The Breakdown - Art Haus Ethereum Meets Bitcoin Financialization

Episode Date: December 20, 2019

One of the most important (yet somehow quiet) narratives of 2019 has been the financialization of bitcoin and the emergence of a robust market for derivative products. That was reinforced today as Binance announced a significant investment in derivatives exchange FTX. How will key events coming up in 2020 like the bitcoin halving be impacted by the presence of derivatives?    At the same time, not all crypto projects are trying to change money. Some, like the Saint Fame DAO, a fashion house-slash-human coordination experiment, are simply trying to do interesting things that people think are cool.

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It is Friday, December 20th. And before everyone heads off to their holidays and family celebrations, we're just going to be wrapping up with a conversation about the two ends of the spectrum of the current crypto market. So on the one hand, we're going to be talking about the one hand. we're going to be talking about the financialization of Bitcoin and the just robustness of the financial infrastructure evolving around Bitcoin, in particular, I mean, crypto in general, but particularly in Bitcoin. And then on the other end of the spectrum, we're going to be looking at

some really interesting experiments on Ethereum that show just how wide an array of use cases and applications these technologies can have in the world. So first, let's talk about the financialization of Bitcoin. So one of the themes of this year has been the emergence of traditional financial instruments like derivatives in the crypto space, and particularly around Bitcoin. In fact, in a lot of ways, the institutionalization narrative of Bitcoin this year, to the extent that it came to fruition, was driven by these institutions offering new types of derivative products. And every metric in terms of how much people and investors are engaging with these instruments, as well as how many more offerings there are is increasing, right? So by way of example, you have backed,

which comes from the intercontinental exchange, the same people behind the New York Stock Exchange, tweeting yesterday, yesterday we set a new volume record, 6,226 physically delivered backed Bitcoin futures contracts, traded at ICE Futures US. If you'll remember a couple months ago, when backed launched these futures, people were hemming and hawing about how underwhelming the launch was. Well, they just continue to kind of grow and grow and grow and grow, affirming all those folks who said it was a much longer-term play that we should be paying attention to. Then you have a competitor to back Eris X that has confirmed the launch of its crypto future markets. Originally, it was supposed to launch with futures that were around kind of a basket or a bundle

of top assets, including Ethereum, like coin, Bitcoin Cash as well. But they decided ultimately to just launch with Bitcoin. Frank Shapiro from the block says, my guess is the CFTC hasn't gotten comfortable with contracts tied to ALTS yet. That's probably the case, right? We have seen this year that the CFTC has confirmed that they think that Ethereum is a commodity

and not a security. However, in general, there's a reason that most of these products right now focus on Bitcoin. It is the one that has the best clearance with regulators, not to mention the most liquidity. So anyway, so you have backed volumes that are on their way up and continue to break their own records. You have new competitors like ErisX. Then you have also news from more within the crypto industry around just how important

derivatives are. Backed and ArsX kind of represent traditional institutions coming into crypto. There's also competition within crypto-native institutions, right? Bitmex has been historically the leader in the derivatives type of product space, but Binance is putting aggressive moves on that dominance. They have been throughout the year. They've launched related products. And now, just today, they announced an investment in the crypto derivatives platform FTX. It's an undisclosed amount, but in a quote to the block, the founder of FTX, Sam Bankman-Fried, said that it was in the tens of millions of dollars. And this is basically a combination of an equity investment in the firm itself, as well as a purchase of a long position in the exchange token for FTX, which is FTT.

This is actually the second major investment that Binance has made in the derivative space. In September, they announced the acquisition of JECS, which is a spot and derivatives platform as well. And the goal of all of these basically is to build out the suite of tools and suite of products that Binance has to offer. Now, SCUE, that is a derivatives analytics platform, looked at some of the data. and basically broke down this deal. So they tweeted out, one, the FTX-Binance deal.

Below, FTX and Binance volumes combined over the last quarter in the Bitcoin futures market, trading at above $1 billion on a regular basis, a force in the making that didn't even exist at the start of the year. Two, Binance volumes alone, Bitcoin Futures and Swaps, their record day was $2.5 billion. FTX volumes alone, record day was $750 million. Also, the two exchanges are the second and third most liquid when measured by order book depth, now becoming a credible threat to Bitmex's top spot. And that, of course, is the point. That's what Binance is going for. Binance knows that this part of the market is an incredibly

important piece of Bitcoin and the future of crypto assets, and they don't want to be second, right? This is not a company that wants to be second in anything that they want to do. So really interesting to see just how aggressive they're being in that space. So these aren't the only types of derivative products that are coming to market either. You're starting to see more more offerings around derivatives that help hedge minor volatility. Another piece of news from this morning, as reported by CoinDesk, liquidity provider GSR is introducing derivative products to help crypto mining companies hedge their risk against price volatility after partnering with Interhash, a mining service startup backed by Canon Creative. Canon Creative is obviously a publicly

listed one of the biggest players in the mining space. And the goal is to effectively offer these products which hedge the just inherent volatility of the mining markets. So the co-founder of GSR said that there are two products. The first is a tailored risk management solution for miners, which provides an average priced out option or swap contract. And the second is a new type of futures contract that trades based on hash rate. So again, the point of all these things is to make the mining business work better to be less risky. And for obviously the company's offering these products to take advantage of that inherent volatility and inherent risk to offer a new type of market instrument. So what is the net of all of these moves? I think that in some ways when we look back at

2019, the emergence of the financialization of Bitcoin, you could say, it might get shunted down the line just a little bit by obvious narratives like defy or obvious narratives like Libra and Central Bank digital currencies. But when it comes to the actual texture of the markets, I think that in a lot of ways, these changes, these shifts, this new focus on derivatives is going to have just huge, huge implications. I've been doing end-of-year interviews that you'll start to see next week, and I'm going to preview in just a few minutes. But one of the conversations I had was with Meltem de Mirrors, who is really interested in just what it's going to mean to have derivatives and derivatives products around the Bitcoin having or havinging. She thinks that it

means that things are going to completely not follow the same patterns that they have before necessarily. And I think that this gets at an underlying reality, which is that derivatives do a lot of incredibly positive things for the market in terms of price discovery, in terms of creating kind of pathways in for new actors that might not be comfortable going and kind of trading the underlying. But again, across all markets, derivatives tend to be orders of magnitudes more than trading the underlying because why would you bother with all that when you can just bet on the price? and that is going to have some really interesting implications for particularly an asset class that in many cases is focused on the limited supply of the underlying asset.

So ultimately, the financialization of Bitcoin, I think, is one of the biggest quiet stories of the year. And something that has, you know, when it comes to implications for 2020 is right near the top of the heap. But with that, let's move to the other end of the spectrum, Art House Ethereum. So this is a great little piece from Brady Dale at Coin desk. He says, Meet the Decentralized Fashion House bringing overpriced T-shirts to Ethereum. This article is about Saint Fame, which is a Dow or a decentralized autonomous organization

that's part fashion house and part Ethereum subculture. Those are Brady's words. I think I saw Linda from Scalar Capital tweet about it and a few other people tweet about it in November. It was the first that it popped up. And effectively, in a lot of ways, it is a experiment in everything. you can do with Ethereum and Daos masquerading as a fashion project. And that's kind of interesting. So here's the idea. Effectively, the Dow is all focused at this moment around a specific

limited run t-shirt. The Dow works by selling a token fame. Each token can be exchanged for one t-shirt. And the price of that fame token is determined using a bonding curve, which is basically a smart contract where each token, the price increases a little bit at a predictable rate. So, for example, the first fame token, the first T-shirt sold for $8. But if all 100 of the limited run fame tokens sell, the last one will be something like $170,000. And I think right now, the most recent was at $158 or something like that, something on that order of magnitude. There's a lot going on here. Bonding curves are an experiment that were first kind of developed and invented by Simon Ruvier and have been a theoretical construct for a lot of

their life. This project is using Aragon for governance to actually run the thing. Smart contracts are built using Zeppelin. I mean, basically it's just a big, massive Ethereum experiment. So what do I think is interesting about this? There are a lot of folks in the Bitcoin space who, get frustrated with this type of project because it feels so many millions of miles away from something that they think is so important, i.e. the development of a non-sovereign, undabasible, censorship-resistant money, that they can't believe that it's in the same space. And I understand that perspective. I think the interesting thing is that one of the subtext, the sub-narratives of 2019, is that different parts of what we now call crypto or the blockchain space or whatever, you know,

moniker you want to use, they're kicking to be free of one another and to be able to develop in their own little sandboxes. And I think that there is no doubt, if you look back across the course of 2019, that DAOs are on the rise and poised to be a major force from, at least from an experimentation standpoint in 2020. People are really interested and excited to go explore how you can coordinate networks of people in different ways. And of course, that's so far away from goals like Bitcoin has, that it becomes increasingly difficult to just see them all as part of the same thing because they happen to run on a shared underlying technology base.

But I think that that's okay. And I think actually it's a sign of maturity that these communities and these different types and categories of projects are getting more and more frustrated being lumped in with one another. At the beginning of the primordial stew of a new industry, a new space, a new technology, of course In the same way than the primordial stew of the universe, at one point, all of the fundamental forces of nature were the same thing. And then they broke off and they matured into their own forces which now dictate the universe. So it is with new technologies and new industries,

where at the beginning there's just such a small number of actors and people building things that it starts closer together. And then as it matures, they kind of move farther and farther away from each other. And we're feeling that expansion, those expansionary forces right now of the crypto universe. And I think that that's okay. I think that it's fine for people to be able to move fluidly between these different types of objectives and different types of use cases for crypto assets and for this technology that underlies them. I think that that's part of what we're going to see in 2020 as well is just a getting

more comfortable with the fact that these are maybe not one big industry, but a number of different industries that are kind of running orthogonally or parallel to one another. That actually gets me into my last point for today, which is just a little preview. So obviously, it is December 20th. It's Friday. Next week is Christmas. The week after that is New Year's. And so to round out this year, you know, I anticipate the news being a lot quieter.

Obviously, projects aren't going to be announcing things. And so I wanted to do something cool and kind of our little take on end of year content. And so I've invited and been doing a bunch of interviews over the course of the last few weeks with some really, really great people. around just like their micro interviews, basically around two questions. The first question is, what was the story of 2019? When the history books are written and they look back at 2019 as it relates to Bitcoin and Crypto, what are they going to say the major narrative was? So that's question one. Question two is simple. What's a prediction for 2020? What is that suggestion about what 2019 was mean for 2020 and the go forward? And so I have, I think about 10 interviews that

will be coming out each day from Monday going through the following, Wednesday going through New Year's Day, and then we'll be back on Thursday, January 2nd. And like I said, we have some really great people. We have Meltem DeMiris, Catherine Wu, formerly of Masari, now at Notation Capital, David Hoffman, who does the POV crypto podcast. We have Peter McCormick from the What Bitcoin Did podcast, just a really cool, interesting, diverse set of people representing both Bitcoiners and folks that are more deep in Ethereum and everything in between.

So subscribe below. grab this feed so you can make sure to not miss those. And yeah, look forward to kicking off a new year with you guys on January 2nd. But until then, I hope that you have an awesome holiday. Keep thinking big, keep thinking bold, and I will catch you guys in the new year. Peace.