Thoughts, stories and ideas.

Twitter is leading mainstream adoption to crypto

The last weeks have brought great news from mainstream companies. TikTok (diving into NFTs), Revolut (designing their own token), Robinhood (ready to launch wallet features)...

The biggest news from a crypto outsider probably come from Twitter, who, in the same day, announced two breakthrough features that are going to open the hearts of many to crypto:

  • Bitcoin tips: Twitter will allow users to reward their favorite content creators in BTC through a payment system called Lightning Network: a Layer 2 solution built on top of Bitcoin that makes small payments more convenient, fast, and, more importantly, incredibly cheap.
  • NFT profile pictures: profile pictures are one of the killer applications of NFTs: in a 100% digital world, changing your profile picture to an NFT has become the way of showing the art you own to the world. Very soon, users will be able to connect their wallets to Twitter and validate and show their NFTs. This is an argument against rightclickers: those people who claim buying NFTs is silly because you can just rightclick-save any digital image.

Banks are increasing their exposition to crypto

Banks are being extremely nice and productive about crypto recently, and in an interesting variety of ways.

Crédit Suisse is using Ethereum to tokenize a ski resort. Swiss law allows tokenized securities to trade on a blockchain with the same legal standing as traditional assets. Tokens will be available for purchase through a private sale that will help the Alaïa resort raise funds.

Societé Générale wants DAI to accept on-chain bond tokens issued by the bank as collateral in Dai loans. Dai is Maker’s stablecoin, a cryptocurrency with a fixed price of $1. To keep that price, Dai is collateralized with different cryptocurrencies, from bitcoins and ether to other stablecoins. Everyone can lock these cryptocurrencies at Maker’s smart contracts to mint Dai. Interestingly enough, Societé Générale presented their proposal using Maker’s official governance forums. Well played, SocGen.

US Bank, the fifth-largest bank in America, is launching its own custody service in collaboration with crypto native company NYDIG. The service could be an on-ramp for institutional investors, who still expect more safety signs from the industry.

Bank of America has been incredibly enthusiastic in a recent report. Bank of America Global Research's latest report, Digital Assets Primer, shows excitement about crypto in ways that prove their commitment. DeFi, NFTs, Layer 1 and Layer 2 scalability solutions, smart contract platforms, stablecoins... They still don’t understand Loot, but to be honest, we neither.

VISA launches crypto payment hub prototype

VISA had already proved that they don't want to be left out of crypto. First, anecdotally, with the purchase of a punk for $150k that was bought “before anything, to learn”.

Now they have jumped to the headlines with a projected Layer 2 solution, for the moment built on top of Ethereum, that expects to become a global, multichain payment hub.

The concept, called "Universal Payments Channel" (UPC), outlines how various blockchain networks can be interconnected to allow the transfer of CBDCs. It shows how Visa can help exchange various CBDCs built on different blockchains in the future.

This way, VISA shows itself as a savvy participant in crypto (they even have launched their first smart contract) while taking positions to become a trusted infrastructure partner whenever Central Bank Digital Currencies decide to show up.

Welcome, VISA. Crypto is inherently meritocratic, so here they don’t enjoy the same privileged position they enjoy inside TradFi, but any initiative helping gain mainstream adoption is welcome.

Q3 recap

The third quarter went by, and it ended like it had started: with China banning crypto.

Back in the second quarter, the Chinese ban on mining and exchanging activities led to the Great Chinese Migration and a downward pricing trend that even looked at times like a bear market. Fundamentals and on-chain metrics finally prevailed: back then, the price was going down while all cohorts of buyers made purchases and got ready to HODL. It took almost a month for the numbers to react to the behaviors. It wasn't until late July that we started riding a new positive curve, only interrupted by the end of September by a few incidents that caused a temporary hiatus in the optimistic general feeling: an unexpected oversized liquidation in the futures market, another ban from crypto, and Gary Gensler, chairman of the Securities and Exchange Committee, picking fights with Coinbase, Uniswap, and expressing his discontent with securities and DeFi.

  • Q3 was the quarter of the infrastructure bill: the time when the Biden administration threatened to tax crypto in a misguided way that could hamper innovation in the US, and when the crypto community responded with unexpected political power.
  • It was the quarter of EIP-1559: the Ethereum upgrade that gave deflationary powers to the protocol, responsible for obliterating $1.6B in ETH and making the remaining supply proportionally more valuable.
  • It was NFT summer, with the most popular NFTs making record-breaking sales, making it to the hands of celebrities and mainstream media headlines, and starting to flirt with DeFi.
  • And it was the time for scalability to take center stage: Layer 1 and Layer 2 solutions started gaining momentum. Solana, Avalanche, Optimism, or Arbitrum began to deliver their promise of relieving Ethereum from some of its burden (some say speeding it up, others say competing or even killing it).

Q3 ended up with crypto losing some traction due to off-chain news. But on-chain, things have remained jolly. Bitcoin, NFTs, DeFi, Ethereum, and its contenders, seem unstoppable and headed for a very positive Q4.

US regulators give crypto a break

On September 29th, Gary Gensler reiterated his preference for a future-based ETF. The SEC has been adamant about approving a Bitcoin ETF (unlike his neighbor, the Canadians), but Gensler thinks an ETF containing options makes more sense. That's cool

Just one day later, the SEC delayed at least two months its commitment to respond to the ETF approval requests from the different institutions who have brought forth their proposals. ETFs could open the floodgates of mainstream institutional investment to crypto. That's not so good.

Also, in late September, Federal Reserve Chairman Jerome Powell said the Fed had no intention to ban stablecoins, although he did call for some regulation. But that's ok.

Nevertheless, a few days later, we learned that the SEC issued a subpoena to USDC stablecoin backer Circle. Just like they did with Coinbase and Uniswap, the SEC is taking on the big fish in their attempt to get a grasp of how to regulate stablecoins and at the same time deliver a message to the whole industry. That is not nice.

But then, last Tuesday, when asked directly whether he would suggest the USA follow China’s path of banning crypto from favoring a government-issued digital currency (CBDC or Central Bank Digital Currency), Gensler answered he didn’t. That's good, Gary, thanks.

U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler testifies before a Senate Banking, Housing, and Urban Affairs Committee oversight hearing on the SEC on Capitol Hill in Washington, U.S., September 14, 2021.
Crypto's newest enemy, Gary Gensler.

Happy birthday Abacus Carbono

We created Abacus Carbono as our contribution to mainstream crypto onboarding. Keeping up with projects, separating grain from the stalk, coping with volatility, dealing with FOMO... that is a full-time job. So many people around us showed interest in crypto but didn't have the time for all the work that picking, purchasing, and holding crypto assets involves.

Some of you might be familiar with the genesis story of Abacus Carbono. It took three years to overcome the regulatory and infrastructural hurdles, including months being delayed by global lockdowns, before we could finally launch.

Now get ready for a colossal cliché:

Things have changed a lot in a year.

They have. We all know this. But how have things changed from the perspective of asset management? The funny thing is that while some things have become much more straightforward, some others are getting increasingly complex.

Some things are simpler now...

Launching a fund would have been much easier now. The world now understands crypto much better, even in those places where they disapprove of it. Regulation is immature and will probably evolve quickly, but in 2021 we can say that it's primarily clear: jurisdictions know what they want and what they don't.

Investors are easier to find. Abacus Carbono's initial customers were trailblazers or lunatics, depending on who you asked. Many of them were already sure they were in this for the long run; many had already tried investing themselves but preferred to delegate it to professionals. To this day, our investors are interested in the space beyond just returns. They are informed and want to be up-to-date on trends and opportunities. As the crypto industry evolves, investors will likely become less interested and more passive.

The ecosystem of companies has blossomed enormously in a year. And, in particular, those who are offering professionalized services. The user experience and scope of the offer from exchanges, custodians, insurance companies, and other intermediaries have evolved positively.

Institutional investors can finally invest in crypto assets. Until recently, it was challenging for institutional investors to have crypto exposure. But this has changed lately: now they have access to regulated and insured custody solutions and trading platforms. And every country in the world is clear about they see crypto assets from the regulatory side.

...but some are more complicated

And, about the scope of the offer: this is where things have got more complex and more exciting. Abacus Carbono only invests in a list of approved assets, according to the regulation. The investment team can add assets to that list through a thorough approval process where an investment committee integrated by risk and investment experts has to validate every proposal.

Criteria for the inclusion of a new cryptocurrency include:

  • Liquidity. They must be available in sizeable volumes in already approved and regulated exchanges (in our case, Kraken and FTX).
  • Technical and economic relevance. Projects’ value proposition must fit identified relevant trends, and have a clear path for its cryptocurrency to accrue part of the value generated by the project.
  • Reputation. Team and project history, security criteria, and code analysis are involved in the process.

The variety of projects that could potentially be approved here is constantly increasing, and so is the speed at which new trends, new investment opportunities, come up. Some of them are off-limits (for example, Abacus Carbono can't invest in NFTs because of their lack of immediate liquidity). Still, DeFi, staking, and lending solutions are on our radar. And with the Cambrian explosion currently happening in different ecosystems like Solana, Avalanche, Terra, Polkadot, the number of projects we analyze is exponentially growing.

We've made our share of mistakes along the way. Most of them missing out on opportunities that could have reaped tremendous benefits. But we are proud to say that Abacus Carbono has consistently outperformed holding. Time proved that we had been right at being patient at some times and good at reacting quickly in others.

These first twelve months of life have been gone by at an incredible speed, both for us and the whole ecosystem. And it doesn't look like it will slow down any time soon. Crypto seems to live in dog years: every year that goes by feels like seven years in traditional finance. We cannot wait to see what the next 12 months bring us.

By the way, we just published a new web for Abacus Carbono. Check it out.

Analytics platform digest

Analytics platform digest

Overwhelmingly transparent. That is an accurate way of describing crypto. Yes, information is open and available. But it is also complex and overabundant, and newcomers can easily drown in data.

Analytics is one of the most necessary side industries that is blossoming on the sidelines of crypto. Even governments are hiring data consultants to help them oversee the sector.

There are dozens of analytics tools helping insiders and outsiders navigate the flood of information in crypto. Here's our humble attempt at scratching the surface with a selection of a few names and URLs. It is by no means an extensive list, just a selection meant to represent the breadth of the space.

  • Block information directly from the blockchain. Etherescan (for Ethereum) or Blockchain Explorer (Bitcoin, Bitcoin Cash, Ethereum…) are windows into the raw data of the Ethereum and Bitcoin blockchains, respectively. A rabbit hole where you can follow the lead of every single transaction ever made. Every Layer 1 solution has its own Etherescan.
  • Cryptocurrencies and tokens. Coingecko or Coinmarketcap are two of the many tools used to follow the daily evolution of assets. They also offer deep resources for training and learning.
  • DeFi insights. DeFi pulse or DeFi Llama offer usable approaches to DeFi. They might differ in the scope of their analytics: DeFi pulse focuses on Ethereum while DeFi Llama also explores other Layer 1 solutions such as Solana or Polygon.
  • NFTs. Cryptoslam, Nonfungible are platforms that dive into NFTs: collections, stellar sales, floor prices, etc.
  • Media. Messari, The Block, Delphi...three of the most outstanding information and research companies also offer freemium dashboards of curated metrics.
  • For pros. Glassnode or Cryptocompare (the latter, with a freemium model) are tools used by professionals for in-depth analysis.

China's impact on crypto is back

China's impact on crypto is back

The empire strikes back. Last week China was again in the front and center of crypto with two macro news that had a powerful (though temporary) effect on crypto. Evergrande’s fall and a(nother) ban on anything that smells like crypto.

Evergrande is the Chinese real estate behemoth whose fall is sending shockwaves through the whole financial system. Its crisis could become a Chinese version of the 2008 Lehmann Brothers. The company reportedly owes immense amounts of money to around 171 domestic banks and 121 other financial firms. And it is probably never going to pay unless the Chinese government does some of its magic and avoids the credit crunch.

The event is being widely reported (read about it on the BBC news site or a wonderful Twitter thread from Mira Christanto, a researcher at Messari), but what's interesting to us is how this affects crypto.

One of the most appealing features of crypto was its low correlation with more traditional assets. Institutional investors pointed at this as one of the reasons to believe in crypto, according to Fidelity Digital Assets’ 2021 Institutional Investor Digital Assets Study. But what we have witnessed these days says otherwise.

Crypto is increasingly intertwined with traditional finance. More investors from TradFi are approaching crypto. And with tokens being a very liquid type of asset, it is reasonable to think that in times of crisis, fear hits fast. Investment funds might also have to balance their risk profiles after the real estate crisis in China, and crypto-assets are an easy target there.

When the effect from the Evergrande crisis started to cool down, the Chinese government made a stellar appearance and banned crypto…again.

This is not the first time, and funnily enough, it will probably not be the last. The Chinese powers are strongly prosecuting crypto. The hardest blow came halfway through 2021, when the Chinese administration chased most miners out, creating an exodus that took crypto to a bearish trend. This time the announcement was sent out by the People’s Bank of China and just added a few details to the well-known official position, like specific mentions to Tether. But apart from that, things remain fundamentally the same. The announcement seems to be tied to the progress of the official Central Bank Digital Currency. China has been fast implementing a government-issued, government-supervised, government-surveilled, digital currency, and they probably want nothing to stand in the way.

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Check the date…

Bitcoin both times went on a dip: once for the Evergrande’s threat, again when news from China broke. But things seem to be getting back to normal already. Crypto has proved great resiliency in the past, and fundamentals and on-chain metrics remain strong, indicating that we are very likely to be back on our feet soon.

The SEC rolls up its sleeves

The SEC rolls up its sleeves

Gary Gensler is openly at war with crypto. Hopes were up in the industry when he was initially appointed as chairman of the SEC, given his background. Gensler was an MIT blockchain professor. The community expected a more nuanced approach from someone with one foot inside, but his recent words and actions show a much more aggressive stance.

It's been some busy weeks for Gensler and the SEC. After probing Uniswap and going after Coinbase for its staking service Lend (and winning), the SEC chairman appeared in front of the Senate and the media -Washington Post- and sent some clear messages to the industry.

  • As a broad statement, Gensler thinks the current regulation is clear enough, and it's time for companies to comply.
  • He claims that "many" tokens have the attributes of investor contracts or securities and should therefore be registered as such. He suggests exchanges and lending platforms should voluntarily register soon
  • He considers stablecoins "poker chips" and expects them to be soon regulated. (How? Read here about the 5 possible approaches outlined in a New York Times article). In the meantime, the Treasury Department, headed by crypto foe Janet Yellen, is currently working on a report to the President’s Working Group on Financial Markets

Regulation is very likely to make a stellar appearance in the US any time soon. The lowest hanging fruit for regulators seems to be centralized exchanges and stablecoins. And a careless approach could deliver a blow to DeFi too. Nevertheless, we believe that the ecosystem is already too strong to fall and that the downside of regulating poorly is so big that not even US authorities are interested in it.

Decentralization against regulation

Decentralization against regulation

Crypto protocols are meant to be governed by decentralized communities of stakeholders. Not because it’s more efficient or important for ideological reasons, but because it’s necessary to unlock their core value proposition: that the underlying protocols will continue to run as designed and will remain open to anyone who wants to use or build on them, without having the rules shift under their feet.

These are not our words; they are Andreessen Horowitz's Jeff Amico's.

As an early VC investor in crypto startups, A16Z is knee-deep in decentralized governance. They are constantly exposed to it as token holders in some of the leading decentralized protocols in the space. Their experience tells them that decentralization of governance is another key feature in crypto's identity. It is a matter of trust to them: decentralization guarantees that projects will be transparent and remain faithful to their foundations.

The ultimate goal is to replace intermediaries like global banks and tech platforms with software built on top of networks that direct the value they generate back to the users who own and run them.

Again, not our words: this comes from The Economist.

The Economist on Twitter: "Decentralised finance is one of three tech  trends disrupting finance—and it has the potential to rewire how the  industry works. In our cover this week, we go down

Today we will be talking about yet another acronym in the crypto space. One that is likely to become as important as DeFi and NFTs and join the club of the most important applications of blockchain to date. We're talking about DAOs.

DAOs

The acronym DAO stands for Decentralized Autonomous Organization, and the concept refers to organizations who cooperate digitally through online platforms that are transparent, somehow democratic, binding, and self-executing. Blockchain technology built a bridge between digital decision-making and the movement of funds that opened the door to a new remote, global, digital way of working together. Blockchains can host programs where the conditions for cooperating are written in stone and open for anyone to read. As a result, DAOs are a new way of cooperating.

Let’s imagine a homeowner's association deciding whether to fix a fence or not while behaving like a DAO. This very modern group of neighbors frequently communicate via an app where decisions are discussed and voted. And the fence around their building is broken.

Their app shows them three different proposals to fix the fence. They have been voluntarily submitted in detail by one of the neighbors.

a) Simple fix: solve the problem with the hole and get on with life. The fix would cost $500; Contractor X would repair it in a matter of three days. The contractor would charge 50% in advance and the other 50% once the community votes to agree the job is satisfactorily finished.

b) Full fix. For those who think the hole is just a symptom of general deterioration, spending $5000 on changing the whole fence is the second option. Contractor Y would do the job in two weeks once an initial 20% payment is made. The community would unlock the rest of the payment by voting 15 days after the job kicks off.

c) Just pass. Holes give fences their unique flavor.

A fully decentralized and autonomous organization would require all the details to be written in stone. Or, in better terms, written in code. For example, what are the payment details for the association, Contractor X and Contractor Y; when would payments be made, when would the final consultation about the results be launched, and how long would it be open for voting. What are the voting thresholds to consider a vote approved or rejected, how is communication managed with the chosen contractor, and what happens if the job is not appropriately finished... Every detail would need to be laid out because the app doesn’t take decisions or ask questions; it executes the tasks.

In a DAO, once the neighbors voted on their favorite opinion, the decision would be automatically executed, for example, sending the initial payment and starting a counter before the final consultation is launched in the community's app.

According to Linda Xie´s definition:

A decentralized autonomous organization (DAO) is a group organized around a mission that coordinates through a shared set of rules enforced on a blockchain.

Or in other, more informal, words from Cooper Turley, they are “internet communities with a shared cap table and a bank account.”

DAOs are a new way of making decisions that could disrupt organizations as we know them. They prioritize transparency, debate, and collaboration. They make execution a technical challenge, devoid of human intervention, where every detail is pre-defined and binding. It is not hard to scale the example of the homeowners to larger communities and imagine how this would work for some areas in corporate and political decision-making.

Decentralized Autonomous Organizations are the iteration of online communities spun from crypto. They share features with previous manifestations of digital associating, such as good old mailing lists, forums, or Facebook groups. They add the component of decision-making and financial allocation.

Financial incentives are not just another ingredient. They are the fairy dust that makes communities fly. Web 2.0 brought unparalleled borderless cooperation between peers thanks to digital platforms. Now the communities formed by those people have a budget. This makes motivation and drive different.

There are many use cases for DAOs. Turley mentions some possible categories, and one single DAO can belong to one or more of them. Some of them are:

  • Grant DAOs, where participants pick projects to fund among a list of requests. Grant DAOs are frequent in the DeFi space, where the community of token holders is constantly seeking to make the community grow.
  • Venture DAOs, similar to grant DAOs, but whose purpose is to become investors in promising crypto projects. Flamingo, The LAO, or Metacartel are examples of these.
  • Protocol DAOs, frequent in DeFi: users can decide how the protocol should work and vote for changes in the code. For example, when a liquidity pool wants to add a new liquidity pair. Uniswap, Aave, Compound,… all main blue-chip decentralized exchanges have protocols governed by the community.
  • Collector DAOs, where participants with a common interest meet, debate, and decide. They are frequent in the NFT space, where a DAO can be made of the owners of a certain collection and decide on measures beneficial for the project, like purchasing more items or even burning some to make the rest more valuable (#truestory). Cryptopunks and Squiggles are some famous NFTs with their own communities.

DAOs obviously have many downsides. They are still an immature way of decision-making, often prone to inequality and unfairness. Sometimes they are plain unnecessary and just a shallow mannerism in the hands of over-enthusiastic players. But governance is becoming increasingly important, especially since decentralization is becoming the shield that defends projects from regulators.

If the value is to be retained within the confines of crypto, instead of shared with big institutions and corporations, governance, in general, will have to play a critical role in coordinating a huge variety of wills.