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Geoff Costeloe: The future of finance is decentralized. Will Canada keep up?


For better or worse, few subjects have captured the attention of the financial world like Bitcoin.

With each wild price swing, those that believe in the digital currency and those that call it a bubble spar on financial networks like CNBC. The recent massive selloff will be no exception (Bitcoin is up more than 250% since this time last year even after factoring in recent declines). Despite its increasing acceptance by traditional markets as a novel asset class, Bitcoin is remains seen as a “party trick” asset: part speculative investment, part inflationary hedge.

But those headlines have continued to miss out on the seismic changes that blockchain technology is ushering into the financial space, challenging the hegemony of traditional brick and mortar banks. This revolution isn’t just on its way — it’s here. Regulators and tax authorities in Canada and around the world need to begin to educate themselves on the rapid development and reinvention occurring on blockchains other than Bitcoin.

The media’s endless fixation on the wild swings in price are missing the forest for the trees.

The Bitcoin network and it’s blockchain are largely restricted to the ability to do little more than securely send, receive and hold bitcoin. This is intentional as the development of the Bitcoin network has been an emphasis on security and decentralization.

The second largest digital asset, Ethereum, operates in a more dynamic way. Users can launch and utilize digital contracts on the network, allowing hundreds of people to bind themselves into financial and commercial contracts, enforceable without relying on lawyers, banks, regulators or central banks. Like many cryptocurrency projects, the first generation of these decentralized applications (DApps) was as silly as they were impactful.

Bitcoin remains seen by traditional finance as a novelty asset that will fade away and by government as only a tool for money launders.

Launching in 2017 from Vancouver based Dapper Labs, CryptoKitties was a collectable game where players could buy, sell, breed and trade unique digital cats. All of these transactions occurred on the Ethereum blockchain, meaning that once launched no individual, group, or corporation was truly in control of it. Ridiculous on its face, the DApp showed the potential to create global, scalable markets out of thin air and to have them operate 24/7 with little or no outside interference.

Since 2017, the scope of DApps has expanded and matured tremendously. Today, the largest DApps are primarily focused on financial products and the size of them is enough to rival mainstream, traditional financial institutions.

One of the largest examples is Aave. Founded in 2017 out of Switzerland, Aave allows users to deposit various digital assets into smart contract as collateral for U.S. dollar pegged “stablecoin” loans. The smart contract dictates the loan/value ratio and interest owing on a per second basis. To have the original collateral released, the user must return to the smart contract the borrowed U.S. dollar stablecoin, plus (variable) interest.

Simultaneously, Aave allows users to deposit their digital assets to a separate contract and earn per second interest on those deposits. With no lock-up periods, the user can remove their deposited funds, plus interest on demand. The borrowing and lending interest rates for assets are correlated in such a way to ensure that interest paid on deposits is always equal to or less than the interest received by the lending.

All the above is done without any agents, sales, margins, or overhead 24 hours a day, seven days a week with no downtime. Crucially, the whole process is agnostic to the size of borrowed or lent amounts. There is no difference in user experience, interest, or fees if you are borrowing $100 or $10 million. The only cost to the user is a “gas fee” required by the network to access and operate the smart contract.

As of writing, Aave currently has $7.89 billion U.S. dollars worth of digital assets locked as collateral in its smart contracts. Aave is one of dozens of new financial players completely reinventing financial markets and collateralized loans.

Another major player is Uniswap. Uniswap is a fully decentralized exchange (DEX), allowing users to exchange one digital asset for another. Unlike a traditional exchange that uses an orderbook to match buyers and sellers of a specific security, Uniswap is an automated liquidity protocol. Any user can create a market by depositing a pair of assets (in equal USD amounts) into a liquidity pool. When other users want to exchange that pair of digital tokens, they complete that exchange using the pair of tokens in the liquidity pool. Users who are providing liquidity are paid a 0.3 percent fee for each exchange, which is divided proportionally amongst the liquidity providers. If the balance of a pair of assets deviates from the original 1:1 proportion, arbitrageurs are incentivized to profit from bringing the pool back to 1:1.

Just like Aave, this provides an invaluable service to digital asset traders. Those who have assets they are not using can be paid to provide liquidity to a paired pool (and withdraw whenever the want) and market gains increased efficiency between different tokens, eliminating barrier to access.

For the week ending April 20, 2021, Uniswap exchanged $10 billion USD that week. As with Aave, this market is available worldwide, 24 hours a day, 365 days a year.

The growth of the DeFi market can tracked live on DeFi Pulse, which currently shows a total locked value across all markets of $27.2 billion.

A man uses an Ethereum ATM next to a Bitcoin ATM in Hong Kong. Kin Cheung/AP Photo.

The Ethereum network is similarly decentralized to the Bitcoin network (but in some technically different ways) and with a network upgrade projected to land at the end of 2021, the Ethereum network will eliminate the use of hardware mining to reduce its environmental impact by approximately 95%.

The promise of these new Decentralized Finance (DeFi) players is a truly global, liquid, and efficient financial system, with low fees, no overhead and no barrier to access. The World Bank estimates that 1.7 billion people worldwide remain unbanked, forced to store their wealth in cash or other physical assets, making them vulnerable to theft or government confiscation.

Digital assets offer not just a way to store their wealth securely, but equal access to a global financial system including access to capital markets they can use to start businesses and grow their quality of life. Individuals living in nations like Denmark with negative interest rates can take advantage of that and instantaneously lend their ‘free’ money to farmers in India or Pakistan with no secure access to financing.

Ethereum is laying down the internet of finance, allowing anyone globally to access markets and capital. An entrepreneurial developer can build new and more efficient ways for people to come together and see their financial needs met.

So, with all this growth and promise, where are our regulators and tax authorities? Nowhere to be seen. Does any government, provincial or federal, have a serious plan to face this financial upheaval? Can we encourage our own entrepreneurs, businesses and non-profits to find ways to become leaders in this emerging ecosystem?

It would seem the answer is no. Bitcoin and cryptocurrency remains seen by traditional finance as a novelty asset that will fade away and by government as only a tool for money launders. The implications of these new technologies are either not understood by our politicians and regulators or are being ignored in the hopes that they will simply disappear.

In a way, this isn’t surprising. Traditional institutions are loath to recognize upstart challengers to their hegemony. Decentralized finance offers lower cost, more efficient, more liquid access to global markets at a speed that traditional institutions cannot match. If they don’t start to adapt to this new world, taxpayers will be left on the hook for the inevitable bailout.

We’ve seen exactly this before. In 1995, Clifford Stoll declared in Newsweek that “no online database will replace your daily newspaper, no CD-ROM can take the place of a competent teacher and no computer network will change the way government works.”

Newsweek ran its last independent print issue on December 31, 2012.

Ginny Roth: We may have to empathize with NIMBYs to solve the housing shortage


The good news is: We seem to be reaching a turning point on the housing issue – people know there is a problem and the chorus of voices calling for change is getting stronger.

The bad news is: We haven’t yet confronted the depth and nature of the political challenge. It’s so politically fraught that it sometimes feels intractable.

As the price of housing continues to rise not just in Canada’s big cities but in smaller cities and towns too, the urgency of the policy challenge is increasing. Fortunately, politicians, business leaders and policy thinkers are starting to take notice.

Even more optimistically, an increasing majority of these voices understand that tinkering on the demand side of the equation will not fix the problem. The cause of increasingly out-of-reach housing prices is not minor, therefore, the solutions will not be found by making minor policy tweaks.

Though some, including the federal government, still claim that taxing foreign buyers or investing in affordable housing here and there will solve the problem, consensus is building around the correct diagnosis of the problem. Canada does not have anywhere near enough housing supply for the number of interested buyers (and sometimes renters) and the single biggest reason for this is planning and land use restrictions that get in the way of development.

The reason these restrictions remain, both as a general matter of policy and in specific instances of application, is because existing homeowners do not want their streets, their neighbourhoods and their towns to change. They elect representatives who will uphold the status quo and punish politicians who threaten it. The common reaction to this challenge is for pro-growth voices to bemoan the selfishness of NIMBYism. We shake our heads and our fists and write snarky columns about their hypocrisy.

Some in Canada, to their credit, are making early forays into trying to counter NIMBYism with YIMBYism (Yes, please, in my backyard!). This pro-development enthusiasm at the policy level, though rare, is welcome and helps contribute to a public narrative which occasionally pushes back against the NIMBY majority. But it is not enough.

An approach that forces through unwanted new developments is politically dead on arrival.

Efforts to make housing more accessible and affordable must ultimately endeavour to bring Canadians onside at the grassroots level. A viable plan must not seek to slip through development approvals without the neighbourhood noticing, nor should it ram through major policy overhauls against the wishes of voters only to have them overturned when a new government gets elected on a promise to bring back local control.

An approach that forces through unwanted new developments (both big city towers and new suburban sprawl) is not only politically dead on arrival, it’s inconsistent with the values of a good society.

There are no doubt unethical manifestations of NIMBYism that we should dismiss. Arguments against new developments are often no more than thinly veiled racism, classism and selfishness. But we should not ignore other legitimate concerns. The desire of a community to preserve its heritage, culture and history is legitimate.

An attachment to parkland, greenspace, mature trees and sunlight is legitimate. And yes, a desire to keep one’s surroundings beautiful is legitimate. We need look no further than the recent outrage over plans to “modernize” the Chateau Laurier in Ottawa to understand that Canadians want to keep their traditional buildings attractive. It is not snobbish or immoral to want your neighbourhood to look and feel good.

More practically speaking, incumbent homeowners do not want to see the value of their homes erode. This challenge is harder to confront but confront it we must. The Liberal government has sought to indulge Canada’s baby boomer homeowners by denying the realities of the need for more housing supply. I can’t say I blame the government for worrying about messing with what is effectively the retirement savings of much of our population. But increasing housing supply must not necessarily erode home values across the board. While an increase in supply would certainly take some of the heat out of the market (after all, that’s the whole point), we know that at the local level, development can sometimes add value to incumbent properties, often many times over.

What is clear is that any approach that dismisses concerns about local neighbourhood character or eroding home values for current owners is both politically and morally unpalatable. So, is there a better way?

It is worth looking to the United Kingdom which, while different on the details for a number of reasons, is confronting a fundamentally similar housing supply and accessibility challenge. As part of an attempt to further solidify a new voting coalition of working-class Conservative voters, Prime Minister Boris Johnson and his government have been re-thinking planning rules to encourage more development.

They issued a white paper to explore options and are in the midst of grappling with political opposition from their own party’s benches. Foreseeing the challenge of this political opposition, British think tank Policy Exchange put out a paper called Strong Suburbs earlier this year to try to promote politically viable policy change.

The paper explores a very specific idea: empowering incumbent homeowners at the local street level to opt into their own gentle densification. This means that a majority of homeowners on an individual street in a suburban community in England could decide to welcome multi-family, multi-floor terrace homes (think beautiful brownstone walk-ups more common on the streets in Paris and London) instead of single-family bungalows, adding value to their properties and multiplying housing availability in their community.

Streets would be empowered to opt in with some constraints placed on height (in consideration of neighbouring streets) and homeowners would be encouraged to apply design and beauty stipulations for developers, avoiding styles that would ruin the look and feel of the community. The paper uses economic modelling to make the case that incumbents would see the values of their property increase, encouraging more and more streets to opt in, thus significantly increasing the overall supply of housing in the country.

There are no doubt challenges with this model and the devil may well be in the details. But it is well past time that Canada start exploring options like the one outlined in this paper.

Our housing discussion still naively assumes we must either ignore the problem and tinker at the margins or grit our teeth and gear up for a big fight to ram through new planning and zoning rules which would be stopped or reversed when voters inevitably put up a fight.

Canada’s nascent YIMBY movement is encouraging and as others have pointed out, the number of voters who cannot afford homeownership is growing. Now we must confront the political challenge, painting a picture for Canadians who own homes and for Canadians who do not, of what a better future with more plentiful, beautiful housing could look like and how we might get there.