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Token Daily Newsletter #37

How tBTC's Coupling of Bitcoin and Ethereum Could Play Out

Building a trustless, intermediary-less bridge between Bitcoin and Ethereum was regarded as a pipe dream for quite some time. This week, that's changed. tBTC finally launched on mainnet, and it's now possible to mint tBTC directly on the Ethereum blockchain in a trustless manner. You can read more about the mechanics of how this works, and its value to the ecosystem, in one of our previous newsletters.

The Coupling Effect

In physics, there's a phenomenon known as the coupling effect which can be observed when two systems start interacting closely with each other.

With the coupling effect, it's common to see new dynamics emerge that were not possible in either system before. In some instances, the coupling results in a complete transfer of energy, or value, from one system to the other. 

tBTC, as the first trust-minimized bridge between Bitcoin and Ethereum, could act as a coupling medium between the two large projects. Though it's impossible to predict exactly how this will play out, here are several directional bets:

How could tBTC affect Ethereum?

tBTC is not the first synthetic BTC on Ethereum, but it is the first to have strong decentralization guarantees. Anyone can contribute collateral to mint tBTC and anyone can become a signer to maintain and secure the bridge linking Bitcoin and Ethereum. The guarantees can potentially encourage more BTC hodlers to put their held BTC "to work" by minting tBTC and using it to generate yield in DeFi.

Previously, collateral used in DeFi was largely ETH because other ERC-20 tokens or centrally-issued stablecoins had a much smaller cap than ETH. This, in turn, instated a fundamental limit on the growth of DeFi because there were limits on the amount of collateral that could be used.

If tBTC succeeds in bringing significant BTC liquidity into DeFi,  DeFi could grow significantly since Bitcoin's market cap is 8x larger than Ethereum's at time of writing. The hope is that this activity would then be reflected in ETH's price. ETH price is one of the most important parameters for the network and DeFi security. 

Another benefit Ethereum could glean from tBTC is enforcement of its interoperability capabilities with other chains.

These benefits, however, don't come without risks. One of the possible long-term risks, albeit unlikely for reasons we discuss below, is that BTC might replace ETH as the main collateral for DeFi protocols. In this scenario, ETH could slowly start to lose value, and the Ethereum network would just become a sidechain for Bitcoin. 

This could eventually cause all value currently stored in ETH to flow back to BTC along with DeFi protocols that can operate either on BTC-dominated sidechains or on top of LN. This scenario is less likely because of both the crypto-economic design of tBTC and the role ETH plays in the security of the DeFi and the Ethereum network as a whole.

How could tBTC affect Bitcoin?

For the Bitcoin network, tBTC has an overall positive effect. BTC has so far demonstrated strong characteristics as a SoV and as a medium for large-value payments. However, BTC's properties as a financial asset, e.g. as collateral for loans, have largely depended on centralized entities acting as BTC banks. This doesn't necessarily align with Bitcoin's philosophy. tBTC could generally improve BTC capabilities as a financial asset by increasing BTC utility and, perhaps, value. 

The only major risk to Bitcoin would be if tBTC facilitated too much bitcoin to move to the Ethereum network. This would cost Bitcoin a significant portion of settlement fees that could eventually contribute to weakened network security. It is worth mentioning that this risk is not specific to tBTC but exists for every bitcoin off-chain scaling solution including the Lightning Network and sidechains. 


It is still a bit too early to know exactly which of the discussed scenarios will play out or which forces will push the result in one direction or another. Nevertheless, the tBTC project is likely to play an important role in the crypto ecosystem.

We expect to see competing projects go a step further and try to build a two-way bridge between Bitcoin and Ethereum instead of the current tBTC one-way bridge.  




⚑️ Happy Halving πŸš€

The Bitcoin halving was the most important event that happened this week. The third Bitcoin phase, characterized by a mining reward of 12.5 BTC per block, ended on May 11th, 2020 at 18:16:54 UTC, with the last block being mined by the F2Pool.

What made this block doubly special was the message F2Pool encoded in the block header which reads "🐟NYTimes 09/Apr/2020 With $2.3T Injection, Fed's Plan Far Exceeds 2008 Rescue". The message is, of course, a winking reference to Bitcoin's genesis block message encoded by Satoshi on January 3rd, 2019: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks."


⚑️ Bitcoin Hashrate Futures

In anticipation of the BTC reward halving, and the volatility in network hashrate that comes with it, derivative exchange FTX introduced a product for speculators to bet on hash rate. The product may help small miners hedge against being outpriced by the increasing network difficulty. Currently, the market predicts a constantly increasing hash rate over the upcoming three quarters despite the decrease in mining rewards.

FTX hashrate futures: price reflect expected hash rate at the end of the quarter 

⚑️ J.K. Rowling and Bitcoin

By crypto standards, responses to J.K Rowling's question about Bitcoin were mild. However, for anyone new to this space, the vast majority of responses would have likely left them more confused, or worse, scared them off. This raises the question about how to properly position Bitcoin to the crypto-curious. The best answer we saw ironically belongs to someone who is currently inactive on twitter, bitcoin developer Greg Maxwell, who posted his response to Reddit.




An attempt at the first decentralized and fully-collateralized crypto-dollar, single-collateral DAI (SAI), came to an end last Tuesday. Anyone with a remaining SAI balance will have to redeem it to ETH using a Maker provided migration tool
πŸ”Ή  How Far is Ethereum 2.0?

There is confusion around Ethereum 2.0 Phase 0 launch date. Although there isn't a definitive date for phase-0 mainnet, most confusion can be resolved by following direct updates from developers actually building ETH2.0 clients.

The launch is inching closer with 3 clients, Prysm, Lighthouse, and Teku, working together on the Schlesi testnet. A fourth client, Nimbus, is catching up. Based on current progress, it is probable that a functioning phase-0 mainnet could be launched in Q3 this year. 




πŸ“Œ Cosmos Game of Zones

The Cosmos project is resuming its efforts to test the Inter-Blockchain Communication (IBC) protocol and launching a new phase of the Game of Zones testnet competition on May 18th. This news comes after several issues that plagued the first phase of the competition which led some veteran Cosmos validators to publicly express their frustration and drop from the competition.  

πŸ“Œ FalconX $17M Raise

Despite the current crisis, many investors are still open for business. Last week, FalconX announced a new round of funding, raising $17M from Accel, Accomplice, CMT Digital, and several other big names. FalconX is targeting its brokerage service offerings towards institutional investors to enable optimal trade execution, along with several other prime services. 

πŸ“Œ Libra Expands Its Member Base

The Libra association recently added three new members to its council. The new members are Paradigm, Slow Ventures, and Singapore-based Temasek. Temasek is the first Libra member from outside North America and Europe which likely signals Libra's intent to have global coverage. 


Disclosure: Volt Capital and/or its partners may have exposure to some of the cryptocurrencies mentioned in this newsletter.

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