Galen Moore
Crypto Long & Short: Does Decentralization Create Value or Destroy It?
To bitcoin (BTC) proponents, the world’s need for a decentralized form of money is more apparent than ever as challenges mount to government monopolies on money-printing and military force, from the U.S. to Uganda.
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It’s possible this vision is attracting new investors into crypto, but this week’s price surge (notwithstanding the sudden bitcoin price whiplash at midnight Eastern, today) may also be driven by circular enthusiasm among existing crypto traders. That seems to be what’s happening with ether (ETH). The No. 2 crypto asset outperformed bitcoin on the week (23.7% to bitcoin’s 18.7% Friday-to-Friday close provided by Coin Metrics). It wasn’t likely due to excitement over a decentralized alternative to the tech giants who testified virtually in Washington. Ethereum’s buzz is coming from decentralized finance (DeFi).
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This week, total value locked (TVL) in DeFi climbed toward $4 billion, driven upward as holders of ether and other crypto assets sought liquidity rewards, paid for by holders of native tokens issued by DeFi lending networks. YFI, a novel token issued by Yearn.Finance, an aggregator of DeFi deposits (as explained here), was a standout. It took DeFi’s blue-chip stablecoin, dai on a dizzying ride to new heights of issuance and back again.
This example of circular enthusiasm is not alone: Compound Labs‘ COMP token and the inflationary token AMPL both use similar mechanisms. The enthusiasm for these lending-related DeFi networks was not dampened by Tuesday’s news that OnDeck (ONDK) would sell to another fintech lender for $90 million. OnDeck went public in 2014 at a valuation of $1.3 billion.
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I still don’t know what the DeFi platforms could be doing right that so many lending fintechs have done wrong.
Ethereum’s core value proposition, meanwhile, is taking on a shade of irony. DeFi is interesting, but Ethereum transactions and fees – metrics you might call ether’s fundamentals – are pushed skyward right now by tether (USDT), a stablecoin with a centrally maintained dollar peg. It crossed $11 billion in issuance on Wednesday.
DeFi’s recent performance is indeed impressive, but so far it’s been outstripped by centralized projects.
Tether demand is also prodded upward by a circular trade. As derivatives data shop Skew pointed out, basis, or the difference between cash price and futures price, on one of the world’s most liquid bitcoin futures markets hit 20% this week. With tether borrowing rates on Nexo somewhere between 6% and 10%, borrowing tether to fund a bitcoin cash-and-carry trade is a nice way to make a low-risk return.
One thing that centralized service providers like iFinex, the issuer of tether, are doing right, it seems, is fueling speculative markets. So far, the most valued applications in crypto are centralized offshore exchanges like Binance or BitMEX. Like iFinex, their operators have developed innovative market structures that have removed barriers of wealth and geography that limited access to high-volatility, high-risk investing, much like Robinhood has putatively done in the U.S.
In that way, the “Robinhood Effect” may represent a threat to crypto from stocks, which also seem to now trade unencumbered by fundamentals, via onramps that broaden access. (Jill Carlson with NLW on CoinDesk’s Breakdown podcast earlier this month is a must-listen on this topic.) Kodak (KDK), which licensed its name to an ICO in 2018, is this week’s poster child.
That may help explain why FTX, another innovative provider of access to sophisticated and volatile financial instruments, has announced Serum, a decentralized exchange (DEX) for crypto derivatives. On the surface, it doesn’t make much sense. Binance’s DEX is the most successful so far, but its flagship, centrally controlled exchange outstrips it in both scale and rate of growth.
Maybe FTX’s DEX will outstrip its larger rival. Maybe it won’t, and it’s just good marketing to have a DEX. But if stock markets more and more resemble crypto markets in their memetic volatility, these DEXs may prove strategically important.
For now, crypto is the frontier. In the future, traders may look even further out. Bitcoin offers access to money, anywhere, unburdened by government interference or inflation. A DEX offers the same for trading and speculation.
Today, it’s hard to find a decentralized product that doesn’t have a more successful, centrally controlled cousin. In the future, under a different geopolitical reality, amid a widening universe of crypto assets and synthetic derivatives? Maybe DEX-building isn’t a defensive move to protect existing crypto markets from regulators, but an offensive move to prepare for even wilder and less-regulated markets in the future.
Hat tips: Nick Gauthier at Nomics for data; Sarit Markovich at Kellogg School of Management for starting my wheels turning on decentralization’s value impact; Emmanuel Goh at Skew and Michael Moro at Genesis Trading for helping me grok the cash-and-carry trade; Mengxi Lu for hearkening back to the heady fintech days of 2014.
Anyone know what's going on yet?
I don’t know about you, but I am getting 2017 feels all over. Kodak is in the news and $TEND, a meme coin based on poultry and deflation, reached $8.8 million in volume in 24 hours, as I was drafting this column. Is this the future? Should I move funds to Uniswap, like this guy on Twitter says he’s doing?
Tuesday, 17 November 2020