Weekly Wrap: Why DeFi, Counterfeit Goods, and Building More Chips

DeFi: A New Way of Banking

Try going to your local bank and asking for a loan without providing your proof of income, social security number, identification, debts information, or monthly expenses. Your banker would probably laugh you out of the building.

However, there is a way you can get a loan without jumping through all those hoops.

DeFi, short for decentralized finance, has grown into a thriving industry worth hundreds of billions of dollars in the last few years.

The Fi in DeFi

Financial applications built on blockchain technology are DeFi.

The blockchain operates as a record of financial transactions. Those transactions are conducted using digital assets. Often those assets are cryptocurrencies.

DeFi transactions can take place between two or more parties. In addition, like traditional banking, they can involve lending and/or investing.

The De in DeFi

Since transactions take place without a central authority, they are considered decentralized. As a result, there are fewer barriers to conducting transactions.

Instead of a War and Peace size loan document, DeFi relies on a “smart contract”. This contract is a computer code spelling out the obligations of everyone involved in a transaction.

“By removing middlemen, DeFi promoted ‘access’ to create a fluid, global financial system open to everyone, with no barriers,” Johann Kerbrat, Robinhood’s chief technology officer told Fortune.

Should You Try DeFi?

DeFi cuts out much of lending and investing red tape. However, it is experiencing growing pains.

Crypto thieves took in around $14 billion according to a report from Cryptoanalysis. Most of that was attributable to the rise in DeFi.

However, some of the success of thieves may be due to the shortsightedness of their victims.

With so many new protocols being developed to facilitate DeFi transactions, some have code vulnerabilities. As a result, hackers often have an open door to transactions.

One way to protect yourself against these vulnerabilities is to refer to a third-party service that audits protocol and identifies the safe ones.

Conclusion:

The digital and financial worlds are constantly evolving. That leads to new opportunities. However, that can also lead to new problems.

The watchwords for any new opportunity, digital or not, are to know what you are getting into.

Alibaba, Tencent Make Naughty List

Alibaba’s AliExpress and Tencent’s WeChat have joined a list of companies the Biden Administration has identified as purveyors of counterfeit goods and violators of copyrights.

The Notorious Markets List (NML) is published each year by the White House and identifies companies that engage in counterfeiting and intellectual piracy.

Forced Labor

This year’s report identifies the impact on workers involved in counterfeiting as well as on companies that hold legitimate rights to goods and brands.

“Counterfeit manufacturing often occurs in clandestine workplaces outside the reach of labor market regulations and inspection systems,” noted the NML report, “which increases the vulnerability of workers to exploitative labor practices. Evidence indicates that the production of counterfeit goods exists alongside widespread labor abuses, from substandard and unsafe working conditions to child labor and forced labor.”

The list was issued by the Office of the United States Trade Representative.

“The global trade in counterfeit and pirated goods undermines critical U.S. innovation and creativity and harms American workers. This illicit trade also increases the vulnerability of workers involved in the manufacturing of counterfeit goods to exploitative labor practices, and the counterfeit goods can pose significant risks to the health and safety of consumers and workers around the world,” said U. S. Trade Representative Ambassador Katherine Tai

Identifying Bad Actors

AliExpress and WeChat were just two of 42 online markets identified by the report. In addition, 35 physical markets have been identified that sell or facilitate trade in counterfeit and pirated goods. Many of those firms operate in one country.

China may have come in third in Winter Olympic Gold Medals this year, but it is the undisputed champ of the NML.

Since the NML originated in 2006, Chinese companies Baidu Wangpan, DHGate, Pinduoduo, and Taobao have been listed. In addition, this year’s list includes nine physical markets in China that produce and sell counterfeit and pirated goods.

Semiconductor Challenge / Opportunity

Are you stuck with a Sony PS4 when you want to be playing a PS5?

Unable to buy that new vehicle you want because it costs more than the house you can not afford?

A lack of semiconductors may be keeping you from enjoying the above or any number of other items.

That may result in you having the “we ain’t got no domestic semiconductors blues.” Well, cheer up Bunkey relief may be on the horizon.

Yep, It Began With Covid

Let’s do a recap to show how we got here. (We will make this brief and Biblical sounding.) Covid begot supply chain disruption which begot the current semiconductor shortage.

U.S.A., U.S.A. – We’re Not Number One

Once upon a time, the United States was the top producer of semiconductors.

“The United States used to lead the world in global semiconductor manufacturing,” according to a White House Fact Sheet. “But in recent decades, the U.S. lost its edge—our share of global semiconductor production has fallen from 37 percent to just 12 percent over the last 30 years.”

The Biden administration says the chip shortage cut the Gross Domestic Product last year by a full percentage point. In addition, the White House says high car prices accounted for one-third of the rise in the Consumer Price Index (CPI) in 2021.

Government – Industry Action

President Biden issued an executive order to rectify supply chain weaknesses a few weeks after taking office. A priority of that plan is increased domestic semiconductor production.

In April, Biden hosted a virtual meeting with chip makers and users. As a result, chip producers and U. S. automakers formed new alliances to shore up the semiconductor shortage.

In addition, industry leaders are launching new initiatives.

The government is offering $52 billion in subsidies to chip makers. As a result, many companies are adding to their capacity and research efforts.

Intel announced last month that it is spending $20 billion on two chip fabrication plants near Columbus, OH. That facility has the potential to grow into a $100 Billion, 8 plant complex, according to Intel.

Other Players

Other semiconductor companies have announced over $80 billion in U.S. projects since the beginning of 2021. Additionally, some of those investments come from foreign companies.

The White House Fact Sheet detailed several of those investments, including:

• A $17 billion Samsung factory in Texas – the result of sustained work by the Administration, including the President’s meeting with President Moon of the Republic of Korea in May.
• Texas Instruments investing up to $30 billion in Texas;
• A new Global Foundries factory in New York state;
• Cree’s intention to spend $1 billion to expand a current plant in North Carolina;
• SK Group investments in a new U.S. R&D center; and
• Micron to expand U.S. production.

Investment Opportunity

With the U.S. and other countries turning to great domestic chip production, investors might want to look for a way to get in on the trend.

Motley Fool recommends two ETFs focused on semiconductors. They are iShares Semiconductor ETF (NASDAQ:SOXX) and VanEck Vectors Semiconductor ETF (NASDAQ:SMH).

SOXX holds an interest in over 30 semiconductor firms and has $7.6 billion under management.

SMH owns shares in 25 companies with assets of $6.5 billion.

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Max K. Erkiletian began writing for newspapers while still in high school. He went on to become an award-winning journalist and co-founder of the print magazine Free Bird. He has written for a wide range of regional and national publications as well as many on-line publications. That has afforded him the opportunity to interview a variety of prominent figures from former Chairman of the Federal Reserve Bank Paul Volker to Blues musicians Muddy Waters and B. B. King. Max lives in Springfield, MO with his wife Karen and their two cats. He spends as much time as possible with his kids, grandchildren, and great-grandchildren.