CryptoAM: Synthetic Assets, Binance Lending, and Tzero Troubles

Hey all, Avi writing from sunny Los Angeles. Nice massive sell-off this morning! Really threw a loop, as the market report was done. I talked about chop…but now we're out of the range.

Three things you need to know:

One: The Evolution of DeFi — From Leverage to Products


To the casual observer, it seems as though DeFi was going through a rough time the past couple of months. In ETH terms, the amount of value locked up with DeFi procotols fell precipitately from the beginning of May through July.

  • According to DeFi Pulse, value locked up in decentralized procotols has rebounded about 25% (in ETH terms). It should be noted however, that much of the drop corresponded with a spike in ETH price, suggesting that much of the drop was due to profit taking. Also, the DAI stability fee was raised significantly during that time, and could have contributed to the fall off in value.

The majority of DeFi value currently exists in leverage/lending platforms. 56% of all value is locked up in Maker currently, and the second place DeFi protocol Compound (also a lending play) controls about 23% of overall value locked. (Data from DeFi Pulse) All of this to say — lending platforms seem to be the main driver of DeFi currently.

I expect this to change dramatically in the coming year. There is a new breed of protocols coming out, focused on the minting and trading of decentralized synthetic assets. The current leader of this class is a protocol called Synthetix, currently #4 on the DeFi leaderboard with $27M worth of value locked up in their ecosystem. Synthethix allows you to mint new assets by staking their native token, and they have a variety of different assets that are decentralized and tradable on their platform.

Just last week, Synthetix announced the first decentralized index fund — a token tied to a basket exchange coins. These coins will have a long and short version. According to an interview with the founder of Synthetix, they intend to launch a variety of different tokens including leveraged forms.

  • The beauty of these products is the decentralized nature of the system that allows anyone (from anywhere!) to trade. For example, someone in Nigeria could invest in an S&P token to get access to the U.S market and hedge out some of their native currency risk. This is what really excites me about synthetic assets….

We are very excited to launch a new category of Synth, Index Tokens, these tokens track an index of centralised exchanges tokens. The long version is called sCEX and the short version is called iCEX. These Synths are designed to give users exposure to a basket of exchange tokens, which have gained huge popularity in the last 12 months. sCEX tracks the value of a basket of exchange tokens roughly approximating their weighted market cap, iCEX is an inverse index of this basket, and works like our other Inverse Synths

Start paying attention: The introduction of decentralized and tradable structured products presents substantial opportunity for people early in the space. Over the coming years, the ability to trade anything from anywhere will become pervasive through the cryptocurrency ecosystem. This of course, comes with many legal implications that will have to be hashed out — but one thing is certain — the tech is coming.

Go deeper: Read the interview with Kain Warwick, founder of Synthetix

Two: Binance Introduces Margin Lending

Yesterday, Binance announced the rollout of their new margin lending platform. The platform is scheduled to go live on the today, August 28th.

Initially only 3 assets will be available for lending:

  • Binance Coin - 15% annualized - 14 day term

  • Tether - 10% annualized - 14 day term

  • Ethereum Classic - 7% annualized - 14 day term

In classic Binance fashion, these offerings are exclusive. The subscriptions are first come, first serve and have a subscription cap on them. Through this first iteration, the subscription caps are 200,000 BNB, 1,000,000 USDT and 20,000 ETC.

  • Binance is appears to be running this in a similar manner to their IEOs as it seems they are attempting to get people interested by making it difficult to access the product.

  • The kicker: It will most likely work! With such a small cap on assets and a such a large userbase, it looks like the caps will be hit almost immediately. Since Binance is backing the payout on these loans, people will likely view this as “free money”.

The bigger picture: Exchanges are quickly expanding into every possible money making operation they can. OTC services, lending services, research, margin, custody…the list goes on. In traditional finance many of the classic crypto-exchange operations are actually performed by many different parties — mostly due to regulation. For example, the order matching engine, clearinghouse and custodian are all different entities in the traditional finance. Exchanges are flipping this idea on its head, and creating really robust ecosystems to capture clientele.

How to use this: It’s important to realize that there are very few widely used crypto-assets. Exchange coins tend to be the most used cryptocurrencies, and are also integral to the success of exchanges. A exchange coin done well can really create a sense of community (and also stickiness), which can help exchanges maintain client relationships.

I believe that a variety of different services and building a strong community can pay massive dividends for exchanges. Looking at up and coming exchanges that offer novel products, a strong community, and large variety of services can help you pick investable assets.

Three: tZERO loses investor following Byrne resignation

Without doubt one of the strangest (and least appreciated) stories in cryptoland looks like it’s come to a head. Following the resignation of Overstock CEO Patrick Byrne (tZERO’s parent company), Makara Capital has officially pulled out of investing in tZERO. The Singaporean based fund had long been playing an on-off game when about deciding to invest in the firm.

Back in March Makara Capital was poised to co-lead a $100M investment in tZERO alongside GSR Capital. This figure was already down from a prior $404M commitment. GSR Capital only ended up investing $5M in tZERO.

Why it matters: I believe you’d be hard pressed to find a story that better illustrates the ups and downs of the security token hype cycle than this. tZERO is one of the most high profile names in the market and raised $134M in an ICO in August 2018.

Key trend: The security token industry, once seen as a natural evolution to ICOs and a vehicle to revolutionize the capital raising process, has struggled with liquidity issues and meeting regulatory requirements.

Go deeper: Read Forbes’ write up on the fall of Patrick Byrne (with analysis on tZERO)

Also in the news:

Market Outlook:

Quick Take

Direction:  We were trading decidedly within range until Bitcoin decided to collapse. Market structure has turned strongly bearish over the last hour based on my interpretation of price action and my telegram chats going silent (this was a joke).

Market looks very heavy to me, and I’m looking at 9.5k to give me a better picture. If we break down past 9.5k — we will be posting a lower low and I’m relatively confident R/R wise shorting down past 9k (which I think will break if we trade below 9.5k — personal opinion. I have been wrong before).

Both realized and implied Bitcoin volatility is continuing to cruise down. Options volumes and open interest are falling off. (Data according to implying that leverage is being flushed from the system. I wouldn’t be surprised if we saw more declines in implied volatilities towards the high 60 - low 70 area based on the long time frame that the high 90/100 range held.

Altcoins are looking increasingly weak, and Bitcoin dominance is continuing to post new highs (Data: Tradingview - BTC.D). This Friday I’ll have more a data driven analysis for you. Stay tuned.

On the macro side of things, the world continues to slide into unease. The Jackson Hole meeting of central bankers this past week had one theme — unease. Many economists are now acutely aware that the current state of the world feels very much like uncharted waters. Gold is up almost 3% over the last week, a telling sign that the market is pricing in major uncertainty (Data: Tradingview)

Key Support:  9500

Key Resistance: 9900

What I’m thinking today:

Venture Capital and the Performance of Blockchain Technology-Based Firms: Evidence from Initial Coin Offerings (ICOs)

Came across this report from UCLA, Erasmus University, and Trier University which seems to have flown under the radar. The main question of this study however is something immensely interesting - did VC involvement in ICOs help increase the value of these projects?

Here’s the authors’ TLDR abstract:

“Our results suggest that VC financing causes BTBFs to substantially outperform their peers. Specifically, we find that VCs are not able to pick better BTBFs to invest in (selection effect). Instead, they add value post-investment (treatment effect).”

What this means:

Selection effect = whether VCs are genuinely better at picking the top projects than the general public. Theoretically they should be better at selection than the average retail investor. Reasons for this include having significant resources to evaluate and screen new investment opportunities, allowing them to conduct deeper due diligence on projects. An example of this might be hiring a technical expert to actually screen whether what a project is promising in its white paper is feasible and makes sense.

Treatment effect = the benefits a project receives by being invested in by a VC. This obviously includes capital, but also value add services such as professional coaching (e.g. providing finance, marketing, strategy advice) and access to a VC’s networks.

The results:

If you want to dig into this further and find out exactly why VC funding matters for projects, the report is here.

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