When investing into something that is revolutionizing an entire Industry you must understand how the current System, within that Industry, works and why something or somebody can make it better. From solving important problems to completely redesigning the System, there is always room for improvement. There are a lot of factors and information that you need to gather in order to judge whether this Revolution will be a success. I have gathered topics that can help you to understand the possible success, the scope and the power of a Revolution.
After knowing if something will revolutionize an Industry, there are ways you can participate in it, whether it be in form of creation ( development, ideas )or in form of investing. You can make money from both of those participation methods, however you need to have certain skills, education, talent or even ideas if you want participate in creation. Or you can simply invest in the success of the Revolution. For that you need two things. Know what to invest into and know how to invest in it correctly. In part 1 I will start by giving you an Argument as to why there is a Revolution happening and cover the very basics to justify this Argument. In the upcoming parts i will share with you the knowledge i gathered from years of studying these Topics and show you a strategy which you can use to be a part of this Revolution.
In upcoming parts I will cover these topics :
- Research
- Know-how
- The product type
- The timing
- Critical thinking
- The scope of change
- Experience/Parallels
- The strategy
- Psychology
- Risk
Introduction
Before diving into these topics, there are some basic things to cover. I will be mainly focusing on the financial Revolution that is currently underway in form of Cryptocurrency and DeFi ( Decentralized Finance ). There is a lot of reading material on these topics and many things to say, however i will try make it simple to understand.
The History of Finance
Without diving into the details, this Industry can be summarized in Phases of progression :
- Finance 1.0
Open and direct trading of goods for services or other goods. No intermediaries, not much of a System.
This was done before, in the old times. There was no widely accepted form of payment like money as we know today. There were no banks but most of the time it was possible to distinguish between two things that have value. ( ex. a cow is more valuable then bread ).
- Finance 2.0
Then came the Revolution that created a System upon which lies what we currently have today. There is a widely accepted form of payment ( money ), we have banks that give us different financial services ( like storing that said money ) and we have a government that controls this money ( issuance ).
Now at this stage money has some sort of value as it is pegged to Gold, a rare metal. This scarcity allows Gold to be the definition of value for centuries. Gold with its physical limitations was very inconvenient to use as form of value transfer, so paper money was created and its value pegged to the precious metal. You would go to a bank, deposit your Gold and get a certificate of ownership of said Gold in form of money that you can use more conveniently to pay for goods and services.
- Finance 2.5
For the better or the worse the Gold standard was abandoned and money was not pegged to anything. Money instead of representing value, became something that represents “buying power”. This change allowed government to control the supply of money, thus creating problems such as inflation ( which lowers your buying power with time ) and debt ( you borrow money to buy something you can’t afford, but the longer you don’t pay the debt the bigger it becomes ). Debt is a consequence of inflation, if you can afford less with your money, you have to borrow it and go into debt.
Banks are the monopolies in this sector and are the ones providing the infrastructure. Today you will need a bank to do almost everything, specially if you are a business, which in turn means you need to pay to the bank that provides you with their services and infrastructure.
- Finance 3.0
A new alternative to the monetary System and Finance as a whole is created, it is called the Cryptocurrency. Instead of relying on banks for infrastructure you can simply rely on having an Internet connection. Instead of having banks holding your money, you hold it in a digital wallet. Instead of having to wait days for banks to send your money across the world for ridiculous fees, you can send it in seconds. And the best of all ? Some Cryptocurrencies are decentralized and controlled by the people, with voting and participating just like in a democracy. Today it is possible to offer any service a bank offers using DeFi ( Decentralized Finance ) and smart contracts ( more on those later ), making banks obsolete in theory.
The Problem( s )
So why was Finance 3.0 necessary if Finance 2.5 works and has worked for years ?
We can see Finance 2.5 problems in two areas, lets call them : The Money area and the Financial System area.
The Money area contains the problem of inflation, the more money is printed, the less it has value, the less you are able to afford. Paper Money is a simple method of payment, however it is not the most convenient nor is it the most efficient method. Holding and storing all of your Paper money is almost unwise, nor will it be accessible in every corner of the world. Using Paper Money or even Digital Money ( using a bank ) is not anonymous. And of course you will always have to rely on a bank to offer you services, for which you have to pay, in order to send money to someone else.
The Financial System area contains a big Problem, the banks. Now if you deposit your money into a bank you get a certificate of ownership ( digitally in form of a magical number that appears when you log into your bank account that corresponds to the amount of money you deposited ). The bank then uses your money to make more money ( like invest it or lend it to other people ). That isn’t necessarily bad for you since you are not loosing money, however if you and your friend and everybody in the country wanted to withdraw the money at the same time ( do a bank run ) it would be impossible. ( the banks must keep only a % of your money in them in form of cash ). Banks ( like many others ) also sell your data ( which is the most valuable resource on the planet ) to advertisement companies, they demand ridiculous fees for their services. They also use fraudulent ways to make you pay more money and many more other Problems. ( like playing a big role in the Financial Crisis of 2008 ).
So overall Finance 2.5 works, but it has many flaws and Problems. But how is it possible to replace an entire Bank’s infrastructure, without making just another Bank ? And how is it possible to offer the services the Banks offer without it ?
The Solution (?)
Enter Finance 3.0, with Cryptocurrencies and DeFi ( Decentralized Finance ).
Disclaimer : For the sake of the argument that Finance 3.0 is a Revolution, I will see Cryptocurrency as a whole Industry and not as specific Cryptocurrency Projects. The reason being that some Projects focus on solving some Problems of Finance 2.5 but not all of them as one Project. There are Projects that solely focus on value transfer, others focus on making a platform where smart contracts can be built ( more on those later ), while others focus on anonymity. Projects that focus on building a platform may be less suitable for value transfer, while some projects with focus on value transfer aren’t capable ( as of yet ) of making smart contracts. Hopefully I can remain unbiased and not mention any Cryptocurrency Projects because I am not a financial advisor.
Also important to know that Blockchain and Cryptocurrency are not the same. A Blockchain may or may not have a Cryptocurrency token, but a Cryptocurrency token must have a Blockchain on which it can run.
So first the basics. Cryptocurrency is cryptographic data that is stored on a Blockchain Ledger ( like a digital book that has blocks with data that are connected to each other to represent progression ). This Blockchain can be installed on a Server or even your computer, so that you can see and interact with the entire chain of all the transactions. Data within is protected using cryptography which then allows you to have a digital wallet. The digital wallet is like your bank account, it holds your Cryptocurrency data and only you have control of that wallet because you have the so called private key. You use this key to send this data ( which is called Cryptocurrency tokens ) from your wallet into another wallet using a public key. Public’s key function is like a pointer to a wallet, but it doesn’t give you any power over it.
So basically you use a private key to open your wallet, put the public key of the wallet of your friend and send it. This Blockchain System then uses cryptography, encryption and math to send your data ( tokens ) from one wallet to another, there is no middle man and everything is secure. These tokens then have a System / Model which gives them value. In a similar way to before when money was tied to the amount of gold you had, your Cryptocurrency gets its value from a concept know as supply and demand. These tokens ( most of the time ) are limited to a certain amount ( depends on the Cryptocurrency project ), and it is not possible ( also in most cases ) to create additional tokens, thus creating inflation. Instead a concept called deflation kicks in and gives these tokens more value overtime. That means that your money does not loose value ( or buying power ) with time, it gains it instead. Because if more people are buying this Cryptocurrency token, the more valuable they become ( see supply and demand ).
But it wouldn’t be a Revolution if it was just that. Cryptocurrency solves many if not all Problems that Finance 2.5 currently faces :
- Globalization, Availability and Speed
Since this Blockchain can be installed on any Server, the only thing you need to have is an Internet connection to that Server in order to access your wallet ( or even install the Blockchain on your own computer ). Which in turns means that you can access your Cryptocurrency tokens in any part of the world as long as you have an Internet connection.
Then you are able to send your tokens to another wallet ( from your friend who is in another part of the world ) completely for free, without fees and almost instantaneous. This not only helps in parts of the world where your bank isn’t available, it also helps if banks refuse to offer you services.
Note : Some cryptocurrencies are neither fast, nor free. This could be due to their goals, Business Model or because of lack of innovation.
- Ownership and Control
This can be seen as a good thing ( more Privacy, more Freedom, more Control ), and as a temporary bad thing. Since this is such a new concept people are not educated enough on this topic. This makes people responsible for their wealth instead of banks and that in turn can lead to disaster if the Person does not understand how the System works and what security strategy needs to be implemented. It is temporary because with education it is possible to teach people on how they should do it thus allow them to be their own bank.
Since there is no bank involved you do not need to pay anything to anybody.
You also can always have access to all of your funds and not be afraid of the bank collapsing because of a bank run.
With banks your identity is tied to both ends of the transaction. ( your bank knows who you are and so is the bank or the person you are sending money to ). In Cryptocurrency you are pseudonymous ( there are some Cryptocurrencies that make you anonymous ). Everybody can see the transactions from everybody using an explorer ( their source, destination and amount ) in a Blockchain Ledger, but nobody knows who the owner of a cryptographic wallet is.
There are ways to find out who the owner of the wallet is, it is however complicated, uses a lot of resources and is not worth most of the time unless you are hunting for people who are using Cryptocurrency for something illegal. There are Cryptocurrency projects that allow you to send their Cryptocurrency tokens completely anonymous. Pseudonimity still suffices most of the time ( for current Cryptocurrency use cases ) which is something banks do not even offer. You can argue that there are companies that offer some kind of privacy, but you still need to pay for their service and give your personal data to that company anyway.
Somebody has to control the whole Blockchain System, improve it, fix problems and make sure that it is not being exploited. What stops somebody from downloading this Blockchain / taking control of it and simply transferring all the tokens to his wallet ?
Enter two concepts which solve this dilemma. Decentralization means that there are many people that can have a say in what changes are made to the Blockchain as a whole and also many people who can participate in the mechanism that makes this Blockchain function correctly. So there are two aspects of Blockchain governance. The first is who can change how the Blockchain operates, develop it and fix it. These are usually the Project’s creators and developers. They may or may not ( depending on their goal and or ability to do so ) allow other people ( like you and me ) to vote on changes they are going to implement into the System.
When they have the System built, there usually is a Consensus Mechanism on which this System runs. It is basically how the Blockchain decides whether a transaction is correct or malicious, it also sends and records transactions into the chain and many other things. Depending on the Consensus Mechanism and the Cryptocurrency, everybody can participate in making the System more secure. When you install this Blockchain on your computer you cannot make changes to it ( alter its functions ), but you can participate in making it more secure , for which you will be rewarded with the Cryptocurrency tokens.
There are many of these Mechanisms ( Proof of Work, Proof of Stake, Proof of Authority are just examples ) and everybody takes a different approach on how to make their Blockchain System secure and how to reward those who participate in making it more secure.
- Smart Contracts and Decentralized Finance
A smart contract is essentially a digital contract, that contains rules which after execution or fulfillment of certain criteria perform actions. These smart contracts reside in the Blockchain and cannot be tampered with or altered by a malicious actor ( they can however be exploited if the contract has security vulnerabilities ).
Some Blockchain Systems are capable of smart contracts that allow for programming, automating and execution of certain tasks. These contracts can be written by anybody and they have many uses and capabilities. This allows everybody to simply program any Service that a bank might offer and implement it into the Blockchain, which uses Finance 3.0 advantages.
Smart Contracts also allow for Decentralized Applications to be created. As example you can created Games or Platforms ( like Social Media Platforms ) to run on that Blockchain and many other things ( creativity has no limit ).
Another capability that Cryptocurrency Projects have is using Smart Contracts to Digitize physical things ( like a house or gold ). Or rather the ownership of those things. This allows for usage of Finance’s 3.0 advantages.
You can Digitize the ownership of a House, that Digitized ownership can be represented as a Non-fungible token on that Blockchain. You can then define the value for it in fiat like $ or € ( basically money ) or you can define its value in Cryptocurrency tokens for that Blockchain ( Cryptocurrency tokens value is derived from supply and demand, Non-fungible tokens can have a fixed value in fiat that you can define ). After you defined the value you can sell your House to somebody else. After the House is sold you send that Non-fungible token to the buyer and he becomes the rightful owner of the House. The transaction is then recorded in an immutable ( something that cannot be tampered with or altered) Ledger in that Blockchain.
Another example where Digitization can use the benefits of Finance 3.0 is Gold ( and many other ores and basically anything physical that has any value ). You can purchase ownership of Gold ( which would have the same value of Gold itself ) in form of a Non-fungible token, send it across the globe almost instantly and without fees or intermediaries and do whatever you want with it. It is also safe inside the Blockchain and you don’t need to carry the physical Gold, nor have to worry about keeping it safe from natural hazards or robbers.
Conclusion
And that is a very resumed and compact Argument as to why Cryptocurrencies and DeFi are a Revolution ( there are many things i left out to avoid complexity ). There always comes a time when it is necessary to rethink our current systems, come up with solutions to the big problems, and perhaps even start from scratch. Humans are evolving and with this evolution comes creativity and innovation. It doesn’t mean that a Revolution must destroy the current System and create Chaos. The idea of this Revolution is to give power back to the people, to improve or completely overhaul the current design and make it faster, better, stronger and more secure. There is a transition period where Finance 3.0 is starting to get recognition around the world and people are realizing its potentials. It is working together with the current System to make sure that everybody is educated, that it is safe for everybody to use and that it complies with Government rules and demands, so that it can be an alternative today which in the future will become a “Standard”.
This content is for information and educational purposes only and should not be considered investment advice or an investment recommendation
