“The best lack all conviction, while the worst are full of passionate intensity”W.B. Yeats
In the ICO boom that we witnessed recently, one curious pattern stood out. For every one legitimate project with a truly disruptive vision and roadmap to back it up, there were a hundred other projects that were in there purely ‘hustling’, with absolutely no intent to actually follow through on the roadmap.
One positive development has been the realization by entrepreneurs that products need to solve real problems, solve problems that the 99% folks out there that do not live, breathe, eat crypto care about. However, even for projects with great teams, roadmaps, and execution chops, product-market-fit in crypto is a tough thing to achieve in the current climate. With a normal (non-crypto) startup, you drop an MVP in to the market, you gather feedback, and you iterate. In crypto, the underlying technology stack is still evolving – Protocols are evolving, the hooks and on-ramps and other infrastructure is still getting built out. The market, the end-consumer (at least the 99% that is not in crypto) does not really want to be bothered about the underlying implementation, and just wants a better mouse-trap, a better way to send money, or a better way to communicate; 10x better, at least, not just incrementally better. To make matters worse, there is the small matter of the regulator, who is also trying to figure things out, and by design, a lagging influence, arriving to the party to stir things up just when things are getting interesting/frothy. We therefore have the product built on a shifting tech stack, a customer that has a high bar and switching costs, and a regulator that is often over-compensating and ends up becoming a hindrance almost as often as they help. What is an investor to do, even going by some of our earlier thoughts on this.
A case in point is decentralized exchanges (DEXs), which we briefly touched upon a few weeks ago. RadarRelay is one of the pioneers of the DEX revolution. Radar basically came out and announced, well… the following:
We believe decentralized exchange, the verb, is unstoppable. We believe in a world where orders fly without borders. However, we were a bit optimistic about the adoption curve of relayers. While Relay has managed to attract users in over 150 countries trading volumes are low. Regardless of how long it takes, we’re committed to Relay, and we will bend the adoption curve of decentralized exchange…
Basically, DEXs are not scaling as fast as they were expected to. Average monthly volumes at all the DEXs put together are less than what Binance does in just half a day. There are multiple issues at play here, including latency, dropped orders, lack of market maker interest and so on and so forth.
However, DEXs are the real deal, long term.
DEXs capture the true power of blockchains and smart contracting. Centralized Exchanges are not ‘crypto-native’, they are a traditional market construct that has been force fitted into the blockchain paradigm. Unlike a centralized exchange like Nasdaq which will make you ‘whole’ in the unlikely event that they somehow misplace any of your shares, with crypto centralized exchanges, you are just letting your tokens sit in massive hacker honey pots that are ridiculously easy to hack, without any recourse in case the exchange loses your coins. Over $2B has been lost in cryptocurrency exchange hacks and it is unlikely that any of it will be retrieved.
In contrast, DEXs are completely trustless, peer-to-peer and have modularization that lets developers separate the platform from the regulatory aspects such as fiat on-off ramps and KYC/AML filters. In an era of rampant hacks and assaults on privacy, DEXs provide an element of true anonymity, much like SSL (Secure Socket Layers) did in the the early days of the internet, truly kicking off e-commerce and transactions on the internet.
DEXs will allow for the use of smart contracts to programmatically bring together multiple facets of decentralization that define the new era of distributed finance (DeFi), such as lending and borrowing, leveraging, automated credit assessment (Dharma, Compound, DyDx, Bloom, SALT, ETHLend, etc). DEXs along with stablecoins can also create a robust marketplace for remittances (we will have more to say about this in a subsequent newsletter for our upcoming stablecoin relayer, Fordex).
In a tokenized economy, DEXs will become critical in seamless value exchange between a diverse array of market participants, most of whom will not be aware that they are being served by a DEX in the background. It is no wonder that the largest centralized exchanges of today such as Coinbase, Binance et al are investing heavily in building and developing DEX technology.
Do DEXs have a problem in the short term? Absolutely, like every other crypto project out there, DEXs have their share of issues. There is the latency, but technologies like Plasma are in the works to solve these. Regulation is still getting to grips with DEXs, as seen from the recent EtherDelta incident. However, the paradigm shift does not happen easily, it is going to take a few iterations. For all we know the end-state for DEXs look as similar to today’s relayers as the iPhone does to the early Ericsson mobile phones!
Investing is like a surfer holding out for the next wave, as Michael Novogratz says. Just hold on. The key is to hold on to a seat when the music stops, so that you are in the game when the markets turn, and the music begins again!
“Fidelity Custody Launch in March” Fidelity Investments’ new crypto custody service may officially launch in March. The storage component of Fidelity Digital Asset Services LLC (FDAS) is already live, with some assets under management. “We are currently serving a select set of eligible clients as we continue to build our initial solutions,” the company said in a statement. “Over the next several months, we will thoroughly engage with and prioritize prospective clients based on needs, jurisdiction and other factors”. According to Bloomberg, Bitcoin storage is to come first, followed by Ether custody.
“Gemini First Crypto Company to Complete SOC2 Audit” Gemini crypto exchange, founded by brothers Cameron and Tyler Winklevoss, completed a SOC 2 Type 1 security compliance review. An organization that undergoes a Service Organizational Control (SOC) 2 audit aims to ensure that it has met the service criteria set by the American Institute of Certified Public Accountants (AICPA). These criteria pertain to standards of confidentiality, security, privacy, processing integrity and availability. Gemini is the first in the industry to undergo such an audit.
“60% Hacks Linked to Two Organzied Groups” Chainalysis, a blockchain analysis software provider has published a report indicating that two “prominent, professional” criminal groups are behind at least 60 percent of all publicly reported crypto exchange hacks, netting around $1 billion in total. The hacks were traced to two prominent groups stealing $90 million per hack on average. The firm named the two groups Alpha and Beta, with the former being a “giant, tightly controlled organization partly driven by non-monetary goals,” and the latter being a “less organized and smaller organization absolutely focused on the money”.
“Bill Commissions Trafficking Study”The United States House of Representatives has passed a bill to commission a study into how cryptocurrencies and online marketplaces can be used to facilitate sex and drug trafficking. The bill was sponsored by Democrat Rep. Juan Vargas and first introduced in June last year. The bill will require the Comptroller General of the U.S. to investigate how cryptocurrencies and online marketplaces may (in)directly enable sex or drug trafficking, and, based upon the study’s findings, recommend regulatory and legislative actions that would impede such illicit use.
Taproot Is Coming: What It Is, and How It Will Benefit Bitcoin by Aaron van Wirdum