The Breakdown - Authoritarian Airdrops, Derivative Competitions, and Lightning at the Point of Sale

Episode Date: December 16, 2019

If 2019 saw bitcoin come together around the digital gold/digital SoV narrative, is 2020 poised for a resurgence of the idea of payments utility, thanks to Lightning powered applications? One beta test of a LN point-of-sale app suggests maybe.  Derivatives continue to grow as an area of focus for both retail and institutional traders, with CoinFLEX bringing in some new talent to expand its derivative competitions and institution-focused ErisX sending notice that futures trading would begin tomorrow.  Finally, Venezuela’s President Maduro has announced that public employees and pensioners will be given a holiday bonus of half a petro. Sincere effort or another example of how digital currencies can be a tool of control?

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 CoinDisc. Welcome back to The Breakdown. It is December 16th, Monday, and we are closing out the year fast, and what that means is a lot of excellent end-of-year content as people try to make sense of what has happened over the course of the last 12 months. and look forward to the next year, in our case right now, the next decade, right? And so today we're going to be looking at three little bits of news that each revolve around what I would say, an interesting narrative leading into 2020. So the first is we're going to look at some experiments on the Lightning Network using

basically a point-of-sale Lightning app and what it means for the utility of Bitcoin narrative. Second, we are going to look at the emergence of a couple new projects in the derivative space. and some news on that front, which has been a huge part of 2019 and seems poised for even more in 2020. Third, we're going to look at news out of Venezuela in terms of the Petro, one of the central bank digital currencies that actually exists sort of, and what it suggests for and what warnings it holds maybe for the entire CBDC space as we move into 2020. First, let's talk about lightning and the Bitcoin narrative more broadly. CoinDesk wrote a story today about a new application that's being beta tested.

It's a point-of-sale app from two partners, iterative capital and Breeze. Now, Breeze is a lightning app that allows other apps basically to plug into it. So Fold and Moon Pay and Bit Refill all plug in and use the infrastructure of Breeze to allow people to pay with Lightning through their experiences. and they've actually been doing quite a bit of volume, right? So Breeze said they did something like 4,200 transactions in October, which may seem small, but again, relative to the world of transactions and lightning is meaningful, it's significant.

So they're working with this trading for iterative capital to launch a new app called Escher, and Escher is meant to be a point-of-sale app for retailers. So some are actually already testing it, and that's where the newsworthiness of this came in. So basically there's a video game store in Alabama that has been testing this and is seeing really positive results. The folks behind it are basically seeing this as a return to the idea that at least via lightning, Bitcoin can actually be a useful tool on the day-to-day level, not just on the kind of long-term holding level, right? And so quote from the store owner in Alabama, he says, Bitcoin needs to move. It needs to become a currency in order for people to trust it more.

I hope this encourages people to spend their Bitcoin that otherwise would not. So the reason that I thought it was worth pointing out then, again, our theme today is stories that relate to some larger narrative. And I think that one of the fascinating things about Lightning and Bitcoin is that they represent two very different stories about Bitcoin in some ways. On the one hand, do you have what has really been a year that solidified the digital gold narrative of Bitcoin, the idea of it as a digital store of value, a way for people to work outside of the normal system. The enshrining of that narrative has been a key part, I think, of 2019. On the other hand, you have this idea of Bitcoin as an actual utility or Bitcoin as

something that you can interact with and pay for things with. And this has been aided and about it, I think, you know, in some ways, lightning feels a little behind from maybe where people thought it was going to be. But on the other hand, we have seen the emergence of a lot of different apps that give people exposure to Bitcoin without necessarily having to be in the crypto space. I'm thinking particularly of Lolly and Fold, which both work with different retailers to give Bitcoin back effectively. And in the case of Fold, I think when you pay with Lightning, it gives you an even higher amount back, right? So it incentivizes people to actually get familiar with these tools. The interesting thing is that these are basically two different visions of what Bitcoin should be

use for. On the one hand, we have the idea of Bitcoin as this long-term hedge, right, and this thing that you just hoddle and you don't use. And on the other hand, you have these applications and, in particular, kind of lightning and this idea of maybe a point-of-sale lightning app that encourages you to actually spend it. So where is the tension and where is the resolution of that tension? Well, the tension is inherent in the sense that Bitcoin in some ways really wants people to hold on to it. It wants more hordlers of last resort, as some people have called them. On the other hand, the way that the tension gets resolved is that there is a necessary process of onboarding and bringing new people into the Bitcoin network.

And if the burden on each of those people is to agree ideologically so much that they're willing to park assets there and simply not use them, not touch them, that's a pretty high burden. You can see a good argument that this sort of easier integration via lightning of day-to-day functions, it doesn't mean that people are going to use it all the time. It may be that they continue to only want to use their Bitcoin as a last resort in terms of spending. But if they have that ability, it may make it much more palatable for people to hold a higher portion of not just their wealth, but maybe the cash that they're going to use day to day in the Bitcoin ecosystem. But I think what's important is maybe less about how to resolve that tension and more about

the fact that it exists. And I think that going into 2020, we're going to see a back and forth, right? You're going to see more and more of these lightning-powered applications trying to make Bitcoin useful, but also the continued importance of this narrative of Bitcoin as a digital store of value, as a digital gold, as a safe haven asset, and it'll be fascinating to see how they play out. Now, one final note, actually bringing this together with another conversation that had a huge amount of attention over the last week, Mark Cuban got into it, basically, with a number of Bitcoinsers, spent a lot of time in this thread arguing about why he is interested intellectually in Bitcoin, but simply doesn't believe that it's going to turn into anything. The real rub of it

that he came down to is, I thought, this tweet where he says, you don't have to convince me, you need to convince your neighbors. If they don't see value, that is the problem you need to solve. I'm not opposed to BTC. I understand every argument being made. The world is littered with great products and services that failed for lack of consumers. So, you know, the positive thing I think, especially looking at all of these consumer-focused, retail user-focused, not just retail investor-focused, but retail user-focused applications, like Fould, like breeze that power so many of these things, and maybe like this new Escher, is that they potentially address exactly what Mark is saying. You don't have to convince me, you need to convince your neighbors.

But with that, let's move on to number two. So number two has to do with derivatives. So derivatives have been a bigger and bigger part of the market, really since I feel like 2018, when people started moving their money out of the ICO casino exchanges and into the derivative casino exchanges, i.e. Bitmex. And I mean that only half jokingly, but I think that there was a shift in trader behavior from betting on ICO pops to betting on just the movement of major assets. That's extended into 2019 in a much different way and in fact has less to do with the kind of gambling trader aspect of it and more just the fact that derivatives are such a huge

part of all mature financial markets. And as this market develops, more and more actors are offering different approaches to derivatives. So we've seen major entrance into the market such as backed. Obviously, CME has its futures. Well, there's a few bits of news today that are part of this narrative, I think, reflect just how much derivatives are likely to continue to be and maybe even be a bigger part of the story heading into 2020. So the first bit is CoinFlex has hired a Binance over-the-counter executive and is looking into new gamified strategies to drive usage of derivatives, right? So CoinFlex right now, if you look at the Bitcoin futures market shares, you have BitMex in the lead with close to 25%, 24.6%, and this is a

according to the block. You have Hobie with 22.3%, OKX with 19.1, Binance Futures with 9.9. ByBit. Exactly, it's close to a top five, maybe I guess a top six, certainly a top 10 Bitcoin Futures Market shareholder.

But what they're interested in is gamifying it, right, and turning it into competitions. So this is a quote, Chief Executive Mark Lamb told the block that CoinFlex will expand its cryptocurrency trading-based competitions, such as its so-called bracket order battle. The competition, according to CoinFlex,

website offers a way for traders to win cash prizes by placing trades with the new order type. Lam said the last competition brought in 80 million in volume during a two-hour period. In 2020, the firm is looking to conduct competitions every week. This is a really interesting way to try to compete on this front. ByBit is doing something similar. They announced something called a BTC brawl competition. Again, for me, the lesson here is that there's a part of the market for derivatives that is really focused on these retail customers for whom this sort of competition aspect is going to

drive volume, drive interest, drive engagement, right? That's one piece of the derivatives market. Resources are being invested in it because it's big business when you can make it work. There's, of course, another side of the derivatives market as well, which is the institutional side. And obviously, a lot of the attention this year has been on these new services like BACT that are trying to make institutionally driven features bigger. Well, another one that is announced itself around the time that backed was announced last year, but has been a little bit quieter this year is Eris X. So Eris X was announced in October 2018. It has some promising backing that made people really interested, prominent affiliations with some big institutions.

And we haven't heard that much. They raised another series B, I guess, in April. But really, it's been kind of quiet, especially as Bact has been loud, right? And Bact has been releasing more and more derivative products, showing growth and volumes. Well, Aris X just sent out a notice this morning, it looks like, that they may be opening trading as early as tomorrow. So the notice that went out said, subject notification of trading hours for futures digital currency products. This market notice serves to notify participants of ERIS Exchange that the exchange has set forth the following trading hours for futures digital currency products beginning Tuesday, 12, 17, until further notice.

It seems like we've got another entrant to this market. And some are speculating that they are part of the reason that they've been quiet is that perhaps they've been caught up in some bigger machinations. Erisex seems to be really focused on that larger deal flow from brokers as opposed to the competition type idea that we saw with coin flex and buy bit. In April, it was reported that TD Ameritrade was looking to potentially link in and connect to ErasX, but perhaps, and this is where this is where this. speculation comes in that was delayed by the announced acquisition by Charles Schwab, who's been

historically pretty hostile to crypto. So either way, you have two sides of the derivatives market being represented in news today. The retail and the consumer side, interested in things like these derivative competitions, and on the other hand, this absolutely much more institutionally focused product that seems to be opening tomorrow. So there's a lot of smart people who think that derivatives are going to continue to be an important part of the market and perhaps even grow insignificance in 2020. And this suggests that that may be the case. We'll wrap up with Maduro and the Petro. So obviously, one of the huge themes from this year is governments getting in on the game of cryptocurrencies, or at least digital currencies. We've talked a lot about this in the context

of Libra and the response of Libra by China and the response to China and Libra from the European Central Bank, which we talked about on Friday and et cetera, et cetera. Well, Venezuela is one of the few countries to have actually implemented their own digital currency. It's called a petro. And so just today it was reported that Venezuela's Maduro will air drop half a petro each to public employees and retirees as kind of a holiday bonus. So basically, it's a thing. equivalent of a $30 holiday bonus. And it's partially a way to get people to sign up, so they have to sign up for the Petro app, which is the official government crypto wallet. The goal, according to Maduro, is to get Venezuelans to switch to the Petro and to start using the Petro. It's a not insignificant

amount of money, right? So the national minimum wage is less than $10 a month, which means that that $30, although it sounds small to us, could be significant. There's a couple things here that I think are worth noting. First is that with the Petro, we really have a chance to see one of the tricky downsides or potential challenges of central bank digital currencies, which is when they are used as tools of autocrats, right? Tools of despots. The Petro in many ways, its goal is to be able to evade sanctions. Maduro is leveraging his power to force it down the throats of citizens. One set of issues that people are worried about with digital currencies from governments, digital fiats, you could say, is their surveillance potential, right?

That's what we talk about a lot in the context of the Chinese government and what a digital yuan will be. Even something that we think about in the context of a U.S. government or any other Western government using it, it just creates such powerful opportunities for surveillance. It's going to be very hard for governments to resist that opportunity, particularly when they have a built-in narrative justification in the form of anti-money laundering and fighting terrorism and crime, et cetera, et cetera. So that's the first concern. The second concern is when a crypto or a digital currency ends up in the hands of an autocrat like Maduro, and it becomes

forced down the throat of regular citizens and the business community and everyone else. And we've seen this with Venezuela. In September, Maduro mandated that the petro would be used in a major national housing development effort that had been initiated by Hugo Chavez in 2011, who obviously was the predecessor to Maduro. Even more worrisome than that, I think, was when we saw in December of last year that a report that the Venezuelan government was forcibly converting pension balances to the petro and converting pensioners monthly payments into the petro. This is a huge breach of trust in so many ways to not give people who you have a social contract with in terms of their pensions a choice in which cryptocurrency or which currency they're paid in when the expectation is

that they'd get the national currency is pretty diabolical in a lot of ways. And I think this flagged just how bad digital currencies can be in the wrong hands and in the wrong context. This all matters because we're going into, again, a 2020 where I truly believe we are going to have a much more important conversation about the future of money and the future of digital currency and whether it is just the role of government or whether it comes from corporate actors or whether it comes from decentralized networks. And we have to take seriously the example that we can see in something like the Venezuelan Petro of what a digital currency can do negative. and how it can be harmful in the wrong context. Now, there is, of course, a counter to that, which is that the Bolivar hasn't been doing much better in the hands of the same people.

So maybe the issue is not about whether it's a fiat money or a digital fiat money, but the problem of mismanagement in general. It's going to be worth noting where it gives them even more power to impose economic problems on top of the citizenry. All three of these things, the relatively small pieces of news taken individually,

but each of them, I think, reflects a larger narrative that is going to be important going into 2020. Over the course of this week, I'm sure we'll be looking at a lot more of these end-of-year pieces and narrative explorations and predictions for next year. And in fact, we'll be even hosting a few of those coming up soon. But more on that later. For now, thanks as always for listening. And I will see you tomorrow.