Øx dApps Coin Together Decentralized Financial System
Last week Coinbase made a long-awaited announcement that they will soon be supporting ERC20 tokens on their platform. While they made no statement on what digital assets they would be adding in the upcoming months, 0x, the decentralized exchange protocol’s coin surged on the back of former Coinbase employees assisting on the project. But in the grander scheme of things, is there more than meets the eye?
Coinbase’s objective of building an “Open Financial System” is neither secret nor small target. The exchange looks to support a decentralized financial market whose offering range from micro-loans and index funds, to venture capital debt. But remaining an isolated exchange would hamper such ambitions as evidence by the company’s Protocol Team who released a statement last month saying that “building an open financial system isn’t something we can do alone.”
|| ZERO CONNECTION? ZERO CHANCE
0x, a decentralized exchange protocol, where three former Coinbase employees sit on the board of advisors has caught the attention of the crypto community. The fourth advisor on the project is Joey Krug, founder of Augur, a forecasting platform project that seems to have merit for a Coinbase listing (Diar, 26 March). The overlap between project advisors and investors could make for a compelling case alone. Indeed, most projects building on top of 0x are interconnected one way or another (see chart).
|| THINK BIG
But while 0x connections deep, the decentralized applications (dApps) being layered on top of the protocol could possibly be the answer the popular exchange is looking for to achieve its overall big picture plans. In fact, these projects could tie together a decentralized financial industry on their own merit.
|| …THINK REALLY BIG
Trading volume on decentralized exchanges remain low, and liquidity humble at best (Diar, 5 February). But 0x has, at the very least, opened up the possibility of pooling liquidity, globally, across markets and exchange relayers. The protocol looks to address inherit speed constraints on Blockchain networks, as well as future interoperability between different Blockchains, Alex Xu, 0x Director of Operations tells Diar. And the protocol also aims to minimize the costs of the vast amounts of volume that would happen on mass scale adoption for the trading of tokenized assets and instruments. Still, 0x is only a potential conduit, not the sole answer towards an encompassing financial ecosystem.
The customer facing use of 0x will, for the most part, come from dApps that adopt the protocol. And there are, currently, only a dozen or so projects that are being layered on top of 0x, or are being developed. But they are unique open-source projects, that could potentially tie-in together to create a wide-range of decentralized financial products with self-governing principles. And 0x themselves have identified areas of interest for dApps (see table 1). Perhaps coincidently, perhaps not, some dApps could potentially be fitting options for Coinbase’s grand plan also (see table 2).
|| BANKERS BAD KARMA
Dharma, which was founded by former Coinbase engineer Nadav Hollander, looks to be addressing a few markets on his former employers checklist– collateralized debt obligations, credit swaps, savings accounts and “Initial Debt Offerings.” And they will be tradable, tokenized debt instruments that could be complimented by another 0x project, dYdX, also founded by a former Coinbase engineer, by leveraging positions with financial derivatives.
But current collateralized loan offerings are facing issues due to the high volatility of cryptocurrencies. And Maker has taken the opportunity to address this issue with its US Dollar pegged stablecoin Dai. And already operational, it is possible to take out a Collateralized Debt Position with Dai against Ether through Coinbase’s Ethereum and ERC20 token compatible wallet and browser Toshi.
|| FINANCIAL NIRVANA IN BLOOM
Bloom, who has partnered up with various Blockchain projects extending its own reach, also looks to tie in Dai for loans. And while not a 0x project, Bloom is setting up shop on District0x – which is. Notably, Bloom is one of few projects that is currently working towards facilitating a credit score and assisting lenders in minimizing non-performing loans – a space that is currently monopolized by FICO – and even that is only insightful for US based operations (Diar, 20 November 2017).
2 of 3 launched districts on District0x, Ethlance and NameBazar, are already available on the marketplace of Coinbase’s Toshi. More districts are bound to keep popping up, including Digital Currency Group (DCG) backed Decentraland. DCG also has an ownership stake in Coinbase. District0x might be the answer in creating new markets and companies around the world through Coinbase's client facing app Toshi, as CEO Brian Armstrong looks to emulate Chinese mega app WeChat.
|| THINGS BEGIN TO COME TOGETHER….
When a marketplace is setup on District0x, a corresponding Aragon entity will also be created as the governing protocol. The partnership between the two companies was struck a little less than a year ago. Aragon aims to remove any form of jurisdiction in regards to company setup, structure and bylaws. Effectively, Aragon is a digital Blockchain jurisdiction – how regulators, courts and tax authorities will respond remains unclear. But considering the potential of raising capital through venture rounds and issuing shares on the platform, silence from watchdogs would be unlikely.
0x Investors, Advisors and Partnership Overlaps Run Deep
1: 0x Aims to Facilitate Trade Across Financial Sector
|wdt_ID||0x dApp Listed Profiles*||0x dApp Fits|
|1||Decentralized Governance||Aragon, District0x|
|2||Prediction Markets||Augur, dYdX|
|4||Decentralized Loans||Maker/Dai, Dharma, Bloom*|
Source: *0x website, 0x wiki **Bloom via Lending District on District0x
2: Coinbase's Secret Master Plan by CEO Brian Armstrong
wdt_ID Applications 0x dApp Possible Fits 1
Dharma, Maker, Bloom*
Identity & Reputation
Request Network, District0x
Augur, Melonport, dYdX
Notes: *Bloom via Lending District on District0x
3. Maker's Dai to Bring Stablecoin to Select Markets
|1||Prediction Markets & Gambling Applications|
|2||Financial Markets; Hedging, Derivatives, Leverage|
|3||Merchant receipts, Cross-border transactions and remittances|
|4||Transparent accounting systems|
Source: Maker White Paper
But Aragon is a powerful proposition. Last week the project released their latest version onto the Ethereum Testnet, and are just shy of going onto the Mainnet pending an independent security audit for good measure.
Those very tokenized shares can end up within an investment fund on Melonport, an asset management platform. Melonport made its way onto the Mainnet at the end of February – one of a handful of reputable projects to make it that far as of date. Started up by former Goldman Sachs superstar Mona El Isa and Reto Tinkler, Melonport would make embezzlement of client funds quite difficult. And with 0x, the possibility of not locking up assets whilst keeping them tradeable within set parameters, makes for a liquid market – should there be adoption.
|| EVEN PLAYING FIELD
The platform would also lower the startup cost to miniscule sums for savvy investors who may not have the capital required to start a traditional investment fund, but wish to begin building their own personal audited track record.
|| BUT IS THERE POTENTIAL?
The possibility of facilitating debt with competitive lending rates through Dharma on the back of a credit score provided by Bloom while accessing a global pool of liquidity through 0x, is a very far prospect. But it is a real prospect nonetheless.
And on an institutional level, with companies theoretically being able to raise capital on Aragon, and speculators creating, at ease, scalar predictions markets on Augur for that very stock, could very well be the coming of age of an autonomous and trustless ecosystem.
It also marks the next regulator headache just as they get to grips with the concept of Initial Coin Offerings.
Institutions Await Consortias to Deliver on Blockchain Promises
Hyperledger, Enterprise Ethereum Alliance, R3 and we.trade are the largest consortia that focus on developing blockchain solutions. The blockchain consortia are consisted of enterprises that are looking to develop large blockchain solutions where the data is private or only shared amongst the participating members. The consensus process through which the transactions are validated have had to been modified and are never as trusted as in public blockchains where the parties are decentralized and incentivized by mining. PwC found an opportunity, and recently announced their intention to launch a blockchain auditing solution, which will provide an independent validation that the technology is functioning as intended. The blockchain consortia are creating a cooperative neutral environment even for traditionally competitive companies.
The driving factor behind firms’ interest in enterprise blockchain are the number of reports that claim the potential cost-savings and tout blockchain as a solution for inefficiencies. Accenture claims that the investment banks can save at least $8 billion per year, or approximately 27% in operational costs. Santander InnoVentures estimated that blockchain can reduce banks' infrastructural costs by $15-20Bn a year by 2022. And a recent report by Calastone said that asset managers could save $2.7Bn a year if the manual practices are replaced by a decentralized ledger.
Hyperledger, an open source consortium, was started by the Linux Foundation in December 2015 and currently has more than 200 companies in its ranks mostly consisted of financial institutions, corporations and startups. Anyone can get involved in its development community. Hyperledger says that the advantage of being a member is to be a part of the community for networking, ability to collaborate with other members. The premier members have the ability to influence strategic direction, have a guaranteed seat on the Hyperledger Governing Board and also a voting seat. Hyperledger currently has 16 premier members including IBM, Accenture, JP Morgan and others.
In December, CME Group, Deutsche Boerse and R3 downgraded their membershipl and 15 other organizations canceled their membership. But last week, Hyperledger announced the addition of Ripple as a general member along with 13 other companies. The group is currently working on five blockchain projects with two that have already released an enterprise-ready 1.0 version - Fabric and Sawtooth. IBM-led Fabric is already being used for a food safety trial with Walmart, Unilever and Nestlé while Intel-led Sawtooth already has Huawei, Amazon and T-Mobile building applications on top of it. Hyperledger’s three other projects should have an enterprise-ready version this year.
Since the launch in early 2017 where thirty companies came together, Enterprise Ethereum Alliance (EEA) has been able to attract a whopping 280 members and it is currently the largest blockchain consortium. EEA’s main goal is to deploy the Ethereum-based technology into the enterprise sector. The organization has seventeen working groups with different areas of focus. Any companies that are interested in or developing Ethereum-based technology for enterprise use cases can join and become a member. There is a difference in the governance of EEA when compared to Hyperledger. Hyperledger’s code is governed by a steering committee whereas the Ethereum code is governed by the Ethereum Foundation with no say from the EEA.
R3, a private company, which leads the oldest blockchain consortium that currently holds more than 100 financial institutions. The consortium was originally started in September of 2015 by nine financial companies - Barclays, BBVA, Commonwealth Bank of Australia, Credit Suisse, Goldman Sachs, J.P. Morgan, Royal Bank of Scotland, State Street and UBS. Since then, R3 has faced some adversity. In late 2016, Goldman Sachs, Banco Santander, Morgan Stanley and and National Australian Bank announced that they are leaving the consortium. JP Morgan, which is a part of both Hyperledger and EEA, followed suit in early 2017. R3 originally planned to raise $200Mn exclusively from members of the consortium in exchange for a 60% stake in the company but was only able to raise $107 million after the unexpected departure of the financial giants.
2016 Selected Banks Noninterest Expense (Mn USD)
Source: Company Filings
Companies Outside of Consortiums Hold Most Patents in Space
|3||Bank of America||Financial||R3|
In late 2017, after two years of development, R3 released the first version of enterprise decentralized ledger solution Corda. Now, nearly five months later, R3 just shipped the third version of Corda. Unlike other blockchain solutions, Corda was designed with the the financial industry in mind intending to let participants control what information they share with others. R3 itself says that even though it was inspired by and captures the benefits of blockchain systems, Corda is not a blockchain per se. Amazon Web Services (AWS) announced a partnership with R3 to allow Corda on its platform. Deutsche Börse Group and HQLA X recently announced their intent to build a securities lending solution on Corda. And Finastra, with cooperation of seven banks, introduced a syndicated loan market built on Corda.
The newest blockchain consortium we.trade is targeted at the European market. In conjunction with IBM, the business-focused consortium was created as a joint venture of eight of the largest European banks with the goal of simplifying international and domestic trade for European SMEs. The commercial roll-out of we.trade is anticipated in Q218.
|| TOUTING BLOCKCHAIN BUT STILL NOTHING MAJOR DEPLOYED
Despite very few commercially-viable blockchain solutions, companies are still joining consortia in pursuit of research and development. A membership in a consortium represents a relatively low-risk way for companies to stay involved in the development of a promising technology while also staying on top of their competitors’ efforts in this area. The members are working together towards a greater goal of improving efficiency and thus also cutting operational costs. In 2018, the consortia are committed to deploying commercially viable blockchain technology, which could also be jump started by the network effects already in place. And while consortia will be crucial in commercializing blockchain solutions, it’s still unclear whether the technology will stand up to the challenge.
Bank of Montreal Bans Debit Cards For Cryptocurrency Purchases
In a memo Bank of Montreal (BMO) said that it decided to block cryptocurrency merchant transactions in order to protect its customers from the volatile nature of cryptocurrencies as well as security risks. The move is a little perplexing on the banks stance since BMO will restrict its customers from spending their own capital on checking or savings accounts. Shorcan Digital Currency Network, the subsidiary of TMX Group, will launching a cryptocurrency brokerage where payment setup and clearing mechanism will be provided by BMO. The only other bank that has decided to undergo the same measures is Citibank India, which announced the move in February. Citibank India said that the reason for the ban is “economic, financial, operational, legal, customer protection, and security-related risks”.
The move to ban credit card purchases has become a standard measure in the last few months as banks do not want be exposed the risks of volatile and speculative nature of cryptocurrencies. In fact, purchasing stocks with a credit card is also not allowed. In the U.S., Capital One, JPMorgan Chase, Bank of America and Citibank banned cryptocurrency purchases by credit cards while in the U.K., Lloyds Banking Group and Virgin Money followed suit.
Select Banks Stop Cryptocurrency Purchase Support
|wdt_ID||Name||Region||Credit card Block||Debit Card Block|
|4||Bank of America||USA||Yes||No|
|6||Lloyds Banking Group||UK||Yes||No|
|7||Virgin Money||UK, Australia, South Africa||Yes||No|
US Department of Justice Continues Crack Down
While the US Securities and Exchange Commission, the US Commodities and Trade Commission, FinCEN, and every regulator aims to define digital assets, the Justice Department just continues business as usual.
The U.S. Attorney's Office for the District of Arizona has found Thomas Costanzo guilty of money laundering for exchanging more than $160,000 worth of Bitcoin on the LocalBitcoins. According to the authorities, Mr Costanzo was trading up to $50,000 of Bitcoin for cash per each trade. The investigation was launched in 2014 when most of the trades were performed. Mr Costanzo was charged with with five counts of money laundering and is now facing up to 20 years in prison and a hefty fine.
Previously, the Department of Justice has sentenced traders to prison for running an unlicensed money transmission business. Michael Lord and Randall Lord were sentenced to 8 years and 3 years respectively for trading on LocalBitcoins. Sal Mansy who transferred around $2.4Mn was sentenced to one year in prison and a fine of $118,000 for unlawfully operating an unlicensed money transmitting business. Bradley Stetkiw and Jason Klein were both charged in unrelated cases for violating money transmitting business licensing requirements.
Any business or a person that conducts more than $1,000 in business with one person in one or more transactions is considered a money services business (MSB) and must register for a federal license administered by FinCen. The necessity of a money transmitting license could hinder the fiat on-ramp process for decentralized exchanges (Diar, 5 February).
Initial Coin Offerings in Decline, Shifts to Private Funders
ICO Funds Raised Peak in Decline (Excluding. Telegram 1.5Bn)
ICO Funds Raised (Average ETH/USD) Decline Continue From Jul-17
Source: TokenData.io, TokenEconomy.co, CoinMarketCap, Diar
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