Happy Tuesday everyone. Hope your week is off to a good start! I’m going on vacation tomorrow to Boca Raton, so mine certainly is…
Don’t worry. CryptoAM will still be in your inbox this Friday 🤙🏽
Three things you need to know:
One: Binance launches ‘Venus’ stablecoin project
As seems to frequently be the case these days, Binance made waves again yesterday when it announced Venus, an “initiative to develop localized stablecoins and digital assets pegged to fiat currencies across the globe.” Stablecoins and digital assets developed by the initiative run on Binance Chain, the company’s public blockchain.
What we know so far:
Actually not a lot. There aren’t any big announcements with large corporations or governments. Instead it’s a call to action for these parties to partner with Binance.
It’s blatantly taking on Libra — and Venus has a distinct philosophical difference with its approach towards stablecoins.
Here’s a good way to think about it, as per Nathaniel Whittlemore:
“What Binance seems to be betting on with Venus is the idea that rather than a transnational global currency, like Libra, maybe people are going to be more interested in regional currencies that are pegged to either their local fiat currency or maybe a regional basket….it’s also classic Binance in that it’s a bit of a regulatory arbitrage play where it’s likely they go after areas and regions first where it’s going to be harder for Libra because of existing political will, but perhaps they’re interested in the technology and the idea and would like a partner like Binance…”
In other words Binance is saying: ‘if you like the sound of digital currencies but don’t have the expertise and you’re scared of Libra, we have the technical expertise with digital currencies to make this work for you and we won’t take away your sovereignty’.
Side note - to the best of my knowledge R3 has been working with central banks on their digital currencies for years via their Corda blockchain.
Yes great but: Binance already has stablecoins on Binance Chain, and they’re not exactly humming along. The Binance GBP Stablecoin (BGBP) for example has a most recent 24hr volume of USD $21,718. Let’s compare that with the major stablecoins:
There is no doubt that having a country-backed digital currency on Binance Chain, let alone any public blockchain, would massively increase the value of that blockchain (BNB to the moon). But if you wanted to view the announcement skeptically, you could read it as a reflection of the current lack of volume for stablecoins on Binance Chain, and an acknowledgment that a partnership with a government or large corporate is needed to boost these volumes.
I also wouldn’t expect governments of the world’s largest countries to parter with Binance anytime soon. India and China both look to be pushing ahead independently with their own separate plans for potential digital currencies. It also seems highly unlikely that the US government would partner with a non-US company for something like this, especially one that proclaims that Venus is the ‘one-belt road’ version of Libra (referring to China’s geopolitical plan to establish itself as the centre of world commerce). More likely would be Binance cultivating links with its existing government partners, such as Malta, Uganda, and Argentina.
But even in these countries, there are still questions about how much value everyday citizens would derive from a digital currency backed to their national currency. Sure, it might be faster and have slightly less friction. But if I have an Argentine peso-backed digital currency endorsed by the national government, my digital currency is still subject to the wild fluctuations of the peso. At least with Libra citizens of countries with unreliable currencies could in theory hold an asset that was backed by relatively stable currencies such as the USD, EUR, and JPY.
On the other hand, maybe everyone is actually overthinking this, and this could be a more likely medium term outcome :)
Two: Coinbase finalizes Xapo acquisition
Coinbase has emerged as quite possibly the most important player in the cryptocurrency custody space after finalizing its purchase of Xapo’s institutional custody service, one of the oldest and largest providers in the industry. The move increases Coinbase Custody’s total assets under management from around $1 billion pre-purchase to $7 billion in assets under custody. This likely puts it second behind only Kingdom Trust, which reports assets under custody of $8.5 billion.
The move marks a continuation of a key theme — consolidation. Currently there are many low margin businesses that exist in the cryptocurrency market, with custody being the one of the most prominent. Custody is one market that scale truly matters, and the continued M&A of the market makes absolute sense. Custodians can only attract significant business if their brand carries weight, and inspires trust. This means it’s highly likely that the smaller custodians (especially as the space matures) will struggle to gain meaningful AUM and will eventually be bought out by larger players.
What I’m thinking: The press announcements stress that despite the purchase Xapo is holding onto and continuing to operate its retail exchange arm. I’d be very interested to know what percentage of the business that represents, given that the company has raised $40 million overall (if you raise that much and are then bought for $55 million - could be a questionable return on investment for investors).
Three: Compound just launched an open oracle system
The concept of truly decentralized systems currently faces a major problem. This problem called the “Oracle problem”. The basic premise of the issue is that smart contracts require inputs from the outside world in order to resolve. For example, if you’re betting on the Yankees vs the Red Sox on a decentralized betting platform, how does the contract actually know who won the game at resolution? Who will be the arbiter of truth?
If the “truth” comes from a centralized source, then the system fails to be truly decentralized and is also subject to gaming and manipulation. Should it be the contract creator that decides on this “truth” or should the users of the contract decide on the truth? As you can see, this has become a very interesting problem, and many different companies have formed different solutions to the issue.
Yesterday, Compound (a leading DeFi lending platform) announced that they were launching a community project — the Open Oracle System.
The systems is meant to provide reliable cryptocurrency pricing data through a group of reporters who offer up reliable information and posters who aggregate and send information to the actual Ethereum blockchain itself.
From there, users can choose a variety of different ways to ingest the information.
Why this matters: The emergence of decentralized systems requires new forms of human coordination, and every iteration of these systems presents new challenges and opportunities. Reading the documentation of these oracle solutions (and in general, DeFi solutions) can often spur ideas in other areas of life, and I highly suggest going through and reading them.
For example, does an oracle that provides rewards to those with consistently correct data work better than one that punishes those with incorrect data? What should the balance between punishment and reward be? Understanding and observing these oracles in action can inform you on how to build out your own solutions.
Go deeper: Some additional readings on Oracles
Even deeper: Some additional oracle solutions
Also in the news:
Bitcoin is running upwards slowly after flushing back down to sub 10k. We’re still trading well within the wide range we entered beginning of June (9k - 14k). On a longer term basis, everything outside this range is essentially noise, and a breakthrough of either side will set in motion large continuation.
Volatility (both historic and implied) has come down significantly over the last month, and with it so have options and futures volumes. We spent an abnormal amount of time with IV’s in the high 90s and low 100s, so this pullback seems warranted and could in fact see continued falling.
From a technical standpoint, looking at the 1D timeframe paints a relatively rosy picture. We’ve painted higher lows, and are looking at an incoming 1D MACD crossover.
I’m currently long, and expect further price appreciation to at least the 11.2k level. I view it as increasingly likely that we’ve set a cycle low at ~9.1k, and will not see lower price levels than that over the coming months.
I am bearish on all altcoins beside exchange coins, and hold some spot long positions in BNB, HT, and OKB.
BitMEX is seeing inflows again
Coinflex, a new derivatives exchange is launching aggressive market maker programs to help kickstart liquidity after raising money from Polychain.
Exchange coins are leading the entire market so far this year — showing that cash flow coins have been a good bet
What I’m thinking today:
There’s a lot of noise about Defi these days. What we don’t see a lot of is discussion of the fundamentals - its unique value, its big opportunities, its risks. The following piece by Linda Xie (co-founder at Scalar Capital, a crypto VC fund), does a good job at this. Let’s assess:
In Linda’s words: “At a high level Defi aims to create a lot of the existing financial systems we have today (borrowing, lending, derivatives), but in a way that is typically automated and removes the middle man.”
Great so we’re clear on what we’re actually looking at that then. Moving on:
This is one of the most discussed - and criticized - parts of DeFi currently. For non-finance people, collateralization is putting down one asset so you can take out another. In the traditional finance world you might for example put your house as collateral to take out a business loan. In Defi collateralization is most often referred to as putting down ETH in exchange for another crypto asset (e.g. DAI or USDC).
The main complaint is that collateralization requirements in DefFi (often between 150%-200%) lead to an inefficient allocation of capital and plus (all that capital is sitting there not being used) and also not many people have that amount of capital to put down in any case.
However Linda points out that despite these seemingly odious requirements, there’s still $500M of loans in Defi currently, proof that there is demand for these services.
Two key use cases for borrowing from Defi currently:
1. Leveraging up during a bull run. If you put $200 worth of ETH as collateral and get $100 worth of DAI, you can use that DAI to buy $100 worth of ETH, meaning you’ve got $300 worth of ETH in total. This is great when prices are increasing - you’re able to increase your upside.
2. Broadening access to financial services to underserved populations. This to my mind should be the long-term focus of the Defi movement. Let’s not forget how powerful it is for people to be able to access financial services - being able to a access loan can help you start a business and lift yourself out of poverty. Linda sees this segment as small currently, but with potential to grow overtime as collateral requirements decrease.
Barriers to expansion
Laura believes in order to decrease these requirements we’re currently lacking two key things:
1. Decentralized identity and reputation systems
This would allow people to prove their identity without needing to submit too much of their personal information. High functioning decentralized identity is a holy grail of this industry. The key with this and reputation systems is to be able to prove who you are and then be able to take actions that add to your credit worthiness. These actions need to be able to be linked to you however so that the system can take these into account. Being able to do this helps refine risk models, which could allow for lower collateral requirements.
2. Legal system to handle issues
If someone doesn’t pay back a loan currently in defi, there are limited methods to track them down and get them to repay at least some of the loan, especially if borrowers are based in different jurisdictions. As a lender being able to estimate how much you can get back in the case of defaults is important it can help you estimate risk better - allowing you again to potentially reduce collateral requirements which would open up DeFi to a greater number of people.
Uniqueness of Defi
It’s worth acknowledging some of the unique aspects of DeFi than set it apart from the traditional financial system. One of these is compostability; the idea that all the different defi protocols are like lego pieces than can fit with each other.
One buzzy concept that has been discussed using this concept is the idea of Superfluidity. This means that hypothetically collateral could be passed from one protocol to another to create a more efficient allocation of capital.
As an example: If I put down $200 of ETH in collateral in Maker, then at some stage instead of just leaving that collateral sitting ideally I could lend it out on Celsius to earn interest. The idea is that you’re being more efficient with capital instead of it just sitting there.
There are a number of risks with this, clearly. The most obvious being that it compounds risk across the system. If Maker needs your collateral back but Celsius has had a bunch of defaults and can’t pay this collateral back then it’s not just Celsius that will have an issue, its Maker also. It also potentially defeats the purpose of having collateral in the first instance.
To drive home the point about compounding risk:
The key theme is: don't judge DeFi for its current capabilities, think instead about the future state of the technology. This is fair enough. The 500M currently in DeFi does show demand, however I'll be watching to see how this number changes over the coming months. Much of the current demand seems to stem from crypto traders looking to leverage their positions. I'm skeptical about the size of that market over the long run. To grow exponentially and truly show its worth, DeFi will not only have to prove to consumers in the existing financial system that it is superior (e.g. through lower lending rates, less friction etc), but should also attempt to bring previously underserved populations into the financial system.
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