5MF (WEEK 31): BTC AS STABILIZED USD, BLACKROCK-ALADDIN-COINBASE, META’S NFT ROLLOUT

Five Minute Finance

Published in

BLOCK6

11 min readAug 5, 2022

The 5-minute newsletter on the important stuff in finance — explaining what’s going on, and why.

Let’s see what’s going on this week:

BlackRock’s Aladdin Assigns Coinbase to BTC Institutional Gatekeeping
The Merge Breakdown: Important, but Ethereum Scalability Yet To Surge
El Salvador Pushes FinTech Innovation with Synthetic Dollars
Meta’s Instagram to Integrate NFTs
Solana’s “Hack” Uncovered

Crypto Access Just Reached its Pinnacle

Coinbase and BlackRock Agree on Landmark Deal to Bolster Crypto Adoption (link)

BlackRock’s Aladdin to Take Bitcoin for a Magic Carpet Ride?

It seems like forever since PayPal announced its Bitcoin integration in October 2020. At that time, Bitcoin was hovering in the $13k — $14k range, only to reach $38k just three months later. In the interim, we have seen institutional adoption flood, but nothing is likely to take the cake as the latest announcement from BlackRock — integrating Coinbase into its Aladdin system.

Immediately after the news broke out, Coinbase (COIN) went up by +32%, from $79.28 to $115.14, only to settle at $90 later in the day. Image credit: Trading View

The ominously named asset manager handles $9.4 trillion (21x Bitcoin’s market cap) in assets which belong to, well, pretty much every company you’ve ever heard of. In fact, BlackRock is such a financial force that the Federal Reserve hired BlackRock to help with its multi-trillion dollar pump in March of 2020. Moreover, at the core of BlackRock’s power is not even the astronomical AuM figure itself, but Aladdin.

Aladdin, short for Asset, Liability, and Debt and Derivative Investment Network, is the most powerful software tool ever deployed. Through Aladdin, Blackrock’s clients manage a cumulative $20 trillion worth of assets.

In real-time, the platform seamlessly combines client-investor communication, portfolio management, and risk analytics. In other words, Aladdin treats money as what it really is — information.

In the end, money is nothing but a unit of information which is used to determine the utility of goods, services, and economies. And Aladdin coalesces this information stream so it can be actionable. This is why the Fed tapped into it during the central bank’s most dire need. Coinbase is now a part of that information stream for all institutional investors tied into Aladdin.

Not too long ago, in 2017, BlackRock CEO Larry Fink called Bitcoin “an index of money laundering”:

“Bitcoin just shows you how much demand for money laundering there is in the world. That’s all it is.”

Now, Fink is releasing the proverbial floodgates for institutional investors, starting with Bitcoin. BlackRock deploys 402 ETFs worth $2.24 trillion in the U.S. market alone.

With powerful BlackRock breaking the psychological barrier, if a fraction of those ETFs decide to include digital assets, we could see an impact in the crypto market. However, as risk-on assets, much will depend on the market’s reaction to the Fed’s take on inflation and interest rate adjustments.

All things considered, there’s a reason $COIN rose 32%+ on the news. BTC, on the other hand, seems to remain overshadowed by the current macro environment.

Ethereum’s September ‘Merge’ to Mark the 55% Milestone to Ethereum 2.0

Bitcoin Lags Behind Ethereum in Recovery as The Merge Looms (link)
Ethereum Has Strongest and Most Reliable Community: Web3 Developer Report (link)

The ‘Merge’ is Just One Part of Ethereum’s Evolution

Every digital asset has its passionate detractors, but one thing is for certain. Without Ethereum to spearhead DeFi dApps, the digital asset landscape would look drastically different. In turn, this gave Ethereum a first-mover advantage, still holding to this day at a 58.73% DeFi market dominance.

Simultaneously, as more blockchains introduce greater dApp-centered utility, Bitcoin’s dominance decreases. After rapidly gaining 6%+ market share during LUNA’s meltdown, that gain has now been all but erased, at 41.66%.

Bitcoin’s dominance, as share of BTC market cap out of total crypto market cap. Image credit: Trading View

With the Merge ahead in September, Ethereum is on the road to close its “patchworked” status, as it fully transitions to proof-of-stake (PoS), leaving miners behind. Ethereum’s current proof-of-work chain will “dock” with Beacon Chain, its new PoS home with over 411k validators that have staked 13.1 million ETH (worth some $21 billion) for the new ecosystem.

Vitalik Buterin calls this milestone “55% complete” for ETH 2.0. Once we see the merge, Vitalik has identified several subsequent phases, to include:

The Surge: Sharding integration to boost transaction speed.
The Verge: Implementation of “Verckle Trees” — a mathematical proof enabling network participants to become validators without storing vast amounts of data.
The Purge: Removal of old network history.
The Splurge: “All of the other fun stuff.” (whatever that means)

Even Bank of America recently noted that the Surge is more important than the Merge for Ethereum to secure its market position. The Surge upgrade should come next year, which introduces sharding — breaking up the network into shard clusters to spread out the load.

Sharding, as database partitioning, has long been in use in multiplayer games to achieve lower gameplay latency. Image credit: Vitalik.ca

This is when Ethereum’s scalability comes into play, on the road to increase the network’s throughput by up to 100,000 tps (compared to its present ~30tps). In the meantime, one should not expect to see major performance changes, such as lower gas fees. The immediate effect of the Merge is an estimated 99.95% energy footprint reduction.

Nonetheless, it will take years for Ethereum to pass all three scalability stages — Surge, Verge and Purge — to reach its theoretical potential. During that time, Avalanche, Cardano, Solana, Radix, and others will be at Ethereum’s heels.

Nobody knows how things will turn out. At the present rate, Telstra Ventures data shows that Ethereum’s dev community is the most dedicated, showing a 24.9% compound annual growth rate since 2018. However, for the same period, Solana’s community grew by 173%, although it remains much smaller — by thousands of developers — compared to Ethereum.

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Galoy Ushers USD Familiarity Through Bitcoin Futures

Galoy Launches Synthetic Dollars Backed by BTC, No Stablecoins Needed (link)

Algorithmic Stablecoins Evolved?

For emerging markets, the name of the game when it comes to tech adoption is — familiarity. If people are familiar with their mediums, they are their wellsprings. For instance, a recent WEF report shows that 65% of investors in emerging markets use social media to make financial decisions.

The same applies to Bitcoin adoption as well. El Salvador’s government noticed that Bitcoin uptake isn’t going as well as it should, due to Bitcoin’s novelty and volatility. But, El Salvadorans do know their dollars. This is why Galoy is moving to offer Bitcoin as stabilized USD.

After having launched its Bitcoin Beach Wallet with support for Lightning Network, Galloy is now deploying synthetic dollars called Stablesats. Not to be confused with stablecoins, Stablesats rely on financial contract trickery, through an interesting concept:

Let’s say you hold 1 million Satoshis (Sats) in your Beach wallet, which is equivalent to $226 USD.
But, because you have bills that are denominated in USD, you want to have your holdings in USD as well.
You would then fill up the USD account with Stablesats. At a hypothetical BTC exchange rate of $30k, you could fill the account with ~$120, now holding 600k Sats in the BTC account.
GaloyMoney platform would then open shorts as a way to hedge against BTC volatility. Shorting means betting on the price of an underlying asset (BTC) to go down.
Whether the next BTC price move is $60k or $15k, you would still hold 600k Sats in the BTC account.

In the background, GaloyMoney would use those satoshis as collateral to fund a futures hedging strategy — through an inverse perpetual swap. This type of futures contract runs indefinitely (perpetually), so it’s always funded between short and long traders.

If the futures Bitcoin price goes lower than BTC itself (spot price), shorters pay those who are long. In the opposite direction, those who are long pay those who are short. Image credit: Stablestats.com

In other words, this negative or positive funding rate ties the futures derivative closely to Bitcoin’s spot price. However, because Stablesats is displayed in USD, the holders don’t see the background canceling of profits and losses (PnL), regardless of any fluctuation in BTC’s spot price.

In the end, because the perpetual swap is “inverse” so it settles in BTC, GaloyMoney platform doesn’t even have to interact with a traditional bank as all settlements are done on-chain. In short, excuse the pun, this is a stability exploit of futures contracts.

It remains to be seen how Stablesats will behave in extreme market conditions though. If the funding rate stays negative for long, auto-deleveraging could be triggered, leading to liquidations and underfunding.

Facebook (Meta) Speeds ahead with NFT Integration

Meta Confirms NFT Rollout Across 100 Countries Amid Coinbase Integration (link)

Meta Picks Flow and Coinbase for its Instagram NFT Infrastructure

Last week, we covered multiple institutions and reports that present a bullish NFT future. This week, gears are still rolling in that direction. Despite Meta’s metaverse division loss of $2.81 billion for Q2 2022, Meta is not dissuaded. As of October 2021, Meta’s Instagram had 1.3 billion monthly active users.

That enormous pool will now have the opportunity to tap into NFTs, thanks to Meta’s finalized integration with Coinbase wallet and Dapper Labs’ Flow blockchain. The NFT rollout is happening across 100 countries, allowing users to display their digital feathers on user profiles.

The reason why Meta chose the Flow (FLOW) blockchain is not a mystery. This enterprise-grade network was built specifically to scale up for a multi-billion NFT user base. Unlike Ethereum, Flow has vertical scalability with four-tier node architecture consisting of collection, verification, execution and consensus nodes.

Accordingly, Flow can easily take 1,000 tps at 0.000001 FLOW fee (1 Flow = $2.6). Throughout the last five days, both Meta (META) stock and FLOW tokens have been pumping.

While FLOW got an NFT boost, META sold $10 billion worth of corporate bonds, pumping its cash flow. Image credit: Trading View

Overall, it looks like NFT infrastructure is just getting deployed in full measure. Circling back to Coinbase joining Aladdin, it will be interesting to see the dynamic between digital assets, as one spills into another. Will the metaverse markecap overshadow Bitcoin’s in a few short years?

Solana’s Recent Exploit Explained

Hardware Wallets Not Affected by Solana Hack: ~$8M Drained So Far (link)

Looming Ecosystem-Wide Disaster Fizzled Out Into Mundane Negligence

2022 hit the crypto sphere with one reputational blow after another. First, Bitcoin dropped like a rock the moment the Fed started seriously tackling inflation. This transformed the conversation from “hedge against inflation” into “hedge against currency debasement”. Then, many CeFi platforms exposed themselves as Ponzi-like schemes with unsustainable APY yields.

Algorithmic stablecoins too turned out to be failed experiments, collapsing one after another. Next on the menu were cross-chain bridges. Up until July, 7 bridges were breached and drained to the tune of $1.043 billion. As sentiment grew darker, the crypto market suffered a $1.2 trillion wipeout since the beginning of the year.

For the last couple of days, Solana has been trending as the potential next reputational hit. Could another ecosystem go down, so soon after Terra’s (LUNA) embarrassment? Fortunately, no. While 9,224 Solana wallets were attacked and drained out of $4 million worth of SOL and USDC, it had nothing to do with some obscure blockchain vulnerability.

The aftermath of Solana’s Slope wallets exploit. Image credit: Dune Analytics

By all accounts from various blockchain security experts and the Solana team itself, it appears that Slope wallet devs were, in a word, sloppy. They sent out, as plain text files, users’ seed phrases to partner apps. Moreover, some of the people used those phrases for other wallets, Phantom and MetaMask, to further confuse the matter.

Because seed phrases retrieve private keys (which unlock blockchain access), users were encouraged to create new wallets and sever all links to the internet. Interestingly, even Binance’s CEO was rightly pointing out that their custodial wallet would be more secure in such an instance, despite handing over private keys to Binance.

As wallet trouble started to pour in on Wednesday, Solana (SOL) took an expected dip but not by much. Image credit: Trading View

Predictably, even Ledger started to trend, as the king of hardware wallets. As luck would have it, the Solana/Slope incident happened just after Ledger announced another $100 million funding round, raising its valuation to $1 billion.

With millions of eyes on the diverted disaster, the lesson of private keys and software wallets was learned. Even non-custodial wallets can put your funds in danger with sufficient dev negligence.

Tweets of the Week

Crypto lender Voyager Digital has been granted approval to return $270 million in customer cash, WSJ reports.

@WatcherGuru

15 images every investor needs to memorize:

@BrianFeroldi

Weaker data across most major US sentiment surveys points to higher levels of unemployment ahead…

@BittelJulien

America’s upper middle class is incurring more debt & saving less than other income brackets. These households have less in excess savings than all but the poorest U.S. households, both in aggregate and per household: Moody’s

@lisaabramowicz1