Banking's $33.5 Trillion Is in Crypto's Crosshairs
By Ian King
Editor, Strategic Fortunes
Banyan Nation,
“First they ignore you, then they laugh at you, then they fight you, then you win.”
This is one of my favorite quotes. I’m not sure who said it, although it’s been incorrectly attributed to Mahatma Gandhi.
To me, it describes the disruptive force of technology — incumbents ignore the upstarts, laugh at them, try to fend them off and then eventually lose to more efficient ways of doing things.
This is exactly what’s happening in the world of traditional finance, as blockchains take aim at the $33.5 trillion financial sector.
Look no further than Jamie Dimon, CEO of JPMorgan, to see how this has played out.
In 2017, he called bitcoin a “fraud” and compared it to the infamous 17th-century Dutch tulip bubble. He believed governments would shut it down if it threatened traditional financial systems.
A year later, Dimon changed his tune but differentiated between bitcoin and the rest of crypto. He acknowledged the potential of a transformative technology for the financial sector. JPMorgan even launched its own digital coin — JPM Coin — for cross-border payments and settlements.
While we haven’t heard much about JPM Coin lately, Dimon’s bank began offering crypto-related investment options to its wealth management clients in 2021.
He’s even changed his tune on bitcoin lately, saying that while crypto may not be a reliable store of value, it is here to stay in some form, especially if well-regulated.
The battle is far from over.
For all its promise, decentralized finance still hasn’t overtaken the financial system. Most blockchains are still slow and expensive, making them useless for millions of daily financial transactions.
However, many of those problems are in the past. And the future for DeFi couldn’t be brighter…
The Dark Horse in DeFi
DeFi requires blockchains to operate at scale. That means the ability to process tens of thousands of transactions at a time.
To put this into perspective, take a look at some of the traditional finance systems that DeFi is looking to disrupt:
- The New York Stock Exchange can handle over a billion shares in trading volume per day.
- Visa can handle 65,000 transactions per second.
- Mastercard can handle 5,000 transactions per second.
This is the kind of scale that DeFi applications need to reach before they can become truly useful to the global population at large.
The problem is that Layer 1s are quite slow and inefficient.
Layer 1s are essentially blockchains that you can build projects on such as DeFi applications.
While upgrading Layer 1 is one part of the solution, the other is Layer 2 protocols.
Layer 2s, as the name suggests, are blockchains built on top of Layer 1 and ultimately connect back to Layer 1 but improve upon the speed and efficiency problem.
So, by building a DeFi application on Layer 2, you can take advantage of Layer 2's speed and efficiency while still benefiting from the security of the Layer 1 it connects back to.
In the crypto world, the most famous Layer 1 protocol is Ethereum. And a good example of a Layer 2 protocol is Arbitrum (ARB).
Arbitrum, with around 38% of the market share of Layer 2s built on Ethereum, has a max capacity of 40,000 transactions per second.
Layer 2 projects are a fast-growing segment in the crypto market and they are expected to continue growing at a rapid rate for the rest of the decade.
The market cap of Layer 2s across all Layer 1s is worth just over $20 billion today.
Investment firm VanEck predicts that Ethereum’s Layer 2s alone will make up 60% of the market and be worth over $1 trillion in market cap by 2030.
But in the search for the right Layer 2 to invest in, Arbitrum, with its first place in terms of market share, isn’t the most interesting one.
That title goes to the Layer 2 in the No. 2 spot — Base Protocol (BASE).
The Onramp to DeFi
It's remarkable that Base is in the second spot, with $6.67 billion worth of digital assets locked or staked on its platform, considering its unremarkable beginnings.
There have been Layer 2s in the works since about 2016 — just a year after Ethereum’s public debut.
But Base isn’t one of them. It just launched last summer.
And it doesn’t have an impressively new technology stack that it pioneered. Instead, it’s just built off of the existing tech provided by the Layer 2 in third place — Optimism (OP).
But there is a reason that it’s gained the second highest market share in just a year since its launch — it was built by the well-known crypto exchange, Coinbase.
With 120 million users and over $226 billion in trading volume over the last quarter, Coinbase is one of the easiest ways for the average person to get into the world of crypto.
It provides an easy onramp for a person to take their fiat currencies and buy crypto tokens on its centralized exchange.
Now, Coinbase is going a step further and creating an onramp for people to take their crypto tokens from their centralized exchange and interact with decentralized applications.
This is exactly what Base was created for.
It’s also much easier to access for the average person compared to other Layer 2s.
There is no website to go to or any list of specific instructions to follow, instead all you need is your Coinbase account to get started and it can guide you onto Base.
The excitement around this ease of access is what has made Base so valuable in just a year.
Base was launched for public access back in August of 2023, with just $134.54 million worth of assets locked in the platform.
But as the number and popularity of DeFi applications on Base grew, the total value of digital assets locked (TVL) on Base exploded.
These kinds of DeFi projects on Base have raised its TVL nearly 50X to $6.67 billion today.
However, there is no direct way to invest in Base to profit off of this trend since there is no Base token and no plans to introduce one.
But one thing you can do is invest in promising DeFi projects in the Base ecosystem since ultimately, these are the projects users will interact with once they get onto Base.
Moreover, these are the projects that stand to benefit the most with the rise of Base.
If you still have questions about our top picks for DeFi on Base, check out Next Wave Crypto Fortunes.
Until next time,
Ian King
Editor, Strategic Fortunes
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