1 Institutional Digital Asset Derivatives Market Research Latest Research & Analysis
THEBLOCKCRYPTO.COM Research June 2020 THEBLOCKCRYPTO.COM Research Latest Research & Analysis
Content 3 Research Team 5 Monthly Overview 18 Macro • The history of M&A activity within the digital asset industry • Nearly 75% of Fortune 100 firms have explored blockchain initiatives • A look at BTC/USD and BTC/EUR volume on exchanges • Value capture by decentralized exchange tokens • How do volume, volatility, and returns of Bitcoin vary based on weekday?
43 Projects • Compound outstanding debt grows 400% over 3 days as COMP distribution begins • Balancer breaks $100m AUM as BAL begins trading on secondary markets • Curve: the asset-specific automated market maker • Early use of UMA’s ‘priceless’ synthetic reflects promising but nascent market • What stood out from the Digital Dollar whitepaper • The Compound token model: how it can expand beyond governance 89 Company • The state of crypto debit cards after the Wirecard collapse • TON: Telegram Orphan Network
101 Trends • DEX aggregators: user experience solutions for the decentralized ex- change space • Despite the recent decline, exchanges still hold more than 16% of all bitcoins • Charting the growth of Reddit communities for major cryptocurrencies • Bitcoin miners are mining fewer empty blocks in 2020 • Ethereum 2.0 & the exchange dilemma • An analysis of U.S. federal databases and blockchain-related mentions • A proxy for crime involving bitcoin use? An analysis of U.S. Attorney press releases
THEBLOCKCRYPTO.COM Research Research Team
Larry Cermak Matteo Leibowitz Ryan Todd Director of Research Research Analyst Research Analyst
Steven Zheng John D’Antoni Mike Rogers Research Analyst Research Analyst Research Analyst
Mika Honkasalo Omkar Shanbhag Research Intern Research Intern
THEBLOCKCRYPTO.COM June 2020 Latest Research & Analysis
Monthly Overview 5 June by the numbers: A look at crypto exchange volumes, open interest, and miner revenue
Research THEBLOCKCRYPTO.COM 5 June by the numbers: A look at crypto exchange volumes, open interest, and miner revenue
Adjusted on-chain volume
Total adjusted on-chain volume, which is a proxy for economic throughput, saw a decline of 3% in June after reaching a 10-month high in May. Bitcoin’s on-chain volume decreased by 9% (from $67.8 billion to $61.9 billion) while Ethereum’s increased by 28% (from $12.5 billion to $16.0 billion). Bitcoin’s on-chain volume was 3.9 times higher than Ethereum’s in June.
Source: Coin Metrics, The Block Research
If we take stablecoins that settle on Bitcoin and Ethereum into account, Ethereum has nearly surpassed the on-chain volume of Bitcoin by the end of the month. (fig.2) pg.6
Research THEBLOCKCRYPTO.COM 6 June by the numbers: A look at crypto exchange volumes, open interest, and miner revenue
fig.2
Source: Coin Metrics, The Block Research
Stablecoins Since early February, the total issued supply has grown by over 100% — from $5.68 billion to $12.04 billion. The fastest stablecoin growth in history coincides with the global liquidity crunch stem- ming from the coronavirus panic and its economic impact.
In June, the stablecoin supply grew from $11 billion to $12 billion. It’s not immediately clear whether the new supply comes from new demand or whether it is existing money that was already on ex- changes and is now being converted into stablecoins.
Source: Coin Metrics, The Block Research
Research THEBLOCKCRYPTO.COM 7 June by the numbers: A look at crypto exchange volumes, open interest, and miner revenue
The adjusted on-chain volume of stablecoins hit yet another all- time high in June and reached $54.9 billion. It increased by 13.9% month-over-month.
Source: Coin Metrics, The Block Research
Dai saw the highest velocity in June — the supply changed hands nearly 13 times. BUSD, the stablecoin of Binance, changed hands more than 12 times in June. The least-utilized stablecoins relative to their size were the Gemini dollar and TrueUSD.
Source: Coin Metrics, The Block Research
Research THEBLOCKCRYPTO.COM 8 June by the numbers: A look at crypto exchange volumes, open interest, and miner revenue
Miner Revenue Bitcoin miners generated $281.6 million in revenue in June, repre- senting a month-over-month decrease of 23% and a 15-month low.
Source: Coin Metrics, The Block Research
Ethereum miners generated $118.4 million in revenue in June, rep- resenting a month-over-month increase of 21% and a 20-month high-
Source: Coin Metrics, The Block Research
Research THEBLOCKCRYPTO.COM 9 June by the numbers: A look at crypto exchange volumes, open interest, and miner revenue
Transaction fees on Ethereum increased significantly and reached an all-time high of nearly 17% of the total revenue, compared to 10% in May. Bitcoin’s transaction fees saw a decline from 10% in May to a little over 4% in June.
Source: Coin Metrics, The Block Research
Web Traffic Web traffic on cryptocurrency exchanges saw a decrease of 14% in June and hit a 5-month low. According to data from SimilarWeb, cryptocurrency exchanges (both spot and derivatives) recorded a total of 98.1 million website visits in June.
Source: SimilarWeb, The Block Research
Research THEBLOCKCRYPTO.COM 10 June by the numbers: A look at crypto exchange volumes, open interest, and miner revenue
Binance had the largest number of estimated visitors in June, with about 23.4 million. They were followed by Coinbase with 19 million and BitMEX with 7 million. Binance, Coinbase, and BitMEX drew 50.4% of the total traffic in June.
Source: SimilarWeb, The Block Research
Korean exchanges, Bithumb and Upbit, saw the smallest month- over-month traffic decreases. BitMEX, Bittrex, and Bitfinex saw traffic declines of more than 20%.
fig.11
Source: CryptoCompare, The Block Research
Research THEBLOCKCRYPTO.COM 11 June by the numbers: A look at crypto exchange volumes, open interest, and miner revenue
Spot volumes
After last month’s 20% increase, cryptocurrency traded volumes saw a 32% decline in June. According to The Block’s volume index, the volume for June came in at $72.2 billion compared to $106.0 billion in May. This was the largest month-over-month decline since August 2019. (fig.11) pg.10
Binance continues to have the largest market share — the exchange captured 56% of the legitimate traded volume in June. Coinbase pulled 9.5% of the volume, followed by Kraken (6.7%), LMAX Digi- tal (6.1%), Bitstamp (5.1%), and Bitfinex (3.8%).
Source: CryptoCompare, The Block Research
GBTC
The daily average volume of GBTC, a closed-end fund that invests exclusively in bitcoin, saw a 24% decline in June after reaching a 10-month high in May. (fig.13) pg.12
Research THEBLOCKCRYPTO.COM 12 June by the numbers: A look at crypto exchange volumes, open interest, and miner revenue
fig.13
Source: Factset, The Block Research
Bitcoin futures The aggregated open interest of Bitcoin futures reached $3.45 billion by the end of June; compared to $3.54 billion by the end of May.
Source: skew, The Block Research
Research THEBLOCKCRYPTO.COM 13 June by the numbers: A look at crypto exchange volumes, open interest, and miner revenue
The monthly volume of Bitcoin futures fell by 40% in June (from $557 billion to $332 billion) after a record May.
Source: skew, The Block Research
Regulated futures On the regulated exchange front, CME’s open interest of Bitcoin futures was $350 million by the end of June after reaching $532 million towards the end of last month.
Source: skew, The Block Research
Research THEBLOCKCRYPTO.COM 14 June by the numbers: A look at crypto exchange volumes, open interest, and miner revenue
The average daily volume in May was $285 million compared to $395 million in May. Bakkt’s volume in June was more than 10 times lower than CME’s and its open interest was more than 40 times lower.
Source: skew, The Block Research
Ethereum futures The aggregated open interest of Ethereum futures reached $632 mil- lion by the end of June; compared to $705 billion by the end of May.
Source: skew, The Block Resarch
The monthly volume of Ethereum futures fell by 16% in June (from $72.1 billion to $60.7 billion).
Research THEBLOCKCRYPTO.COM 15 June by the numbers: A look at crypto exchange volumes, open interest, and miner revenue
Source: skew, The Block Research
Bitcoin vs. Ethereum futures Both the aggregated open interest and volume of Bitcoin futures were 5.5 times larger than those of Ethereum futures in June.
Bitcoin options The aggregated open interest of Bitcoin options reached $1.83 billion on June 25 and then contracted by more than 50% as $935 million worth of options contracts expired. By the end of the month, the open interest was sitting at a little bit over $1 billion.
Source: skew, The Block Research
Research THEBLOCKCRYPTO.COM 16 June by the numbers: A look at crypto exchange volumes, open interest, and miner revenue
The monthly volume of Bitcoin options fell by 15% in June (from $3.73 billion to $3.18 billion).
Source: skew, The Block Research
Ethereum options The aggregated open interest of Ethereum options reached $171 million on June 25 and then contracted by more than 30% as $59 million worth of options contracts expired. By the end of the month, the open interest was sitting at $132.7 million.
Source: skew, The Block Research
Research THEBLOCKCRYPTO.COM 17 June by the numbers: A look at crypto exchange volumes, open interest, and miner revenue
The monthly volume of Ethereum options increased by 55% in June (from $215 million to $333 million).
Source: skew, The Block Research
Bitcoin vs. Ethereum options The aggregated open interest of Bitcoin options was 7.5 times larg- er than that of Ethereum options in June. The volume of of Bitcoin options was 9.5 times larger than Ethereum’s.
Research THEBLOCKCRYPTO.COM June 2020 Latest Research & Analysis
Macro 19 The history of M&A activity within the digital asset industry
26 Nearly 75% of Fortune 100 firms have explored blockchain initiatives
29 A look at BTC/USD and BTC/EUR volume on exchanges
34 Value capture by decentralized exchange tokens
40 How do volume, volatility, and returns of Bitcoin vary based on weekday?
Research THEBLOCKCRYPTO.COM 19 The history of M&A activity within the digital asset industry
• Since 2013, a total of 129 M&A transactions have been conduct- ed within the blockchain sector, with a reported total value of approximately $2.6 billion
• Trading Products & Exchanges made up approximately 48% of the total reported value of M&A deals and 23% of all deals
• Coinbase, Binance, and Kraken have the most active firms in acquisitions, all with boasting at least 10 M&A transactions
More than two years after Bitcoin’s price reached its all-time high below $20,000, a pattern of mergers and acquisitions across the digital asset space continues to take shape.
In 2018, overall investments in the industry surged to $7.9 billion, representing more than 1,050 deals. With capital readily available, a plethora of firms formed to cater to this burgeoning industry. De- spite all of the venture funding allocated, the industry at large has suffered to achieve mainstream adoption.
A lack of mainstream adoption has led to highly competitive sub-in- dustries, with companies offering similar products and services to limited user bases. In other instances, smaller firms with a single service offering in a specific niche have been acquired by larger firms looking to differentiate themselves by forming a full-service suite of products and services.
As a result, we have already seen the early innings of the digital assets industry’s consolidation, which is more likely to continue than not in crowded sub-industries.
M&A Reported Value
Since 2013, there has been a total of 129 M&A transactions within the sector. Of those transactions, only 49, or 38%, have reported a deal value.
An uptick in M&A activity occurred in 2018 when the reported value jumped from $266 million in 2017 to approximately $1.3 billion, an almost 400% increase.
Research THEBLOCKCRYPTO.COM 20 The history of M&A activity within the digital asset industry
Trading products and Exchanges have been responsible for about $1.3 billion, or approximately 48%, of the total reported value of M&A deals. The Data & Analytics category has been the sec- ond-highest category by M&A value at $414 million. However, Bi- nance’s acquisition of CoinMarketCap for a reported $400 million skews this figure.
Outside the exchange space, the mining sector first began to con- solidate between 2017 and 2019, when the market mania height- ened and competition quickly steepened.
Research THEBLOCKCRYPTO.COM 21 The history of M&A activity within the digital asset industry
Some of the largest M&A deals have been acquisitions of mining firms. In total, the total acquisition value of mining ventures ex- ceeds $305 million. In 2017 and 2018, there were a total of nine deals involving mining firms.
M&A deals (Year-over-year)
Between 2013 to 2017, 39 M&A deals were announced within the blockchain sector. M&A activity in 2018 dramatically rose — increas- ing 207% — from 15 deals in 2017 to 46 in 2018.
As a sub-sector, Trading Firms & Exchanges saw the highest num- ber of deals, representing 23% of the overall amount.
Other categories that saw a notable number of M&A deals include the Banking & Payments sector, representing about 12% of trans- actions. Data & Analytics and Mining represent approximately 10% and 9%, respectively. (fig.4) pg.8
Category make-up of M&A deals (%)
Similarly, the Trading & Exchanges, Banking & Payments, and Min- ing categories saw similar changes.
Research THEBLOCKCRYPTO.COM 22 The history of M&A activity within the digital asset industry
fig.4
All of these categories experienced a decline in their share of ag- gregate M&A deals. This data suggests that these segments have experienced some level of maturation to date. It may also suggest that the industry is expanding beyond just these three categories, and firms are looking for other areas to expand like investing appli- cations or institutional products and services.
Research THEBLOCKCRYPTO.COM 23 The history of M&A activity within the digital asset industry
One area in particular that has shown relatively low M&A activity is the custody space. With a wide assortment of firms catering to institutional clients, more acquisitions shouldn’t come as a surprise. Bigger firms are beginning to offer custody as just one feature as a wider array of services. We can see this with Coinbase’s acquisition of Xapo’s custodial service, Genesis Trading’s recent acquisition of custody firm Vo1t, and BitGo’s acquisition of both Hedge for staking services and Harbor for expansion into the digital securities market.
Largest M&A deals by reported value
To date, three firms within the blockchain industry have been ac- quired for a reported $400 million.
These deals include NXMH’s acquisition of Bitstamp, Binance’s ac- quisition of CoinMarketCap, and Circle’s acquisition of Poloniex.
Half of the ten largest M&A deals involved companies acquiring an exchange or a firm that offers trading services/technology. Mining is the only other category that makes more than one appearance, with CollinStar Holdings’ acquisition of BiWang Group for $100 mil- lion and HyperBlock Technologies’ acquisition of CryptoGlobal for $80 million.
Firms within the Blockchain Industry with the most M&A activity
Leading exchanges in the sector — such as Binance, Coinbase, and Kraken — have been the most active in consolidation, either acquir- ing direct competitors or firms in different segments to complement their core services and improve the overall experience.
Research THEBLOCKCRYPTO.COM 24 The history of M&A activity within the digital asset industry
The differences between the exchanges’ acquisitions provide in- sights into how they’ve been trying to position their firms in the market. Kraken has primarily focused on acquiring other exchanges and enhancing its trading product, whereas Coinbase has opted for a more diverse product suite.
Kraken has acquired the exchanges Coinsetter, CleverCoin, and Bit Trade. For the exchange’s futures product offerings, the exchange acquired Crypto Facilities, a derivatives exchange, and Cryptofi- nance, a software tool that aggregates prices across 50 exchang- es. Its acquisition of CF Benchmarks for indices and Circle’s OTC desk also illustrate the focus on trading and institutional clients.
On the contrary, the only exchange that Coinbase has acquired is Paradex, which gave it exposure to decentralized exchanges. The firm is exploring areas that go beyond just trading, which can be illustrated by its acquisitions of Neutrino, a blockchain surveillance firm, Tagomi to build out a full-service brokerage, and Cipher for its dapp browser.
Coinbase has also made acquisitions to obtain talent. Such deals include the acqui-hire of Blockspring as well as Koding, a code col- laboration platform.
Research THEBLOCKCRYPTO.COM 25 The history of M&A activity within the digital asset industry
Conclusion
Binance’s acquisition of Coinmarketcap marked the first major acquisition of a data analytics provider. With the site’s significant traffic, it is expected to help the firm with marketing and client ac- quisition. The acquisition may pave the way for future consolidation among data providers in the race to become the first Data & Analyt- ics unicorn in the sector.
Further, with lagging fundraising conditions due to the COVID-19 pandemic — and an increasing institutional presence in the space — further consolidation across custody firms is also likely, as it be- comes just one service among many offered in full product lines.
Research THEBLOCKCRYPTO.COM 26 Nearly 75% of Fortune 100 firms have explored blockchain initiatives
• Some of the U.S.’s largest frms are exploring blockchain initiatives • The Block examines the blockchain efforts of the Fortune 100 list
The cryptocurrency mania of 2017 inspired some of the largest companies in the U.S. to experiment with blockchain systems. Large corporations jumped at the chance to be associated with blockchain technology, due to its novelty and its association with technological innovation. IBM, for example, has said the technology has the potential to change entire industries and “even the world.”
It is no surprise then that 72% of the top 100 firms on the Fortune 500 list have either explored blockchain opportunities or have even launched blockchain-based services. The Fortune 500 list consists of the 500 largest US companies by total revenues. For this piece, The Block takes a look at the top 100 firms from the Fortune 500 list and the status of their blockchain efforts.
The sector breakdown of the Fortune 100 list is shown below.
Of the 72 firms that have explored blockchain products, ~42% of them have yet to pass the exploration phase of their blockchain efforts, according to The Block’s research. We define exploration as efforts made by firms to patent blockchain projects and partici- pate in blockchain consortiums — for instance, the OOC Oil & Gas
Research THEBLOCKCRYPTO.COM 27 Nearly 75% of Fortune 100 firms have explored blockchain initiatives
Blockchain Consortium and the Life Insurance Blockchain Adviso- ry Council — but have yet to publicly disclose any piloting or re- al-world usage of blockchain products and service. The status of blockchain efforts of the 72 firms from the Fortune 100 list is plotted out below.
The remaining ~58% of firms on our list have either piloted block- chain products or launched blockchain-based products and ser- vices. The most popular blockchain network among these firms is Hyperledger, specifically Hyperledger Fabric. Hyperledger’s dom- inance is due to the fact that most firms working on blockchain efforts on our list are working with IBM Blockchain, which is built on the Hyperledger Fabric blockchain framework. Walmart’s pilot tests of IBM’s food supply chain provenance project is an example of this.
Firms leveraging Ethereum for their blockchain efforts are often working a private fork of the public blockchain — for instance, J.P. Morgan’s Quorum project. (fig.3) pg.14
Research THEBLOCKCRYPTO.COM 28 Nearly 75% of Fortune 100 firms have explored blockchain initiatives
fig.3
Research THEBLOCKCRYPTO.COM 29 A look at BTC/USD and BTC/EUR volume on exchanges
• There are only four exchanges that have historically attracted the most liquidity for BTC/USD pairs — Bitfinex, Coinbase, Kraken, and Bitstamp • In terms of BTC/USD volume, 2020 monthly high is still four times smaller than the all-time record in December 2017 • Coinbase is the leader for BTC/USD volume while Kraken is the clear leader for BTC/EUR volume • Bitfinex’s share of volume dropped significantly in the last three years – from 50% to less than 20% now
Traded volume is often looked at in aggregate, which means that the volume of all trading pairs on each particular exchange is add- ed up. This approach heavily favors exchanges, such as Binance, with hundreds of pairs and a lot of market makers. Binance sup- ports nearly 200 coins while both Coinbase and Kraken support less than 40 coins and Bitstamp only supports 7 coins.
Less than 50% of Binance’s total volume comes from Bitcoin and Ethereum. The rest is spread out across nearly 200 other coins as seen below.
Source: CoinGecko
If we compare Binance to the four trailing spot exchanges, Bitfinex drew 81.2% of the total volume from Bitcoin and Ethereum, Bit- stamp 80.4%, Kraken 75.0%, and Coinbase 61.0%.
Research THEBLOCKCRYPTO.COM 30 A look at BTC/USD and BTC/EUR volume on exchanges
Source: CoinGecko
Volume of BTC/USD pairs
Based on the evaluation of liquidity, both by using order book depth and also historical spreads, there are four exchanges that have his- torically attracted the most liquidity for BTC/USD pairs — Bitfinex, Coinbase, Kraken, and Bitstamp.
What initially jumps out when looking at the daily average volume of BTC/USD pairs is that volume is still much lower than what it was in late 2017 and early 2018. In 2020, the volume has so far peaked in March when the daily average volume reached $492.7 million. In June, the volume is falling again and the daily avg vol- ume is currently at $291.3 million — 36% lower than in May. (fig.3) pg.17
When it comes to market share, the decline of Bitfinex is worth pointing out. In late 2017, Bitfinex was pulling more than 50% of the BTC/USD volume while now, its share has been less than 20% in the last two months. Bitstamp has been able to hold a similar share of volume since 2017. Coinbase has seen steady growth since early 2018 and is now the leading BTC/USD market with al- most 40% of the market share. (fig.4) pg.17
Research THEBLOCKCRYPTO.COM 31 A look at BTC/USD and BTC/EUR volume on exchanges
fig.3
Source: The Block Research, exchanges
fig.4
Source: The Block Research, exchanges
Volume of BTC/EUR pairs
The same trend as for BTC/USD is apparent for BTC/EUR. Volume was much higher two years ago than it is now. However, EUR volume in 2020 is higher than highs in 2019, which is not the case for USD.
Research THEBLOCKCRYPTO.COM 32 A look at BTC/USD and BTC/EUR volume on exchanges
Source: The Block Research, exchanges
Indeed, the ratio between BTC/USD and BTC/EUR volume is ris- ing suggesting that volume in the euro is growing faster relative to volume in the dollar. After being as low as 15%, the euro volume is now about a third of the dollar volume.
Source: The Block Research, exchanges
Research THEBLOCKCRYPTO.COM 33 A look at BTC/USD and BTC/EUR volume on exchanges
When it comes to market share, Kraken dominates with more than half of the BTC/EUR volume. Coinbase and Bitstamp each have about 20% while Bitfinex has the lowest BTC/EUR volume.
Source: The Block Research, exchanges
Research THEBLOCKCRYPTO.COM 34 Value capture by decentralized exchange tokens
• Decentralized exchanges are perhaps the fastest growing sector in Open Finance. • Over the past 30 days, decentralized exchanges have facilitated an average of $46.2 million in daily trade volume. • The value captured by decentralized exchange tokens ranges from anywhere between 0.3% and 0.01% of exchanged value, depending on the protocol.
Decentralized exchanges have perhaps been the biggest success story in Open Finance in 2020.
Some $1.38 billion has traded on decentralized exchanges over the past 30 days. During the last 18 months, the average growth rate for decentralized exchanges has been 32% month-over-month.
Source: Dune Analytics
Even though decentralized exchanges account for less than 1% of spot trading volume on centralized exchanges, the trajectory is a positive one. New technologies to improve the scalability of decen- tralized exchanges also help improve their competitiveness against their centralized counterparts.
Research THEBLOCKCRYPTO.COM 35 Value capture by decentralized exchange tokens
Source: Coingecko, CryptoCompare
Decentralized exchanges can be categorized by those that use a traditional order book model and those that use liquidity pools. The latter of which use prices that are determined according to some constant function equation.
For order book exchanges, the biggest challenge today is the scal- ing limits of the Ethereum network. This is an issue both in terms of latency, — where transactions take 15 seconds to process — and cost, because a single order may require a fee of upwards of a few dollars depending on network congestion. Profitable market-making requires constantly managing positions in order books, and this has been mostly infeasible on the base blockchain layer.
As a solution, 0x uses off-chain order matching and only transacts on-chain to settle trades. Meanwhile, Kyber Network batches many orders (with multiple tokens and price parameters) by market mak- ers into a single transaction. Recently, we’ve seen the launch of ex- changes Loopring and DeversiFi, which both utilize zero-knowledge proofs to achieve thousands of transactions per second on a side- chain. The security of these chains is ultimately derived from the Ethereum blockchain since the Rollup chain’s blocks are validated on the blockchain, but users can transact faster and for lower fees without having to post all trades to the underlying blockchain.
Research THEBLOCKCRYPTO.COM 36 Value capture by decentralized exchange tokens
Liquidity pools are a simpler way of bootstrapping liquidity than or- der books, since market-making only requires broadcasting a single transaction when depositing liquidity into a pool. As a drawback, this model can lead to higher slippage costs for users because a constant function equation determines prices instead of direct order matching.
To combat this issue, liquidity pool-based decentralized exchanges optimize both the function and the parameters by which assets can be deposited.
For example, Curve uses a pricing formula that is optimized for as- set pairs that are price-stable relative to one another (e.g. stable- coin-to-stablecoin swaps). Balancer allows liquidity providers more control over which assets and how much of them are within those pools, and for pool owners to customize their own fees to make providing liquidity more attractive.
Source: The Block Research
Are the tokens valuable?
It is clear that if Open Finance is to succeed, the decentralized ex- change of assets will be a part of the equation.
After all, there will be demand in a digital economy to exchange
Research THEBLOCKCRYPTO.COM 37 Value capture by decentralized exchange tokens
assets with one another. In the best case, decentralized exchanges will grow to facilitate significant value transfer and be comparable to the world’s largest stock exchanges that facilitate hundreds of billions in trade volume today.
One way of viewing decentralized exchanges is as disintermediated versions of traditional exchanges, wherein the exchange middle- man is removed and buyers and sellers are free to exchange. Gen- erally, there are no registration fees or eligibility criteria for listing new exchange pairs beyond a technical standard. Decentralized exchanges cannot be used for on-ramping fiat into the crypto eco- system, but once assets are on a blockchain, they become freely tradeable in any decentralized exchange.
Decentralized exchanges also potentially fragment the traditional exchange business into many different services. As a result, many revenue sources that traditional exchanges have are cut. Unlike traditional exchanges, decentralized do not have proprietary trad- ing software as a revenue source, since anyone can build their own exchange interface on one of these protocols. Similarly, data feeds are fully trustworthy because of the transparency provided by blockchains. And again, anyone is free to build a value-add service on top.
Today, there are relatively significant differences between what token holders of decentralized exchange protocols charge for them- selves. Over the past month, 0x has facilitated an average of $3.44 million in trade volume per day, while Kyber Network has done $3.61 million. Yet, at the current rates 0x, token holders are being paid roughly $2,000 per month for staking their tokens behind mar- ket makers, while 199,366 KNC tokens have been burned over the past 30 days — worth $235,000 at current prices.
Overall, protocol fees for both token holders and market makers on 0x have totaled at $15,000 during the past month.
This means that KNC is valued at a 75x multiple to its annual earn- ings, while ZRX is at 8,900. This state of affairs persists with both protocols facilitating roughly the same trading volume.
Research THEBLOCKCRYPTO.COM 38 Value capture by decentralized exchange tokens
Source: The Block Research
Decentralized exchanges are still in their infancy, which is why direct earnings comparisons in this fashion tell very little. Once the protocols mature, it’s unlikely that one can capture 100 times the value of another for providing nearly the exact same service.
Fees (via token burn or dividends) is an additional cost for which traders have to pay.
Uniswap v2, which launched in May 2020, now includes an option to turn on a 5 bps fee. The fee is deducted from liquidity provid- ers that are currently earning 30 bps per trade, and would be paid directly to Uniswap’s development team or token holders if a token is launched. This means that liquidity providers will relinquish one- sixth of their earnings to token holders. While this fee has benefits for the protocol — such as paying for continued development — it also increases the incentive for liquidity providers to fork and modi- fy the protocol to keep those profits. In contrast to how difficult it is to launch an exchange in the real world, any developer can launch a decentralized exchange to a global audience from day one.
Token holders of decentralized exchanges are not the primary service providers to users, similar to many other crypto protocols.
Research THEBLOCKCRYPTO.COM 39 Value capture by decentralized exchange tokens
In Proof-of-Stake blockchains, token holders stake their tokens to verify transactions and receive transaction fees. Similarly, REP token holders are responsible for correctly reporting the results of Augur’s markets in exchange for fees. In both cases, cutting down on the token holder earnings impacts the security of the protocols. Removing token holders from decentralized exchanges does not directly impact security, or even liquidity, negatively.
Compared to a protocol like MakerDAO, decentralized exchanges also have less governance overhead that would justify token hold- ers taking a large cut of the profits. Decentralized exchanges are much more logically complete systems and do not require outside input as much as is the case for MakerDAO’s risk governance. Additionally, MKR holders are compensated for the risk they take, since they are diluted via new token issuance as a final backstop if the system becomes undercollateralized. Decentralized exchanges do not require such an insurance scheme.
There’s only a certain number of ways to match and settle orders on order books or adjust parameters for liquidity pools. From a technical perspective, transaction settlement is actually facilitated by whichever blockchain the decentralized exchange runs on. It is also easier to replace a decentralized exchange than start liquidity effects over again for a currency since you can optimize for specific markets (for example, which Curve Finance has done for stablecoin swaps) compared to having to outcompete an entire other protocol with existing users.
Decentralized exchange aggregators such as 1inch Exchange further drive liquidity towards protocols with the least excess fees. By default, users receive the best prices, and liquidity is directed towards the protocols that provide those prices. This, in turn, incen- tivizes liquidity to form around the most efficient design. With such a competitive market environment, there is no room for excess rent-seeking.
Due to low switching costs for users and market-makers, the ease of forking an exchange’s code and setting up a competitor, and the relatively small role of the exchange operator — in this case, token holders instead of the shareholders of Nasdaq or NYSE — there’s a strong counterargument against decentralized exchange tokens capturing significant value long-term.
Research THEBLOCKCRYPTO.COM 40 How do volume, volatility, and returns of Bitcoin vary based on weekday?
• The stock market is only open less than 20% of the time when cryptocurrency markets are open • Bitcoin is the most traded on Wednesday and Thursday and the most volatile on Thursday • It is the least traded on weekends and also the least volatile
Cryptocurrency markets are unique because they are global and open 24/7, which introduces interesting dynamics.
The regular trading session on the U.S. stock market is 6.5 hours a day — from 9:30 am until 4 pm. But the weekends and holidays are closed so there are normally 252 trading days a year, meaning that the stock market (not including after-market trading) is only open 1,638 hours a year.
If we discount the brief periods of scheduled or unscheduled main- tenance, the cryptocurrency markets are open 8,760 hours a year. That means that the stock market is only open less than 20% of the time when cryptocurrency markets are open.
But how do specific weekdays affect the trading? Or do they at all? Let’s take a look.
Volume
Source: The Block Research, Coinbase
Research THEBLOCKCRYPTO.COM 41 How do volume, volatility, and returns of Bitcoin vary based on weekday?
Trading volume is a good proxy for liquidity. When the liquidity is deeper, it means that more traders are participating in the market. It’s expected that the weekends will have less volume as traders will generally participate less than on weekdays.
When looking at the volume of BTC/USD pair on Coinbase from 2016 until today, Wednesday and Thursday have the highest vol- ume of $97.3 and $96.5. As expected, Saturday and Sunday have the lowest volume of $60.4 and $62.8 million respectively.
The margin of error ranges from 15% to 23%, which means that the result will be within 15% to 23% of the mean 95% of the time.
Volatility
Volatility, which is measured as the difference between the daily low and high price, also varies quite significantly based on week- day.
Thursday has historically been the most volatile with the average volatility of 6.82%. Both Saturday and Sunday have historically had the lowest volatility of 5.13% each.
The margin of error ranges from 10% to 15%, which means that the result will be within 10% to 15% of the mean 95% of the time.
Source: The Block Research, Coinbase
Research THEBLOCKCRYPTO.COM 42 How do volume, volatility, and returns of Bitcoin vary based on weekday?
Returns
Looking at the data for average returns shows that Saturday and Monday tend to yield the highest return while Sunday yields the lowest (the only negative) return. However, the confidence interval is too wide, which means that we can’t certain about the true value of the mean and the results can’t be relied on.
Source: The Block Research, Coinbase
Conclusion
Bitcoin is the most traded on Wednesday and Thursday and the most volatile on Thursday. It is the least traded on weekends and also the least volatile. The wide confidence interval error bars nullified any seasonality of returns.
Source: The Block Research, Coinbase
Research THEBLOCKCRYPTO.COM June 2020 Latest Research & Analysis
Projects 44 Compound outstanding debt grows 400% over 3 days as COMP distribution begins
55 Balancer breaks $100m AUM as BAL begins trading on secondary markets
64 Curve: the asset-specific automated market maker
71 Early use of UMA’s ‘priceless’ synthetic reflects promising but nascent market
78 What stood out from the Digital Dollar whitepaper
84 The Compound token model: how it can expand beyond governance
Research THEBLOCKCRYPTO.COM 44 Compound outstanding debt grows 400% over 3 days as COMP distribution begins
• Money market protocol Compound began the distribution of its governance token, COMP, on June 15 • With a market price of ~$200, COMP offers borrowers and lenders close to $600,000 in subsidies per day • Outstanding supply and debt have since grown more than 210% and 470%, respectively, as speculators seek to participate in the distribution • While the protocol’s key performance metrics are up across the board, it remains unclear whether momentum can be sustained as competing protocols begin to issue equivalent subsidies
Path to COMP
Founded in 2018 and backed by leading venture funds Andreessen Horowitz and Paradigm, Compound is an Ethereum-based money market protocol in which rates are set algorithmically according to supply and demand at any given time.
From the outset of the project’s life cycle, Compound founder Rob- ert Leshner has signaled his intention to progressively ‘decentral- ize’ the protocol by removing administrative control privileges from the core Compound Labs development and instead encouraging a community of individuals and entities to set market listings, rate curves, risk parameters, among other features.
This structural transition serves two primary purposes. First, it removes key-man risk while simultaneously opening up access for operational insight and active participation to a diverse audience. Second, opening up the set of operational stakeholders provides some degree of regulatory protection, allowing for the monetization of protocol-facilitated financial activity without explicit KYC/AML procedures.
Compound’s newly introduced governance token, COMP, marries these two purposes, serving as both a voting mechanism and, po- tentially, an equity-like financial instrument. 10 million COMP have been issued by the Compound Labs team, of which 57.71% will, or have been, distributed among team members, founders, investors, and partners. Following in the footsteps of synthetic asset issu- ance platform Synthetix, the remaining 42.29% will be distributed among protocol liquidity providers and users over the course of 4 years, on a roughly 2,880 COMP/day basis. 50% of this distribu-
Research THEBLOCKCRYPTO.COM 45 Compound outstanding debt grows 400% over 3 days as COMP distribution begins
tion is reserved for the supply side, while the remaining 50% will be distributed to borrowers. Distribution occurs on a pro rata basis according to market interest accrued. As an example: should the USDT market generate 95% of protocol interest on any given day, 1,368 COMP will be distributed pro rata to both USDT borrowers and lenders.
COMP Market
The introduction of COMP on June 15 has had a significant impact on Compound protocol activity, likely catalyzed by the immediate launch of a Uniswap COMP/ETH market. With 25,000 COMP and 2,000 ETH deposited into the Uniswap v2 pool, COMP was list- ed with a price of roughly $18.50, or 0.08 ETH. In just three days COMP price has since appreciated to $145.10, likely boosted by Coinbase Pro’s announcement of their intention to list COMP start- ing 22nd June.
Source: Dune Analytics
Volumes have been outsized relative to other Uniswap markets: by comparison, ETH/USDC, the market with the second-most volume, has seen less than $800,000 over the past 24 hours.
Research THEBLOCKCRYPTO.COM 46 Compound outstanding debt grows 400% over 3 days as COMP distribution begins
Source: Dune Analytics As has been the trend across ‘Initial Uniswap Offerings,’ a concen- trated few investors have disproportionately benefited from being the first to purchase COMP tokens. However, 60% of those that have bought COMP have paper gains, if not realized gains, and gains outweigh losses 4.4:1.
Source: Dune Analytics Supercharged rates Although just 0.25% of total supply, the seeding of initial liquidity and resulting price action has assigned an explicit market price to the COMP distribution, allowing prospective lenders and borrowers to quantify the subsidy’s effect on their returns.
Research THEBLOCKCRYPTO.COM 47 Compound outstanding debt grows 400% over 3 days as COMP distribution begins
On a gross basis, we see that cumulative daily COMP earnings have averaged over $250,000 in the first four days of distribution. COMP distribution has increasingly skewed (96.44%) towards the USDT market, which is set to bring in over $325,000 of COMP on June 18.
Source: Dune Analytics
This skew is due to the shape of the USDT interest rate curve, which has (inexplicably) been set high relative to other assets. Ev- ery dollar of USDT borrowed or lent generates more interest than alternative assets, thereby providing USDT with a systematic ad- vantage in the COMP distribution race. A proposal has since been put forward to Compound protocol stakeholders which,
Source: Dune Analytics
Research THEBLOCKCRYPTO.COM 48 Compound outstanding debt grows 400% over 3 days as COMP distribution begins
if implemented, would divert 10% of USDT market participant inter- est and rewards to an insurance fund, thereby dampening the ef- fect of the curve shape.
Below we see annualized returns for suppliers per market per day. As of June 18, USDT lending rates are as high as 58.43%, having peaked at 170.18% on June 15. At 5.22%, DAI rates are also note- worthy, with MakerDAO’s Dai Savings Rate currently offering 0.00%.
Source: Dune Analytics
Perversely, because COMP is distributed equally to both sides of the market and, by definition, there are fewer dollars being bor- rowed than supplied at any given time, borrowing assets proves to be more lucrative than simply lending.
Source: Dune Analytics
Research THEBLOCKCRYPTO.COM 49 Compound outstanding debt grows 400% over 3 days as COMP distribution begins
Below we see annualized returns for borrowers per market per day. Rates have come down since June 15, where USDC and USDT were both yielding over 200% APR, although borrowing USDT still yields over 50% APR.
Protocol activity These unprecedented returns have inspired unprecedented activity. The number of Compound’s weekly unique suppliers has jumped 200% week-on-week, while the number of unique borrowers has grown 238%.
Source: Dune Analytics
Cumulative outstanding debt has grown 470% to $137m since June 15, 84.80% of which is denominated in USDT.
Source: Dune Analytics
Research THEBLOCKCRYPTO.COM 50 Compound outstanding debt grows 400% over 3 days as COMP distribution begins
Similarly, outstanding supply has grown by 212% since June 15 to $480m. However, supply market share is split fairly evenly be- tween USDT (35.64%), USDC (26.26%), and ETH (28.08%). This distribution on the supply side may be a function of several factors. USDT’s lending rate is the most competitive but users are unable to borrow against their USDT collateral, making it impossible to leverage funds for outsize exposure. ETH remains the most popular collateral type across all platforms, and many Open Finance users naturally use it as collateral in order to leverage long while main- taining exposure. USDC may be the preferred collateral among risk-averse investors: by borrowing USDT against USDC collateral, users can avoid liquidation risk (minus interest accrual) and lever- age their assets by proceeding to sell their borrowed USDT for more USDC.
Source: Dune Analytics
Preliminary data indicate that the effects of Compound’s COMP distribution have been felt across competitive liquidity pools. Mon- ey market Aave, saw two successive days of $1m+ USDT outflows from lenders, followed by two more successive days of large USDC outflows following the launch of the COMP distribution program. (fig.10) pg.37
Research THEBLOCKCRYPTO.COM 51 Compound outstanding debt grows 400% over 3 days as COMP distribution begins
fig.10
Source: Dune Analytics
Similarly, Aave’s net originations have picked up after a slow April, likely due to demand to deposit assets into Compound.
Source: Dune Analytics
Even Balancer, which just last month introduced a governance to- ken of its own, has not been immune to outflows, with over $1m of ETH leaving the protocol on June 15. However, since then, Balanc- er has seen net inflows of both cDAI ($746k) and cUSDT ($1.95m) as Compound lenders seek to capture governance token distribu- tions across both protocols.
Research THEBLOCKCRYPTO.COM 52 Compound outstanding debt grows 400% over 3 days as COMP distribution begins
Can Compound maintain momentum?
Cosmetically, the introduction of COMP has been one of the re- sounding strategic successes in the short history of Open Finance. Key performance metrics including unique users, outstanding debt, and interest accrued are all up several hundred percent in less than 100 hours proceeding the launch. COMP itself is trading at a $1.45bn market capitalization on a fully diluted basis, over three times that of MakerDAO’s MKR.
Yet it is still rather difficult to ascertain what the medium-long term consequences of COMP will be. Compound’s intended goals are two-fold: to generate and grow revenue, which invariably requires growing outstanding debt; and to distribute COMP in an equitable fashion, thereby creating a “decentralized” governance structure free from regulatory intervention.
While key metrics are up, notional volumes are likely significantly lower due to the widespread use of leverage. Additionally, it would be difficult to argue that recent protocol activity has been organic: capital is quite clearly chasing abnormally high risk-adjusted re- turns. The question then becomes whether Compound can keep these users after the distribution cycle ends. To this end, Com- pound has been prudent to set a four-year flat issuance schedule.
Research THEBLOCKCRYPTO.COM 53 Compound outstanding debt grows 400% over 3 days as COMP distribution begins
Yet the protocol is still at the mercy of opportunity cost: as gover- nance token distributions become increasingly common — Curve, Ren, Synthetix, Balancer, and Futureswap have all announced sim- ilar initiatives — liquidity will flow seamlessly between protocols, possibly leading to abnormally volatile interest rates. In this sce- nario, Compound may come to realize that its customer acquisition budget — which amounts to an astonishing 42% of protocol value — has been drained by arbitrageurs.
Additionally, Compound’s liquidity flows are now disproportionately tied to the market price of COMP. At present, the market is pricing in not just future cash flows, but also the implementation of the very fee-accrual component that would endow COMP with quantifi- able monetary value. It remains unclear as to where those fees will be derived: at present, a price-to-earnings ratio based solely on the past 12 months of liquidation fund accrual yields a 3,600 multiple.
To date, COMP has benefited from positive reflexivity: as the COMP market price appreciates, the value of the subsidy increas- es, driving in more liquidity and ultimately boosting protocol earn- ings. At the same time, Compound is also exposed to negative reflexivity: if the COMP price falls, the subsidy value decreases, causing liquidity to flow out, driving the price of COMP down fur- ther. With Uniswap currently the primary secondary market and such a small percentage of total supply circulating, it does not seem unlikely that this scenario could arise, especially as lenders and borrowers begin to realize gains on their COMP holdings.
Equitable distribution has never been a strong suit of the crypto- currency industry, and despite best efforts, COMP appears to be no exception: the top 10 borrowers in the USDT market comprise over 61% of total USDT debt.
In reality, capital is not evenly distributed, so we should expect some degree of power law distribution, and there are reasonable arguments to be made that those contributing most to the protocol should have a disproportionate say in governance. That being said, a meaningfully wide distribution of COMP may not be possible, and the concentration of tokens in the hands of a few entities may open the protocol up to regulatory pressure.
Research THEBLOCKCRYPTO.COM 54 Compound outstanding debt grows 400% over 3 days as COMP distribution begins
Source: Dune Analytics
Regardless, the COMP distribution experiment is a grand, exciting experiment, and is likely to set the standard for governance token distributions in the future. Further, by subsidizing rates to such a high degree, COMP may serve as a powerful pull force for capital that has historically avoided interacting with the cryptocurrency ecosystem, especially in the context of low-rate macro environ- ment.
Research THEBLOCKCRYPTO.COM 55 Balancer breaks $100m AUM as BAL begins trading on secondary markets
• Balancer, an n-dimensional automated market maker, has sur- passed $100m in AUM • Key performance indicators are up across the board as protocol token, BAL, trades at $1.4bn fully diluted market capitalization • Despite dramatic growth in liquidity inflows trade volumes re- main relatively muted, raising questions around long-term capi- tal efficiency
Path to BAL Launched on March 31 and funded by venture firms Placeholder and Accomplice, Balancer is a non-custodial n-dimensional auto- mated market maker protocol. Like its predecessor, Uniswap, the Balancer system comprises various liquidity pools, with which third party traders can interact and swap assets in return for a fee.
Balancer departs from Uniswap’s default dual asset structure, with each pool capable of supporting up to eight assets with arbitrary weightings. The customizable nature of Balancer pools allows them to serve as index fund-type products, with the added advantage that fund rebalancing earns liquidity providers discretionary fees from arbitrageurs. Further, the ability to dynamically change asset weightings allows Balancer to serve as key ‘rolling’ infrastructure for financial instruments with set expiries.
Balancer commenced its ‘liquidity mining’ program on June 1, dis- tributing protocol tokens, BAL, to liquidity providers (LPs) at a rate of 145,000 tokens per week. At the time of writing, 435,000 tokens have been distributed to LPs, with a remaining 30 million BAL split among: the founding team, advisors, investors (25 million); the Balancer Ecosystem Fund (5 million) and the Balancer Fundraising Fund (5 million). The Balancer team has imposed a hard cap of 100 million tokens: however, because issuance rates are ultimately sub- ject to governance, there is a possibility that fewer than 100 million tokens are issued over the course of the protocol’s life.
BAL distribution methodology
BAL distribution is a function of asset weightings, liquidity, pool fee and asset type. As to the latter, a pool with functionally identical as- sets (e.g. DAI and cDAI) will receive 10% of the distribution allotted to a pool with equal liquidity and weightings but different assets. As for weightings: the further a pool deviates from the 50/50 structure,
Research THEBLOCKCRYPTO.COM 56 Balancer breaks $100m AUM as BAL begins trading on secondary markets
the greater the slippage for traders, but the lower the ‘impermanent loss’ for LPs. Balancer disproportionately rewards pools with more equitable weightings in order to compensate for the cost of liquidity provision.
With lower fee pools earning more than their high fee counterparts we see that pool fees have gravitated towards the lower end of the spectrum: the most popular pool fee (225 pools) sits between 0.1%-0.2%, and there are 149 pools (25% of all pools) with less than 0.1% fee. For perspective, Uniswap mandates that all pools set a default 0.3% fee.
Source: Dune Analytics
BAL market structure
Like Compound’s COMP, the BAL token has yet to be endowed with a cash-flow component: if there is consensus among BAL token holders to monetize the protocol, a fee feature must be introduced via the governance process. Nevertheless, the BAL token is cur- rently trading at a ~$1.5 billion valuation on a fully diluted basis, with speculators presumably pricing in the expectation of a future cash-flow component.
That said, BAL has a rather different market structure than COMP: while the BAL market was only launched on June 23, distribution commenced on June 1. By the time the market was listed, numerous
Research THEBLOCKCRYPTO.COM 57 Balancer breaks $100m AUM as BAL begins trading on secondary markets
LPs already had non-trivial BAL inventory to sell. Contrast this with the COMP dynamic, where issuance and market listing commenced on the same day, therefore naturally restricting sell pressure.
Source: Dune Analytics
As a result, BAL price activity has not followed the same ‘up-and- to-the-right line’ as COMP: while the token is still trading at mul- tiples to its listing price, data shows significant volatility as large token holders market sell their holdings: a single market sell order of over 94,000 BAL for $1.1m in ETH was enough to shift BAL price down 45%.
Source: Dune Analytics
Research THEBLOCKCRYPTO.COM 58 Balancer breaks $100m AUM as BAL begins trading on secondary markets
BAL price recovered rather immediately to the $18 range, although it has since continued its downwards trajectory. The near-imme- diate launch of BAL derivatives on FTX may contribute to further volatility, with current market structure particularly susceptible to market manipulation.
Positively reflexive
This rich secondary market valuation has had a positively reflex- ive relationship on Balancer protocol activity: as the price of BAL increases, the value of weekly subsidies grows, drawing in more liquidity and growing (potential) BAL cash flows. Protocol-wide li- quidity now extends beyond $100m, double that of primary compet- itor Uniswap.
Source: Dune Analytics
The number of unique LPs per day has grown dramatically since the introduction of BAL on June 1, and even more dramatically since BAL started trading on secondary markets: June 24 saw an all time high of 436 unique LPs, up 14,433% over May 24 figures. (fig.5) pg.45
Similarly, the number of pools created per day has seen exception- al relative growth since the launch of BAL as new LPs seek to cre- ate pools tailored to their existing portfolios: new pools created per day saw an all time high of 84 on June 24, up 8,300% over May 24. (fig.6) pg.45
Research THEBLOCKCRYPTO.COM 59 Balancer breaks $100m AUM as BAL begins trading on secondary markets
fig.5
Source: Dune Analytics
fig.6
Source: Dune Analytics
Below we see Balancer pools by liquidity. Together, the top 20 pools, which make up just 3.3% of all pools, account for over 88% of protocol liquidity. However, Balancer fares better when compar- ing with Uniswap v2, the latter showing a stronger power law distri- bution of liquidity among the top 20 pools. (fig.7&8) pg.46
The ERC20 version of Ether — WETH — remains the most popu- lar asset by cross-protocol liquidity ($23.8m), followed by USDC ($13.7m) and BAL itself ($12.4m). Compound USDT (cUSDT) and Compound BAT (cBAT) currently sit in fourth and sixth place with roughly $10.5m and $8.7m of liquidity, respectively. (fig.9) pg.46
Research THEBLOCKCRYPTO.COM 60 Balancer breaks $100m AUM as BAL begins trading on secondary markets
fig.7
Source: Dune Analytics fig.8
Source: Dune Analytics
fig.9
Source: Dune Analytics
Research THEBLOCKCRYPTO.COM 61 Balancer breaks $100m AUM as BAL begins trading on secondary markets
Indeed, despite witnessing net outflows in the two days immedi- ately following the launch of COMP, Balancer has since been a net beneficiary of Compound’s subsidy-driven growth: the chart below shows over $15m worth of Compound-token inflows into Balancer on June 25 alone as Compound liquidity providers seek to capture Balancer subsidies with their collateral derivative assets. This ac- tivity provides weight to the theory that protocol subsidies can be positive sum games rather than directly competitive.
Source: Dune Analytics Despite subsidy, volumes continue to lag Uniswap Balancer volume per asset reveals that trader appetite continues to be weighted towards ETH, with stablecoin USDC in a distant second.
Source: Dune Analytics
Research THEBLOCKCRYPTO.COM 62 Balancer breaks $100m AUM as BAL begins trading on secondary markets
Yet while Balancer now contains double the liquidity of Uniswap, trade volumes continue to lag by a significant margin: even on June 24, when the protocol recorded all time high trade volumes ($4.7m), Balancer’s volumes were just 26% of Uniswap’s.
Source: Dune Analytics
That Balancer continues to lag on volumes suggests that, absent the BAL subsidy, LPs would be better off allocating to Uniswap. However, when accounting for BAL, LPs are earning as much as 6.8x more through Balancer than they are through Uniswap. The size of this differential multiple is of course largely a function of BAL market price, which is set to change at any given time: howev- er, we should naturally expect outflows from Uniswap into Balancer as long as these rates last.
Source: Dune Analytics
Research THEBLOCKCRYPTO.COM 63 Balancer breaks $100m AUM as BAL begins trading on secondary markets
Road ahead Preliminary data suggests that the introduction of BAL has been a net positive force for the Balancer protocol yet there remain several open questions.
It is still unclear as to whether protocol tokens in non-custodial ex- change systems are net value generative. In a lending system like Compound or MakerDAO, where assets have tailored risk parame- ters and protocol token holders serve as underwriters of last resort, one may convincingly argue that frequent third party intervention is necessary: in the context of this continued maintenance, fees that accrue to token holders can be considered justified. By contrast, once deployed, non-custodial exchange protocols can effectively exist as closed circuit systems: that is to say, the design space for discretion is limited and a state of negative equity is impossible, so the purpose of a governance token is not as obvious. While data clearly indicates that a protocol token with an expectation of future monetary value can incentivize present-day liquidity inflows, once the protocol fee is implemented LPs will actually find themselves earning a lower rate as some portion of fees are diluted towards non-LP token holders. One might argue that similar results could be achieved while preventing LP inflation via token issuance by modifying the LP share distribution curve and disproportionately rewarding those that contribute early.
It will likely be some time before the ‘liquidity mining’ distribution methodology is optimized: this also applies to projects beyond Balancer. In Balancer’s case, while the existing method does serve to encourage the growth of deep liquidity across a long tail of mar- kets it may be disproportionately rewarding assets relative to their volume. Additionally, finding an appropriate oracle to calculate pool asset values may be difficult.
Finally, it appears that, sans-subsidy, Balancer’s capital efficiency is uncompetitive vis-a-vis other exchange protocols using a con- stant function AMM. This may be a result of Balancer’s support for non-equitable pool asset weightings, which, compared to 50/50 weightings, produce greater slippage per trade, thereby driving traders to alternative venues. In the near-medium term the addi- tional BAL subsidy should be enough to compensate for relatively muted trade volumes: however, over the long term, protocol stake- holders may have to directly contend with the trade off between slippage and ‘impermanent loss’, and its implications for token value accrual.
Research THEBLOCKCRYPTO.COM 64 Curve: the asset-specific automated market maker
• Curve is an automated market maker that has been optimized for trading between assets that are relatively price stable with one other (e.g. stablecoin-to-stablecoin swaps). • In June, Curve facilitated $340.4 million in trade volume, up from $37.8 million in May. • The increase in trading volume was kicked off by demand to li- quidity mine Compound’s COMP tokens. Soon, Curve is expect- ed to launch its own CRV token.
Curve’s formula for less slippage
Curve launched in January 2020 and is an automated market mak- er (AMM) decentralized exchange, similar to Uniswap and Balanc- er. The key insight behind Curve is that, by changing the pricing formula for assets in its liquidity pools, Curve can offer less slip- page for trades between assets that are relatively price stable to each other (e.g. stablecoins).
Instead of a traditional order book where buyers and sellers post orders that are executed when prices match, in AMMs, traders and market makers deposit and withdraw assets from liquidity pools. Prices are determined by the amount of assets in a pool and slip- page is a function of a trade’s size relative to the amount of assets in a liquidity pool.
Uniswap is perhaps the most straightforward example of an AMM. It uses a “constant product” market making function x * y = k, where k remains constant, and x and y are the amount of tokens in the li- quidity pool. For example, an initial deposit of 1,000 DAI and 5 ETH would create a k of 5000.
The AMM model includes slippage as an inherent part of each trade, since the act of trading means adding one token to the li- quidity pool and removing another. When buying (and removing) token x from a Uniswap pool, since the product of x and y must remain constant, the amount of token y that must be added for the constant to remain constant has to satisfy the formula (x + x_re- moved) * (y + y_added) = k.
Buying 1 ETH from the example liquidity pool would mean that (1,000 DAI + DAI_added) * (5 ETH - 1 ETH) must equal 5,000. This would mean the trader would have to add 250 DAI to the pool
Research THEBLOCKCRYPTO.COM 65 Curve: the asset-specific automated market maker
for the trade to execute. This would also create a price of 250 DAI / ETH for the trader, whereas the original state was 1,000 DAI / 5 ETH = 200 DAI / ETH — thus, there’s a 50 DAI slippage.
Source: StableSwap (Curve) Whitepaper
In the chart above, the straight dotted line refers to a function where the price remains constant ($1), as both x and y increase and decrease at the same rate (for practical reasons, it’s impossi- ble to build an AMM like this). Curve’s (“Stableswap invariant”) key insight was introducing an amplification effect to the AMM pricing function. This amplification acts as leverage where the price range for trading is decreased, but within that range there’s also less slippage. Curve’s pricing function acts as a hybrid between the Uniswap’s constant product function and the constant price function.
In practice, this means the price offered by Curve remains stable (or near constant) longer as trade sizes relative to liquidity pool size increase. Today, a 100k USDC-DAI swap on Curve would result in virtually no slippage, while the same trade on Uniswap would result in a slippage of 9.11%.
Optimizing the pricing function for specific assets for less slippage has benefits to both traders and liquidity providers — compared to using the same generalized function for all assets. Traders experi- ence less slippage and are incentivized to use Curve over other op- tions. Increased trading leads to more liquidity provider fees. This, in turn, attracts more liquidity, and again, better prices follow.
Research THEBLOCKCRYPTO.COM 66 Curve: the asset-specific automated market maker
A problem for liquidity providers in AMMs is impermanent loss. Simply put, if token prices change on markets external to the AMM, the only way for the AMM’s price to adjust is for an arbitrageur to buy the underpriced asset or sell the overpriced asset in the liquid- ity pool. Arbitrageurs effectively extract capital from the liquidity providers’ holdings in the liquidity pools when the arbitrage trade is available. In Curve, since pooled assets should have the same prices, prices in the liquidity pool should always revert back to the mean and close arbitrage opportunities.
A risk for Curve is that one of the assets in its pools suddenly loses its peg with the rest of the assets. There are multiple different kinds of risks that may be realized — such as USDT having a bank run or the SNX backing sUSD losing its value as collateral. In this scenar- io, other assets in the pool will get drained while only the broken token remains, as the broken token will get sold for the working assets in the pool.
Source: Pintail
In Uniswap, a doubling of the price of one asset compared to the other will lead to a 6% loss compared to just holding the first asset (not accounting for trading fees). For a 5x price change, the losses extend to 25%. Due to the removal of impermanent losses, Curve can offer trading fees of just 0.04%, whereas Uniswap’s trading fee is 0.3% and the median trading fee on Balancer is 0.15%,
Research THEBLOCKCRYPTO.COM 67 Curve: the asset-specific automated market maker
Growth driven by demand for stablecoin-to-stablecoin trading The biggest beneficiary of Compound’s liquidity mining program — in addition to Compound — for COMP tokens has been Curve. The methodology for calculating COMP distribution to the USDT mar- ket led to an average lending rate of 67% for USDT during the first week of liquidity mining starting from June 15th. This led to mas- sive demand to trade for USDT with other stablecoins.
As a result, Curve’s weekly trading volume shot up from $14.0 mil- lion to $218.4 million. This amounted to 45.7% of all trade volume across decentralized exchanges, compared to a 5.7% market share during the previous week.
Source: Dune Analytics
Since the initial craziness that surrounded the COMP token launch, Curve’s trading volumes have fallen closer to earth, but overall they remain above pre-COMP levels. Last week, Curve averaged $13.8 million in daily trade volume.
Stablecoin trading makes for the majority of trading activity on Curve, but the role of Ethereum-based synthetic BTC has increased. Right now, the most popular trading pair on Curve has been USDC-USDT, accounting for 48.4% of trade volume. BTC-based pairs have ac- counted for 6.1% of trading volume over the past month.
Research THEBLOCKCRYPTO.COM 68 Curve: the asset-specific automated market maker
Source: Curve Finance
In the future, Curve can increasingly play a supporting role for oth- er projects that want to abstract complexity from end-users.
The margin trading protocol dYdX recently integrated Curve Fi- nance to remove the notion of specific stablecoins as trading pairs in their markets. Instead of decentralized exchanges offering sepa- rate markets for USDT/ETH and USDC/ETH, by using a Curve sta- blecoin pool they can offer a single USD/ETH market. This removes the issue of fragmenting liquidity between similar trading pairs and allows users the option to participate with any stablecoin that is to their liking.
CRV tokens will drive more liquidity
Curve will be launching its own token, CRV. It is expected that the token launch will happen during the summer. In addition to reward- ing users with CRV who provide liquidity, Curve will offer an ad- ditional bonus to users who partake in the protocol’s governance process.
Given the brief history of liquidity mining, it’s likely the liquidity in Curve’s pools is about to get a lot deeper. The total value in Bal- ancer’s liquidity pools has increased from $38.9 million to $110.6
Research THEBLOCKCRYPTO.COM 69 Curve: the asset-specific automated market maker
million in the first week after the BAL token launched, and the value locked in Compound’s lending markets has also increased by 550%.
Source: DeFi Pulse
Curve has already started a pilot liquidity mining program together with Synthetix and Ren Protocol, where liquidity pools with syn- thetic BTC on Ethereum will receive tokens. By providing wBTC, renBTC (Ren Protocol’s BTC), or sBTC (Synthetix’s BTC) into a Curve pool, users can earn REN, SNX, and CRV rewards. These incentives started on June 19th and will run for ten weeks. CRV to- kens will be distributed to liquidity providers once the token is live.
Since June 19th, total liquidity on Curve has grown from $19.1 mil- lion to $49.4 million.
Once the token distribution mechanism for CRV tokens begins, it’s likely that total liquidity will skyrocket. This will further cement Curve’s advantage as the de facto decentralized exchange for stablecoin-to-stablecoin and other assets that are price stable with one another. (fig.6) pg.56
Research THEBLOCKCRYPTO.COM 70 Curve: the asset-specific automated market maker
Source: Curve Finance
Research THEBLOCKCRYPTO.COM 71 Early use of UMA’s ‘priceless’ synthetic reflects promising but nascent market
• Nine days after launch, UMA’s ETH/BTC “priceless” synthetic counts over $44,000 in open interest • The token initially traded at a premium as high as 52% versus spot, although the spread has since collapsed • Despite relatively muted market interest, the launch showcases the value of the “priceless” approach
Founded in December 2018 by ex-Goldman Sachs traders Allison Lu and Hart Lambur, UMA is a synthetic asset issuance platform built on Ethereum.
UMA offers two inextricably tied products: a framework for issuing ERC20-style synthetic assets, and a Schelling Point-inspired ora- cle scheme, dubbed the Data Verification Mechanism (DVM). The core innovation UMA brings to the market is the notion of ‘priceless’ synthetic assets.
That is to say, under the assumption of honest behaviour, third party ‘keepers’ can liquidate synthetic issuer collateral without explicitly referencing an on-chain price feed. By avoiding the ref- erence process, UMA’s synthetic assets can mitigate reliance on potentially manipulated and/or disrupted oracle schemes, which has previously damaged Open Finance protocols like MakerDAO and Fulcrum.
In the event that the issuer disputes the keeper’s implicit reference price, the DVM can be used as a resolution mechanism of last re- sort, with the incorrect party forfeiting a bond to their counterparty. In many ways, ‘priceless’ synthetics rely on the same hybrid game theoretical-economic guarantees as the Layer-2 scaling solution Optimistic Rollup — agents are assumed to be honest but punished if they deviate from a cooperative strategy.
Following an initial distribution of their proprietary token, which is used as a voting signal in the DVM, the UMA project has released their first synthetic framework for an Ether/Bitcoin (ETH/BTC) in- dex, allowing anyone to gain ratio exposure while avoiding expo- sure to the underlying. Issuers must maintain a minimum 120% collateralization ratio, with all margin posted in the synthetic stable- coin DAI. Issuers are effectively net short the ETH/BTC ratio while buyers are long. The synthetic expires on August 1, at which point each token will be redeemable for DAI at face value. As an exam-
Research THEBLOCKCRYPTO.COM 72 Early use of UMA’s ‘priceless’ synthetic reflects promising but nascent market
ple, if the token expires at a value of 0.03, each token can be re- deemed for 0.03 DAI.
While UMA’s inaugural product has an expiration date, it is possi- ble to create perpetual exposure, either through auto-rebalancing Balancer pools that roll exposures on behalf of liquidity providers, or by adding a dynamic funding rate, similar to that used by BitMEX for their perpetual swap products. While each design has idiosyn- cratic tradeoffs, it is likely we will see concurrent experimentation in both directions in the near future.
Preliminary data suggests interest is slightly muted, although the UMA team has been rather explicit regarding the trial-run nature of this first product. Indeed, there remain significant barriers to issu- ance. UMA has yet to provide a graphic user interface for issuers, with minters instead resorting to UMA’s less user-friendly com- mand-line interface.
Open interest — a key metric for any derivative product — has re- mained roughly flat around $44k since the product’s inception.
Source: The Block, Dune Analytics
There have been just six unique synthetic issuers since May 20, with the single-largest issuer accounting for 71.1% of all tokens issued to date.
Research THEBLOCKCRYPTO.COM 73 Early use of UMA’s ‘priceless’ synthetic reflects promising but nascent market
Source: The Block, Dune Analytics
Distribution is even more concentrated amongst market liquidity providers, where the largest LP accounts for 99.8% of liquidity. The mismatch between LPs and issuers suggests some portion of is- suers are happy to stay net short ETH/BTC rather than potentially collecting a passive yield through market-making.
Source: The Block, Dune Analytics
Research THEBLOCKCRYPTO.COM 74 Early use of UMA’s ‘priceless’ synthetic reflects promising but nascent market
The mismatch may also be explained by the poor returns for LPs to date. The charts below show LP returns vs. a ‘hold 50/50’ (holding 50% DAI, 50% ETH/BTC synthetics) and a ‘hold 100’ portfolio since the market’s inception on May 20. LPs have underperformed both portfolios by 1.64% and 4.22%, respectively.
Source: The Block, Dune Analytics
Source: The Block, Dune Analytics
Research THEBLOCKCRYPTO.COM 75 Early use of UMA’s ‘priceless’ synthetic reflects promising but nascent market
Increased volume — and, resultantly, increased trading fees — is necessary to subsidize the ‘impermanent loss’ phenomenon, a function of selling assets as they increase in price and simultane- ously buying assets as they fall in value. Volumes have steadily declined since May 20’s high of $9,299.
Source: The Block, Dune Analytics
Volume per trader conforms to a power-law distribution, with the top three traders accounting for 58.2% of market volume to date.
Source: The Block, Dune Analytics
Research THEBLOCKCRYPTO.COM 76 Early use of UMA’s ‘priceless’ synthetic reflects promising but nascent market
The ETH/BTC synthetic is up roughly 15% since May 20, while ETH/USD is up about 4.7% over the same period.
Source: The Block, Dune Analytics
Due to the nascent state of the market, we have seen significant discrepancies between the synthetic price and the spot ratio. The delta between the two extended as high as 52.69% on May 21.
There are three non-mutually exclusive explanations as to why we see such significant deviations.
First, it is simply easier to buy the token than it is to issue and then sell it into the market. The premium thus reflects both an imbalance between supply and demand as well as a reward for issuer effort. Second, because no equivalent derivative exists, the arbitrage pro- cess is not particularly straightforward. In order to capture the pos- itive delta, an arbitrageur would have to enter into an equal dollar value long ETH and short BTC position, and then maintain the dol- lar values of those positions until expiry. The creation of an inverse ETH/BTC synthetic token would likely alleviate these issues. Third, ex-bond trader Kevin Chan posits that the premium may reflect the positive convexity of the token versus an equivalent exposure via long ETH/short BTC. (fig.9) pg.63
Research THEBLOCKCRYPTO.COM 77 Early use of UMA’s ‘priceless’ synthetic reflects promising but nascent market
fig.9
Source: The Block, Dune Analytics
Research THEBLOCKCRYPTO.COM 78 What stood out from the Digital Dollar whitepaper
How should the next form of money be designed? It’s a question my colleague Mike Orcutt posed in an excellent feature this week that explored why it has come time to have a serious conversation about central bank digital currency design.
Specifically within the U.S., over the last couple of month’s we’ve seen notable developments in the push towards widening the dis- cussion on how to design future corporate and government digital currencies.
By way of countless hearings and closed-door discussions, we’ve seen the Libra Association and by Facebook Calibra Novi, slowly bend the knee to global regulators’ demands in terms of its pro- posed design. This has manifested in subtle changes to the original white paper – which has now been “retired” completely – as it slow- ly morphed into the fully revised one issued in April.
It remains my view that the most notable change in the new Libra whitepaper was the acknowledgment and hope to one day be able to integrate the network with central bank digital currencies. From the white-paper:
“Over time, our hope is that the Association will be able to collabo- rate with central banks on issues such as direct custody of cash or cash equivalents and very short-term government securities or the integration of the Libra payment system with CBDCs. This would reduce credit and custody risk, streamline the operations of the Re- serve, and provide additional comfort to Libra Coin holders.”
It took a while, but ultimately Libra realized it would need to be a fully permissioned network that will house different wrappers for underlying, digital representations of fiat – and if all goes according to plan, likely central bank digital currencies.
Meanwhile, with DCEP knocking on the door, and Bank of England Governor Mark Carney’s call last summer for a “synthetic hege- monic currency” to help move away from the dollar, some in Wash- ington have expressed an interest in starting to wonder how, if at all, the Fed should react. Last year we saw two U.S. lawmakers send a letter to the Fed asking the central bank to consider devel- oping its own digital dollar. The two representatives outlined con- cerns that the U.S. dollar could be in “long-term jeopardy” from the
Research THEBLOCKCRYPTO.COM 79 What stood out from the Digital Dollar whitepaper
wide adoption of state-backed digital fiat currencies — citing a BIS study that has found over 40 countries looking deeper into digital currency initiatives.
And more recently, we’ve seen members of the senate and con- gress float the idea of using “digital dollars” as a mechanism for ef- fectively administrating stimulus aid to U.S. citizens. Yet, there still seems to be no indication that Federal Reserve Chairman Jerome Powell believes people are now clamoring for CBDC retail curren- cies in the U.S. There’s also the sticky issue of the Fed’s unwilling- ness to allow “narrow-banking” or pass-through-investment-entities to park deposits on the Fed’s balance sheet anytime soon.
But that hasn’t stopped the recent thrust from the private market on how to push the conversation of a U.S. digital dollar forward. Last week, the Digital Dollar Project, the high-profile partnership between former CFTC Chairman Christopher Giancarlo and con- sulting firm Accenture, released its first white-paper: a document that largely presented a philosophical argument as to why its time for the U.S. to start seriously contemplating how it might design a digital version of the dollar, and what the core characteristics of a successful digital dollar would look like.
Proposed critical elements of a successful dollar:
Research THEBLOCKCRYPTO.COM 80 What stood out from the Digital Dollar whitepaper
The white-paper is revealing in two ways. The first thing that stuck out was the extent to which Giancarlo’s initial formal remarks of the project at The Block’s Davos event in January found its way into this first copy. The vision presented at Davos of a tokenized dollar: 1) issued by the Fed; 2) with the intended use cases of both whole- sale and retail payments; 3) and administered through a two-tier distribution model via commercial banks, very much aligns with the stated goal of the Digital Dollar Project. From the recent white-pa- per:
“The Digital Dollar Project seeks to encourage the next major in- novation in the US currency: a tokenized digital dollar that has the same legal status as physical bank notes. This US CBDC issued by the Federal Reserve System would enjoy the full faith and credit of the US government, represent a third format of central bank mon- ey, and be fully fungible with Federal Reserve notes (bank notes or cash) and reserves...
Research THEBLOCKCRYPTO.COM 81 What stood out from the Digital Dollar whitepaper
Accordingly, it could facilitate broader, more diverse access for institutions to large value payments and support the emergence of digital financial market infrastructures. Furthermore, from a settle- ment perspective, a tokenized digital dollar could provide atomic delivery, either Delivery versus Payment (DvP) or Payment versus Payment (PvP)...
A digital dollar would offer a new choice for digital transactions, instantaneous peer-to-peer payments, and in-person transactions.” DIGITAL DOLLAR PROJECT - WHITE PAPER
Research THEBLOCKCRYPTO.COM 82 What stood out from the Digital Dollar whitepaper
The white-paper also reveals a level of self-awareness of the ele- phant in the room, the thorny issue of balancing privacy amidst the need for proper compliance and regulatory standards surrounding AML and KYC procedures. Something that Libra has only recently now come around to addressing.
Following a similar vein as to what we’ve seen explored with Swe- den’s e-krona, one approach offered as an area to explore in the DDP white-paper is to provide different levels of privacy for various levels of value transfers -- similar to how the US attempts to pre- vent money laundering with cash by requiring the reporting of cash payments that exceed $10,000 (called IRS form 8300). But the paper makes clear that ultimately the level of privacy enabled will “reflect the development of jurisprudence around the 4th Amend- ment.” Translation: the U.S. has work to do in modernizing its infor- mation-sharing policies amidst an ever-increasing digital world.
Other notable considerations the paper points out, include:
• The debate to embed interest-bearing functionality: the advan- tage of not including this feature would be the ability to mirror cash-like functionality today, rather than offer a bank-like depos- it. This would be the easiest way to steer clear of potential bank intermediation, and/or concerns of broader financial instability in times of financial stress. On the other hand, foregoing the ability to embed interest-bearing features directly into the digital dollar would limit the ability to use the asset as a new monetary policy transmission tool.
• The digital dollar isn’t being proposed in a vacuum: The white- paper addresses that the vision of the digital dollar should not be “antithetical to the development of private sector initiatives.”
• The digital dollar isn’t guaranteed to be run on “DLT” infrastruc- ture: The paper uses language such as, “[digital dollar] is re- corded on new transactional infrastructure, potentially informed by distributed ledger technology. Later the paper states that the digital dollar may, in fact, end up being “inspired” by distributed ledger technology and decentralized technologies.
What often feels lost in the conversation about the Digital Dollar Project is the fact that its current purpose is to raise awareness
Research THEBLOCKCRYPTO.COM 83 What stood out from the Digital Dollar whitepaper
for why the Foundation (and its growing advisor list) believes the U.S. should consider a retail CBDC, rather than planning an actual launch. It’s doing this by engaging with both the private and public sectors to explore research and public discussion on the poten- tial advantages of a U.S. digital dollar backed by the full faith and credit of the Federal Reserve, and what that would even look like in practice.
To that end, this really feels like the first inning in legitimizing the philosophical question of what a digital dollar should look like, and why it’s a conversation worth having.
Research THEBLOCKCRYPTO.COM 84 The Compound token model: how it can expand beyond governance
• The Compound team has recently removed admin privileges to their smart contracts and the protocol is governed fully by COMP token holders. • 42% of COMP supply will be distributed to Compound’s users (borrowers and lenders on the platform) gradually over the next four years. • Initially, COMP token holders will have governance rights over Compound’s smart contracts but no financial rights (to token burns or dividends). These rights can be modified by COMP to- ken holders.
The standard playbook for crypto projects has become “progressive decentralization.”
Unlike in 2009, when Bitcoin was launched as a fully-functioning, permissionless protocol from day one, many projects today are centrally controlled and teams hold admin privileges over their smart contracts. In practice, this means the core development team can unilaterally decide to upgrade and/or seize assets controlled by its smart contracts. For example, a lending protocol could seize collateral or a decentralized exchange could freeze user balances.
These admin privileges are expected to be relinquished over time as protocol governance moves from a core development team to “community-driven” governance.
Progressive decentralization has two main benefits over launching a protocol that is decentralized from day one:
It is easier and faster for the developer team to upgrade and iterate on their product A core team is in charge, instead of a community of token holders, pushing legal issues associated with token distribution further from the network launch — ideally to a place where the project might be considered “sufficiently decentralized” to not be deemed a security under U.S. law.
The project that’s perhaps best-known for progressive decentraliza- tion is Compound. Compound is a protocol that establishes money markets for Ethereum-based tokens. Interest rates are determined algorithmically by supply and demand. Users can lend and borrow assets such as ETH, USDT, and WBTC via Compound.
Research THEBLOCKCRYPTO.COM 85 The Compound token model: how it can expand beyond governance
Compound launched on the Ethereum mainnet in September 2018. In May 2019, version 2 of the protocol was released. At that time, new assets were added, risk modeling was improved, and most crucially, the groundwork for a governance process was laid. Today, Compound is one of the most successful decentralized projects, with over $100 million of value locked in its smart contracts and $16.5 million in outstanding debt.
Source: Compound API
On February 26, 2020, Compound announced COMP — a gover- nance token that enables COMP token holders to vote on upgrades and changes to the protocol. On June 2, the Compound team fully handed over control of the protocol to COMP token holders and is now unable to override governance decisions made within the pro- tocol. If a quorum of at least 400,000 COMP tokens (4% of the fully diluted supply, and double that for tokens held today) participate in a vote, and a majority of those tokens vote in favor of the proposal, the protocol is updated.
Additionally, distributing COMP to users incentives providing liquid- ity to the Compound protocol. Balancer, an automated market-mak- ing protocol, saw its liquidity inflows increase significantly after the BAL token was introduced on June 1.
Research THEBLOCKCRYPTO.COM 86 The Compound token model: how it can expand beyond governance
Source: Dune Analytics
Today, roughly half of the eventual COMP supply is allocated to Compound’s founders and team, as well as the shareholders of Compound Labs, Inc. — which includes investors from previous VC rounds, such as a16z and Paradigm from a $25 million Series A in late-2019.
The COMP announcement emphasized that the COMP token’s pur- pose is for governance, stating that “COMP empowers community governance — it isn’t a fundraising device or investment opportuni- ty. Until the decentralization process is complete, COMP will not be available to the public.”
In theory, launching COMP as a governance-only token that does not give its holders financial rights, either in the form of token burns that resemble share buybacks or as dividends, means the tokens can be distributed to a broader community without it being a clear securities offering. (Of course, whether state and federal se- curities regulators in the United States agree with this does remain to be seen.)
However, the Compound protocol itself does have an obvious val- ue-capture mechanism from the lending and borrowing activity it facilitates. Borrowers pay interest to the protocol and lenders re- ceive interest from it. Between this incoming and outgoing flow of value, there is a spread (originally either 5% or 10% of the borrow
Research THEBLOCKCRYPTO.COM 87 The Compound token model: how it can expand beyond governance
interest) which is deposited into a reserve that acts as a liquidity cushion and safety mechanism for the protocol.
Since COMP token holders govern the protocol, they can adjust the reserve ratio and start paying out dividends from the reserve to themselves as profit if and when they wish.
Source: Token Terminal
Based on current interest, the reserve is increasing annually by about $40,000. This earnings rate has fluctuated wildly based on interest rates for stablecoins. In August 2019, when the DAI sta- bility fee was 20%, lending rates were at their highest and Com- pound’s annual reserve growth rate was just under $1 million. (fig.4) pg.74
The process of flipping a governance-only token via a community vote into a productive asset that creates yields for owners will likely see increasing adoption by crypto projects.
The cynical view is that the process of creating a governance-only token, where it is obvious that it can later be used to turn on cash- flows to token holders, is simply adding complexity in an attempt to skirt securities laws and avoid registration requirements. There is, of course, no technical reason why those fees could not be turned on from day one.
Research THEBLOCKCRYPTO.COM 88 The Compound token model: how it can expand beyond governance
fig.4
Source: Compound API
Even though 42% of COMP supply will be distributed to the com- munity (to borrowers and lenders that use the protocol) over the next four years, in practice, a handful of early investors and the core development team hold a large enough portion of the supply to control the decision-making process. It could be that the SEC and others will thus cast a skeptical eye on this approach, viewing the distribution process as nothing more than “governance theater.”
On the other hand, the governance process is open to anyone to vote on or submit suggestions for protocol changes. Compound supports vote delegation, and independent delegate groups such as DeFi Rate could be a way for smaller token holders to pool influ- ence. COMP’s distribution mechanism, whereby tokens are distrib- uted evenly between lenders and borrowers based on the amount of interest they receive or pay, will likely reach a broader and more active user base than is the case for most other tokens.
Research THEBLOCKCRYPTO.COM June 2020 Latest Research & Analysis
Company 90 The state of crypto debit cards after the Wirecard collapse
93 TON: Telegram Orphan Network
Research THEBLOCKCRYPTO.COM 90 The state of crypto debit cards after the Wirecard collapse
• Wirecard has collapsed in the last couple of weeks as sophisti- cated fraud was uncovered • This puts many crypto debit cards, including Crypto.com, TenX and Cryptopay, in jeopardy • There are now 8 other card issuers that are working with crypto- currency companies • A research glance on which cards are working and what regional issuers are still working with crypto companies
Wirecard, the German fintech giant and the issuer of several high-profile crypto debit cards, collapsed in the last two weeks as its stock price sank by 97% — from over €100 on June 18 to around €3 as of today.
Source: Tradingview
Wirecard’s collapse
Wirecard’s collapse began on June 18 when its auditor refused to sign off on the company’s 2019 financial report and said it was unable to find evidence for €1.9 billion worth of cash. Wirecard at the time said “spurious” balances may have been provided by a third-party “in order to deceive the auditor.”
Research THEBLOCKCRYPTO.COM 91 The state of crypto debit cards after the Wirecard collapse
Wirecard later admitted that €1.9 billion in cash probably did “not exist”, and soon after, its CEO Markus Braun resigned. He was then arrested and later released on bail. Shortly after, Wirecard filed for insolvency at a district court in Munich “due to impending insolvency and debt.”
EY Germany, Wirecard’s auditor said last week: “There are clear in- dications that this was an elaborate and sophisticated fraud, involv- ing multiple parties around the world in different institutions, with a deliberate aim of deception,” and added that “even the most robust and extended audit procedures may not uncover a collusive fraud.”
It was later reported that EY failed to check for three years whether Singapore’s OCBC Bank actually held up to €1bn of cash on behalf of Wirecard and instead only relied on documents and screenshots provided by third-parties and Wirecard itself.
Germany will reportedly terminate its contract with the country’s accounting watchdog, the Financial Reporting Enforcement Panel, and will look to overhaul accounting regulation in Germany. Ange- la Merkel, Chancellor of Germany since 2005, said the case was “alarming”, while Finance Minister Olaf Scholz called it “a scandal which is almost unprecedented in the world of finance”.
On Friday, FCA, the U.K.’s financial regulator, suspended Wire- card’s subsidiary Wirecard Card Solutions (WCS), which issues Visa crypto debit cards. The FCA said WCS “is no longer permitted to conduct any regulated activities” and “must not dispose of any assets or funds.”
WCS issued several crypto debit cards for European customers from firms such as Crypto.com, TenX, and Cryptopay. Crypto. com CEO Kris Marszalek said the FCA has “effectively shut down” WCS. “Our EU/UK cards will stop working today. All customers will receive 100% credit back to their crypto wallets within 48 hours. We’re moving the card program to a new vendor,” Marszalek added.
Crypto card issuers Wirecard was the best-known card issuer that worked with crypto- currency companies after the collapse of Wavecrest in early 2018. Wirecard had two wholly-owned subsidiaries that issued crypto debit cards — Wirecard UK (also known as Wirecard Card Solu-
Research THEBLOCKCRYPTO.COM 92 The state of crypto debit cards after the Wirecard collapse
tions) and Wirecard Singapore. Wirecard UK issued cards for Eu- ropean customers while Wirecard Singapore for some countries in Asia. As already mentioned, cards issued by Wirecard UK have already stopped working and the fate of cards issued by Wirecard Singapore is still unknown.
However, there are now 8 other card issuers that are working with cryptocurrency companies. The most frequently used one is U.K.- based Contis, which issues cards for Wirex, Monolith, Swipe.io, and soon also for Binance. However, Contis only issues cards for European customers.
If Wirecard Singapore were to be suspended just as its U.K.-based counterpart, there would be only one issuer shipping cards to Asia and that is Omnipay through Crypterium. In the U.S., there are currently two issuers — Metropolitan Commercial Bank and Evolve Bank & Trust.
It’s likely that Crypto.com, TenX, and Cryptopay will begin to mi- grate its European customers to Contis. Finding a new issuer in Asia will surely prove to be a challenge since there hasn’t been one yet historically that lasted.
The full table of the largest crypto debit card providers along with their respective issuers can be seen below.
Source: The Block Research
Research THEBLOCKCRYPTO.COM 93 TON: Telegram Orphan Network
• Telegram’s support for the TON blockchain came to an end last month • The initiative was funded via the sale of SAFTS, but a legal fight with the SEC ended with an injunction against the issuance of tokens • TON was intended to be the next-gen blockchain with input from a world-class developer team before its abandonment
On May 12, Pavel Durov announced that Telegram was terminating its involvement in the creation of the TON blockchain.
The announcement came in the wake of a U.S. Securities and Ex- change Commission lawsuit, which first resulted in a temporary ban on the distribution of TON tokens, and later, by a court decision, a permanent one. Investors anticipated having not only a next-gen- eration blockchain but also the help of the Telegram user base in spurring adoption.
When Telegram needs financing
A month ago, Telegram Messenger reported about 400 million monthly users, with at least 1.5 million new users signing up each day.
However, the product of the Durov brothers does not have a sus- tainable business model. The messenger app was financed from Pavel’s personal funds received from the sale of a stake in the VK social network, which was created prior to Telegram and gained enormous popularity in the CIS. Regarding the issue of monetiza- tion, Durov stated in 2015 that “Telegram will always be free to the user” and it won’t use subscriptions or advertisements.
For five years of Telegram’s operation, the messenger has not violated the principle of free-use. However, reaching a break-even point remains a significant issue. On August 14, 2017, Pavel wrote that he would agree to sell a 10% stake in Telegram for $500 mil- lion. Later, instead of selling the stake, a decision was made to launch a blockchain network that would be integrated with the messenger.
On January 29 and March 14, 2018, SAFTs (Simple Agreement for Future Tokens) in two rounds — each for $850M — were sold. The price of the Gram token in the first SAFT was $0.38. However,
Research THEBLOCKCRYPTO.COM 94 TON: Telegram Orphan Network
tokens were to be released in 25% batches in 3, 6, 12, and 18 months after TON’s launch.
In the second agreement, the price was increased to $1.33, but there were no lock-ups anymore. Under the agreement, Telegram would return a refund if the blockchain had not been launched by the end of Q4 2019. Both SAFTs were registered with the SEC as Reg D Offerings, as Protocol Labs did with Filecoin.
A total of 175 investors participated in the purchase of 2.89B Grams. Thirty-nine of them were U.S. purchasers ($424.5M), which provided the cause of action from the SEC. In addition, some of the participants, despite the restrictions in SAFT, were also underwrit- ers. They resold their future tokens at inflated prices to other inter- ested parties, including U.S.-based investors.
Source: TON Whitepaper, Reg D Offerings
Due to the SEC lawsuit, the deadline for launching TON was post- poned until the end of April 2020. If most investors did not agree to change the deadline, they would receive back 77% of the invested amount. It turns out that Telegram spent 23% (about $390M) out of the collected $1.7B in two years, mostly on the messenger app.
Research THEBLOCKCRYPTO.COM 95 TON: Telegram Orphan Network
As the reader may know, the situation in the court turned against Telegram, leading Durov to speak with investors again about the launch deadline. Ultimately, U.S. participants were offered 72% refunds. Investors from other jurisdictions also got the additional opportunity to convert their SAFTs into loans, with 53% APR and the possibility of early repayment.
Another ambitious idea The TON Blockchain is actually a collection of heterogeneous blockchains with sharding, a concept that theoretically allows for achieving millions of transactions per second (TPS).
Sharding is a technique that allows you to scale the blockchain by dividing it into smaller blockchains — or shardchains. Each shard- chain has its own set of validators, which create blocks, enabling the simultaneous addition of a larger number of blocks to the block- chain as well as transactions.
When creating the specification for sharding, Nikolai Durov was guided by the fact that one blockchain account might be considered a shardchain. Obviously, maintaining such a structure for a long period is highly inefficient. Therefore, there is a dynamic regulation in the number of shardchains. With network congestion, a smaller number of accounts — even only one — is included in the shard- chain that leads to more shardchains, and vice versa. Consider the table below that shows how this roughly works with a blockchain possessing 100 accounts.
Source: The Block Research
At any given moment, each of the accounts is assigned to one of the shardchains according to the account’s address. The maximum
Research THEBLOCKCRYPTO.COM 96 TON: Telegram Orphan Network
number of shards is limited to 2^60. Communication between shardchains is established using messages delivered by special mechanisms called Hypercube Routing and Instant Hypercube Routing.
A collection of homogeneous shardchains that use a common pro- tocol is considered a workchain. Each heterogeneous workchain may have its own rules: they only should meet basic interoperabil- ity criteria to interact correctly between different workchains. The maximum number of workchains can be up to 2^32. The zero work- chain is called a basechain. The basechain, in turn, is the most cru- cial workchain for TON with Gram as a native cryptocurrency.
The masterchain is an exclusive kind of workchain and is quite sim- ilar to the Beacon Chain in ETH 2.0. It is responsible for the gen- eral parameters of the TON Blockchain, validators and the storage of hashes of the last blocks from all the shardchains of each TON workchain. Due to its high importance for the entire blockchain, a masterchain cannot be divided into shardchains.
The TON Blockchain uses Proof-of-Stake (PoS) for block genera- tion, while its version of Byzantine fault tolerance (BFT) — called Catchain — is used to reach consensus. PoS allows only to a small number of accounts — validators that stake the largest number of Grams — to create blocks. The BFT, in turn, is an algorithm in which ⅔ honest participants are guaranteed to come to consensus.
As in Polkadot, there are fishermen, or network participants who re- port invalid blocks. In such cases, TON has a mechanism of ‘rewrit- ing’ invalid blocks with valid ones. This mechanism, combined with Catchain and the ability to change the block configuration through governance, makes the blockchain more resistant to forking.
At least 100 accounts with the largest stakes become validators and receive tx, storage and gas fee + coinbase (newly minted coins), proportionally to their stakes. As with most PoS block- chains, the part of their stake can be slashed for dishonest behav- ior. In addition, other network participants who may earn are:
• Nominators who lend their Grams to validators and gain a share of the validator’s reward; • Fishermen who check the blockchain for invalid blocks and re-
Research THEBLOCKCRYPTO.COM 97 TON: Telegram Orphan Network
ceive a stake share from the validator who signed the block; • Collators who collect transactions and suggest a new shard- chain block candidate, simplifying the work of validators, and also gain a share of validator’s reward.
The mention of the gas was not accidental. Just like Ethereum, transactions in the TON Blockchain are executed on a virtual ma- chine called TVM. Using new programming languages for TVM, de- velopers write the contract code in FunC, which they further com- pile in Fift Assembler, and then use the Fift to deploy blockchain contract. At the same time, the TVM is a Turing-complete machine that allows smart contracts to solve any reasonable computational problem.
In addition, “TON” means not only the TON Blockchain but a combi- nation of components that form the overall ecosystem:
• TON Blockchain (next-gen blockchain); • TON Network (peer-to-peer network); • TON Storage (file system); • TON Proxy (proxy, similar to I2P); • TON DHT (node discovery and routing); • TON Services (apps not necessarily associated with the block- chain); • TON DNS (human-readable names for TON Blockchain compo- nents); • TON Payments (payment channels); • Applications that give access to the blockchain — for example, Telegram. At the moment, along with TON Blockchain, only the components required for its work, such as Network, DHT, and efforts on DNS, Storage, and Proxy, are ready. The remaining components were probably expected to be written as smart contracts by independent developers, as evidenced by the contests that took place.
Telegram or snail mail
Fulfilling the promises given to investors, Telegram began with the release of Telegram Passport, which was supposed to become TON External Secure ID. However, Passport was launched not in Q1 2018, as indicated in the roadmap, but at the end of July 2018.
Research THEBLOCKCRYPTO.COM 98 TON: Telegram Orphan Network
This identification service has not received the expected adoption in almost two years of operation, though it was integrated by ex- changes CEX and Xena. What’s more, there have been no signifi- cant updates since August 25, 2018.
Source: Telegram Open Network teaser
The launch deadlines for TON — Q4 2018 and March 2019 — were missed. At the end of May, the website test.ton.org was launched, but its direct relation with TON has not been officially confirmed. The website contained documentation related to the project, as well as the source code of the TON Blockchain Lite Client.
On September 7, the TON team uploaded the blockchain source code on GitHub, which also contained Full Node, providing the op- portunity to become a validator, and launched the official explorer.
On October 2, in a letter to investors, it was announced that the launch would take place by the end of October, and a tool for gen- erating account keys was sent to investors. On October 31 — in the wake of the SEC lawsuits — Gram wallets for the testnet became available. A few weeks later, on November 15, the testnet was re- launched for the use of the new database. On June 1, the testnet-2 consisted of a masterchain with a block height of about 4.1M and a basechain of 16 shards, with 5.7M blocks in each. (fig.4) pg.84
To prepare the TON ecosystem for custom use, Telegram launched the first stage of the coding competition on September 24. This was the first official proof of the connection between TON and Tele- gram. Participants were required to create a multi-sig wallet, DNS resolver, payment channel or find bugs in the blockchain code. As a result, 41 out of 66 participants shared $235,000 in rewards. From December 7 to 22, twenty-six of the winners created smart contracts.
Research THEBLOCKCRYPTO.COM 99 TON: Telegram Orphan Network
fig.4
Source: TON.live explorer
The Telegram team announced on January 6 that there would be no integration with the messenger at the time of TON’s launch, a move that would require the use of a stand-alone wallet app. A month later, the development team published the documentation needed for creating TON Sites. These sites using links in the format ton://... would provide access to services inside TON.
No happy ending
Despite the closed development and problems with the regulator, Telegram earnestly sought to release TON and create the integra- tion with Telegram.
Indeed, the code for integrating TON in Telegram appeared:
• For Android on December 31 in Telegram v.5.13 and then disap- peared on January 23 in v.5.14; • For iOS, on September 17 and is still available, but is presented as a stand-alone wallet module.
One may also find some hints of preparation for launch outside the Telegram messenger code. On April 27, the mainnet configuration was added to the TON client code, and the next day, the config appeared on test.ton.org but slightly modified. On April 26, in the
Research THEBLOCKCRYPTO.COM 100 TON: Telegram Orphan Network
desktop version of the Gram wallet, support for the Mainnet was added only to be postponed on April 30. On the same day, code related to the mainnet in the iOS Gram wallet also appeared with the new configuration in the Android wallet. On May 27, almost a month after abandoning TON, developers made final changes in code: they added TON Storage code and enhanced TON Payments support.
Telegram’s move to discontinuing work on TON did not stop the community, which last month launched a blockchain called Free TON. Still, it has no relation with Telegram, so TON’s investors will not receive any tokens connected with this blockchain.
Durov’s project was not the first to face resistance from regula- tors. One may recall Libra, the Facebook-backed stablecoin project that also encountered such difficulties. As a result, Libra ultimately changed the underlying concept and has moved in the direction of supporting fiat currencies like the U.S. dollar and the euro.
To conclude: a large amount of investment money, a potential user base and an ambitious development team are not always enough to achieve a goal. Ultimately, many of the innovative ideas from the original TON team have been incorporated into Free TON. As to whether the team behind that project or someone else will succeed, only time will tell.
Research THEBLOCKCRYPTO.COM June 2020 Latest Research & Analysis
Trends 102 DEX aggregators: user experience solutions for the decentralized exchange space
109 Despite the recent decline, exchanges still hold more than 16% of all bitcoins
112 Charting the growth of Reddit communities for major cryptocurrencies
116 Bitcoin miners are mining fewer empty blocks in 2020
106 Ethereum 2.0 & the exchange dilemma
124 An analysis of U.S. federal databases and block- chain-related mentions
127 A proxy for crime involving bitcoin use? An analysis of U.S. Attorney press releases
Research THEBLOCKCRYPTO.COM 102 DEX aggregators: user experience solutions for the decentralized exchange space
• Decentralized exchange aggregators (DEX aggregators) or li- quidity aggregators provide access to multiple sources of liquidi- ty in a single place.
• They consistently provide better prices than single decentralized exchanges, especially across larger orders and are proving to be viable user experience solutions for the DEX space.
• Minimal variation in liquidity aggregation results and existing, successful protocols for liquidity aggregation optimization mean that further developments in the space will likely move from pro- tocol improvements to further integrations.
The widespread use of centralized exchanges for buying and sell- ing decentralized cryptocurrencies has proved to be a persistent irony that has defined the cryptocurrency space throughout its exis- tence.
An analysis of the proportion of trade volumes occurring on central- ized exchanges (as opposed to decentralized exchanges) proves that customers are willing to relinquish custody of their crypto, ac- cept central points of failure and place trust in centralized entities for the ease of usability, faster throughput and the overall higher liquidity that’s available.
However, recent months have seen a notable rise in decentralized exchange (DEX) trade volumes. In particular, the ratio of trade volume on decentralized exchanges to centralized exchanges has steadily increased for various reasons. These reasons, among oth- ers, include:
• Decentralized exchanges building deep liquidity across central asset pairs such as ETH/DAI, ETH/USDC, USDC/DAI. • Increased potential for margin trading in DeFi due to greater ac- cess to leverage, naturally increasing trading volume. • Stronger perceived value propositions for non-custodial ex- changes in light of the data breaches and platform failures expe- rienced by BlockFi and BitMEX
Research THEBLOCKCRYPTO.COM 103 DEX aggregators: user experience solutions for the decentralized exchange space
Source: Dune Analytics
Source: Dune Analytics, CoinGecko, CryptoCompare
Despite current growth, decentralized exchanges are still impeded by various barriers, primarily related to problems with liquidity.
Liquidity, of course, is a cyclical predicament, being an important factor required to attract a large user base but generally one that
Research THEBLOCKCRYPTO.COM 104 DEX aggregators: user experience solutions for the decentralized exchange space
requires a large user base itself to facilitate it in the first place. The liquidity problem for decentralized exchanges is further exacerbat- ed by the fragmented nature of the competitive DEX landscape, with existing liquidity scattered across the many different platforms. The early DEX experience was largely marred by high slippage and wide spreads. And while the liquidity pool model provides an automated and decentralized means of providing liquidity to decen- tralized exchanges in a way that solves some of the problems in the traditional order book model, it is far from immune to significant slippage in the face of large orders across asset pairs.
In the face of these issues pervading the growing DEX landscape, decentralized exchange aggregators (DEX aggregators) have seen increasing interest and use as general ease-of-usability solutions, with the potential for lowering some of these barriers of entry.
Also referred to as liquidity aggregators, decentralized exchange aggregators provide users with access to liquidity from multiple sources in a single place and automatically optimize trades accord- ing to price by splitting orders across the order books of different decentralized exchanges. The one-stop-shop model provides users with a simpler and more convenient way to enter and exit positions while avoiding the price slippage associated with the limited liquid- ity of a single exchange. Therefore, the fruits of liquidity aggrega- tion are largely reaped in the form of an enhanced user experience, filling a very real need in an ecosystem that has suffered from usability problems right from the start.
With projects such as Totle taking a highly UX focused approach, DEX aggregator initiatives reflect an important need-based evolu- tion that is solving problems and, as a result, attracting attention.
Large players in the decentralized exchange aggregator space, such as 1Inch Exchange, are experiencing substantial volume growth because of their ability to consistently provide optimized prices — for larger swaps, especially — as compared to any single DEX.
Below is the trading volume on the leading DEX aggregator 1Inch Exchange as a percentage of total DEX trading volume.
Helps show that DEX aggs are getting more attention in the DEX space.
Research THEBLOCKCRYPTO.COM 105 DEX aggregators: user experience solutions for the decentralized exchange space
Source: Dune Analytics
To gain further insight into this interest growth, we conducted the following analysis of price quotes on large swaps from DAI to ETH on various decentralized exchange aggregators and aggregator protocols, using Uniswap — one of the largest decentralized ex- changes by volume — as a point of reference.
Source: 1Inch Exchange API, 0x API, Paraswap API, DEX.AG API
Research THEBLOCKCRYPTO.COM 106 DEX aggregators: user experience solutions for the decentralized exchange space
The graphs examine exchange rates over the course of three hours for swaps of 5000, 10000, 25000 and 50000 DAI to ETH. The anal- ysis collects quotes from the API’s provided by 1inch Exchange, Paraswap, 0x and DEX.AG.
Source: 1Inch Exchange API, 0x API, Paraswap API, DEX.AG API
Source: 1Inch Exchange API, 0x API, Paraswap API, DEX.AG API
Research THEBLOCKCRYPTO.COM 107 DEX aggregators: user experience solutions for the decentralized exchange space
Source: 1Inch Exchange API, 0x API, Paraswap API, DEX.AG API
The above analysis provides a lot of interesting insight into DEX aggregator performances relative to each other as well as decen- tralized exchanges in general.
Most notably, it is apparent that the DEX aggregators can effective- ly use liquidity aggregation in practice and resist slippage, while the price quoted by Uniswap deteriorates as orders sizes get larg- er. Among liquidity aggregators, the analysis shows that Paraswap provides the best rates across all price ranges about half the time, followed by 1inch Exchange at one-fourth of the time, although by very small margins (around .01% across all order sizes). Another interesting factor to note is that 1Inch Exchange seems to be the most volatile of the DEX aggregators, showing the larger variation in prices across all order sizes.
Overall, however, DEX aggregators demonstrate far less price vari- ation across different order sizes compared to individual decentral- ized exchange aggregators, which could potentially inform future developments in the space.
As a solution that is fundamentally based on solving the needs of usability from a convenience standpoint, DEX aggregators will likely see further evolution — its winners, losers and overall di- rection — and diverge from the minutiae of the underlying liquidity
Research THEBLOCKCRYPTO.COM 108 DEX aggregators: user experience solutions for the decentralized exchange space
protocols themselves. With largely similar performances across the board in terms of prices, and existing, well-performing liquidity pro- tocols such like 0x abstracting out the heavy lifting in terms of opti- mization, the deciding factor for a DEX aggregator’s success could very well be an eye-catching yet simple user interface, more robust wallet integrations, meta transaction support and RFQ integrations.
The exception to this rule could be the effective, at-scale accu- mulation of substantial liquidity pools across many asset pairs for exclusive additional liquidity for a particular aggregator as a com- petitive edge. This could be a viable solution, with DEX liquidity providers collecting more and more returns on their investments every day.
At the end of the day, decentralized exchanges still face a long journey ahead of them in catching up with their centralized counter- parts and holding a comparable share of the volume. While decen- tralized exchange aggregators are a welcome solution to fragment- ed liquidity in the current DEX landscape, they do not themselves solve the liquidity problem.
Whether it’s possible to practically and sustainably operate decen- tralized exchanges at the scale of centralized exchanges remains to be seen.
Research THEBLOCKCRYPTO.COM 109 Despite the recent decline, exchanges still hold more than 16% of all bitcoins
• Exchanges hold roughly 3.08 million BTC on behalf of custom- ers, which is 16.5% of all available bitcoins • The amount is down by 10% since February 9 when exchanges held as much as 3.43 million BTC (nearly 19% of the available supply) • Coinbase holds by far the most of all exchanges – 984.3k BTC, which is 5.4% of all BTC in circulation
Cryptocurrency exchanges hold more than 3 million bitcoins, an equivalent of $29.3 billion on behalf of users, according to research by The Block.
Compiling a comprehensive list of exchange wallets is an impossi- ble task without the help of sophisticated on-chain analysis. This is because some exchanges, such as Coinbase, hold their bitcoins in hundreds of cold wallets with only small amounts. Other exchang- es, such as Huobi, have their holdings spread across a few mas- sive wallets (such as this one holding 255.5k BTC).
Exchanges sometimes migrate their cold wallets into a bunch of smaller ones and it’s nearly impossible to determine whether it was just a regular withdrawal or a creation of a new cold wallet. That’s why there are large disparities between different data providers (as seen below) since some completely exclude the ones they can’t 100% verify. Generally, the larger the number is, the more compre- hensive it is but there could also be some false positives.
Source: The Block, bitUniverse, chain.info, Glassnode, Peckshield, BitFury, BitcoinWhosWho, Glassnode, CryptoQuant
Research THEBLOCKCRYPTO.COM 110 Despite the recent decline, exchanges still hold more than 16% of all bitcoins
The Block used data from multiple different data providers (bitUniverse, chain.info, Glassnode, Peckshield, BitFury, Bitcoin- WhosWho) to come up with what we consider to be the most accu- rate amount of bitcoins held by exchanges. At the time of writing, exchanges hold roughly 3.08 million BTC on behalf of customers, which comes down to 16.5% of all available bitcoins.
While that might seem like a lot, the amount is actually down by 10% since February 9 when exchanges held as much as 3.43 mil- lion BTC, which was nearly 19% of the available supply.
Source: The Block, bitUniverse, chain.info, Glassnode, Peckshield, BitFury, BitcoinWhosWho, Coin Metrics
What’s perhaps the most interesting though is to look at which exchanges are holding the most bitcoin. Coinbase holds by far the most — it currently has 984.3k BTC in its wallets and had more than a million BTC less than two months ago. In December 2018, Coin- base disclosed it held 5% of all bitcoin, which is roughly consistent with its current holdings (5.35% of all BTC). Coinbase is followed by Huobi (413k BTC), Binance (318k BTC), OKEx (268k BTC), and BitMEX (217k BTC).
Research THEBLOCKCRYPTO.COM 111 Despite the recent decline, exchanges still hold more than 16% of all bitcoins
Source: The Block, bitUniverse, chain.info, Glassnode Peckshield, BitFury, BitcoinWhosWho
It’s still surprising that leading exchanges like Coinbase, which claim to identify with “don’t trust, verify,” don’t either disclose the list of their addresses or participate in privacy-preserving proof of solvency. Without knowing each exchange’s holdings, it’s impossi- ble to demonstrate whether it has sufficient reserves to settle each customer’s account.
Research THEBLOCKCRYPTO.COM 112 Charting the growth of Reddit communities for major cryptocurrencies
• Online forums have become a popular place for cryptocurrency enthusiasts to share information • Reddit’s subreddit feature has made it one of the go-to places for creating cryptocurrency-centric forums • The Block takes a look at Reddit data to examine the growth of these dedicated subreddits
Ever since the creation of Bitcointalk by Satoshi Nakamoto, Web forums have become a popular realm for cryptocurrency enthusi- asts to share news and talk about their interests with specific, like- minded community members.
Reddit’s subreddit features allow for community members to dedi- cate specific forums for conversations on specific topics. Since the creation of r/Bitcoin subreddit in 2010, every single popular crypto- currency has a dedicated subreddit.
For this piece, The Block took a look at some stats from subreddits of five popular cryptocurrencies: Bitcoin, Ethereum, Ripple, Lite- coin, and EOS, and their large subreddits.¹
Below is a graph of the historical subreddit growth of our five popu- lar cryptocurrency subreddits. We see a clear growth spike starting in mid-2017, which coincides with the price increase from the 2017 bull market.
Source: Subreddit Stats
The 2017 bull market brought many new members into these subreddits. In fact, a majority of subreddit subscribers to five of the
Research THEBLOCKCRYPTO.COM 113 Charting the growth of Reddit communities for major cryptocurrencies
largest dedicated cryptocurrency subreddits joined during and or after the 2017 bull run. Some subreddits like r/EOS and r/Ripple had over 99% of their community members joining during the bull run.²
Source: Subreddit Stats
The five following charts below show that the daily growth of subreddits is often associated will large price spikes in their re- spective cryptocurrencies.
Research THEBLOCKCRYPTO.COM 114 Charting the growth of Reddit communities for major cryptocurrencies
Research THEBLOCKCRYPTO.COM 115 Charting the growth of Reddit communities for major cryptocurrencies
The most significant single-day subscriber growth came from r/ EOS, which, in December 2017, saw a 64% spike in the number of subscribers. The charts also show that since early 2018, the daily growth rate of these subreddits has significantly stalled, with growth rates trending near 0%.
¹We did not include bitcoin cash, bitcoin sv, and binance coin subreddits due to their low subscriber count and unclear dominant subreddits (ex: r/BTC is a popular bitcoin cash subreddit despite being named after the Bitcoin ticker)
² Note that EOS’ was publicly announced in mid-late 2017, which points to the newness of its members
Research THEBLOCKCRYPTO.COM 116 Bitcoin miners are mining fewer empty blocks in 2020
• Empty blocks on Bitcoin are defined as blocks that include only the coinbase block reward transaction • 2020, so far, has seen fewer empty blocks compared to the same period in 2019
In May, Bitcoin recorded its third halving, cutting the per-block sub- sidy from 12.5 BTC to 6.25 BTC.
With each halving of the block subsidy, transaction fees become a more significant component of miner revenue, thus incentivizing miners to include as many transactions in the blocks they mine as possible. However, even with the expected halving, miners this year were still mining empty blocks.
Empty blocks, as previously described, are a misnomer as the blocks aren’t really empty. Instead, empty blocks are typically de- fined as blocks with zero transactions other than the coinbase block reward. In other words, empty blocks include exactly one transaction — the transaction that rewards miners for finding it.
The primary reason why miners mine empty blocks is how mining is structured. When miners receive block N from the network, they need to perform a series of actions, including downloading the block, verifying its header, verifying the transactions in the block, and constructing a template for the next block. While this is all hap- pening, some miners will attempt to find block N + 1, in parallel, as to not waste time and hash power with an idling miner performing those actions.
Because these miners have not fully downloaded and verified the transactions in block N, they will attempt to mine an empty block in block N + 1 to prevent the inclusion of transactions already found in block N, as these inclusions would cause the network to reject the new block on the basis of duplicate transactions. If the miner gets lucky, it might find block N + 1 before it finishes downloading the entirety of block N, thus generating revenue from the subsidy in N +1 and setting itself up to mine block N + 2. If it is unlucky, it will finish downloading N and begin finding block N + 1, this time with the expectation that it will include transactions as it now knows what transactions were in block N.
Below is a high-level visual representation of this process, all of which occurs in fractions of a second.
Research THEBLOCKCRYPTO.COM 117 Bitcoin miners are mining fewer empty blocks in 2020
Source: Bitcointalk.org
While miners are still mining empty blocks in 2020, that trend ap- pears to be slowing down compared to the previous year. From January 1st to June 1st, only 0.3% of blocks mined were empty. This is a significant decrease from the 0.79% figure over the same period for 2019.
It is unclear what caused a decrease in empty blocks in 2020. One explanation could be that miners were prepping for the inevitable subsidy halving in May by prioritizing the inclusion of transactions and the accompanying fees. However, transaction fee revenues in 2019 and 2020 over those periods are very similar — coming in at $57.2M in 2019 and $57.7M in 2020 — so it is unlikely that a large increase in fees provided incentives for fewer empty blocks in 2020.
A leading mining pool told The Block that it could be pure luck that miners are mining fewer empty blocks this year compared to 2019.
Source: Blockchair
This trend of fewer empty blocks is also visible on a month-to- month comparison between 2019 and 2020. The chart shows that the drop in empty blocks was not the result of a sudden strategic
Research THEBLOCKCRYPTO.COM 118 Bitcoin miners are mining fewer empty blocks in 2020
move by miners reconfiguring their software to stop mining empty blocks as the percent of empty blocks mined each month has hov- ered around ~0.30% in 2020.
Source: Blockchair
The chart below shows the most active empty block miners as a percentage of the total number of blocks they’ve mined.
Source: Blockchair
Of the 20 self-identifying miners in 2020, nine of them have mined empty blocks. More than half of these empty blocks were mined by F2Pool and BTC.com
Research THEBLOCKCRYPTO.COM 119 Bitcoin miners are mining fewer empty blocks in 2020
Source: Blockchair
Research THEBLOCKCRYPTO.COM 120 Ethereum 2.0 & the exchange dilemma
• Ethereum’s transition to Proof-of-Stake will introduce new dy- namics in regards to potential centralization issues • Staking services by exchanges have been highly successful. Currently, the three largest validators on Tezos are all exchang- es- Coinbase, Binance, and Kraken
Ethereum’s expected transition to a Proof-of-Stake consensus model will arguably be the largest historical event for the alterna- tive consensus model to Proof-of-Work. In order to get a better idea of the magnitude of such a move, in 2019, Proof-of-Stake networks accounted for only 8% of the crypto market cap. Ethereum’s market cap alone is larger than the aggregate of Proof-of-Networks, cur- rently accounting for approximately 10% of the crypto market cap.
Amongst community members, there is a sense of excitement and anticipation for a transition that feels like its been a long time com- ing. The excitement is rightfully warranted, however, transitioning to Proof-of-Stake will introduce new dynamics in regards to poten- tial centralization issues that developers will need to be attentive to.
Not all networks are created equal, so comparing one Proof-of- Stake network to another isn’t an apples to apples comparison. For example, EOS chose to design its network with only 21 block pro- ducers, which has at times led to claims of centralization and col- lusion in its governance process. In Ethereum, there will be a mini- mum of 16,000 validators and anyone who meets the pre-requisites of owning 32 Ethereum can become one.
While we can not make an exact comparison, with knowledge of Ethereum’s staking mechanics, a sample size of staking networks for historical reference, and a survey conducted by ConSenys on Ethereum users, we can form reasonable assumptions.
Staking on Exchanges
In 2019, we saw many firms, whether that be exchanges or custo- dy providers, rush to add staking support. For many, the first asset offered was Tezos, and these services to date have been highly successful. Currently, the three largest validators on Tezos are all exchanges- Coinbase, Binance, and Kraken. Coinbase’s validator is more than double in size the second-largest despite charging much higher fees or 25% of all rewards generated.
Research THEBLOCKCRYPTO.COM 121 Ethereum 2.0 & the exchange dilemma
Source: TzStats, The Block Research
Tezos provides us with a small sample size of the average user’s behavior and how they stake their assets. When excluding the Tezos Foundation and the Tezos it itself owns, it shows that approx- imately 30% of users are currently staking on an exchange.
What does this mean for Ethereum?
It is likely that the 30% figure on Tezos will be higher on Ethere- um. For one, Tezos users have the option to “delegate” their funds, meaning they can assign their tokens to a validator of their choos- ing. There are now wallets and applications that support this task, making it essentially as seamless as clicking a button. Despite this option, users on average continue to instead stake with exchanges, even when being charged at a much higher rate.
With Ethereum, users will not have the option to delegate funds. A user will need a minimum of 32 Ethereum to stake themselves or will have to join a staking pool, such as the proposed Rocket Pool if they want their tokens to take part in staking.
Rocket Pool is an interesting concept in addressing the needs of users looking to stake and a decentralized alternative to using a
Research THEBLOCKCRYPTO.COM 122 Ethereum 2.0 & the exchange dilemma
centralized exchange. For the time being, however, it is likely such a service will be minuscule when compared to centralized ex- changes. When looking at the nascent Open Finance industry more broadly, in general, they have been trivial to the markets at large when compared to their centralized counterparts. As a reference, volumes on decentralized exchanges are up 450% since January 2019, despite this, they still only make up 0.66% of centralized ex- change volumes.
Ethereum held on Centralized Exchanges is growing
Source: Glassnode, The Block Research
Phase 0 of Ethereum 2.0 and the ability to stake its tokens is still months out, but the overall trend of Ethereum balances on cen- tralized exchanges has already grown. Year-to-date, Ethereum on exchanges has increased by approximately 11% and over the past year, the figure has heightened by approximately 33%.
Approximately 17% of Ethereum’s supply is already sitting on cen- tralized exchanges. It should be expected that this number will increase once there are additional incentives such as earning re- wards through staking.
Research THEBLOCKCRYPTO.COM 123 Ethereum 2.0 & the exchange dilemma
ConsenSys Survey Findings
ConsenSys conducted an online survey on existing Ethereum holders that had 287 respondents. The intent of the survey was to gauge what holders’ behaviors, preferences, and intentions would be in relation to staking Ethereum. While this sample size is small relative to existing holders of Ethereum, it does provide additional information.
Approximately 20% of respondents noted that they were either like- ly or very likely to use a third-party provider for staking. An addi- tional 37% of respondents claimed they were unsure.
For users who planned to use a third-party, approximately 38% cit- ed staking protection as important. This concern could fare well for exchanges who have the overhead to afford taking the losses that can occur from “slashing” or instances when a validator is penal- ized with losses of its tokens for an error. In cases such as Rocket Pool, losses instead are socialized across users.
37% of these same respondents, however, did cite “non-custodial” as a preference, so this could fare well for projects like Rocket Pool.
For respondents that noted they were unsure whether they would be staking or not, 35% said they would stake with a third-party if they did and another 51% were undecided.
Respondents that said they would not be staking, 71% noted that the reason was that they do not have 32 ETH.
What this all means
Contrary to what many of us like to think at times, the future is far from predictable. However, judging by the current actions of users taking part in Proof-of-Stake networks like Tezos, increasing ex- change balances of Ethereum, and the staking preferences noted in the survey conducted by ConsenSys it seems increasingly clear that a large percentage of users will stake their Ethereum on cen- tralized exchanges. This will be something developers will need to pay great attention to, and potential solutions such as Rocket Pool will be needed for the dominance of exchanges from becoming too high.
Research THEBLOCKCRYPTO.COM 124 An analysis of U.S. federal databases and block- chain-related mentions
• Federal databases provide valuable information on various in- dustries • The Block looked at the databases of the SEC, the U.S. Con- gress, and the United States Patent and Trademark Office to gain insights into cryptocurrency trends
Federal databases often provide a trove of interesting information. These databases often follow a structured process for collecting, organizing, and displaying data because of regulatory requirements.
The insights that can be extracted from these databases are widely applicable. From making investment decisions to planning strategic moves, many industries rely on data from their respective governments.
For this piece, The Block looked through three U.S. federal web- sites and databases to survey the growth of the cryptocurrency industry.
First up is the “Electronic Data Gathering, Analysis and Retrieval” filing system created by the Securities and Exchange Commission (SEC), more commonly known as EDGAR.
EDGAR is used by all publicly traded companies to submit required filings to the SEC. One of the database features allows users to search for mentions of specific terms and how many filings they appear in.¹ We used this feature to search for historical filings men- tioning the five blockchain-related terms below.
Research THEBLOCKCRYPTO.COM 125 An analysis of U.S. federal databases and block- chain-related mentions
In the chart, we see that “Blockchain” mentions dominate the SEC filings from publicly-traded companies, compared to the four other terms in our search process. Perhaps unsurprisingly, we also see a huge increase in blockchain-related mentions in 2018 — one that coincides with the late-2017 cryptocurrency price mania.
Since 2018 however, the mentions appear to have entered a down- trend. We would have a clearer view of this potential downtrend at the end of 2020 and the data is fully reported.
The next database, we analyzed is the Trademark Electron- ic Search System (TESS) created by the United States Patent and Trademark Office (USPTO). The search engine allows users to search for all registered and formerly registered trademarks in the USPTO database. We used the TESS to find live trade- marks — trademarks that haven’t been abandoned and are currently active — for blockchain-related terms.
Research THEBLOCKCRYPTO.COM 126 An analysis of U.S. federal databases and block- chain-related mentions
We see a similar dominance for the terms “Blockchain” and “Cryp- tocurrency” in trademark applications as we did with SEC fil- ings — showing the popularity of broader and more widely applica- ble terms for business use cases.
Our last database in this piece is from the U.S. Congress’ website. We used the site to search for blockchain-related mentioned in leg- islative documents and congressional records for the chart below.²
In the 2019–2020 period, we see more “blockchain” mentions than the years 2017–2018. This is despite the fact that we are only half- way through the year 2020.
This spike in blockchain-mentions from the U.S. Congress might have been fueled by several factors. These include the announce- ment of Facebook’s Libra initiative, the continued popularity of cen- tral banks around the world using “blockchain technology” to build their digital currencies, and use of blockchain as a foundational technology in China’s drive for innovation as mentioned by China’s President Xi Jinping in late 2019.
¹ The EDGAR database limits our search timeframe from mid-2016 to present
² The U.S. Congress’ search engine displays its results in two-year timeframes
Research THEBLOCKCRYPTO.COM 127 A proxy for crime involving bitcoin use? An analysis of U.S. Attorney press releases
• While the U.S. government has not published regular reports of crimes involving the use of bitcoin, they do publish press releases with bitcoin tags • We analyzed these press releases and use them as a proxy for bitcoin crime growth • Of the 94 U.S. Attorney district offices, 53 have published such press releases
Bitcoin is a popular asset in darknet markets due to its censorship-re- sistant nature and growing liquidity. The Block previously analyzed that 93% of the largest darknet markets support bitcoin as a payment meth- od and 44% of these markets exclusively support bitcoin payments.
While the U.S. government does not regularly publish organized re- ports of crimes associated with the use of bitcoin, the Department of Justice does publish press releases of news involving bitcoin. While these releases are but a fraction of total crimes committed in the U.S., we believe they can be used as a proxy to measure the historical use of bitcoin in criminal activities.
For our data set, we analyzed the appearance of the term “Bitcoin” in press releases published by the 94 U.S. Attorneys’ offices. We also filtered out releases not associated with crimes but just public announcements.
Press releases referencing crimes involving the use of bitcoin have steadily increased since 2013, with 2019 being the year with the most reported crimes by the U.S. Attorneys office.
Source: USAO
Research THEBLOCKCRYPTO.COM 128 A proxy for crime involving bitcoin use? An analysis of U.S. Attorney press releases
Similarly, while bitcoin references are a very small fraction of to- tal press releases by these offices, its share continues to grow. In 2019, bitcoin press releases made up over half a percent of total published criminal press releases, up from 0.04% in 2013.
Source: USAO
Of the 94 U.S. Attorney district offices, only 53 have published press releases regarding crimes involving the use of bitcoin. The ten-most active offices are listed below.
Source: USAO
Perhaps unsurprisingly, some of the most active districts are ones in regions that have been identified by FinCEN has “High Intensity
Research THEBLOCKCRYPTO.COM 129 A proxy for crime involving bitcoin use? An analysis of U.S. Attorney press releases
Financial Crime Areas.” The Southern District of New York, the most active district in our data set, is often nicknamed “Sheriff of Wall Street,” due to its purview over New York City’s Financial Dis- trict.
For its press releases, the U.S. Attorney’s Offices also tags ‘topics’ in its press releases for easy search and filtering. The Block ana- lyzed these tags to compiled the chart below of most commonly-cit- ed crimes in these press releases.
Source: USAO
Because of its digital nature and its history with Silk Road and darknet markets, it is no surprise that cybercrimes, drug crimes, and financial fraud accounted for 84% of the topics tagged in bit- coin-related press releases.
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