After a week off, it's time to jump back on the crypto train.
It's great timing as well, because the Hash Ribbon indicator just printed a buy signal - another sign that we are exiting a long 2 year bear market and are ready to make our ascent to new highs.
You can see this indicator in the chart below - this is the first buy signal after the halving event and looking at 2016 - the same indicator put us on a path for new highs two years later.
Today, I'm giving a talk at our monthly DeFi Toronto event covering the recent announcement that Centre had blacklisted a USDC address - essentially locking those USD funds forever.
I originally recommended using USDC as a method to onboard yourself in crypto but given this encroachment on sovereignty - which was always possible - I'm going to discuss alternatives.
But first a recap...
Recap
Feel free to skip these recaps if they are getting redundant - but they help a lot of people that are new to this newsletter get caught up and I think some people just read and need reminders to take action.
In our first post, we talked about how scarcity = value and ultimately, Bitcoin is the first implementation of provable, true scarcity. We then talked about valuation models for Bitcoin.
In our third post, we got into buying stablecoins which we'll rehash today before jumping into trading for your first native digital asset using a decentralized exchange or DEX.
Next up was dollar cost averaging into Bitcoin or Ethereum on autopilot - are you doing it yet? And in our next two posts, I explained how you could start earning from lending your funds.
More recently, we jumped into security and how to take your crypto offline with hardware wallets before talking about the most recent craze - liquidity mining where you can still earn up to 31% APR.
Two weeks ago, I brought your attention to the Long/Short MVRV ratio for Bitcoin and how it had signalled the start of a new bull market in crypto.
Take your pick below...
Revisiting Stablecoins
People around the world are being increasingly subject to censorship and revocation of access to services they previously relied on for business and commerce.
My friend has been banned from Twitter for months with no reason given and this poor guy got fired as a customer from Bank of America after 20 years as a loyal user.
On the surface, it's easy to say - hey they're not me and it'll never happen because I do everything by the book but so did these guys and they still got banned.
And now they're trying to regain access from a large conglomerate who is either unresponsive or has low level employees responding to thousands of requests from people they don't care about.
You're gone - you're out and god knows what you'll do if this was your source of income.
Now imagine this is your money - you're using USDC and they run some algorithm that finds that your USDC can be traced back to the dark web and decide to freeze all related accounts.
Boom - overnight your money is frozen - likely forever.
How could you ever trust a system like that?
This happened to an account with $100,000 USDC at the request of law enforcement and you know how many things they get wrong.
You think that guy is ever getting his $100,000 back?
This is not even an isolated incident across stablecoins.
USDT has been freezing accounts like they're going out of style. Amid regulatory pressure, 40 addresses have been blacklisted since 2017 holding $5.51 million in USDT!
Now, maybe these accounts are held by bad people but you can see how it can be a slippery slope where soon innocent people are being locked out of legitimate accounts with no way to regain access.
All regulatory approved stablecoins have this feature built in.
So now, we have to search for alternatives...
DAI
The first and obvious one is DAI which is collateralized by a host of on-chain assets and has a purported decentralized governance process through their MKR token.
Upon closer inspection, it all falls apart…
The MKR token is highly centralized allowing individual holders to swing entire votes in their favour. A year ago, the top 100 accounts owned 92.8% of all MKR.
Either these entities can be pressured by regulators or they can adjust the dynamics in their favour at the expense of holders of DAI.
Not a risk I want to be exposed to.
To add to this problem, DAI nearly collapsed on Black Thursday and had to be re-collateralized by raising $5M through a dilution of MKR holders.
More recently because of pressure from liquidity mining on Compound - the peg has broken and it routinely trades at a premium.
Finally, the governance team added USDC and TUSD as reserve assets which I explained above could be frozen at any moment by regulators which would pull 11% of collateral from the DAO.
In my opinion, you don't want so many attack vectors for a stablecoin that should be permission-less and stable in value (with relation to USD) across time.
Here's a more in-depth thread:
META, COIN, RAI
In February, a proposal for a governance minimized ETH backed stablecoin was proposed to remedy some of the inherent challenges of the Maker Dao system.
Similar to Maker, META would be a governance and rewards token while COIN would be the stablecoin backed exclusively by ETH.
However there are a few principle differences:
Collateral Type: Only ETH will be accepted while Maker Dao's stated goal is to include everything from real estate, stocks, stablecoins, crypto, etc. The Maker system scales larger, faster but introduces many layers of risk for each additional asset included.
Collateral Price: Through the Maker DAO governance process, price feeds are chosen while the team at MetaCoin appears to have settled on ChainLink as the price oracle. Once again, with only one collateral type, the system is much simpler.
Rates: In MakerDao, rates including the Savings Rate and Stability Fee are voted on by MKR holders while in Metacoin the goal is to be governance minimized so the rates will be derived algorithmically to stabilize the price.
If that wasn't enough information, I lied above in that the project will use ETH as collateral when in fact it will use RAI - a reflexi-bond that aims to be a more stable proxy for the price of ETH.
The goal is to have a more stable form of collateral avoiding forced liquidations during large swings in the market all while remaining trustless. You can read about the full details here.
Lien Finance
Another project I'm keeping a close eye on is Lien Finance which just hit testnet this week. At a high level, it aims to split an ETH deposit in two parts - the stable value and the volatile portion. These are respectively called a Solid Bond Token (SBT) and a Liquid Bond Token (LBT).
The LBT which has a maturity date can be sold on their Fair Swap exchange where speculators can effectively buy what is an option on the price of ETH.
Conversely, the SBT can be deposited into a smart contract and in return the user will receive iDOL tokens or "internet dollars" meant to be a stablecoin pegged to USD.
My Thoughts
Across the entire DeFi space, its rather terrifying to know how much risk a user can be exposed to when using tokens that on the surface appear totally similar.
If I hadn't walked you through the mechanisms and design behind each project, it would hard decipher the systemic risks for each token when they're all marketed as stablecoins.
This is an inherent challenge with all smart contract based tokens.
With Metacoin and Lien Finance, we're moving in the right direction with governance minimized - market driven stablecoins but both projects are far away from being adequately tested and trustworthy.
Furthermore, there is no indication they will scale when they are fully backed by ETH.
Conversely, with most centralized stablecoins - USDC, USDT, etc. - you run the risk of being shutdown with no remedy to recover your funds.
And with DAI, you're exposed to a number of hidden risks.
So what can we do?
At the moment, not a whole lot.
But given that we are in a bull market, I would be limit long BTC, ETH and the rest of the native assets just like the folks at Pantera Capital, a16z, Placeholder and more.
I would keep it simple and just dollar cost average into all my positions knowing we will probably be in an up-trending market with possibly large 30-40% drawdowns over the next few years.
Make sure to subscribe to stay up-to-date.
Around the Space
Aave Launches Credit Delegation
The team at Aave, which will be at our DeFi Toronto event today, is launching credit delegation. Users will be able to delegate their credit lines to other users. For instance, Karen deposits USDT into Aave and delegates her credit line to Chad who can then withdraw ETH from Aave. OpenLaw can be used to manage the agreement between Chad and Karen. Love the names and absolutely love the idea. I think p2p lending is the future, why let the bank get the spread/rewards for making loans when we can work peer to peer to grow the economy while enriching each other.
Coinbase considers IPO in 2020/2021
Coin-sellout - I mean CoinBase is looking to cash in on the stock market sweepstakes while the going is good and hoping for an IPO within the next year. After their recent private valuation at $8B, I suppose this is the only regulatory approved way to cash out. I don't think Coinbase can survive in this eco-system long term because it's clear there's a bifurcation in the industry - to truly go global you need to be agnostic, open while having to comply to any one jurisdiction's regulations is onerous and ultimately delays innovation and/or stamps it out completely.
World's first NFT loan is repaid
The first non-fungible token (NFT) loan was repaid this week. Brantly Millegan borrowed $1000 against his ENS name - brantly.eth back in April at 15% interest to be repaid in 90 days on July 14th. Ownership was transferred over to Rocket NFT who issued the loan while Brantly was able to retain the right to use and direct the ENS name.
At first glance this doesn't seem like much but in effect he was able to borrow against a pure digital asset and if the loan wasn't repaid he would lose title. This is similar to the meatspace when you borrow against your car but the key is that it can now be made AND enforced purely in the digital realm. HUGE!
Abra hit with $300,000 in fines by CFTC and SEC
Abra, a cryptocurrency app launched in 2014, and a related firm were charge with offering unregistered synthetic US stock market securities to retail investors by the CFTC and SEC. Along with a cease and desist order, they were forced to pay a small penalty of $300,000. The implications for synthetic platforms like Synthetix and UMA protocol remain uncertain. What's clear is that to move the industry forward platforms may need to completely decentralize their governance, development and product.
The Graph process 1 billion in queries in June
The Graph Protocol, which aims to be an indexing protocol for open networks, just crossed 1 billion of monthly queries in June. DeFi sub-graphs including those used by Synthetix, Uniswap, Balancer, Aave and more drove most of the volume with the DeFi space broadly constituting 76% of those queries. DeFi and open protocols are a treasure trove of data and as they grow in size the opportunity to harness that data for banking apps, registries and marketplaces will grow and the Graph Protocol may be at the center of it.
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Disclaimer: Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.