Welcome to the first issue of Crypto Digest. This is the evolution of Raúl’s Crypto News. After some months of silence (ok, yeah…a few dozen months), I’ve decided we should get back to writing. With more and more people becoming involved in crypto, it feels like the right moment to invest time in helping everyone understand and feel welcome in the ecosystem. We’re very happy to have you here.
In each issue you will find one main topic -something we feel is worth explaining in depth- and “six angles”: crypto is a complex matter with many ramifications -social, political, technological… We stop by six other events or concepts to cover the many angles from which you can approach it.
In this issue
Coinbase: “the Google of crypto”
Six Angles
1. Geopolitics | Xinjiang’ blackout
2. Art | Celebrities & NFTs
3. Politics | Digital Euro
4. Startups | FTX
5. Sustainability | Bitcoin’s energy consumption
6. Concept of the week | AMM
Coinbase: "the Google of crypto"
Coinbase's IPO is probably one of the year's highlights, and it could be a historical moment for years to come. The company has been called "the Google of cryptoeconomy". We've heard before expressions like "the Airbnb of camping" or "the Uber of private jets". When they happen, people mean there are features in common. But being "the Google of" something brings a plethora of connotations.
Coinbase has been the friendliest, most convenient entryway to crypto since 2012. For those who state that blockchain and cryptoeconomics are the next step in the evolution of the internet, the comparison fits. What the internet did to information -democratize it, flip it, speed it up...-, crypto has the potential to do with money. Google was our guide then, Coinbase opens our door now.
Coinbase, over the years, went from offering a very minimal, very welcoming UX for mainstream users to building a full suite for crypto, with solutions in DeFi, e-commerce, custody, institutional investment, etc. Financially there seem to be parallelisms too in the time of the IPO. And if you need any more coincidences, Coinbase has also had its share of public scrutiny and outrage for political reasons.
But why is Coinbase's listing big such a big deal for crypto?
Ever since big names such as Tesla, Square, or Microstrategy very openly entered the space, crypto gained legitimacy. BTC was no longer just for pirates, outlaws, and anarchists. Investors with suits and ties would no longer risk their credibility if they publicly support it. And this is probably one of the reasons for the current bull run.
Coinbase's IPO breaks another important barrier. This time it is a crypto native company that walks to the other side of the road. Traditional investors now have the opportunity to put their bets on crypto without leaving their comfort zones. For better or worse, Coinbase's evolution is strongly linked to Bitcoin's and crypto economy in general. For those investors who decide to purchase Coinbase stock, there is a new incentive to root for the crypto economy. And if the trend continues, investors will start looking for the next Coinbase.
It's not the best time for maximalists. Coinbase's IPO is likely to be the first step in an increasing understanding between traditional finance and crypto revolutionaries. Coinbase's CEO claimed that they expect their business model to gradually move away from transaction fees (currently accounting for 96% of its revenue) and increase their earnings through services such as credit cards, loans...In other words, by becoming a de facto bank.
But there are a few ways in which Coinbase's IPO will probably boost the crypto startup ecosystem. First, it is likely to become a vote of confidence from many traditional investors to other companies that won't need to fight as hard for legitimacy. Investing in crypto is no longer that crazy a move, and this will benefit crypto-related companies looking for funding or even thinking about an IPO (if we have to guess the next, we’d say DCG).
Secondly, the listing method Coinbase chose has poured money from institutional investors directly into the hands of early crypto investors and Coinbase founders and employees. A direct listing is a more open and democratic method. Shares are not created. Instead, current shareholders (investors and employees) sell them to whoever wants to invest. A direct listing makes the price more volatile and the process cheaper for Coinbase because it does not need intermediaries. It gives every individual the same opportunity to invest and is "more true to the ethos of crypto", in the words of Coinbase CEO Brian Armstrong. As the money from investors ends up in the hands of true crypto believers, we could expect a lot of that money circling back into the sphere and speeding up the maturing process.
⬡ 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. Geopolitics | Xinjiang Blackout
A flooded coal mine in the Chinese region of Xinjiang led to an unexpected peek under the hood of Bitcoin mining. After the Chinese government closed the facility for a safety check, the subsequent power outage in the region brought an estimated 20-25% decrease in hashrate from April 15-16th.
Hashrate is the computing power that secures Bitcoin transactions on the blockchain. Machines worldwide are constantly competing to certify these transactions, earning newly minted bitcoins in the process, in a protocol that is core for decentralizing the system. Any computer in the world can, in theory, become a bitcoin miner, which allows bitcoin to survive without a central authority.
China has always been a primary power in mining due to miners there having easy access to cheap hardware and energy. And the indirect power this gives to the Chinese government is a looming threat to the independence of the ecosystem. This incident again shows China’s dominance in mining. But Bitcoin wasn’t really affected: the protocol is designed to be resilient to these situations, so after this hashrate decrease, blocks were easier to write, and no user or transaction was affected.
2. Art | Celebrities & NFTs
NFTs... we tried to avoid talking about them, but it’s impossible.
NFT stands for Non-Fungible Token. The crypto community came up with yet another weird acronym that tried to simplify an underlining technological concept... that’s not too hard to understand anyway.
Behind NFTs, there's ERC-721: the Ethereum standard that allows the creation of unique tokens on the Ethereum blockchain. That's what the "fungible" is about: dollars are fungible from the moment the dollar note in my pocket has the same value in the market as the dollar note in Lebron James' pocket. But when objects are non-fungible, such as collectibles or works of art, they cannot simply be traded for an equivalent one. ERC-721 tokens brought another dimension to the blockchain: the possibility of creating unique digital assets. And the world went crazy.
NFTs have triggered some fascinating, innovative routes in areas such as art and gaming, where there seems to be a perfect fit for the technology. But it has also sparked some weird endorsements that remind us of less flattering times in crypto, such as the ICO bubble in 2017-2018.
NFT's are like a teenager: annoying, all over the place, and looking for an identity. And they say "you don't understand me" a lot. And it's true. NFTs need to settle down: are they an investment, or are they an expenditure? Are they meant to be kept and cherished, or traded? Many people will buy NFTs as investments only to realize that the future won't bring any buyers. But some others will manage to keep relevant over time and grow in value (and even outperform well-established cryptocurrencies). Our candidates: collectibles like CryptoPunks, EulerBeats, or Autoglyphs, or gaming-related assets like Axie Infinity’s lands or Sorare’s rarest trading cards.
3. Politics | Digital Euro
Christine Lagarde recently spoke to Reuters about the advancements in the development of a European Digital Euro after the European Central Bank published the results of the public consultation conducted between October 2020 and January 2021. Apparently, concern number one expressed by the respondents, according to Lagarde, was the rather confusing statement: "We want our privacy to be protected, but we don't want anonymity".
Although the rise of cryptocurrencies inspired central Bank Digital Currencies (CBDCs), this hypothetical digital euro (or dollar or yuan for that matter) will never be a one, just like your PayPal balance or the account balance in your bank's app aren't either. In fact, in many ways, CBDCs are a reaction against the threat of potential loss of power posed by cryptocurrencies and related projects such as Facebook's Diem (formerly known as Libra).
Cryptocurrencies are decentralized by definition. In contrast, Central Banks are, by definition... central. We must remember this core difference because it is at the core of any discussion about what a cryptocurrency really is.
Digital euros can be confiscated. Crypto can't.
The valuation of digital euros can be manipulated. Crypto can't.
Crypto runs on a permissionless blockchain. Digital euro won't.
4 Startups | FTX
FTX is one of the most promising companies in the crypto sphere. It is a centralized exchange born from Alameda Research, a quant trading firm launched in 2017. FTX offers a vast amount of trading products, focusing on derivatives, such as futures and tokenized stocks. In just two years, it has become the #2 biggest derivatives exchange.
The company's CEO, Sam Bankman-Fried, is a 29-year-old vegan crypto-billionaire philanthropist who became Joe Biden's 2nd biggest donor in 2020 and whose hairstyle has its own follower base on Twitter. We told you. Crypto is something else.
Before Coinbase's IPO, Bankman-Fried published his opinion about the financial statement published by the company, with a surprising final informal disclosure of FTX's own financial situation. According to him, FTX could have 10 to 25% of Coinbase's earnings:
5 Environment | Bitcoin's energy consumption
Bitcoin's energy consumption, and all the cryptosphere's, in consequence, has been scrutinized since 2010. Proof of Work, the consensus mechanism behind Bitcoin’s blockchain, forces miners to spend vast amounts of computing power to participate, which means thousands of computers buzzing 24/7 in remote oversized farms.
In crypto's defense, we must say that miners are heavily incentivized to save energy. The transparency and accountability of blockchain technology is probably the main cause of criticism: people can estimate the energy consumption of the bitcoin blockchain, but they rarely ask how many computers are uselessly turned on in the hundreds of thousands of bank offices worldwide running minesweepers. The chart below is a little taste of revenge.
Crypto, by the way, is working hard to reduce its carbon footprint with drastic changes in its protocols. Bitcoin miners are increasingly using green energy, and Ethereum’s Proof of Stake is coming.
6. Word of the week | AMM
Automated Market Makers are a key concept in DeFi: an AMM is a decentralized exchange protocol that allows settling transactions autonomously, without relying on an order book. Here's how it works:
Any transaction requires that two parties (a buyer and a seller) agree on a price. Traditionally, brokers facilitate this, managing an order book that contains both sides’ offers. However, in an AMM price is defined by a mathematical formula called bonding curve, which determines a price depending on that asset’s liquidity relating to another asset. And that price changes every time someone trades because liquidity changes too. Complex, we know, let’s try an example:
In our AMM, we only trade two assets: dollars and bitcoins. Initially, there are $100 and 100 BTC, so 1 BTC = $1.
A trader arrives and buys 10 BTC at $1, leaving 90 BTC at our AMM and $110.
Now the price is higher: our AMM has fewer BTC.
AMMs push decentralization even one step further. They are central in DeFi, and a leap forward in the automation of financial relations. AMMs and liquidity pools are two of the main cogs in the DeFi clockwork. Two simple inventions that embody the spirit of decentralization that fuels the crypto economy and that are likely to rock the traditional finance world.
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