
In January 2020, the total value locked in DeFi was under $1 billion. Now, about 20 months later, we see it is over $200 billion. That is an enormous move of capital away from the existing financial system.
And it is something that is not likely to stop.
DeFi continues to grow at an outstanding pace. The situation is that this only captures a percentage what is taking place. These sites only reflect certain DeFi applications. We still like to categorize things.
What is rapidly evolving is the concept of DeFi in everything. We are going to see this especially in gaming. The ability to tokenize the gaming process then have people stake it is DeFi. However, since it is not on a platform that is recognized as such, it will be overlooked. Yet, we cannot argue with the fact that those in-game assets have value and are financialized in the process.
Thus, the numbers will end up being much higher than the "official DeFi" stats reveal.
With more money comes expanded development. Over time, it only makes sense that cryptocurrency will capture a larger share of the world's transactions. We are in the very early stages but the growth rates are incredible.
Cryptocurrency will not be tying into the existing system: it will be the system.
The Tokenization of Real Estate
Much of what we are discussing is still in the abstract. Without applications that handle what we describe here, it takes a bit of imagination. However, this will be cleared up in coming years.
It will be driven home when we see the tokenization of real estate. This is the largest market in the world, accounting for a significant portion of many nation's GDP. The tentacles of this single industry are enormous.
This is also one of the most archaic, non-liquid markets we can find. Here we see a premium is often paid for that lack of liquidity. Price discovery is a bit amateurish, comparing recent sales based up, in many instances, guesswork.
Blockchain is going to change the record keeping of all physical assets. This is something that governments monopolized. In many countries, it caused people to lose their land as someone showed up "from the government" claiming the land was not theirs. Here we are going to see a new recording method, one that is immutable so that the path of ownership can be followed.
In addition, once something is tokenized, it has the potential to be traded instantly in a highly liquid market. Price discovery is ever ongoing meaning asset valuation is open for all to see. The union of buyer and seller is made easier, removing most of the intermediaries that infect the real estate market.
The reason why this will happen is the tokenization of real estate is a much better system. It provides instant opportunities to most players that do not exist at the moment. Even the big money players will benefit which only increases the likelihood that it will happen.
Financial Technology (FinTech) gained a lot of momentum about 20 years ago. Since that time, it completely disrupted the banking industry. As powerful that those entities were, they could not stop the onslaught to many parts of their business. Mortgages is where this is most evident with more than half originating in the United States outside the banking sector.
The tokenization process is the application of technology. Cryptocurrency in all its forms was developed in the digital world. This is not something that ever existed in the physical. Ultimately, it is code, no different than any other piece of information.
Of course, we see how our world changed over the last few decades due to the introduction of the Internet. Information use to reside in physical form. Yet, things such as cloud, email, and messenger programs took over the storage and transmission of information. The old system is basically dead.
We will see this happen with real estate. That will be the proverbial breaking of the damn. After that, people will look to tokenize everything.
Once that happens, cryptocurrency will eat the entire system.
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