The goal of this paper is to investigate how Blockchain technology and defi(decentralised finance) can give some organisations a competitive advantage using Porter’s 5 forces. We will also use a SWOT analysis to evaluate Blockchains impact on society on a macro level. We will particularly focus on the use of Bitcoin as a hedge against inflation and make some comparisons to other assets like gold and property. As an emerging technology over the past ten years, blockchain offers a great opportunity to restructure businesses and the economy, while opening us up to new interesting threats.
We will use Binance, Compound and Montelibero as examples of organisations that use Blockchain and defi to gain competitive advantages in their respective markets. In the conclusion, we will give a brief explanation of how an organisation can apply Blockchain and defi tools to gain a competitive advantage.
What is blockchain technology and Defi?
Decentralised finance(Defi) is a set of tools that are most typically derived from blockchain technology. Defi provides ordinary people with hi-tech tools to become their own bank and trade new asset classes 24hrs a day. Defi and modern banking are similar in the sense they both need rules and liquidity to function. Modern banking is usually based on the “hub and spoke” model, meaning that usually financed is largely controlled by a small group of people and often concentrated in one location or city. Defi, as the name suggests is more decentralised. An entirely new financial network could be run by someone’s smartphone. As of March 2021, over $41 billion is locked up in these defi smart contracts.
Binance offers people an entry-level set of tools that most people can easily integrate with their bank. From there, customers can use a range of defi saving and loans schemes with much more profitable rates than given by traditional banks.
Compound is for advanced users. It provides an algorithmic interest rate platform that is excessed from customers' own decentralised wallets called a DEX or decentralised exchange. Based on the Ethereum blockchain, it offers users excess borrowing and lending functionalities, which are not regulated by the government or credit checks.
Montelibero is a token that allows customers to invest and vote on a particular land development project in Montenegro. They building a physical pro-freedom community that is backed by a cryptocurrency as both their decision-making tool and a way to redistribute profits.
Impact on society
Bitcoin as a hedge against inflation
Inflation can be defined as the gradual increase in prices across the economy. If for example, inflation is at 5%, then all of those who do not receive an increase in income now have a decrease in purchasing power and are relatively poorer than before. This explicitly affects savers, pensions, low income and propertyless people.
In an inflationary economy, those who have the money first get the benefit of yesterday's prices before inflation kicks in. These are usually large investment banks. The end result is that the average cost of homes is increasing in proportion to the average person’s income. The rich get as the poor get poorer.
Typical hedges against inflation include investing in property, precious metals like gold and even investing in the stock market. Cryptocurrencies like Bitcoin provide an even stronger hedge against inflation.
Now we will do a SWOT analysis on using blockchain and defi as a hedge against inflation. We will be using Bitcoin as the flagship for the crypto market.
The biggest strength that Bitcoin has is that it actually gets great returns investment every four years. Every four years the rewards are halved and thus create a predictable four-year market cycle, which in turn sets the pace for the entire crypto market.
Gold and property in comparison often follow a ten-year economic cycle but do not give the same return for investments.
Bitcoin and cryptocurrencies values are deeply pegged to utility and speculation. Bitcoin miners receive rewards for running the network to mitigate the costs of running the network. Those costs put a temporary floor on how low a miner will sell their Bitcoin for, but if the overall market no longer values Bitcoin or considers any other crypto service as valuable then its value can possibly go to zero.
Gold in comparison will always be used to create jewellery and has other practical uses like jewellery and electronics. Property will always be in demand as the world’s population increases.
Humanity does need a new economic system to protect itself from zombie banks. Since the 2008 global financial crisis, no government authorities actually fixed the issues that caused the crash in 2021 large banks are starting to fail again.
Gold or any property based currency offers protection against the double-spend problem but is not as easily implemented as adopting cryptocurrency. Since we moved from a gold-backed currency to a fiat currency, going backwards makes sense and creating a new system opens us up to new opportunities.
The biggest threat to the crypto market is how we convert cryptocurrency back into fiat currency. The most popular method of trading crypto for fiat is Tether. Tether is a so-called stable called which is perceived to be backed by one US Dollar and for years has been accepted as the industry standard.
However, investigations are indicating that the company that owns Tether does not have enough US Dollars to back the amount of Tether in circulation. Thus we end up with the same double-spend problem we tried to avoid by using blockchain technology as a hedge against inflation.
If there are more Tethers in the market than USD backing them, this could inflate the price of Bitcoin and all cryptocurrencies.
The gold and property markets also have similar market manipulation problems as well. Most gold in the stock market are only backed by paper. The property market is often inflated by the availability of cheap loans and low-interest rates.
Another major threat to defi is “rug pulls”. This is when developers create a project and after they lock up a certain amount of assets, they run off with the money. This problem is solved by independent audits.
Using defi for a competitive advantage
Porter’s 5 forces
1. Supplier power.
Cryptocurrencies are typically “free banking” currencies. Their value is determined by a 24hr trading system. Some projects may have one entity owning a large market share and these situations are considered risky and possibly a red flag for being a scam.
Binance has thousands of blockchain companies as suppliers. Most of these projects are open source so there is no risk of one project trying to muscle favours out of Binance.
Compound is currently only integrated with the Ethereum blockchain and other Ethereum based networks. This means that the app’s popularity is dependent on the success of Ethereum's main development team. It would be possible for Compound to integrate with other blockchains and thus balance its dependency.
Montelibero has solely based the blockchain called Stellar Lumens. If the Stellar Lumen project goes down then it would be difficult for Montelibero to transfer to a different blockchain. However, since their token is proportional to their land developments value they could move to another technology while maintaining its value and usage.
2. Buyer power.
A major weakness in the cryptocurrency space is the ability of a large buyer to influence the price over a day. A wallet holding one to ten million dollars worth of a particular cryptocurrency could sell its assets and crash the price over a day. These large wallet holders are called ‘whales’. A series of whales selling off their assets can cause a long-term market crash and these are ‘whale dumps’.
Both Binance and Compound will profit well even during times of large whale dumps. Montenegro is a lot more exposed if a malicious investor wanted to take over with a $500,000 account.
3. Competitive rivalry.
The cryptocurrency market has an infinite supply of rivals that provide identical services. Bitcoin, Ethereum and Monero are the main trendsetters for blockchain technology. Most other projects are based on protocols created by these development teams.
Binance will maintain its market share as long as it provides more professional trading services than its main rival Coinbase, and is more user friendly than the dozens of potential rivals.
Compound could be replaced by any development team that copies or ‘forks’ its code and provides better customer service.
There are similar projects to Montelibero in Serbia, USA and India. Customers will pick each project solely based on their preference for each region. Montelibero is safe from competitive rivalry in that regard.
4. Threat of substitution.
The threat of substitution is very high. While blockchain and defi are radically altering how ordinary people relate to finance, new financial technology(fintech) is being developed in the traditional banking sector. The more efficient traditional banks become, the less likely people are to move to cryptocurrency.
Both Binance and Compound could be replaced by a new better company in one day. Montelibero is much less likely to be substituted.
5. Threat of new entry.
Any intermediate level software developer could create a new product or service that could be a new entry threat.
Binance has a sizable amount of resources, the economics of scale and highly trained employees to protect its market share. Binance has been harmed by harsh regulations from government authorities, then bounces back with new innovations.
Blockchain technology and defi give us an opportunity to create a new economic system where “code is law”. Participants can freely create their own to fit their own needs. Cryptocurrency has proven to give the best protection against inflation for savers.
Being the wild-west of finance, the crypto space is open to attacks from whales, government regulators and malicious actors. Liability issues around code errors are still not clear enough for less tech-savvy investors.
How to apply defi to most businesses?
Despite the risks, any business could apply blockchain technology and defi to gain a competitive advantage in their respective markets. Organisations can create tokens that have proportional value to their assets and also give dividends to token holders. Companies could choose to give added value to token holders by allowing them to vote on business decisions like they were stakeholders. This helps to decentralise and democratise the economy.
Even if the price of Bitcoin crashes in the winter, blockchain technology and defi are likely to stay for another generation and provide us with funny memes coins.
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