Relaynode SoCal: November 4, 2019
Risk in the Crypto Echo Chamber

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What I’m Thinking
I just landed in New York from San Francisco blockchain week. Hats off to the Dekrypt Media team for putting on an excellent event in spite of the fires and power outages at Berkley.
I like to attend one blockchain week every few months in order to reconnect with old friends, make new ones, and gather information. It’s true that our industry has too many conferences, but it only takes one bit of market intel or one introduction to a new portfolio company to make an investor’s year.
I also like to use this time to identify the predominant narratives of this echo chamber, so I can question them in real time. Asking “why?” twice usually does the trick. For example, every venture fund in crypto right now has the same thesis: DeFi. Why? I’m not sure.
To me, DeFi still feels like the dragon eating its own tail — more leverage to fuel crypto’s killer applications — speculation and regulatory arbitrage. I’ve written on this before, but the hidden systemic risks of DeFi still outweigh its benefits. Here’s one argument that I heard a few times this week: “Nexus Mutual solves the problem of smart contract technology/security risk in DeFi.” Maybe, but the insurance protocol clearly creates additional layered risk — moral hazard. Does anyone remember AIG? I’m sure my co-author, Roy Learner will disagree with me on all of this, and most crypto fund managers are way smarter than I am, so I’ll probably be eating my words in a few years.
I do think the promise of DeFi to create new markets at the convergence of other trends is interesting. For example, imagine using Synthetix to launch derivatives on tokenized athlete contracts (like that of Spencer Dinwiddie). NBA playoff games in which all 10 men on the court have a tokenized contract would allow for real-time derivatives trading throughout the game.
Things to Read
The team at Delphi Digital released a monster bitcoin report analyzing some key data. A few highlights: volume is on the rise which shows we may have reached a local bottom for BTC price; long-term holders (both 2 and 5 year) have reached YTD and ATHs; open interest has remained elevated possibly due to lower price volatility.
Gossamer released a report on the “next wave of DeFi users.” They surveyed 21 individuals, so the sample size is quite small, but here are a few takeaways: new potential DeFi users were excited by the high rates & seemingly uncorrelated returns to equity markets, but fearful of hacks, lack of accountable third parties, volatility and the lack of insurance options.
Covalent released a report on InstaDapp to further explore DeFi data. Most volume on Instadapp flows through its CDP bridge which allows users to swap between Maker and Compound to receive the highest DAI interest rate. Competition in the interest arbitrage space is heating up (Staked, Gossamer, etc) which will likely lead to rate parity across protocols over time. I also found it unsurprising that 80% of Instadapp’s volume came from 3 wallets.
Unfortunately I missed Nic Carter’s presentation at Macro.wtf, but he thankfully posted the slides on Twitter. For me, the most surprising takeaway was that in recent years cash usage as a SoV has actually increased. Nic argues this is likely due to the reduced opportunity cost of holding cash in a negative interest rate environment.
If crypto had universally accepted valuation frameworks, would this lead to more institutional adoption? Investors understand how to value equities and fixed income securities (DCF, comps, IRR analysis, etc), but thus far there are few standards for valuing cryptoassets (we can’t even agree on what to call them).
On the tokenized asset front, there were two big pieces of regulatory news this week. First, security token platform Harbor received a transfer agent license from the SEC which will enable the company to build a platform for trading securities. Paxos Trust received a no-action letter from the SEC to settle US-issued equities trades on its private permissioned blockchain for broker dealers.
In Japan, the FSA approved Stellar Lumens, the first token to be whitelisted by the Japanese securities authority in over a year.
Meanwhile, it was a rough week for crypto derivative exchanges. BitMex was hacked and over 30,000 trader emails were leaked. There was a flash crash on Deribit due to a bug in the exchange’s Bitcoin index calculation mechanism. This crash triggered over $1.3m worth of invalid liquidations. Deribit handled it quickly, fixing the indexing issue, and repaying those who were improperly liquidated. Finally, upstart derivatives exchange FTX was hit with a $150m lawsuit for allegedly manipulating markets, racketeering, and illegally selling securities. All of this serves as a reminder that trading crypto (and its derivatives) is a high risk endeavor with many unknowns, tread carefully.
Speaking of unknowns, this report on Tether reminded me of the darker side of our industry. There is so much happening behind the scenes (particularly with exchanges and miners) that many of us do not understand. Tether, Bitfinex, and CCC were key players in the industry for years. Who knows how this mess will unravel and what ripple effect it might have on the broader space.
Oh yea, and Dfinity finally released something.
What’s New in DeFi
Written by Roy Learner, Wave Financial, former Enterprise Ethereum Alliance
ZRX tokenholders are currently voting to implement v3, a change to the protocol that’s aimed at adding value for tokenholders, while also improving the developer experience on 0x. If approved, v3 will be implemented on Ethereum mainnet on November 25th.
0x v3 introduces a staking mechanism for the ZRX token, which provides rewards and additional voting power to market makers in exchange for providing liquidity. The general idea:
- Takers pay an extra fee to the 0x protocol, which is denominated in ETH. The fee is calculated as a multiple of the trade’s gas price (IMO, front-ends will simply combine 0x fees with ETH gas fees, abstracting away some of the complexity)
- Taker fees go into a Liquidity Reward Pool
- Market makers stake ZRX to get a proportional amount of the Liquidity Rewards
- ZRX holders can also delegate to Market Makers’ pools, receiving some portion of the rewards. However, ZRX tokenholders who delegate lose half of their governance voting power.
It will be interesting to see the dynamics of ZRX staking pools play out, as market makers will compete for market share by offering delegates a share of their rewards (if there is a significant upcoming vote, will we see market makers share 100% of Liquidity Rewards with their delegates in return for the increased voting power?)
0x v3’s overall shift introduces a delicate balance between protocol fees and providing best-execution. With the emergence of DEX liquidity aggregators like Totle, who pull liquidity not only from 0x, but also from Kyber, Uniswap, etc., 0x runs the risk of introducing too high a protocol fee that liquidity ultimately ends up flowing to cheaper DEX’s.
This is the largest upgrade for 0x since the launch of the network in August 2017, so definitely recommend learning more (and voting if you are a ZRX tokenholder).
LA-Based Jobs
If you’re company is hiring in LA, please submit new roles directly to marc@relaynode.io
Spring Labs — Senior Blockchain Engineer (Full Time)
Wave Financial — Consulting Associate (Full Time)
Ikigai — Analyst (Part Time)
WAX — Senior UX Designer (Full Time)
ARCA — Data Scientist / Quantitative Analyst (Full Time)
Blockchain Research Analyst (Full Time)
Events
CryptoMondays LA (Free)
When: Monday, November 4th, 6–9P
Where: Upstairs Space 1212 Restaurant on 3rd Street Promenade in Santa Monica
Custom Digital Assets — Create Your Very Own Digital Asset Via Stellar
When: Monday, November 4th, 6–8P
Where: Rough Draft Brewing Company, 8830 Rehco Road, San Diego
A technical walkthrough on how to create your own digital asset on the Stellar blockchain
Crypto Art Show
When: Saturday, November 9th, 7–11p
Where: Innerspace Gallery, 110 Winston St, Los Angeles, CA 90013
A collective of crypto artists including Brekkie von Bitcoin, Max Osiris, & Lucho Poletti are showcasing their artworks
Crypto Traders Dinner Party (Free)
When: Tuesday, November 12th, 7–9P
Where: Panini Cafe Santa Monica, 312 Wilshire Blvd Santa Monica, CA 90401 United States
Network with other crypto traders of all levels
Discussion about Monero technology and usage (Free)
When: Wednesday, November 13th, 8–10P
Where: CRASHSPACE, 10526 Venice Blvd, Culver City CA 90232
Learn about latest updates to Monero
Crypto Trivia Night Hosted by ARK.io (Free)
When: Thursday, November 14th, 7–9P
Where: Crypto Blockchain Plug 614 East Manchester Blvd · Inglewood, CA
Take a look at last months Crypto Trivia Night… https://www.youtube.com/watch?v=DIp84sO5DTI
Notable Conferences
Nov 1–3 — Prosper Retreat by Celo (The Land Sanctuary, 2.5 hours north of San Francisco)
Nov 4–5- Stellar Meridian (Mexico City, Mexico)
Nov 4–7 — Web Summit (Lisbon, Portugal)
Nov 13th — Digital Asset Summit: Markets (New York, NY)
Nov 12–13th: Coindesk Invest: NYC (New York, NY)
Nov 12–13th — Capital: Global Coinmarketcap Conference (Singapore)
Nothing written in RelayNode LA is legal or investment advice and should not be taken as such. RelayNode LA does not make any guarantee or other promise as to any results that may be obtained from using our content. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence.

