Will Decentralised Finance take over Traditional Financial System? – Arthur Cheong from DeFiance Capital 

In episode #9 of Chills w TFC, we bring on one of the leaders in the decentralised finance crypto space. He was an oil trader turn crypto investor. Today, he runs his own cryptoasset investment fund.

Join me as I chill with Arthur Cheong from DeFiance Capital to discuss about the broad view of the crypto market. What is going on? What is blockchain? What are the different types of coins and what do they do? Where is the money going into? Where does bitcoin stand in this whole equation? Where does he sees the future? Tune in to find out!

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podcast Transcript

Reggie: Hey coconut. So yeah, I know many of you guys want to learn about crypto and you keep asking on the Telegram group, keep asking on Instagram and I have officially caved in, alright? So we’re going to dedicate the whole month onto cryptocurrency and digital finance. But because I am limited in my understanding of crypto, I’m bringing a lot of good friends and guests on to talk about cryptocurrency.

In today’s episode, we’re going to run through the broad crypto currency space of the different, different coins. What are the different types? What are they doing? Where is innovation happening? Where is money going into, and also answer, or attempt to answer, the one question of will Bitcoin go to zero? Or is it here to stay?

Welcome to another Chills with TFC session. In this series, we hope to bring on interesting, relevant people to help us learn better from various perspectives. Life is not always learning from people that you already agree with. Perspectives shape a rounder thinker. So in our pursuit of the life we love while managing our finances well, our guest today is one of the leaders in the DeFi crypto space, decentralized finance, and I’ll let him share with you, yeah, I’m not going to butcher it, but I got him on to paint a broad view of the cryto market. What is actually going on? What is blockchain? Where does Bitcoin stand in this whole equation and where he sees the future.

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Essentially, I try to squeeze everything out of him. He was an oil trader turned  crypto investor running his own fund today. And he is Arthur Chong from DeFiance Capital. 

You know, for, for the people that don’t understand crypto, can you just kinda help us understand a little bit of like, hey, why crypto is always discussed with blockchain.

And how much do I need to know if let’s say somehow I’m interested in crypto, clearly I’m not in that camp yet. So if I want to explore the space of crypto, how much do I need to know about blockchain? 

Arthur: Yeah, I will say that you definitely do not need to be a very technical person to understand crypto and blockchain. Like I am an economic major. I don’t have a computer science background and yet I would consider myself fairly knowledgeable on the crypto and blockchain. So I would say that blockchain is a technology that underpin crypto currency. So blockchain is just very simple. It’s an immutable ledger.

It’s like, the easiest way to think of it is like a Google sheet that’s maintained by everyone. Yeah. If you choose to participate in the network. And once the transaction is confirmed, it’s very difficult to reverse the transaction record. So in a sense that it serves as an immutable ledger. Yeah, so this is what blockchain is about. 

And the good property of this allow cryptocurrency to build on top of like a decentralized blockchain technology. So not all blockchain need to have a crypto. So that there is actually some variant called the permission blockchain, which a lot of the big corporates are experimenting with it. Like especially IBM has been very popular in pushing the enterprise blockchain adoption. 

Those actually do not have any cryptocurrency. They’re a little bit like a database, but it’s not maintained by one single server, but instead maintained by a lot of different nodes. So this is a blockchain, but most of the permissionless blockchain, which means that there’s like a public where everyone can join, have a native crypto attached to the blockchain to serve also as a security guarantee as a blockchain because that you need to incentivize people to maintain the network. 

So the cryptocurrency is paid up as an incentive to maintain the network as well. So like when your mine Bitcoin, you’re getting paid Bitcoin, but you’re also maintaining the security of Bitcoin at the same time.

Reggie: Okay. So what I’m getting is essentially blockchain is a technology, it’s a crowd-sourced technology in some ways, right. Because most of the data centers and service are centralized, but then, so the computing power for most, you know, technology or most whatever out there, they’re all centralized in one space.

Okay. So for all you guys that don’t know compute and all those, we’re trying to help you understand, okay. So then blockchain essentially is a, is a shared computing where you have different, different computers running or different kind of servers running, you know, that keep up with the work load of whatever blockchain that it’s trying to do.

So, and in that sense, because they keep up with that work that the blockchain intends to do. And in the case of Bitcoin is mostly just transactional, right, they’re tracking the transaction ledger in that sense. So transaction work. If the computer participates in that, then it gets the incentive of Bitcoin in that sense. So that’s kind of how they maintain the whole thing going. So they welcome people to participate in this process of keeping the whole thing working and through that process, you incentivize them the currency, which is Bitcoin, if you’re doing a Bitcoin blockchain, correct?

Okay. So then that was like, like years back already. Bitcoin is the ancient guy in like crypto. Much like how Facebook is traditional marketing now, right?  Nowadays I talk to people like, eh, we need to do some traditional marketing ah, Facebook, Google, it’s already traditional.

And for you in this space, you are very big on, you know, from what I understand, you’re very big on like the whole idea of decentralized finance. So I’m very curious. What do you think, do you think decentralized finance first, you help us explain, okay, and then do you think decentralized finance will take over the traditional financial system today?

Arthur: I would say no, I think they will coexist in the future because I think that currently the financial system, I would say, depending on which country you are staying, are probably not serving some of the population in the world. And I think that what decentralized finance can do is to complement and in some case provide a much better solution than what the existing financial system can offer. So I think that that’s why both of them will coexist. I don’t think that despite like how good the product is that the entire existing traditional finance will just get replaced, but what can happen is like coexistence.

I mean, for a more layman explanation, I would say that decentralized finance, what we call DeFi in the industry. It’s… you can think of it as like a FinTech 2.0, so FinTech has grown significantly over the last ten years. So I think the recently the most popular event is probably the Ant Group, like  the Chinese Ali Pay..

Reggie:  Which they just pulled out. 

Arthur: Yeah. So they were trying to do an IPO, but for some reason, the Chinese regulator asked them to stop doing that. So, but you need to know that last year they have processed $16 trillion worth of transactions, more than PayPal. So they are like definitely giant right now.

And at IPO valuation, they’re actually worth more than any bank in the world, including JP Morgan. But I mean, that doesn’t mean that the China traditional financial system is getting replaced. It’s not. Yeah. So they actually coexist. I think it’s the same for DeFi. So DeFi in some areas, provide a better solution, but it’s not going to replace traditional finance.

It’s just going to coexist. Yeah. So it’s just like, depending on which product is the best, you’d go for that. 

Reggie: Okay. So can you help me understand what is decentralized finance? 

Arthur: Sure. So decentralized finance is very straight forward. It basically refers to a financial application that is built on open source technology, which is most of the case is decentralized, permissionless blockchain, which most of the time is also Ethereum, because Ethereum right now is the most popular smart contract platform for various application. 

Reggie: So how does that translate to layman? Like, let me give you a scenario. Okay, so let’s say I want to transfer money. Well, essentially, that’s what decentralized finance is trying to do . So if I want to transfer money, if I transfer through  let’s say Ethereum  blockchain, compared to transferring to the traditional financial system, how does that look like? From a decentralized finance viewpoint?

Arthur: So I would say one of the biggest characteristic is the permission-less nature. So let’s say you want to send, okay, let’s say $100,000 to someone that’s in Africa. If you go through the traditional banking process, you are going to take days, probably one week and incur a lot of costs in doing so because the current banks work on SWIFT, and work on like a correspondent banking system, but…

Reggie: And how much would that cost if I go through traditional? 

Arthur: I think it depends. So, but there’s the fixed costs that are, I think, $20 to $30 wire costs on both sides. And also there might be some FX costs if you convert, if you don’t convert, yeah, it’s dollar. So I would say at least like $40 to $50 of fixed cost.

Yeah. Yeah. For DeFi, there’s basically no transaction cost, as long as the receiving party have crypto wallet. Yeah, you just need to pay the network transaction fee, which  most of the time is below $1 right now. So yeah, you can just send as long as he or she has an internet connection, so you can definitely receive it within like 10 minutes. Yeah. Usually less. Yeah. 

Reggie: Okay. So it’s basically built on anonymity because you don’t need to go through the traditional check system because nowadays there’s bigger volumes, they will ask you to check, all the KYC, know your customer, right. What are you trying to do, is it terrorist money, blah, blah, blah.

They’re trying to, they’re trying to do all those things, right. So there is no need for that. And there is essentially a faster system, and it’s cheaper. That’s what you’re trying to tell me. 

Arthur: Yeah. And actually, even for KYC, even if you go through KYC, you can still use this to settle , like you can send it to the exchange account of the receiving party.

So he or she has done the KYC on the exchange already. You can still send to his or her exchange address and it’s still faster and cheaper than going through the traditional banking system. Yeah. But obviously the open nature is also one of the plus part of it. But even if you go using the KYC channel, it’s still the same speed and same cost.

Reggie: Yeah. So it sounds so good. Why isn’t it going to take over the…? 

Arthur:  Because I think finance is like a multitude, right. It’s not just about payment and transfer. There’s a lot of other things in finance that I think that yeah, it’s just not going to be replaced so easily. Like insurance, asset management, the capital market, lending and borrowing, all these are part of finance.

So what I’ve illustrated do you, it’s just like a payment and transfer part of finance. So it’s just one big part, but it’s just one part of finance. Yeah. 

Reggie: Okay. So what I’m getting from you is that because generally, right. Okay, so far I’ve very hard to find bears for crypto la. Home. Most of the bears are not in crypto, that’s why they are bears.

But then most of the bull case so far is crypto currency will take over the world. I see rolled eyes here [laughs]. So that’s, that’s the bull case. And I think that’s crazy, but from what you’re saying, that doesn’t sound as crazy. Can you, can you just kind of help us paint the picture of  why that way of looking at it, it’s not accurate?

Arthur: Okay. First of all, when people are usually referring crypto will take over the world, usually those are people who are saying, are usually referring to Bitcoin, because Bitcoin right now is like 60 or 70% of the market in terms of the market capitalization, in terms of value. I think… 

Reggie: You mean like the crypto market? 

Arthur: Crypto market, yeah. So I think that doesn’t make sense because Bitcoin existed for 10 years. There were a lot of people, even companies, trying to use Bitcoin for payment and it never  take off. I think the reason is very clear. People do not want to transact in a volatile currency. People want to transact in a stable currency and in most cases it will be the fiat currency, be US dollar, Aussie dollar.

So I think that will not happen simply because, yeah, it’s too volatile to be used on a day-to-day basis, but it can be a good medium to long-term store of value because Bitcoin specifically have some characteristic that make it suitable to be a store of value, that it has a fixed supply, 21 million Bitcoin forever.

And it also like, it’s easy to carry and it’s also very similar to gold, yeah. Fixed supply, and then also like a scars, all this thing. So it just make it like a suitable as a medium to long-term store of value. So I will say that actually, Bitcoin specifically, not referring to other crypto, it’s actually trying to compete with gold as an asset, but it’s not really trying to compete with like a day-to-day currency.

Reggie: Yeah. Yeah. And on that note of like, you know, Bitcoin potentially being a store of value. When you compare with gold , which is what a lot of people are doing, digital gold, the whole idea, when you compare it with gold, then there’s this idea of like a broadly accepted asset class, which hinges on the idea of having a lot of people buy into it. You know, it’s a network effect kind of thing. 

If everybody buys into this idea, then there is a potential of it becoming some sort of value. So, because gold is already dominant in terms of the acceptance that it is an asset class, so everybody buys into it.

So there’s a network effect in gold. And then now you’re trying to tell me that, not just you, a lot of people are trying to tell us that Bitcoin can have the kind of network effect. So how is that going to happen? 

Arthur: I think that it’s just going to happen where the younger generation are usually much more familiar with like digital goods or digital asset.

Like if you grew up playing World of Warcraft, Maple Story, all this online game, you always recognize that this digital good will have value. And there were a lot of people who are just like farming those items… 

Reggie: Shout out, shout out. Mesos, mesos [laughs]. 

Arthur: Yeah, exactly. So I think that like the internet have come into the scene for 30 plus years, and it’s just very natural for the internet to have its native currency.

And Bitcoin is just very likely to be the one that… it doesn’t have to be physical, but as more and more people believe in it, and I will say that actually, you look at adoption, more and more people start to believe that Bitcoin has value. And this is a fact, I mean, it’s not something you can argue against.

So, and the network effect of Bitcoin is definitely increasing because in this increasingly digital world, people just believe like a pure digital currency has value. And yeah. So I think that is just how it’s going to be.

Reggie:  Yeah. So whatever you just said, right. Essentially double downs on the idea of the network effect, right.

Essentially there must be a lot of people that subscribe to this, then there will be a net value for, for this , like how everybody play Maple Story. Then mesos became a thing, right? People sell mesos. So you must have a lot of people to participate in the Bitcoin story and a Bitcoin network.

And in that case, then that hinges on the fundamental risk, which is what if people don’t join. So what do you think is some of this risk of this thing not ultimately fruiting into what people are saying that Bitcoin can be a gold? 

Arthur: Yeah. I would say the major risk is like a very strict government clamp down.

I think that is possible, although unlikely. I would say if let’s say, government say that it’s illegal to own or transact Bitcoin or crypto in the future, I think that would definitely kill the network effect because most of us still don’t want to do illegal stuff. But I will say that this also is very similar to like how, like a peer to peer torrenting technology works.

Like I believe in Singapore, it’s actually illegal to torrent, download a lot of the copyrighted material. I will say the same in a lot of country, but torrenting technology is still very popular and people are still using it for various file sharing. So yeah, I mean, the risk is definitely a very strict government clamp clampdown, but I will say that at this point of time, it’s actually very hard to like have a full shutdown of Bitcoin and cryptocurrency right now, just simply because you must have a valid reason.

I mean, you can implement KYC, AML, but it’s harder to find a valid reason to shut it down because it’s just the technology. Yeah. 

Reggie: But I think one country has a pretty valid reason, that is China, right? So China has released their own digital RMB, you know, and they’re building everything on the blockchain.

So they are very ahead in this whole like digital currency space. And honestly, for a lot of Chinese, you know, they have a lot of like underground money changers, all sorts of way to bring money out of the country and all of those are deemed as illegal. So then at this point in time, Bitcoin is also not legal in China, right?

Arthur: But no, it’s actually legal to own Bitcoin, it’s recognized as a property in China, but it’s not… the illegal part is basically running an exchange in China or running an OTC business in China. 

Reggie: Okay. So Bitcoin is allowed in China. It’s just not allowed to do the transaction part, you know, as an OTC provider. Okay. So over the counter, right. So essentially that just means like you need money, I transfer my Bitcoin to you. If someone else needs money and then you come through me as a central medium, then I draw a set of percentage over the counter transaction.

So that’s not allowed in China, okay. But because China is doing its own digital yuan, what’s stopping China from, you know, just wiping out the Bitcoin market? By just saying that hey, you’re going to bring our money back into the digital yuan, right. And you know, we’re just going to forgo this idea of Bitcoin, you know, much like how India remove the fiat currency of 1,500 and Indonesia, you know, getting the people to bring money back to Indonesia, so they didn’t get fined. So what is stopping China from doing that? You know, is that a serious risk? 

Arthur: I wouldn’t consider it a very serious risk because I think that Bitcoin, right now, actually for people who are in the industry, if people wanted to bring that money out of China using crypto, they usually don’t use Bitcoin nowadays.

They actually usually use a stablecoin, and the most popular being a USD Tether. Yeah. So because Bitcoin is too volatile, so Bitcoin is still mostly used as a store of value right now. So I think that, yes, I mean this risk might exist, but if it did happen I think that a lot of Chinese are still gonna own Bitcoin.

They are just not going to don’t look like declare it, because you can always keep your own Bitcoin. You just don’t use it on any exchanges. And right now you can actually also acquire it from a decentralized exchange as well. Just that you do not use any proper kind of centralized exchange to acquire Bitcoin. That’s what will happen. Yeah. 

Reggie: Okay. So fundamentally there is still the risk of the network effect not fruiting because of all these government interventions, but what you are betting on is that that is highly unlikely. 

Arthur: I would say that even if let’s say China do it is definitely not going to kill Bitcoin already, because Bitcoin is sufficiently diversified in terms of geographic.

So china is an important country for crypto ecosystem. But if let’s say they have a complete ban, I think it hurt Bitcoin, but it will not really kill Bitcoin network effect.  

Reggie: Okay, so that is for Bitcoin. So there are three kinds, generally broadly three kinds. So one is Bitcoin, which “the digital gold.”

One is the ether network, right, which does a lot of the transactional stuff, which all your stablecoins coins are built on. And then there’s the asset class, which is the third class of, you know, I don’t know what unique coins are here, but it’s just fundamentally a kind of cashflow generation model.

So there are these three, right? So Bitcoin, ether network for transaction. So there’s a function there. And then the last one is asset class. How do you then make money in this space? Because if there so many things going on already, how do you make money? 

Arthur: I focus, like I mentioned before, it’s on a sector called decentralized finance.

And I will say that when it comes to investing in this space, my philosophy, it will be very akin to venture investing but with public market liquidity, because I will say that when you’re investing in a lot of these, like a newer application or protocol. A lot of them are in a venture stage, like a startup, like in terms of like the life cycle of the organization.

But I think the unique thing is most of this, most of this protocol or applications, they do have a native crypto attached to it. Like you use both as an incentivization mechanism, but also to build a community. So what happens is usually you’d be able to acquire liquidity for your crypto token with a much shorter timeframe than you do traditional venture investing.

Like if you invest in a startup, usually you need to wait for like a five to ten years before you can exit, typically, like even for M&A or IPO. But in crypto, usually you can exit, like you have some liquidity for investment within two years. Yeah. So that’s how I do crypto investing right now and why I focus on decentralized finance, because there has been a lot of use cases.

There’s experimenting with crypto over the last three to five years. And I would say that since 2017, that was a year that everyone was trying to put anything on blockchain. Airbnb on blockchain, Google on blockchain, whatever. But actually I would say, coming from someone who have actually been through this whole cycle, most of it, I would say almost all of it didn’t work out, because ultimately blockchain as a technology, it doesn’t solve all the issue. It’s one technology that comes with its trade-off. 

So it gives you like a, more of like an open and permissionless nature, but it also bring with it very expensive to use blockchain technology and also very slow. Especially when you compare them to like the centralized counterpart like Amazon web services. So it’s not suitable for most of the other use cases, I would say, except for finance. Because for finance, a lot of the time, you actually don’t really compete on the speed and the cost of the services, you actually compete on the trust layer.

Why we use a lot of the financial institutions? Because there’s a lot of trust. We trust DBS, we trust all this bank and we trust all these financial institutions and where does the trust come from? One part of it is the regulation. But also one part is they have the history. They’ve proven themselves. 

But I think for blockchain, what this can bring is actually, you actually don’t really need to trust the, like the team or whatever, because once they deploy on a blockchain, it’s immutable, so you can actually, the smart contract will just run the program as per specified so that even the team themselves can not really change anything after they have deployed it to the network.

So this whole bring a new level of transparency into the financial activities that they are providing. So I think that this is something that is a bit like the zero to one innovation that I think is cost and the speed trade off are actually worth it. Yeah. For most other use cases, it actually doesn’t work because you kind of don’t really need that much of like censorship resistance or like auditability, but for finance, it actually makes sense. 

Reggie: Mm. Okay. So I get what you’re saying. Essentially, the traditional way of running data and the blockchain is… the fundamental difference is it’s quote unquote, 100% secure, right? Because everything is built on the chain. It’s not so easy to like, fuck it up la, essentially. 

Arthur: And it’s actually more transparent. 

Reggie: More transparent. You can see the whole thing, right. But it is slower, more expensive to run than the centralized stuff. So there are only certain use cases, you know, for this technology, if you see from a technology viewpoint. And how you make money is you invest in the coins of these new DeFi ventures that are coming in. So then how do you exit? Do you exit in a private market or do you exit when it goes for ICO? Or how does that work for you? 

Arthur: So there’s a different way to exit. Most of these… 

Reggie: Because you are buying something at a young stage, right? So then how do you even buy those kinds of stuff to begin with? 

Arthur: There’s a few ways. Because we are like a crypto fund, so sometimes we are able to invest in like the earliest round, like so-called like the seed round. Because the project was just like at a MVP stage. They are trying to build their product, so they raise some funds. So we are usually investing fairly early on and that’s how we acquire the crypto asset. 

And how do we exit? It depends. Sometimes it will get listed on certain centralized exchanges, such as Coinbase or Binance. Then, we might exit, yeah. And sometimes it would just be listed on decentralized exchanges. Decentralized exchanges is like Coinbase and Binance, but just that they are not like controlled by one single company. Anyone can use it and provide liquidity. So we can also sell it on decentralized exchange as well. 

Reggie: Yep. Okay. Do you mind sharing some of your success case? Is it possible? 

Arthur: Sure. Yeah. So you want me to mention a name?

Reggie: Tell me the name, man. 

Arthur: Okay, cool. I will say, okay, someone has success cases. One project I would like to mention is  essentially launched by one of the co-founder, he’s actually an NUS PhD. Yeah. So he’s from Vietnam, but he studied NUS for the PhD in computer science. After he graduated, he started working on blockchain, all those thing, and he actually launched this project in 2017.

So it’s basically a decentralized exchange, it’s called Kyber Network. So what they plan to do is just like a coin-based equivalent, or Binance equivalent, but it’s just that it’s decentralized, not controlled by any single company. So it raised the ICO, from 2017 to 2019, it actually been keep dropping.

Because, I mean it went through a bear market, but actually throughout the last two to three years, the team never really give up building. They just keep improving their product, build a better product. And the market has… although the fundamental has improved significantly, the market has not been paying attention. 

So we actually, this one we actually invest very late. They launch it 2017, the token was available in 2017, but we only invest in it in 2019. So this one, I have a little bit of public market component already. It’s a bit like investing in stock.  But I can see that the fundamentals just keep improving, but market has not been noticing.   So I’ve been just buying it from an exchange directly.

It just slowly build a position and invest and also, I do know the team quite well because they are also based in Singapore. So I talked to the founder, understand their vision, understand what they’re trying to build. Just really have a good understanding on the team’s vision and what they’re building.

And also do my own analysis on the valuation and the… given the current traction, is it undervalued or overvalued? So I decided that it’s significantly undervalued, that’s where I invested in it. So yeah, we kind of realized like a 10 times return in like seven months for this investment.

Yeah. Because it’s just, after the market start recognizing its potential and it also get listed on more and more exchanges, the valuation just increased significantly over the last 12 months. Yep. 

Reggie: Okay. That’s cool. Then, are you concerned about institutional investors coming into the game or, you know, like more and more big boys are coming in and then, you know, when institution comes in, then they have a probably more buy and hold way of doing things. Because that’s what institutions generally do, more long-term outlook. Will they kind of skew the market in terms of like price discovery, or like trying to find potential? Because all these big boys come in, right, then it’s very tough for you to find good stuff. What are your thoughts on that?

Arthur: I would say that I’m not concerned at all, because I think when the institutional investor come in, they will actually really going to focus on the top few, like mostly Bitcoin and probably some Ether. And I think actually they bring much needed and rationality and professionalism to the space.

Because I think right now this space, one of the reason that it’s so volatile is because there’s a lot of people who are just purely speculator and trader. They are not really looking at a more professional manner. So they buy when it’s going up, sell when it’s going down and this is not really how investing works.

So I think that institutional investor will bring more professionalism in this space. It’s really much welcome. And it might actually even dampen the volatility slightly as well. Yeah. Make crypto slightly less volatile if more of them come in, because they don’t kind of… I mean, there are trading firm but I’m talking about the investing one. They, yeah, they don’t really trade in and out everyday, right? So they bring much needed stability in this space. 

Reggie: Do you feel like most of the people are really just trying to trade the market? Like how they trade currencies? 

Arthur: I will say there’s a lot of speculator, probably not trading a day in day out basis, but yeah, there’s definitely a lot of speculator that don’t really invest in a more professional manner in this space. Yeah. Which is why unfortunately, a lot of to have lost money and, yeah, I mean, because I’m the person that went through the entire into a cycle and although I did end up doing pretty well, I see a lot of my friends and acquaintance that kind of give up along the way, and they will not dare to reap the success although the market can recover. But it was just, one of the reasons is they’re not approaching it in a very robust and professional manner.

They’re really just, a bit like, hearsay this one seems good, I buy, or seems bad, and then I sell. I think this is usually not a recipe for success. Yeah. 

Reggie: Yeah. Yeah. Sounds like, it sounds like a lot of people in the stock market. 

Arthur: Yeah. I would say it’s actually quite similar. It’s just that the volatility in crypto is just like probably life few times more than the crypto.

Reggie: Yeah. I think few, few more more times. Not just few times more. So in that sense, a lot of people, because of a lack of understanding, because of, you know the high volatility and all these like hype news up and down, right. It doesn’t give a lot of confidence in the space. And from what you’re seeing is a very different way of looking at it, to look at the functionality that, you know, this technology actually has a certain case in a certain sector.

And what you spot is decentralized finance, which we’ve talked about extensively. But are there other use cases for this technology of blockchain and crypto? 

Arthur: I would say yes. Although that is still a bit early. I would say right now that another use case is basically  what they call Web 3.0.

So what is Web 3.0? So one way to explain it is that the current internet space we’re living in, it can be categorized it as like a Web 2.0, so it’s basically dominated by the tech giants, like Google, Facebook, Amazon, Netflix, Apple. So what Web 3.0 want to change is to basically decentralize the power. Again, decentralization, this is a very big theme of crypto in general. All the other data, identity…. 

Reggie: Wait, is it is a big theme of blockchain, or is it a big theme of crypto? 

Arthur: Big theme of crypto, I would say. Decentralization. 

Reggie: So blockchain is just a technology, you can use it however you want. But whenever the blockchain is matched with a crypto, it tends to have this identity of a decentralized.

Arthur: Yes. Correct. So basically that too much power concentrated in this technology company. So the Web 3.0 want to decentralize this from them, be it on a data layer, on a usage layer, and on an identity layer. So imagine that when you actually own your identity, so that let’s say you want to use any of the, let’s say, Facebook, Google, you actually have your own single identity that you own instead of the account that they have with them. And they actually are monetizing all your data to make money. Like there’s one new Netflix documentary called The Social Dilemma. So basically, to say that how they have been using the user to make money.

So I think that this is the Web 3.0 thesis, and yeah, so this is something that I think that this is one of the valid use cases that you can actually build, let’s say, a decentralized Facebook where you are actually the one that own your data so that you do not have data privacy concern.

Yeah, but this is, I think, still quite far away from realizing due to the maturity of blockchain technology in general. 

Reggie: Is there any other, is it just this one? 

Arthur: I think these two are the most popular one, decentralized finance and the Web 3.0. Pole. Another one, I would say, I think it’s more specific it basically have to do with gaming. Basically that there’s a thesis that right now, like, if you look at certain game, right, people are trading those in-game items. Like the skin or CS gold, or World of Warcraft, whatever. All this, a lot of online game, right, actually, all this in-game item are very valuable, but the challenges, I would say the issue is the company, if they close down, all the in-game item are worthless. Yeah. 

And the company can always make some arbitrary changes that affect the in-game economy or whatever. So the kind of thesis is to make it like a more player-owned game, where a lot of the important changes and whatever is actually decided by the player instead of by one single company deciding everything.

Yeah. So I think that is kind of a valid use case. You can use like a crypto and blockchain to distribute control and ownership and the power of the game when the player actually can… it’s a bit like a player co-operative.  

Reggie: Yeah. Everything is a co-op, everything is decentralized, that’s the…

Arthur:  Yeah. So I think I can see certain use cases but I think it’s also quite game specific. Like for some game, you probably don’t need this, but I think for certain game where there’s a very strong social aspect, it probably makes sense to integrate some of this… 

Reggie: Like world Warcraft, right? Something like that. That kind of MMORPG.

Arthur: Yeah. Or something like, when there’s a strong collectible component into it. Like people actually spend a crazy amount money on this kind of collectible game, like one very popular game called Fate/Grand Order. Like people spend insane amount of money, like every year they bring in billion dollar revenue on this one single mobile game. 

Reggie: Really? 

Arthur: Yes. You can search on it, FGO. It’s a collectible game. People kind of like, you can roll certain character you want. And obviously the rare one is quite hard and people can spend $300 every month on it. Japanese game. But in all this, actually people spend their hard-earned money on this character and actually they do feel treasure.

This also ties in to the theme that recently, I think probably due to some popular YouTuber, the first-generation Pokemon card is suddenly worth a lot again. The Charizard was sold for a few thousand, I think close to $20,000.

Reggie: That guy is crazy. He also sells the magic cards. He also sells all the weird weird cards, and then he will do those kind of have pack opener. What’s his name? I can’t remember, but… 

Arthur: Yeah, it’s just like a sudden resurgence, right? It’s suddenly like the Charizard is worth so much right now. And I’m sure a lot of people are regretting that their parents throw away all those Pokemon cards. [Laughs] 

Reggie: My friend was just telling me, aiya, that’s the worst thing that I’ve thrown away, you know, it’s like my Pokemon cards are going to be worth so much. 

Arthur: Yeah. Yeah. This is just something that I think people feel, like, value. Like it’s the first generation. I don’t think these cards can be used in tournament anymore.

Like they probably so outdated in terms of meta. But people still cherish it. Treadmill. 

Reggie: So fundamentally that’s a very collectible way of looking at things now, right. So, I mean all those things, potential cases, but people have to kind of look at it on their own and decide how it is.

So for our listeners that are new, that are contemplating whether to be in this space, right. What are some advice you have for them in terms of like, if you want to start, how do you start? How does it work from an investment viewpoint? 

Arthur: Yeah, I would say definitely do your own research. You actually do not need to rush in to buy. I think one good way to learn is also have a small amount, like don’t need to have much, probably just $100-200 will do. Just try to use it first and really understand what you are using. And if you want to invest, what are you investing? I think the most popular way and the right way is really to just start with Bitcoin, Ethereum first, understand these two platform and slowly go down from there.

So after you have a good understanding, you understand what you are investing in, then you’re less likely to be shaken out because this space is indeed very volatile. So if you don’t really have a strong understanding, you will be shaken out because you actually don’t know what you are investing and buying.

Then obviously when it drop, then you are more inclined to sell, right. So I think that’s just like, the thing about crypto. There’s immense volatility, so you just need to have this in mind, but if you do the research, you believe there’s a future, yeah, and then you can invest in it. And I would say for most people, it’s better than if they come in with an asset allocation model.

So there’s a lot of like correlation study has been done. In fact, they have shown that if you invest in Bitcoin, it actually help to improve the portfolio return from a risk adjusted perspective, because it’s usually not correlated with other asset class over the long-term period. And so when stock market is going down, Bitcoin and crypto might be going up, and then obviously the vice versa. It can happen.

So I think the recommended portfolio allocation for most people, unless they have a super strong understanding and they want to spend a lot of time, it’s usually between 5 to 10% of their entire investment portfolio. Yeah. So I would say that is a healthier way of investing into crypto for most people, if they do not want to spend too much time.

Reggie: Okay. Not like everything in, siao siao like that la. 

Arthur: Yeah, yeah. Definitely. Yeah. I think, yeah, definitely make more sense from a portfolio allocation point of view. 

Reggie: Okay. I have one last question. I think very important. Recently, I talked to a lot of friends. And one of this idea came out, the whole idea of tokenization, where companies or institutions, they take traditional assets and they kind of back it up with a token.

They back the token up with the traditional assets and maybe it’s art paintings, maybe it’s like farm land, property, whatever. What are your thoughts on this? 

Arthur: I think it’s very case specific. I think that… 

Reggie: So do you even see this as a crypto investment? 

Arthur: I think, no, I don’t think so. Because these are using crypto as a technology to change a representation. I don’t see this as a crypto investment because they’re ultimately tied to a real asset. You’re actually investing in the real asset just through the blockchain technology. 

Reggie: Okay. Okay. So you don’t see that as a crypto use case, you just see that as a technology to kind of split up and tokenize that asset.. Okay. So nothing to do with the crypto space in your view.

Arthur: Yeah, I don’t think it’s that close. There’s a lot of experimentation in that, but I think that’s another topic. I think that it’s valid use case of the technology, but how successful it will be, I think it’s a bit too early to say. 

Reggie: Okay, thank you. Is there any last words you want to share? 

Arthur: Yes. Actually on investing, I do want to add a little bit, like for those investors who prefer to be active and more hands-on, which is, actually I’m that kind of person. And I think that actually crypto is probably the best place you can invest in for a few reasons. Because crypto is in a level that is still pretty young and immature.

So actually, if you are some guy who’s very active, like to make your voice heard, you actually can make a change to this space. You can actually influence the direction of the certain project that you invest in, and this is actually not really possible in traditional finance. 

Like I invested in the Singapore stock market before, like from small cap, mid cap, to large cap. And I can tell you that this is my opinion, the Singapore stock market is just not very conducive to minority investment most of the time. Like small and mid cap, right? Like they don’t really care about the minority shareholder interests. You can write an email to the investor relation, but I don’t think you can make any changes.

But I think in crypto it’s very different.  For all of the younger stage protocol, if you are a very active member in the community you can actually… a lot of your opinion and voice will be heard and you can actually participate in improving the protocol or the project that you invest in as well. So I think this is something that make changes. And I will say that although a lot of the rights are not like legally stipulated for a lot of crypto investment, ironically, I think as a token holder, I actually get more right than as a shareholder in some of the small cap, mid cap company in like a local stock market. 

Yeah. So for a more open minded investor who prefer to be hands-on, active, I really suggest you guys to explore crypto as an investment because I think it’s very rewarding and exciting to be in.

Reggie: Okay. Thanks for coming on the show. You shared a lot of good stuff. I hope you guys learned something. We’ll see you around, yeah. Take care. Thank you. 

Arthur: Thanks, Reggie.

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