21Shares Research Newsletter - Issue 41

Market Outlook

The crypto asset market performed especially well over the last week, with Bitcoin hitting over $10,000 and Ethereum and Bitcoin Cash both returning over 19% since February 4. The biggest driver of growth over the last week was likely the news that Bakkt is planning to launch its consumer app in the coming months — an app that will reportedly allow users to trade reward points (on Starbucks, for example) for cash and Bitcoin. In addition, as we explain below, the news of the SEC commissioner's proposal to give new token sale projects a 3-year safe harbor period is another large and bullish driver for the market's growth. The top five crypto assets performed as follows: BTC (7.76%), ETH (19.05%), XRP (3.34%), BCH (19.63%), and LTC (9.45%).

On-chain transaction volume for the top five crypto assets peaked during the week, on February 6, before consolidating in the following days as Bitcoin passed the $10,000 mark. However, the total on-chain transaction volume was up from $2.81B to $3.09B. The average on-chain transaction volume for the top-five crypto assets is as follows: BTC ($2.25B), ETH ($371M), XRP ($155M), BCH ($268M), and LTC ($51.4M).

Podcast — A $70 Million Decentralized Organization Is Returning Its Funds To The Community, Find Out Why. (Exclusive Interview With Digix Co-founder Shaun Djie)

DigixDAO is arguably the world's oldest decentralized autonomous organization (DAO) and has been a pioneering innovation in the crypto asset industry since its inception in March 2016. In addition, Digix was the first crowd sale based on Ethereum. It was launched to manage the minting of stablecoins backed by gold through the use of smart contracts. In January 2020, almost four years since the inception of the project, the holders of the DigixDAO token voted to dissolve the DAO and return the 380,000 ETH held by it to the token holders.

Hany Rashwan, Lanre Ige, and Hansen Wang from the Amun team are joined by Digix co-founder Shaun Djie to discuss Digix's journey from launching the world's first DAO and minting the gold token to the passing of the vote for the dissolution of the DAO.

Listen to the full episode on Spotify, Apple Podcasts, or Megaphone.

News - SEC Commissioner Hester Pierce Proposes 3-Year Safe Harbor for Crypto Token Sales | CoinDesk

What Happened?

SEC Commissioner Hester Peirce has formally proposed a safe harbor for token projects. It would give them some breathing room to develop their networks and communities before having to worry about the regulatory regime.

Under Peirce’s proposal, unveiled during a speech at the International Blockchain Congress in Chicago Thursday, crypto startups would have a three-year grace period from their first token sale to achieve a level of decentralization sufficient to pass through the agency’s securities evaluations, including the Howey Test, the famous U.S. Supreme Court assessment.

Why Does It Matter?

While Commissioner Pierce's proposal is still a far way from officially becoming SEC policy, the ramifications of such a proposal would be extremely impactful on the dynamics of the whole crypto asset market. One of the reasons for the cooldown of the token sale and token market was fear and uncertainty from the issuer on whether or not their tokens where safe from enforcement action. This fact has been one of the reasons why an increasing amount of activity within the space — such as the derivatives market — has taken place outside of the United States.

Commissioner Pierce's proposal could potentially reverse this trend and make it easier for businesses, especially those in Decentralized Finance (DeFi) ecosystem to prosper. The proposal certainly will have a number of hurdles to clear, as pointed out by well-known crypto lawyer Preston Byrne. Noticeably, the process by which a development team could sufficiently "decentralize" themselves within 3 years seems vague. Moreover, the proposal's aim of decentralizing seems at odds with the proposal's allowance for development teams to actively solicit trading venues to facilitate secondary trading.

Learn more here.

News - Value Locked Into DeFi Protocols Has Crossed $1 Billion | The Block

What Happened?

The total amount of money locked into decentralized finance (DeFi) applications and protocols has crossed a milestone of $1 billion. There has been a growth of nearly 100% since the start of this year as the amount locked was $670.77 million as of Dec. 31, 2019, according to DeFi Pulse. Maker, the Ethereum-based lending protocol, remains the leader in the space with nearly 60% dominance.

Why Does It Matter?

Hitting the $1 billion mark is a proud moment for the DeFi community which in the last two years has grown from nothing into the most vibrant aspect of Ethereum. The chart below shows DeFi's growth in value since late 2017. One interesting thing to note is how much dominance the Maker/Dai stablecoin project has over DeFi; currently, as previously mentioned, Maker accounts for around 60% of DeFi and the Dai stablecoin forms a significant amount of the value and volumes of other popular DeFi projects like Compound.

As such, in some regards, despite the fact that the news of DeFi's growth is undoubtedly positive, it also shines a light on potential sources of systemic risk within the sector — with the obvious one being DeFi's extreme reliance on the Maker/Dai stablecoin system.

Learn more here.

News - Investors Can Now Trade Reelection Futures Contracts for President Trump, Bernie Sanders, and Pete Buttigieg | The Block

What Happened?

Crypto asset derivatives exchange FTX has added a new futures contract, TRUMP-2020 (TRUMP), for users to monetize their prediction of the 2020 U.S. presidential election results. According to FTX’s Thursday announcement, the TRUMP future will expire to $1 in the case that Donald Trump gets re-elected in the upcoming U.S. presidential election, and expire to $0 otherwise.

After launching a re-election futures contract for Donald Trump last week, crypto derivatives exchange FTX has added five more futures contracts for other U.S. presidential candidates. The new contracts cover Bernie Sanders (BERNIE), Joe Biden (BIDEN), Mike Bloomberg (BLOOMBERG), Pete Buttigieg (PETE) and Elizabeth Warren (WARREN), FTX announced on Monday. It means users can now further monetize their prediction of the 2020 U.S. presidential election results.

Why Does It Matter?

In a similar fashion to the decentralized prediction market Augur, FTX's futures contracts allow users to bet on the outcome of the upcoming US presidential election through their futures platform. While the six options currently available have only been trading for two days together, they already give us an indication of the probabilities the markets are assigning to the different candidates. As of today, the TRUMP contracts are priced at $0.663, compared to $0.196 for BERNIE contracts, and $0.059 for PETE contracts. We show the breakdown of the market's implied election predictions in the chart below.

Interestingly, prediction markets have been touted as a classical use case of smart contracts on platforms like Ethereum but FTX was able to launch theirs without the use of tokenization — but rather their own internal system for the collateralization and payouts of futures contracts, as their CEO pointed out. Some market commentators have called into question whether, in this case, smart contracts will in fact be needed for such use cases or whether simply a decentralized means of payment and unit of account is all that is necessary. We expect this debate to continue as both the DeFi and unregulated derivatives market — the former relying on Ethereum and the latter relying (mostly) on Bitcoin — continue to grow and, to some extent, compete for the same cake.

Learn more here.