I was recently in Las Vegas, where I saw a crypto ATM for the first time. At first glance, there was nothing shocking about it: It looked similar to a normal ATM but with a much larger screen and a built-in keyboard. Since this ATM was in a car rental agency, it gave customers the ability to rent a car using cryptocurrency.
I watched as a short line of customers patiently waited their turn, using the ATM to turn their Bitcoin and Ethereum into U.S. dollars. A few clicks on the keyboard, and the ATM spit out a stack of $20 bills, which were then brought to the rental desk to complete the purchase. I was fascinated, but what surprised me the most was how normal the process was — neither the customers nor the rental agents gave any indication that this was a strange new way to rent a car. It was just business as usual.
And according to the numbers reported by The New York Times, that trend is only continuing to grow. But while the use of cryptos in everyday transactions will doubtless become more common, it’s not necessarily disruptive to our current way of doing things. Not too much changes in how we buy and sell, whether we’re using a dollar or a Doge. In my view, the primary utility of cryptos isn’t using them to buy a Coke at 7-11.
There’s something far bigger and far more revolutionary happening in the background. I believe one of the most significant impacts of cryptos will be the disruption of the most entrenched part of our financial system: banking.
Bank Holidays Are Coming to an End — Finally!
We’re talking about a revolutionary, world-changing shift, and it’s already growing much faster than anyone expected. And there’s nothing to slow it down.
After all, just about everything about the traditional bank can be instantly replaced by a blockchain-based system. We don’t need the fancy buildings with marble lobbies or the red-roped lines, where you wait your turn to get your money from a teller or a loan from a banker sitting at a big, mahogany desk.
In short, traditional banks are very expensive middlemen. We’ve put up with limited hours and a silly calendar of banking holidays for far too long! The world has been moving away from that costly model for decades, and cryptos have finally created a way for us to get rid of the entire system altogether.
It’s already underway. And this growing area of cryptocurrency already has a catchy new name.
Welcome to DeFi
Hands down, the fastest growing area of cryptocurrencies is DeFi, or decentralized finance.
In the past year, we’ve seen the creation of several thousand new DeFi coins. Some coins just focus on very specific functions, such as bridging transactions between other coins. Other coins offer secure verification.
In fact, it’s now safe to say that every part of our traditional financial system has a doppelgänger somewhere in the crypto universe.
There are cryptos for real estate, with more than a dozen coins that have a $50 million market cap (or greater) and focus on localized real-world holdings. There are cryptos for insurance and re-insurance. Cryptos like Numeraire (market cap: $309 million) are their own AI data-driven hedge funds. Synthetix (market cap: $1.8 billion) is its own derivatives platform. DGLD is a gold-based coin that’s backed by real bullion held by a reputable third party in a Swiss vault.
And while many of these cryptos are still limited in their capabilities, that’s changing fast as well. This is a lot of abstract stuff, so let me give you the ground-level view of where these changes are taking place.
The first is in lending. I recently got a $15,000 loan from Binance (one of the largest crypto exchanges in the world) with no credit check, no application, and an 8% interest rate.
My only collateral was Ethereum and other assets — but I didn’t have to turn them over. I could still use them to trade or exchange as I wished. And I could transfer the $15,000 anywhere I wanted. While it’s still a complicated process to get cryptos back into U.S. dollars (and could create a taxable event depending on how you do it) there wasn’t anything stopping me from using that money however I wished.
This kind of loan is obviously very different from a mortgage or a business loan, but we’re starting to see new innovations that are more of a threat to anything offered by traditional banking.
Other technologies allow YOU to be the bank. If you believe in a brand-new coin or technology, you can personally offer liquidity to others. In crypto-speak this is called “staking.”
Some kinds of staking work automatically just by holding the coin. For example, Coinbase offers an auto-stake feature with its USDC (U.S. Dollar Coin), which automatically earns a .15% APY for as long as you hold it. You can literally sit back and watch your USDC slowly grow. (While small, that’s still a better return than some traditional savings accounts, and there aren’t any catches to it.)
Other kinds of staking require a greater manual effort but can offer greater rewards (MUCH greater).
You can manually “stake a pair” by taking a common crypto like Ethereum and pairing it with an equal amount of another coin and then transferring it to a pool in an exchange. Transactions are bridged through the liquidity put up by you and any others in your pool. You receive fees in both coins for your trouble (plus there’s often a bonus paid by the exchange). The ledger is public, and you can look in at any time to see each and every transaction that was bridged through your pair — anyone can.
Most DeFi exchanges are named after food, and the three largest are Pancake Swap, SushiSwap, and Uniswap. While the names may sound comical, these three exchanges should be taken quite seriously, as they process more than $103 billion of daily transaction volume. That’s far more than most regional banks in the traditional sector.
Let me give you a real-world example of a stake I hold. It’s a pairing of 50% Ethereum and 50% Alpha, an obscure coin that’s new to the scene. I chose it because I believe that the utility of Alpha will grow over time as it’s used in new DeFi projects.
I staked $7,000 worth of these paired coins on SushiSwap, and in three months it’s earned me $840 in fees and $170 in bonus tokens. When you combine that with the price appreciation of both coins, my pair has been worth as much as $16,000+. It’s been a nice return so far! And even as prices rise and fall, as they continue to do, the idea is that the compound growth of fees making more fees will eventually grow beyond any dips in price.
In short, I’m a 21st-century banker! And while it still feels, at times, the equivalent of opening the only bank in a Wild West town of old (like in the gold boomtowns of the 1840s and 1850s), the new tools of today offer far more exciting possibilities.
DeFi is a revolution that can no longer be ignored. As the infamous Elon Musk recently said in a tweet…
The Writing Is On the Wall for Banks
But bankers aren’t stupid. As stodgy as most bankers are, the reality of an all-digital future has dawned on them.
Zooming all the way out, the world is already beginning to look quite different.
Even the Federal Reserve is taking steps in this direction. It hasn’t revealed all the details, but it’s been working on a blockchain-based project of its own. It isn’t totally a digital dollar. It also isn’t a typical reserve, bond, or other Federal Bank security. It’s all of them at the exact same time. In short, the Fed is working to create its own “crypto,” which — apart from the key differences of centralized control and direct interaction with the dollar — is in every way just another blockchain-based asset.
But I predict that these new centralized innovations by traditional banks have the potential to backfire. In fact, they may serve to hasten the move to DeFi.
Why? It comes down to independence. At the moment, the Fed can’t reach into your wallet and manipulate your physical dollars (it can only manipulate the supply and wider market to try and control their value). But once the Fed creates a digitized currency, there’s nothing to stop it from digitally altering those dollars right in your bank account.
DeFi is built from the ground up to prevent this very thing. It uses a broad network that is trustless. This means that even the developers of a well-developed crypto can’t change the rules. They have no special power or control. But as you’d expect, the Fed doesn’t plan on going this route. It’s confirmed that there is in fact going to be a room at the Federal Reserve, highly guarded, with a computer terminal that can be used to directly create a digital currency. If you ask me, that’s a frightening future. (Though it could make for an interesting plotline in a new Mission Impossible movie.)
I’ll be writing more about DeFi in future articles. But in the meantime, I urge you to not miss out on your chance to learn more while it’s still early. Many of these projects have already proven that early investors can make a lot of money in this growing space.
My colleagues Jimmy Mengel and Jason Simpkins cover this and other breaking-news topics in their weekly video bulletin Trend Tracker; it’s an ideal place to get started. They’ll give you up-to-the-minute ways to buy in and earn big. (And bonus! You can send them your questions to be answered weekly.)
In sum, I personally believe DeFi is one of the most innovative financial technologies to be invented in the last 25 years. I don’t always agree with Elon Musk, but I’ll happily side with him on this one: “Don’t defy DeFi.”
Stay strong,
John Carl
Contributing Editor, Outsider Club
John Carl is a regular contributor to Outsider Club and a financial analyst based in Charlottesville, VA. His financial career began in 2009, when he made early successful calls on Netflix, Chipotle, and Green Mountain Coffee. Today he covers precious metals, cannabis, technology, cryptos, and biotechnology. You can follow John on Twitter.
