economics

Should You Care About Cryptocurrency and Decentralized Finance?

Bitcoin, along with other cryptocurrencies, are gaining a lot of public and media attention. Some of it is positive. Some of it is negative. Should you care about crypto and its future?

The short answer is yes. There seems, however, to be a significant misunderstanding and misnomer about the term “cryptocurrency.” As the name suggests, it implies a digital form of currency for a medium of exchange between goods and services. In laymen’s terms, cryptocurrency implies something analogous to a digital dollar—an electronic variation of fiat currency. While some cryptocurrencies, like Bitcoin and Litecoin, were designed with that in mind, the cryptospace is far more diverse and deeper than mere digital currency.

What really drives cryptocurrency? Cryptocurrencies are more like the energy, the fuel, or the power, that enables digital technological ecosystems to operate. Blockchains, smart contracts, nodes, and other digital technologies that operate in an ecosystem require something to power it up. This is where decentralized finance (DeFi) cryptocurrencies come into play. Unlike Bitcoin or Litecoin, DeFi coins are the energy for ecosystems to function, provide the cost of transaction on the network, and keep the system operational. No cryptocurrency in the ecosystem, no operational ability. In the world of DeFi, this makes the cryptocurrency valuable and with rewards offered to those who stake, there are incentives for usage by those who hold the coins.

Factors driving the value of cryptocurrencies are manifold. There is the practicality of the technology that fuels the cryptospace: blockchains, smart contracts, node deployment, NFTs (non-fungible tokens). Technologically speaking, the technology that cryptocurrency networks operate on are indisputably practical—our digital future guarantees that. Those who claim crypto have no intrinsic value fundamentally misunderstand cryptocurrency and seem to be unaware of the technology that underpins it. Then there are the memes and media attention (positive and negative) that attract people to said cryptocurrencies and technologies and trigger buying and selling sprees that have the potential to “moon” (rapid growth in value) the currency or cause a sharp crash and correction which manifests itself in the extreme volatility of the cryptospace. Furthermore, successful developments and launches of test protocols, ecosystems, updates, ecosystem construction, and contracts for development, also impact the value of cryptocurrencies. Better development and better deals give reason for bulls to be confident. Government action (positive or negative) toward cryptocurrencies can also cause fear, uncertainty, and doubt (FUD) or euphoria pending on the news. Lastly, fair market value fluctuations also cause swing—particularly steep corrections after massive gains (doubling in value in a single day is not out of the realm of possibility for certain small cap altcoins).

Whether proof-of-work cryptocurrencies like Bitcoin ultimately survive and thrive in the long-run (most likely, in my opinion), DeFi (with their generally carbon neutral proof of stake systems and coins) is certainly in everybody’s future. Furthermore, the places around the world that stand to benefit the most from the successful integration of DeFi crypto in the world are developing countries and continents: South America, Africa, and the poorer regions of Asia and the Middle East. The underdeveloped and unbanked regions of the world have the most to gain from blockchain DeFi technology which will rapidly move these places to digital development and documentation which underpins the high standards of living and comfort that developed nations enjoy. In fact, El Salvador recently passed legislation to make Bitcoin legal tender. Other South American countries are proposing similar legislation.

Given the high number of global workers who engage in remittances, DeFi offers a quicker, more efficient, and less costly alternative to the current system of remittances which will improve the lives of foreign workers and their families back home, not to mention improve the economic conditions of their native nations.

But it won’t just be developing nations that enjoy the fruits of DeFi’s transformation of the world. Developed countries, should they not act like Dodo birds, can benefit too. Existing global economic institutions and businesses to better interconnect themselves through transnational ecosystems for transactions and money payments which will improve global business practices and interconnectedness in our global world. Crypto friendly nations and cities will become hub for the latest technological innovation and development. Look no further than states like Wyoming and cities like Miami which are maneuvering with bold, forward looking, leadership to make themselves havens for the burgeoning crypto industry and the innovation it brings.

Political economy and the makeup of political power will also be impacted by cryptocurrency. While businesses can become more efficient and interconnected through global blockchain ecosystems, DeFi will nonetheless erase some of the power of legacy finance (big banks and Wall Street institutions) as they cope to share the economic marketplace with cryptocurrency and its decentralized manifestation. DeFi will permit the possibility of a greater redistribution of economic wealth and power into the hands of individuals—people will no longer need banks and middling institutions to operate financially. Digital wallets may replace centralized bank accounts. DeFi ecosystems with their millisecond transactions will replace bank wiring which can take days. The blockchain technology will prevent fraud and destruction of evidence—as is common in the current traditional financial system. DeFi will make our lives better, more efficient, and simpler than brick and mortar banks. If legacy finance is to survive in the new digital future, they will have to accommodate and integrate into the DeFi future; something that forward-looking banks and financial institutions are already doing as they embrace the practical and global relevance of blockchains.

With the reality of adapt or die imposing itself on the status quo, leading blockchain development companies are also working with banks receptive to the DeFi future to roll out CBDCs (Central Bank Digital Currencies) which are essentially digital versions of fiat currencies. They are also working with financial institutions to link banks, businesses, and networks into a cross platform ecosystems which will further connect the world and make it easier to conduct business, travel, and leisure across the globe. Cryptocurrency and DeFi need not be perceived as purely antagonistic in a zero-sum game mentality. Cooperation would be best for everyone and it seems that some people in traditional finance and business recognize that.

But finance isn’t the only thing that the cryptospace is transforming. Music, media, sports, and video games are also going to be transformed through crypto technology, smart contracts, and NFTs. The current $1.7 trillion industry that is the cryptospace is just going to grow and grow and grow as it enters the marketspace of traditional finance, digital technologies, video games, media, music, and more. Crypto isn’t going to be a juggernaut, it already is and will continue to be juggernaut into the future.

We should care about crypto and DeFi for several other reasons, contra fiat social welfare economists constantly harping about the supposed irrelevance of crypto and its supposed speculative bubble.

First, it is the future. If it wasn’t apparent a few years ago, the fog is lifting right now and it is revealing that this is the future of our increasingly digitized, technologized, and globalized world. Even in the “worst case” scenario, crypto and DeFi will play a major part of our digitized, technologized, and globalized world. It is more likely, however, that crypto and DeFi will be the leading player in this coming reality and everyone else will be piggybacking on DeFi.

Additionally, crypto and DeFi will finally offer substantial improvements to living in underdeveloped regions of the world. Seventy years of UN humanitarian failure and developmental economic stagnation will be washed away with the coming DeFi revolution that will transform the underdeveloped and unbanked regions of the world providing more stability, economic growth, and contractual verification—all necessities for higher standards of living. So relevant is DeFi to the developing world that certain crypto developers and foundations are on expressed missions to improve developing nations and the developing world is the most enthusiastic about crypto and DeFi.

Lastly, crypto and DeFi will empower all of us as individuals to take control of our finances without the need of intermediary institutions. While I do not believe that banks and other legacy finance institutions are foolish enough to extirpate themselves by not integrating with DeFi. and while I do not believe that even a majority of people in developed countries will embrace the thoroughly decentralized and libertarian alternative that DeFi offers (like banking purely through digital wallets) many people will and those who do not will still have greater freedom and economic mobility while still using tradition banks in the cryptospace (70% of Americans expressed a positive opinion of crypto if they could use their current banks to buy, sell, and store crypto—something that forward looking crypto-friendly banks like US Bank and JP Morgan haven’t missed). Whether fully independent, or with the assistance of traditional banks, DeFi offers greater economic empowerment for individuals.

We should care about cryptocurrency and decentralized finance for the reasons enumerated above and countless other reasons too long to express here. We shouldn’t be alarmed about the future or remained shackled to the failed fiat welfare utopianism of the post-1945 world. We should welcome what the decentralized finance and digital economy future offers. If we do not, we risk being left behind in the inevitable digital, technological, and DeFi revolution that is on already taking off. As such, we should prepare for the new world that crypto and DeFi will build instead of fighting an already lost battle against it or ignoring it until it is too late. If the idiots in our government, however, shills and stooges for the current financial regime, think otherwise, we only have ourselves to blame for continuing to elect people who want to regulate us back into the stone age.

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