Q9 Weekly | DEX Education

9 December 2022

DEX Education

• Stablecoin active addresses, crypto options both hit record highs
• Chainlink staking now live
• Decentralised exchange activity heating up

Spot markets held up relatively well this week with BTC climbing above $17k and ETH holding $1.2k. AXS, the native token of blockchain-based play-to-earn game Axie Infinity, came out of oblivion with a double-digit (+21.1%) price rally this week. Stablecoins are also holding up: active addresses continue to breach new heights, recently crossing 1mn per day.

Source: Coinmetrics

Crypto options hit new highs in Nov. The number of ETH options contracts traded rose 10% in Nov, reaching a record high of 8.9mn. Trading volume in BTC options rose 17% to 778,000 contracts, nearing the record rally registered in Jan 2021. In nominal terms, the total options turnover rose 5% to $25.5bn, with the exchange accounting for over 90% of the global trading volume.

“Market volatility and overall fear and unrest have resulting in trading opportunities (up 20% in overall volumes or + USD 8 billion) but perhaps more importantly clients were able to hedge existing portfolios,” Deribit said in its monthly newsletter.

Source: Glassnode

Institutions also continue to build and invest: Here’s a thread on “2022 The Year Institutions Evolved Into Crypto” and an infographic from Binance. Goldman Sachs plans to spend “tens of millions of dollars” on crypto firms whose valuations have been hit after the implosion of FTX. “We do see some really interesting opportunities, priced much more sensibly”. And despite the recent downturn, Blackrock CEO, Larry Fink considers the technology behind crypto “will be very important… I believe the next generation for markets and next generation for securities will be tokenization of securities”. However, he also believes that most existing crypto firms “are not going to be around” in the future.

Coinbase revealed revenues will be ‘half or less’ of last year’s. Last year the firm raked in roughly $7bn and $4bn of positive EBITDA. However, “this year, with everything coming down, it’s looking, you know, about roughly half that or less” according to CEO Brian Armstrong. Armstrong also believes there is a clear need for regulation in crypto and that he expects something to be put in place in the US within the next year.

On the regulatory front: US Senator Elizabeth Warren is reportedly working on a sweeping cryptocurrency bill that would hand the SEC most regulatory authority over the market. Warren’s office is looking at a range of crypto-related issues, including regulations, taxation, climate, and national security. The UK Economic Secretary, Andrew Griffith, reiterated the country’s commitment to becoming a key center for the crypto industry, saying the collapse of FTX isn’t a reason to change course. The European Commission is struggling to find out how to deal with foreign crypto services providers as it sets out to increase reporting obligations for European crypto companies… and Hong Kong’s legislative council passed a new amendment to its AML and terrorist financing system to include virtual asset service providers.

Portfolio Mismanagement

FTX’ total investment portfolio was published by FT Alphaville. Alameda/FTX Ventures held nearly 500 illiquid investments split across 10 holding companies. The total investment value is given on the spreadsheet as in excess of $5.4bn. Going by the spreadsheet, boundaries between SBF’s companies were blurred.

Crypto and DeFi projects account for the majority. But the list also includes numerous start-up video game studios and betting platforms, online banks, publishers, a fertility clinic, a military drone maker and a vertical farming company. Some entries have no clear link to an active business, suggesting they may be misspelt or mislabelled.

Investments to the tune of $5.4bn managed on a rough excel spreadsheet with names misspelt says everything you need to know about SBF’s management experience and his appropriateness in terms of running a “multi-billion dollar” company.

Source: FT Alphaville

A LINK to the Future

Staking for decentralised oracle network Chainlink (LINK) is now live on Ethereum, in what Chainlink co-founder Sergey Nazarov claims is one of the most highly anticipated events for its network. With staking enabled, holders of LINK can contribute to the network’s security and receive rewards.

Staking is initially open to node operators and members of the community who qualified for early access. Users can stake up to 7,000 LINK tokens and start receiving rewards, and are subject to a 9–12 month lock up period. This is because the next version of staking is expected to launch in that timeframe, at which point stakers can either unlock their tokens or migrate them to the new version.

Chainlink is by far the most widely used oracle network in the industry. Oracle networks are critical blockchain infrastructure allowing developers to securely use real-world data in their applications and enabling the majority of on-chain use cases today.

Oracle Comparison — Active Users

Source: DuneAnalytics

More Chainlink Staking Details:

• Chainlink Economics 2.0 Staking Protocol and Staking v0.1 Launch Details
• How To Stake Chainlink (LINK)
• Chainlink Staking Data and Node Operators

Lets Talk About DEX, Baby

DEX user activity continues to hit new highs. Since the FTX implosion, traders are channelling more digital assets to decentralised exchanges than ever before, cutting out financial middleman, and executing peer-to-peer on the blockchain.

DEX users trade tokens directly with each other using blockchain-based smart contracts instead of passing funds through an intermediary or central authority. Thus, as with other platforms in the world of DeFi, there is no central oversight and (for good or for ill) investors are responsible for their own trades, settlements and safe-keeping of coins or tokens.

DEX vs CEX

Source: Reuters

U N I Need to Talk

Uniswap is the most successful decentralised app in crypto. The DEX has executed a cumulative $1.2 trillion in trading volume, capturing nearly 70% of DEX volume on Ethereum. The UNI token sports a $4.4 billion market cap.

Source: Messari

However, total borrowing volume across major decentralised lending protocols has declined roughly 75% from $32bn to $8bn over the past year. This is down in line with the rest of the lending market as investors fret about counterparty risks.

Source: TokenTerminal

Practicing Safe DEX

Advocates of decentralisation say DEXs could offer investors some protection from the kind of shenanigans that appear to have gone on at FTX. DEXs cannot halt withdrawals, they require users to retain custody of their funds, and trading activity and reserves can be traced directly on the blockchain. There are definitely elements of DEXs appealing to people as they mitigate the chances of encountering some nefarious operator.

However, DEXs are not necessarily safer than their centralised rivals, with inexperienced investors potentially exposed to huge risks.

1. It’s still a very nascent and experimental space. It isn’t battle hardened yet and there are idiosyncratic risks with each project.
2. Most investors can’t read or audit code. So… although it’s open-source it might not mean that much to your everyman trader.
3. Each protocols code should be kept simple. The more complex, the more points of failure.
4. Self-custody and decentralised wallets are not yet up to institutional level security practices.
5. We’ve already had some huge DeFi blow-ups: see Terra/Luna earlier this year.

DeFi protocols also aren’t suitable for investors such as traditional financial institutions and specialized trading firms. DEXs typically have slower transaction speeds, while hedge funds might not want their trading strategies to be publicly traceable on the blockchain. Many traditional finance institutions are also legally required to hold external funds with an external custodian and would not be able to self-custody investors’ assets to trade them on decentralised exchanges.

In the CEX vs DEX battle, it’s not a question about which one will win out. There is a major role of both centralised and decentralised finance in the future. The interconnectedness is critical. Both will grow and co-exist together.

In the News…

• Sen. Warren demands answers from Silvergate Bank about its business dealings with FTX
• Temasek-backed crypto shop Amber halts expansion plans in rocky market
• SBF at Dealbook Summit: ‘I didn’t knowingly commingle funds’
• 3AC founders have one week to provide key financial documents: Singapore court
• Galaxy Digital wins Celsius bankruptcy auction to acquire crypto custodian GK8
• Binance generates 90% of its revenue from transaction fees
• Ripple leads $72mn round into crypto market maker Keyrock
• Bitcoin miner Marathon explores Compute North bid
• Troubled crypto exchange Zipmex to be acquired for $100mn
• Bitwave raises $15mn for crypto-focused tax and accounting platform
• ‘Crypto is anything but private’ an author examines crime on the blockchain
• The people who hate Sam Bankman-Fried the most