Analyze the structure and operation of the traditional economy, then map it to the Crypto market to predict its future.
Hey everyone! As you know, the Coin98 Insights website is an information channel for analyses ranging from basic to in-depth within the Crypto market. However, as Crypto is becoming increasingly widespread, even attracting the participation of investment institutions, banks, and even governments from the traditional financial market, these actors are having an increasingly profound impact on the Crypto market.
Therefore, the Coin98 Insights team will begin a series of articles titled “Traditional Finance related to Crypto Space – How is the traditional financial market related to Cryptocurrency?” to provide you with an overview and more in-depth analysis of how the traditional financial market operates. At the same time, we will map them to the Crypto and DeFi markets to analyze and forecast the development of this market in the future.
This series of articles includes the following topics:
- Similarities between the economy and the Crypto market.
- Overview comparison of the traditional financial market with DeFi (history, development trends, market size).
- Deep dive into comparing each segment of traditional finance with corresponding DeFi segments to answer the question: Is this segment still attractive for investment?
In this first article, I will introduce you to how the Crypto market is like a miniature economy.
Overview of the structure and operation of the economy
Throughout a long history, there are currently many theories explaining the structure and operation of the economy. However, in this section, I will use the General Equilibrium Theory developed by French economist Leon Walras.
Economic Structure
According to Leon Walras, within the structure of a market economy, there are three types of markets: the goods market, the capital market, and the labor market. Where:
3 Components of the Economy
- Product Market: This is where the production, supply, and exchange of goods and services take place.
- Capital Market: This is where the demand for borrowing and lending meet, forming the cost of capital and interest rates.
- Labor Market: This is the market for hiring labor, where the price of labor (or what we call wages) is formed.
How do these factors affect each other?
These three markets actually operate independently of each other, but due to production and business activities, they have a close relationship with each other.
How the Markets Interact with Each Other
Specifically, when a market demand for a certain product (service or good) arises, businesses will conduct research, produce and sell that product.
And in this process, businesses will have a need to borrow capital to expand production and business activities in order to gain more profit. At the same time, when expanding business, there will be an additional need to hire labor, creating a labor market.
How the Economy Works
The key factor of an economy is whether or not that economy creates added value?. What is the added value here?
To simplify it for you to easily visualize, an economy is considered to be growing when it creates more products (goods & services), but these products must be consumed by consumers for the economy to grow.
=> The thing to note here is that more goods and services are produced and the demand for those products also increases. Then the economy will grow and vice versa.
How the Economy Works
A more specific example is when the 4.0 industrial revolution occurred, with the development of information technology. The economy has produced many new products (such as Netflix, Facebook, Tiktok, …) and the market has been very receptive to these products. Thanks to that, the economy has grown and people say that the 4.0 revolution has great potential for the development of the economy.
Conversely, in the context of the Covid-19 pandemic, many business activities were stagnant due to a decrease in consumer demand (due to social distancing policies) leading to goods & services being produced without demand from consumers. As a result, the economy declined sharply.
Crypto & DeFi is a miniature economy
Perhaps you have had some mindset from the past until now that: “Crypto or Bitcoin is just a financial game, just Pump & Dump”. However, if we stand from a general perspective by mapping from the structure and operation of the economy above, we will have a different perspective on the value of Crypto & DeFi.
Where does Bitcoin’s added value lie?
An economy must create added value to be able to exist and develop over a long period of time. So where does the added value of Crypto & DeFi lie?
Going back to when Bitcoin was first born after the 2008 economic crisis, when it comes to Bitcoin, people will think of “Payment” – A currency outside the capitalist system. At the present time, Bitcoin is no longer associated with “Payment”, but instead “Digital Gold” or “Store of value Asset Class”. A tool to help us store value and protect assets from inflation.
Recap a bit for you about inflation and Store of value assets:
- As I analyzed above, the economy grows when more goods & services are produced and the demand for that increase in goods and services increases.
- Money is just a tool to reflect the value of the products created, as well as to make product exchange easier (for example, if the economy has x products, there will be x’ corresponding Dollars printed).
- Because x increases (economic growth), x’ must also increase by a corresponding amount. However, due to the problem of information asymmetry, the government will issue more money than it actually needs to bootstrap growth (similar to how DeFi platforms create Liquidity Mining Programs to attract users).
- During economic downturns (corresponding to the use of the Liquidity Mining Program that the market dumps) will lead to x’ being much larger than x and lead to high inflation causing the currency to depreciate (or token price decrease as in the example). And the consequence is that the value of the USD gradually decreases over time as you can see in the image below:
Therefore, Bitcoin will be an asset that helps us prevent inflation and protect our purchasing power.
That is also the added value of Bitcoin because it satisfies the need for a Store of Value asset. If Bitcoin were a service, it would be equivalent to the service of protecting our assets from inflation. In addition, the fact that more and more businesses now accept Bitcoin for payments has further solidified its value.
The Added Value of Crypto & DeFi
So, Bitcoin creates added value, but what about the entire Crypto and DeFi market?
Because Bitcoin creates added value, the “services” that arise within DeFi also create added value. For example:
- AMM/DEX: Helps us easily own and exchange Bitcoin.
- Lending & Borrowing: Allows us to earn more profit by lending Bitcoin and receiving interest.
- Derivatives/Insurance: Tools to hedge against the risk of short-term price fluctuations.
- Oracles: Provide data services to ensure there is not a significant price difference between markets.
- Asset Management: Platforms that help you achieve higher performance when holding Bitcoin (or other assets).
- …
You can refer to What is DeFi to get an overview of the pieces in DeFi as above.
DeFi helps users capture more value from holding Bitcoin
In the process of helping you gain the added value that Bitcoin creates (Store of Value), or helping to optimize the profits earned, these platforms will charge a fee.
With mechanisms to capture value for the tokens of the platforms, these protocols are no different from manufacturing businesses with corresponding tokens being stocks on the stock market.
That’s about DeFi in particular, but what about Crypto in general? As you can see, the Crypto market not only has DeFi but also has many Blockchain platform coins, NFTs as well as infrastructure such as Chainlink, The Graph,… So where does their value lie?
When expanding the picture above, you will see more clearly:
A simplified illustration of the links within the Crypto Economy.
- Blockchains like Ethereum, BSC, Solana, etc., in addition to being platforms serving the development of DeFi, also have Use Cases that address many needs such as applications in Logistics, Banking, Agriculture, Storage, etc. (detailed information can be found here).
- From solving problems outside of DeFi (such as entertainment, payment, etc.), Crypto will welcome the reverse flow of investment and make the market grow stronger and stronger.
- Other infrastructure platforms such as Chainlink, The Graph, etc. will be important factors serving the operation of the entire system mentioned above.
Therefore, they all create added value based on the initial basis of the formation of Bitcoin as a store of value asset.
Structure of the Crypto Market
Based on the structure of the economy consisting of 3 components as I mentioned above, the Crypto market has the following similarities:
- Product Market: As I analyzed above, the products (goods & services) in the current Crypto market are inflation hedging of Bitcoin, DeFi services (exchange, asset management, etc.), collection and entertainment (NFT) and some Use Cases applying Blockchain in reality…
- Capital Market: Most clearly shown in Lending & Borrowing platforms, operating similarly to the traditional financial market (just not as complex).
- Labor Market: Currently, personnel for Crypto (or developers) are still largely recruited in the traditional economy. As for platforms that belong to the labor market in a trustless and decentralized way, I currently see very few. There are only a few prominent examples today such as Keep3r Network or Human Protocol.
Due to the origin of the Crypto market originating and being built from Bitcoin – a financial asset, you can clearly see that the products built on it have a very strong financial orientation.
The evidence lies in the fact that the labor market (decentralized or built on blockchain) has not yet developed, as well as the product market mainly related to finance (applications in entertainment and collection through NFT are currently still quite focused on finance and investment).
Thus, the current Crypto economy is still missing quite a few pieces as well as markets that are not yet diverse. Therefore, the opportunity for Crypto to develop beyond DeFi today is huge.
Development Trend of Crypto Economy (cEconomy)
In this section, I will compare and analyze the development history of the economy and based on that, project the future of the “Crypto Economy”.
Development History
The history of the formation and development of the economy (in a simple way):
- The economy initially relied mainly on self-sufficient cultivation, the products produced were also very simple (mainly agriculture and animal husbandry).
- The industrial revolution phase reduced the role of self-sufficient cultivation, shifting it to monoculture forms of agriculture and expanding further over the past three centuries. Economic growth has mainly taken place in the mining, construction and manufacturing industries. Trade became more important due to the need for improved product exchange and distribution in the community.
- In the economies of the modern consumer society stage, there are increasing contributions from services, finance and technology,…
Looking at the Crypto market, we can see a similarity:
Comparing with the development of the Crypto market.
- Starting with the development of Bitcoin (as the most basic commodity).
- With the birth of Ethereum and Smart contracts, it is like an industrial revolution, opening up many applications for Crypto as the infrastructure to develop the next phases (similar to the development of industry, building bridges and roads to serve the next development step). DeFi develops in this phase.
- Cross-chain, Multi-chain and interoperability between chains are developed (similar to international trade), value flows are passed between Chains to optimize each other’s strengths. When DeFi Dapps developed on ecosystems become saturated, there will be a need for multi-chain interaction to optimize benefits.
- More and more Dapps in many fields other than DeFi are gradually being built.
Future trends
Comparing with the development of the economy, you will clearly see that there is a fact that the economy is developed from simple to complex and with many different relationships.
And in the process of economic development, old professions do not disappear, but on the contrary, there is still growth (agriculture & animal husbandry still have growth today) but will develop into a different form. more complex.
Regarding the Crypto market in general, it is still quite small and has a lot of potential for development in the future. But what about each part of the economy? What trends will they develop in?
Considering the development history:
- As you can see, in the current market, BTC along with other Blockchains have developed a lot and are gradually becoming more saturated. In the long term, they will continue to grow, but will have a slower growth rate than the following Sectors.
- With Smart contracts and the DeFi market, I still see quite young pieces as well as DeFi Stacks that have not been fully filled (we can see AMM, Lending, Stablecoin,… are very developed, however other pieces such as Derivatives or Asset Management, etc. have not yet made much of a mark on the market).
- Next is the development of Multi-chain and Cross-chain (similar to international trade in the economy). Although this happens quite often throughout the history of development, but certain infrastructure is needed (such as the development of seaports, transportation systems in the traditional market), this segment can be promoted.
- And after that are other Dapps developed to serve more purposes in life, escaping the framework of DeFi. In this case, we can mention some typical examples such as Gaming with the Play to earn trend, MUSIC with AUDIO, art collection with NFT issuance & Marketplace platforms, etc.
Considering the st
ructure of the economy:
- Product market: Currently, the main products are still quite financially oriented. Therefore, in the future, the trend will continue to develop existing products (DeFi & Blockchain), and at the same time we will witness many new trends such as Gaming or NFT (Products that go beyond finance).
- Capital market: Because the Crypto market is developing with DeFi currently being the strongest, it seems that the capital market in Crypto is gradually moving towards saturation. However, there are still niches that can develop in this market (I will have a more detailed analysis article on this segment in this series).
- Labor market: This is a relatively new niche in the Crypto market, because currently only the most prominent appearance is with Keep3r Network and Human Protocol. Therefore, this can also be a place where we can find good investment opportunities.
Thus, with the increasing popularity of Blockchain, there will be many products built in the future and there are always many opportunities in the market.
Epilogue
Thus, by introducing and comparing the overview of the traditional economy as well as comparing it with the Crypto market, you can see many similarities in the structure as well as the development trend that can happen in the future.
As well as the economy, when the market is increasingly developed, the pieces, the Layers on the Crypto market have become saturated. It is not that it does not continue to grow, it just slows down.
When the market continues to grow in the long term, there will always be new products developed, meaning that there are always opportunities in the market. You just need to closely monitor the market, update regularly with innovations to be able to grasp the opportunity as soon as possible.
And because the Crypto market is associated with many financial products. So the next issue I will discuss with you is: What similarities does DeFi have with the traditional financial market? What stage is it currently in in the development process?
