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Finance Redefined: The slow march forward, March 24–31

Republished by Plato

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Finance Redefined is Cointelegraph’s DeFi-centric newsletter contextualizing major events in the previous week. Subscribers receive a copy every Wednesday.

Editor’s Note

This is one of those weeks where it’s hard to find a central topic for this newsletter. There weren’t any big scandals or releases, more like a slow grind with a few projects launching new features, others announcing their fancy investment round, while every celebrity and their mother keeps dropping NFTs. Snoop Dogg is the latest, I believe?

I suppose a fair question to ask is, “why NFTs and not DeFi?” The answer is money. NFTs are currently making stupendous amounts of money to their sellers, not unlike the DeFi yield farming mania of the summer of 2020. In crypto, money is always the answer.

NFTs too shall pass, but like other past trends in crypto, this current rise may leave behind a residue that’s much larger than what we started with.

I would say DeFi is in its “accumulation” stage right now, and that’s why we’re seeing a steady stream of releases and investments, without any of them really rocking the ecosystem. Market conditions are not helping either, as we’re still in a wavering stage that needs to ultimately resolve itself. Maybe we’ll resume the bull run shortly, maybe we won’t. I’ve come to understand that timing the market’s top is fairly easy, the problem is that there are so many “tops” in a crypto year that it becomes difficult to tell a local correction from a global peak.

Sushi releases Kashi

One of the bigger developments this week was SushiSwap finally deploying BentoBox and Kashi, a margin lending platform. What distinguishes it from platforms like Compound or Aave is its segregated approach to risk. Kashi uses separate vaults for each pair of lendable assets, meaning, for example, that putting Ether into an ETH-SUSHI vault does not let you draw UNI from the ETH-UNI vault.

The segregated approach allows higher risk tolerance. A spectacular collapse in value of some small and illiquid coin does not affect anything but its own vault. This means that SushiSwap can create margin trading pairs for even the smallest of projects without suffering structural risk. With the upcoming Kashi V2, the act of creating lending vaults will even become permissionless, similar to creating AMM pools.

Margin trading is the lifeblood of DeFi. Margin traders paying for the privilege of shorting your coins (or dollars) in Compound or Aave are the source of your “risk-free” yield when supplying capital. Expanding margin trading to more coins adds capacity for more capital chasing those sweet DeFi APYs across the entire market.

Aave, Polygon, and the importance of narratives

Aave and Zapper have just announced an integration into Polygon, the sidechain and layer-two ecosystem formerly known as Matic Network.

The choice comes as an obvious consequence of the high gas fees on Ethereum, which have been pricing out a lot of smaller users for quite some time now. However, Aave’s destination is quite curious. Up until the rebranding, Matic was a weird mix of a competitor and addition to the Ethereum ecosystem. It ran a Plasma network, but most projects preferred to build on its smart contract-enabled “sidechain.”

The Matic sidechain is, in reality, an independent blockchain that simply lets you bridge assets back and forth from Ethereum. In order to qualify as a proper sidechain, it should have used ETH or at least something like DAI to pay for transaction fees — instead it uses MATIC tokens. Under Matic’s very loose definition, Polkadot, Near, Avalanche and Binance Smart Chain would all be sidechains of Ethereum.

But imagine the backlash if Aave announced it would move to Near or BSC — it would be seen as nothing less than betraying Ethereum. I’ve witnessed how projects like Balancer or Curve downplayed their involvement with “the enemy” after agreeing to release news of an integration with an external platform. Though, to be fair, these other platforms were also probably jumping the gun on the announcement.

Either way, Polygon’s rebranding and shift into a “Polkadot on Ethereum” strategy is paying dividends for public perception. Even if, in practice, moving to Matic is for now equivalent to moving to BSC. That may change with future releases of the Polygon SDK and other tech solutions, but narratives seem to be the main drivers of the scalability platform choice right now.

I’d argue that being “Ethereum-native” is the only reason people are even considering using Optimistic Rollups, the “darling” of the Ethereum layer-two solutions that carries impressive usability flaws.

In other news

Coinsmart. Beste Bitcoin-Börse in Europa
Source: https://cointelegraph.com/news/finance-redefined-the-slow-march-forward-march-24-31

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$420M in leveraged long traders liquidated after XRP rallies to $1.96

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XRP holders couldn’t have asked for a better year as the cryptocurrency rallied almost 800% and flirted with a $2 level in the early hours of April 14. 

In addition to achieving its highest level since January 2018, this robust price increase signals that investors are not worried about the ongoing SEC “unregistered securities offering” dispute.

However, just 6 hours after rallying to $1.96, XRP price crashed by more than 20%. During an interview, DCG Group CEO Barry Silbert said it would be risky for exchanges and companies in the United States to relist XRP ahead of receiving the SEC’s blessing. These remarks may have contributed to the unprecedented $420 million long liquidations on derivatives exchanges today.

XRP price in USDT at Binance. Source: TradingView

Over the past couple of weeks, the primary catalysts for XRP’s rally have been victories in Ripple’s legal battles. Lawyers representing Ripple were granted access to internal SEC discussions regarding cryptocurrencies, and more recently, a court denied the disclosure of two Ripple executives’ financial records, including CEO Brad Garlinghouse.

Considering the recent rally, pinpointing a single reason for the price correction will likely be inaccurate. Nevertheless, the impressive $420 million long liquidations past 24-hours exceed those of Feb. 1 when XRP price crashed by 46% in two hours.

XRP futures aggregate liquidations. Source: Bybt

The only logical reason behind this staggering liquidation is excessive leverage used by buyers. To confirm such a thesis, one must analyze the perpetual contracts funding rate. To balance their risks, exchanges will charge either longs or shorts depending on how much leverage each side is demanding.

XRP perpetual futures 8-hour funding rate. Source: Bybt

The chart above shows that the 8-hour funding rate is surpassing 0.25%, which is equivalent to 5.4% per week. Although this is excessive, buyers will withstand these fees during strong price rallies. For example, the current upward price move lasted for almost three weeks, and prior to that another took place in early February.

Blaming the liquidations exclusively on leverage seems a bit extreme, although it certainly played its part in amplifying today’s correction.

Moreover, the record growth in XRP futures open interest was accompanied by a hike in the volume at spot exchanges. As a result, the eventual impact from more significant liquidations should have been absorbed by the increased liquidity.

Cascading liquidations will always take place in volatile markets. Thus investors should focus on how long it takes until the price recovers from it.

Fundamentally, a 10% or 20% intraday drop should not be interpreted differently. The correction depends on how many bids were previously stacked at exchange orderbooks and is not directly related to investors’ bullish or bearish sentiment.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

Coinsmart. Beste Bitcoin-Börse in Europa
Source: https://cointelegraph.com/news/420m-in-leveraged-long-traders-liquidated-after-xrp-rallies-to-1-96

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Garry Tan’s 2013 investment of $300K in Coinbase is now worth $2.4B

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Garry Tan, a prominent angel investor and the founder of Initialized Capital, was one of the first investors to provide seed funding to Coinbase eight years ago. 

Less than a decade later, and after today’s highly anticipated Nasdaq listing for Coinbase’s COIN stock, Tan’s 2013 investment of $300,000 into Coinbase is now worth $2.4 billion.

Coinbase debuted on the Nasdaq on April 14 at $381 per share, making it one of the most hyped listings in the U.S. stock market of the year.

How did $300,000 become $2.4 billion?

In 2013, when Tan invested in Coinbase, it was unclear whether Bitcoin would be recognized as a global asset and an established store of value.

At the time, there were not many reputable exchanges, and the few that existed were often hacked. Tan’s investment took place before the monumental Mt. Gox hack that saw billions of dollars worth of BTC stolen.

Even after launch, Coinbase was not always in an uptrend. According to Coinbase co-founder Fred Ehrsam, from 2014 to 2017 the company faced numerous hardships. 

Ehrsam said:

“Over time, crypto grew, and so did the company. A simple #Bitcoin wallet evolved into individual and institutional products to support a blossoming cryptoeconomy. 2 nerds who met on the internet (yes, @brian_armstrong and I met on @reddit ) turned into a company of 1000+. There was serious hardship. In the 3 years between 2014 and 2017, the outside world thought crypto was dead. Over a third of employees left. Yet crypto kept building. @ethereum came on the scene and showed that crypto native applications were possible, opening up a whole new world of possibilities.”

Even if the listing fails to impress, Coinbase has alluring financials

Coinbase is the first publicly listed major cryptocurrency exchange in the U.S. stock market and its availability on Nasdaq now provides mainstream investors with exposure to the crypto sector. Even if the listing fails to impress on day one, the company still has strong financials and user metrics.

Coinbase made $1 billion in the last quarter and has more users than every financial institution in the U.S. apart from JPMorgan, making it a highly compelling trade for investors in the traditional financial market.

Coinsmart. Beste Bitcoin-Börse in Europa
Source: https://cointelegraph.com/news/garry-tan-s-2013-investment-of-300k-in-coinbase-is-now-worth-2-4b

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German software developer donated $1.2M in ‘undeserved’ Bitcoin to political party

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A German national who reportedly sees his Bitcoin profits as “undeserved wealth” has donated more than $1 million to the country’s green political party.

According to Hamburg-based news outlet Die Zeit, Moritz Schmidt, a software developer from the northeastern town of Greifswald, has sent one million euro — roughly $1.2 million — to Germany’s green party, known as The Greens or Alliance 90. A party spokesperson said Schmidt had made significant gains during the Bitcoin (BTC) bull run but wanted to contribute to causes related to environmental and climate protection rather than HODLing his crypto.

“The donor has made it clear to us that he sees these profits as undeserved wealth that he does not claim for himself, but wants to use socially, for something that corresponds to his convictions,” said the Greens spokesperson. “In the meantime he sees the Bitcoin system critically, among other things against the background that the necessary arithmetic operations consume huge amounts of electricity.”

Records for the Greens show that Schmidt’s donation is the biggest the party has received this year, with the next highest contribution at 500,000 euro, or roughly $600,000. The funds will reportedly be used for the party’s federal election campaign and the state election campaigns in 2021.

The software developer is not alone in seemingly hoping the crypto industry will become greener. Many have criticized Bitcoin mining for its impact on the environment, with some estimates indicating the network consumes more energy than the entire country of Argentina. However, Mike Colyer, CEO of crypto mining firm Foundry Digital, said this week that he believes mining Bitcoin could eventually help the transition to a “world where 100% of our energy is produced from renewables.”

Coinsmart. Beste Bitcoin-Börse in Europa
Source: https://cointelegraph.com/news/german-software-developer-donated-1-2m-in-undeserved-bitcoin-to-political-party

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