Distributed Collateral: New Economics
This are changing rapidly and most people are completely asleep to what is taking place. Nevertheless, an entirely new economic paradigm is forming which is going to alter the lives of billions of people.
Presently, we see a couple hundred million people starting their journey. While many scoff this entire shift as more of the same, this is not the correct conclusion. To do so is akin to believing the Internet was just another information source.
It is easy to miss what is taking place in the early stages of change. This is especially true with technology which the majority do not understand. They are busy going about their days and do not take the time to delve into what is occurring. Perhaps this is why most miss what is happening until it becomes mainstream.
Fundamental Wealth
All wealth creation is based upon asset accumulation. At the base level, people need something that has value. This means ownership. Those who fail to own assets tends not to be wealthy. Certainly, a superstar athlete with an enormous salary will be wealthy simply due to cash flow. However, as we have seen on numerous occasions, those who do not invest in assets, no matter how much the salary, can end up bankrupt.
Therefore, it is vital for everyone to focus upon the fundamental aspect of wealth creation, the ownership of assets.
Economies that flourish are constantly expanding their asset base. Through innovation, expansion, and forward progress, they keep amassing a larger foundation from which to grow upon. Of course, those that fail to do this end up floundering. We saw this repeatedly throughout history.
Much of the traditional wealth was dependent upon the ability to produce food or extraction of minerals that were in the ground. In other words, it was mostly a matter of geography.
Things changed over the last couple hundred years. The Industrial Revolution added another factor in the ability to produce. It went from what was grown to what could be drilled and manufactured. The overall economic impact of agriculture was reduced while hard goods expanded.
Of course, in the last 50 years, this was replaced by the information age which brought us the onset of the digital world. Here we saw assets such as Intellectual Property explode. Today, the most valuable companies in the world have very few physical assets.
As we can see, while the form might change over time, the key is that to achieve wealth, assets are required.
Economic Distribution
There is the saying about give the man a fish versus teaching him to fish. It is an age-old parable because there is a validity to it.
While many rage on about Universal Basic Income, some have taken a different approach. Instead of giving people direct payments (fish), they propose the idea of Universal Basic Assets. The difference between the two should be clear.
One simply provides cashflow based while the later offers the same in addition to the opportunity for appreciation. At the same time, assets utilize market concepts to generate the payouts.
The entire discussion in this area is centered around distribution. While we could make a case that growth stalled over the last decade or so, the bottom line is we are pretty good about generating valuable assets. As for the distribution, that is another matter entirely.
Here is where we see crypto-economics entering the picture. This is a field that few took the time to consider. Perhaps that is for the best since we do not have a lot of think tank, theoretical concepts emerging. Instead, we simply are building a system based upon these ideas.
Collateralization Of Assets
The key to economic development is to leverage assets for productive purposes. As wealth is amassed, the assets can be collateralized for even more expansion.
Probably the greatest example of this is housing. Investors buy up properties and rent them out. They are providing a service to the tenants, by providing a place to live. Most would agree this is a necessity.
Of course, the majority of investors do not pay cash for the property. Their main option is to get a loan against the property. Hence, that asset is collateralized for further economic gain. While asset appreciation can happen, the cashflow also adds to the return the investor gets.
This is the basis for most of our real estate market. Properties are used as collateral against the loans based upon the future financial value that is provided. Lenders take the risk of market downturns yet offset that through a variety of measures designed to reduce it.
The challenge with this system this ends up in the hands of very few. We see a financial situation whereby the banks and financial system have most of the assets. They benefited from policies that enrich themselves at the expense of everyone else.
Cryptocurrencies Are Assets
Many feel to realize that cryptocurrencies are legitimate assets just like any other. As mentioned before, asset basis keeps expanding as our economic systems evolve. What was valuable in the 1850s is different from today.
We are witnessing the foundation for the next generation Internet. Here again, we see many missing this point. A couple decades ago, many were not familiar with the idea of the Network Effect. Nor did people consider the value of data.
At present, we see this is no longer the case. Most are aware of data and how platforms are enriched by what is generated. We also see more investors looking at companies that have the ability to generate the Network Effect. It does not take a genius to figure out why Google, Facebook, and Apple were so successful.
It will be a major revelation when people understand that cryptocurrency is data. We are really looking at nothing more than bits of information that is transferred back and forth. Hence, all cryptocurrency has some type of value. Naturally, for most, without much activity or use cases, the value is miniscule.
There are, however, many platforms that are growing in value. This is going to provide enormous opportunity for collateralization in the future. For example, it is not too outrageous to believe that trillions of dollars of economic activity will backed through the collateralization of Bitcoin.
One problem we see if that Bitcoin is shifting into the hands of the present power brokers. Since the main way to get Bitcoin is through purchase, those with existing resources can accumulate most of the supply. Here is where Wall Street, corporations, and eventually governments will step in. It is also something that is going to happen to Ethereum since they switched their model.
Fortunately, we are seeing hundreds of projects popping up whereby the economic activity is growing. As the world of DeFi, NFTs, and DAOs progress, the economic impact will catapult exponentially. We saw the same thing with the unfolding of the Internet.
The difference being is we are starting at a much higher level and all data can be monetized in a way that distributes it to the masses.
Massive Economic Expansion
We are on the edge of an era where we will witness massive economic expansion.
Going back to real estate, we can see how that industry collateralizes hundreds of trillions of dollars globally. It is no wonder that it is the largest industry while also making up a sizeable percentage of every economy.
Cryptocurrency is going to provide even more impact. To start, real estate is not a liquid market. It takes a long time and a great many headaches to move a property. Tokenization is going to allow most assets to be moved at the click of a button.
The potential can be viewed simply by looking at Bitcoin. There are all kinds of forecasts out there. However, what if the price does reach $1 million as many expect. That would put it near the $20 trillion mark. What would that do to the rest of the market?
For example, many feel that Ethereum will eventually surpass Bitcoin in market value. If it does, and BTC is worth $20 trillion, that would make the two combined worth more than $40 trillion.
What if we add in, say, Cardano. If that is success, how many trillions is that worth?
The point is we can keep going on with this. As more activity is tied to cryptocurrency, we are going to see massive values tied to assets that can collateralized. Since we are dealing with different networks, what tokens are desired varies. Hence, whatever people are holding has value to some network. Of course, the larger the "community", the greater the Network Effect.
In conclusion, we can see an entirely new funding mechanism arising. If there are trillions of dollars in value out there with cryptocurrency, and it is growing, then people are able to take those assets, join them, and fund whatever they want. Therefore, we will see investment in businesses, research, and whatever else interests people.
Over time, the economic impact will be massive. People will have the resources to get involved with what interests them. Communities will suddenly be able to provide the economic incentive to accomplish whatever the collective goals are.
This is the new economic opportunity that comes from collateral being distributed to the masses.
Distributed Lending
All of this leads into the idea of distributed lending. This only makes sense since we have long talked about Decentralized Finance (DeFi). Why wouldn't lending be a part of that.
Here is where we are going to see an evolution in the development of cryptocurrency. We are going to have to move past the idea of pure speculation to one where financial approaches are taken. Most are not interested in looking for the 1,000x move in everything. Many with money look to generate solid returns.
With distributed lending, anyone with resources can participate. What this means is either the person can give him or herself a loan or issue one to another. Either way, they are further able to generate a return. This is where the shift in mindset to yield will occur.
It will require a different person than we traditionally saw up to this point in cryptocurrency. However, when the infrastructure is there, we could see this explode. The key will be liquidity.
And it all starts with distributed collateral. That is the foundation of the new economy
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