Why Blockchains Matter

We believe blockchain technologies represent an opportunity to redefine the mechanics of banking -- making it dramatically more efficient and accessible. The conclusion is borne from decades inside the largest financial institutions in the world, witnessing banking system inefficiencies firsthand.

The legacy banking system was built upon a foundation from the 1970s -- half a century ago.  Automated Clearing House (ACH) networks, which today process $62 trillion annually, have not evolved meaningfully since their launch.  Today, there are over 98 independent ACH networks globally.

Other pillars of the current financial system, like trading stocks or bonds, or borrowing and lending, each exist on a different set of technology platforms with various levels of digitization and interoperability. Additionally, financial standards related to things like credit scores are different in almost every country.

Financial applications require integration with dozens of legacy systems, standards and firms and completing even a simple financial task requires significant coordination across regulatory frameworks, technologies and methods of settlement. 

Source: https://www.worldbank.org/en/topic/financialinclusion/brief/gpss http://money.visualcapitalist.com/all-of-the-worlds-stock-exchanges-by-size/

Blockchains (and the related technologies of distributed data storage and smart contract protocols) deliver on a vision for a common global infrastructure -- an operating system for finance -- that connects people and capital on a single platform.

Blockchains matter because of their programmability, interoperability and composability, which invites a 27 million-member global software developer community to innovate and improve upon a variety of new frameworks. The developer community and free-market actively test new blockchain innovations, which we believe will be disruptive to the financial marketplace.

Specifically, we are excited about smart contract technology, which is built on top of blockchain technology. Smart contracts are the primitive data structure that form the basis of blockchain applications. Programs can be written inside of a smart contract to perform different tasks, the same way programs are written inside of an iOS, Windows or Android application. Once the program is evaluated, the result is stored on a blockchain where it cannot be altered. Decades-old procedures and technology in traditional finance organizations is replaced with code and smart contracts that are used as the building blocks of new financial applications.  

We are in the infancy of a financial technology revolution built on a standard set of rails where value can flow around the world as fluidly as data transmits over the internet.

Cryptocurrencies Go Mainstream

One need not blindly agree with our vision. Adoption and awareness around the world is growing -- an indication that blockchains, and their associated currencies, should be taken more seriously.

Globally, 100 million people hold Bitcoin -- arguably the most well-known cryptocurrency. That number is expected to double in the next five years. Though still a small portion of the worldwide population, the value accrued to the currency is arguably too large to ignore. The market capitalization, or value of all bitcoins in circulation, reached more than $1.4 trillion at its peak in November of 2021. Meanwhile the combined value of the most popular cryptocurrencies exceeded $2.5T, approaching the GDP of France -- the world's 7th largest economy, according to the World Bank.

Granted, this popularity is in its nascent stages. Most of the value accrued has been over the past 2 years. There are signs, however, that blockchain technology will be here to stay, despite the criticism around the volatility in prices of many major cryptocurrencies.

Some of the largest investment firms, including Morgan Stanley, Citibank, JP Morgan Chase and Bank of America, have set up institutional trading operations for cryptocurrencies. Both Mastercard and Visa have aggressively invested in blockchain technology companies and made a commitment to accept cryptocurrencies as a currency of settlement on their networks. Similarly, retail brokerage houses like Fidelity and Schwab have begun to make digital assets available on their platforms.

At Domain Money, our goal is to separate the signal from the noise by looking beyond price volatility and focusing on the long-term potential of blockchain technology to improve on the world’s core financial systems.

Money Markets

Blockchain can touch any person, anywhere, and bring the sophistication and opportunity once available to the few, to the many. Here's an example within the money markets of an application built with blockchain-based smart contract technology.

Suppose a doctor in Nebraska wishes to borrow money for a short period of time. His options are to get a loan from a bank or use a credit card.  As you can see below, these are expensive options.

However, if a larger institution wanted to borrow money, they could access wholesale money markets where rates are significantly lower. These lower rates are due, in part, to the fact that larger institutions work with trusted parties,  but also because these institutions are able to access competitive money markets that are not open to individuals. Similarly, a money market can be built with blockchain technology and bring the competitive dynamics and efficiencies of institutional money markets to individuals around the world.

Equally important is the fact that virtually anyone can supply capital to be lent out. A merchant in Taiwan can lend their assets to a money market and earn a yield far in excess of the rate he/she would earn if these funds were deposited in a local bank. For instance, in the U.S., the average interest rate paid on bank deposits is 0.06%, according to the Federal Deposit Insurance Corporation.

Removing the barriers that prevent consumers from accessing true market rates to borrow or lend is one of the most powerful implementations of blockchain and smart contract technologies. It’s also among the first broadly adopted examples of decentralized finance (DeFi). The size of this market has grown substantially over the last year, per the image below.

Operating Leverage

Operating leverage is a key element of the blockchain story and why it matters. The ability of a small team of developers (vs thousands doing manual tasks at legacy banks) to build and maintain financial applications that connect people and capital around the world is leading to a Cambrian explosion of development. Tens of thousands of developers have shifted their efforts toward projects in the blockchain, and the efficiency gains are flowing to users, perpetuating the adoption and development cycle.

Compound, one recent example of a blockchain-based borrowing and lending platform, was built by about 20 people, has $17B of yield-generating deposits, $7B of loans and has been used by about 330k people around the world in the last year.

By comparison, LendingClub originates $10B in loans annually, which is comparable to Compound, and has 50x the number of employees.

Where Is Blockchain Going?

Blockchain systems have thus far proven to be both secure, and efficient, when compared to incumbent solutions.

We believe that digital assets and applications built on blockchain technologies will dramatically expand over the next decade and ultimately, individuals will interact with blockchain technology on a daily basis as they go about spending, borrowing and investing.  There is a blank canvas for entrepreneurs and developers to quickly create novel solutions within finance to disrupt the highly fragmented and antiquated system we use today.

For now, anyone can participate in this market. You don’t need to be a venture capitalist, or wait for these companies to go public. You can invest today in the banking system of tomorrow.  

Domain Money Advisors, LLC is providing this information for informational purposes only. While Domain Money Advisors, LLC believes that the information contained herein is reliable and derived from reliable sources, it makes no representation, warranty or undertaking, stated or implied, as to the accuracy or completeness of the information. Domain Money Advisors, LLC, and its parent company, Domain Money, Inc., expressly disclaims any liability or loss incurred by any person who acts on the information, ideas or strategies discussed. The information contained herein is not, and shall not constitute an offer to sell, a solicitation of an offer to buy or an offer to purchase any securities or cryptocurrency, nor should it be deemed to be an offer, or a solicitation of an offer, to purchase or sell any investment product or service.  Investing comes with inherent risks and you should always invest within your means and risk tolerance.  Past performance is not an indication of future returns and you should always consult a financial advisor prior to making investment decisions. Please see important disclosures at https://domainmoney.com/legal