The next time you visit your local bank branch, I dare you to try something unusual…
After you finish your personal business, ask the branch manager to show you an anonymized history of every account balance and transaction. Tell them you just want to make sure their financials are in healthy, working order.
They’ll likely laugh you out of the bank…
The thing is, lack of transparency was a main contributor to the Great Financial Crisis of 2007–2009.
According to the official report released by the U.S. Financial Crisis Inquiry Commission on the 2008 meltdown:
Panic fanned by a lack of transparency of the balance sheets of major financial institutions, coupled with a tangle of interconnections among institutions perceived to be “too big to fail,” caused the credit markets to seize up.
Ironically, the 2008 financial meltdown gave birth to bitcoin… with its promise of complete financial transparency by using blockchain technology.
Unlike your local bank, decentralized blockchains are open digital ledgers based on “proof,” not “trust.”
But how do we know that for sure?
That’s a question we recently got from reader Greg L., who asks about the transparency of decentralized finance (DeFi) protocols:
You say DeFi protocols are open and transparent. And anyone can see exactly what’s happening under the hood at all times. How can you see what is happening?
In today’s issue, I’ll show you how you can easily review the transaction histories of major DeFi protocols.
But before we go there, let me tell you why “transparency” (or a lack of it) is also the reason for the crisis in crypto we’re seeing today.
The Real Cause of the Crypto Crisis
If you’ve been following the Daily for the past few months, you know we believe the current crypto sell-off isn’t a problem with DeFi protocols.
Instead, it involves the reckless lending activity by centralized finance (CeFi) platforms that are heavily involved in crypto.
DeFi is built on blockchain technology. It aims to make banking, borrowing, lending, and investing more accessible, cheaper, and profitable for millions of people.
DeFi lending works by taking collateral and issuing loans against it. To manage risk, these protocols require the collateral’s value be greater than the amount borrowed.
CeFi crypto firms like Celsius and Voyager took deposits from the public and lent them to hedge funds to generate yields… without safe levels of collateral to back those loans.
As it turned out, many of these hedge funds were taking on an absurd amount of risk…
When their bets went awry, they couldn’t repay their loans – leaving massive holes in the balance sheets of the CeFi lending platforms.
And as the debts began to sour, it sent a cascade of margin calls throughout the space. Every major lender began recalling loans since no one knew who was exposed.
The forced selling crippled Celsius and Voyager… Both companies have since filed for bankruptcy.
It was like the Great Financial Crisis all over again, just on a smaller scale.
The silver lining of this shakeout is it highlighted the differences between CeFi and DeFi… and why transparency is so important.
Centralized platforms like Celsius and Voyager are private companies. They’re opaque. We have no way of knowing how much risk they’re taking.
DeFi protocols are open and transparent. You can see exactly what’s happening under the hood at all times.
The major DeFi lending platforms continue to function exactly as intended – without the liquidity and credit issues we’re seeing on centralized platforms.
And you don’t have to take our word for it. You can see for yourself.
Crypto’s “Hidden” Advantage: Transparency
The blockchain is essentially just a ledger of all transactions that occur on its network. And the beauty of DeFi is that anyone can view this “ledger” themselves.
For example, a website called Etherscan allows you to see the entire history of the Ethereum blockchain – all the way back to its beginning.
If you know a wallet address, you can simply type it into the search box and see its current balance and entire transaction history.
It’s important to note the blockchain still maintains privacy. It doesn’t track user info such as name, date of birth, Social Security Number, or other real-world identifying information. Only your crypto wallet address.
Below is a snapshot of the transaction history of a random ETH wallet…
Admittedly, the transaction history may seem confusing to those who aren’t familiar with the blockchain. But here’s a breakdown of what it shows:
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The addresses of the wallets involved in the transactions.
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The value of ETH transferred to and from wallets.
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The tokens used to make the transactions.
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How long the funds remained in the wallets.
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The transaction block number.
You can view Etherscan here. And if you’re interested in learning more about how to read the transactions, you can check out this beginner’s guide from ZenGo.
Best of all, using Etherscan is free. You don’t need to create an account to access all of its features.
And Ethereum isn’t the only blockchain that’s open and viewable. DeFi protocols like Aave, a lending and borrowing application built on Ethereum, are also transparent.
You can use Etherscan to easily see Aave’s assets under management… how much collateral is in their lending pools… the number of lenders and borrowers on their platforms… and their rates. All in real time.
But even if you don’t want to take a peek under the hood, all this proves one key point…
DeFi’s Transparency Is Its Strength
Currently, Ethereum’s market cap is roughly $200 billion. That’s larger than all but the top 3 banks in the world (JPMorgan Chase, Bank of America, and ICBC).
Yet, unlike major banks, DeFi protocols on Ethereum are completely visible to everyone at all times. You don’t have to ask the branch manager to see records.
As a result, they’re not susceptible to the kinds of credit crises we saw in 2008… and earlier this year with the centralized crypto firms.
That’s why we believe DeFi will eventually overtake the traditional financial sector and become a multitrillion-dollar asset class.
Of course, the prices of DeFi tokens have suffered along with the overall market – but we expect them to recover with it… Especially as investors look for more transparent lending platforms.
So if you want to peek under the blockchain hood, check out Etherscan.
But you don’t have to become a crypto expert to profit from this revolution. You can start with a small stake in Ethereum.
As Daily editor Teeka Tiwari says, treat this pullback as an “in-game reset.” You just need a small stake to position yourself to profit when crypto returns to its all-time highs.
Regards,
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Chaka Ferguson
Editorial Director, Palm Beach Daily