Token Daily Capital Newsletter #4
Bitcoin in the political arena, SEC approval of Blockstack Reg A, DeFi Debates
TWEET OF THE DAY
“two things I do not understand and cannot be bothered to research to try: bitcoin and tiktok “
- Chrissy Teigen. Celebrities are realizing the easiest way to get social media engagement — outside of saying something controversial that gets you canceled — is to simply mention bitcoin.
IN BITCOIN
⚡️ The Fed vs. The White House
On the same day the Federal Reserve Chairman compares Bitcoin to gold as a speculative Store of Value asset, the sitting president of the United States tweets Bitcoin’s value is based on thin air. Just wait until he finds out about the US dollar.
⚡️ New Bitcoin Hash Rate ATH
The Bitcoin network broke through its old hash rate all-time high. the network hashrate is now around 65 EH/s (at time of writing). Of course, this cannot occur without a debate around the relationship between a network’s hash rate and security.
⚡️ Betterhash
One common complaint about Bitcoin mining is that it’s centralized. Here’s a complete list of all the things that are currently wrong with mining pools and how the Betterhash protocol will solve them.
IN ETHEREUM
🔹 0x Emergency Shutdown
The 0x team decided to use their kill switch and shut down the 0x V2.0 smart contract, effectively halting any trading activity. Later, the team clarified the kill switch was activated because a vulnerability had come to their attention. This predictably reignited a debate on the meaning of decentralization.
🔹 A New Website to Try Ethereum
Lately, we’ve seen a wave of builders doubling down on the Ethereum on boarding experience. The latest tool: TryEthereum.today. The site links to the most popular services for buying, storing, and using Ethereum.
🔹 A Community Built Ethereum 2.0 Web Interface
Mytchmatic is a community-driven initiative to build a GUI interface for Ethereum 2.0. It will allow users to understand how the system operates and how validators are performing.
On the Regulatory front
The SEC just approved the first (and second) public token sale in the US. The first was Blockstack on July 10th, followed closely by Props on the second day. One day after getting the green light, the Blockstack promptly started their public token sale. The traffic momentarily crashed the website.
Blockstack and Props have chosen to take an “untested” regulatory approach to get the SEC approval. The token sale was registered as a regulation A+ offering which allows the companies to raise money from accredited and non-accredited investor — but with a cap of $50M. It also requires companies to comply with certain reporting requirements. The success of Blockstack opens the door for other legitimate token projects and is a huge win for the space in general.
Read of the Day
📚 Pathways for DeFi on Bitcoin
This week, we did a deep dive into how Bitcoin can expand its footprint in the Decentralized Finance (DeFi) world given its prime position as the most liquid and recognizable cryptocurrency.
📚 History of Bitcoin Sidechains
An interesting thread about the history of sidechains and how they are different from L2 solutions.
Events
CryptoEconomic Security Conference
If you are a researcher working on the economic security of public blockchains there is a Call for Papers for the CryptoEconomic Security Conference in Berkeley On Oct 28–29.
Voice of Blockchain — Chicago
The Token Daily team will be at the Voice of Blockchain conference in Chicago on 9/30–10/1. Swing by the “Designing Privacy Into Distributed Systems” panel and say hi.
THOUGHT OF THE DAY
Does the Current DeFi Systems Make Sense?
This week an interesting debate emerged between DeFi proponent Ryan Adams and DeFi skeptic Preston Byrne around whether the current DeFi systems, specifically MakerDao, make any sense. While Ryan celebrated Ethereum and MakerDao’s ability to issue loans upwards of a million dollars with a few clicks and no paperwork, Preston argued that taking a $1M loan using a $1.5M collateral is an act of pure stupidity. The debate was interesting as it exposed different facets of the current DeFi narrative. It’s worth a deeper look.
First, some basics if you are not familiar with how MakerDao works. MakerDao allows users to open a CDP “Collateralized Debt Position” by locking their own ETH into a smart-contract and receiving a loan in Maker’s stablecoin “Dai”. The collateral should be at least 150% of the loan value at any point in time. So, to receive a $100 loan in Dai the collateral should be at least $150 worth of ETH (let’s say 0.5 ETH at $300 per ETH price point). If at any point the ETH price tanks and your collateral is worth less than $150, your debt position gets liquidated and you pay a penalty (13%) and get the rest of your ETH back. In addition, you “obviously” pay some interest on your loan. The interest rate, aka the stability fee, is decided by the MKR token holders in frequent votes. Currently, the interest rate is 18.5% annually.
Why would anyone pay 18.5% interest for an over collateralized loan?
Let’s view this from multiple angles:
First, how do over-collateralized loans even work?
To answer that let’s consider a hypothetical scenario where Mr. and Mrs. X wants to buy a second car for the family. They have a nice house, a car, and some savings. Yet, they decided to get a car loan to buy the second car. The bank doesn’t ask for any collateral. While this could be considered an unsecured loan, here’s how it could be done: the lending bank has enough “indirect” guarantees the family will be able to pay back the loan. This comes through a combination of credit history and the family’s wealth. Moreover, the financed car is not really the family’s car until they pay the whole debt. So in some sense, that car loan is in fact over-collateralized. The same goes for a mortgage and other debt-financed properties. In DeFi, there are no legal guarantees for repayment and the debt (Dai loan) is completely owned by the borrower the moment the debt creation transaction confirms. So, it is very hard to avoid over-collateralization on-chain. Yet, there are some interesting projects like Enable Dao that try to open a door for uncollateralized loans using social attestations.
Second, isn’t 18.5% interest rate a bit overboard?
Well, to some extent yes, if you really want to use ETH as collateral, companies like BlockFi or Unchained Capital can offer you an interest rate below 11% for one year. However, you need to disclose your identity, where you’re based, and wait for the company’s approval. If you don’t want any of that, then MakerDao or DeFi protocols, in general, are your best shot even at 18.5% interest rate.
Third, several use cases make this lucrative enough
Use cases like having leverage on ETH long positions or accessing liquidity without the need to sell your assets are lucrative to many people. They find such scenarios important enough to justify a high rate to the tune of 18.5%. The empirical evidence is overwhelming: the MakerDao smart contract already has more than $400M of locked ETH.
Disclosure: Token Daily Capital and/or its partners may have exposure to some of the cryptocurrencies mentioned in this newsletter.
