The Breakdown - Why Stay in Crypto?

Episode Date: January 8, 2024

A reading of: https://www.coindesk.com/business/2024/01/03/stablecoins-can-help-fix-the-current-lending-market/ and https://twitter.com/CampbellJAustin/status/1742292350578090368

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Sunday, January 7th, and that means it's time for the first long-read Sunday of 2024. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes get a bit.ly slash breakdown pod. All right, friends, well, today we are looking optimistically and positively towards the future.

And instead of just talking again about the ETF and what it might do for price and attraction, we're going to step back and ask the question of why crypto more broadly. Our main piece on that is going to be a long Twitter essay from Austin Campbell. But first, I want to pair it with another piece by Christine Kai and Sefton Kincaid of Sakata partners that argues that stable coins can have a specific function in the world today. The piece was called Stable Coins can help fix the current lending market, and Christine and Sefton Wright, lending markets are evolving, transitioning from a traditional bank-centric framework to a more diverse and technologically advanced system. This evolution is particularly

evident since the global financial crisis and is fundamentally reshaping the landscape of capital aggregation and distribution. However, the current market structure still faces considerable friction. We believe integrating blockchain into the existing financial tech stack will improve the efficiency of capital flows and expand access. Section, blockchain enhanced capital distribution. The diminishing role of traditional banks in capital distribution post-global financial crisis has paved the way for fintech lending companies like SOFi and Ramp. These firms are filling the void with innovative solutions such as buy now pay later options by leveraging online platforms, data analytics, and machine learning. Despite advancements, issues like archaic payment systems

and SME funding gaps persist. Stablecoins can help overcome these challenges by revolutionizing fund disbursement with superior cost and speed. By leveraging stable coins, fintechs can tap into new markets with limited access to conventional banking services, offering more accessible and efficient financial solutions at a global scale. Section. The $150 trillion opportunity. Private credit has flourished post-global financial crisis, growing to 1.6,000. trillion dollars in becoming a competitive source of large-scale financing. However, compared with the state of innovation in capital distribution, capital aggregations growth historically was hindered by its manual processes and too many intermediaries, which made onboarding large numbers of

smaller ticket LP's uneconomical. Tokenization can streamline and automate these intensive operational processes. Such efficiencies bring two major advantages. Firstly, it is now more economically viable to underwrite smaller loans. Secondly, it democratizes investment opportunities, lowering barriers to entry for a broader spectrum of lenders, including those with smaller capital contributions often overlooked today. Other benefits include improved transparency, secondary liquidity, and simplified risk customization enabled by the programmability of smart contracts. According to recent research by Bain & Co, alternative investments are underrepresented in individuals' portfolios. Individuals own 50% of global wealth, but only 5% allocated to

alternatives, while public pensions allocate about 25% to the same asset class. And while disparate liquidity demands and the highly manual nature of the alternative fund industry are barriers, Bain presents a clear case that tokenization can help the private markets industry tap into the $150 trillion individual investor segment, quote, unlocking potentially $400 billion in additional annual revenue for the alternatives industry. Section Outlook for blockchain-based credit ecosystem. One, expand the role of stablecoins in capital distribution. In 2023, companies like Visa, MasterCart, and Checkout.com integrated stablecoins with various applications. In 2024, we anticipate a broader adoption in global payments, encouraged by increasing regulatory

clarity in jurisdictions such as Hong Kong and the UK. A key development in this area is stablecoin-based lending services. These services are expected to be particularly impactful in regions where traditional bank financing is inefficient or scarce. Two, tokenization and alternative asset funds. Over the past year, pioneers like Hamilton Lane and KKR adopted tokenization strategies to attract individual investors by reducing costs and lowering minimum subscription amounts. Looking ahead to 2024, we expect more private credit funds to explore the advantages of tokenization and optimize capital aggregation using blockchain technology, while private credit lending solutions on defy continue to grow, addressing financing gaps in the real economy.

In conclusion, blockchain technology through innovations like stable coins and tokenization is pivotal in advancing efficiency and access to capital markets. All right, so back to NLW here. this is the very technocratic explanation of why crypto, and I think it's in the context specifically of this move towards the institutionalization of crypto, which is the dominant theme heading into 2024. The authors are pointing out ways in which the introduction of tokenization and stable coins can make markets work better, bringing with it the variety of benefits that that potentially implicates. And yet, it is perhaps not the big roaring, emotional answer to why

crypto. And as we turn the corner not only from 23 to 24, but also from the end of the bear market to the beginning of a new bull, Austin Campbell does a bit of reflection that I think will resonate with many of you. Austin is the founder and managing partner of Zero Knowledge Consulting, and is an expert in stable coins having previously been at companies like Paxos. Austin writes, over the holidays, I was asked a few times about why I was still in crypto or what the driving force was behind my work, despite the incredible market puk of 2022 and the number of scammers, grifters, and just plain fools in the space. It's a good exercise to figure out what you truly believe when you have to explain your actions to other people. Or, at a bare minimum,

the lies we tell ourselves to rationalize things, although I don't believe that to be the case here. I've decided to share those thoughts here, but to explain, I have to talk a bit about my worldview. First, for those who have not read Peter Zihon's excellent, the end of the world is just beginning, you should. I'm not quite as dire on many of these points as Mr. Zihon, but I think his core insight of a unique moment of security plus demographic bubble in working age population leading to much of the growth of the past few decades is correct. This also means that the next few decades will, if nothing changes, be significantly worse. There's definitely some truth to that. We aren't going to make more humans absent cloning, and even then I doubt we can

make adults of working age. And the declines in demographics are going to spark a lot of geopolitical instability, especially, as I do agree, the United States seems tired of footing the security bill for the entire world and has been experiencing some negative outcomes based on the current situation. What does this have to do with you being in crypto, you cry? And why do you have to explain everything like such a college professor. I feel personally attacked rhetorical device I created for the purpose of representing my audience. But second of all, the answer is that when things start to break down or slow down due to the forces of demographics, you fight that by having linkages that improve things. 2008 was bad. I don't know if you remember it, but I do acutely. I was literally in the

last recruiting event ever held by Lehman Brothers right before they went bankrupt, in the ultimate left hand versus right hand, not knowing what the other was doing moment while I was at NYU. A lot of things broke, a lot of the issues with our financial system were laid bare, and continue to be problems even until today. We don't have great visibility into assets moving through the system. We are still taking a huge amount of centralized risk to things like clearing. We still have issues with measuring leverage, counterparty credit risk, and overall exposure in the system. The banks have gone from too big to fail to too bigger to fail. Third, both of these problems can be addressed with crypto, and these are two of the key reasons why I am in the

space. On the first problem, a globally available open source, open access system that is credibly neutral. Listen, we can argue about centralized versus decentralized, but to me the most important property is credible neutrality so you aren't getting expropriated by governments. Is a way to preserve links of trade, common interests, and of asset exchange in a world that is otherwise de-globalizing. Here is probably one of my biggest disagreements with Zahan's book, where he waves his hand at Bitcoin and moves on. As understanding what an open access system does to potential global capital flows, and subsequently financial inclusion and development, is critical to understanding why blockchain matters. For most people who don't get,

it, I find it's usually because they grew up and live in the U.S. or Europe, and have never had to try to do something like buy a house in Latin America with money in France, much less run an international business outside of first world-type jurisdictions. I think one of the keys to avoiding a combined security and economic breakdown of the scale we face is having shared economic interests, where the act of war, attacking global shipping, or just behaving like a previous-age warlord state guarantees, first and foremost, that you experience the pain of your actions directly, because bringing down a system you are plugged into and is keeping you alive is far more painful than blowing up someone else's system. If the U.S.-led security order is receding, a global collective

economic platform would be a helpful tool to have to replace it. On the second, you cannot break up the big banks by centralizing the system more and more. The great lie of 2008 was that Dodd-Frank was going to shrink the big banks. It did the opposite. That any investor protections or systemic improvements would happen that benefit the small guy, they did not, and that the compliance and risk changes would improve the playing field for all, they built a bigger moat for the huge players. You get out of this with transparency to solve many of the structural problems rather than centralizing, and with decentralization, forcing the destruction of monopolies and oligopolis and the erosion of the market forces that created behemots like J.P. Morgan, my former employer.

Note, this is not a statement about the quality of these institutions. JPM had the best risk management of any firm I had ever worked for. It is rather a statement about systemic design and how catastrophes are inevitable and we need to build a system that can survive them. We also need a system where giant incumbents are not titans that cannot be assailed, thanks to giant regulatory, technological, and structural barriers, erected by a combination of government efforts and market restrictions, but rather one where we have an open access platform that lets new ideas in as opposed to forcing them out.

And we're not going to get there by doing what we are already doing in Tradfai, but more and harder. Instead, we need to re-architect the system, in order to design something with a different trust model, different transaction flows, and different distribution of economics. That's why I am in this space. It's also why I regard people who oppose crypto-owned blockchain in general as usually either uninformed or pro-incumbent monopolists who are fighting to preserve their privileged positions. Do you know what you didn't see in here?

An anarcher libertarians screed against having a system or a need for fraud and scams to be part of an ecosystem. I do think both sides have allowed the extremes to co-op the discourse and scream bat-sha-insane nonsense through a megaphone. So one of my hopes for 2024 is we can get back to meat and potatoes and talk about why this stuff matters in terms of long-term structure. And also, you know, build it and be allowed. to build it in the United States. If I allow myself a moment to try to sum up what Austin was saying,

in a world where many people from many political persuasions feel that what's necessary is a total re-architecture of the economic system, Bitcoin and crypto actually offer an alternative architecture for the economic system. That alone makes it more interesting than all the screaming and op-eds in the world. It's a thing that's real. It's a thing that exists. It's a thing that millions of people participate in day in and day out. Perhaps in 24, more people will engage with it as such. For now, that is going to do it for today's episode. I appreciate you listening as always. Until next time, be safe and take care of each other. Peace.