The final module in the first course has to do with DeFi myths and facts. I will focus on a number of misunderstandings that are very common in the space, and I will close with the vision for the future of DeFi as well as some conclusions on this first course and a preview of what we'll do in the second course, which is called DeFi primitives. Let's start with the misunderstandings, and there's lots of them. Some of these misunderstandings, I think you'll see there's some truth to them, but it's more complicated. For example, DeFi is a small part of the market compared to CeFi and will never overcome CeFi. Well, the first part of the statement is definitely true because we're really small, we're less than one percent into this disruption. But I think it's really important to look at the vector, look at where we came from to where we are today in DeFi, and that vector is very positive. It's not as much where we are today compared to centralized finance, it's what if we continue on that vector, how long will it take for DeFi to replace centralized finance? Of course, there's many hurdles here, and one hurdle is the strength of the entrenched players. So the banks, the stock exchanges, the insurance companies. They're very strong players and it's in their interest to delay, postpone, or excessively regulate. Number 2, DeFi is difficult to use and we'll never have widespread adoption. Well, the first part is also true. Again, this is early on and the user experience today is not very good. But the question is, is that experience going to be the same in the future? It doesn't make any sense. You should not rule out a transformation of the user experience so that using DeFi applications are just so easy. It's like using the apps on your phone that we're used to using that deal with centralized institutions. It'll be just seamless. Indeed, I think of my own experience with the Internet in the 1980s. Emails, credibly difficult to use. It's clunky. The interface for email and file transfer was terrible and it was a real barrier to entry. But then the World Wide Web was launched in the mid 1990s and the experience improved and continues to improve. Number 3, cryptocurrency is mainly used for illegal activity. It is true that early on in the life of Bitcoin, it was used for illegal activity and maybe that actually contributed to its profile, and this is just a screenshot from the Silk Road website, on the dark web that you could buy drugs and other things, and everything you can see is priced in Bitcoin. Very expensive compared to the price of Bitcoin today. It is important to understand that, number 1, these cryptos are not totally anonymous and I'll explore this in some detail. There are cryptos that are anonymous, and that actually is a reason not to use cryptos like Bitcoin or Ethereum in illegal transaction. If you want something that's anonymous, you have to use cash because cash is ultimately anonymous. Indeed, it's interesting to me that 79 percent of the value of US currency is in $100 bills, yet people don't carry $100 bills. Indeed, to go pay for something at a retail outlet, there's often a sign that says, "We do not accept $100 bills." Why is 79 percent of the value of the US currency in $100 bills? That's pretty simple. To me, this is what's used for illegal activity. The large denomination bills are just the ideal choice. [inaudible] was interesting when El Chapo, the Mexican drug lord was captured, they seized $200 million in cash. Almost all of it was $100 bills, but also there was a good chunk of 500 Euro notes and things like that. You want illegal activity to be anonymous, then you use cash. Next one is government central bank digital currencies will put cryptocurrency out of business. The CBDCs, as they're known, face many hurdles but importantly, governments are strongly incented to actually have a central bank digital currency. The reason is simple. It makes it almost impossible to evade taxes because they see everything, and also you have instant monetary policy. But one of the hurdles is, I think it's going to be a very tough sell. That maybe, this can work in China where the citizens don't really have a choice, but are you comfortable with the central bank seeing every single transaction? Probably not. It's also the case that with the central bank digital currency, you can create, but you can also destroy, which means you could be censored. What does that mean? That whatever money you've got in the central bank digital currency could disappear. Next one, blockchains are not secure. For example, the government hack the hackers to get back the colonial pipeline ransom. Like I said, this one's totally false. The colonial pipeline ransom was in Bitcoin, and the Bitcoin blockchain has not been hacked. I've already gone through that this is technologically infeasible to hack. What happened was that the hackers weren't very smart, and they kept their private keys for the Bitcoin that was sent to them on a computer that was hooked up to the Internet. That's a basic mistake. Then the government hacked into their computer, stole their private keys, and moved the Bitcoin to their own account. This has nothing to do with block chain. This has to do with somebody or some group of people being careless in terms of the private keys. There's also many other stories of centralized exchanges being hacked and again, this has nothing to do with blockchain technology. It has to do with the careless security measures that are implemented in protecting the private keys. You want to really protect your private keys. You keep them basically in a cold wallet, which means something that's not connected to the Internet, and many mistakes are made and lessons learned. Here's one, all cryptos are bubbles. There's no fundamental value. Well, we've actually already gone through this that it is possible to have, for example, the Iraqi Swiss Dinar that didn't have any fundamental value, but it had value. The key thing to realize is that if you've got something that's collateralized, well, that's got tangible value that's true. The second thing is that there's many different types of cryptos. We've talked about Bitcoin, we've talked about Ethereum, but we've also talked about tokens that are linked to gold or stocks. Those definitely; the gold and the stocks have tangible value. There are other cryptos that provide services, utility. You can't lump them all together, number 1, and number 2, I think I've emphasized that value also comes from intangible value, not just tangible value. Mining is a waste of energy. We're going to deal with this in extensive detail in the fourth course, where I will actually go through and calculate how much it would cost in terms of carbon offsets to produce one Bitcoin. I'll go through the calculations. Proof-of-work which Bitcoin and Ethereum use right now, is both a strength and a weakness. It's a strength and it provides unprecedented security, but it's also environmentally reckless. We have to deal with that. That is what I call environmental risk. I'm not worried about Ethereum. Ethereum will transition in 2022 to a different consensus protocol that is very friendly in terms of the environment, but Bitcoin is a different story and again, in the fourth course, we will deal with that. Here's one, cryptos are two volatile to be useful. Again, this very sloppy because it depends on what crypto you're talking about. If you're talking about Bitcoin, yes, of course, it's five times more volatile than stocks. There are individual stocks that are five times more volatile than, let's say the S&P 500. But things like stable coins are not volatile. Or a token that's tied to a particular utility, like computing time or storage, disk Storage. They've got value that is not volatile. It's market does add value. Nevertheless, it is true that the cryptos are volatile. There's probably two leading factors driving that volatility. Number 1, is the uncertainty over what the value actually is. Some people believe Bitcoins worth zero, some people believe it's worth $400,000 a coin. That's a pretty big gap. Think about a stock, people might disagree upon the value of the stock, but it's nothing like that. That's the first thing. I guess the other thing is that there's relative illiquidity. Yes, this market is $1.5 trillion as of this recording, but it's still small. I'll compare it to other asset markets. That means that a large sale could drive the price down and a large buy could drive the price up temporarily, creating volatility. Will volatility decrease in the future? Probably. But again, it's difficult because there is no tangible value here, there's intangible value and with intangible value, it's always difficult to actually figure out how much that is worth. Quantum computing will render the whole space irrelevant. Well, it turns out quantum computing is irrelevant for cryptographic hashing. The machine in the basement that we do our theorem hashing or Bitcoin hashing, that's not going to be replaced by quantum computer. It's a misunderstanding of quantum computing technology. That's one of the things that I teach in my tech driven transformation, a business course is quantum computing. Also, a theorem transitioning to proof of stake makes it even less relevant to talk about quantum computing for hashing. However, there is one issue, and that is the way that we generate our public keys and the way that we sign the transactions. Right now, and I think I said this earlier, it's really easy to generate a random number which is your private key, and then put it through a computer program to derive the public key. But it's really hard to go the other way. It's not feasible actually today. Quantum computing holds the promise of going the other way. But the solutions relatively straightforward. You just use a different signature, use a different algorithm. Then the current algorithm, and these algorithms already exist today and they're called quantum resistant signatures. Transactions are too expensive and too slow, so DeFi is going nowhere. Well, that's again one of these statements that is true right now. But in the future, it's not obvious. It is a big mistake to assume the technology remains stagnant and prudence will definitely happen. There is the possibility that we go to a world where transactions costs are near zero. That opens up many, many possibilities. You need a smartphone and Internet to make this work and billions do not have either. Well, that is also true for today. But currently you can get a smartphone for $20. In luck, in a couple of years, almost everyone will have a smart phone no matter where you are in the world. Indeed, it's interesting, in some parts of Africa, you can buy smartphone and it comes with a small solar panel with a light bulb also, so you can charge your phone even if you don't have electricity. This will happen. The Internet itself, it will be commoditized, it will be worldwide, will cover the entire globe, essentially for free and we're seeing that happen already. Again, you need to think of the future. There are pump and dump and Ponzi schemes and DeFi making it unattractive for investors. Well, let me tell you that throughout the history of business, there's been pump-and-dump schemes and Ponzi schemes. Pump and dump is where you really say things positive about your product. You might even go buy some of the product to drive the price up. A product might be a stock price. Then you dump it. All of those that went along for the ride, they saw the price going up, they get wiped out. Any technology like this, it's got a risk of people trying to take advantage. What you need to have is a discipline. Fundamentally, if you're investing in deeper, you need to understand the protocol. You should not invest if you do not understand the protocol. The same thing with any other investment. Some of the discipline that I teach in my courses are the following, ask the following questions; does the DeFi idea solve a problem? It's not useful to solve a problem that doesn't exist yet. Number two, is the problem an important problem? There's plenty of small problems but value is not going to be created unless you're solving big problems. Is DeFi the best way to solve the problem? There might be other ways to do it with a regular database, a centralized database that solves the problem. Of course, you need to look at the competitive landscape. You need to figure out how easy it is for a competitor to enter so-called moting. A very important question is, does the idea scale? Often we start with one particular application and the technology can be used to either horizontally scale, which means to go into different markets, maybe globally, or vertically scaled to use the same technology in a different application. To repurpose the basic idea for a different application, so these are very important things. Before you do the investing, you need to go through this list. DeFi is too hard to understand. Well, you're taking this course, and I think at the end of this course you're going to be in good shape. I congratulate you for taking the courses. It is definitely true that it is hard to understand and some of the concepts that I've gone through so far in this first course, we're going to loop back and return to them and go into more detail. It's definitely hard to understand, plus it's changing, so even though you do this course, there will be innovations that happen shortly after the course, however, this is really important with the new technology that's complicated. If you've got a reasonable understanding of the technology that opens opportunities, so the ones that are informed have a really big upside and I want to make you one of the informed. Another one is DeFi to proceed. But every new technology is risky. If you want risk-free, then you hold treasury bills which don't even make the inflation rate so you lose value, but you're safe. DeFi is risky, definitely true but it's also anti-fragile. What I mean by that is that you can attack a DeFi protocol, you can find a vulnerability and then we just forkit and improve upon it and make it stronger. That's very unique and it can be done very quickly. DeFi is too early in development. I will wait. Well, I doubt you're waiting given that you're enrolled in my sequence of four courses, but that's a typical of response. Yes, we are early. But for me, that is the advantage. You always want to be in early. By the time it's so developed, there won't be any upside or not the same upside. That is not a good reason. You should not wait. You need to get in now. DeFi, this is the last one, requires a degree in computer science, which I don't have hence I'll avoid it. Well, I don't have a degree in computer science. Many of the most prominent people in the DeFi space don't have a degree in computer science. The most important quality in DeFi is the same most important quality in almost anything. In business or the arts, it's creativity. It's important for you to understand the potential of DeFi and its risks. You don't need a CS degree for that. You can generate ideas. You might not be able to execute on the idea, you need a developer to do that. In execution, very important, so you need a partner. But if you're creative, the upside is virtually unlimited in this space. I think there's a lot of misunderstanding in the space and hopefully, I've cleared up some of the myths.
