In a previous post, I touched on the concept of decentralization favouring diversification in light of cryptocurrencies and open financial networks.
Upon further pondering on this concept, the seed for this post began to emerge, which is basically about exploring this framework as a foundation to build a structure on top of it, which is building a fortress of assets(structure) on the principles of decentralization and diversification(foundation), both from a theory and practical perspective.
Open financial networks are inherently decentralized or tend to be because they're open, meaning anyone can participate since it is permissionless.
One of the effects of that is over time, the more decentralized the network gets, the more diversification can take hold, as in spreading the risk on top of spreading the control.
Cryptocurrencies are a product of open financial networks and can be termed as an asset apart from the other qualities that they posses, such as medium of exchange.
The Forest Analogy
Analogically, this can be pictured as a forest and its inhabitants, where open financial networks represent an entire forest, a thriving ecosystem that allows various species to flourish, with no single dominant tree, but rather a diverse range of plants(and animals) coexisting(decentralization), and different species fill different niches, which contributes to creating a resilient and perhaps, a balanced environment(diversification).
In this analogy, cryptocurrencies can be viewed as as individual fruits, nuts, or flowers within the forest. For example, Bitcoin network could be the giant oak tree and its fruit, acorn as BTC.
In theory, building a fortress of assets leveraging open financial networks is quite possible. This is because these networks inherently promote diversification and decentralization, which are hallmarks of a secure and resilient financial portfolio.
Let's break down why:
Diversification: Open financial networks offer a vast array of cryptocurrencies and other digital assets, allowing you to spread your investments across different asset classes, mitigating risk.
Decentralization: By distributing control across the network, open finance reduces reliance on centralized institutions that could be vulnerable to failure or manipulation.
Coming back to the forest analogy again. A fortress built within this diverse ecosystem wouldn't rely on a single tree (centralized asset) for its foundation. Instead, it would draw strength from the variety of plants (diversified assets) within the forest.
Through gathering a diverse collection of fruits, nuts, and flowers (cryptocurrencies and other assets), one creates a reserve that, in theory, can withstand fluctuations in the value of any individual element. This reflects the concept of diversification within one's asset fortress.
In practice, things are not that clear cut. Although it's still a possibility to build a fortress of assets, the degree of this possibility is limited. For one, the foundation itself is relatively still in a rapidly evolving stage and hasn't reached a respectable level of overall maturity yet.
This introduces a lack of stability, which can make it difficult to build a fortress without a stable foundation. Besides, the long-term viability of certain cryptocurrencies and digital assets remains to be proven.
Secondly, consider the forest analogy again. While the forest boasts variety, it might be dominated by a few giant trees (like Bitcoin and Ethereum in the crypto space). This concentration of power creates a vulnerability, similar to a forest with only a few dominant tree species. If a disease or environmental change were to wipe out these giants, the entire ecosystem could suffer.
Ideally, the forest (open financial network) should be well-balanced with a variety of mature plants (established cryptocurrencies) and new growth (emerging cryptocurrencies) to ensure long-term resilience.
In Closing
Building a fortress of assets on the foundation of open financial networks is an intriguing idea. The potential for both diversification and decentralization offered by this approach is undeniably appealing.
But, like any grand visionary project, a reality check is necessary. The relative newness of open finance introduces uncertainties regarding the long-term viability of certain cryptocurrencies and the overall stability of the ecosystem.
Undoubtedly, the key is to approach this endeavor with a healthy dose of optimism and a clear understanding of the inherent risks.
Thanks for reading!! Share your thoughts below on the comments.
Posted Using InLeo Alpha
Decentralized investment options have opened up all together a different world of investment. As you say options are unlimited here but at the same time one also has to be careful in the selection. There is a lot of freedom here, big gains if you get lucky and chances of big losses too
Right. I think the scales are steep in both directions and the goal with these new kind of investments is to minimize the inherent risks as much as possible while also gradually increasing one's exposure to big potential gains.
Thanks for stopping by :)
Your posts are always so so nice to read.... Loved the analogy you made with the forest.
Indeed, planting just a single tree isn't enough but when you've planted many so large to be likened to the forest in this aspect when you've acquired many cryptocurrencies rather than placing all your eggs in one basket, that's when you thrive financially
Yes, exactly. I think it's a gradual process but once you have enough diversified trees in a well decentralized manner, then the fortress begins to take shape and hopefully, the laws of nature will do us more good than harm lol.
Thanks for stopping by :)
You're always welcome bro
I like your analogy between the crypto space and a forest and the vulnerability that is introduced when you have only a few dominant species, in the eventuality of something happening to them. I agree, that for a forest to thrive, it needs many more strong species in its ecosystem and new ones that grow and show potential from time to time. That's a balanced ecosystem that is more resilient, and, even if one species of tree disappears from the forest, others will be there strong to take its place and make sure the forest will go on.
Right. I think the analogy is quite fitting. That's definitely the path to a balanced and more resilient ecosystem. Less reliance on a few dominant trees, giving room for other trees to grow and contribute to the ecosystem.
Thanks for stopping by :)