Implications of decentralization to inexpierenced investors.

Investing has multiple interpretations in different cultures. In some countries,either due to socioeconomic conditions or misconceptions, their citizens either are financially illiterate (strong choice of word,but i have also been one of them), or they consider investing as gambling, thus choose to stay away from it at all costs.

In other countries it is considered mandatory by the vast majority of their citizens, in order to build eg. a nest egg for older age, or achieve faster financial freedom. Let us not forget the famous quote by Nobel prize winner

Trust comes either due to proximity and availability heuristic (a friend recommended, or the first article i read about investing), or due to thorough study of data and parameters of the asset we chose to invest into, with which our principals and targets tend to overlap. A key difference in the above is the different timeframe each one of us has, as well as the investable amount (either it being lump sum, or monthly). Some want to change their financial situation in the next 5 years, whereas others want to build up a nice nest egg for retirement or leave a nice heritage to their heirs.

The last two years since the pandemic hit, it was a rollercoaster in markets. Governments printing endless amount of money to keep the markets afloat due to the shutdowns, endless stimulus checks to boost the stagnant workforce and overall an expansion of the M2 money supply that did not correspond to actual value being produced. You can read abou the M2 money supply here. This lead in a disproportionate appreciation of assets (Crypto, stocks, Real estate) that was based on money handed to the masses, printed out of thin air. This appreciation was mostly nominal though, since the depreciation of the fiat currency, either be it the dollar, the euro or the Yen, led to gradual loss of buying power.

This era marked the popularization of Bitcoin and crypto overall to the masses, and the shift in mentality of most averse to investing to starting dipping their toes and having skin in the game slightly.

Gradually, influencers through social platforms (youtube, twitter, etc.), leveraged this “need” for quick gains from the masses, leading people with little to no financial knowledge into countless scam schemes in the crypto ecosystem under the “NO FINANCIAL ADVICE” legal protection. This last phrase isn’t just protecting the creator. It entirelly shifts the responsibility of choice over matters the average audience does not have any qualification or knowledge, to impulsiveness and quick gratification of quick and easy financial gains.

As i stated previously, the majority, including myself, focused on how fast this asset could make people rich… and it actually did quite a few. Of course as the rules of the market suggest, one’s win is definetely another one’s loss. In a non productive asset, this rule applies 100% and this is the reason why Warren Buffet and his right hand Charlie Munger continuously refer to it as “Rat poison” since, according to them, it has 0 value. Of course terms like “productive” and “value” are quite subjective in our day and age. Some will say productive is an asset that produces cash flow, others it has value because of the laws of supply and demand and the chance of price appreciation over time.

Let’s start with Bitcoin. What is its value proposition. For sure, unless i missed some lines, Satoshi Nakamoto did not promise anyone to become rich nor the price of Bitcoin will hit 1 million by 2030 (Although there are mathematical models strengthening this thesis). Its first and biggest value proposition is the establishment of a TRUSTLESS payment system, meaning no intermidiaries will have to intervene in order to settle any financial transaction and that no authority has the ability to confiscate this asset (excluding of course brute force).

I will not dig deep into this post about the value proposition of Bitcoin, this big introduction aimed into familiarising the non knowledgable to the concepts of decentralization. The concept of decentralization existed long before our time, going back even to the Byzantium and Roman times. Of course the principal was the same, though the execution layer in terms of finance was completely different.

Decentralized finance services, known as DeFi, shortly after the birth of Bitcoin, appeared over the Ethereum chain around 2015. Ethereum was developped to solve some scaling and transaction speed issues Bitcoin was facing. On top of Ethereum one of the largest DeFi projects emerged, the Uniswap protocol. Uniswap is a decentralised exchange offering services to customers and investors without requiring and form of KYC, along with its native token, offering voting rights over the protocol. I will explain the last functionality in a later post.

Copying Uniswap’s base code with slight modifications, emerged countless other decentralised protocols offering similar services. Those services included staking, liquidity farming, token swapping among others. For those not familiar with the first two, those are basically interest earning methods with the second one providing liquidity between 2 assets, while earning fees from the swaps the daily users execute on the platform.

Protocols are, still after so many years, in a completely infant stage, although there is great progress being made. Start ups forcing their developpers into executing fast, writing, most of the times, naive code that hosts millions of dollars from investors and users alike. The result? A code visible most of the time due to blockchain’s visibility (exluding Solana with programming on Rust language, although wormhole hack occured as well), quite easily exploitable by hackers and bad actors overall.

In a failed attempt to keep this story short, thank you for reading this far, i will jump into my personal conclusion and my goal from now on. In order to trully achieve decentralization we need both the builders and the users to be on the same page and pace. Users/investors need to educate themselves as much as possible before even thinking of touching crypto overall not just DeFi, and protocols should prioritize security more than scalability and range of services.