COVID-19 is bigger than anything written below. Still, there's substantial activity in crypto that's worth tracking while isolating at home. Stay safe and stay informed.
Interpreting Recent Signals from Stablecoins
In response to the COVID-19 crisis, stablecoin issuance has significantly increased over the past few weeks. Our friends at TokenAnalyst and Coin Metrics published several interesting data points on the topic including the fact that Tether (USDT) added $2B of USDT since the beginning of the year, putting it at a current market cap of around $6.1B. USDC showed a similar trend with a ~50% market cap increase since the start of March. The obvious cause is that crypto investors are worried over the current climate, so they are exiting their current positions and hedging into stablecoins as they take a wait-and-see approach.
If we dive more deeply into the numbers, a particularly interesting data point emerges: that is, a significant percentage of the new issuance (~25%) is still sitting on the sidelines - inside exchange wallets specifically - and hasn't been withdrawn to cold storage. This likely indicates that crypto investors are probably hoping for a quick reversal and want to be able to make their trades quickly.
TokenAnalyst data on stablecoin balances held at major exchanges
This beckons the question - why leave money in stablecoins? Why not convert to cash? All signs lead to low trust in the traditional banking system during crises. So low, in fact, that these investors might prefer keeping their cash in digital stablecoins instead of withdrawing this money into fiat. In this regard, users accept the additional risk that comes tethered to centralized issuers just to avoid dealing directly with traditional financial institutions.
Another explanation may have to do with the fact that crypto users can realize high yield by holding onto stablecoins whereas traditional banking yield is being decimated by the current crisis. For instance, Binance still offers around 6% in interest for 1 month USDT and BUSD deposits. Coinbase also offers 1.25% on any USDC deposits. The question then becomes, how long can these stablecoin yields be maintained?
Until recently, US T-bills have been able to avoid negative interest rates, unlike in Japan and Europe. The current crisis pushed the short-term, e.g., 1M and 3M, T-bills into negative yield territory on March 25, before rebounding to stay slightly above zero. With many experts predicting negative yield on USD deposits, one starts to wonder how this will reflect on most USD dominated stablecoins like USDT or USDC. As many exchanges offer higher interest rates on stablecoin deposits, it is not clear how these exchanges, or their partnering stablecoin issuers, will navigate the situation when the USD peg backing the stablecoin is earning zero or negative interest while they are paying their customers single-digit interest rates.
Exchanges probably hope that speculative leveraged-trading will allow them to pass these high-interest rates to margin traders. However, stablecoin issuers don't have similar sources of revenue. For issuers, negative interest rates can lead to a situation where USD collateral decreases below outstanding token market cap, leading to fractional reserves. Issuers like Tether (USDT) and Centre (USDC) will have to implement policies to navigate the negative interest rate era.
⚡️ Lightning Network Faraday
The team at Lightning Labs has taken another major step towards improving the LN user experience. Their new tool Faraday aims to make channel management easier by providing details on the usefulness of open channels and recommendations on which channels need to be closed to improve LN capital efficiency. The tool monitors the channel routing behavior and peer uptime to evaluate whether the channel is being properly utilized or needs to be closed. Along with Lightning Labs' previous Loop tools, which focus on channel liquidity management, this set of tools will eventually enable automated management of LN nodes.
⚡️ Strike.me by Zap
In an earlier newsletter, we discussed why we believe LN can be a strong candidate as a mainstream payment rail once the volatility and tax issues are mitigated. We also discussed how Strike was the first product to cleverly address these issues. As a demonstration of the Strike product, the Zap team has launched Strike.me, a user-facing platform using Strike for tipping. Users will be able to create their individual pages and start receiving tips or donations dominated in fiat without being subject to BTC volatility.
🔹 Multi-client ETH 2.0 Phase 0 Testnet
Vitalik estimates a muli-client testnet launch in April is highly likely, and considering that Least Authority completed a security audit of ETH 2.0 phase 0, it seems like things really are moving in that direction.
Prysmatic Labs, which is developing the ETH 2.0 Prysm client, has announced steps to restart their current highly-stable testnet this coming week. The testnet has been in operation for 3 months. It will be restarted to comply with the most recent phase 0 specs, targeted to allow wide multi-client operation. This materially increases the probability of a 2020 mainnet launch.
🔹 Balancer Mainnet Launch
Early last week, new DeFi protocol Balancer launched on Mainnet. Balancer takes automated market-making pools, pioneered by Uniswap, a few steps further. In Uniswap, liquidity pools have only 2 tokens that can be swapped and each token represents 50% of the pool liquidity at any point in time. Balancer expands the concept by allowing the liquidity pool to have more than 2 tokens, plus the pool can have any arbitrary ratio of the tokens. For instance, at time of writing, the most liquid Balancer pool (~ $100k in liquidity) is a pool exchanging MKR and ETH with 75/25 split. When a user tries to use Balancer to exchange a pair of tokens, the protocol draws liquidity from various pools to reduce slippage and provide better UX.
Fortmatic's Magic Link
Asymmetric key cryptography, i.e., public and private keys, which went mainstream through crypto, may ultimately be the standard for identity-based logins over the next few decades, presumably replacing passwords. However, as many users are still not comfortable holding their own private keys, Fortmatic, with its new product Magic.link, is providing a smooth onboarding tool for these users.
Users benefit from more secure key-based authentication while using the same tools they familiar with, such as email. Magic utilizes AWS KMS to generate key-pairs for app logins and authenticates identity using a simple link sent to the user's email. This way, the service reduces password reuse and improves identity protection.
Disclosure: Volt Capital and/or its partners may have exposure to some of the cryptocurrencies mentioned in this newsletter.