The impact of cryptocurrencies such as bitcoin, which is experiencing renewed interest from investors as it hovers near all-time highs, extends far beyond their status as “digital gold” or as alternatives to conventional fiat currency.
In fact, the blockchain technology on which cryptocurrencies are based, is also being used by a new generation of tech-savvy investors to build an entirely new, alternative financial system — and it’s happening right under the noses of traditional financial services firms.
“What’s happening is that finance is being automated in a manner that does away with the need for the host of intermediaries you usually have in any transaction — whether it’s transferring money or trading a derivative instrument,” says Sean Sanders, founder and CEO of Revix, a crypto neo-broker, which was locally founded but is headquartered in London.
“All of those financial intermediaries require a fee for their service but if the current crypto market trajectory continues it won’t be too long before transaction fees are reduced to near zero.”
To put Sanders’ view into perspective, consider the decentralised finance (DeFi) movement that exploded in 2020 and whose ambition is nothing less than the creation of a globally accessibility blockchain-based, automated financial system encompassing all financial services. That may sound like a far-fetched concept but the DeFi ecosystem has already spawned a global network of integrated protocols and a variety of new financial derivatives.
Technology gurus measure the industry’s size by tracking the dollar value of crypto assets locked into the DeFi network, which at the time of writing stood at $25.03bn (R374.6bn). Thanks to blockchain, essentially a digital ledger that stores transactional data, along with the power of smart contracts that enable automated execution, the DeFi network largely runs independently of intermediaries. Records are also digitally maintained in real-time.
Crypto borrowing
“Imagine a scenario [in which] a customer in Johannesburg wants to purchase a product in Cape Town that’s owned by someone who lives in Europe,” says Sanders. “DeFi allows the entire transaction to be digitised and automated so that money is released and transferred only once delivery of the product takes place and without any need for filling out paper documents, dealing with call centres or any intermediaries for that matter.”
While Sanders’s example illustrates how the technology works at the simplest level, it also extends to new derivative financial instruments and investment opportunities. Holders of crypto assets can now earn a yield on their holdings by tapping into a growing digital market for crypto borrowing, lending and liquidity provision. Moreover, a home-grown SA solution is at the centre of this phenomenon.
Yearn.Finance, created by Cape Town-based crypto programmer Andre Cronje in 2020, provides a suite of products for crypto holders to seek out the best yields available in the DeFi ecosystem. Yearn acts as an aggregator that identifies the highest yields available and automatically shifts between crypto asset pools as interest rates fluctuate. Users can even take out crypto insurance to cover potential losses. Yearn is governed by holders of its native token, YFI, which has a market value of about $37,000. That rivals the current price of bitcoin while the entire market capitalisation of crypto assets channelled into Yearn exceeds $1.1bn.
“Think of it as an algorithmic, automated hedge fund where token holders of YFI are limited partners who both govern the system and receive rewards from it,” says Chris Becker, Investec’s blockchain lead. “Its market cap is already more than $1bn, which must make it one of the quickest ascents to unicorn status yet.”
In the world of finance a “unicorn” is a start-up with a valuation of $1bn or more.
Becker says it won’t be long before “75% of the world will be connected to the bitcoin and ethereum blockchains”.
“Blockchain is like an operating system for money that enables the entire financial system to be automated and digitised — from the transaction itself to recording the transaction and securing it,” he says.
“It’s also creating a multigenerational opportunity to get involved in creating an entirely new financial system that will be more open, more inclusive and decentralised.”
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.