Pandemic incentivised investing & innovation

There is no denying that the previous 18+ months have accelerated the pace at which digitisation is eating the world – as with everything, there are pros and cons of this. One component that’s caught my attention is the digitisation and gamification of trading and investing, across equities and crypto.

At face value, the media would have you believe that ‘robinhood investors’ are ruining traditional market flows and relative predictability of trends. How dare these ‘inexperienced’ and ‘erratic’ investors take on the Wall St. hedge fund scene and make some money on the side, whilst being stuck in recurrent lockdowns…

Quite on the contrary, this trader demographic (including myself) are contributing to overall market liquidity and if anything, have enhanced the profile of trading and investing. RMIT data showed that the pandemic had accelerated trading volumes in Australia by 66% and globally by 50% between 2018 and 2021. Surely the mass redistribution of wealth can only be a good thing – the more the merrier.

The more demographics with financial skin in the game, the higher the incentive to remain up-to-date on (and to research) current affairs and trends, which has a knock-on effect to innovation. As most of us are aware, one of the most innovative spaces at the moment is cryptocurrency and blockchain technology. With over 11,000 different crypto projects on-going in 2021, tied to an array of different categories across: smart contracting, privacy, lending, memes etc.

As Tupac once said, through every dark night (the pandemic), there’s a bright day after that (innovation) and with specificity to crypto, it really is paving the way for technological innovation at scale – and helping many people increase their revenue streams as a result.

How crypto enables money to make money

In the realm of crypto and blockchain, innovation comes in layers – literally; layer 1 being the foundational blockchain architecture such as Ethereum, Polkadot etc. whereas layer 2’s could loosely be described as ad-on/interconnectivity features. What is increasingly interesting is the speed of traditional financial market disruption, with some notable projects listed below:

AAVE (notable competitors - Compound, Curve)

One of the most legitimate projects, with an electronic money license provided by the UK financial authority is a money lending and borrowing protocol. An incredibly engaging initiative, where any crypto holder (with sufficient holdings) can essentially become a bank/depositor, and any borrower (with enough collateral), can obtain funds out-with the traditional banking means.

At a high level, the process works through depositor and borrower tokens. As a depositor, you purchase what would be described as a ‘depositor token’, which is then transitioned through a smart contract, to a ‘borrower token’, and the conduit market maker algorithm within Aave protocol provides the depositor with a recurring interest yield.

As of July 2021, Aave had a total locked value (TVL) of ~$3bn, up from only $40 million in May 2020 – thus evidencing the rate of innovation progress across the pandemic period. Correlation does not determine causation, however.

The benefits of this type of initiative are quite clear; those with liquidity (depositors) can provide it and earn a hefty recurring yield, with the security that their loan has been collateralised on the blockchain. Borrowers are afforded with liquidity at speed, without the need to sell any tangible assets or a credit history.

Is this the future of lending, quite possibly…it will be interesting to see how institutions capitalise on this.

ALCHEMIX

Potentially one of the most exciting and potentially game-changing initiatives in the world – if the hype can be delivered upon. The project mandate is orientated around self-repaying loans…to reiterate…SELF-REPAYING-LOANS. The general concept is relatively simple and uses a 200% collateralisation ratio e.g. how much you can deposit versus how much you can borrow against it. A working example can be seen below:

· A borrower requests a loan e.g. $50k, which requires to be collateralised

· The borrower stakes their collateral e.g. $100,000 (via DAI) is provided

· Interest is then yielded from the posted DAI, which feeds into paying off the loan

· Over time, the yield contributes to loan payoff – with maximum benefits depending on durations and rates.

Noting that the above is an over-simplification, the concept highlights a key trend that those within the banking industry should take note of – there is a growing desire for faster loans with reduced barriers to entry…and it looks like it is going to become reality sooner rather than later.

To ensure their legitimacy going-forward, Alchemix has partnered with a validator/audit entity - runtime verification. The aim of this partnership is to ensure that prior to mass go-live, the code and methodology behind the concept is functional and reduces user risk; which provides confidence that the founders have good intentions for the customer.

Staking

A somewhat simpler and less risky form of making your money work for you, this approach provides crypto stakers an interest yield, depending on the volume of crypto staked and the annual percentage yield (APY) associated with that specific cryptocurrency. Not too dissimilar to when banks had interest rates >0% for your savings account, this initiative ensures that almost anyone who holds crypto, can stake it (in a locked or flexible manner) and obtain financial reward in return.

Interest rates vary, dependent on the risk associated with the particular crypto project – something inherently volatile. This is compounded even further, if choosing to ‘lock’ your staked crypto within the staking vault for a pre-determined period of time…usually ranging between 30-60-90 day periods, with interest rates ranging higher the longer you lock up your crypto.

Further thoughts

Although equity and crypto investing was prevalent pre-pandemic, multiple corresponding factors seem to have accelerated the trend. The digitisation and gamification of investing has made it more accessible than ever, and has left little excuse to not participate – the key is to simply get started. Conducting your own research allows for informed decisions to be made, regarding the trends across equities and cryptocurrency; whilst determining your individual risk tolerances allows for pragmatic capital allocation. All of which incentivises a recurrent cycle of liquidity, innovation, creativity and subsequently – progress.