Tuesday, March 5, 2019

Crypto Markets Thoughts Mar 2019

For the people following my tweets and retweets on Twitter, I doubt you'd gain much from this post. Perhaps just a more organized and presentable format than Twitter which is a very haphazard medium.

Recently, the biggest discovery for me was the Uniswap AMM model. Basically its an algorithmic automated market maker. It's is very interesting for several reasons. First off, it's rent-free. This means that the developers make absolutely nothing from its success. They managed to build it because they were given a grant by the Ethereum foundation. Basically, they created a token-less, rent-free model of Bancor. The grant they received was $50k. Guess how much Bancor raised in their ICO? $153M.

Let me do the math for you. Bancor has a budget 3000X larger than the Uniswap team. And guess what? Uniswap does ~70% of the volume that Bancor does. And Bancor has been around for a pretty long time, while Uniswap launched a little over 3 months ago. The growth has been astonishing.

The next interesting thing is how Uniswap basically works as a nominated money changer that is open 24/7.

Anyone (including you) can basically "fund" the money changer by giving him capital, and he perpetually quote rates and fills exchange requests. Every single time the money changer completes a trade, he helps you take a 0.3% cut, and FOR FREE. Remember, this is a public good, rent-free model.

There is no token.
There is no profits going to external parties.
All profits goes back to the people who have put in liquidity.

Basically, you provide liquidity and you get paid whenever people utilize your liquidity. Simple, ain't it?

It's an extremely interesting MARKET NEUTRAL strategy, which there are very very very few in existence, even in traditional markets.

Anyway, explaining the algorithm of AMM is a bit complex, but essentially as long as you were already going to simply hold your crypto assets, you stand almost no risk by contributing liquidity, while you can enjoy the upside of skimming 0.3% of every trade that occurs by Mister Money Changer (Uniswap).

The perpetual 24/7 nature of Uniswap brings me to believe that in the future, projects will raise funds and upfront announce the intention to allocate funds to create and start a Uniswap liquidity pool, alongside the traditional strategy of listing on "regular" exchanges.

People are just starting to understand the importance of liquidity. I can never stress how important liquidity and market depth is.

The last point about AMMs (you will need technical knowledge to understand this bit), is that they basically provide a native, on-chain price oracle, kept accurate by funding arbitragers with arbitrage profits. This actually means that it *can* be used as a price feed, though it's probably not a fantastic one. Still, very interesting.

Uniswap and AMMs aside, the next interesting thing for me is regarding the #DeFi movement, which is short for decentralized finance, aka "Open Finance".

Being heavily interested (and invested) into DeFi related projects has kept me on the toes regarding the development of this space.

One of the most interesting aspects that I am enjoying about it so far is the flourishing of multiple avenues to "work" your otherwise idle crypto-assets, and these are mostly through fully collateralized lending.

The range of options vary with risks, the main one being custodial risks. But it is possible to earn anywhere between 3-7% on your crypto assets by "lending" it out.

As I said before, each avenue has different risks. In some, the risk that you assume is catastrophic - the 3rd party absconds with your crypto and you never see anything back. In others, the risk has been reduced to smart contract execution / bug risks - which means that you technically never give up your crypto to a 3rd party. It's yours, but you just can't use it, but you can get it back anytime and no one can stop you. More confusing than it sounds, but it's mindblowing.

It means that anyone can just throw in ETH / tokens into these smart contracts, and whenever they feel like it, they can withdraw with some returns. It's like a perpetual rolling fixed deposit. Or maybe a money market fund. With no questions asked, no KYC/AML needed, processes deposits in 15 seconds, processes withdraws in 15 seconds. It's a super crypto savings accounts with mad interest, that's basically what it is. If this ain't an interesting way to store money, I don't know what is.

For someone like me that is heavily invested in crypto, having my crypto "work" for me instead of sitting idly in my wallets is a godsend. I've been evaluating and trying out a lot of options lately, but I have to say that I am very impressed at how the space is developing and I think it's entirely possible that in the near future you can just lock up ETH without staking in the POS model and still get paid fat chunks of interest.

Interestingly enough, this has also led me to the realization that BTC is a lot more "limited" and constrained than I had initially thought. The limitations of BTC script language means that all the complex smart contract interactions going on in the ETH DeFi space is... impossible to do on BTC without the use of sidechains / another chain or trusted 3rd parties.

There is no such thing as trustless BTC lending (yet).

Basically, outside of payments and a store of value, BTC has limited itself from expanded and extended functionalities.

And once you realize that, you also start to figure out that BTC's Lightning Network dream is also at risk of ever truly becoming reality because of this. It has recently surfaced the amount of issues that the LN has in its current stage, but of course work is being done to improve it.

Yet on the ETH side of things, there's literally 20+ projects and teams working on different scaling solutions which are almost all independent of each other.

Let me rephrase this whole thing:

One problem of crypto is scaling up.

BTC's solution is the LN, and they have a few teams working on different implementations of the same thing.

ETH's solution is SEVERAL solutions, and some solutions have several teams working on different implementations, but ANY solution would scale up ETH, though different solutions have different impacts of scaling benefits.

So BTC has 4 teams trying out 1 way to solve a problem. ETH has many teams, trying out several ways to solve the same problem.

Don't get me wrong, I love BTC and what it represents. But practically, can BTC ever scale up with LN to be the kind of digital money that people would use in the future?

I'm rather meh on that prospects. I still have BTC, but I am extremely more overweight on ETH.

Anyway peeps, this is just the ramblings of a crypto observer. I'm sure that this is just technical bullshit mumbo jumbo for the majority of you, but hopefully it's a refreshing take for some of you, especially those that are not on Twitter.

Not many people dare to be "anti-BTC", but at least I come prepared with reasoning for my stance. The market will let us know who is right in the future.

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