Bitcoin hogged the headlines in the last week with its sprint past R700 000 on news that electric car company Tesla had invested $1.5 billion in the crypto, but a potentially more interesting story is playing out among three of the smaller cryptocurrencies – Ethereum, Cardano and Polkadot.
There is a battle playing out among the three over who gets to control what many perceive as the future global financial system – something known as ‘decentralised finance’ or DeFi.
Types of financial systems
A brief explainer here: the existing financial system is built around centralised control, such as banks, stock exchanges and insurers. These require intermediaries and brokers who add friction and costs to the system. These intermediaries squat in the middle of transactions for which they siphon off fees. And they’re often not quite as independent as they claim, so they end up selling you something you may not really need or want.
There are crypto exchanges where you can purchase cryptocurrencies (as well as digital silver, digital gold, stablecoins backed 1:1 with the rand, the US dollar and other currencies). These also have owners, and therefore fall under the heading of ‘centralised finance’.
Then there are the decentralised finance (DeFi) exchanges that have popped up in the last few years. They allow you to buy and sell cryptos without an intermediary, and often at better prices than on centralised exchanges.
You can also borrow, lend and earn interest – all without a go-between. Sending and receiving funds through DeFi is generally faster than in the traditional world of finance, and a loan can be taken out in minutes with no paperwork whatsoever.
With DeFi, the lender doesn’t even know your name.
To borrow on one of these exchanges, all you have to do is provide collateral in some recognisable form, such as bitcoin. Pretty soon, you’ll be able to ‘tokenise’ or convert highly illiquid assets such as property into digital assets and use that as collateral. And you’ll be able to own a fractional share of a highly desirable property, or a tiny piece of Apple equity. These are called ‘tokens’ rather than shares, and you will be able to buy and sell them on these DeFi platforms.
An option for the poor
The poor will also have easy access to this financial system.
Traditional financial providers and governments have promised to extend financial services to the poor, but the results are so far have been underwhelming. DeFi should be able to do that with greater efficiency and much lower costs.
For example, it has been estimated that the fees for cross-border remittances cost developing countries about 5% of GDP.
Crypto-based providers like Paxful have been able to slash those fees to 1% and less.
A new financial architecture
Competing to own this new DeFi space are software projects like Ethereum, Cardano and Polkadot. These are not ‘stores of value’ like bitcoin, but are platforms offering a new way of transacting without intermediaries. Each of these has its own cryptocurrency, so you can invest in them.
They are open-sourced projects, meaning any developer has access to the code, and they will eventually be interoperable with other financial ‘rails’ such as Visa and Mastercard.
Vitalik Buterin is the founder of Ethereum, and he set out to build a system that would allow transactions to take place between people anywhere in the world, with no need for trust or due diligence, and to settle those transactions instantly without need for an intermediary.
The idea of the ‘smart contract’ was born, where transactions are recorded on a giant decentralised ledger reposited (stored) on thousands of computers around the world rather than on a single centralised server, as with a bank.
This ledger is known as the Ethereum blockchain (the Ethereum cryptocurrency is called ether, or ETH).
Ethereum is a brilliant concept but suffers from bottlenecks and inefficiencies. The fees for using the system rise and fall depending on congestion on the network. The scalability of Ethereum has been a problem for some time, and developers hope the recent adoption of the Ethereum 2.0 upgrade will solve that.
Ethereum’s constraints have created opportunity
Those problems with Ethereum have opened up opportunities for Cardano and Polkadot, which do not suffer the same scalability issues.
Charles Hoskinson worked with Ethereum but left in 2014 and founded Cardano in 2015. He set out to build a system that improved on issues of speed and scalability faced by other cryptocurrencies.
In December last year a new phase of the project was launched allowing for the integration of smart contracts, with the addition of a multi-currency ledger being added to the blockchain.
This is of particular interest to corporations operating around the world.
Cardano (which goes by the code ADA) has been called the ‘Ethereum killer’ because of its ability to solve common business problems and scale without the kind of congestion problems facing Ethereum.
The jury is still out as to whether Cardano will dislodge Ethereum as the platform of the new global financial system.
Cardano in rands
Cardano has run from R2 to R13 in the last two months. You can earn interest of about 5% a year on your Cardano by ‘staking’ it (staking means putting your crypto to work in the blockchain and getting rewarded for it).
Ethereum in rands
Source: TradingView
Polkadot (DOT) was founded by Gavin Wood, who previously worked as a research scientist at Microsoft and co-founded Ethereum with Vitalik Buterin with the aim to make “one computer for the entire planet”.
Polkadot’s big advance over other blockchains, which operate in silos, was to create an internet of interoperable blockchains for a decentralised web. It aims to allow all blockchains to link and work together and offer smart contract functionality.
This is a huge benefit for developers as it allows them to develop apps that will work on all blockchains, not just one.
As Decrypt points out, the two issues blockchain-based systems most need to solve are scalability – the number of transactions per second the network can handle – and governance: how the community manages protocol upgrades and changes. Polkadot aims to solve both of these problems.
It was launched in May 2020, but has already risen to become the sixth largest cryptocurrency with a market cap of $26 billion – an extraordinary feat in a matter of just months.
Polkadot in USD
Source: CoinGecko
What the experts say
Richard da Sousa of AltCoinTrader says coins to watch in 2021 are ether, Cardano and Polkadot, for the reasons already given. “While bitcoin and Ethereum are breaking all-time highs in recent weeks, smaller coins such as Cardano have yet to do that.”
Jon Ovadia, CEO of crypto company Ovex, says two coins to look out for are FTT and SRM.
“Full disclosure: these are coins backed by one of our investors, FTX. Both of these coins are what are known as exchange coins and essentially give the holder rights to cashflows of the exchanges.
“The way this works is the exchange uses a portion of the fee income to buy back tokens from the open market on a regular basis. The most recent FTT burn was over $3 million. So I’d watch those coins very closely.”
Jason Carpenter of Etherbridge says Ethereum is definitely one to watch.
“Additionally investors could look at buying some of the blue chip DeFi infrastructure. Uniswap, Compound, Aave, Synthetix, Maker, Balancer. These networks are becoming core infrastructure of the Ethereum financial system.
“As these investments are incredibly volatile and in their infancy, caution must be paid to risks,” says Carpenter.
You can buy these on most decentralised exchanges, including Binance. Perhaps the best one-stop shop as a decentralised exchange is Uniswap, while Binance (which is a centralised exchange) offers access to most of these tokens.
“Investing in bitcoin, Ethereum and DeFi should be done so with small allocations and with a long term time horizon.”
Josh Miltz, co-founder of crypto company BitFund, says two coins on his radar are Polkadot and Filecoin.
“Polkadot is considered one of the most pioneering projects based on a multi-chain framework that can be a competitor. It aims at providing the most advanced peer-to-peer network for numerous blockchains. Over the past three months, Polkadot has gone from $3.70 a coin to $22.80 a coin, with a market capitalisation of over $20 billion.
“Filecoin is an open-source public cryptocurrency and digital payment system, is intended to be a blockchain-based cooperative digital storage and data retrieval method, and is another exciting cryptocurrency to look out for. The project was launched in August 2017 and raised over $200 million within 30 minutes.
“Filecoin aims to store data in a decentralised manner. Unlike cloud storage companies like Amazon Web Services or Cloudflare, which are prone to the problems of centralisation, Filecoin leverages its decentralised nature to protect the integrity of a data’s location, making it easily retrievable and hard to censor.”