Weekly Insights #31
May 17: Crypto market prices increased drastically in the past week and experienced a big decline only this morning. The origin of this recent dip is being attributed to the Bitstamp exchange, which experienced odd trading activity and had all of their USD/crypto markets crash nearly 20% in minutes, causing a $250M long squeeze on BTC alone. Other news includes a new Gemini partnership with Flexa, a global cryptocurrency payments network, and some of the biggest companies—including Microsoft and Amazon—developing tools on the Bitcoin and Ethereum blockchains.
NOTEWORTHY NEWS
Flexa and Gemini Partner to Make it Easy to Use Cryptocurrency —May 13, Tyler Winklevoss
Gemini announced a partnership with Flexa, a global cryptocurrency payments network that enables major retailers to accept cryptocurrency payments in stores. Consumers can now easily spend their Gemini dollars (GUSD), bitcoin, ether, and bitcoin cash using the SPEDN mobile wallet app. In addition, all cryptocurrency deposited on the SPEDN mobile app is custodied with Gemini, providing security for those using this new payment technology.
Microsoft Launches Decentralized Identity Tool on Bitcoin Blockchain—May 13, The Coindesk
Microsoft is launching a decentralized identity (DID) solution called Ion on the Bitcoin public blockchain. The solution’s usability is similar to the “log in with Facebook or Google account” feature on external services, except that the user owns and fully controls the data. While the solution is currently on the testnet, it will shift to the mainnet later this year. According to the whitepaper, the public blockchain (what they call a decentralized system) is solely used for anchoring identifiers and authentication for the DID owner without risk of censorship, while the data is kept off-chain.
OUR OPINION: While the whitepaper never mentions Bitcoin, it mentions participation in the development of standards and technology that support a variety of blockchains and ledgers, and Bitcoin makes the most sense. They use a public blockchain for timestamping and authentication, and Bitcoin is the safest network with by far the largest amount of hash power. Large IT companies are starting to understand the advantages of public decentralized blockchains.
Ethereum is The Platform of Choice for JP Morgan, Amazon, Microsoft—May 16, Yahoo Financ
Among the 50 largest companies integrating blockchain technology into their operations, 32 are working with Ethereum. JP Morgan is building Quorum, the permissioned blockchain based on Ethereum for international settlement and clearing for institutional clients. They have tokenized USD, and 220 banks are already included in the Interbank Information Network hosted on Quorum. Amazon Web Services added Ethereum as an option for its Amazon Managed Blockchain, a service that helps companies launch their blockchain. Microsoft released a suite of tools that enables the development and deployment of Ethereum-based applications on the Azure Blockchain Service or on Ethereum.
THE WEEK AHEAD
Decentralized Stablecoin Dai Achieves Parity
MakerDAO, the decentralized organization that governs the system behind Dai, has voted to increase the stability fee several times in the past two months in order to lower the issued supply of Dai and increase its price towards parity with USD. While the last hike increased the stability fee by 3 percentile points to 19.5% annually and Dai achieved parity with USD, the community is now voting on whether to lower the fee.
The increase in the stability fee was much needed, as it signaled to all participants of the systems—CDP owners and Dai issuers, Dai holders, market makers, and MKR token holders—that Dai is in fact stable and that the community is prepared to hike the stability fee in the case of a Dai discount. The belief in a functioning system, either a fiat system or the current MakerDAO and Dai system, is very important for the expectations and actions of the participants of the system. While governance was successful, we believe that factors other than the stability fee played an important role in Dai retracing towards the peg.
Factor 1: Increasing demand for alternative stablecoins after Tether uncertainty
The first and probably most important factor that influences demand for Dai is the current uncertainty about Tether (USDT) and the Bitfinex exchange. Tether is the oldest and still the most dominant stablecoin in the industry by market capitalization, on-chain volume, and exchange trading volume. Several alternative stablecoins that operate on public blockchains exist today, some of them regulated, but they are all “fiat coins”—tokenized USD with a custodian—and they are mostly not permissionless. Dai is an exception, as it is not a 1:1 custody-based tokenized form of fiat, and it might be the first go-to alternative. Since the news about Tether started to circulate, the issued supply of alternative stablecoins has increased in general, but daily Dai on-chain volume increased by more than 300% since parity was achieved, and Dai is leading the on-chain volume metric while having one of the lowest issued supplies.
Source: Block Analitica
Factor 2: Increasing number of alternative secondary lending platforms and lack of direct competition to MakerDAO
The main purpose of opening a CDP and issuing Dai is creating a leveraged long position. This could be in ether, bitcoin, or even an ICO, but the issuer supports his new position or consumption with debt. This means that other money markets are competing, and while the price of the debt or the interest rate is not the only factor to consider, it is the most important one. Compound Finance, which is not a direct substitute for MakerDAO but rather a secondary P2P decentralized lending market on Ethereum that supports alternative collateral than ether, has a lower interest rate on Dai. This means a trader can use a token with an objectively higher market risk than ether for collateral and borrow Dai with a lower interest rate compared to the stability fee in MakerDAO.
At the same time, companies like Dharma are offering subsidies to lenders and borrowers in order to attract customers, and borrowing with them is cheaper. Some MakerDAO users seeking leveraged long exposure may have switched to cheaper alternatives, and some users who use MakerDAO for its decentralized nature or the size of their position (the total supply of Dai in Compound is 7.2M) do not have any real alternatives. In both cases, the stability fee is not necessarily so relevant, as alternative platforms will always have lower interest rates (except in the case of reaching the debt ceiling of Dai or a very low stability fee in single collateral Dai), as they are secondary markets, and since there is no direct alternative to MakerDAO for some CDP whales, it is the only option.
Factor 3: General price increase since the beginning of April
The last factor that played a role in Dai reaching the peg is general market dynamics. The crypto market has been experiencing a large price increase since the beginning of April, and some CDP owners may have taken profits. Some spot market traders may have bought into Dai to hedge their portfolios, which is supported by increased on-chain volume.
MARKET OVERVIEW & METRICS
Weekly Crypto Stats
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- Global network value reached $230.45B, with 19.8% weekly delta.
- Global crypto market turnover reached a new ATH and is currently $110.84B.
- Real 10 market turnover was $5.93B, 261.6% weekly delta.
- Bitcoin dominance is 56.3%, with -3.10% weekly delta, and beta of 0.84.
- Ethereum dominance is 10.18% with 4.9% weekly delta, and beta of 1.30.
- Bitcoin hashrate is 48.64B TH/s, with -2.7% weekly delta.
- Ethereum hashrate is 168.15K GH/s, with 9.5% weekly delta.
CHART OF THE WEEK
This content has been put together by Marko Štemberger and Tilen Držan. Feel free to contact us for any feedback or if you have questions.
Information provided above is not to be considered as an investment advice.
ANNOUNCEMENT
Block Analitica, the company behind Squared Capital, has just launched its digital asset metrics dashboard to the public. Though still in beta, if you are interested in a more in-depth analysis of blockchain fundamentals — everything that’s happening with stablecoins, development activity, exchange balances, and much more — we invite you to register for a free account.
Branko
Litecoin