For much of the last last year, I have been immersed in the world of cryptocurrencies & blockchain applications. In particular, the convergence of traditional finance and blockchain. I met miners, math whizzes, old school finance people, BTC evangelists and a lot of coders (including a few hacktivists).
Given the industry is moving at breakneck speed, it is time for a refresh.
Early observations and my current view:
- Many “disruptive” blockchain projects would be fine with a simple permissioned database. You hear “blockchain is a solution looking for a problem” a great deal. – There are plenty of super smart and exciting projects out there, but no extinction just events yet. Have a look around R3 Corda, an enterprise blockchain for real-life projects in many sectors. . Huge sums of money are tied up in utility tokens and decentralised finance applications (DeFi).
- Institutional investors appetite for bitcoin and other digital assets was “at an inflection point”– While correlations with markets in March did not help BTC/Digital Gold bulls, infinite QE and considerable improvements in custody, fiat rails and trading security are making institutional participation much more straightforward. I suspect the inflection is already here.
I’m mostly focused on cryptocurrency investment, exchanges, custody, lending, crypto funds and ultimately the widespread adoption of DLT and cryptocurrencies.
Bitcoin and Blockchain Refresher (Thanks to CB Insights)
Bitcoin’s blockchain technology allows for the creation of a unique and scarce digital asset where everyone knows the history of each particular bitcoin. A single bitcoin is not just a string of ones and zeros: it’s also the first successful (at least so far) censor-proof, portable, easily transactable, durable, and secure digital asset.
Bitcoin’s value is subject to the same supply-and-demand mechanics found in any marketplace. If investors find the above characteristics valuable and demand for bitcoin grows, bitcoin’s price rises, and vice versa.
Bitcoin’s supply is limited to 21M coins, although only about 18.5M have been mined so far. As of August 10, 2020, Bitcoin is valued at about $220B in aggregate.
Blockchain technology faces scaling issues. Bitcoin can process about 4-5 transactions per second. Ethereum maxes out at about 25 transactions per second. Visa can process over 24,000 transactions per second.
Protocols such as Ethereum & EOSIO aim to increase the speed of transactions significantly vs bitcoin.
Digital Gold
It is easy to focus on Bitcoin as it comprises approximately 60% of digital coin market cap, with Ethereum next at around 12%. Coinmarketcap suggests the total market cap of cryptocurrencies is $369bn, trading $84bn in a recent 24 hr period.
During my years in Asia, each decent China equity rally was accompanied by a frankly ridiculous number of new retail brokerage account openings. Sometimes over 1m accounts were opened in one day! Crypto wallet installs could be a similar indicator.
Crypto derivatives have grown significantly with new highs reached in futures and options on various exchanges. This would suggest interest from institutions and sophisticated investors is growing.
The emergence of insured and credible custody (Bitgo, Fidelity, Gemini) and safe trading (Copper, Tagomi, Fireblocks) is, without a doubt, a considerable catalyst in further interest in digital assets. Liquidity providers such as B2C2 take much exchange pain away for bigger players. For investors/speculators still not keen to set-up trading accounts many tracker funds (Coinshares, Grayscale) and actively managed crypto-asset funds are available ( Nickel, Soldium)
Perhaps this comment from Brian Armstrong, CEO of Coinbase late last year shows the trend is clear.
“Whether institutions were going to adopt crypto or not was an open question about 12 months ago. I think it’s safe to say we now know the answer. We’re seeing $200-400M a week in new crypto deposits come in from institutional customers.”
DeFi (Further thanks to CB Insights)
Decentralised finance (DeFi) is an ecosystem of smart contracts that allows participants to offer and access financial services in a peer-to-peer format, without relying on traditional intermediaries like banks, credit unions, or brokerages.
The MakerDAO is a decentralised lending protocol and one of the most popular DeFi dapps (decentralised applications). The protocol allows users to use ETH as collateral to borrow DAI, a digital token pegged to the dollar. The dapp allows investors to go long on ETH: users can spend the DAI borrowed to buy even more ETH, which can then be cycled back into the vault to borrow more DAI. This creates decentralised leverage — investors can bet on the price of ETH for only a small initial sum.
A variety of dapps are being built to facilitate trading, banking, and investing solely through smart contracts. Compound, for example, allows users to earn interest or borrow crypto against collateral. Through Uniswap, users can swap tokens or provide liquidity and earn fees. With Augur, users can bet on real world events and earn payouts automatically based on the results.
The DeFi space has been growing rapidly: the total value locked in DeFi increased by 10x since the start of 2020, to over US$7bn. Check out defipulse.
Lending dapps dominate the space with huge numbers locked in. Aave ($1.5bn), Maker ($1.42bn) and compound ($782.9m)
The remaining Ether is split between minor DeFi applications including decentralised exchanges and financial derivatives.
DeFi Market Cap, estimating tokens associated with the DeFi phenomenon now have a combined market value of $12.7 billion.
Can’t choose which one? Binance plans to offer “DeFi Index Perpetual Contracts,” listed on Binance Futures. The contracts will be denominated in the dollar-linked stablecoin tether, and offer traders leverage up to 50 times their money down.
The “fully synthetic derivative product enables greater access to decentralised finance,” Binance said in the release. Binance’s DeFi index consists of 10 tokens associated with DeFi, several of which rank among the year’s best performers. They include Chainlink’s LINK, Compound’s COMP, Kyber’s KNC, Aave’s LEND, ZRX’s 0x and MakerDAO’s MKR.
Meanwhile “old school DLT/Blockchain applications could be numerous:
- Tokenised Real Estate: illiquid assets and siloed networks.
- Digital assets: Represent any asset or agreement.
- Supply chain: Inefficiencies in global value chains.
- Digital Identity: Massive vulnerabilities.
- Decentralised advertising: Trust and transparency.
- Insurance: Archaic end-to-end processes.
- Healthcare: Tracking IP, drug provenance, parent admin.
- Trade Finance: Opaque and fragmented industry.
Outlier Ventures has a significant portfolio of companies pushing DLT/Blockchain to create the “next era of digital infrastructure”.
A good example is Sovrin, an open-source project creating a global public utility for self-sovereign identity.
The use case is compelling as they discuss here. “As hacks and breaches become commonplace, affecting millions of people around the world, self-sovereign identity (SSI) is quickly gaining traction among technology developers looking to gain an edge in the race toward web 3.0. This new type of decentralised identity brings control and security back into the hands of the individual. Unlike flawed centralised models, including some federated and siloed traditional data systems, which could become honeypots and security risks, SSI allows identity holders to communicate peer-to-peer with organisations, disrupting the status quo of online transactions.”
I should not have to give all of my passport details to someone who may only require my date of birth. SSI allows me to control my digital identity and verify who I am in a secure way.
If this all sounds to conceptual vs real world, you can find real value being created with the utility tokens connected to some of these projects.
Fetch AI just listed at $71m market cap. Polkadot, another recent listing has a cap of $5.4bn.
DLT is real for sure…to be continued
