CryptoAM: BitMex, McKinsey and Zilliqa

Happy Tuesday from a sunny NYC 🌞

Three things you need to know:

One: BitMEX & CryptoCompare start streaming data

Information is power. Especially when we’re talking about financial services, having the most up-to-date and important data is essential when conducting trades and making decisions.

You’ve probably heard of Bloomberg. A big part of the company is the Bloomberg Terminal, which is the market leader in providing this important data to those who need it. Less well-known is Bloomberg Terminal’s biggest competitor - The Eikon Terminal (which is owned by Thomas Reuters).

You’ve probably heard of BitMEX. The cryptocurrency derivatives exchange is a giant in the industry. Our final player is CryptoCompare, another well-known player that provides market data across the crypto industry.

The Eikon Terminal now supplies its 190,000 users with cryptocurrency futures data from BitMEX, as first reported by The Block. Our friends at CryptoCompare are the ones who make this possible by taking the data from BitMEX and integrating this with The Eikon Terminal.

Seems dumb but makes sense: Traders can already access all this derivatives information from BitMEX via its APIs. The data on The Eikon Terminal isn’t any different and doesn’t come any faster. The point however is to get institutional traders more familiar and comfortable with crypto specific products by having information accessible on a platform they already know. It’s basically making it as easy as possible without having to change existing habits.

Why it matters: It’s another example of how crypto is trying to reach out to traditional investors and encourage them to take positions in the market. The Eikon Terminal costs $22,000 a year, so you can bet these 190,000 users have some financial firepower backing them. Remember the entire crypto market cap is only $250 billion, the same size as Visa. CryptoCompare actually took another big step today, streaming their data though Quandl, a NASDAQ data service. We’re seeing continued integration of the cryptocurrency market into the traditional markets, and the trend is only getting stronger.

Two: McKinsey wades in on blockchain and retail banking

Let’s hope the message is finally starting to get through. McKinsey this week opined a piece where it laid out the key areas where it believes blockchain could have a positive impact for retail banking (small business and consumer focused banks).

Why it matters: McKinsey are top dogs and probably the most prestigious firm on the planet, with deep connections to many governments and large businesses. When they say something, important people tend to listen.

Here are the two most important retail use cases the company believes could be deployed at scale, along with recommendations of how to achieve these:

1. Remittances (surprise)

Cutting down the time and cost associated with cross-border payments. Less focus was placed on remittances between family members and more about how this could reduce international trade costs.

Ripple’s Ripplenet and JP Morgan’s Interbank Information Network (IIN) were specifically referenced as examples of current blockchain solutions.

One key obstacle to real time settlement is the friction of converting crypto-to-fiat and vice versa. And that’s true; on and off ramps in crypto are a big painpoint and even more important for businesses who move large sums. Their view was that while stablecoins were helpful for this, even these had to be converted back to fiat at some stage.

What they didn’t mention: This obstacle is something that IBM and Stellar’s World Wire does for retail banks. It takes their fiat payments, converts it to crypto, and deposits it to the recipient in fiat. This means that at no time does the bank have to worry about holding crypto and any of the accompanying volatility, as this process is entirely managed by IBM.

2. KYC and ID fraud prevention

Identity fraud and anti-money laundering compliance represent a significant cost for banks around the world. Banks’ efforts to address identity fraud have led to longer onboarding times and higher costs, as there is a higher requirement for consumers to prove their identity when setting up a bank account (think of all the documents you have to submit, and then think that someone from the bank has to verify those).

Opening a new bank account and onboarding could be made easier for banks if the individual had a digital fingerprint linked to a blockchain, according to McKinsey. If the bank is able to reference this digital ID and all the appropriate information, then they could grant access to services much more quickly without needing to go through as many identity fraud prevention measures.

Biggest problem: Much of this requires banks to share data with each other. This not only requires banks to trust each other, but also calls for data standardization across banks.

Recommendations to increase adoption:

1. Central bank digital currencies to mitigate the need to transition between fiat and digital assets.

2. More clear regulation of crypto assets around the world so they can move freely without risk of government crack downs.

3. The creation of customer identities on blockchain to enable banks to offer real-time loan decisions based on authenticated ID.

What I’m thinking:
If you’re a crypto entrepreneur, pay attention to the problems that McKinsey identifies. It likely comes from feedback from their clients who are some of the largest companies in the world.

Three: Zilliqa enables smart contracts on its platform

Zilliqa announced yesterday that they have successfully introduced smart contracts onto their blockchain. This is a big step forward for Zilliqa, and also a warning shot to Ethereum, as Zilliqa claims they are the first ever fully-functioning public smart contracts platform built on a sharded architecture. 

Per Coindesk reporting:

Among the core features offered by Zilliqa’s smart contracts, Kumar listed that they are amenable to formal verification and come with a suite of static analyzers that help spot potential bugs and issues in contracts. Further, the Scilla language is designed to handle different operational components, such as computation and communication with other contracts, in a “clean manner,” eliminating complex interleaving.

Why this matters for you: Whether or not Zilliqa is adopted or not, this is a threat to the dominance of Ethereum. Over the last year, we’ve seen a significant amount of smart contract platforms launching, and over the next year I’m sure we will see many more. While Ethereum does have a massive head start and network affect, it’s not impossible that their marketshare is impacted by the rise of these additional protocols, and it certainly introduces far more investment risk. It’s likely to me that Ethereum actually underperforms a vetted index (even to the downside) of “smart contract protocols”, as it will be easier for a smaller protocol to grow quickly than it will be for Ethereum.

Also in the news:

Market Outlook:

Quick Take

Direction: The market is looking a lot stronger since last week, but it still has an overall bearish structure. We are ranging between 7500 and 8100, prices inside this range are noise for everyone not scalping.

The market structure right now is looking relatively bearish. Most buyers looking at Bitcoin are already exposed enough for the 7500-8500 level. Buyers above 8000 were clearly looking for 9k+ soon, and when it got smacked down they all pulled their bids.

I am still betting on revisiting 7.2k - 7.4k. I would flip bullish if we take out 8200 with volume.

Key Support:  7400

Key Resistance: 8100

What I’m thinking today:

The Making of a Successful Protocol

I read two articles recently by Placeholder that got me thinking about the paths to success that newly developed protocols can take.

The best way to fund and develop a protocol is still a lingering question in the cryptocurrency world, and there is no standard way to do so. We’ve seen a depth of different types of options:

  • Bitcoin — open source software, released to the world. Zero developer funding.

  • Zcash — open source software, released to the world. Founders reward extracted from block rewards and delivered to the Zcash foundation.

  • EOS — ICO model, raised significant capital upfront, then proceeded to build the software. Used funds raised from investors to then encourage building on the protocol.

There are two angles to creating a sustainable protocol discussed in the posts above:

  • Supply-siders that install productive capital

  • Investors that contribute investment capital

The question at hand that is posed: which group should a protocol emphasize first in order to maximize the value of the network?

Minting models fall flat when there’s no investor interest at the tail-end, as then the supply-siders are not able to sell earned assets at high enough prices to cover costs and must abandon the protocol.

Investment-capital-driven networks fall flat when there’s little supply-side support because no clear model was put in place to compensate them for their work, or there’s too little upside left if investors gorged themselves. With no supply-side, the protocol has no utility, and has no chance of making the final leap to enticing a demand-side and completing the economy.

Looking at the failures outlined, it’s clear that a combination of both is necessary in order to have a successful launch in today’s environment. You need both an investor base that is willing to buy into a token, and also a model where early participants in the process of the protocol are rewarded.

The majority of recent protocols have been failing on the supply-side. In fact, many new protocols do not even have a supply side and rather issue all tokens up front meaning that they do not get buy in from participants from the beginning, and instead have to focus on capturing participants who may or may not get value from the protocol. It’s incredibly important to have an initial base of people (who may be investors but should not only be limited to investors) who will participate in the protocol from the beginning. It’s one of the reasons I believe it’s difficult for protocols that have already been fully issued to succeed.

Many of these recent protocols have noticed this, and are now building out investment funds with their excess capital to try and stimulate protocol growth, because their current supply side dynamics & investor base were poorly constructed. Now these investment funds are actually a good idea, as you should be doing all you can to incentivize participation, but may have come too little too late.

Two protocols that have balanced the supply side & investment side decently are EOS and Tezos. Both offer early and strong adopters (delegates & bakers respectively) the ability to gain significantly from taking part in the governance of the protocol. They also raised significant treasuries, and are putting them to work through grants and venture investments.

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