Crypto Joins Global Markets in Free Fall + MIT Bitcoin Expo

Bitcoin and ETH plummeted on Sunday, but hardly anyone cares as global markets slide further into uncertainty and panic over COVID-19 and Saudia Arabia’s oil shock.

I won’t add to the market hot takes, but two highlights for DeFi.

Liquidations on Compound, dYdX and Maker have gone bonkers in the past week, creating serious profit opportunities for liquidation bots.

With dYdX and increased volume throughout the day, this number will likely approach $75m in daily volume across DeFi DEX’s. 0x’s Liquidity API with strong volume too.

MIT Bitcoin Expo + Cryptoeconomic Systems conference

I was in Boston this past weekend and wanted to highlight a few interesting presentations. I found myself more interested in the Cryptoeconomic Systems track, which featured presentations of published papers in the new academic journal.

Fractional Reserve Bitcoin Banking

Bitcoin has long been seen as a rejection of the rehypothecation of money and an attack on fractional reserve banking, but several panelists expressed concerns about this growing trend in Bitcoin.

Essentially, exchanges and specialized lending shops like Blockfi or Babel lend out Bitcoin to traders and financial institutions typically to short it. The bitcoins come from depositors and long-term hodlers who want to earn a yield on their idle Bitcoin.

Say I deposit 100 bitcoins in Blockfi and it lends all of them to a trader. My Blockfi account says I have 100 bitcoins, but the trader actually has 100 bitcoins to freely transact or sell, essentially adding 100 bitcoins to the total supply.

Exchanges, particularly those in Asia, are aggressively building out lending capabilities. It seems nearly impossible to stop bitcoin-based financial products, but the community is looking for solutions, like Proof of Reserves, that provide transparency to the risk that the Bitcoin lending facilities are exposed to.

This, along with the growth of Bitcoin in custody, illustrate the conflicts between Bitcoin’s traditional values and its expansion into new products and investor markets.

Cloud Crypto Land: Limits of a Blockchain-based Economic System

Lawyer Edmund Schuster gave the skeptical take for the weekend, presenting a paper on how blockchains and existing legal systems don’t mix, as he said, “Decentralisation is [the] absence of hierarchy; rule of law, as any rule, requires hierarchy”.

Schuster’s argument focuses on real-world assets, including property rights, intellectual property or any other asset that requires enforcement by a third party. Bitcoin and ETH, assets that are native to the blockchain, are more useful but suffer the same fate whenever these assets interact with the “real world”.

I have some disagreements, but the framing is solid. The takeaway is that the two systems won’t interact seamlessly, but rather through specific (regulated) gatekeepers.

Having said that, I think he underestimates two things:

1. The ability of a blockchain-based system to become a sustainable economy in the digital world without any reliance on existing legal systems. This exists already. You can quibble with the future size, but there will be an independent blockchain-based system, much like there is an unregulated cash economy.

2. The efficiency benefits of digitization. Tokens, Schuster argues, are only a small improvement from medieval merchants trading pieces of paper because both only work when the transaction is simple (ie no lawyers). But, even if courts could roll back a transaction, DeFi protocols demonstrate the benefits of programmability and transparency of digital assets, even in a regulated world.

Money and Credit in a Crypto Economy: Securing Liquidity Without the Need for Central Control of Issuance

An ambitious paper, but that’s what you might expect from a team named Economic Space Agency. While many disparage debt-based money (aka fiat), the paper and the talk by Akseli Virtanen, explore how to disseminate credit if money is not debt-based.

The talk builds off of ideas in David Graeber’s Debt: The First 5000 Years, which I think is one of the most important books in the crypto space. Essentially, Graeber argues that money never emerged in a barter economy, but that all forms of money throughout history are essentially IOUs from debtors that everyone trusts.

Economic Space Agency aims to build a new credit system with stability that is built on mutual stakeholding:

In a system where all agents can participate in issuance within the distributed exchange protocol and network, when offer matching is mediated through a common asset (or unit of account), netting enables exchange and settlement to occur without the need to actually hold the common asset (or unit of account). It means a non-money-intermediated means of liquidity: a distributed monetary system that can secure liquidity without the need for central control of issuance/un-issuance of a money instrument. The goal of the mutual liquidity protocol we propose is not to issue credit with the objective of seeking an income stream (interest payment of debt), but a mutual responsibility for securing inter-temporal matching on a ledger. Credit-for-mutual-liquidity and equity-for-mutual-stakeholding represent a profound change in our understanding of the economic roles of debt and equity.

An audience member commented that they’re proposing a non-interest rate credit system that sounds awfully familiar to Islamic banking.

Two other papers of interest:

• The Political Economy of Blockchain Governance – Barton Lee, Dan Moroz and David Parkes

• An Analysis of Uniswap Markets – Guillermo Angeris, Hsien-Tang Kao, Rei Chiang, Charlie Noyes, Tarun Chitra

Chart of the Week: Funds in Compound Top 100 addresses

Elias Simos and Tara Tan included this chart in their State of Crypto Report, which they presented at MIT Bitcoin Expo. The chart (in log scale) shows the amount of funds held by the top 100 addresses on Compound. It’s a good reminder that although it democratizes access to financial services, DeFi – like traditional finance – is a whale’s game. Large investors will still dominate DeFi until its products and services have a wider appeal.

Odds and Ends

• DeFi wallet Argent raises $12m in Series A, led by Paradigm Link

• dYdX introduces trading fees & new business model Link

• DeFiZap launches programmable pooling incentives for SNX & sETH Link

• PieDAO aims to create ETFs for DeFi Link

• pTokens launch, joins crowded BTC on Ethereum market Link

• New Bankless podcast with Ryan Sean Adams and David Hoffman Link

Thoughts and Prognostications

• Flashloans: A Secure and Generalised Approach [de Graff/PieDAO]

• DeFi Oracles – Draft for Review [Linda Xie/Scalar Capital]

• The Bitcoin-to-Salvia Divinorum Trade Route [JP Koning/Moneyness]

• Kyber Ecosystem Report #12 [Kyber]

• The Crypto Credit Report Q4 2019 [Credmark]

• DeFi: Dependency Hell Meets Finance [Daniel Que/Coinbase]

• Building Liquidity in Token Distribution [Mike McDonald/Balancer]

And then there’s this update to a cool chart from Alethio mapping the DeFi ecosystem:

That’s it! Feedback appreciated. Just hit reply. Written in Cambridge on what feels like the beginning of Spring. Shout out to Dimagi for giving me a desk today.

Dose of DeFi is written by Chris Powers. Opinions expressed are my own. All content is for informational purposes and is not intended as investment advice.

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