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Crypto Assimilation

By Kenetic Trading on The Capital

This week in Crypto

Bitcoin has seen an impressive ~16% rally this past week, moving from $9,500 up to $11,060 at the time of writing, breaking through the $10,500 resistance we have long talked about. Investors clearly have concerns with the continued loose monetary policies of governments around the world, as gold has now breached its previous all-time high. The idea that value in gold is just pent up demand for Bitcoin is an interesting concept developing within crypto forums. Should you adhere to the Austrian concepts of sound money then it is inevitable that capital will flow to the hardest (soundest) money available in the market. Bitcoin certainly has a solid argument to take this accolade.

Gold’s impressive run can only be bullish for Bitcoin in the long term as it shows that the mass psychology of the market is fearful of where the global economy is heading with persistent government intervention, and are seeking safety in the scarcity of gold and increasingly, Bitcoin.

Outshining Bitcoin’s price action has been an impressive run in Ethereum. ETH price has been explosive with a ~29% move up this past week. The excitement surrounding DeFi, and inflow of value locked into DeFi has helped shine a light on the potential greater upside that exists with ETH. Whereas Bitcoin is a mere 1.8x away from its previous all-time high, Eth is 4.4x away from its high of $1,391 and as we enter more bullish macro market conditions, moving out of Bitcoin’s relative crypto safety and into ETH has been a popular trade. This is reflected in the decreasing market dominance of BTC, despite its price rise, and the increasing ETH market dominance.

Chart showing BTC dominance by market cap
Chart showing ETH dominance by market cap

Crypto Assimilation

In May of this year, a certain Mr. Brian Brooks took over as Head of the Office of the Comptroller of the Currency, OCC. The OCC charters, regulates, and supervises all national banks and federal savings associations as well as federal branches and agencies of foreign banks, and is an independent bureau of the U.S. Department of the Treasury. The stated mission and role of this government agency is:

‘’To ensure that national banks and federal savings associations operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations.’’…by… ‘’issuing banking rules and regulations and providing legal interpretations and guidance on banks’ corporate decisions that govern their practices. https://www.occ.treas.gov

Previous to taking on this important role, Brian was Chief Legal Officer at none other than crypto behemoth Coinbase Inc and is known for his progressive stance on digital assets and disruptive financial technologies.

Last week, the crypto industry saw firsthand the influence and importance that someone like Brian’s can have on the crypto industry, the dinosaur-like OCC, and indeed the wider regulatory systems in the US. On Wednesday, news broke that a letter from the OCC was effectively greenlighting national banks to hold the cryptographic keys of their customer's digital assets should they wish to, as part of the core services that they offer. Currently, all the major US crypto custody businesses must seek approval on a state-by-state basis, but now this change in stance by the OCC will allow for a much easier nation-wide adoption of custody services, should there be demand.

Generally speaking, institutional investors are risk-averse and slow when it comes to change. When an institutional investor makes a portfolio allocation into crypto, the leap of faith required to choose a firm like Coinbase or Bitgo is a considerable challenge for many older generation investors, regardless of their conviction. However, should their local banking partner now be able to offer such services, that leap of faith suddenly becomes much easier to digest.

Brian Brookes’ potential impact on the shape of the US market and its adoption of crypto is without a doubt very important and goes to show the value of having crypto advocates and technology progressives in positions of regulatory and political power. We need more Bitcoiners and crypto enthusiasts such as the likes of SEC Commissioner Hester ‘crypto mum’ Pierce and Brian Brookes to expedite the integration of crypto into the rickety US legacy financial system and force change within the complex regulatory infrastructure.

As a final point, it will be interesting to observe if the banks develop and build their own systems or will we see crypto M&A heat up as banks look to acquire some of the leading names in digital asset custody currently in the market.

Liquidity Farming — Synthetix

There have been many different ways crypto companies have bootstrapped and financed their projects from Initial Coin Offerings (ICO) to Initial Exchange Offerings (IEO), Initial Fork Offerings (IFO), Initial Airdrop Offerings (IAO) and Decentralized Autonomous Initial Coin Offerings (DAIOC). The latest method is yield and liquidity farming within the burgeoning DeFi space. With total USD value locked up now approaching $4bn, the recent success is a result of clever incentive-driven mechanisms which reward investors and holders of crypto assets, with the stomach for the considerable technical and market risk associated with DeFi, to put these idle assets to work and seek out yield within the DeFi ecosystem.

The increasing composability of DeFi has allowed different protocols and projects to collaborate for each other’s benefit with snowballing effect, one of which is monetizing project native tokens, akin to the now infamous ICOs of 2016–2018. Previously, investors would simply deposit ETH into a smart contract and receive X token back as their investment in a project, whereas now investors can put their crypto assets to work as collateral within DeFi to earn interest in USD equivalent stable coins and also receive native tokens to the projects associated with the incentive schemes that run for a fixed period of time.

A recent collaboration between Synthetix, Ren Protocol, and Curve Finance nicely illustrates this composability.

These independent projects all built on Ethereum have structured a series of incentive mechanisms with the goal to drive synthetic Bitcoin liquidity to Synthetix Ethereum based decentralized asset exchange where users can trade on-chain synthetic versions (synths) of FX pairs, common stocks (Tesla and Apple in the pipeline) as well as commodities and in time all the associated derivatives. These synths can all be traded against BTC, or rather it’s synthetic version sBTC.

The issue with many new exchanges is liquidity. An exchange may have the best tech stack, solid VC backing, and a slick GUI but without liquidity, an exchange is useless as price discovery fails. Synthetix is looking to solve this by providing holders of Bitcoin (BTC) a way to unlock their value to be used as liquidity on their exchange in return for tokens.

Using decentralized stablecoin only exchange, Curve.Finance, BTC is first converted into an ERC20 USD pegged token via the highly innovative REN Bridge feature within the REN protocol. There are multiple trading pairs pools to choose from with Curve including the ERC20 token sBTC (synthetic BTC) required for Synthetix Exchange’s incentive program. At this stage, users could just deposit their unlocked BTC value in the Curve liquidity pool and earn interest as a percentage of their ownership of the liquidity pool they have entered. When there is an imbalance in the trading pairs, a fee is added or subtracted from the assets in the pool in order to maintain the preset balance required for the pool to function well. Too few of one asset will attract a fee to incentivize a greater volume of deposits and vice versa.

To maximize returns, ‘’yield farmers’’ can transfer the value now exchanged into sBTC at Curve into the Synthetix ecosystem to be staked and used as liquidity on the exchange. Essentially the role of traditional large market makers is being replaced with a cooperative approach using the aggregate liquidity of anyone who wants to participate.

The process of seamlessly moving from one application to the next allows users to benefit from each platform’s functionality and their incentives as they arise, once an incentive program finishes as is the case with the Synthetix on the 28th August, yield farmers can simply move the tokenized assets and their rewards (normally via the conversion into and out of new tokens), to new platforms or ultimately back into BTC and USD via exchanges such as Curve.

The Synthetix liquidity incentive provides participants with weekly payout of REN and SNX tokens and in time CRV and BAL tokens. Like many ICOs, the hope here is that project owners see price appreciation in their native tokens of which a percentage is typically retained by the project’s founders and technical associates, this in turn provides funding to further expand the ecosystem.

Despite the exponential interest in DeFi and the lucrative incentives on offer, we remain skeptical about the longevity of the value of these tokens once programs finish. Will the token's utility maintain their value and will liquidity stay with the DEX’s that run these collaborative incentives? No doubt, the space is maturing and we are encouraged with the standards that the likes of Chainlink bring to oracle manipulation risk as was evident with the bZx hack earlier this year. There is certainly a place for fully decentralized exchanges and peer-to-peer, permission-less financial products and services but this is still very much the wild west of crypto.

Crypto weekly performance: 28th July 2020. Source www.bitgur.com

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Auros

Auros is a proprietary crypto trading firm. We produce newsletters and thought pieces on all topics related to crypto.

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