Changes in the world: Why are traditional financial elites devoting themselves to crypto finance?

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The outdated narrative and unpopular mechanism of traditional finance make it face the challenge of emerging DeFi.

Original title: “Western Nuggets, why are traditional financial elites devoting themselves to crypto finance? 》
Written by: Lily King of the Border

We are witnessing a wave in which more and more talents from top traditional financial institutions choose to change their camp to join crypto finance.

Former SEC Chairman Jay Clayton recently joined the advisory board of the crypto-custodial platform Fireblocks; Faryar Shirzad, former head of government affairs at Goldman Sachs, joined Coinbase in May this year; and former CFO John Dalby of Bridgewater joined crypto investment company NYDIG in May.

The same thing happened in the regulatory and financial circles in Hong Kong and Singapore, and I was also part of this wave. For those who switch camps, the crypto world is like a wild west that is very different from traditional finance, full of unknowns and hopes, and a fascinating opportunity to escape the involution and reshape the future.

At the same time, the influx of talents, funds, and information from traditional finance will also have a significant impact on the next evolution of the crypto world.

The crisis of traditional finance: outdated narratives and unpopular mechanisms

There are still many people in the traditional financial industry accusing encrypted assets as a Ponzi scheme that will bring huge losses to society, although there has not been a scammer in the crypto world that can cause greater society in any financial crisis in the past than traditional financial elites. Turbulence and economic losses for ordinary people.

This was most obvious in the global financial crisis in 2008. The unpredictable subprime mortgage derivatives produced by a group of Wall Street elites dragged the world into a big bubble. When the bubble burst, the government lost trillions of dollars. Are passed on to the entire society.

This kind of game has been going on. Wall Street has blown up new bubbles again and again, and once there is a risk of bursting, they will release water to support the market through the old folks of their own central bank.

Such games have sharply magnified the inequality of wealth, making the traditional financial industry an exploiter and oppressor in the eyes of the Western people. That’s why there was the “Occupy Wall Street” movement in 2011 and the retail “short squeeze” hedge fund movement launched on the Reddit forum this year.

Bitcoin was born during the financial crisis in 2008, and has always had its own “anti-financial exploitation” narrative.

In the creation block (the first block on the Bitcoin blockchain) minted by Satoshi Nakamoto, a headline of the day was written in the London Times: “On January 3, 2009, the Prime Minister will rescue the bank for the second time.” (The Times 03/Jan/2009 Chancellor on brink of second bailout for banks) In recent years, this kind of narrative has gained the sincere belief of countless people.

In Twitter and Reddit, which are active in the crypto community, crypto assets are seen as a banner against the “corrupt and infinitely distributable Federal Reserve” and “greedy and sinister Wall Street.” Many people say that “buying crypto assets is a kind of vote. Not an investment.”

More importantly, traditional finance is losing the younger generation.

In the traditional financial system, whoever has a large wealth base and who first occupies scarce resources will continue to obtain the greatest benefits. This is the reason why wealth inequality continues to expand.

In such a system, young people cannot see the exit and cannot wait for the beacon, so they would rather choose encrypted assets.

On Robinhood, a leading Internet brokerage firm with mainly young users, 10 million users (the total number of Robinhood users is around 20 million) have invested in encrypted assets. The first financial assets that many young Americans invest in are not stocks, but crypto assets such as Bitcoin, Ethereum, and Dogecoin.

It is not only young retail investors who embrace crypto assets, the “rich second generation” and “rich third generation” are all fascinated by crypto assets.

They have wealth that society envy, but they are also under tremendous pressure and are unwilling to live in the shadow of the previous generation. But in the traditional business field, it is difficult for them to break away from the resources they have to inherit and surpass the previous generation.

Their previous generations often succeeded by capturing contemporary opportunities, such as real estate or the Internet. For their generation, encrypted assets are their own contemporary opportunities. They are the digital native generation. Regarding the encryption field, they can confidently say to the previous generation: “I don’t know how your private bank investment returns have been recently? I invested in an ugly pet in the Axie Infinity game a few months ago, and the current return on investment is 600%.”

Encrypted finance is winning the yearning of people, especially the hearts of the younger generation. With the occurrence of wealth inheritance, traditional finance can no longer ignore the power of encrypted finance.

DeFi challenges the core functions of traditional finance

In the past 15 years, my private equity fund has been very successful, managing more than US$12 billion in assets. We are able to make money because emerging companies need to invest a lot of capital in the development process.

This is particularly obvious in the development of Internet platform-based companies. They need to continuously invest in servers, hire larger and larger teams, and use cash subsidies to win users, so they must introduce equity capital round after round.

In this process, their valuations have continued to increase, and their equity capital can exit at a high level when they are finally listed. But we see that the platform-level applications of the blockchain do not need such capital operation methods to develop.

Bitcoin has not financed any funds, it is completely built in a decentralized way. The founder of Bitcoin, Satoshi Nakamoto, disappeared after giving the world a Proof-of-Work mechanism (Proof-of-Work), but this mechanism is enough for countless people from all over the world to invest in maintaining the network together and becoming a verifier of transactions. Promote the circulation of Bitcoin, develop applications similar to the Lightning Network, and jointly build Bitcoin into a trillion-dollar market value super network.

The subsequent smart contract platforms Ethereum or Polygon also use a similar development method. They only need a small amount of start-up capital, and then based on the POW or POS (Proof of Pledge) mechanism, they can use decentralization to develop into a global network.

Compared with the previous generation of Internet platforms, blockchain platforms do not rely on traditional financial capital to support their own development.

In the traditional financial system, private equity funds have advantages beyond the reach of the public. Private equity funds can use their industry information, capital and resource advantages to obtain equity before a good company goes public, and the public will participate when a good company goes public. It is necessary to pay a premium that is much higher than that of the primary market.

The blockchain platform is an open system. Anyone can provide computing power and certification support for the network through mining or pledge, and obtain a certain equity-based token reward. Anyone can participate in the early construction. , Share the success of the platform.

The core functions of traditional finance, from asset transactions to lending, are being challenged by Decentralized Finance (DeFi).

In decentralized exchanges, such as Uniswap and Sushi, all the assets being traded come from users. The users who provide assets to them are called LPs (Liquidity Providers), and they can receive transactions from the exchanges. Share in the fee.

The role of LP is somewhat similar to that of market makers on traditional exchanges, both of which provide liquidity for exchanges, but market makers on traditional exchanges are designated institutions with the highest qualifications, and anyone can do decentralization. LP of the exchange.

In decentralized lending platforms, such as Aave and Compound, investors can get interest much higher than bank deposits, and borrowers can get funds faster than bank loans. They rely entirely on smart contracts written by automatic codes to gather resources and demand at both ends of the loan, set interest according to the state of supply and demand, and control risks through over-collateralization.

These DeFi platforms use blockchain-based smart contracts to complete the core functions of traditional finance. They do not require the bloated organization, cumbersome processes, screaming intermediaries, and expensive and luxurious office buildings and outlets that are common in traditional financial institutions.

At the same time, their mechanism allows all builders and users to form a vibrant community of interests. That’s why former SEC Chairman Jay Clayton said: “It is almost inevitable that financial institutions will be transformed into blockchain.”

Crypto Native will still be the core competitiveness

People in the traditional finance industry, if they dispel prejudices and study crypto finance with a humble attitude, it is difficult not to be impressed by the creativity of crypto finance. Therefore, traditional financial talents and capital are rapidly pouring into the crypto world. They have strengthened the momentum of the crypto world and helped the crypto world to further build a bridge between the virtual economy and the real economy.

We have seen traditional finance legal and compliance talents helping crypto finance find ways to coexist with regulation.

Only by coexisting with supervision can institutional capital enter the crypto world, increase liquidity for the entire crypto market, and realize the inclusive and open characteristics of the blockchain, so that the public can enjoy the benefits of DeFi.

When the two worlds gradually expand their intersection, the biggest nightmare of those who switch camps may be that they think they have joined a decentralized community of “heroes do not ask where they come from” composed of scientists, geeks, geeks, and ordinary “code people”. In the end, it was discovered that the same group of “elites” who came to harvest the fruits of victory had mixed market arbitrage into muscle memory.

When external forces flood in on a large scale, the most cherished teams are those native to the “Crypto Native” blockchain.

This type of team has grown up with the crypto world. Their destiny is always tied to the blockchain. They have the respect and trust of the crypto community because of their pioneering insight and years of hard work.

Next we will see some large crypto financial companies that have been matured by traditional financial capital.

However, the quantitative trading model of traditional finance cannot replace the wisdom that Crypto Native has gained from multiple bull and bear experiences and years of in-depth observation of information on the chain.

The traditional financial decision-making model based on “odds” and “winning rate” cannot replace the “heart rate” that Crypto Native can see-the trend of trust and consensus.

The traditional financial organization based on levels and departments cannot replace the distributed collaboration that Crypto Native has honed for many years, and maximizes the use of community creativity and diversity.

Just as the traditional literary and art circles have transformed their own IP into NFT, it is difficult to shake the status of CryptoPunk and CryptoKitties, which are incomprehensible by mainstream curatorial circles, as the top-tier assets of Crypto Native IP in the NFT field.

The scale of the entire encrypted assets is now around 2 trillion U.S. dollars, and the entire traditional financial assets are at the level of one hundred billion U.S. dollars.

Many excellent crypto teams are already trying to build bridges between the two assets. MakerDao has made great progress in experimenting with real-world assets such as real estate as collateral. Aave and Compound built Aave Pro and Compound Treasury to provide institutional clients with interest rate products with stable returns.

These products tailored to meet the compliance and workflow requirements of institutional customers will greatly expand the lending market of encrypted assets and have become one of the catalysts for the prosperity of DeFi.

The next superhero team in the crypto world must be able to attract traditional capital that is ten times and one hundred times the crypto capital, and use the spiritual core of the blockchain to build the Wild West into a future country.

This kind of superhero team will need the core of Crypto Native, as well as traditional financial talents to work together to build bridges and bring the multiplication effect in the real economy to the team.

About the author: As the general counsel, he worked for Asia’s largest alternative investment management fund with assets under management of more than 40 billion U.S. dollars. Will soon join Asia’s largest crypto asset custody platform and institutional asset management platform Cobo as COO.

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