🎙️ A Bankless Nation (Part 1)

https://bankless.substack.com/p/-a-bankless-nation-part-1

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🎙️ NEW PODCAST EPISODE

Listen to episode #17 | iTunes | Spotify | YouTube | RSS Feed


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Episode: #17 – A Bankless Nation (Part 1)
June 15, 2020

An alien visits earth. He sees our cities, our governments, our moral codes. He’s curious, “What’s are you trying to do here?” he asks the humans. 

The humans respond: “We’re trying to get coordinated”.

Coordination is how humanity rose above the animals. Built the pyramids. Put a man on the moon.

We’ve coordinated as hunter-gather societies in tribes. As agrarian societies in kingdoms. As industrial societies in nation states.

And now…as information societies in digital nations like Ethereum and Bitcoin. This. Changes. Everything. 

Covered:

  • Uh…why are we here? What’s the point?

  • A nation is more than a nation state!

  • The thing that makes humans special

  • Getting past Dunbar’s number

  • The rise & limits of nation states

  • The next evolution of the nation

  • How you become a citizen of Ethereum

Join us next Monday for a fresh episode!


Resources discussed:


Episode Actions:

  1. Read David’s “A Bankless Nation” piece from last week 

  2. Subscribe to Bankless newsletter so you don’t miss part 2!


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How DAI gets to $300B

https://bankless.substack.com/p/how-dai-gets-to-300b

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Dear Crypto Natives,

How does DAI get to $300B?

There’s a lot loaded in that question.

Every $1 in DAI must be backed by more than $1 in assets.

But should DAI remain mostly backed by trustless assets? Away from the grasp of third-parties and settled on Ethereum—maybe that’s the point of crypto.

Or should DAI open the door to trusted assets? Increasing resilience with non-correlated assets from traditional finance—maybe that’s how to onboard the world.

It’s clear Maker is going in the direction of the latter. But it’s also clear that someone (maybe Maker?) will reclaim the the former.

There’s a fork in the road for DeFi but we get to choose both paths.

Here’s the thing—until now there hasn’t been a good set of tokenized assets for Maker to consume. But a few projects are starting to change that.

Centrifuge is one that launched this week. They’re taking revenue streams from digital music and supply chain, tokenizing them, and adding them to DeFi. They see Maker as a global credit system for the world. They see DeFi as a force for traditional asset democratization—the future of FinTech—a new backend for global finance.

Banked assets using bankless protocols? We’ve written about this before.

This is the second path for DeFi.

Let’s explore.

– RSA


🙏Sponsor: Aave—earn high yields on deposits & borrow at the best possible rate!


WRITERS CORNER

Post by: Jason Jones, commercial lead at Centrifuge and huge Bankless fan

Decentralizing the global credit system

Contrary to public opinion, a securitization is one of the greatest inventions in modern financial history. A securitization requires the coordination of a large number of parties to package and sell pools of loans. When structured properly, it is an incredibly efficient way to distribute vast sums of capital to deserving recipients. It optimizes risk and reward for different types of investors and it provides efficient access to capital to large and small businesses on a global basis.

The securitization market is moving onto the blockchain with companies like Provenance, Cadence, and Centrifuge (my project) leading the way.

  • Provenance is taking the private chain approach by using a forked version of Hyperledger to coordinate with traditional financial players to complete large, rated securitizations while eliminating costly intermediaries.
  • Cadence is democratizing securitizations by offering smaller sized pools to retail accredited investors by issuing tokenized borrower payment dependent notes on Ethereum. (RSA note—great article on Cadence here)
  • Centrifuge is building a securitization Money Lego for the DeFi community starting with a MakerDAO adapter.

There are three macro factors that make the timing perfect to move the entire securitization market onto the blockchain.

Factor #1: The Blockchain Can Democratize Access

The current securitization market issues over $1 trillion a year globally but is only open to institutional investors. The average deal size is often around $750m-$1 billion and the buyers are typically pension funds, insurance companies, sovereign wealth funds, and credit funds. The deals are so large because it is structurally expensive, but by using the blockchain we can cut costs, reduce deal sizes, and widen the audience of Asset Originators and Investors. Provenance offers these same players the opportunity to use their lower cost infrastructure to complete similar transactions. Cadence is opening this market to smaller sized investors and asset originators. Tinlake is bridging this market to DeFi.

Factor #2: The Blockchain provides Transparency

For most regular folk, if they have ever heard about the securitization market it is because of its systematic meltdown in 2008 and the subsequent movie The Big Short, which did a great job of spotlighting how things got out of hand. The blockchain can help with data normalization and transparency, can help with information sharing and transaction privacy, can set systemic rules, and can align incentives of market participants.

Factor #3: Fintech Has Already Primed the Market 

P2P lending is a pre-cursor to decentralized lending. In 2013 Eaglewood created the first fintech securitization by pooling $53m in Lending Club loans. SoFi completed their first securitization in 2014 and since then has securitized over $20 billion in student loans. It took several years for the banks, auditors, administrators, trust companies, valuation firms, and credit rating agencies to accept marketplace lending as a legitimate channel for asset origination. There was a high level of doubt, mistrust, and unwillingness to accept change. But over the past few years fintech has become one of the leading drivers of growth and that stigma has almost completely faded. This market has been primed and is open to experimentation.

Maker Decentralizes the Buy Side of Global Credit

MakerDAO could be compared to a bank that offers:

  1. a decentralized line of credit,
  2. a DAO that must form a decentralized lending operation, and;
  3. a stablecoin that needs a diverse set of uncorrelated assets.

Let’s break that down.

Decentralized Line of Credit

When a borrower locks their token into a Maker Vault, Maker provides a revolving line of credit that includes a debt ceiling (credit line) and stability fee (interest rate). This is very similar to when a bank issues a borrower a credit card or warehouse line.

Decentralized Lending Operation

MakerDAO has an open call to Domain Teams to onboard into their system. I recently helped to make the case that Maker should focus on risk, marketing and compliance teams to scale the system globally. These teams will screen MIP6 collateral applications similar to how banks review loan applications. Maker can take some cues from the fintech community that has focused on UX and AI driven automated decisioning. The trick for MakerDAO will be how to get the approval process down to minutes or seconds from months. The right Domain Teams will know just what to do.

A Stablecoin of Uncorrelated Assets

The total market cap of the crypto ecosystem is about $250 billion and the correlation of the top 20 largest cryptoassets (ex-stablecoins) is highly correlated averaging around 0.57 (on a -1 to +1 scale), so let’s treat cryptoassets as one asset class. For concentration risk purposes, let’s say we don’t want more than 10% of any asset’s market cap locked into Maker Vaults and we don’t want any asset to represent more than 25% of the entire Collateral Asset universe.  That means that the total Dai circulation backed by cryptoassets could be $25 billion today. If the cryptomarket triples, then the total Dai circulation backed by cryptoassets could rise to $75 billion.

If crypto Dai is 25% of the entire Collateral Asset universe, then real world assets will make up the balance equal to $225 billion of Dai. Multi Collateral Dai makes this possible. Three large categories will be:

  • hard assets like gold and real estate,
  • currencies (most likely in the form of fiat-backed stablecoins), and
  • public and private credit securitizations.

Since these markets are all in the trillions, collectively, they can fill the $225 billion gap. At $300b in Dai circulation, Dai will be considered a legitimate emerging global currency.

Centrifuge Decentralizes the Sell Side of the Global Credit

Centrifuge sits on the sellside. Similar to how an investment bank facilitates a new issuance, Centrifuge helps asset originators to bridge their assets to DeFi. Asset originators can tokenize on the Centrifuge Chain, pool on Tinlake, and then borrow from MakerDAO and other DeFi protocols in the future.

One of our first deployments is with Paperchain, which is an Asset Originator that has submitted a collateral onboarding proposal with MakerDAO. Paperchain allows musicians to get paid faster for their streamed music. In this scenario, the Musician/Record Label is the Supplier and Spotify/Merlin is the Buyer.  Paperchain advances money to Supplier today and collects from Buyer in 60 days when the invoice payment is due. Here is a overview of the process:

Every month Paperchain will tokenize additional invoices on Centrifuge, add more collateral to their Maker Vault, and access more Dai to lend to musicians from their revolving line of credit.

It gets more interesting once we open the process to more than just the Asset Originator and Investor. As I mentioned upfront, a securitization requires the coordination of a large number of parties to package and sell pools of loans.  Centrifuge’s protocol is a system of coordination for all parties in a securitization to package and sell a pool of loans.

As you can see in the illustration below, Asset Originators can add Service Providers as collaborators to a document.  In this case the Asset Originator has added an Auditor, a Valuation Firm, a Ratings Agency, and the Buyer as collaborators.  All of the collaborators are connected through nodes in the Centrifuge P2P network.

Now, when the Asset Originator uses the Centrifuge Chain to mint their NFT, they have a document that is a verifiable, transferable, digital representation of the document.

Build Open Finance to Instill Trust

I would like to wrap up with a quick discussion about the concept of Trustlessness.  There are only a few things in this world that are actually trustless… gravity, taxes, a mother’s love for her baby. These things are beyond trust, they are facts. Everything else is on a spectrum. I love the idea of a “Purity” Dai backed only by trustless assets that are decentralized and settled on-chain. As a community I think we are trending in the right direction as we approach trustlessness. But the trustless Purity Dai market it too small to satisfy the needs of stablecoin market. We will run out of collateral assets, heighten the stability risk of Dai, and will limit the circulation of Dai. MakerDAO has made the right decision to focus on Global Dai.

So as we bridge real world assets into Defi, let’s continue to strive for trustlessness but let’s also focus on the higher goal, which is to grow Dai into a globally accepted digital currency that can be used by anyone, anywhere, anytime. We can build an open and transparent system on-chain even though real-world asset will still settle in local legal jurisdictions. And some day we will reach the point where code truly will become law and settlement can move on chain making us one step closer to a trustless asset.


Author bio

Jason Jones is commercial lead at Centrifuge & a huge Bankless fan. Check his full bio here.


Action steps

  • Recap—how can Maker can be used as a global credit system?
  • How much of DeFi’s growth will come from tokenized traditional assets?

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Aave

Aave is an open source and non-custodial protocol for money market creation. Originally launched with the Aave Market, it now supports Uniswap and TokenSet markets and enables users and developers to earn interest and leverage their assets. Aave also pioneered Flash Loans, an innovative DeFi building block for developers to build self-liquidations, collateral swaps, and more. Check it out here.


Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

How to use Gnosis to profit on stablecoins

https://bankless.substack.com/p/how-to-use-gnosis-to-profit-on-stablecoins

Another money protocol was born last month. A liquidity protocol called Gnosis.

Three reasons it’s worth learning about:

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Dear Crypto Natives,

Another money protocol was born last month. A liquidity protocol called Gnosis.

Three reasons it’s worth learning about:

  1. It’s on the trustless end of the spectrumhigh density—like a Uniswap
  2. It takes a new approach to liquidity—not AMM, not orderbook—batch auction!
  3. You can do cool stuff with it today

We’re going to focus on that last part in today’s tactic.

Specifically, how can we use this batch auction mechanism to profit on stablecoin mis-pricing—almost passively?

You’ll remember tactic #34 where we showed you how to do this with automated market makers like Balancer. Turns out we can do it with Gnosis too!

Cool right?

Let’s dive in!

-RSA


🙏Sponsor: Aave—earn high yields on deposits & borrow at the best possible rate!


TACTICS TUESDAY:

Tactic #39
How to use
Gnosis to profit on stablecoins

Stablecoins are low-volatility assets that approximately peg the US Dollar. However, in practice, stablecoins tend to deviate from the $1.00 price point. In today’s tactic we’re going to show you how to use the Gnosis protocol through the Mesa exchange front-end to exploit this spread and make a profit. In the the process you’ll learn about the Gnosis protocol—the most trustless Ethereum exchange mechanism since Uniswap.

  • Goal: Provide liquidity to Mesa DEX and slowly earn a spread
  • Skill: Beginner/Intermediate
  • Effort: 10-15 minutes
  • ROI: Variable

Note: the Mesa exchange is still in beta and the Gnosis protocol is new. Be aware of the risks!


Guest post by: Ingamar Ramirez is a freelance writer for Blockchain startups

This is a chart of stablecoins.

Each of the spots where the lines are over $1.00 were opportunities to sell stablecoins at a spread using the Gnosis protocol and earn profits. This tactic will show you how.

But first, what is Gnosis?

Gnosis—the Liquidity Maximization Protocol

The Gnosis Protocol enables trading platforms to execute “ring trades”, which can match three or more people trading multiple assets. Detailed in the image below, this allows their orders to be fulfilled simultaneously when they would not have been able to otherwise.

(Above) Image from Gnosis Developer Portal

Here’s the process:

  1. open orders are all laid out at the beginning of a five-minute batch auction
  2. an open competition for the most optimal settlement solutions is run by solvers to maximize trader welfare and provide single clearing prices
  3. after five minutes, orders are filled and settled on-chain by the time the next five-minute batch auction begins.

That’s it!

Mesa—a front-end for Gnosis

Mesa is the latest frontend built on the Gnosis Protocol and hosted by the DXdao.

While still in beta, it offers a market trading interface (reminiscent to Uniswap) with an additional feature:

Liquidity Orders 🔥

Liquidity Orders allow users to set a spread at which they are willing to sell their stablecoins for other stablecoins (i.e., 0.3% spread to always sell 100 DAI for 100.3 USDt, or buy 100 USDt for 99.7 DAI). This is predicated on the assumption that your stablecoin is always worth at least $1.00. A liquidity order costs a one-time gas fee but after it you can simply sit back and observe your order’s progress. 🏖️


⚠️ Ideal for large liquidity providers. Liquidity Orders on Mesa are typically ideal for large liquidity providers due to the initial gas fee. However, once this Liquidity Order is submitted, all transactions are gasless indefinitely until you decide to change or terminate your Liquidity Order.


How to submit a liquidity order on Mesa

Let’s submit a liquidity order on Mesa and try this out.

1. Go to Mesa

At the Mesa front page (mesadev.eth.link) you will see a place to trade your crypto on the left, as per usual for DEXes. After connecting your Metamask wallet, click “Balance” to see how funds are deposited into the platform.


2. Load funds

To load wallet funds into the exchange platform, click Enable, corresponding with the stablecoins you wish to deposit for your Liquidity Order.


⚠️ Note: After signing through Metamask, the Enable button will be replaced with a + and – symbol. “+’’ allows users to deposit, while “ – ” allows users to withdraw back to their wallets. You do not need to Enable a coin to withdraw it.


Depositing with Metamask will prompt another signature request, and after your approval you can move on to the next step by clicking the Liquidity tab.


3. Set Liquidity Order

Now you will see the “New Liquidity Order” page, where you can select which stablecoins you wish to include. The more you include, the more opportunities your Liquidity Order will have. Before continuing make sure you select the stablecoins you wish to add to this order.


⚠️ Note: the more tokens to be included in the liquidity order the higher the gas fee.


In the next section, you will be prompted to define the spread. This means inputting the profit you intend to make under the assumption that your stablecoin is worth $1.00. The higher the spread, the less likely the orders will fill. The lower the spread, the more likely orders will fill, but with less profit.

Some things to be aware of:

  • When you hit “Submit Transaction,” you may wish to lower gas fees to save on ETH. However, this may jeopardize order fulfillment, as there is only a 15-minute window for these transactions to be mined. It is recommended to either not lower, or raise the one-time gas fee for your Liquidity Order, so that miners can fulfill the transactions in time.
  • Once your Liquidity Order is submitted, there is no more work to be done. Transactions from here on are gas-free.


4. Sit back & wait

That’s it—your trading work is done.

You can check back periodically to see if profits are gained.

Today, the best way to know if profits are gained is to check the Balances tab and see if your balances have changed. In the future there will be alternate ways to check this.

You can also head back to the “Trade” to view the orders. These are combinations of the stablecoins you selected in the Liquidity tab. There is nothing you need to do here, as it is just for display. However, you can cancel any number of these orders if you so choose. (The Closed tab is for spot orders on the left, or closed Liquidity Order pairs.)

The Future

Gnosis is a liquidity money lego for batch auctions. It maximizes liquidity at low cost for certain types of trades. In four steps steps you were able to execute a liquidity order on Mesa using the Gnosis protocol to profit on stablecoin spread across a range of stablecoins.

No bank. No centralized exchange. Just you and your Ethereum wallet.


💰Want to go deeper and earn more? There’s an incentive program running for liquidity providers to earn GNO tokens as they trade on Mesa. More in Gnosis discord.


Author bio

Ingamar Ramirez is a freelance writer, copy editor, and marketing consultant for blockchain startups. He hosted two seasons of Top of the Block podcast and is currently focused on DAO-related content.


Action steps

  • Understand the basics of Gnosis—a batch auction money protocol
  • Use a Liquidity Order on Mesa to profit on stablecoins when they rise above $1

Go Bankless. $12 / mo. Includes archive accessInner Circle & Deals(pay w/ crypto)

Subscribe now


🙏Thanks to our sponsor

Aave

Aave is an open source and non-custodial protocol for money market creation. Originally launched with the Aave Market, it now supports Uniswap and TokenSet markets and enables users and developers to earn interest and leverage their assets. Aave also pioneered Flash Loans, an innovative DeFi building block for developers to build self-liquidations, collateral swaps, and more. Check it out here.


Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

Crypto-fiat: Mutualistic or Parasitic?

https://bankless.substack.com/p/crypto-fiat-mutualistic-or-parasitic

Level up your open finance game three times a week. Subscribe to the Bankless program below.

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Dear Crypto Natives,

$9b in stablecoins now….🚀

The question is: are they mutualistic or parasitic to their host networks?

Nic dives into the data, considers arguments, and explores in depth in today’s piece.

I love the way Nic thinks—the analogy of Ethereum as a monetary sovereign is one of my favorite ways of looking at the system and he provides phenomenal depth here.

And here’s what I realized after reading—there’s so much more to discuss!

What if stablecoins become 10x the marketcap of native crypto assets?

What’s the role of trustless economic bandwidth?

Do all these arguments apply to Bitcoin?

So I asked Nic to come on the Bankless podcast to go in-depth. Look for that episode in early June. In the meanwhile, you can tell us what followup questions this article raised for you in the comments section. We’ll hit them in the podcast.

– RSA


🙏Sponsor: Aave—earn high yields on deposits & borrow at the best possible rate! 


THURSDAY THOUGHT

Crypto-fiat: Mutualistic or Parasitic?

Post by: Nic Carter, Partner at Castle Island Ventures

Crypto-fiat has exploded in recent months. By this, I mean representations of either bank or system liabilities that circulate in tokenized IOU form on public blockchains. Or as most people know them, stablecoins. They’re quite popular these days:

Source: Coin Metrics

Generally speaking, these tokens target the return profile of sovereign-issued fiat currencies like the US dollar. They achieve this in a variety of ways. The simplest is treating the token as a bearer instrument which entitles the holder to claim an equivalent amount of electronic dollars held by the issuer. The issuer’s willingness to increase and decrease the supply in response to market forces, in conjunction with a willing set of arbitrageurs, ensures that the token generally trades at par.

The second approach involves using more volatile collateral, for instance the “native units” of public blockchains, to create crypto fiat. This is more complex and less efficient, in that more collateral is required to create one unit of crypto fiat, since it fluctuates relative to the peg. In practice parity is maintained through the combination of overcollateralization, programmatic risk management, and interest rates. The non-bank or crypto-endemic nature of the collateral is an obvious selling point. Lastly, you have a model in which a pool of capital providers assumes the role of an ersatz currency board, and is trusted to stump up funds to defend a peg in times of distress (and is rewarded with seigniorage in times of growth). (RSA note—this is DAI’s model)

The precise mechanics of crypto-fiat systems don’t particularly matter for the purpose of this article. Let’s assume that they work reasonably well and will continue to work in the future. The public blockchain that they circulate on doesn’t really matter either — these questions apply to any standard public blockchain where a native unit (BTC, Ether, etc) coexists with dollar-denominated tokens.

Recently, as crypto-fiat tokens have come to represent a larger portion of economic throughput on popular blockchains, questions have emerged as to their potential impact on the underlying systems. Some analysts refer to them as “parasitic” to the systems that they circulate on. The question is this: if crypto-fiat proves more attractive to transactors than the more volatile native unit, does this compromise the security of the system entirely? And what does it mean for the native currency unit?

To assess this question let’s briefly look at the usage characteristics of crypto-fiat. Just how big are they? And are they really displacing native cryptocurrencies?

Crypto-fiat transaction dynamics

Here I will limit the analysis to Ethereum, as it is the home of about 75 percent of outstanding tokenized dollars. Let’s start by looking at stocks.

Source: Coin Metrics

Today, crypto-fiat on Ethereum accounts for just over $7b, compared to Ether’s market cap of about $24b. A non-exhaustive sample of the largest non-stablecoin tokens on Ethereum adds up to about $10b. So Ethereum still has a “top heaviness” ratio (value of non-native tokens / value of native token) of less than 1. It’s occasionally claimed that non-native tokens exceeding the value of the native token would put a chain critically at risk; I see no reason to believe that this would be the case. However, if non-native tokens outpaced the native unit by a factor of say, 5, that might be cause for concern. I expect that top heaviness will be a long-term feature of virtually all token-bearing blockchains.

What of flows? Arguably more important is the actual economic throughput facilitated by these systems. Stablecoins still account for a relatively small (but growing) share of on-chain transactions. Transactions that result in transfers of Ether are still more popular, while other tokens have been marginalized.

Source: Coin Metrics

Arguably most important is the actual value being transacted on-chain. You can see that, despite accounting for fewer transactions, crypto-fiat has come to dominate the transactional throughput in dollar terms on Ethereum. Other ERC20 tokens are almost irrelevant. Note that there’s significant imprecision in this data, and I’m relying on the adjustments the Coin Metrics team makes to avoid self-spends, churn, and spammy behavior types.

Source: Coin Metrics

If you depict it in market share terms, you can see Tether eating into Ether’s territory. Even leaving Tether aside, other stablecoins like USDC, BUSD, and DAI account for a considerable amount of value transacted.

Source: Coin Metrics

The big spikes you see in ‘Other ERC20s’ mostly have to do with tokensales. The first big one is the Augur tokensale and that big cliff in mind-2018 is when EOS went to mainnet. Other spikes include activity relating to ZRX, Enigma, BNB, LEO, and Chainlink. However as tokensales became less popular, and lots of tokens that were merely using Ethereum as a pre-mainnet staging ground moved on to the next stage, the relative influence of ERC20s has declined, and crypto-fiat has rocketed to the fore.

By combining these charts you can infer that stablecoins are satisfying a large amount of transactional value with a relatively small monetary base. Computing a naive velocity figure (a measure of how many times a given unit ‘turns over’ in a year) confirms this.

Source: Coin Metrics

Stablecoins exhibit very high velocities when compared with native units: they are used transactionally much more than generic cryptocurrencies (Bitcoin has a similarly low velocity in the single digits). This isn’t altogether too surprising. We know that stablecoins have effectively taken over the inter-exchange settlement use case and are now treated in many parts of the world as non-bank dollar substitutes.

Lastly, it’s important to note that stablecoin transactions are quite different from Ether transactions. The latter tend to be much smaller, in the tens of dollars, whereas your typical stablecoin transaction settles thousands of dollars worth of value.

Source: Coin Metrics

The installed userbase of stablecoins is still relatively small. As of today only about 1.3m addresses across all the various stablecoins on Ethereum hold over $1 in their accounts; the equivalent figure for Ether is 12 million. So we have a smaller, but extremely engaged userbase of active transactors using stablecoins for large, frequent transactions, on a smaller monetary base. It’s worth caveating again that we can’t know for certain if these are crowding out Ether transactions or merely adding to them; but they all compete for the same blockspace, and ceteris paribus, the larger transaction should be willing to bear a higher fee.

Given that stablecoins have attained such popularity in a relatively short period, it’s not too far-fetched to imagine a world where the vast majority of transactions on Ethereum are dollar-denominated. The exchange risk for the duration of the transaction (or contract) appears to be so unpalatable as to compel transactors into using non-native assets. I don’t know whether the architects of Ethereum envisioned this possibility, but now that it appears possible it’s worth contemplating its implications.

So does the growth of crypto-fiat help or hurt the Ethereum system?

Ether-dollarization

There’s a simple feedback loop that powers cryptocurrency systems. Users find a certain type of blockspace desirable, so they acquire the native unit to transact. They also pay fees in those native units. That reservation demand (holding a native unit for a nonzero time period) is a source of buying pressure. The appreciation in the native unit in turn feeds back into security (and optionally, pools of capital like developer funds) as security is generally a function of issuance and unit price. As security and hence settlement assurances increase, the blockspace becomes more attractive. In a proof of stake world, this is simplified: security is presumed to be a function of market cap. If you can induce transactors to buy, hold, and use the native unit for long term contracts or settlement collateral, that demand should be manifested in price, making the system more secure.

Stablecoins puncture that somewhat. Not only do they potentially replace demand for the native unit as a settlement medium, they also force transactors to juggle multiple currencies—one for actual payments, the other for paying fees. Imagine sending a bank wire and being asked to honor the $10 wire fee in the form of shares of your bank’s stock. You would probably just prefer to pay the fee in dollars. (I should note that proposals exist to liquidate tokens to ETH in the background so users can transact without owning ETH.)

There are exceptions, though. Dai is collateralized by Ether on the backend, so even when employed as a transactional unit, it still manifests reservation demand for Ether. Dai has slightly compromised on this vision of liability-free collateral by introducing USDC, BAT, and Wrapped Bitcoin into the collateral mix, however. For now, the most prominent transactional medium (measured in dollar terms) on Ethereum is Tether, which is backed by dollars in a network of offshore banks. While the Dai approach is far more elegant in terms of maintaining the feedback loop of transactional demand ➡️ reservation demand ➡️ security ➡️ transactional demand, Dai accounts for a relatively small fraction of the stablecoin market. Even certain DeFi use cases that began as the exclusive purview of Dai have begun to be serviced by the more pedestrian, dollar-backed USDC. Dollar-backed stablecoins are simply cheaper to issue. While Ether-backed stablecoins promise a harmonious vision of stable transactional units while retaining the native unit as collateral, it appears that generic fiat-backed stablecoins have the upper hand for now.

Protocols as monetary sovereigns

I find it helpful to think about the problem in the context of nation-states managing their own currencies. They deal with very similar problems: how to enforce a local monopoly for their sovereign currency and ensure it holds its value. Sometimes these states fail in that task and suffer currency substitution on the part of their citizens; this is referred to as dollarization. You might say that, just as in Venezuela, the Kingdom of Ethereum is being threatened with dollarization right now. The question is whether Ethereum has the toolkit to resist this phenomenon or, at least, to de-fang it.

As the local sovereign authority, Ethereum (the protocol) endows Ether (the monetary unit) with certain privileges, the same way the US government gives the dollar privileges. Let’s briefly consider what gives the dollar its strength. It is a conjunction of both explicit privileges and emergent properties which result from systems the US guarantees and maintains.

The dollar’s explicit privileges include:

  • The fact that it’s the sole currency that the Treasury will accept for tax payments
  • Legal tender laws which define Federal Reserve notes effectively as a valid and legal medium in which to settle debts and pay for things
  • The creation by the US government of tax liabilities, forcing businesses and individuals to acquire or retain dollars to pay taxes (if they turn a profit / make sufficient income)
  • The dollar’s exemption from capital gains taxes owing to appreciation in the currency, unlike foreign currencies

There are also some emergent features which backstop the value of the dollar:

  • The US government will only accept dollars in exchange for Treasury bills, widely considered the safest form of government debt
  • Buying securities domiciled in the US like stocks or bonds requires dollars
  • More generally, the US is the effective guarantor of the post-WWII western system of international commerce, causing the dollar to be a settlement medium for trade, both within the US and internationally
  • The US maintains longstanding arrangements with countries like Saudi Arabia in which they agree to denominate the sale of oil in dollars, and in exchange receive protection and military assistance from the US
  • The dollar tends to be more reliable and stable than other currencies, so it is held as a means of preserving purchasing power, even outside the US

Contrary to popular belief, there’s nothing actually stopping Americans from using another currency as a transactional medium, except for the fact that it would be really inefficient, would entail exposure to frictions like capital gains taxes, and transactors would eventually have to acquire dollars for tax purposes anyway. Zeroing in on taxation as the sole driver of the dollar’s value (as many individuals do, when posed the question), is somewhat reductive. While the US does endow the dollar with certain explicit qualities, you could say what it really does is cultivate an environment where it’s generally a good idea to hold dollars. These factors combine to create a very strong reservation demand for the dollar, both within the US and abroad.

It’s also worth mentioning that some countries impose capital controls to prevent their currencies floating on the open market. Instead, they tune the demand side of the equation by effectively prohibiting their citizens from exiting the currency for another. It goes without saying that cryptocurrencies, lacking a government or military, do not have the means to enforce anything resembling capital controls. To the contrary, they are globalized, largely frictionless, and highly portable.

How does Ethereum stack up? It’s not a nation-state and lacks the ability to directly intervene in the economy the way a government might. Moreover it’s inextricably linked to the crypto markets and cannot prevent the free flow of capital. The rise of crypto-fiat can’t exactly be impeded through capital controls. Nevertheless, Ethereum can endow Ether with certain privileges. Borrowing from these common arguments for why Ether will hold value, let’s start with Ether’s explicit privileges:

  • Ether is the default unit for fee payments, and fees are mandatory in order to send a transaction
  • Ether payments are ‘discounted’ relative to tokens: sending ETH requires 21,000 gas whereas tokens require 40,000+ gas
  • A portion of fees paid in Ether will likely be burned (if EIP-1559 is accepted)

Ether’s emergent features are as follows:

  • Ether is collateral in contracts on Ethereum and a settlement medium for intra-protocol applications (like Maker etc.)
  • A significant fraction of Ether may be locked up when proof of stake emerges
  • Ether is the reserve currency for token issuance on the platform (like ICOs) and more generally, as a base currency (alongside Bitcoin) for the crypto market at large
  • Ether is an object of speculation; some people take a position just for the sake of it

To briefly address the less compelling arguments: ICOs appear passé and don’t seem to be returning anytime soon. While many altcoins trade against ETH, their dominant pairs are BTC and increasingly USDT. Speculation alone isn’t a sufficient source of reservation demand at equilibrium, and its presence doesn’t yield any useful analysis. And locking up coins through PoS doesn’t guarantee their appreciation—it is always possible that you have a low-velocity tranche of locked coins with transactors using the remaining non-locked Ether on a short term, as-needed basis. Consider that masternode coins like Dash weren’t spared price depreciation, even though a significant fraction of supply was inert in masternodes.

The most compelling arguments for Ether’s long term value, in my view, boil down to Ether as a necessary asset for fees, and Ethereum’s ability to keep Ether valuable is similar capacity to that of the US and the dollar. The task is to cultivate an environment where it’s generally a good idea to hold and use ETH. More specifically, Ether’s must avoid the joint foes of fee abstraction and settlement medium abstraction.

Fee abstraction

As far as fees are concerned, the Ethereum community seems firmly united against the idea of paying fees in anything other than Ether. It’s worth noting that there is no rule which actually states that a transactor must pay a miner in Ether in order to have their transaction included in a block. They could always make a payment out of band. That said, Ethereum’s protocol itself erects significant barriers to making non-ETH fee payments. Not only are Ethereans highly attuned to the threat of fee abstraction, but Ethereum’s more malleable social contract would likely accommodate a change to the protocol should fee abstraction develop. Already, it looks like EIP-1559, which makes significant alterations to fee logic on Ethereum, will be pushed through.

If you zoom out, insisting that fees be paid in Ether (and then burning them, effectively rewarding holders of Ether at the expense of validator revenue) looks to me like a straightforward form of rent extraction. Imagine an absurd scenario in which the protocol mandated that fees were a colossal 0.5 ETH per transaction. Either transactors would devise an out-of-band method to pay validators (which I would imagine is possible with some creativity, even if the protocol itself forbids it), or they would migrate to an alternative chain without this onerous tax.

While the architects of the Ethereum protocol are free to tinker with it to their pleasure, there’s always the risk that they make the chain unattractive to users. Both the effectively mandatory nature of the fee payment in Ether and then stripping of that fee from validators, and using it to reward holders instead, could discourage putative transactors from using Ethereum. An alternative chain which allowed transactors to pay fees in tokenized USD rather than forcing users to juggle multiple currencies could well use that wedge to seize market share.

Settlement medium abstraction

As with the dollar, there’s nothing which actually requires Ether to be used as the settlement medium on the Ethereum system. And this is really the system feature which is under threat. Fees appear likely to always be denominated in ETH, but fees represent a relatively small fraction of reservation demand, amounting to only 800 ETH per day at current rates. And ETH for fees can be procured on a high-velocity, just-in-time basis, minimizing their demand impact. Far more important is retaining Ether’s status as the dominant transactional medium on chain.

If crypto-fiat becomes firmly entrenched on chain, and marginalizes native units, the valuation of the native unit will suffer. Burns and staking affect the supply side of the equation—what matters is demand. However, Ethereans need not despair. While stablecoins are having their moment in the sun, and eclipsing Ether’s transactional volume for now, they are not perfect substitute goods. Fiat-backed stablecoins carry legal and regulatory baggage which could sting users at any moment. They are not liability free: they depend on an acquiescent set of banks and a benevolent issuer. Counterparty risk is always present. Some on-chain use cases will always require truly native, liability-free collateral.

Poisoned chalice?

The good news is that stablecoins seem to manifest fee pressure for Ethereum. While opinions vary, I am generally of the view that to be sustainable in the long term, as much validator compensation as possible should come in the form of fees (rather than issuance), and that a robust blockspace market is highly desirable. Fees are a form of revenue for the chain, and having revenue streams buys you significant optionality. If you look at just USDT transactions on Ethereum, you can see that periods of heavy load coincide with fee spikes.

Source: Coin Metrics

Note the big spike in Sep. 2019 which manifested in fee pressure with a lag, the trough in January as USDT transactions dropped, and fees creeping up in April as USDT picked up again. Of course there are other confounding variables, so a fuller analysis would be welcome, but copious demand for high-value transactions will always mean willing fee-payers, which is not a bad thing.

One commonly cited drawback of non-native assets on chain is their potential to introduce miner-extractable value (MEV). And if MEV opportunities from non-native tokens grow very large relative to the value of the underlying collateral securing the network, then perhaps an imbalance might develop that could be exploited. The common response is that non-native tokens are not protected solely by crypto-economic measures, but by extra-protocol legal and institutional constraints. For instance, since stablecoins can generally be frozen by their issuers, stealing USDT or USDC might just not be worth it. But then the question is: why bother settling these IOUs on chain, if settlement is in fact a function of the benevolence of the issuer? If these are just paper claims on a database ultimately maintained by a legal corporate entity, why bother with a cumbersome base-layer public blockchain at all, and not a more centralized sidechain?

Ultimately, it appears that some degree of settlement medium abstraction is currently occurring, for a straightforward economic reason—denominating medium and long-term contracts in volatile collateral is simply a sub-par experience. Ethereans should hope that either Ether-backed stablecoins become more prominent, or that custodial stablecoins suffer a series of trust failures, reminding users why liability-free native units are so powerful. The fee abstraction risk appears mitigated for now, but designers should be wary of alternatives. Excessive rent seeking and intermediation may push users towards competitors which welcome stable collateral and maintain a looser attitude to fees.


Action steps


Author Blub

Nic Carter is one of my favorite writers and thinkers in crypto. He cofounded Coinmetrics, an onchain data resource that we use regularlyin Bankless. He was also the first crypto analyst at Fidelity and is now a Partner at VC-firm Castle Island Ventures. His writing was vital to framing how I think about Bitcoin as a value settlement network.


📺Watch Bankless Live at Ethereal Today and Tomorrow

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Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

How to make money with Balancer

https://bankless.substack.com/p/how-to-make-money-with-balancer

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Dear Crypto Natives,

Balancer is what you’d get if Uniswap and Set had a baby.

It’s like Set because it can be used to bundle any group of assets into a single ERC20 token—say an index fund token composed of 50% ETH + 20% MKR + 30% DAI—and it auto-balances to always maintain the same proportion.

And it’s also like Uniswap because it’s an automated-market maker that can be used as as liquidity infrastructure for the entire DeFi economy

Today we’ll hit the basics: how to use it to trade, how to supply liquidity to get returns.

But we don’t stop there.

At the end of this tactic I’ve added a Bonus Tactic that actually shows you how to create your own Balancer index fund and liquidity pool. 🔥

Maximum level-ups today.

This is one of the coolest money legos I’ve seen.

-RSA


🙏Sponsor: Aave—earn high yields on deposits & borrow at the best possible rate! 


TACTICS TUESDAY:

Tactic #33: How to make money with Balancer

If you have some ETH or ERC20 tokens lying around you’ve probably already asked the question: how should I put these to work? With DeFi there are a multitude for you to earn money with your idle assets: from lending money to Compound (tactic #23), opening a Maker vault, to being a Uniswap liquidity provider (tactic #15).

Now there’s Balancer—a new option for providing liquidity. Balancer allows pools with different combinations of tokens (think token ETFs or index funds). With Balancer, any liquidity provider can customize their exposure while earning trading fees from the protocol.

  • Goal: Provide liquidity to a Balancer pool & earn fees (add-on: create your own pool!)

  • Skill: Beginner/Intermediate

  • Effort: 15 minutes (1h for the add-on of creating a Balancer pool yourself)

  • ROI: Variable. Usually ranging -5% to 20% APR. (See recent ROI here)


What is Balancer?

Guest post: Fernando, co-founder Balancer Labs & Nodar, co-founder DeFiZap

Balancer is an AMM protocol that allows anyone to provide liquidity to existing Balancer pools or create one themselves. Each Balancer pool is composed of 2 to 8 tokens. Each of the tokens makes up a percentage of the total pool value: these are the token weights that are chosen at the moment of pool creation. The mathematical properties of Balancer protocol ensure that the value percentage of each token in a pool will stick closely to the weight even as the market prices of the tokens themselves vary. 

A Balancer Pool is a self-balancing index fund

This means that each Balancer pool is a self-balancing index fund itself. But it gets better. In a conventional index fund the investor has to pay a fee for the rebalancing service, but in a Balancer pool the liquidity provider is actually rewarded for their service of providing liquidity to the protocol. They earn fees while their index funds are continuously rebalanced for them. 

Why Balancer is a magical money lego

Balancer pools can be one of two kinds:

  1. shared (i.e. finalized)

  2. private (i.e. controlled) 

Shared pools have fixed parameters (they cannot be changed even by the pool creator) so that anyone can add liquidity to them. This is necessary since the pool creator could indirectly steal money from other liquidity providers in their pool if they could, for example by adding a new token they control all the supply of.

Private pools are as flexible as it gets: tokens can be removed/added, weights can be changed and even the swap fee can be adjusted. However the only address that can provide liquidity to it is the pool creator. This is great for big index funds that manage funds of third parties for example.

But private pools get really interesting with smart pools.

Smart pools are private pools that are owned by smart contracts. These smart contracts can be used as a gateway for external users to add liquidity to pools under known conditions. Some great examples are:

  • PieDAO BTC++: the BTC++ pool is currently comprised of 4 different types of ERC-20 BTC synthetics. Through governance, PieDAO can change the weights of each of these types of tokenized BTC, add new types in the futures and even pause trading if one of the tokens has problems and loses its peg.

  • RealT index fund: instead of having fragmented liquidity in many Uniswap Pools, RealT tokenized properties can all live in the same Balancer pool, effectively creating a RealT index fund. By using a smart pool, RealT can keep the possibility of adding new properties in the future, as well as changing the weights of existing ones (say for example one of them is refurbished and doubles in market value).  

  • Bootstrapping liquidity pools: projects that are seeking to both make their native token liquid and also distribute tokens in a sale can use the concept of a smart pool that gradually flips the weights of its underlying tokens. This is an effective way of killing two birds with a stone: provide liquidity for your token at the same time as you exchange it for ETH or DAI to fund your project development.  

Pools in pools

All Balancer pools are themselves represented by ERC-20 tokens, allowing the composability feature of creating Balancer pools of Balancer pools. Many BTC++, which are Balancer Pool Tokens themselves, are pooled in another Balancer pool with ETH. So if you want to trade one of the flavors of BTC in BTC++ like wBTC, you can get BTC++ with ETH and then from BTC++ pool tokens you can withdraw pool liquidity with wBTC alone. 

As RealT grows, they could create pools with 8 properties located in the same city, and then create Balancer pools with these Balancer pool tokens for properties in a state, and so on.

Buying a Balancer index fund asset

Of course you don’t have to be a liquidity provider or pool creator to gain exposure to a Balancer index fund asset. If you want to get exposure to BTC++ for instance you can buy the BTC++ token from a secondary exchange or mint BTC++ in Balancer by providing the underlying tokens.

Many end-users of Balancer in the future will probably be the holders and traders of the thousands of Balancer index pool assets that will inevitably be created using the protocol.

How to use Balancer

Trading using Balancer

  1. Visit Balancer exchange and connect to your MetaMask Wallet or use WalletConnect.
    No signups. No kyc. We’re bankless, remember?

  1. Choose which token you would like to sell and which to buy from a dropdown list of available assets or by entering Token Name, Symbol, or Address.

  1. As you start entering your ‘Token to Sell’ amount, Balancer will filter through applicable pools containing your requested tokens and spread your order using the most efficient allocation to provide the best possible price.

It’s important to note that the bigger your swap amount, the more liquidity you are requesting from available pools ultimately resulting in higher and higher price paid for the asset your are buying—aka slippage. To control this, after finalizing your input amount you will notice a summary of your expected price slippage and there’s an option to set an additional limit.

  1. Click ‘Swap’ and Confirm the transaction on on your Metamask (or WalletConnect). Here’s an example of ETH to MKR swap.

    Tx hash: see here

Adding liquidity using Balancer

Note: You need to know the concept of impermanent losses from tactic #15—it applies here too

  1. Visit Balancer Pools and connect MetaMask Wallet or use WalletConnect. View available pools and choose which one you would like to add liquidity to. We will add liquidity to 75% WETH / 25% MKR Pool

  1. Click Add Liquidity and Unlock both MKR + WETH. What you are doing here is approving the Balancer pool contract to use your deposited MKR + WETH tokens. Each one of these approvals is a separate on-chain transaction but each one will only cost 45K in gas or $0.05 (assuming 6 gwei gas rates).

    MKR approval tx here.
    WETH approval tx here.

  2. Make sure you have appropriate proportions of underlying tokens required to enter your chosen Balancer pool. In our case we will be adding MKR tokens we received from our swap example (~0.0865 MKR). Since this pool is 75% MKR + 25% WETH we need to match our MKR tokens with ~0.0503 WETH tokens. Keep in mind, these are WETH tokens so if you have ETH, you will first need to wrap it into WETH. Again, this would be a separate transaction with gas cost ~45K.

Wrapping ETH in WETH tx here.

  1. Choose how much MKR+ETH Liquidity you would like to deposit and confirm the transaction on your Metamask.

Adding liquidity tx here.

Removing liquidity via Balancer

  1. Removing liquidity from Balancer Pools is extremely simple. Just visit your pool page, in our case it’s here.

  2. Click ‘Remove Liquidity’, choose how much you would like to withdraw as % of total, and confirm with your Metamask.

Remove Liquidity tx here.

Note: As you can see, in return you will receive both MKR + ETH in similar proportions + any earned swap fees.

⚠️Making this one-click. Zaps will soon be available to make tasks like supplying and withdrawing liquidity one-click. See tactic #25 for our how-to on Zaps and stay tuned to DeFiZap for more.


Bonus tactic:
How to Create your own Balancer pool

You’ve had a taste of Balancer but maybe you want to create your own Balancer index fund asset and liquidity pool. In today’s bonus tactic we show you how.

This bonus tactic is for the trailblazers. Is that you?

I want to do the Bonus Tactic!


Author blurbs

Fernando is the idealizer of Balancer Protocol, CEO and co-founder of Balancer Labs. Nodar is one of the founding team members of DeFiZap. He also makes DeFi Tutorials to highlight best use-cases & risks involved when using Open Finance tools.

Nodar Janashia is the co-founder of DeFiZap. He also makes DeFi Tutorials to highlight best use-cases & risks involved when using Open Finance tools.


Action steps

  • Trade using Balancer and add liquidity to a pool

  • If you’re advanced—do our bonus tactic and create your own Balancer pool


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🙏Thanks to our sponsor: Aave Protocol 

Aave protocol is a decentralized, open-source, and non-custodial money market protocol to earn interest on deposits and borrow assets. It also features access to Flash Loans, an innovative DeFi building block for developers to build self liquidations, collateral swaps, and more! Check it out here.


Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

🎙️ #4 – Ether: The Triple Point Asset

https://bankless.substack.com/p/-4-ether-the-triple-point-asset

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🎙️NEW PODCAST EPISODE

Listen to episode 4 | iTunes | Spotify | YouTube | RSS Feed

Episode: #4
March 23th, 2020

There are three asset “superclasses”
– Store of Value
– Capital Asset
– Commodity Asset

Join Ryan and David as they explore the boundaries between asset types, and discover where Ether lies in relation to these three classes. 

Additionally, Ryan and David compare and contrast the economic and financial institutions that make up the world we know, and how they relate to these three classifications. 

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4 things to expect in the corona era -Bankless

https://bankless.substack.com/p/bankless-covid-19-prep-plan

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Dear Crypto Natives,

Suddenly everything’s different. We’ve entered a new era.

And what’s worked in the past isn’t certain to work in the future.

The big banks are saying U.S. GDP will end the year at -1.5% with unemployment at 5.25%. That’s bad, but not terrible.

You think they’re right?

Conventional wisdom says stocks are a buying opportunity now.

You believe them?

How about these:

It’s just a flu?

What if their models are wrong.

We need more than conventional wisdom.

We need unconventional wisdom for unconventional times.

Here’s a few things to expect next.

This is your bankless COVID-19 Prep Plan.

– RSA


🙏Sponsor: Aave—earn high yields on deposits & borrow at the best possible rate! 


THURSDAY THOUGHT

4 things to expect next…

People are in a habit of making predictions at the beginning of the year. That’s hard. Who knows what a year will hold?

It’s probably more useful to make predictions as we’re exiting one era and entering another. This is a new era—the corona era. Historians will have a better name for it someday. But whatever they call it then, this new era will shape our lives now in even more profound ways in the decades to come.

Here are 4 things I expect to happen next.

1. Things will get uglier.

Things will get uglier for a time.

We haven’t contained the virus. The U.S. and many other western countries reacted late. Hospitals will be overrun and deaths will number in the millions—all this despite our social distancing efforts.

(Above) Total cases and total deaths from Coronavirus as of March 19th—exponential growth

Governments and companies now face an ugly tradeoff. Social isolation is the only way to contain the virus right now. Yet the more social isolation the higher the toll on the economy.

The markets started seeing it in late February—the S&P dropped almost 30% since then. That’s bad—but we’ve seen worse. In the Great Recession we dropped 50%. It took 6 years to get back to highs. Our great grandparents saw much worse than that—stocks dropped 90% during the Great Depression and didn’t fully recover until 1954—over 25 years later!

What’ll this one be before it’s over? A 4.3% drop in GDP and 10% unemployment like 2008? Or a 30% drop in GDP and over 20% unemployment like 1929? Something less? Something inbetween?

It’s hard to tell. But you should assume things will get uglier. Faced with bad options and in an attempt to avert a Depression governments will bring wheel out their secret weapon—the money cannon.

2. Central banks will print a lot of money.

Fiat currency supply has increased 10x over the last 20 years. The Fed printed more than $3 trillion to get us out of the Great Recession alone. They literally called it into existence by adding a few digits to their centralized banking ledger.

(Above) Global fiat base money supply increases since 1970 sourced by Crypto Voices

In crypto money of course the money printing is set by algorithm and maintained by social consensus. If someone changes the algorithm to print more and you don’t like it, you don’t have to accept their fork. Social consensus means opt-in.

Fiat has no such constraint. Fiat can issue 5% one year and 80% the next. Central banks can print money to bail out Wall Street, or Corporate Executives, or a Favorite Industry, or a Persuasive Politician, or, occasionally—the people. You want to fork? Sorry. They put you in jail for that.

Is there any greater power than the power to create money?

And governments around the world will use this power like they’ve never used it before. Not all of the issuance will be a bad. Maybe some is even necessary.

Regardless.

Tens of trillions will be printed. The QE and fiscal stimulus and industry bailouts and exotic buybacks during the Great Recession will look quaint in comparison.

And yet…

3. People will want dollars.

A liquidity crisis. That’s the first phase of an economic downturn of this type. And dollars are the most liquid asset that exists. It’s the money with the highest moneyness. The money you panic into. The global reserve currency. The king.

Everyone wants to own the king during a liquidity crisis. So they sell their other assets and buy dollars. This influx of demand increases the price of dollars relative to other currencies and relative to other assets.

(Above) U.S Dollar Index measures the value of dollars relative to other currencies—USD is up!


But it’s not just liquidity they’re after.

Part of the reason there’s a rush to dollars is because so much global debt is denominated in dollars. If you have debt in dollars, and you’re suddenly facing an uncertain world, you want to be sure that you have dollar reserves in order to pay off your debt.

We saw a similar effect with DAI on a smaller scale over the past couple of weeks. DAI price shot up as high as $1.08. Why? Because Maker Debt holders needed DAI to pay off their DAI-denominated debt. USDC doesn’t help if your debt is denominated in DAI, just like Australian Dollars don’t help it your debt is denominated in U.S. Dollars.

Oil? Mostly denominated in US dollars—every country on earth has future oil debt. That’s why currencies like Australian Dollars are getting crushed by USD right now.

(Above) Australian dollars losing over 15% relative to U.S. dollars over the past several weeks

Even though the Fed is bound to print tens of trillions in the next couple years people still want dollars. Not just for legacy reasons either. Japan, China, Europe—their money printers burn hotter and spit out cash even faster than USA.

In the land of the blind USD is the one-eyed man so he gets to be king.

At least for now.

4. Crypto will rise.

Crypto has shown recent correlation with stocks during this liquidity crisis phase. When stocks went down, so did crypto. The correlation between the two asset types has never been higher.

(Above) Correlation between S&P vs BTC/ETH is higher than ever. It’s above .6 now. That’s 2x higher than anything before. We’re in a flight to liquidity like 2008. Will this last? Not in the next phase, not w/ the money printers firing up.

But we won’t always be in the liquidity crisis phase.

Markets operate on cycles. De-leveraging is an important phase of that cycle. Once it wanes people will pause to look at their infinite-issuance dollars and their 0% interest savings accounts and wonder if these are the best places to store value through the rest of the 2020s.

They’ll see what we’ve seen.

A money system that’s bankless. Not centralized, but permissionless, available to any citizen of the internet.

They’ll see monetary assets like Bitcoin and Ether that aren’t subject to the whims of central bankers and an open financial system that’s replacing banks with code.

They’ll see crypto monies with issuance at 1%.

They’ll see opportunities to earn double-digit interest on stablecoins.

They’ll see 1,000 reasons to log into a crypto bank or use an Ethereum address.

We’re seeing hints of this last one already. $150m new USDC stablecoins were issued in the past week alone. People are exiting ETH and BTC but instead of transferring dollars back to their WellsFargo accounts they’re keeping them in crypto. For them, the crypto money system—crypto banks, Ethereum addresses, crypto wallets, DeFi—are proving more useful for dollars than their legacy counterparts.

(Above) Stablecoin growth over time—massive recent growth (h/t Nic Carter)

That’s how it will happen.

The utility of the crypto money system will continue to grow.

The separation of money and state will become more attractive.

The central bankers will drop the ball in big ways.

And crypto will rise.

Final Thought

Don’t panic, position. Prepare for the new normal. Then get ready for things to get uglier, central banks to print, people chase dollars, and finally…for crypto to rise.

No, we’re not certain of these things. We’re betting on them.

The 2020s belong to crypto.

This has been your bankless COVID-19 prep plan.


Action steps


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Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

How to make money in crypto gaming

https://bankless.substack.com/p/how-to-make-money-in-crypto-gaming

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Dear Crypto Natives,

How much would you pay for something that looked like this?

What if I were to tell you over $1m worth of these things have already been sold. Average price? Almost $6 each.

3xhuman breeds and sells these digital creatures as his job. In today’s tactic he shares how he makes money doing it.

Why’s this so cool?

eSports was getting huge before coronavirus. Now that traditional sports are canceled and much of the world is stuck inside for months, I expect we see eSports 🚀.

And this is more than eSports.

Crypto gaming is an eSport that allows players to unlock open economies. It’s DeFi + gaming. You can grind Small Love Potions by playing Axie, then sell them on Uniswap. You can breed Axies together, then sell them for profit on OpeaSea.

This stuff is super early, but the potential is massive. And there’s already people making a living doing it.

You’re indoors now, the real world’s a bit chaotic at the moment—this is the perfect time to take a break and level up on crypto gaming.

Opportunity awaits.

-RSA


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TACTICS TUESDAY:

Tactic #28: How to make money in crypto gaming

Guest post: @3xhuman, Blockchain eSports player & DeFi Wizard

Learn how you can start making money in a friendly ecosystem while playing blockchain games (in this article I will use Axie Infinity as an example). We are going to learn how to evaluate Axies, how to fight with them, and how to create new, higher-quality Axies to sell for profit!

  • Goal: Learn how to breed, trade, and fight Axie Infinity internet monsters

  • Skill: Intermediate—Advanced

  • Effort: 8-16 hours (be persistent!)

  • ROI: 10-50% (my personal is above 33%)


Requirements: Metamask and ETH in your account for this tactic.


How it started for me

I loved playing MMORPGs as a young boy. I earned glory and recognition from other players by being the best. But glory isn’t everything. I also played games to earn loot. 

It was Kal Online that taught me in-game items are worth real money. Every week, guilds fought against each other to conquer the castle. Rulers had access to larger resources. These were economic wars.

I found myself earning as much as my parents from games like Kal Online at the age of fifteen. Earning entailed selling the loot I earned from killing monsters.

This primed me for crypto markets. I spent time trading and learning everything I could in crypto. But after years of doing this as a burnt BitMEX, I started looking for something where I could use knowledge about crypto markets but combine it with a passion to play games.

I knew there was opportunity in the intersection of blockchain games and crypto markets. I wanted to combine those two worlds.

I found the right game

Finding the right game wasn’t easy. Games of chance like CryptoKitties were never interesting for me. I was looking for a game that allowed players to be competitive.

I learned that Axie has a fully, player-owned economy that allows players to seamlessly sell and trade their game assets for digital currency. That’s how I got into Axie in January 2019. That month I bought a PC streaming setup. I invested around 15 ETH and made Axie portfolio management my daily work. I loved it.

You should know that Axie was a completely different game at that time, with some bad mechanisms. I like to say that an Axie portfolio is like a start-up. You have to be vigilant. You need to know the market, your customers, and adjust the product to the change in the market conditions and customer expectations.

(Above) Some personal stats, over 12 ETH in profit via in-game market, not including OTC

How to get started with Axie

Here’s everything you need to know about getting started with Axie to make money.

1) Buy your Axie team & create an account

Axie Infinity is one of the first blockchain games that introduced a mobile application, but it’s also available to download on PC, Mac, Android or iOS.

You need to have at least 3 Axies in your MetaMask wallet to start. Axies can be purchased on the official marketplace here.

To start I’d recommend buying the most basic team first, any cheap Axies are fine. This is risk mitigation, you want to see if you like the game before making bigger investments.

Once you have your first 3 Axies, you can create an account:

  1. Go here

  2. Log in with Metamask

  3. Create your account with email and password

  4. In the mobile app provide the same email and password that you just set
    (that’s how your Metamask account is connected with the mobile application, so you don’t need to have a web3 wallet all the time with you)

2) Understand the game mechanics

Like any game, to make money you have to understand the game mechanics. So let’s look deeper into these the mechanics behind Axie.

What Are Axies?

Axies are (mostly) cute internet monsters that players can battle, collect, and raise. Each Axie has different traits that determine their role in the battle and the whole game ecosystem (e.g. mystic traits).

Statistics

Each Axie has 4 stats: Health, Morale, Skill, and Speed.

  • Health: The amount of damage your Axie can take before being defeated

  • Morale: Morale increases the critical strike chance. It also makes entering last stand more likely and adds more last stand “ticks”

  • Skill: Skill adds damage when an Axie plays multiple cards at once (combo).

  • Speed: Speed determines turn order. Faster Axies attack first. Speed also decreases Axie’s chance of being the victim of a critical strike.

Body Parts

Each Axie has 6 body parts: eyes, ears, horn, mouth, back, and tail.

Horns, Mouths, Backs, and Tails determine which cards an Axie can use in battle.

Each body part also adds stats, depending on the class of the part:

  • Plant: 3 HP + 1 Morale

  • Aqua: 3 Speed + 1 HP

  • Reptile: 3 HP + 1 Speed

  • Beast: 3 Morale +1 Speed

  • Bug: 3 Morale + 1 HP

  • Bird: 3 Speed + 1 Morale

Classes

Each Axie has a class (similar to “types” from Pokemon). Each class is weaker and stronger against other classes.

When calculating damage, the card class of the attacking move is compared to the Axie class of the defender. This means that a Bird card used to attack a Beast Axie will deal 20% additional damage. A Beast card used to attack an Aquatic Axie will deal 20% less damage.

Now that you’ve learned the basics you’re ready to fight with them.

Battle System Mechanics

The Axie battle system is a turn-based card game where the goal is to eliminate all of your enemy’s team (3 Axies). Each turn, a player must strategically play cards that maximize their chance of winning.

More on battle mechanics:


Getting your first strong Axie team

Now you’re ready to create your first strong Axie team. Due to the mechanics of the game, most new players field teams consisting of 1 “defender” and 2 “attacker” Axies. The defender (the tank) should be placed in the front of your team, so it draws incoming attacks.

(Above) My tank Axie high HP tank Axie is placed in front to aborb attacks. Each Axie can draw from a pool of 4 potential cards in battle. Each card comes from a body part—Mouth, Back, Tail, and Horn.

You need a “defender” (often referred to as a “Tank”) Axie which can be defined as: the most adept at absorbing damage—High HP stat (50+), as well as having at least 2 high shield cards (Def 70+). More is better, but that can also be a lot more expensive (this is your chance to gain ETH if you choose to be a breeder).

(Above) Example of a defender Axie—my tank

⚠️Tip—Almost all plant class cards are good tank cards (Pumpkin, Zigzag, Yam). Reptile and aquatic cards can also be tank cards (Tiny Dino, Hermit). Self-healing cards such as Shiitake and Rosebud can make a tank more resilient. You can find a full list of cards here.


You’ll need an “attacker” Axies, commonly referred to as “DPS”. In general attacker Axies have the following traits: 2 cards with 100+ damage, sacrifice survivability (HP & shield) for damage output.

(Above) Example of good damage-dealing Axie.

⚠️Tip—Speed can be useful on damage dealing Axies, allowing them to incapacitate an Axie before it can attack. The skill stat adds damage to combos. Bird & Beast cards are almost always good damage-dealing cards. Morale increases the chance of a critical strike, dealing 100% more damage on an attack. This makes high morale Axies (generally beast and bug Axies) good fits for the damage dealer role.


Ok, now that you know how to put together a strong team let’s go through the basics of Axie price evaluation (better move combination = higher demand and price) so you can determine what to buy for your first team.

3) What can you do with Axies and how can you earn?

Like real-world pets, Axies can be bred to create new offspring. The offspring can be used in battle, breed new offspring, or can be sold on marketplace (in-game or OpenSea). In order to manage the Axie population, breeding has certain resource requirements. 

Each Axie can be bred 7 times (maximum). Breeding costs about .002 ETH, as well as Small Love Potions ($SLP). Small Love potions can be earned by playing the game in PvE Adventure mode, with bots as well as the PvP Arena with real people. Once you earn them, you can sync them to your wallet on this page.

In the graphic above, 1 potion = 100 Small Love Potions ($SLP). The cost to breed two Axies will be based on the breed count of both parents. For example, two Axies that have 5 breeds each will require 1,600 Small Love Potions to breed. Note: tagged Axies (Origin & MEO) do not require Love Potions to breed, but still limited to 7 breeds each.

If you want to engage in breeding, you should ensure permanent access to high-tier, virgin Axies, so that production costs are lower for you (SLP-wise).

On February 11th, the cheapest Virgin Axie (0 breeds) costed around .0189 ETH, which is over 9 times the breeding cost. This means that there is a clear path to earning in Axie Infinity, one way or another.

Here’s where it gets interesting in the intersection of gaming and DeFi—Small Love Potions are ERC-20 tokens which can be bought and sold on Uniswap. So, if you don’t want to use your potions to breed, you can instantly sell them and take profit.

Let’s walk through the three main ways to earn with Axie:

  • Collector Approach

  • Breeder Approach

  • Battle Approach

A) Collector Approach

If you’d like to create a collection, and you don’t care much about battle consider an investor approach. If you believe that Axie Infinity is a game you can grow 10x or more, buy rare and unique Axie and hold them. With the popularity of the game, your rare Origin or Mystic Axies should also gain in value. Some have already sold for more than 50 ETH.

(Above) You can see more price data on the Axie market from NonFungible.com site


What Axies are considered ‘collectible’?

– Tagged Axies (Origins, Meo, Meo II, Axies with Mystic parts)
– Low ID Axies
– Mint Condition (Virgins, Low Breed Count)
– Special Number ID (e.g. #420, #50000, #11111)
– Agamogenesis (more about them)


⚠️Tip—Rare class Axies like reptiles, birds will be more valuable as Origins and Mystic from regular class Axies like plant, aquatic or beast. Low ID =  1-100. Decent low < 10 000. Mystic Axies that are also good battlers will be more valuable than ‘any mystic’ e.g. plant Axies with DPS move set.


B) Breeder Approach


Genetics

Each Axie has 6 body parts, as well as body shape. For each part, an Axie possesses 3 genes—a dominant (D), recessive (R1), and minor recessive gene (R2). The dominant gene is what determines the body part that is physically present on the Axie.

When breeding, each gene has a chance to be passed down to offspring:

  • Dominant (D): 37.5% chance to pass this gene to offspring.

  • Recessive (R1): 9.375% chance to pass this gene to offspring.

  • Minor Recessive (R2): 3.125% chance to pass this gene to offspring.

You don’t need to count all of this in your head! You can use this calculator to look up the probabilities when breeding 2 Axies. While you can’t see the R1 and R2 (recessive genes) on the main website yet, you can view them using this extension built by one of our community members, Freak.


⚠️Tip—There are some parts like Holiday skins and Mystic that cannot be passed down through breeding. As of January 2020, these are Mystic parts and body parts from our special Holiday breeding events.


How is the Axie Class Calculated?

There are no recessive genes for the class. Each baby has a 50% chance of inheriting each of their parents’ class when born. So, a Beast/Aquatic pair would have a 50% chance of producing a Beast and a 50% chance of producing an Aquatic. If both parents have the same class, the baby is guaranteed to be of that same class.
Many players aim to create strong Axies for battle when breeding, which means aiming for good Defenders, Attackers, or Support Axies. I showed you some Axie archetypes (Tank, Damage dealer) above. Let’s walk through an example.

How Long Does It Take For An Axie To Become An Adult?

Axies take 5 days to reach maturity. After 3 days, you can morph your Axie to the petite form and see what genes it has. After 2 more days, you’ll be able to morph it into an adult and use it in battle!

How To Know What To Breed And How To Sell Your Axies

  • Be active on discord and social media—earn a good reputation.

  • Learn from others (what people have, what they breed, and what will be easy to sell)

  • Breed Axies that will be good in battle, demand is high for them, more people can afford them as they are cheaper than Origins and Mystic Axies (in general)

Example—I wanted to breed a strong damage dealer. As a first step, I scanned my collection for Axies that when bred together, would have a good chance of producing an Axie capable of dealing a lot of damage. In particular, I was looking for high morale Axies. This means cards that had either a high attack or a good combo of moves, that can make even more damage than the amount display on cards. This would allow them to get more damage done by dealing critical strike or get me more energy points.


⚠️Tip—Always read the card descriptions because many cards affect each other for better results. You want to know this and take it into consideration when breeding.


I settled upon the two Axies above. Both Axies have a high morale stat. I generally consider above 50 as high and with 52-61 being very high. They both have my favorite move set, with Imp and Ronin, so I will be able to deal a large amount of damage and at the same time, gain more energy points for future moves.

One of them was a 3 and the other was bred 2, so the breed cost is 700 SLP + .002 ETH. I was very confident that the baby would have a higher value, so I went ahead and did the breed! Keep in mind that some players just want to create the most beautiful babies (purely aesthetic)! Beauty is in the eye of the beholder (sometimes).


⚠️Tip—There are some parts that cannot be passed down through breeding. As of January 2020, these are Mystic parts and body parts from special Holiday breeding events.


C) PVE & Tournament Approach

If you want to minimize risk (any new Axie is a risk of failure and the possibility that the offspring will be a weak Axie despite valuable parents) then you can still earn by winning tournaments and fighting PvP and PvE. Here the entry threshold is higher. A Team able to pass the PVE game and grind SLP is worth about 0.3 ETH, a Team able to win fights with other players is worth around 0.6-1.5 ETH, a tournament team can be worth 2 ETH or more. In addition, to win tournaments you need to have your own unique strategy that can only be developed by devoting hours to playing.

Final Thoughts

The best strategy is to combine all the above approaches in a way that suits you. Remember that blockchain games like Axie are in alpha and beta. Playing them in a profitable way means adapting to changing conditions and constantly looking for market advantages. Being a professional blockchain game player is not an easy task, you have to devote a lot of time to it. However, if you are looking for challenges and you have the soul of a player—try, maybe it will be your dream job as it is for me.


Author Blub

@3xhuman has been a crypto enthusiast since 2012. He currently spends his time on the intersection of the blockchain gaming market and DeFi. Follow him on twitter and medium.


Action steps

  • Pick a crypto game like Axie (Gods Unchained is another good one) to dig into

  • Build a game portfolio and start earning money


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Aave protocol is a decentralized, open-source, and non-custodial money market protocol to earn interest on deposits and borrow assets. It also features access to Flash Loans, an innovative DeFi building block for developers to build self liquidations, collateral swaps, and more! Check it out here.


Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

Bankless Podcast: Economic Bandwidth

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🎙️NEW PODCAST EPISODE

Listen to episode 3 | iTunes | Spotify | YouTube | RSS Feed

Episode: #3
March 15th, 2020

While the internet revolution is all about data, the crypto revolution is all about value. Scaling the internet is all about scaling data bandwidth, but scaling crypto is all about economic bandwidth. 

Join Ryan and David as they explore the concept of economic bandwidth and how it relates to crypto-systems.

Links mentioned in podcast:

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Weekly Action Recap

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Dear Crypto Natives,

Don’t panic, position. Did you position yourself yet? Time is short.

The bye-bye-good times possibility getting more real by the day. If it continues expect a flight to liquidity—treasuries, cash—followed by unlimited money printing by the central banks—followed by the rise of non-sovereign crypto monies.

Those first two are all but certain. The rise of crypto monies? That’s the bet.

When you read about the emergent structure of Ethereum it seems unavoidable. But it may take time. Privacy is one issue. But the system has other flaws. And we got to see them as it was majorly stress tested this Friday—DeFi wobbled but didn’t fail.

Schools now closed where I live, stores will be next.

Some know a tidal wave is about to hit others still blissfully unaware.

You may be working from home soon if you aren’t now. Use extra time to help people. Use the time to level up—read the archives—listen to the podcast—join the chats.

Because once the wave recedes and we start to recover the world will need bankless more than ever. And we’ll be ready.

– RSA


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Recap for the week of March 8th, 2020


🎙️Listen to Episode 2: The Evolution of Monetary Policy

Listen to episode 2 | iTunes | Spotify | YouTube | RSS Feed


SCHEDULE RECAP:


ACTIONS RECAP:

  1. Execute any good market opportunities you saw in Market Monday

  2. Complete weekly assignment: become a DAI liquidity provider on Curve

  3. Get an anonymous email account from ProtonMail to use in DeFi

  4. Listen to Evolution of monetary policy in iTunesSpotifyYouTube

  5. Get your mind blown by this article from David Hoffman

  6. Understand: what are bonding curves and AMMs?

  7. Share: what was the worst day in crypto like?


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🙏Thanks to our sponsor: Aave Protocol 

Aave protocol is a decentralized, open-source, and non-custodial money market protocol to earn interest on deposits and borrow assets. It also features access to Flash Loans, an innovative DeFi building block for developers to build self liquidations, collateral swaps, and more! Check it out here.


Tag me on twitter when you subscribe & tell me how you’re going bankless for 3 x 🔥

Bankless should be required coursework—but they won’t teach this stuff in school!


Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case

Friday Open Thread: You just experienced the worst day in crypto. What was it like?

https://bankless.substack.com/p/friday-open-thread-you-just-experienced/comments

Friday Open Thread: You just experienced the worst day in crypto. What was it like?

Ethereum had worst day ever -43%. Bitcoin second worst day ever -40%.

BitMex down. Gas 20x. Network congested. Dai off peg. Maker troubles.

Yesterday was the biggest stress test DeFi’s ever had.

And it’s not just crypto. Stocks worst day in 30 yrs. Fed adds trillions to repo markets.

These are historic times. Capture the moment.

Tell us what you did, how you felt, what you’d doing now, where you think this is all going.

We’re in this together crypto natives…so share your story:

You just experienced the worst day in crypto. What was it like?

Rise of the Liquidity Robots 🤖

https://bankless.substack.com/p/rise-of-the-liquidity-robots-

⚠️Hey it’s been a tumultuous day for crypto & DeFi—more thoughts in the days ahead. Want info faster? Become a full subscriber & join almost 500 other Bankless members in the Inner Circle Discord channel. It’s here to help during times like this.

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Dear Crypto Natives,

We’ve talked about money robots before. But the liquidity robots are a special kind.

They can operate without human intervention, providing trading, liquidity, and price information according to a pre-set formula called a bonding curve.

And we’re only starting to unlock their potential. Another branch in the tech tree.

I’ve asked Ric to explain them to us today. 🔥

– RSA


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THURSDAY THOUGHT

Rise of the Liquidity Robots

Written by: Richard Burton, Designer and DeFi Investor

How markets work

The relationship between supply & demand is something that economists have studied for a long time. It emerges over time as people buy & sell things to one another.

In the stock market, market makers are responsible for connecting buyers & sellers to facilitate trades. These people make money by charging a spread. This is the gap between the price of the asset when it leaves one person & is bought by another.

How Automated Market Makers work

Automated Market Makers have existed in the traditional financial system for a while. They allow financiers to set up price relationships that must be followed. If an asset hits a certain price, a specified amount can be bought.

In traditional finance, automated market makers are operated by humans. Humans deploy them, control them, turn them on, turn them off. They operate on centralized exchanges which are also controlled by humans.

On Ethereum, this human control can be minimized. Humans still create market making robots, but then we can set them free to run on their own like an economic lifeform. With the right design, they can be as autonomous & unstoppable as the Ethereum protocol itself.

Not just automated, but autonomous.

Uniswap was one the one of the first of this kind of market making robot on Ethereum (Bancor was first). I had the pleasure of watching the Uniswap robot get built in my office in 2018.

To understand how AMM robots like Uniswap work, let’s start with core concepts:

📊 Market Makers

Fleshy humans who make trades to make markets.

🤖 Automated Market Makers (AMMs)

Robots made of smart contract code who do this job.

🦄 Fixed Product AMMs 

Robots that use a bonding curve to determine what price they will execute a trade at and then just do it.

What do we mean by curves?

Image

📈 Supply Curve

A graph plotting the relationship between the cost of something and the quantity supplied. The curve emerges after observing the data.

📉 Bonding Curve

A relationship between a token’s price and its supply that is defined by a mathematical curve.

The asset supply is collected in liquidity pools:

🏊‍♂️ Liquidity Pool

A smart contract that is storing tokens that are ready to be traded.

⚖️ Arbitrage

Where a trader will take advantage of price differences or imbalances in the supply of liquidity.

🔁 Exchange

Where one token is exchanged for another using the curve & pool.

All this leads to the concept of a bonding surface:

Image

🌏 Bonding Surface

A multi-dimensional price & supply relationship between 3 or more tokens. These can facilitate trades that occur between lots of assets simultaneously.

📐Constant & Invariant

These are types of mathematical functions that can define the curves on a graph.

There you go! Those are the core elements of an Ethereum AMM.

What projects are working on AMMs?

There are lots of new projects emerging in the Automated Market Making space. You can check out this history of inspiration behind Uniswap here to see the lineage.

In 2018, Uniswap was up against Kyber, 0x, & Bancor, who had raised over $200m. With a few grants & loans, Hayden Adams (the primary developer behind Uniswap) launched the system & completely blew past the competition. The other AMM robots were too complex & hard to use. Uniswap just worked.

(Above) Decentralized exchange marketshare, Uniswap & Bancor are the AMMs

Let’s go through the big AMM projects on Ethereum today:

Bancor – 2017

  • First major smart contract AMM out in the wild

  • Pioneered some key design patterns

  • Used a bonding curve to calculate prices

  • Used a bonding curve to track liquidity provider contributions

  • Connected multiple pools through a hub-spoke model

  • Unfortunately used $BNT token as the hub currency (rather than Ether)

Uniswap – 2018

  • Main goal: a decentralized protocol for token liquidity

  • Simpler bonding curve than Bancor

  • Used Ether as a hub currency

  • Very gas efficient

  • Not very capital efficient

  • Over all, extremely well crafted (see Hayden’s launch tweet from Nov 2018)

Curve (aka Stableswap) – 2020

  • Main goal: low slippage, stablecoin-to-stablecoin trades

  • Extremely capital efficient => very low slippage

  • Multidimensional bonding surface, like Balancer

  • Works very well for stablecoins, does not work well for non-stablecoins

  • Relatively risky bonding curve

  • The actual bonding curve formula is opaque (see my tweet on this here)

(Above) Bonding curves of Curve (aka StableSwap) vs. Uniswap

There are new AMM projects coming to Ethereum soon too:

Balancer – ETA 2020 (article here)

  • Main goal: decentralized Vanguard

  • Generalizes Uniswap’s bonding curve to a multi-dimensional surface 

  • Enables token weights in the pool (e.g. Eth=50%, Dai=25%, MKR=25%)

  • Portfolio model 2x more capital efficient than hub-spoke

  • But portfolio model can fragment liquidity

  • Having weights increases gas costs

(Above) Balancer can create liquidity pools comprised of multiple-tokens

Shell Protocol – ETA 2020 

  • Low slippage trades

  • High liquidity provider profits

  • Weighted, multi-dimensional pools

  • Support any flavor of stablecoin (e.g. Dai, cDai and Chai)

  • Granular customization of AMM behavior

  • Mitigate the cost of a broken stablecoin

  • Transfer arbitrage profits to liquidity providers

(Above) Balancer can create liquidity pools comprised of multiple-tokens

Why they work better

I think Jacob said it well:

The thing that Uniswap brought to the market was the concept of *uncensorable token listing*. If you want to list a stock on the New York Stock Exchange, you need the permission of several financial institutions. It usually costs millions of dollars to do it.

If you want to list a token on Ethereum, you need to create a single transaction. It costs less than a dollar to do it.

Why they work on Ethereum

Traditional markets use order books because they can run at high speed. People can post orders and remove them in split seconds. 

Ethereum processes blocks of transactions every 20 seconds. Automated Market Makers work well because in one turn of Ethereum you can poke a token in and get another token out.

What it lacks in price perfection, it makes up for in predictability.

Traditional economists look at this and see the slippage. Ethereum economists look at this and see the simplicity. It is a great circuit which can process lots of money.

The market is telling us that these systems are very valuable.

(Above) Steadily growing volume on Uniswap shows that AMMs are valuable


Final Thoughts

We’re seeing the rise of autonomous Automated Market Makers on Ethereum. These unstoppable robots are pitted in a fight for liquidity against each other and also against traditional orderbook exchanges.

They differ in subtle but profound ways: their primary currency pair, the design of their bonding curves, and reward structures for liquidity providers are different for each. Some are even adding the ability to create pools containing multiple assets—a sophistication which could bring ETF-like functionality to AMMs.

As they increase in liquidity, they decrease price slippage and become more efficient—better able to serve the needs of the DeFi economy. The best AMM experiments are likely to survive and create lasting network effects.

We get the pleasure of using the liquidity robots and watching them battle it out!


Action steps

  • What are the core components of AMMs on Ethereum?

  • Try it yourself—trade with a liquidity robot like Uniswap or Curve


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Aave protocol is a decentralized, open-source, and non-custodial money market protocol to earn interest on deposits and borrow assets. It also features access to Flash Loans, an innovative DeFi building block for developers to build self liquidations, collateral swaps, and more! Check it out here.


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Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

How to stay private in DeFi with email

https://bankless.substack.com/p/how-to-stay-private-in-defi-with

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Dear Crypto Natives,

Don’t dox yourself when using DeFi. We talked about it in Tactic #14.

What do I mean by dox?

Your Ethereum address is like a fully public bank account—anyone can see it. The only thing that keeps the world from linking your address to you is anonymity—people see the activity, they see the assets in your account, they just don’t know its all yours.

Unless…they’re able to link your Ethereum address to your identity.

It’s easy for this to happen. Seriously, all it takes is one slip-up to lose your privacy.

Here’s the thing. There are loads of DeFi services and tools that need an email address for certain features. Not because these services are evil and want steal your privacy, but because it’s the best way to give you features like:

These features can be great.

Wouldn’t it be nice to get an email alert from DeFiSaver that your Maker Loan needs more collateral?

How about an alert from InstaDapp when there’s a better DAI interest rate available?

The problem—if you give up your [myname]@gmail.com email address it’s now linked to your ETH address and now all this is linked to your identity.

Yeah, the services encrypt your email address. Maybe you can trust them.

That’s not the point. This is DeFi. You shouldn’t have to trust them!

Fortunately there’s a really simple way to avoid the email identity link this problem. Get the goods without sacrificing your privacy.

This one takes 15 mins, so don’t skip it.

Ready? Let’s level up.

-RSA


🙏Sponsor: Aave—earn high yields on deposits & borrow at the best possible rate! 


TACTICS TUESDAY:

Tactic #27: How to stay private using DeFi

Setup an anonymous email account that can’t be linked to your identify. Use this anonymous account for DeFi services that require email.

  • Goal: Get an anonymous email address to stay private using DeFi

  • Skill: Beginner

  • Effort: 15 minutes to setup

  • ROI: Privacy is security, self-sovereignty, & freedom—privacy is priceless


This one’s super simple.

What’s the best way to avoid linking an identifiable email address to your DeFi account activity?

Don’t use an identifiable email address!

That means you don’t use your primary email address. You don’t use your secondary address. You don’t use any email address you’ve ever given to anyone or that can somehow be linked to your identify at all.

Protect the anonymity of your Ethereum address by using an anonymous email address that you create.

Here’s what you do:

1. Create an anonymous email account

There are are number of anonymous email account providers including ProtonMail, Tutanota, Secure Email, Guerrilla Mail—here’s a review. None of these require you to provide identity upon registration.

I’ve found ProtonMail to be the easy button here. It’s nearish gmail in user experience, has a solid mobile app, supports two-factor authentication, requires no personal information to register. I’ll assume that’s the route you’re choosing.

Pink an anonymous username. Something generic, no pets names, no birth dates.

Create the account and download the mobile app.

2. Set security and recovery options

You can set a backup recovery email address—but I wouldn’t. Defeats the purpose, doesn’t it? Instead, make sure you’re careful with backups of your password. Both in a password manager (you need a password manager like OnePass or LastPass in crypto) and by following the advice here.

Also enable two-factor authentication using these directions. Google Authenticator is a useful mobile app for this. Make sure you store the one-time use recovery codes generated through this process—on paper in a vault with your passwords if you’re paranoid.

3. Use the email address without tying it to your identify

Now you can use this email address for social recovery in Argent, or to get crypto by linkdrop email, or to get notifications on your Ethereum address in Etherscan.

It doesn’t matter if your Ethereum activity is associated with this email account, because like your Ethereum address, it’s pseudo-anonymous.

⚠️Here’s one thing you can’t do. You can’t tie this email address to your identity in any way moving forward. That means you can’t give it to your relatives or friends. You can’t post on your twitter account or a discussion forum. You can’t link it to AML/KYC on an exchange. If it becomes linked to your identify, you lose your privacy shield.

(Above—setup watch list on your Ethereum address using an anonymous email in Etherscan)

Final Thoughts

Setup an anonymous email address and use it when you want to subscribe to DeFi features that need email. This keeps separation between your identity and your Ethereum address activity, which is easily linked if you use a primary email address.

You’re not trying to hide nefarious activity. You’re keeping your financial transactions from public display. That’s fair. That’s a right. Your financial data should be private.

I’m optimistic that protocols like Tornado and Aztec will improve privacy 10 fold in the coming years unlocking entire new branches in Ethereum’s tech tree. Until then, we have to know a few tactics email anonymity to prevent us from doxing ourselves.

We’re the beta testers of a new global money system, remember?

The journey is fun. Rewarding. Massive potential upside.

But it ain’t always easy.

That’s why we stick together.


Action steps

  • Get an anonymous email account from ProtonMail to use in DeFi


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🙏Thanks to our sponsor: Aave Protocol 

Aave protocol is a decentralized, open-source, and non-custodial money market protocol to earn interest on deposits and borrow assets. It also features access to Flash Loans, an innovative DeFi building block for developers to build self liquidations, collateral swaps, and more! Check it out here.


Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

🎙️Bankless Podcast: The Evolution of Monetary Policy

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🎙️NEW PODCAST EPISODE

Listen to episode 2 | iTunes | Spotify | YouTube | RSS Feed

Date: Monday, March 9th
Episode: #2

How did money get to where it is today? David and Ryan explore the historical progress of money, and the management of money, across time. We ask questions like “what makes good money” and “how does money get managed” and “who gets to manage money, and why”

We end with a comparison of the different money management policies of each respective crypto-system, and how each system arrived at that conclusion

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Tools from our sponsors to go bankless:

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Episode Actions:

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  3. Make the commitment to go more bankless


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Friday Open Thread: What’s your best advice for someone new?

https://bankless.substack.com/p/friday-open-thread-whats-your-best/comments

Friday Open Thread: What’s your best advice for someone new to crypto?

We all started somewhere. Remember when you knew nothing?

We forget how intimidating this space can be. It’s traveling to a strange new country: new language, new cultural, different values. Danger everywhere. Predators and scams to avoid.

Where should people get started? What resources? What first steps? What should they avoid?

You’re a crypto native now…

So what’s your best advice for someone new?

Post in thread!

ETH is irreplaceable

https://bankless.substack.com/p/eth-is-irreplaceable

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Dear Crypto Natives,

Economic bandwidth is the new fat protocol thesis.

Read this and this for a primer.

But why can’t we use something other than ETH for economic bandwidth in DeFi?

This article answers that question. Along the way, we create a taxonomy for economic bandwidth and map crypto assets in one of four trust quadrants.

This is the mental model you need to understand economic bandwidth.

This is why I think ETH is irreplaceable.

This is the magic quadrant for crypto.

Let’s level up.

– RSA


🙏Sponsor: Aave—earn high yields on deposits & borrow at the best possible rate! 


THURSDAY THOUGHT

A Taxonomy for Economic Bandwidth

Written by: Ryan Sean Adams and Lucas Campbell

Economic bandwidth is the fuel for powering open, decentralized financial applications. In Eth2, economic bandwidth also serves to secure Ethereum as a global settlement layer. The more economic bandwidth on a network, the higher the capacity for financial applications and security of the network at large.

In order to fuel a decentralized, permissionless financial economy, Ethereum will require trillions in economic bandwidth. But where will it come from?

Yes, economic bandwidth comes from the total value of the network’s assets.

But we need more specificity…because not all economic bandwidth is created equal.

Trustless Economic Bandwidth

Today Ethereum’s native currency, Ether (ETH), serves as the primary reserve asset supplying economic bandwidth for its money protocols and financial applications. 

Importantly, Ether supplies the most valuable form of bandwidth—trustless economic bandwidth. Ether is trustless value supplying economic bandwidth for Ethereum’s permissionless money protocols.  

In order to build a trustless economy, we need trustless value. Imagine if USDC were the main reserve asset for Ethereum. The entire system would be subject to the whims of Coinbase, Silvergate, and the Fed. Not decentralized. Same system as today.

Trustless value is only possible with fully decentralized crypto-native assets that settle on-chain with no central backing like BTC and ETH.

The aggregate liquid value of trustless assets on a network is the network’s trustless economic bandwidth. Total trustless economic bandwidth of Ethereum in USD terms is the liquid market cap of the network’s trustless assets—the market cap of Ether.

But can Ethereum tokens also be a source of trustless economic bandwidth? 

Tokenized Assets as Economic Bandwidth 

Though tokenized assets on Ethereum supply economic bandwidth it is not necessarily trustless economic bandwidth. 

An example:

Synthetix is a synthetic asset issuance protocol built on Ethereum with a value accrual asset called SNX. While Synthetix introduced ETH-based collateral, a move which will drastically increase the economic bandwidth for Synths, today its synthetics almost entirely relies on economic bandwidth supplied from SNX.

Could other DeFi protocols use SNX as economic bandwidth?

Yes, but they’d have to trust Synthetix.

Even though SNX has proven itself as a form of economic bandwidth within the Synthetix ecosystem, it’s lacking the most important characteristic when it comes to economic bandwidth for a broader permissionless economy: it’s not trustless. While SNX settles onchain, the Synthetix team has enough control to tinker with issuance (see SNX issuance changes here and here).

SNX has trustless settlement because it settles on Ethereum but not trustless issuance because its supply can be manipulated by a self-interested third-party. SNX is not as trustless as ETH.

It seems there’s a spectrum of trust across the axises of issuance and settlement. Can we apply this to a broader taxonomy of assets?

Quadrants of Trust

Let’s define the degree of trust associated with an asset by these two components: trustless issuance and trustless settlement.

  • Trustless issuance means the asset’s issuance policy isn’t dependent on and can’t be manipulated by a self-interested third-party

  • Trustless settlement means the asset’s transaction finality isn’t dependent on and can’t be manipulated by a self-interested third-party.

An asset with trustless issuance combined with trustless settlement is the optimal form of economic bandwidth for a decentralized system. Zero Trust assets are those in the upper right quadrant.

  • Zero Trust Assets (T0)—trustless issuance & trustless settlement

Let’s look at the other quadrants:

  • Bearer Trust Assets (T1): trusted issuance & trustless settlement

  • Legal Trust Assets (T2): trustless issuance & trustled settlement

  • State Trust (T3): trusted issuance & trusted settlement

ETH, BTC, and gold are some of the three most trustless forms of economic bandwidth in existence today. Unfortunately, since trustless-ness of gold is limited to its physical form, it’s less useful bandwidth in a digitally-native economy.

Here’s how we’d map these assets:

Let’s run through our reasoning—first Zero Trust assets:

  • BTC: a zero trust asset when settled on the Bitcoin network

  • ETH: similar to BTC, issuance & settlement slightly less trustless that BTC

  • DAI: backed by ETH, but oracle & governance makes it less trustless than ETH

  • DAI (future): if trusted assets are added to DAI as collateral DAI drifts left

Bearer Trust assets are about possession:

  • Cash fiat: settlement by possession, but issuance requires trust of US gov

Legal Trust assets are often neutral issuance assets wrapped in legal guarantees:

  • Tokenized gold: gold issuance can’t be manipulated—but if the gold in the vault backing PAXG disappears your only recourse is legal system

  • wBTC: a Bitcoin coupon custodied by a legal entity—settlement by legal system

State Trust assets comprise almost everything else in our traditional financial system:

  • Stocks: issuance increase by shareholder vote, settlement by corporate law

  • USDC: not really settled on Ethereum, dollars settled in bank system

  • T-bills, derivatives, bonds, CDs: all these are state trust assets

Maybe you’d change the placement of some of these assets in the graph, but are you seeing how the model works? Stuff in the left and bottom quadrants requires guns and governments. Stuff in the top right doesn’t.


❓Why are gold bars Zero Trust? Gold’s issuance is set by physics. Gold’s above ground supply is costly to increase (barring tech leaps in sea or asteroid mining). Gold’s settlement is also trustless—finality occurs when a unit of gold is transferred from one person’s physical possession to another. Possession is finality.


ETH and BTC are the only multi-billion dollar digital assets that have ever occupied the Zero Trust quadrant. DAI, tBTC—only possible because of ETH and BTC. That’s why crypto money is a such a big deal.

But here’s the problem with Bitcoin.

BTC is settled trustlessly on its respective network, but if deposited in Coinbase, settlement now depends on a third-party. BTC moves from a Zero Trust asset to a Legal Trust asset.

Since Bitcoin is limited by the functionality of its network it serves more as a network for peer-to-peer value transfer rather than a network for programmable money. Most of Bitcoin’s money verbs require a trusted crypto bank.

That’s why ETH is so important. The expressivity of Ethereum means we can create an entire money system inside the Zero Trust quadrant.

That’s why ETH is irreplaceable.

(Above: you’ve heard of Gartner’s magic quadrant? Top right is crypto’s magic quadrant too.)


Ethereum’s Economic Bandwidth by Type

Let’s run some numbers. What’s the available Zero Trust (T0) economic bandwidth versus other forms on Ethereum today? 

As expected, Ether is the largest supplier of T0 economic bandwidth by far—providing over $24.6B in bandwidth to Ethereum. Other forms of trustless economic bandwidth include DAI and REP.

T1 economic bandwidth forms $5.4B in total available bandwidth as it includes a majority of token projects like LINK, SNX, BAT and others. These are liquid assets with trustless settlement but trusted issuance. Trusted issuance because their respective teams have enough control over the protocols to change issuance.

That said, it is entirely possible for many of these T1 tokens to become trustless economic bandwidth in the future if they’re able to minimize the influence of single entities and individuals within the ecosystem—there was a time when BTC was in the T1 quadrant too!

Economic bandwidth T2 and T3 supply a little over $1B and $3.2B, respectively. Recall that T2 assets have trustless issuance but trusted forms of settlement—wBTC and tokenized gold are examples.

T3 assets include USDC, TUSD and USDT—fiat-backed stablecoins with trusted settlement and issuance, making them largely rely on the legacy financial system to succeed. UDST provides the highest amount of T3 economic bandwidth at over $2.7B of the reported $4.3B in circulating supply is now tokenized on Ethereum.

Economic Bandwidth Consumed by DeFi

We also can measure economic bandwidth consumed by DeFi protocols. Over 3.27% of available T0 economic bandwidth is being consumed by Ethereum’s DeFi today. This is some of the most decentralized DeFi activity on Ethereum.

But of course DeFi protocols like Compound, Uniswap, and Maker are not limited strictly to trustless economic bandwidth. Compound for example, has permissionless lending markets for a range of Ethereum-based assets, including USDC.

Even though USDC has a relatively high usage rate within DeFi, T3 bandwidth consumption is low overall due to the lack of DeFi’s adoption of Tether—USDT is the biggest supplier of T3 bandwidth in our data set.

Ultimately, we can see that Ethereum’s money protocols are consuming more than just trustless economic bandwidth. It is entirely possible for liquid, non-trustless assets to serve as economic bandwidth for the broader ecosystem.

Eyes on the Prize

While DeFi protocols can leverage trusted forms of economic bandwidth to improve financial products, it is vital that we remain focused on the core mission of open finance: trust-minimization.

Trustless economic bandwidth is trust-minimized fuel for an open economy. Combine this with permissionless money protocols and it’s an unstoppable force for money and finance at large. 

Unless our goal is to simply reconstruct the same old financial system, we need trustless economic bandwidth. That is the most important thing to remember as we pioneer through this financial revolution.

Closing thoughts 

The goal of this article was to propose a taxonomy for economic bandwidth. By analyzing assets on the trust quadrant, we established a framework for understanding the importance of trustless assets to decentralized finance.

There are two core components for trustless economic bandwidth (1) trustless issuance and (2) trustless settlement. Assets like ETH in the Zero Trust quadrant have both of these attributes and form the basis of a trust-minimized crypto money system—they cannot be replaced by assets from other quadrant.

Of course any tokenized asset can leverage the permissionless, programmable, and open nature of Ethereum’s financial system and benefit from settlement on Ethereum. Tokenization is good for crypto and good for the world. But we should remember, only Zero Trust bandwidth can contribute to the decentralization and security of Ethereum.

A trustless economy will require trillions in trustless economic bandwidth.

ETH is irreplaceable economic bandwidth.


Action steps

  • ETH is irreplaceable as economic bandwidth—do you agree?

  • Review: what are the four types of economic bandwidth?

  • Where would you map assets on the Trust Quadrant?


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🙏Thanks to our sponsor: Aave Protocol 

Aave protocol is a decentralized, open-source, and non-custodial money market protocol to earn interest on deposits and borrow assets. It also features access to Flash Loans, an innovative DeFi building block for developers to build self liquidations, collateral swaps, and more! Check it out here.


New to the Bankless program? Start here.


Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

How DeFi can pay for your lunches

https://bankless.substack.com/p/how-defi-can-pay-for-your-lunches

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Dear Crypto Natives,

Remember that guy who tried to live on Bitcoin in 2013?

Living bankless was harder back then. No one accepted it. Lots of friction. But people kept saying that one day every Starbucks would accept Bitcoin.

But it didn’t stick.

It’s funny because the guy in that story is now a mega-millionaire much the result of…not spending his Bitcoin!

What does that teach us? It teaches to not to spend our BTC & ETH! Who wants to end up like Bitcoin pizza guy?

But it’s time to check in again. New tools like stablecoins and DeFi protocols are now make going bankless easier…and even…better than a bank?

I asked Brice to share his story. He’s uses an Ethereum address, a few protocols, and a wallet + visa card combo to get passive DeFi income to pay for his lunches.

(Above—watch Brice pay for French cheese the bankless way)

And he plans to do a whole lot more!

We’re closer than ever to the dream of a crypto money system yet hardy anyone’s talking about it. They will. The next 10 yrs is where crypto becomes useful in daily life.

This is the decade we go bankless.

Let’s dive in!

-RSA


🙏Sponsor: Aave—earn high yields on deposits & borrow at the best possible rate! 


TACTICS TUESDAY:

Tactic #26: How DeFi can pay for your lunches

Brice tells us his system for earning daily DAI to pay for expenses like lunch. He uses an Ethereum address as his bank, DAI as his stablecoin and savings account, tokenized real-estate to generate passive income, and a smart-contract wallet plus Visa card for spending. Learn about his 5 DAI per day portfolio.

  • Goal: Generate a stable return in DAI to cover for living expenses.

  • Skill: Intermediate

  • Effort: An hour or two a week, sometimes less

  • ROI: 9-12% annual if fully passive


⚠️RSA’s note on risk: In this bankless frontier Brice is taking on many risks—to name a few: failure of DAI, failure of protocols like aDAI, failure of smart-contract wallet, variable interest rates, failure of the entire Ethereum protocol. He could lose all or a portion of his funds in a worse case. The passive income opportunities he mentions should be adjusted for these risks.


TACTICS TUESDAY:

Tactic #26: How DeFi can pay for your lunches

Guest post: Brice Berdah, Community at Monolith & DeFiFrance Co-Organizer

My relationship with money has always been ambiguous. As a teen, I was your usual “get money it’s spent that day” kind of guy—I wasn’t really thinking or strategic about it, just looking forward to enjoying what money enables.

The masterplan

As I grew up and started earning money on my own, I began thinking more and more about money and personal finance. Shortly after my first proper job, I was already doing math on my expenses, my income, and how long I would need to work and save in order to not have to work anymore. The dream of freedom.

Quickly, this turned into a basic plan with two arbitrary choices:

  • I would aim to acquire $1.5M. I assumed this capital would earn 5% / year landing me around $75K/year of interest before taxes—enough to sustain my lifestyle if not too excessive.

  • And I’d get there by the time I’m 35 (giving 20-30 good years to do my things)

It was obviously and predictably a failure. Between the start of my plan at 21 years old and now (I’m 28), I was barely able to save a fraction of the required amount.

Why did my plan fail?

As I was learning about decentralised finance, I took some time to reflect on the back-then current failure of my masterplan. Here are the main reasons I identified:

  • I did not define steps to reach the end goal: I wanted to jump straight from no passive income to full passive income, without planing any intermediary step to make it more realistic and achievable.

  • I had little to no discipline when it came to taming my expenses

  • I overlooked the “details”. I had little to no idea of how I was actually going to produce a stable and consistent 5% return on such capital. I just assumed it would be attainable.

Enter decentralised finance

So let’s jump to the current situation! I followed the development of the DeFi ecosystem very closely, thanks to my job at Monolith and the different meetups I co-organise.

At first, I used DeFi out of curiosity: the amount I engaged was marginal—most of my net worth was still in ETH/ERC-20 tokens. Like most, I was both curious and perplexed—is this magic internet money experiment really working?

My “Aha!” moment

I started seriously using more DeFi services, like Compound & bZx and then later the Dai Saving Rate & Aave. It was awesome and magical, but it wasn’t what lit the spark for me.

Nope.

The magic spark came from a piece a tokenised real estate I bought on Ethereum using RealT. You may already know RealT—it’s a platform for tokenized real-estate. You own property tokens and receive daily rental payments in DAI.

Why this? It got my mind racing. This was how it went:

  1. 1st day of rent: oh okay, this thing is real. By this point, I started discussing RealT with other people in the scene. 

  2. End of first week: now I was checking my wallet balance every morning—seeing the list of rent paid was exhilarating but left me craving more! 

  3. End of first month: at first I spent the DAI almost immediately using my Monolith Visa card. It was so tempting—the DAI sitting there in my wallet, accumulating every day.

  4. After first month: as the idea of daily DAI became a reality to me, I started rethinking about my masterplan: how much DAI do I need per day to live solely on that? How much capital would it represent? (Hint: way less than $1.5M)

(Above: a DeFi Milkshake I bought with my daily DAI passive income using Visa card)

DAI per day as a framework

What happened there? Why would RealT have this impact on me while Compound did not? (Huge respect for all the projects mentioned in this post, please keep going!)

I think the answer is more straightforward than what people expect:

We used to download movies or buy them to watch them. At some point, Netflix offered us streaming and 99% of us never looked back—I expect the same thing to happen with money.

Money that empowers people

Simply put, daily DAI streaming is a paradigm shift that enables most of us to instantly become much smarter and efficient in the way we relate and manage our assets. It’s empowering to the individual.

Why? The concept of DAI per day reinforces two powerful ideas: first, streaming money and second, using DAI as the base monetary reference.

Why is streaming money a paradigm shift?

  • It makes it easy to break down significant objectives in small chunks

  • There is no wait time between the first initial investment and the first payout. Payouts are available instantly—and spendable anywhere that accepts Visa

Why is DAI a paradigm shift?

  • DAI is a stablecoin—you don’t have to hoard it or worry about daily value lose

  • DAI is at a bridge: easy to spend in the real world but also a hop away from all other Ethereum-based assets (including passive income assets like RealT)

  • As DeFi grows sources of DAI/day are becoming more numerous and attractive 

  • Finally, the tokens used for payouts are more diverse (consider liquidity pools). Bringing everything back in DAI/day gives you exhaustive visibility over all your crypto-passive income sources.

That Daily Dai Lifestyle

Enough context, let’s get practical: what can we do today with these shiny new financial levers?

I went back to my masterplan to give it a second try. 

This time, instead of going straight for full financial independence, I decided to aim for something more practical. For me, it was straightforward: I have three lunches in London every week, costing me around $30 per week on average. 

That means I need roughly 4.3 DAI per day to pay for them.

I could also skip lunch, but I decided to have it for free thanks to DeFi! I’m not there yet but getting close: according to my revised plan, I’ll be getting free lunches by the end of March. 

Starting with a 5 DAI per day portfolio

I am currently exploring different possibilities in my portfolio, so let’s consider a simple one: one that nets you 5 DAI per day.

Here’s what you can expect if you want a simple passive DAI strategy:

  • 8-9% APR with DAI: for instance, locking your DAI in the DSR is at 8%

  • 9-12.5% APR with income assets: but with a higher risk, using RealT

Now that’s if you want to set it and forget about it. There are other opportunities with additional earning opportunities. For instance, if you own a RealT asset, you can:

  • Try to sell at a premium on Uniswap

  • Benefits from their liquidity incentive program

But let’s keep this simple and passive:

  • We’ll stick with the Dai Saving Rate—the safest way to produce DAI interests right now—and RealT—a more risky bet that can offer higher returns

How much in assets values is required for 5 Daily DAI at the below rates?

Going farther

While this is a simple framework to get started it suffers from some limits. For instance, if you’re looking to generate 100 DAI/day from this approach, RealT will not cut it. You’ll run into issues of liquidity (not enough estate available) or systemic risk (you’d be owning a sizeable share of ALL RealT estates).

With my current understanding, I intend to maintain a similar strategy up to roughly 10 DAI/day. My current portfolio also includes aDAI. 

As I blast through the 10 DAI/day, this year, that is if the plan stands, I will be diversifying more and more. I think liquidity pools & staking (SNX, for instance) can be a way to go. However, I’m not familiar enough with these topics & haven’t started committing serious amounts of money to it—so I’m not the best one to talk about it right now: maybe in a few months? 

Wonder how this looks in practice? See for yourself at tokenbrice.eth.

(Above: see Brice’s DAI earnings & spending in real-time—plug tokenbrice.eth into Zerion)


On projections…

Allow me to loop back to my masterplan. While the DAI per day approach is fantastic it has one main downside: it makes yearly projections harder.

Take a minute now and try to guess how much daily DAI you need to produce 50k DAI per year? Did you do it?

How close were you to 137, the actual answer? Most people tend to overestimate.

So while DAI/day is my base, I also look at two other levels to not lose track of the big picture: the DAI per month and the DAI per year.

Going bankless in the real world

I hope you found value in this tactic—my goal is practical DeFi: demonstrating what you can do harnessing DeFi today.  This post was written down & translated adaptation of my last talk at DeFi France.

Late last year Mariano Conti’s talk sent an electro-shock to the crypto world: he reminded us that DeFi is already used for very real situations, such as avoiding losing 50% of your net worth to inflation. 

It was the perfect demonstration of someone living in the real world using the opportunities offered by DeFi. My goal was to provide the European version of it.

Mariano survived inflation using DeFi.

I, on the opposite, want to live my best life, thanks to DeFi.

Here’s the magic: both of us are acting in our own best interest and in doing so, we are supporting the development of a fairer & more accessible financial system for all.

This is a clear illustration of how fast the industry is evolving: hop on & enjoy the ride!


Author Blub

Brice Berdah is the community manager at Monolith and co-organizer of DeFi France. He’s an active crypto user and leader in the grassroots movement for decentralized finance in the EU.


Action steps

  • What are the passive income opportunities in DeFi and what are the risks?

  • Get a Visa card for daily DAI spending (Monolith if in EU or other options)


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Aave protocol is a decentralized, open-source, and non-custodial money market protocol to earn interest on deposits and borrow assets. It also features access to Flash Loans, an innovative DeFi building block for developers to build self liquidations, collateral swaps, and more! Check it out here.


Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

Friday Open Thread: Why are you here?

https://bankless.substack.com/p/friday-open-thread-why-are-you-here/comments

Friday Open Thread: Why are you here?

I mean why are you in crypto. Have you ever thought about it?

Are you here for the revolution, the money, the tech? The adrenaline rush? Are you here to change the world? Where do you get the drive, the passion? Why do you spend so much time on this stuff?

Maybe it’s one big reason. Maybe it’s several. Maybe it’s about getting something. Maybe it’s about giving back. Maybe it’s shallow. Maybe it’s deep.

I want to know…

Why are you here?

Post in thread!

How to use a Zap

https://bankless.substack.com/p/tactic-25-how-to-use-a-zap

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Dear Crypto Natives,

I love simple tools that make everything else in the DeFi ecosystem better.

Zaps from DeFiZaps are one of those tools and it’s time we did a tactic on them.

Does anyone remember how painful it was to buy something on Amazon in when it looked like this? A ten-step process only suffered by the uber geeks brave enough to submit their credit card online.

Back then one-click eCommerce was considered a major innovation! Amazon had to license a one-click patent from Apple to even attempt it.

That’s where we are today in crypto. Simple transactions are still painful. And it’ll take a thousand tiny UX innovations like Zap to get us to mainstream.

I have hope. Because as we’re leveling up…so is DeFi.

Let’s learn about Zaps.

-RSA


TACTICS TUESDAY:

Tactic #25: How to use a Zap

Guest post: Nodar Janashia of DeFiZap with collaboration from RSA

DeFiZap is a system of smart contracts—Zaps—that deploys ETH (and soon DAI) across multiple DeFi protocols in one transaction. It’s the Amazon one-click of DeFi. Use Zaps to get instant access to DeFi opportunities directly from your Ethereum wallet including 💸Lending, 🦄Pooling, ⛽️Staking, and 🚀Leveraged Liquidity.

  • Goal: Pick a Zap based on a DeFi position you want to take

  • Skill: Beginner

  • Effort: 30 minutes

  • ROI: Hours of time & $100s in gas for frequent DeFi users


Why use a zap?

Zaps allow you get into a DeFi position in one transaction—it’s called zapping in.

Zapping in

Say you have ETH and want a position in the Uniswap ETH-DAI pool. This yielded 4% over the last 90 days but you think ETH to USD price will stay flat (important due to impermanent loss) and Uniswap fees will increase yield above the Dai Savings Rate.

Well, it’s a painful process to get into that position. You need to supply half ETH and half DAI. Takes 4 transactions. 10 minutes. Ugh. Ugly as eCommmerce in the 90s.

Zap allows you to do it in one click.

Zapping out

Now say you zapped into the Uniswap ETH-DAI position above. You made profit, now you want out. You can zap out the same way you zapped in. One transaction. Easy.

There are dozens of Zaps now. Each Zap is a recipe for getting into and getting out of a DeFi position—in one click.

Which Zap should I pick?

This is like asking which DeFi positions should I take? It depends what you’re trying to accomplish. DeFiZap has a simple survey you can take that recommends a few based on your tolerances. I expect we’ll see Zaps integrated directly in more wallets too.

Today Zaps provide more benefit to power users—people who already know the position they’re trying to take and the risks of each protocol and want to execute it with less time, effort, and money. Almost like an automated OTC desk.

Zaps are generally practical—they don’t shotgun your capital across the ‘top 10 on coinmarketcap’—they inject into DeFi protocols built on Ethereum. Easy interactions in and out of protocols can supercharge user adoption. Though users should be aware of the risks of each underlying protocol.

Flavors of Zaps

There are many flavors of Zap today and more are added all the time. We’ll focus on Unipool Zaps for this tactic.

Unipool Zaps 🦄

Unipool Zaps allow anyone to earn trading fees by adding liquidity to Uniswap Pools using ETH (the ability to initiate Zaps with DAI is coming soon).

Unipool Zaps auto swaps half of your ETH into the entry ERC20 tokens required to match for the pool (decreasing your ETH exposure), effectively allowing you to start earning liquidity fees without having to go out of your way to supply both sides of the pool. This is especially useful to help liquidity providers measure their returns.

Some popular Unipool Zaps include:

⚡️sETH Unipool: Bullish on ETH
⚡️MKR Unipool: Expect ETH to MKR rate to remain flat
⚡️DAI Unipool: Expect ETH to DAI rate to remain flat
⚡️CHAI Unipool: Expect ETH to CHAI rate to remain flat
⚡️General Unipool: Pick your own ETH-Token pool

The sETH pool keeps your ETH Exposure

If you want to keep your exposure in ETH the sETH Unipool Zap allows for one-click liquidity to sETH Pool on Uniswap using just ETH. This way you remain exposed to ETH price while generating fees from people trading ETH/sETH on Uniswap Pool plus extra SNX staking rewards. (⚠️RSA note—sETH does expose you to the risks of the Synthetix platform—make sure you understand those thoroughly before proceeding)

The cDAI and CHAI provide lending interest while you earn trading fees

You probably know a bit about DAI from our recent cDAI and CHAI articles. When holding cDAI users accrue interest based on the lending rate at any given time—8.5% as of today. CHAI works the same way, less risky than cDAI and earning 8% now.

The CHAI Unipool Zap and cDAI Unipool Zap allow you to enter these respective liquidity pools with just ETH—you earn Uniswap trading fees on top of the cDAI interest rate!


⚠️Before entering a Uniswap Pool make sure you understand the concept of impermanent loss which was covered here or here so you’ve have clear expectations on gain and loss potential.


Other Zaps for lending and leverage are also available. Though again, users should assess the risks of each lending and leverage protocol before using them. For example, some of the Zaps are configured to use the Fulcrum protocol which was recently attacked. (RSA—I’m looking forward to Zaps that automate insurance on these protocols!)

Zaps Cheatsheet

Here’s a quick cheatsheet on popular Zaps available and the positions they provide:

Example:
Zap into the sETH Unipool

Zap into the sETH Unipool in a two steps and one transaction.

Intermediate level: Zap in via website

  1. Connect MetaMask or Fortmatic wallet

  2. Go to the sETH Zap and click ⚡️ZAP IN

  3. Select your desired input amount and confirm 

Advanced level: Zap in via ENS

You can also Zap in via ENS! Since the sETH Unipool Zap was registered with the Ethereum Name Service under sETHUnipool.DeFiZap.eth adding liquidity is as easy as sending an Ethereum transaction. (Note: make sure your gas limit is set to 1,500,000.)

(Above: adding liquidity to sETH Unipool by sendiing ETH to ENS name)

Final Thoughts

Zaps are an awesome tool to make it faster, easier, and cheaper to get into popular DeFi positions. You can zap into positions and zap out of them in one transaction.

While Zaps make it easier to enter and exit positions, it’s still up to you to assess the ROI and risks of the underlying positions you’re entering. These are powertools, not a short-cuts. Before zapping into a Unipool you need to know how Uniswap works, before zapping into sETH learn the risks of Snythetix. Don’t zap into positions without doing your due diligence. Level up first. That’s why we do the program.


Action steps

  • Learn the flavors of Unipool Zaps and try one out!


Author Blub

Nodar Janashia is the co-founder of DeFiZap. He also makes DeFi Tutorials to highlight best use-cases & risks involved when using Open Finance tools.


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Filling out the skill cube

This week you leveled up on Zaps a tool that helps you take positions in DeFi protocols to lend and earn. Keep to the skill cube. Keep leveling up!


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Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.