DeFi’s road to mass adoption

On By mehranmuslimiblogIn DeFiLeave a comment

According to Eric Chen, CEO and co-founder of Injective Labs, while the DeFi sector has witnessed massive growth since 2020, there are still some issue to address, namely scalability, gas fees and liquidity. On the upside of this remark, Chen also noted that the entire DeFi industry is focused on building infrastructures to address these problems, saying: “It still has a lot of problems to solve before being able to serve billions of users. Scalability, miner extractable value and gas costs will become more and more important to improve over time.”

DeFi TVL

It is also good news that the total value locked (TVL) in decentralized finance (DeFi) has risen above the $200 billion zone after slipping below that range for most of the year. In January the TVL had dropped to a low of $185.20 billion, but jumped by 13.54% to reach over $200 billion on 20th March.

It has also been noted that new forms of utility like liquid staking are on the rise and some believe that more people may be drawn to DeFi as more institutions jump into the fray.

Chen believes that the sector’s growth can be attributed to the development of new primitives and user growth, and commented, “With many traditional institutions joining the space, DeFi will gradually reach mass adoption.” 

Permissioned DeFi

One of the reasons traditional institutions may enter DeFi is Permissioned DeFi, a form of DeFi that combines decentralization with centralized mechanisms like whitelisting for Know Your Customer and Anti-Money Laundering purposes/ He said, “Permissioned DeFi certainly allows traditional institutions to be much more comfortable in participating in the ecosystem. It will play an important role in fostering global mainstream adoption.”

For example, this year, liquidity protocol Aave launched a permissioned deFi pool. This allows institutions to access decentralized finance features while being compliant with existing regulations. 

DeFi is easier to regulate

Chen also commented that DeFi is easier to regulate than legacy infrastructures. He believes that DeFi’s mission to “provide decentralized, secure, and transparent financial services,” makes the work of regulators much easier, providing they do proper research into it, and understand it.

Layer 1s versus Ethereum

On By mehranmuslimiblogIn apps, DeFi, Ethereum, Solana, UncategorizedLeave a comment

Last year, the networks that set out to compete with Ethereum for a slice of decentralized applications proved to be profitable. These blockchain networks, also known as ‘Layer 1s’, include Solana, Polygon, Avalanche, Polkadot and Cosmos amongst others.

These protocols are masters of decentralized computation, something that can power any type of software, but is “particularly apt for digital scarcity, property rights and provenance,” writes Lex Sokolin at Coindesk. And as last year showed, they proved to be increasingly profitable for investors. However, they only remain valuable if they are used by the developers who make apps.

They also require users. As Sokolin says, “if there are users in your platform, developers value that as a distribution channel in addition to a technology enabler.” He refers to this creating a viral loop “that can create positive network effects, which allow certain equilibria to hold, and others to collapse.” He adds, “So layer 1s do both – they provide the computational unit as well as the market context in which that computational unit is generated and executed.”

Yet Ethereum is still holding the biggest slice of the market. It is true that its dominance has declined. For example, in September 2020, Ethereum had 90% of the assets on the market, and today it has about 50%. How and why has that happened?

Let’s take Avalanche as an example. It is launching a $290 million incentive program to grow the applications built on its technology. Its market cap is around $30 billion, so this expenditure on platform growth and customer acquisition is only one percent of its cap. And last year, Polygon, targeted DeFi growth with a $100 million ecosystem fund, which worked for it, as you will find quite a number of DeFi projects on its blockchain.

Ethereum by contrast was boosted by Consensys, which “played the role of ecosystem fund in the early days, eventually generating sufficient building and adoption by the community.”

These ecosystem funds are a really important element in the rise of Layer 1 solutions. Success and sustainability comes from spending on marketing, growing your adoption against others, building in profitability and using profitability to grow your market share. Ultimately, it should have been easy for Ethereum to hold onto the lion’s share of the market, but it didn’t factor in investors’ appetite for. As Sokolin says, “there’s a lot more risk capital out there wanting to recreate a layer 1 investment return profile,” which is good news for those protocols.

Consumers want banks to offer crypto

On By mehranmuslimiblogIn Altcoins, Banks, Bitcoin, cryptoLeave a comment

The crypto market saw a sudden uplift on 15th March, following a few days of sideways trading. According to Ron Shevlin at Forbes, Biden’s recent executive order regarding the responsible development of digital assets helped lift the price of Bitcoin, Ethereum, and other cryptocurrencies.

Ari Redford, Head of Legal and Government Affairs at TRM Labs, offered Shevlin a neat opinion about its effects: “The executive order is really a call for coordination—playing quarterback to ensure that regulators are working together to feed into a clear and consistent framework for crypto regulation rather than engage in disparate work streams.”

This is important for traditional banks, and it should encourage them to engage with cryptocurrencies. They would be foolish not to do that, since many Americans are demanding to be able to purchase crypto directly from their bank, rather than use a crypto exchange.

For example, a very recent survey by Cornerstone Advisors conducted in February 2022 found that “one in five American adults hold some form of cryptocurrency.” The generations that favour crypto are Millennials and GenZ, with Gen X trailing a bit behoind, and the Boomers solidly rejecting the idea of crypto.

Twenty-five percent of Gen Zers already own crypto and 29% plan to buy it within 12 months. Thirty percent of Millennials already own it and 27% will buy it this year. Furthermore, among the Gen Zers and Millennials with crypto, 40% bought or sold it five or more times in 2021.

With regard to banks, the survey revealed that around 50% of Americans that already own crypto would “definitely use a bank to invest in crypto if they could, with another 42% indicating that might do so.”

But banks don’t seem to be getting this message. Shevlin writes: “According to Cornerstone Advisors’ What’s Going On in Banking 2022 study, just 1% of US banks provided cryptocurrency investing or trading services before this year.” What is more, only 1 in 10 American banks plan to offer a crypto service in 2022. It seems that although regulators are trying to make it easier for the banks to become involved, bankers are still tied to their old views.

One senior bank exec told Cornerstone:

“Why are there more cryptocurrencies than US banks and credit unions combined? When is the consolidation and fallout going to occur?”

While another said: “Cryptocurrencies aren’t stable enough to be a legit payment mechanism as the value could fluctuate during the transaction. Instead of pushing crypto ATMs and ways to create your own currencies, it would be great to see more focus on how to solve issues like unaffordable housing and the student loan.”

It seems he’s missing the point, and indeed, the demand. Although nt all of them are so blinkered. One banker actually sounded positive, commenting, “We need to accept that cryptocurrency is here and start planning TODAY on how to approach this and not wait until it’s too late and we’re reacting versus planning.”

We know that banks are risk averse, and have consistently issued warnings about the risks they see with crypto, but it would seem that based on the consumer view, the biggest risk to the banks is not getting involved with cryptocurrencies at all.

Bretton Woods III: a new world monetary order

On By mehranmuslimiblogIn Bitcoin, Economy, GovernmentsLeave a comment

In 1944, as WWII was coming to an end, the Bretton Woods system of monetary management was established. It set the rules for financial relations between countries, for their central banks and governments. It also created the IMF, the World Bank and WTO. This week, Zoltan Pozsar, Credit Suisse’s short-term interest rate strategist, published a note about a new world monetary order, which he called the “birth of Bretton Woods III”.

In his words, he see this as, “a new world (monetary) order centered around commodity-based currencies in the East that will likely weaken the eurodollar system and also contribute to inflationary forces in the West.” What does that mean for us? And what part might cryptocurrencies play in it?

Bretton Woods I was based on a gold-based system where the U.S. dollar dominated and was freely convertible into gold. This changed dramatically in 1971 when the US had to change its currency, “so that the dollar was free-floating and backed by the full faith and credit of the government,” not gold.

Bretton Woods II then became the model. In this, the dollar still dominated, but in a system that mostly uses “inside money.” Inside money is someone else’s liability, while outside money is nobody’s liability. This is why we have a system that is largely based on debt. For example, when China holds US Treasury bonds that is inside money. When Russia sells USD to buy gold, that is outside money. It makes things pretty complicated when you factor in the full package of economic sanctions against Russia, and add in the fact that China holds massive amounts of seizable, U.S.-based inside money. It could sell its US Treasury bonds to “fund the purchase of “subprime” Russian commodities,” writes George Kaloudis in Coindesk, but it would also give China control over inflation. Such a move could also lead to commodity shortages and a recession in the West.

Pozsar’s note suggests there is a “new confiscation risk associated with US inside money,” that could spark a new monetary regime, as the world turns to focus on outside money, such as gold and other commodities, as countries try to boost their reserves. Or they might turn to cryptocurrencies, particularly Bitcoin.

At the end of his note, Pozsar wrote, “After this war is over, “money” will never be the same again…

…and Bitcoin (if it still exists then) will probably benefit from all this.”