Category: Market Analysis

By Christopher Kilbourn | Crescent City Capital Market Analyst Intern

Steinbeck famously quipped that in America, the poor view themselves as “temporarily embarrassed millionaires.”  This week, the House Financial Services Committee met to discuss the Biden Administration’s recommendations on stablecoin regulation, and the many millionaires of crypto Twitter rose up to express their dismay.  Government oversight has long been the bête noire of the crypto community, and to hear the average community member rail against it, you’d think that they were the ones pulling rugs, rather than being rug pulled.  Congress was similarly divided in their ideas on how to proceed with regulation, but both left and right seemed opposed to the Administration’s advice.  Behind the bluster on all sides, a common conclusion can be drawn: that crypto regulation is considerably behind the times and it may take several years of increasingly large shocks to the emerging crypto banking sector before enough systemic risk is present for anything substantive to be done.  Let’s see where things stand now.

In November, the Biden Administration pulled together Janet Yellen, Jerome Powell, Gary Gensler, and Rostin Benham, acting chair of the CFTC, to make policy recommendations on the regulation of stablecoins.  In essence, the report their working group produced made several basic recommendations.  First, that any stablecoin provider should be licensed as an insured depository institution, which it identified as a state and federally chartered bank.  Second, that custodial wallet providers, i.e. any institution responsible for the wallets on which consumers store the currencies they use to make payments, should similarly be subjected to “appropriate federal oversight.” 

The long and short of these requirements is that firms like not only Tether and Circle, but also Coinbase and Binance would have to register as banks and submit accordingly to the capital and risk management requirements to which banking institutions must adhere.  While opponents seem to think this is a ploy to deliver decentralized finance into the hands of the existing tradfi overlords, the President’s Working Group (PWG) claims to have recommended them simply out of concern for the stability of the broader financial system.  We saw last week some of the first inklings of what might occur when treasury funds are handled less than judiciously, which is a greater threat than ever in crypto protocols that increasingly involve the management of reserve assets (An update, for anyone curious.)  So what’s the problem?

On Tuesday, the PWG report was finally presented to the House Financial Services Committee by Nellie Liang, the Treasury Department’s undersecretary for domestic finance, to general skepticism.  Republicans appeared opposed on principle to the suggestions, arguing that limiting stablecoin issuance to chartered banks would stifle competition and rein in a new market before it was able to get off the ground.  Conspicuously, a number of democrats crossed ranks to agree, with Democratic Rep. Gregory Meeks commenting, “It occurs to me that limiting stablecoin issuance to insured depository institutions, which have a high barrier to entry, could limit competition.”  While a few congressional Democrats have begun to float ideas around on how legislation could be drafted in the future, it seems that there is little hope of decisive action being taken in the short term.

Reflections

One source of complication is just how quickly traditional categories break down when discussing the subject of decentralized finance.  At one point, Liang specifically stated, “Stablecoin issuers do not make loans. They don’t engage in fractional reserve banking.”  But clearly some stablecoin issuers do both of these things.  The multi-collateral DAI stablecoin was being issued as early as 2017 as a loan secured by other cryptocurrencies, and the reserves backing USDT, the largest stablecoin by a wide margin, are comprised of only 2.9% cash.  If these are activities that stablecoin issuers are engaged in, then clearly stablecoin regulation needs to regulate these activities with the same oversight and for the same reasons as they are in traditional finance.

While the crypto space widely views government crackdown as the greatest threat to the burgeoning asset class, there is an actual apocalypse in sight in the form of systemic risk brought on by unregulated activity.  If protocols are issuing tokens that function identically to asset-backed securities – as Wonderland did with a token backed by yield-generating stablecoins – then they should be governed by the prudential regulations that govern traditional banking, for the exact same reasons.  And if they do as Wonderland and Abracadabra did and leverage these stablecoins before investing them on other protocols, they are for all intents and purposes engaging in fractional reserve banking, and there’s no logical argument against being regulated as such.  In the case of investors simply parking their own stables on a protocol in exchange for yield, there’s truly no reason they shouldn’t be covered by federal deposit insurance, at the very least. 

It might not be unreasonable to say that as long as these measures go unpassed – as long as the crypto space remains free of prudential regulation – the systemic instability of the emerging crypto banking sector will remain a greater threat to investor funds than government ever could.  As the space evolves into bigger and bigger business, it seems to be transitioning from a blank canvas upon which innovators and idealists experiment with the future and into a wild west in which there is very little to stop corrupt actors from operating with impunity.  Until measures are put in place to prevent this, investors can always count on periodic shocks for opportunities to buy.

https://www.americanbanker.com/news/cheat-sheet-how-regulators-want-to-rein-in-stablecoins

Michael Patryn Rinsing Millions From Wonderland Treasury? (fullycrypto.com)

https://www.ft.com/content/529eb4e6-796a-4e81-8064-5967bbe3b4d9

https://www.americanbanker.com/news/lawmakers-appear-unlikely-to-limit-stablecoin-issuance-to-banks

https://www.americanbanker.com/news/democrats-circulate-bill-to-rein-in-stablecoins

By Christopher Kilbourn | Crescent City Capital Market Analyst Intern

Few are the occasions when crypto and cancel culture get in bed together, but last week appears to have been one of them.  That Dani Sesta is at the heart of the scandal may come as a lesser surprise to some – in retrospect, it’s no particular shock that the man who brought the phrase “degenbox of Magic Internet Money” into serious financial discourse might have courted controversy.   Nobody, however, predicted that the treasurer of Avalanche’s premier OHM fork would turn out to be an ex-con with an 18-month bid in federal prison under his belt by the age of 23. 

Both manage to spice up a notoriously dry conversation about the innerworkings of decentralized finance, so perhaps we can seize upon the opportunity to investigate further.  For while the lurid details seem little more than a good headline, the outcome was a serious destabilization of several defi protocols, and the situation offers an object lesson in how these projects functioned.  Now is as good a time as any to learn about the mercenary liquidity problem and the perils of defi, and thus be better able to judge the solutions provided by future investment opportunities.   

Matters of Liquidity

At its heart, defi consists of blockchain projects that replace the institutions of banking with automated smart contracts.  In the same way that a homeowner might use a house as collateral for a loan, or a depositor may place money in a bank, defi users can send tokens to a contract to borrow money or be paid interest.  The flagship application of decentralized finance, perhaps the basis for all others, is the decentralized exchange.  To this we turn for the critical task of exchanging tokens on chain without the intermediary of a private bank of corporation.  Sparing the gory details for the time being, take it on good faith that liquidity is the basis for any DEX’s success.  Nothing is more important when exchanging tokens than finding a narrow spread between ask and bid, and to that end, users will naturally seek the exchange with the greatest amount of liquidity.

We arrive now at the first issue.  Who provides this liquidity and why?  There’s a word for centralized liquidity providers: they’re called banks, and we don’t like them.  So who are the liquidity providers in a decentralized exchange?  The answer, fellow degen, is you and I.  Defi revolves in essence around incentivizing users to provide peer-to-peer liquidity.  When a user contributes a pair of tokens in equal amounts to an automated market maker’s liquidity pool, they are paid reward tokens as interest, generally at unheard of and borderline unconscionable APY. 

The Rent is Too High

Here’s the thing.  In order to attract competitive amounts of liquidity, protocols will incentivize liquidity providers at ever-increasing competitiveness.  One outcome of this is an undesirable emissions rate, resulting in inflationary tokens with no hope of delivering the 10,000X return to which its investors are rightfully entitled.  The other is the encouragement of “Liquidity locusts,” or mercurial liquidity providers who only contribute so long as the incentives are kept artificially high. 

2021’s most creative answer to this problem came in the form of Olympus DAO.  Rather than having liquidity providers lock tokens on the contract and essentially paying interest on the loan, Olympus devised a novel bonding solution.  Simply put, providers sell their liquidity pairs to Olympus in exchange for discounted OHM, and the Olympus treasury keeps their tokens for good.  This system of protocol owned liquidity has two major advantages for Olympus.  By amassing gigantic reserves of every currency imaginable and providing liquidity on their own, Olympus gets to keep the trading fees that normally get distributed to liquidity providers on rent-based DEXs.  But more importantly, it means that Olympus doesn’t lock other people’s liquidity on their protocol, it owns the treasury itself – and thus, OHM is not pegged or collateralized, but backed. 

The Run on TIME

Olympus’s idea gained a good deal of traction following its release, and OHM forks abounded throughout 2021.  One of the more prominent of these is Wonderland on the Avalanche ecosystem, formed by a public-facing founder named Daniele Sestagalli and an anonymous team of developers.  When news came out last week that one of these developers was Michael Patryn – convicted in 2007 for selling stolen credit card numbers and affiliated with a failed Canadian crypto exchange that cost investors $169 million – investors were understandably miffed.  The price of TIME cratered and Sestagalli was subjected to intense scrutiny over his willingness to trust a man convicted of grand theft with the $712.9 million Wonderland treasury.

As is commonly the case, the issue proved contagious.  Sesta is also responsible for a lending protocol called Abracadabra, which appears for all intents and purposes to be a Maker clone marketed towards 7-year-olds.  Therein, degenerate youngsters can open a vault on the contract, collateralize it with various currencies, and borrow the native MIM stablecoin against their own holdings – all while cosplaying a wizard casting spells across an 8-bit cartoon world.  The whole thing has a Joe Camel quality that may turn some users off, but at the end of the day there’s just no accounting for taste. 

What ties Abracadabra and thus the Sifu scandal into the outside world were the colossal UST holdings that users had locked on Abracadabra’s protocol, which Sesta subsequently leveraged, rehypothecated, and staked on Terra’s Anchor protocol.  As investors dumped all the MIM they could, they returned to Abracadabra to withdraw UST, causing a run on the protocol’s treasury and a correlated selloff that temporarily broke UST’s peg with the US dollar.  With Sesta having leveraged the stablecoin to the point of a $0.97 liquidation price, any serious imbalance in the liquidity pools could have resulted in a liquidation and spelled disaster for Anchor.  At its peak, Abracadabra accounted for $1B of Anchor’s $6B TVL, and a liquidation of this collateral could have sent shockwaves far beyond the world of Sesta’s involvement.  Disaster was narrowly avoided, Terra restored its peg, and the system healed faster than a Luna tattoo on Mike Novogratz, fresh on the heels of his New Year’s in New Orleans.   

Reflections

The revelation of Dhanani’s involvement shines a light on a genuine vulnerability inherent to the nature of crypto.  In a sense, blockchain technology exists for the explicit purpose of replacing human institutions with immutable protocols, and in doing so, it creates a bulwark against human corruptibility.  While the anonymity this makes possible is considered an indispensable feature to many users, it can also inhibit users’ ability to judge a protocol by the reputation of its founders. 

What nobody seems to be discussing in this story is that with the advent of the Olympus-style protocol-owned-liquidity system, the management of treasuries becomes a larger part of defi protocol governance.  And whether a financial entity happens to be centralized or decentralized, wherever a human manages a $712.9 million portfolio with no regulatory framework in place overseeing his management, there is manifest potential for bad faith decision making.   Anyone considering investing in this style of defi protocol would be wise to do considerable research on both the investment activities of the treasury and the human beings responsible for conducting it. 

Secondly, with regulation at the forefront of everyone’s mind, this is one more reason for suspicion of a space that lacks legal oversight not only over its financial instruments, but increasingly over the reserve currencies that are used to buy them.   Stablecoins stand directly in the crosshairs of congressional inquiry and these developments will only make the coming debate rockier and more contentious.  With regulatory uncertainty likely to be one of the primary sources of volatility in the crypto space this year, this is one more reason to expect anything but smooth sailing over the coming months.   

• https://research.thetie.io/olympus-dao/
• https://reimaginedfi.medium.com/lets-talk-about-stablecoins-42f0aa2a7bcb
• https://capital.com/wonderland-time-price-prediction
• https://medium.com/coinmonks/what-is-protocol-owned-liquidity-a-primer-on-the-model-developed-by-olympus-dao-55368f200d66
• https://abracadabra.money/
• https://medium.datadriveninvestor.com/abracadabra-money-the-degenbox-guide-37d54fc4c4da)

By Chris Kilbourn | Crescent City Capital Market Analyst Intern

Winter arrives in Russia, and a young man’s mind turns to war.  Geopolitics are back in the news this week, and it may behoove the crypto space to step back and consider its role in the future of this global game of Risk.  And with fears of a looming bear market weighing heavily on everyone’s mind, it may be encouraging to consider some of the fundamental reasons why people – or nations – might still be turning their eyes towards Bitcoin in 2022.

National Adoption

The dip is upon us, and one of the more public figures currently buying it is President Nayib Bukele of El Salvador.  Much has been made of his country’s adoption of Bitcoin as a legal tender last year, most of it negative.  Experts of all stripes have condemned the choice, with many charging that Bukele has turned participation in a Ponzi scheme into official state policy.  Institutions from Moody’s to the IMF have concluded that he has been sold on a lie, and they seem hellbent on swaying him from his course.  After all, it can turn heads when people with questionable financial literacy seem convinced they’ve outsmarted the most highly educated economists in the world, and Bukele’s current economic policy can essentially be summarized with the words “up only.”

Bukele is intransigent in the face of such criticism, however, and his flippant treatment of global scrutiny has a distinct undertone of defiance.  When Bloomberg criticized his mobile investment antics last month, he doubled down with the revelation that all trades are performed au naturale.  His dismissive tone is that of an upstart who operates outside of conventional channels and is thus liberated from answering to their representatives.  Indeed, like a Gamestop investor squeezing out hedge funds on Robin Hood, he seems to feel a mixture of triumph and moral vindication born not only from the promise of wealth but also of upending a perceived injustice.  And when a man stands so resolute in the face of global criticism – to say nothing of a $20 million trading loss – one has to question whether he has some ulterior motive besides simply getting rich quick.   It bears questioning whether there is a larger game he might actually be winning.

The Dollarization of El Salvador

What makes El Salvador’s case interesting is the currency which BTC seeks to replace.  It is known as the US Dollar, and it was adopted in 2001.  With 16% of El Salvador’s GDP accounted for by foreign remittances sent back from expatriate relatives, a large portion of the nation’s income at the time had to be exchanged for the native colón, artificially overvaluing the country’s currency and driving up interest rates.  In an attempt to stimulate growth and further integrate the country with the more dynamic American economy, the dollar was adopted as legal tender in 2001 and essentially replaced the colón over the next three years.

The move had a variety of interesting consequences that form a microcosm of USD’s role in the global economy and the position of outsized prestige enjoyed by America as a result.  With the colón essentially out of circulation by 2004, El Salvador’s Central Bank lost any and all capabilities to set monetary policy, as their people were now using another country’s money.  Like the Greeks before them, monetary integration actually inhibited growth by preventing them from manipulating their currency to, for example, render their exports less expensive and more attractive to foreign importers.  The people of El Salvador were now beholden to a currency whose primary motive was the enrich the country who issued it.

The Current Monetary Order

While few nations have been moved to accept the dollar as a national currency, all operate nonetheless in a power dynamic with the United States that is largely mediated by the dollar’s status as the world’s reserve currency.  In a world of political realism in which all states are ultimately competing in a zero-sum game for their own self-interests, this means ceding a degree of relative power to another player.  Let’s consider a few of the ways America uses the dollar to assert itself and consider whether there are any new entrants to the game of global monetary competition that could possibly upset this balance of power.

Far, far more than any other currency, global capital markets are denominated in dollars.  60% of the currency reserves held by foreign treasuries are held in dollars, and dollars are involved in 90% of transactions in foreign exchange markets.  This means that nations or corporations who wants to borrow or lend money on the world stage are essentially required to do so in USD, which creates tremendous global demand for both dollars and dollar-backed securities.

There are several consequences of this state of affairs.  The US Federal Reserve has a disproportionate influence over the world’s financial life.  The United States has a greater control over international financial networks, which enables us to sanction and police both state and non-state actors.  Nothing, however, compares to the primary benefit of the USD’s dominance on the world stage: when everyone wants your money, everything becomes cheap.

With so much demand for the US dollar, the people, companies, and government who hold it essentially have an upper hand in economic affairs.  The people benefit from the purchasing power of a strong dollar and live lives of greater abundance due to the stream of inexpensive foreign imports.  American companies have greater access to investment capital through the highly liquid US capital markets, and avoid paying transaction fees since they are able to borrow in their native currency.  And the US Government, able to borrow at perennially low interest, employs exorbitant deficit spending to finance its domestic agenda and outsized military.  Any way you slice it, American hegemony on the global stage is propped up by the financial primacy of its currency.

Rumblings of Change

So if the world does its lending and borrowing in the debt markets with the greatest amount of liquidity, and one nation is able to finance itself so well by issuing treasury bonds backed by the currency that dominates these markets – what happens when highly liquid capital markets arise that use a different currency altogether?  And could any country with treasury holdings in that currency not issue bonds backed by it?

This is precisely the scenario upon which El Salvador staked its future in November, when Bukele announced a $1B bond collateralized by the country’s Bitcoin holdings.  While Bukele plans to use the money to build a new city on top of a volcano and use geothermal energy to power his mining operations, the number is conspicuously close to the $1.3B loan they are currently in jeopardy of losing from the IMF for the normal functioning of government.  If it succeeds, the implications could be enormous.  Not only would Bitcoin emerge as a viable asset that state treasuries could use to back financing for government programs, but doing so would upend the sometimes predatory relationship between third world countries and the creditors with whom they fall into cycles of debt and imposed austerity.  And it would essentially distribute the “exorbitant privilege” of reserve currency status amongst all nations with Bitcoin in their treasuries, with power accruing in proportion to their holdings.

This all hinges on the development and adoption of a global system of decentralized finance with enough liquidity to supplant the dollar as the de facto currency of international lending.  This is certainly a trend with a long time horizon, but the incentives seem to be there.  It only makes sense that other nations would want to lend and borrow in a common currency that is not subject to the machinations of a competitor’s central bank.  Countries like Iran, who have run afoul of the United States, will likely be delighted to have access to capital markets after their banks have been shut out of global finance, and have begun putting infrastructure in place to that end.  And in general, if a nation can make economic decisions in a way that limits the soft power of a competitor state, it’s often a safe assumption that they will.

At the end of the day, with each country that begins to accumulate Bitcoin as a reserve asset, the size and liquidity of this alternative debt market grows, and crypto thus becomes more attractive to the remaining nations. As all of the existing Bitcoin will be mined within the next 20 years, it can only become an increasingly scarce resource, and thus a closed system in which nations will be forced to compete for influence.  Should Bitcoin and its attendant system of decentralized finance establish themselves as the building blocks of an alternative global debt market, the national treasuries of the world will logically embark on an arms race to accumulate as much of it as they can — and with other countries already teasing the adoption of Bitcoin as a legal tender, it may only be a matter of time before more dominos begin to fall.

1. https://www.forbes.com/sites/rogerhuang/2021/06/27/an-economic-history-of-el-salvadors-adoption-of-bitcoin/?sh=36a9923e93fd
2. http://suffragio.org/2013/11/11/el-salvadors-experience-in-dollarization/
3. https://equitablegrowth.org/reserve-currency-privileges-costs/
4.  https://crsreports.congress.gov/product/pdf/IF/IF11707
5. https://www.numbrs.com/bitcoin-and-the-transformation-of-geopolitics/
6. https://www.crypto-reporter.com/news/iran-to-approve-crypto-payments-for-international-settlements-23977/

By Cameron Tuths

Chairman Jerome Powell of the Federal Reserve spoke publicly yesterday in an address to the country. In his speech, he indicated a strong likelihood that the Fed will soon raise the federal funds rate to curb runaway inflation. The news was a surprise to nobody as rate hikes have seemed imminent for months, and many argue it should have been done earlier in 2021 when the inflation problem was not as severe and the economy seemed to be roaring out of its covid-induced tightening period. With consumer prices indicating a seven percent increase in 2021, the highest in 40 years, inflation is an issue that the Fed must handle in the immediate future. The chairman will most likely raise rates in March of this year, with models predicting anywhere from 3-5 hikes before the year is over. Many on Wall Street had seen this coming for months, and once their holiday bonuses cashed in at the end of the year, they went about rebalancing their portfolios towards more risk-off assets. The significant change to the world of crypto in 2021 was the introduction of institutional investors, which brought a rise in prices during the summer months. These institutions will continue to act as institutions do, meaning when they perceive murky waters ahead, indicated by rising interest rates, high inflation, and geopolitical issues, they will shift away from risky investments relatively quickly. This is in part responsible for the recent sell-off of crypto at the start of the new year.

Further pulling money from crypto is the announcement that the Fed will end their quantitative easing policy by letting their holdings expire starting in March to shrink their balance sheet. Government bonds comprise the bulk of the Fed’s assets, and by letting them expire, they will create a large depression in the bond market. This, in turn, will force bond yields up and costs down until the gap that the Fed left is filled by investors. This is in an active effort to reign in the risk curve of the broader markets through what Milton Friedman referred to as the portfolio balance channel. Due to these converging factors, a less than stellar performance in the crypto space is to be expected as rate hikes are announced and implemented over the coming year. Reassuring for crypto investors is that in the last cycle, when stocks and crypto followed each other into the red at the onset of the pandemic, both came out the other side better than they had gone into it. Stocks rebounded out of their dip to new peaks, 30% increased over pre-pandemic highs. On the other hand, Bitcoin came out of the same slump to new highs that were over 260% increased over pre-pandemic highs. Coming out of the tightening cycle that we are currently entering, it is expected that crypto markets will have an opportunity to eclipse summer 2021 prices and reach new peaks. 

In the coming years, it is expected that crypto and the world of decentralized finance can decouple themselves from the traditional financial world so that rate hikes and bond prices have less of an impact on coin prices. While traditional markets often trade off of macro trends and the state of the general economy, DeFi can grow into its own sector as it has inherent value and can prosper in a tight economy. Once the full extent of Web 3.0 and blockchain technology is realized, investors will feel more comfortable with crypto and can consider the space to be less risky in future market cycles. We can also look forward to a world where the Fed chairman’s words no longer have the world reaching effects that chairman Powell’s currently does, as seen by the instant market plunges that his speech caused midday yesterday.  

References:

1. Howard Schneider and Ann Saphir, https://www.reuters.com/business/finance/inflation-fighting-fed-likely-flag-march-interest-rate-hike-2022-01-26/
2. Fed, https://www.federalreserve.gov/newsevents/pressreleases/monetary20220126a.htm
3. Jeff Cox, https://www.cnbc.com/2022/01/23/inflation-surge-could-push-the-fed-into-more-than-four-rate-hikes-this-year-goldman-sachs-says.html
4. Fed, https://www.federalreserve.gov/monetarypolicy/bst_fedsbalancesheet.htm
5. Agence France Presse, https://www.barrons.com/news/fed-pulling-back-on-stimulus-preparing-for-rate-hikes-01643217307?tesla=y

Written By: Cameron Tuths| Jan 20, 2022

There are three types of assets that all financial instruments fall under. This was “discovered” by world-renowned economist Robert J. Greer in 1999. While occasionally an asset may be classified in two of these categories, Ether is bound to be the first asset to fall into all three of these categories, making it an enticing investment opportunity. David Hoffman has affectionately coined the term “Triple Pointe Asset” to describe this unique trifecta.

Let’s start by defining the three asset classes:

Store of Value: is an asset that will not deteriorate or expire, maintains its value through time, and is seen as a holder of wealth instead of an appreciating investment, yet its value can rise as seen in the rise in gold prices. 

Commodity: these are one-time use assets because the commodity can produce something useful and desired. For example, crude oil is a commodity that can be used to run an engine. This commodity has value until it is used. 

Capital Assets: produce capital in the form of cash flow, dividends, or returns. A stock is a capital asset as it often returns dividends and is seen as an investment because the investors are hoping that the value of their shares will rise and can then be liquidated for a profit. 

As seen in the chart below, many precious metals like gold and silver are considered both stores of value and commodities. In addition to maintaining their value well, these assets have many industrial use applications, in which case it would be classified as a commodity if used in that manner.

Ether is a Capital Asset because staking your Ether grants you a share in the Ethereum network, a claim on Ethereum’s transaction fees (gas fees), and the right to work on the Ethereum network. These are all returns granted to the investor once they purchase and stake their Ether, similar to owning a dividend-paying stock. The ability to add to the Ethereum network is unique to this investment and is something that will see increased interest as the network continues to mature.

As a commodity, Ether is better understood as the gas for the Ethereum network. Whenever transactions are completed on the Ethereum network, Ether must be used as a transaction fee “gas,” and thus, Ether is a commodity on the Ethereum network. Just as oil’s price rises as supply decreases, Ether’s price increases as the demand for Ether keeps growing, yet supply decreases. 

Lastly, Ether is a store of value for multiple reasons. Ether is being used as collateral, as seen in today’s developing DeFi economy. The “Eth locked in Defi” metric measures the amount of Ether that is currently “locked” as collateral, and this figure has constantly risen. The stablecoin Dai requires more Ether to be “locked” than the value of Dai being transacted. Assuming Dai and other Ether-backed applications can continue this progress, Ether is set to become significantly more in demand. This will further make Ether more valuable, bettering its store of value ability and even granting returns. Possibly more important is the EIP-1559 proposal called “London,” which will “burn” or remove a specified amount of Ether from circulation every transaction. This will make Ether a deflationary asset, increasing its price over time. 

To review:

Staked ETH = Capital Asset

Consumed ETH (gas fees) = Consumable/Transformable Asset

ETH Locked in DeFi/Decreasing supply = Store-of-Value ETH

Eth = Triple Point Asset

References:

[1] David Hoffman, Ether: The Triple Point Asset, https://newsletter.banklesshq.com/p/ether-a-new-model-for-money

[2] Lyle Daly, https://www.fool.com/investing/stock-market/market-sectors/financials/cryptocurrency-stocks/what-is-staking/

[3] https://defipulse.com

[4] J.P. Morgan Center for Commodities, Robert Greer, https://business.ucdenver.edu/commodities/robert-greer

Written By: Cameron Tuths| Jan 13, 2022

Bitcoin in many developed nations such as the United States has taken on the role of being a store of value, often affectionately referred to as “digital gold.” Those invested in Bitcoin think of it as just that, an investment, instead of a currency which means few transactions are occurring. One might be quick to point out the growing use of Bitcoin in everyday commerce and its extensive use in developing nations worldwide, especially those nations whose economies rely on migrant remittances, such as El Salvador, where Bitcoin was recently recognized as legal tender. Even in countries like El Salvador, a recent survey [2] revealed that when Salvadorans can choose which currency to pay with, 91.4 percent of people use the dollar, while only 4.9 percent favor Bitcoins. Assuming Bitcoin’s final position in the global financial system is primarily that of a store of value, and transaction numbers fail to explode as would be seen following the widespread adoption of Bitcoin as everyday money, Bitcoin’s long-term sustainability is in jeopardy. 

Bitcoin relies on an army of miners who use their computing capabilities to verify bitcoin transactions, making Bitcoin secure. These miners get rewarded both with issuance in the form of mined bitcoins called block rewards as well as a portion of the transaction fees that the verified block will bring in. Currently, close to 98% of all the rewards earned from bitcoin mining come from block rewards and not transaction fees. This is a limited resource as there is only around 2 million Bitcoin left to be issued out of a 21 million coin total. The amount of new coins issued per successful validation of a new block decreases in half about every four years. Currently, a miner earns 6.25 BTC per block, and in a decade, that figure will be below a single Bitcoin per block.

To further drive up costs to miners, the difficulties of these validations are increasing. In 2009 the difficulty level of a transaction was 1 and is now on level 22 trillion and rising biweekly. This means that more complex equipment is needed and more electricity required to earn a single Bitcoin, making Bitcoin-mining an ever-increasingly unattractive business venture. Bankless author Ryan Sean Adams wrote, “By 2032, BTC-denominated block rewards will be only 6% of today’s rewards. Yes, we can assume BTC will have appreciated between now and then—for example, if the price rises to $140k per BTC, then 2019 level security budget may be maintained. But is 2019-level security enough for a multi-trillion dollar network?” and is $140,000 per Bitcoin a realistic price target?

If Bitcoin cannot reach that high of a price, miners will have to rely more on transaction fees to pick up the slack. Currently, there are not nearly enough transactions to subsidize the loss of block rewards, but someday that might change. If it doesn’t change drastically, fewer miners will continue mining Bitcoin, thus fewer people securing the Bitcoin network. With fewer miners handling transactions, transaction fees will rise, and people will pay more per transfer. This further disincentivizes using Bitcoin as a currency, making people more likely to see it as a store of value. This is a vicious cycle that, left unfixed, will lead to the ultimate collapse of the Bitcoin system as eventually, the low transaction numbers coupled with the loss of block rewards leads to fewer miners and a less secure blockchain.

Some experts suggest that it is inevitable that Bitcoin will need to change its monetary policy to allow for issuance to continue past the 21 million mark. With the one core promise of Bitcoin being that no more will ever be issued, Bitcoin investors ask when they inevitably do issue more coins, will Bitcoin still be Bitcoin? 

References:

[1] Adams, Ryan Sean. “BTC’s Monetary Policy Is Overrated.” Bankless, Bankless, 17 Oct. 2019, https://newsletter.banklesshq.com/p/btcs-monetary-policy-is-overrated. 

[2] Albinson Linares, Noticias Telemundo. “A ‘Bitcoin City’ in El Salvador Inspired by Ancient Greeks? Here’s a Reality Check.” NBCNews.com, NBCUniversal News Group, 30 Nov. 2021, https://www.nbcnews.com/news/latino/Bitcoin-city-el-salvador-inspired-ancient-greeks-s-reality-check-rcna6944. 

[3] Miles Carlsten Harry Kalodner, S. Matthew Weinberg, Arvind Narayanan. “On the Instability of Bitcoin without the Block Reward.” Princeton.edu, Princeton University, https://www.cs.princeton.edu/~arvindn/publications/mining_CCS.pdf. 

by Ira Rahman

Covid-19 has imposed numerous challenges to the world’s economy. Whether supply bottlenecks, sickness impacting the labor force, currency inflation, or political instability, the challenges are even more exasperated in communities in the developing world, where governments have fewer resources for the pandemic and its effects. By the year 2021 we have seen growth in the crypto market in the U.S and even a larger increase around the world. Trading volumes in Brazil have risen 2,247% in 2021, 833% increase in one year in Venezuela as hyperinflation increases, 143% increase in Turkey and, in Nigeria, Africa’s largest economy, trading volumes have risen 128% year.

There has been an increase in crypto trading in developing due to the advantages a decentralized monetary system creates. One of the critical factors encouraging people to use cryptocurrency is the cost of transferring money. The World Bank reported in 2020 that sending money to Africa via traditional bank transfer costs an average fee of 8.9% compared to the global average of 6.8%. Sending money abroad, or even receiving funds from overseas, comes with additional costs, such as exchange rates and fees. This is where crypto is helping fill that gap. With Bitcoin, you can have an international bank account, and the costs are much lower.

This year El Salvador made cryptocurrencies a legal tender in the country. El Salvador’s economy is heavily reliant on the remittance market, accounting for more than 20% of their GDP, with 95% of remittances sent by Salvadorans working in the United States to their families. Existing remittance services charge fees for these transfers, accounting for a sizable portion of the value sent, especially for smaller transfers. Funds can also take days to arrive and are frequently collected in person, increasing the time and cost. An estimated 70% of El Salvador’s population lacks access to a bank account, which adds to the time and cost according to Forbes. Overall, in Latin America, only 30% of the population over the age of 15 have a bank account, according to 2019 data by consultant McKinney. Due to the significant size of underbanked communities, cryptocurrencies offer a way to transfer and keep online savings. Additionally, due to rising inflation imposed by the economic challenges of the pandemic, many people are looking at cryptocurrencies as an additional asset class.

What is could it mean for the price of bitcoin and other coins?

As crypto trading volumes increase worldwide, they have led to increasing interest in regulations. Initially hesitant about digital currencies, some countries are now seeing their benefits for their citizens.  Prince Clem Agba, a Nigerian minister of state for budget and national planning, has extended his support for the budding space of cryptocurrencies before the government of Nigeria. Earlier this year, Nigeria’s central bank had banned Bitcoin transactions facilitated by commercial lenders. Agba believes that imposing anti-crypto regulations in the country could lead to grim consequences. The minister’s support for cryptocurrencies comes amid Nigeria’s economy struggling to overcome inflation caused due to slow, COVID-riddled economic activities. He states in a Bloomberg report “The uncertainty in regulating cryptocurrencies risks denying government and citizens the chance to maximize opportunities from the technology.”

As of today, BTC is at 47,700, and other coins are also lower today than they were a few months ago. However, many investors are still bullish about the market.  In an interview report by Times magazine, Robert Breedlove founder and CEO of the marketing of the digital assets and consulting firm Parallax Digital pointed to how the last quarter of 2021 is roughly 510 days after an event called “halving,” in which Bitcoin’s algorithm changes the reward for mining transactions on the blockchain.  Breedlove said past halving events had been followed by new highs roughly 500 days afterward. Breedlove predicts the price of BTC will reach surpass $100,000 next year. A bullish analysis is followed by the increase in demand in digital currencies around the world. Popular crypto exchange Coinbase says it now has over 73 million worldwide users. In contrast, fellow exchange Gemini recently released its “State of U.S. Crypto Report,” which found 21.2 million Americans own cryptocurrency.

Laurel, A. “Cryptocurrencies are taking the developing world by storm, with more users now in Nigeria than in the US – 2 experts lay out how bitcoin is changing emerging-market finance,” Bisaya News; Bisayanews.com, July 17, 2021. https://www.bisayanews.com/2021/07/17/cryptocurrencies-are-taking-the-developing-world-by-storm-with-more-users-now-in-nigeria-than-in-the-us-2-experts-lay-out-how-bitcoin-is-changing-emerging-market-finance-currency-news-financial/

DeMatteo, M. “Bitcoin is on its way to $100,000, according to experts. Here’s when they predict it will happen.” Time Magazine; time.com, Dec 16,2021 https://time.com/nextadvisor/investing/cryptocurrency/bitcoin-price-predictions/

Shumba, M. “Cryptocurrencies are taking the developing world by storm with more users now in Nigeria than in the US.” MSN Money; msn.com, July 17, 2021. https://www.msn.com/en-us/money/markets/cryptocurrencies-are-taking-the-developing-world-by-storm-with-more-users-now-in-nigeria-than-in-the-us-2-experts-lay-out-how-bitcoin-is-changing-emerging-market-finance/ar-AAMg3Iy

Parashar, R. “Nigerian Minister Favors Cryptocurrencies as Nation Battles Inflation” Gadgets 360; gadets.ndtv.com, Dec 13, 2021. https://gadgets.ndtv.com/cryptocurrency/news/nigerian-minister-suggests-government-legalise-cryptocurrency-2648621

Wintermeyer, L.“Could Developing Nations follow El Salvador’s move to Bitcoin?” Forbes Magazine; Forbes.com. Aug 5, 2021. https://www.forbes.com/sites/lawrencewintermeyer/2021/08/05/could-developing-nations-follow-el-salvadors-move-to-bitcoin/