#4 El Salvador, saviors, security and yes...Elon again
The debate whether bitcoin is a currency, a store of value, a financial asset of a mythological creature is now over, at least in one place in Central America
El Salvador has recently decided to adopt bitcoin as legal tender, alongside the USD. A historical moment in crypto that, nevertheless, had little impact in the price curve.
Elon, on the other hand, proved his superpowers again. A tweet just hinting at the possibility that Tesla could eventually accept bitcoin again, as it did for a few short weeks, did pump up the price.
No one should hold that much power.
But if someone had to, crypto fans would probably prefer it was Jack Dorsey. The founder of Twitter has proved his allegiance to the project, and is putting his money where his mouth is.
In this issue of Carbono Insights you will also read about some usual suspects - NFTs, energy consumption, legislation - but also about MEVs, or how some robots are programmed to take advantage of privileged information to make a profit in a questionnable manner.
We hope you enjoy.
El Salvador becomes the first country to adopt Bitcoin as legal currency.
So this is now something that has happened: a country has accepted bitcoin as legal tender within its borders. El Salvador, a small country in Central America, recently passed a law with the support of 62 of 84 Congress members. Something that Salvadoran president Nayib Bukele called “a supermajority.” El Salvador is now the first country in the world that will accept official payments in bitcoin, and it forces businesses to accept it as legal tender. The law also says that the government will not apply capital gain taxes to bitcoin. The debate over whether bitcoin is money or not is now closed, at least in one small country in Central America. One small step for man, one giant leap for bitcoin-kind.
Some facts about El Salvador make it look like an appropriate subject for such an experiment.
El Salvador is the smallest country in Central America, with 6,4M people and an extra 1,5M Salvadorans (around 20%) living abroad. The money sent from emigrated Salvadorans amounted to 20% of El Salvador’s GDP in 2020. Bitcoin is expected to help streamline and optimize the money that emigrants bring to the local economy.
Bitcoin has also been pitched as a way to bank the unbanked. Data says almost 70% of the population does not have a bank account. That 70% might now have access to a whole banking infrastructure that requires hardly anything more than an internet connection.
It is also one of the few dozen countries without its own currency. In 2001 they dumped their local “colón” to adopt the US dollar as their official currency. Back then, it was a measure to counter inflation. But after the US Federal Reserve's extraordinary measures against the pandemic, now it is the USD bringing inflation to the country. The financial measures pumped money into the American economy, its homes, stock market, and financial institutions, but Salvadorans were left with inflation. Bticoin’s finite supply has always been pointed to as a key factor in countering that inflation.
Detractors have also been quick to respond. The volatility of the asset seems less appropriate for the Salvadoran government purposes than other available solutions. And in a country with just 34% of Internet users, it seems like the unbanked might remain the same for the moment. The IMF has also announced concern, although in a very unspecific wording.
“Adoption of Bitcoin as legal tender raises a number of macroeconomic, financial and legal issues that require very careful analysis so we are following developments closely and will continue our consultation with authorities,” Gerry Rice, IMF
Many others have pointed at the figure of Bukele as an unreliable source of legitimacy. Some of his past actions have illustrated the president as a populist (to say the least) with a tendency to draw guns.
Bukele is certainly going all-in on this initiative, at least in terms of communication. His Twitter timeline looks like a fanboy’s.
Bitcoin’s price did not seem to react at all to this news. El Salvador has a weak economy with foreign exchange reserves that are smaller than some big crypto hedge funds. But the approval of bitcoin as a currency has a very relevant symbolic value in a market that, as we have seen, is as connected to the ups and downs of abstractions like legitimacy and psychology as much as it is to dollars.
Following Salvadoran news, some other Latin American countries expressed their growing interest in exploring the space. Countries like Argentina or Colombia are already very involved in crypto-assets. Or rather, their population is. These are places whose citizens are exposed to the consequences of monetary policy and evolution in a very down-to-earth way. Inflation has a daily effect on their pockets, and some of the benefits of bitcoin and other crypto-assets can be felt in the streets. Some of their governments willing to watch what a confrontation with traditional financial institutions looks like.
El Salvador will probably not be the last country to accept bitcoin. Around the world, the position towards cryptocurrencies is changing, although in varied directions. India seems to be looking into one of the most relevant financial consequences of considering bitcoin a currency: the relationship of bitcoin with taxation is determined by its definition, and currencies are not subject to capital gain taxes, as they are in most countries that have attempted to regulate the space. Coming from a country that has considered banning cryptocurrencies, this seems like great progress. Other countries, on the other hand, including European nations individually or the European Union as a whole, China or the US, are looking into creating their own digital currency instead.
The Salvadoran bitcoin law might not sound like a big deal to big financial markets, but crypto has been living off small wins since 2010. If the latest small wins are, as they seem, small first steps in the direction of considering it a legal currency, valid for government payments, crypto is steadily continuing its way into global disruption.
⬡ Six Angles
We select six topics to illustrate the very different angles crypto can be approached from. We could choose dozens, but six is the atomic number of carbon… and otherwise we'd be writing for ages.
1. New heroes | Jack Dorsey
After Elon’s heartbreak, crypto has found another candidate to become its celebrity superhero. He was always there, always faithful, and has recently proved, once again, his love and commitment. We are talking about Jack Dorsey. Dorsey is the founder of Twitter and Square. One startup that disrupted communications with its short, social, real-time messaging revolution; and a second one that brought credit card payments closer to the streets.
Dorsey has been a public advocate for a very long. His allegiance is not new, but his figure has risen in a time of uncertainty with some grandiloquent words that inject well-needed confidence.
"Bitcoin changes absolutely everything," the Twitter and Square CEO said at the Bitcoin 2021 Conference. "I don't think there is anything more important in my lifetime to work on." Twitter CEO Jack Dorsey signalled his enthusiasm for bitcoin again, saying it is the most important thing to work on in his lifetime.
Dorsey also had two big announcements to make that have made him the hero of the week. For one of them, he turned to his own platform to make the announcement.
According to his tweet, Square would be working in a hardware wallet whose most relevant feature is the sharing philosophy imbued in the project from day 1.
And, in other news, he announced that Square would also collaborate with Blockstream, a digital asset infrastructure, in building a “green” bitcoin mining facility. Dorsey has put his money where his tweets are, and Square will invest $5M in this initiative.
This is not the first time Jack Dorsey takes out the checkbook. Square famously bought $50M in bitcoin in October 2020 and then added another $170M in February 2021. Square´s CFO claimed then that the company believes bitcoin can become the native currency of the internet.
2. Art | NFT Bubble?
Some say NFTs are slowly entering the mausoleum of doomed crypto acronyms, right beside the DAO and ICOs. In recent days we have seen some red flags pointing at the possibility that the 15 minutes of fame might be out for Non-Fungible Tokens.
A recent report by Protos, a media outlet specializing in crypto, highlighted a few data points that might signal a sudden, maybe fatal, decline in NFT markets.
NFTs peaked on May 3, when $102 million worth were sold in a single day. The crypto-collectibles market made up $100 million of those sales.
But according to data analyzed by Protos, just $19.4 million in NFT sales were processed in the past week.
Armed with half a dozen charts, Protos compares the peak in NFT activity with last week´s (the article was published on June 2nd), showing a sudden decrease in activity.
But Coinbase contested the information in a very balanced response in their blog.
According to the Block’s Data Dashboard, weekly users of Ethereum-based NFT platforms reached all-time highs just last week. So what’s the real story?
It’s possible that both are true
The number of people interacting with NFTs “could be rising,” according to Coinbase. There is certainly not a shortage of projects from industries such as art, music, or sports. There are sectors where collectionism will never decay and where there is a cultural fit with NFTs. And just 8 days after the article by Protos, a blue-faced, masked Cryptopunk was sold in Sotheby’s for over $11M. Maybe it’s not NFTs decaying, but the hype around them.
3. Legislation | DeFi 101 by the World Economic Forum
The World Economic Forum recently published a white paper titled “Decentralized Finance (DeFi) Policy-Maker Toolkit”; an approach to a definition of DeFi, its core features and elements, the current risks they pose to users and society, and a suggestion on how policymakers can approach legislating the space. The document is a follow-up to "DeFi Beyond the Hype The Emerging World of Decentralized Finance. “
It was produced in collaboration with the Wharton Blockchain and Digital Asset Project. Among the extensive list of content contributors and content reviewers, there are key figures from players such as Consensys, Aave, Compound, to name just three.
The toolkit is clearly a sign of the times. The WEF shows the utmost respect for DeFi as a force for innovation and approaches regulation suggestions with moderation and nuance. There are still many relevant public figures making uninformed claims.
The World Economic Forum points at five main areas of risk where legislators should set their eyes.
Financial risks, or the risks of asset depletion for natural causes, malpractices, or maliciousness.
Technical risks because code can be buggy.
Operational risks, because humans can be even more buggy
Legal compliance risks to prevent crime, fraud, or abuse.
Emergent risks, when the interconnected nature of DeFi causes chain reactions where a huge general malfunction affects many initiatives.
Common goals for financial regulation include: protection of investors and other consumers; market efficiency and integrity; capital formation; financial inclusion; prevention of illicit activity; safety and soundness; and financial stability
Many of these issues are also problems high up in the agenda of crypto entrepreneurs. This convergence between the intentions of groups of people who have been foreign to each other is a powerful sign of the maturity of the space.
4. Security | Be like Bobby Ong
Bobby Ong, COO, and Co-Founder of Coingecko, recently published a very extense thread on security measures that need to be considered when entering the crypto space. His tweets are an opportunity to remind everybody of one of the foundational aspects of crypto. Decentralization is the secret sauce of cryptocurrencies. The absence of a central authority has facilitated high-speed financial creativity, but this comes with some caveats. Without a bank to cover for you, you are in charge of your own security. Do your homework.
Some of Bobby’s recommendation are cybersecurity best practices that can be applied to a safe everyday digital life, like sensible password management, two-factor authentication, and Chrome extension austerity, because they might be a gateway for evil, and you don’t want evil in your browser when you’re dealing with money.
Other recommendations are idiosyncratic to crypto:
consider using hardware wallets. Money is best kept outside of a computer where a lot of activity is happening.
Be careful with the privacy of your wallets. If you are operating in a p2p way, for example, transacting money from a personal wallet to another wallet, you are also revealing valuable information. Once your wallet is identified, people can trace your balance and activity.
Beware of scams. If something looks too good to be true, it probably is false. Be careful with amazing opportunities coming from cold emails, Google Ads, or Twitter accounts, especially if they come from celebrities. Impersonating EIon Musk in Twitter sometimes only takes changing the L in Elon for a capital i (like I did above) in a Twitter handle or an email address. To the careless, it might look like it’s Turboking of Tesla himself giving away his ETH.
Decentralization gives superpowers to finance. But with great power comes great responsibility. If you want to enter crypto safely, you´d better be ready to bring forth the right efforts.
5. Environment | Elizabeth Warren and Elon, again
Bitcoin’s energy consumption is back under the spotlight. Just one day after El Salvador announced their support for bitcoin, U.S. Senator Elizabeth Warren criticized bitcoin’s energy consumption in the Banking Senate Subcommittee.
“A single Bitcoin transaction uses more energy than a typical US household in a month. I think the estimate is 53 days.” Bitcoin.com
The replies didn’t wait. Many relevant figures in crypto highlighted the hypocrisy of pointing fingers at bitcoin while using social media, another great source of energy consumption, and coming from one of the people in the world who regularly consumes private jet flights.
A few days later, our favorite supervillain went back to Twitter to drop another surprising announcement. Elon Musk published a tweet with an informal compromise to let Tesla accept bitcoin again if the ecosystem proves advances in clean energy usage. The “announcement” led to an increase in bitcoin’s price that again proves the power of Elon and his companies to affect the market.
6. Blockchain | The questionnable MEV
Crypto chats have been buzzing with conversations about MEV (just when you thought there were no more possible acronyms in the universe). MEV stands for either Miner Extractable Value or Maximum Extractable Value. We will explain the difference in a moment. And it is defined as the value some actors of the crypto space can obtain by benefitting from a privileged position in the blockchain processing sequence.
To put it more superficial but easier to understand, it is the money miners make by playing with the order of transactions in the block validation process. Something many thinks is in a moral grey area, to say the least.
The mempool is the queue where valid transactions wait for miners to compose a block with them and start the validation process. Usually, it´s the fees that determine the order in which transactions are allowed in. But miners have realized that occasionally there is money to be made if you know how to play your cards wisely. Bots identify transactions where they can manufacture opportunities for arbitrage by creating and reordering transactions in their block.
The most common form of MEV seen today is third-party bots performing arbitrage between two or more decentralized exchanges (DEXs). An arbitrage opportunity is created when the price of a crypto asset on one exchange deviates from another, typically caused by a large trade on one of the exchanges. Arbitrage bots profit from this opportunity by purchasing an asset on the exchange offering a lower price and selling it on the exchange offering a higher price, bringing both exchange prices back to an equilibrium while earning a profit . Chainlink
MEV can take many forms, some with fancy names such as “sandwiching” or “uncle bandit.” But in the end, it is a malpractice that messes with the theoretical incentive to order blocks by fees or gas price, artificially alters the unwritten rule that determines how to order transaction, and creates a negative situation for regular users who are either scammed or affected by increases in fees.
MEV used to stand for Miner Extractable Value because it described what miners could do with privileged information. But many are trying to change the M to Minimum, just because it´s no longer only miners playing a little dirty. Anyone with access to the Mempool can do it, and many people are. Some groups in the crypto-space are looking into ways of curbing this practice. Flashbots, a community of developers, leads the way by shedding light on the issue and making it transparent to the community.
If there is any topic you want us to adress, write us at team@carbono.com, or reach out to @carbono_com, @raulmarcosl or @mrubio on Twitter.