Blockchain

Bitcoin as legal tender

Over the past few weeks, a significant number of countries have become crypto-friendly. More so, in Latin America and Africa than in the western world. The whole macro-economic environment of these countries has so far been dependent on oil or on loans provided by the International Monetary Fund, or international aid. Most of such international aid and/or loans come with riders that provide access to the nations natural or human resources or affect soverignity in some way.

El Salvador, a small country with a 6.5 million population, recently became the first country to make Bitcoin legal tender. This has been claimed and cited by certain Bitcoiners as a watershed movement where Bitcoin moved from a fringe asset used to hold assets – to the mainstream. The case of El Salvador is unique, because of two factors – the country has been ravaged by decades of civil war(s) and mutinies against the rulers. While the rest of the world embraced globalization So much of economic damage has happened in that country that they do not even possess mints to print sovereign currency. That country had the US Dollar as their only national currency till this point. This meant that the Federal Bank in the United States controlled all the money supply within El Salvador. Governments control societies, through the control of money supply…and being dependent on a foreign country for monetary policy (supply) meant the country was not entirely Free.

Now with Bitcoin, being the second only legal tender after the US Dollar, El Salvador has taken a path that is unique. One thing is for sure – El Salvador cannot print their problems away – like is done in so many countries with a flexible monetary policy, wherein governments can choose to print and circulate money to prevent short-term credit crunches, business loss, etc. Below I highlight a few challenges that can accompany adoption at the socio-economic level within El Salvadore. I also highlight the benefits that can accompany adoption of Bitcoin as a legal tender.

A few challenges that can accompany such adoption are as follows:
1. Political and Lending Challenges:The macro-economic resistance from international lenders.
2. Adoption Challenges:The resistance from within the country where users who are unbanked find it difficult to adopt the technology either via smartphone-based wallets or through desktop-based wallets.
3. Legacy Challenges: The difficulties to migrate legacy infrastructure to be able to access and use cryptocurrencies for common usage.
4. Printing away Problems: The inability to print away money during times where regular business (and commerce) is affected, will cause significant and rampant inflationary situations for prices of common commodities unless governments enact price control and anti-hoarding measures.
5. Managing Volatility : international commerce and banking systems will have to leverage against Bitcoin price fluctuation when Bitcoin demand falls and increases in global markets (or when coordinated mainstream media attacks) happen for bitcoin driving down prices.
6. Money Laundering protections, anti-scamming protections and emphasis on cybersecurity : It is important to note that El Salvadore should lead the world in what can become a successful model for other non-pariah states and nations to adopt, when their own financial systems and monetary systems have been decimated by global markets. For this to happen, user(s) from El Salvadore should be protected from or should be answerable to money laundering laws and stringent cybersecurity norms that prevent both the misuse of cryptocurrencies, and, of resources that are used to hold, store and transact with cryptocurrencies. The cryptoworld is full of scams  of all kinds from fake ICO’s to money skimming schemes, to every possible illegal activity under anonymity. strong regulation that can penalize both perpetrators and protect those who have been affected, is the need for the hour.

These macro-economic  and legal challenges should be handled by policymakers, with significant experience and expertise in a timely fashion -using rigorous economic and policy-based modeling. If there is a lack in rigor and/or policy awareness, and there is a delay in implementing/modifying legal clauses to suite the new conditions that persist, then cryptocurrency adoption would cause more troubles than otherwise. 

That being said there are significant advantages to adopt Bitcoin as a legal tender.
1. De-clutching from another country’s monetary system – in this case, US federal reserve’s monetary policy, sort of giving the country incentives to use their own bitcoin.

2. Increase in Networth for the country. If Bitcoin’s price grows as has done over the past 10 years, El Salvadorians could see a sudden increase in their networth, and as a nation could progress toward increasing GDP, GNP and average networth of each citizen.

3. Forcing infrastructure growth, network connectivity, and the digital economy. Now, all businesses however remote they are – will be forced to be connected to the internet. India accomplished a lot with its Railway system wherein the country grew its road network, electric connectivity, water supply, bridge construction, and such throughout the length and breadth of a vast country on the backbone of its Railways. In addition, the railways employ more than 3 million people and is one of the largest service providers for the logistics and supply chain in India. This is not to mention e-commerce, payment gateway advancements, prevention of fraud, etc. in the Railways. El Salvador’s bitcoin adoption will do the same – on the digital infrastructure side. internet companies, service providers, electricity providers, and allied service providers will be forced to connect the remotest corners of El-Salvadore, creating huge amounts of demand and supply for these services. Overall, in the next few years with this economic model we might see the whole of the country become internet-enabled, with every citizen understanding and creating unique applications for their own use.

4. Human Capital and Knowledge Work increase. The Bitcoin beach movement created to accomplish the true potential of Bitcoin – enables citizens of El-Salvadore to leapfrog into the networking, telecommunication, and fintech revolution. Already large mines powered by entirely green sources such as “Volcano” are being created in ElSalvadore. With China pulling the rug on all activities crypto -i.e., development, mining, exchanges, and transactions legally, a section of the miner(s), and their equipment will move to El Salvadore, creating not only an environment where Bitcoin is used for active commerce, but also for mining… The next generation of el Salvadorians (after the millennial generation i.e., the gen Z) will grow up knowing technology, using Fintech apps, fintech blockchains, writing code and programming money, to create an entirely sustainable ecosystem that is supported by open-source programming and knowledge.

It is the moment of reckoning for Bitcoin, the lightning network, and all other cryptocurrencies. If Bitcoin adoption becomes successful, the next natural steps for El Salvadore would be to let in stable-coins and technologies such as Ethereum, etc.That being said, if this decision to co-opt Bitcoin with the US dollar were to become successful, ElSalvadore -will leapfrog quickly into the first world, similar to what Singapore did during the period 1950-1980.

 

 

 

 

 

The Salience of a Crypto-Bans

Road image with crypto coins symbol

The recent news-bites from a variety of outlets citing unnamed government sources introducing a bill in the Indian Parliament about banning cryptocurrencies in their entirety seemed to make news waves. So much so that it was assumed that Bitcoin price dropped a whole 10 percentage points because of this… however, one has to note that crypto-exchanges in India account for less than 1% of the global trade. Indian customers own only about 1.4 billion – 2 billion in domicile, which is a small fraction of the 1.2 trillion dollar market capitalization of all cryptocurrencies globally. Trading volumes are still in the millions of dollars for the entire country, whereas the top global exchanges single-handedly have several billion-dollar trades in a single day. Not to mention that custody businesses and such have not yet started in India overall.

While established stockbrokers and old economy veterans would vouch for a ban, citing lack of “value”, lack of “production functions” or “hugely speculative market behaviors among traders”, these criticisms have been tried and tested. So much so that there is an entire website dedicated to obituaries here: https://99bitcoins.com/bitcoin-obituaries.

By banning cryptocurrencies – Firstly, governments will move the entire sector into the black market. For example in Venezuela where a dictatorship deemed that cryptocurrencies were to be banned, people stored Bitcoin on mobile phones, traded for it in US dollars and escaped the country. Similarly, in Nigeria where mail scammers were banned from converting crypto into fiat by banning exchanges, peer-to-peer money transfer increased manyfold.

Secondly, banning will forfeit innovation in many sectors, such as decentralized finance, which provides individuals an opportunity to borrow against collateralized assets. Governments will miss out on capital gains, tax revenues, and other kinds of income taxes gained from people who are employed in this sector. This change in lending and consumer loan behaviors will prevent large-scale loan scams that have caused bank after bank from collapsing in India.

Thirdly, web3.0 which is about the decentralization of the internet where no single monopolized entity can control the gateways to the internet will completely exclude India. For example, today almost all data are controlled and owned by foreign and multinational companies possibly in foreign data centers. In the great west vs. east internet, wherein China runs its own internet behind the firewall, and collects and analyzes large troves of information about foreign citizens, whereas the US runs a similar operation to to control user data. web 3.0 apps can allow individuals to control their own data. With Web3.0 and decentralized search engines, blogging platforms, multimedia websites and apps, gaming platforms, and such these data will be encrypted and stored on decentralized nodes. Web-3.0 which connects to wallets requires that users pay small amounts of gas fees or transaction fees from their crypto-wallets using public cryptocurrencies. This prevents large issues such as spam and other malfeasance remnants from the past.

Fourthly, Financial inclusion by not involving private or public banks will remain a distant dream. With 200 Million people, un-banked, cryptocurrencies will provide a mechanism to enable the remotest person to access money without needing a bank account. Similarly signing up using complex procedures that governments require for accessing bank accounts will be entirely avoided. In addition, when banks and financial institutions collapse, people lose their money. Cryptocurrencies and their derivative software allow individuals to not only access their money but also have the ability to transact with it.


Fifthly, Last but not least is the concern about money laundering and cybercrime.Often mainstream media (possibly paid media) cites money laundering as the most common use case for cryptocurrencies. While a large amount of recent criminal activity such as cyber-attacks which blackmail users to pay in crypto-etc. have been detected. Such instances is still a small fraction of the money laundering that takes place through other means. . Many innovations in crypto-analytics such as chainalysis, etc. monitor public blockchains and provide law enforcement a quicker and faster route to capture money laundering instances to prosecute. In fact, the DEA and other authorities have seized millions of dollars worth of cryptocurrencies in the past few years using a combination of these techniques.

Sixth, Considering the percentage of money laundering happening with fiat currencies vs. cryptocurrencies, cryptocurrency-based money laundering is just a trickle. In addition, crypto-money laundering is tractable at entry points such as gateways which convert crypto tokens into fiat currencies. Specifically, when regulated exchanges exist, all of this information is accessible and disclosed by exchanges to tax authorities on a daily if not weekly basis. having access to this information combined with the public nature of the blockchain provides authorities operating in the income tax sector a once-in-a-lifetime mechanism to detect and prevent such instances. In addition to that, if the money laundering or crypto-malfeasance exceeds the tolerance levels of society, a technical change made on the blockchain can rollback such a change or exclude bad-actors entirely.

Seventh, With innovations happening in the design of next-generation cryptocurrency protocols where the crowd of developers, i.e., the protocol enforcers themselves penalize illegal behavior. As a result, incentives to cheat or extract illegal rents in this ecosystem drastically reduces. Comparing this with money laundering in terms of hiding physical assets such as land-records ( or cash or gold ) that individuals carry on their person, or hide under other pseudonyms or in the names of other people, cryptocurrency-based money laundering is a small fraction of the actual money laundering that happens.

Money laundering is a real problem but is more easily detectable with cryptocurrencies.

The NFT Marketplace

NFT – Non Fungible tokens, are tokens that are made accessible on the digital platform, on marketplaces like opensea.io or on rarely. These tokens usually are pieces of complex digital art, signed by cryptographic functions and stored on the blockchain. Often, unreleased music or unique tracks and albums can also come to reside on the blockchain.

These pieces of art have buyers and sellers and often trade at large valuations. On several marketplaces, unique pieces of art are sold for upward of 1 Million USD, and are collected by “Art Collectors”. This unique facilitation of authentication, non-piracy and validation by the Ethereum blockchain. These NFTs digital nonfungible cryptographic tokens are based off the ERC 721 standard, and provide a easy mechanism to store associate and connect different forms of digital art with the blockchain. The following are the NFT marketplaces
1) Cryptokitties
2) NBA topshot
3) CryptoPunks
4) CryptoArt
5) OpenSea.io
6) Nifty gateway

Economics of the art Marketplace – Often with art marketplaces, problems of authenticity, storage, occasional maintenance and renovation of the art piece influence the prices. Art marketplaces, are often characterized by large and public auctions by brokers who are usually large auction houses such as Christie’s or Sotheby’s. Digital Marketplaces on the other hand are all pervasive, decentralized and convenient for both the artist, the art collector and the occasional buyer. anyone who can write an ehtereum contract and can handle WordPress hosting with possibly Woo-commerce or another e-commerce plugin will be able to create a unique NFT marketplace..

However, as per the principles of Pareto-efficiency – these digital marketplaces are often characterized by a 20% head that determines the actual sales on the marketplace. However the remaining 80% of the NFTs will possibly be never sold ever on the market. That being said, the top creators of NFTs such as the artist beeple are masters of their craft and can use marketplaces such as nifty-Gateway to make millions (https://www.postandcourier.com/charleston_scene/charleston-artist-beeple-changing-digital-landscape-made-3-5m-in-1-weekend/article_394dcd16-7533-11eb-83e5-33d121ba910b.html)

Not to mention that artists trained in creating original work have now found a large worldwide marketplace, without needing to host expensive broadway shows, or book painting events, or invite expensive museum clientele to buy their art. All they need to do now is to find a nice platform such as one of those mentioned above, and host their piece of art on the blockchain using some ethereum in their wallets.

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??💎 – 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.