Blockchain

Aggregators in the cryptocurrency sector

Cryptocurrency symbol

Unlike stock markets where there are a couple of major exchanges per country the cryptocurrency sector has 100’s of exchanges and now liquidity providing token swapping networks.

The prices and transaction rates vary across these networks and getting the big picture across these networks to compare prices of tokens and the prices of individual swaps are challenging. To fill these gaps two classic aggregators have taken shape in the market. The first one called Matcha which compares prices across different exchanges, and swapping exchanges, etc., and gives one the ability to connect and exchange one token for another. Visit matcha.XYZ and use it.

Here a video for matcha https://www.youtube.com/watch?v=KDhMRFSRtwQ&feature=emb_rel_end

The next major aggregator is this software tool called 1inch.exchange which enables users to look at the prices across several swapping exchanges which are backed by liquidity pools. These aggregators not create a layer above the traditional marketplace but also facilitate arbitrage where a user can buy off one decentralized exchange and trade at a more favorable exchange – extracting the difference for a profit.

1inch Exchange: DeFi’s Next Hidden Gem??đź’Ž – YouTube

In 2021 corporate opinions change with respect to cryptocurrency

Glass Buildings

Last week Ray Dalio – the legendary and largest hedgefund manager of our times released a “research and insights” column announcing that ” I believe Bitcoin is one hell of an invention. To have invented a new type of money via a system that is programmed into the computer and that has worked for around 10 years and is rapidly gaining popularity as both a type of money and a store hold of wealth is an amazing accomplishment “. The full letter can be found here ( Ray Dalio — What I Think of Bitcoin (bridgewater.com) ). At the end of this announcement was also another interesting thing – his assessment is that Bitcoin should grow to become a storehold of value and could come to replace what has been the value of gold i.e., approximately 10X its current valuations at constant supply. The other interesting aspect that he touches upon is the fact that Bitcoin and the cryptocurrency sector will provide a new class of funds for their clients. ( Dalio Expects to Soon Offer Alt-Cash Fund, Says ‘Bitcoin Won’t Escape Our Scrutiny’ – CoinDesk )

Similar moves have been made by Paypal -which allows individuals to now purchase cryptocurrency from a PayPal wallet. While such a wallet is really not feature-rich and doesn’t allow individuals to trade or even send this purchased cryptocurrency outside the wallet, Paypal has set up an entire cryptocurrency division to enable an upgradation of their services and cross country /currency movements using cryptocurrencies. The other large networks that are following PayPal’s example are VISA the world’s largest money transfer, credit enabling network which expects to convince banks to integrated with crypto wallets for the faster transaction of money across geographies. VISA is already offering services that enable users to directly use their debit cards from cloud-based wallets such as coinbase. Similar changes are being made by MasterCard and other networks.

As of date, major mainstream hedge funds are starting to offer products in the crypto-sector. The mainstream money exchange systems and payment systems are facilitating a combined financial transaction product that supports credit cards, currency, and cryptocurrency in one account. It is only a matter of time before mainstream banks (Bank of America, Chase, Wells Fargo, Citigroup, Bank of Santander) also start offering services to hold cryptocurrencies. At the end of the day, the main banking sector will have to rise to the fact that “alt-cash” systems increase the efficiency of the entire networked system providing increased security and traceability.

Wrapped Tokens and Synthetix tokens

Wrapped Tokens and Synthetix tokens

The “W” tokens

Over the past year significant development has happened in the smart contract space, where native tokens from other blockchains have seen a shift to a wrapper based economy. Such a shift is possible because ethereum’s smart contract architecture makes it possible to wrap anything into a contract and write it to the blockchain. As of date, the total number of Wrapped Bitcoin WBTC is approximately 5% of the total market supply available for Bitcoin. WBTC – an ethereum smart contract wrapped version of Bitcoin provides the ability to trade (i.e., buy and sell Bitcoin) on market maker platforms such as sushiswap or uniswap, and on peer-to-peer smart contract exchanges such as AAVE, ZRX, etc. Wrapping native tokens of other blockchains and facilitating transactions in them, make for a significant market share and provides flexibility to such markets.

The “s” tokens

Right behind the “W” revolution is a host protocol for derivatives called Synthetix network, which creates this ethereum laced synthetic token and facilitates Derivatives trading. While wrapping is a “first step” at creating an asset class around non-native tokens for the ethereum blockchain, the Synthetix network enables users to create futures, options, swaps and other kinds of assets based on values of other tokens. This market is just getting started – and is based off the synth token which provides network validation and other services. In the “sBTC” is a synthetix network version of Bitcoin. Similarly the synthetix network intends to create a marketplace for real world assets like AAPL or TSLA which are real stocks sold on NYSE. Creating sAAPL or sTSLA will actually enable these tokens to be traded on exchanges and on exchange protocols such as balancer or uniswap and will provide full liquidity to the owners of these assets.

The Rise and the Tremendous Rise of the DeFi Marketplace

Rise of the Defi Marketplace

Historically till date there have been more than 397 obituaries for bitcoin. Bitcoin Obituaries – Bitcoin Declared Dead 350+ Times (2021 Updated) (99bitcoins.com) – the most recent one calling Bitcoin “vapor”, “nothing”, etc… on Jan 31st 2021. Amongst the other names of Bitcoin have been “rat poison”, “money laundering device”, etc… However, considering the value locked up in Bitcoin, even Janet Yellen had to give a clarification to her statement after the senate hearing about Bitcoin here ( Janet Yellen Clarifies Her Stance on Bitcoin — Promises ‘Effective’ Crypto Regulation – Regulation Bitcoin News )

Nevertheless, the Decentralized finance marketplace and the Centralized finance marketplace includes hundreds of innovations

a) market driven mechanisms for stable coin issuance such as Maker DAO,

b)the consortium based issuance of stable coins such as USDC, USDT, etc. and

c) marketplaces which return interests on user deposits from marketplaces such as Celsius Network or staked.us which piggybacks on other instruments.

d) derivatives based marketplaces such as Synthetix network

e) market-maker networks such as uniswap, aave, balancer

f) staking networks that include staked.us , stake.fish

g) validator networks that include infrastructure for staking

The total value locked in DEFI exceeds 90Billion USD with the top defi protocols including MakerDAO, WBTC, Synthetix, AAVE and UNISWAP each of whose value (native tokens + combined value of the wallet) is greater than 4 billion USD.

So much for the obituary…..

Price manipulation courtesy /r/wallstreetbets and the Musk-tweets

Market

For a brief while over the past 10 days most stock markets in the world were rattled by an anti-establishment mania where a set of traders sharing information on reddit’s wallstreetbets forum decided to send the price of Gamestop (a traditional retailer struggling to survive the pandemic and e-commerce/game streaming revolution) to the moon. Similar attempts were made to send the price of AMC to the moon using Zero-trading fee apps like Robinhood and using leveraged stocks. However, short this rally lasted such an attempt met with massive resistance from clearing houses that are used by exchanges to settle the trade on NYSE. An unusual volume of trade on the stock definitely caused panic amongst hedge fund managers who had publicly taken bets against the stock in what is known as the put option – designed to profit when a stock reaches a price on its way down, and usually the profit is many times the invested amount. When the stock rose, these hedge funds had to take in billions of dollars of loss to cover their positions on the street, and definitely wipe some sweat, blood and tears off their face. Frontrunning such massive crowd manipulated stock prices – a once in a lifetime happening- found its challenges quickly amongst regulators, stock brokerage houses and clearing houses not to mention exchanges which immediately ceased trade in these manipulated stocks – causing massive losses to those who had wildly purchased the stocks of Gamestop in a frenzy.

Definitely while Gamestop is a cultural icon that needs to fundamentally be restored, in the long run business fundamentals such as price, earnings, projected growth, etc. will definitely determine the price of the asset rather than the euphoria of the crowd. Hopefully, with the stock having reached such highs hopefully gamestop will be able to rejig its business and reinvest some of the recent earnings from this euphoric capital infusion from public markets to really show some growth over the long term.

However, just on the tail of such massive market manipulation is the arrival of Elon musks single worded tweets pushing up bitcoin and “Doge” coin a coin that has risen more than 3000% in the last 1 year. While bitcoin’s properties of supply, value, technology and mining are subject to significant research amongst financial institutions, academics and technologists alike the euphoria surrounding “doge”coin needs some serious validation and thought. a meme based coin that sets its supply at several billion coins, that has lasted for a few years, and rewards miners 10000 dogecoins per block mined possibly needs some deeper thought amongst investors about the principles of its value? other than pure speculation. The question people should ask is “what is the utility?” of such a token – if there is one…

On the overall, speculation can trump value creation in the short term, but in the long-run sound technology backed by value will create the required market conditions for a utility driven increase in value.

The Eth2.0 staking update.

Ethereum 2.0 logo

The ETH 2.0 (Ethereum 2.0) migration has progressed much over the past couple of months.

Beacon chain the first of the three steps for migration locks in the proof-of-stake and enables the entire network to test out proof-of-stake as a validation mechanism. The detailed features of beacon chain are given here (https://ethereum.org/en/eth2/beacon-chain/)

While beacon chain does not yet allow writing of smart contracts on it, beacon chain enables proof-of-stake to Ethereum. It involves staking ETH in order to activate validator software. As a validator one will process transactions and create new blocks on the chain. About 32 ETH are needed on a minimum to become a single validator. Services such as staked.us allow you to stake your ETH from your own wallet, but will provide validator software and surrounding infrastructure to use your staked ETH. Currently approximately 2.25% of the total Ethereum supply has been locked up in ETH2.0 and this is valued at approximately 2.5 Billion USD.

The following link shows the interest calculation and current rates of staking rewards on the ethereum network.

Ethereum 2.0 (ETH) Interest Calculator and Current Rates | Staking Rewards

Surprisingly the minimum requirement for staking has been oversubscribed by more than 500% with a yield of approximately 10.14% per annum. The lockup period of approximately 18 months signals a shift in this market where cryptocurrency was usually easily sold and purchased by regular users.

Overall, staking is a large business and a significantly powerful indicator of how this ecosystem progresses. 

Ethereum 2 and the bumper harvesting of tokens in proof of stake

The beacon chain that arose as the result of 3 years of work of the ethereum community secured more than the required number of validators on the network. The statistics of the ethereum network are shown on https://beaconscan.com. While beacon chain works as the active test net for it’s massive scalability re-design, it is definitely a showcase of the powerful unity amongst the ethereum community, by contributing almost 500 Million dollars worth of ethereum for the next couple of years, to enable genesis.

Early statistics of beacon chain show that the expected number of ethereum coins have far been exceeded in number by more recent deposits of 32 eth validators. The beacon chain still continues to accept deposits, and while before genesis pooled validators were not allowed, newer exchange based staking services such as kraken.com have started offering pooled staking for validators. Similarly staking businesses such as staked.us are offering deposits to the beacon chain smart contract even if one didn’t have 32 eth to stake. These developments are welcome and would allow beacon chain to flourish, despite there being a lockup of between 5 and 10% of the available ethereum supply into beacon chain smart contracts that enable validation of transactions.

To learn more about the architecture of the beacon chain visit this URL:https://ethos.dev/beacon-chain/

While the beacon chain does not necessarily alter the functioning of decentralized applications, it does provide eth2 developers to write applications that scale faster and can effectively disrupt the need for large deposit and confirmation cycles once the beacon chain moves to the next level.

The Dow Jones Crypto Index

The year 2021 will possibly be noted as the year when the world recognizes mainstreaming of cryptocurrencies as the first possible type of blockchain based assets in markets. The signal from Dow jones a reputed industry standard for indices and a powerful market determinant – about launching a separate cryptocurrency index will possibly be a silver lining in the otherwise grey cloud. While the Dow Jones index is a critical factor, what remains to be seen is whether mainstream brokerages, traders and other financial actors like banks in the US will make crypto a part of their portfolio of products.

It is already known that major banks in Japan – an economy struggling from negative inflation- seems to have found solace in the growth of at least one financial asset I.e., cryptocurrency. The main Nomura holdings bank in Japan accepts cryptocurrency deposits directly and provides customers with dual accounts – one for cash or other assets and another for cryptocurrency based holdings.

One of the key factors that has been lacking till date in the cypto-space was an index from a reputed and established firms on Wall Street, that can be used for benchmarking existing asset portfolios. Of course, private indices did exist e.g., such as the cci30.com index. The CCI30 was definitely one of the best indices that existed ever, but it was possibly inefficient as a baseline. The DJIA indexes 30 largest stocks by market capitalization.

Hopefully the mainstream banking and stock trading firms will pay heed to this sector. It is a known fact that most ultra HNIs, Family offices and others have invested in this sector. Many of those who used to condemn this sector as vapor ware as late as 2016 have now started accepting the value of this sector overall.

That being said, whenever regulations catch up globally to protect the assets of citizens by preventing fraudulent asset issuance, then blockchain based assets would be much sought after.

Regulation and the FinHub-SEC

One of the most progressive endeavours in the financial sector affecting mass adoption has been that of whether governments are willing to actively regulate a class of assets against fraudulent rent seeking by unscrupulous market actors.

While most markets are governed by inherent reputation mechanisms, that operate as a forewarning to future investors, cryptocurrency markets – because of its international nature has taken more time to form these reputation mechanisms. As a result, regulation in the most advanced countries of the world are lagging and are a step behind the innovation. What is interesting though is that decentralization – like the cypherpunk movement – if left unregulated or if banned can continue to exist underground, without any oversight.

As many different types of assets such as security tokens and cryptocurrencies expand in their reach globally, SEC has stepped up in their functions by separating financial technology regulation from regular security regulation. The FinHub website recently separated from SEC’s main website offers several insights for all kinds of token issuers and for the general public. Similarly, the website also provides information about different decisions taken by SEC’s FINHUB team for example, the rejection of Winklevoss Bitcoin Trust ETF, the no-action letters issued to Paxos Trust and such..

These regulations, be they for ICO’s or for other forms of secondary token assets issued by the FinHub are worth a read at the FinHub website and provide guidance to those in the industry and those in academia about future directions the space of crypto. The separation of Finhub from SEC itself signals that existing regulations and frameworks for analysis may not be sufficient to regulate this sector fairly to prevent malfeasance and to protect the wealth of a county’s citizens.

Uniswap and the Life of a Protocol

Uniswap logo

In decentralized finance, and in the overall blockchain sector, what has always mattered is that the protocol survives beyond the scope of the current software it runs within. As a result, we have seen massive adaptations after adoption of the first instance of a successful protocol. For example, The bitcoin protocol has morphed into multiple different protocols and chains, and coins over the past 12+ years. Similarly, other token protocols have morphed.

However, within the scope of liquidity pools and decentralized exchanges, the feat accomplished by Hayden’s Uniswap protocol is a story unto itself. For example, when uniswap was released it received significant adoption since it offered ordinary retail users a chance to invest their coins and earn some interest from liquidity pools. This market making wherein retail individuals would park their coins in liquidity pools became a significant component of the decentralized economy and the protocol’s did not depend on a single team of individuals, or a single peice of software or even a common user interface. This software system runs autonomously, is governed by a decentralized team, and is managed and maintained by a globally distributed software team. While core protocol specifications and modifications to these specifications are the responsibility of a central organization, the development and user interface is completely decentralized.

When uniswap.org raised their first external investment from the professional VC community which required KYC, AML etc. adherence, the community that engaged with the code, decided to fork off and overnight several instances or clones of the uniswap started operating. True decentralization just needs an individual to login or connect with his/her own wallet, and does not need a login ID or password to access the services of the decentralized application.

In a short timeframe there are more than 100 uniswap protocol applications, some running on hosted services like zapper.fi. Some running within the context of the mobile phone apps such as moonswap. Some even running with their own separate unlinked liqudity pools like sushiswap. What matters is that the input to the liquidity pools in the form of token pairs are sourced from a variety of user interfaces such as zapper.fi or aave.  The more the Decentralized applications that run on the same protocol – irrespective of the user interface or the mode of operating (mobile app, web app, hosted application, windows application) the more the protocol’s life extends.

The network effects of such a protocol  – that survives beyond its source and provides access to users globally, – i.e., virtually anyone connected to the internet  – is  going to give this a life beyond what has been explained or thought of as possible in traditional software development lifecycle thoeries. There is virtually not going to be an End of Life or a single point of maintainence.