Daily Balajisms - TradFi Winter

Let a hundred crypto-friendly zones bloom in this winter of traditional finance.

Balaji Srinivasan came up with the term TradFi Winter to describe the current turbulence in the legacy finance world. The term is borrowed from the web3 world where we had a DeFi Summer in 2021. But the legacy finance got affected with the worst aspects of DeFi, where customers engage in mercenary behavior of yield farming and chasing of ever higher returns.

Regulators don’t tell you which institution has a deteriorating balance sheet and you have to do your own research (an echo of SBF tweeting “FTX is fine, assets are fine”). And many institutions can experience a digital death similar to what happened to FTX or SVB.

For traditional finance, it is all the downside of DeFi, but with no upside like in DeFi, says Balaji. Ten billion can disappear from FTX. And now close to 81% of total equity of US Banks might be missing – $1.7T out of $2.1T according to NYU study.

The next shoe to drop might be the commercial real estate, where also the big “G-SIB” banks might suffer big losses. This echoes the 2008 GFC times. But history doesn’t repeat, it rhymes.

And in my opinion, the next gray swan might be the digital death of the legacy automakers who are being squeezed out of the Chinese market at a rapid pace. Every third car is sold in China and China accounts for 50% of VW profits. All Western legacy automakers seem to be experiencing the proverbial Talebian Thanksgiving turkey moment.

Fiat, the reserve currency of the dollar, might die with Fiat the legacy car. Mobile phones disrupted the legacy automakers indirectly, with improvements in battery technology. Now the legacy automakers might disrupt the legacy financial system.

Balaji sees current times in a metaphor of giant balloon payment that suddenly came due at the end of the Fed-dominated global finance era, where fiat was backed by men with guns and men who buy ink by the barrel. Software and softwar are eating the world.

Both Covid and the chaotic US withdrawal from Afghanistan were apocalypses, in the literal sense of “uncovering”. Together with this current TradFi Winter, these events revealed that, what Balaji calls, a possible sci-fi scenario of American Anarchy vs Chinese Control might not be as sci-fi and as distant as we thought. We might get chaotic half-measures of digital lockdowns, attempts at digital dollar (CBDCs and quasi-CBDCs) and digital withdrawal from the fiat system.  

Social media are American glasnost and cryptocurrency is American perestroika, thinks Balaji. Twitter, after Elon Musk’s takeover, became a freer place for global discourse creation and the orange coin is the new blue jeans now.

The TradFi Winter is coming and it’s time to think about technical defense and social defense says Balaji. Technical defense is buying bitcoin – when the fiat fails you, buy into digital gold. But a technical defense is not enough. One needs a social defense as well, and that means moving to a crypto-friendly jurisdiction.

Balaji predicts three different types jurisdictions emerging once bitcoin will become the de facto new global reserve currency - an ungovernable governor of government, as Robert Breedlove said, or what Balaji calls a new type of global government, that no one expected. These will be fiat states, bitcoin-only states and crypto states.

During these times of fiat upheaval, you want to be sufficiently far from the Blue (US Democratic Party) network. Dubai is better than Dublin.

There is a difference between King’s Landing and Winterfell, to make the Game of Thrones analogy.

Balaji mentions the concept of Marcher lords that guard the border of a civilization but are not fully domesticated by it, and are thus on a periphery of (eco)systems. This is also where innovations happen.

Let a hundred crypto-friendly zones bloom in this winter of traditional finance.