Bankers: If You’re Not Riding the Next Wave, You’ll be Crushed by It

Eric Elliott
Sep 20 · 8 min read

Three Big Waves that Crushed Whole Industries

When the iPhone was released, Nokia knew they were in trouble. They did not have a touch screen product, yet. They didn’t have an OS capable of competing with iOS or Android. Instead of riding the momentum of dominating the cell phone industry for the last several years, they were crippled by the inertia of a company unwilling and unable to disrupt itself.

They didn’t see the wave coming, and it crushed them. In just 6 years, Nokia’s market cap fell 90% until they were gobbled up by Microsoft.

Digital photography was pioneered by Steven Sasson in 1975 while working for Kodak. At the time, Kodak dominated the photography market, including cameras, film, flash bulbs, chemistry to develop images, and even a mail order processing service. 14 years latter, Sasson tried to bring a professional digital camera to market, but the marketing department shut the project down, fearing it would cannibalize the company’s core business model. Less than a decade later, it was clear to everyone in the photography industry that digital was the future, but by that time, Kodak had missed the boat that they built.

Between the invention of the digital camera in 1975, and the first real commercial success of digital cameras in the latter half of the 1990s, Kodak had ample opportunity and the patents needed to own the market for sharing personal memories — a function that still plays a central role in today’s smartphone and social network technologies. Sasson even predicted using phone technology to transmit digital photos in the 1970s. But they didn’t do it.

Because they couldn’t see how massive the wave was until it was too late, and refused to compete with their own business model, Kodak was crushed, first by digital cameras, and then smartphones came along and finished the job.

In 1999, the music industry had its best CD sales year ever, grossing $12.8 Billion, accounting for 88% of music industry revenues. The same year, Napster blew up and ushered in the digital music wave.

By 2015, CD sales had been decimated down to $1.4 Billion accounting for 22% of industry revenues. Adjusting for inflation, that’s a drop from $18.9 Billion to $1.5 Billion — a 92% decline.

The music industry spent the first half of the 2000–2010 decade fighting digital formats tooth and nail — suing every company that tried to make digital music work. Only after watching their cash cow drop 92% and evolving through a rough period of contraction and consolidation did they make a real effort to turn things around and work with streaming media companies. They’re now up almost 50% over the 2015 lows. 75% of revenues come from internet-delivered formats.

The Next Big Wave is About to Hit the Banks

The world’s largest bank is the Industrial & Commercial Bank of China, with $3.6 Trillion in total assets. China recently announced their intention to issue a new national digital currency. While many in the US comment that it’s likely related to Facebook’s announcement of their Libra cryptocurrency, which they hope will become a global standard for payment processing, it’s more likely that China’s Central Bank wants in on the digital currency transformation that has already happened in China. China’s retail economy is already dominated by two digital payment providers: WeChat and Alipay.

China isn’t alone in issuing a digital currency, though.

The Bank of England has been investigating a cryptocurrency option since at least 2015, and recently, Bank of England governor Mark Carney proposed a “Synthetic Hegemonic Currency” backed by a number of digital central-bank currencies to replace the US Dollar as the global reserve currency.

The Bank for International Settlements recently conducted a survey of 63 central banks and found that 70% “are currently (or will soon be) engaged in CBDC [Central Bank Digital Currency] work”. Nearly 50% are in the experiment/proof of concept phase and are “increasingly collaborating with each other to carry out proof-of-concept work on eg cross border payment and securities settlement”.

Notable central bank digital currency pilots include Sweden’s e-Krona and Uruguay’s e-Peso. Meanwhile, the Bahama’s are in the process of creating a central-bank issued cryptocurrency. Project Khoka in South Africa ran a successful test using an Ethereum-based blockchain for private interbank transaction settlements, and project Ubin tests demonstrated similar results for Singapore.

At this stage, it looks like a matter of when, not if central banks will move to Central Bank Digital Currencies (CBDCs) and distributed ledger technology for interbank and international settlements, and eventually consumer payment systems. Judging by how quickly WeChat and Alipay took over China, by the time central banks do issue public digital currencies for consumer retail use, mainstream adoption of cryptocurrencies for retail payments may already be well underway.

DeFi is Coming

While central banks around the world are investigating digital currencies both with and without the use of Distributed Ledger Technology (DLTs, e.g., blockchains), fintech startups and Decentralized Autonomous Organizations (DAOs) are beginning to roll out financial primitives such as loans and insurance on blockchains (mainly Ethereum).

This new ecosystem is called DeFi, short for Decentralized Finance. It allows users to create and trade financial instruments without permission or underwriters on an open market. The only requirement is that they follow the rules of a smart contract: decentralized code that runs on a cryptocurrency network like Ethereum. The money transacted is in the form of tokens — programmable digital currency.

If somebody wants to take out a loan, the only requirement is that they put up the required collateral. There are no credit checks. No bank officers. No underwriters involved. If they don’t pay the loan back, the collateral is liquidated automatically by the smart contract.

As I write this, there is $145 million in outstanding loans across Maker, Compound, Dharma, and dYdX. This is obviously a tiny drop in the bucket of the $215 Trillion global debt market, and if you’re a banker, you’re probably laughing at me right now because you have small single accounts with larger outstanding balances than that.

But this is how exponential curves start out. They look small. They creep up gradually, until they turn into epic hockey curve rocket graphs that move too fast for any market to outrun. Especially long entrenched markets with gigantic vested interests and enormous investments in the status quo. Ask Kodak about that. They had 20 years to prepare and still got crushed.

What’s really interesting is how fast this is taking off. Compound V2 just launched this may. It’s done $100 Million in year-to-date (YTD) volume, and has $40 Million currently outstanding.

Right now the customers in this market are mostly early stage venture investors testing the waters, super-early innovators building the foundations of the ecosystem, and a trickle of the earliest of early adopters.

None of these loan products have rolled out in a mainstream app, yet as I write this. That’s about to change. 2 years from now, we’ll look back and these numbers will look tiny by comparison, and then maybe you’ll notice.

But if you wait 2 years to notice, it may be too late to drop in on the wave. If you wait too long for the break you’ll be left behind and crushed.

Why DeFi?

Decentralized finance is great for everybody, including banks. DeFi will increase capital efficiency, deepen liquidity, dramatically increase inclusion (growing the whole pie), and offer you the opportunity to pioneer new products and financial primitives and offer them to a much wider open, global market.

But most bankers are going to ignore this article, so I’m going to tell you why DeFi is great for you.

Banks have a ton of overhead. If you want to borrow from your home to finance a remodel, you currently have to go into a branch office (made of bricks and steel, and glass, and lots of expensive stuff) and talk to a loan officer (on salary), and your loan will need to pass through underwriting (which is semi-automated in some cases, but often involves some manual process and more salaries).

Currently, home equity loans hover around 7% for the best credit customers.

On the supply side, customers deposit funds into an interest bearing account. Right now, the highest yields I can find hover around 2%.

That leaves a big spread in the loan market. If you’re an investor, the spread is your opportunity. Potentially, competitive DeFi products could lower the cost of capital for all kinds of investments.

In the meantime, DeFi opens up opportunities for anybody to be a lender, at very high interest rates compared to bank savings accounts. Let’s look at what’s happening today:

Current DeFi loans are used primarily for short-term leveraged trading, where interest accrues for a short period in exchange for far greater earning opportunities. For example, Binance is currently testing a new leveraged trading feature, powered by BNB loans supplied by Binance customers in exchange for 10% interest.

In the near future, it will be trivially easy to build a retirement portfolio spread across assets like Bitcoin, BNB, and Ethereum, and take a loan using those funds as collateral to buy a car or home, or pay for some unexpected expense.

Your money stays in the market earning returns while you pay back the loan. Your Bitcoin holdings never get liquidated (unless you don’t repay), so if the market goes on a bull run in the meantime, you won’t miss out. The hope is that the market will grow faster than your loan will accrue interest, so you don’t suffer so much opportunity cost when you have a big purchase to make.

DeFi Can Lower Risk

Another thing that excites me about Decentralized Finance is that it opens up the opportunity for new and interesting venture finance models. Say you want to start a new business, and offer investors a low-risk option to invest and earn equity gradually over time, as you need the funds, rather than in one big lump sum.

Investors can lock up $10 million in a smart contract that opens a Compound lending account, and sends the interest to the new venture. In exchange, investors get sent back tokens representing venture equity. Investors could always retain liquidity, withdrawing their funds, or exchanging the venture tokens if they lose faith, but the only real risk in this scenario is opportunity cost. An example of this model is called a Public Interest Project — a proposed alternative to high-risk Initial Coin Offerings (ICOs).

This may not be the right model for risk tolerant early-stage venture investors, but it could be a good model for reduced-risk angel syndicates or endowment funds.

We’re Building the Future Today

If any of this sounds exciting to you, and you want to get in on disrupting a $215 Trillion industry, I build development teams for crypto ventures, and I’m always looking for smart people to work on smart contracts in Solidity and code user interfaces in JavaScript and React.

Some cool problems we as an industry need to solve:

  • Identity — putting users in control of their private information and public user profiles.
  • Security — keeping money, keys, and crypto assets safe from loss, theft, and bugs.
  • Crypto collectibles and non-fungible tokens — Representing rare assets in an open trading ecosystem.
  • User experience — building beautiful, inspiring user interfaces people love to use.

If any of those sound like the kinds of things you’d love to work on, please get in touch.

Eric Elliott is the author of the books, “Composing Software” and“Programming JavaScript Applications”. As co-founder of and, he teaches developers essential software development skills. He builds and advises development teams for crypto projects, and has contributed to software experiences for Adobe Systems, Zumba Fitness, The Wall Street Journal, ESPN, BBC, and top recording artists including Usher, Frank Ocean, Metallica, and many more.

He enjoys a remote lifestyle with the most beautiful woman in the world.

The Challenge

Our goal is to build a world that democratizes opportunity, where people control their own privacy and property, and all people participate in processes that are transparent, trustworthy and inclusive. Join us. #crypto #blockchain #bitcoin #technology

Thanks to JS_Cheerleader

Eric Elliott

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Make some magic. #JavaScript

The Challenge

Our goal is to build a world that democratizes opportunity, where people control their own privacy and property, and all people participate in processes that are transparent, trustworthy and inclusive. Join us. #crypto #blockchain #bitcoin #technology

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