If you haven’t heard the news from last week, Tesla CEO Elon Musk was on Saturday Night Live.
It was long-awaited that he would talk about Dogecoin, a cryptocurrency that has gotten a pretty big following among people who love the Doge meme.
But none of this really matters. You shouldn’t be focusing on it at all.
In today’s Market Insights video, I explain why what you should really be thinking about is what is actually getting built on blockchain and cryptos right now.
(If you’d prefer to read a transcript instead, click here.)
Why Elon Musk’s Opinion on Dogecoin Doesn’t Matter
Today, I want to talk about Tesla CEO Elon Musk’s views on cryptocurrency and Dogecoin … and why none of that matters.
Specifically, if you haven’t heard the news last week, Musk was on Saturday Night Live. It was long awaited that he would talk about Dogecoin, which is a cryptocurrency similar to bitcoin. It’s actually a form of Litecoin, which itself is a form of bitcoin.
Trillions of Dogecoin are in existence, and it has gotten a pretty big following among people who love the Doge meme. But none of this really matters.
And even last night, Musk came on, and he said that Tesla is no longer accepting bitcoin to buy its cars because bitcoin isn’t environmentally friendly (which isn’t true). None of this matters. You should not be focusing on any of that at all.
What you should really be thinking about is what is actually getting built on blockchain and on cryptocurrencies. And what I’m specifically talking about right now is decentralized finance.
OK, so there’s bitcoin, there’s Dogecoin, there’s Litecoin. But then there’s good ol’ Ethereum. And what is happening in Ethereum right now is absolutely unprecedented.
There are billions of dollars being locked up in protocols that are built on top of Ethereum. And they’re recreating traditional finance in a way that people with no prior history can have some type of economic agreement.
And it’s all ruled by the rules of the protocol. There’s no centralized intermediary like a bank that says who can borrow money and who can loan it. It’s all based on the rules of the protocol.
This is a new financial system that’s being created entirely by code. And the code is out there. It’s similar to public infrastructure. And we’re seeing incredible growth in these decentralized finance protocols.
Most of them are built on Ethereum, which is why the value of Ethereum has gone up seven times faster than the value of bitcoin over the last year and a half. And I believe that within the next year and a half, so by the end of 2022, the total market cap of Ethereum will eclipse the total market cap of bitcoin, and it will be the No. 1 cryptocurrency.
Right now, bitcoin has been the most dominant cryptocurrency. It has had a $1 trillion market cap throughout most of its existence. It commanded about 90% of the total market value of cryptocurrency.
It was the only game in town. But there’s a new sheriff in town. Ethereum now has half the market cap of bitcoin. It’s a $500 billion protocol, and it’s gaining quickly.
Let me show you what’s happening with Ethereum and the reason why I believe we’ll see this “flippening” event in the next year and a half.
So, what you’re looking at right here is DeFiPulse.com. And basically it tracks how much total value is locked in these decentralized finance protocols.
I want to go all the way back in DeFi to 2017.
OK, so back then there was just tens of millions of dollars in DeFi. And the definition of DeFi, or decentralized finance, is using blockchain technology to recreate banking services. You can stake your cryptocurrencies and allow somebody else to borrow them for a fee.
You can also be a decentralized market maker, which means you can play the role of the market makers on the New York Stock Exchange that are constantly ripping us off. You can be one of those by staking your assets in a smart contract. You can then be a decentralized market maker.
And some other ideas are a decentralized derivatives market. There’s talk about doing decentralized mortgage lending. And obviously, when we start getting things like title insurance and autos and VIN numbers on the blockchain, we’ll be able to use those assets as collateral to take out loans and purchase such assets.
But right now the majority of DeFi, or decentralized finance, is being used for trading and speculating, market making and lending assets. So, if I’m a trader and I want to buy more Ethereum, I can go get the leverage, and I can borrow Ethereum and hold it if I’m willing to pay the fee to somebody else that’s letting me borrow that.
So, let’s talk about the total value locked now. Really, early 2020 is when this started to take off. And the summer of 2020 was the tipping point.
So, back then, in June 2020, was the first time the total value locked in DeFi crossed $1 billion. Right now we’re up to $83 billion. It’s down a couple billion dollars in the last few days, but this is still 80X growth in less than a year.
And I believe it’s just going to continue because of the interest rates that traders and investors are finding by taking things like stablecoins such as USDC or Dai that are equivalent to a dollar. And instead of putting a dollar in your bank, you can take the Dai or the USDC and put it in one of these collateral schemes where you can stake it and earn 7% or 8% interest.
Now, the top one is Maker, which allows you to collateralize your Ethereum. So, you take your Ethereum and you put it in a Maker vault, and then you can borrow a stablecoin that’s pegged to the U.S. dollar against it.
So, let’s say you want to spend your Ethereum, or you want to use it as collateral to buy something, but you can’t pay in Ethereum. Now you can pay in something that is equivalent to a U.S. dollar.
So, Maker is the largest right now by total value, locked at $14 billion. Then you have Aave, a similar protocol to Maker, which allows you to stake cryptocurrency for an interest rate and also borrow them. Compound is very similar in lending.
And then at the bottom you have the two largest DEXes, which are decentralized exchanges. We’ve got Uniswap here with $8 billion in collateral locked, and then Curve Finance.
And what a decentralized exchange is, is that I can take two crypto assets that I own — let’s say I own Aave and Ethereum — and I can put them on a smart contract. And somebody who has Ethereum can purchase my Aave and sell me their Ethereum. So, I’m acting the role of the market maker, and I get paid a fee to do that.
This is a brand-new type of financial instrument that came about in the last year, and it’s gaining major traction right now, as you can see by the amount of total value locked in DeFi. So, what I’m saying is you hear the headlines about Dogecoin, you hear the headlines about Elon Musk — forget about all that stuff.
Focus on Ethereum and focus on what’s getting built in the Ethereum ecosystem right now.
There are also competing cryptocurrencies that are considered “layer one” like Ethereum. And they’re coming out with competitive products in the same way that when the internet first started, there was a handful of search engines.
Remember Yahoo and Lycos and AltaVista and Go.com? Many of you are too young to remember these old search engines that existed until Google came around.
Right now, Ethereum is essentially the Google of DeFi. But there are competitors that are working on similar products that you also need to keep an eye on.
Editor, Strategic Fortunes