How to bet on DeFi with Augur v2

https://bankless.substack.com/p/how-to-bet-on-defi-with-augur-v2

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Dear Bankless Nation,

Augur is one of the OG Ethereum money protocols.

It allows anyone, anywhere, to bet on anything. No betting limits. No KYC. Pure Bankless. A powerful primitive.

Last week, Augur launched its highly anticipated v2 upgrade. It provided improvements over the first version and features only possible by incorporating other money legos—Uniswap, Maker, 0x—this is Ethereum’s tree of life in action.

The big upgrade people were waiting for.

So we brought in Ben to show us how to leverage Augur to predict the future outcome of an event. And what better event to predict than the future number of DeFi’s go-to metric, Total Value Locked (TVL).

At the beginning of June, TVL reached $1B. By the end of July, it was $4B.

What will TVL be by the end of the year? $5B? $10B? $20B? Or will it go lower?

If you think you know the answer, you win some Dai.

Yeah, a second tactic this week. Gotta level up fast—we’re in the bull market now!

-RSA

P.S. for more on Augur vs alternatives check out our podcast with Joey Krug—he also talks about navigating high gas fees!


🙏Sponsor: Aave—earn high yields on deposits & borrow at the best possible rate! 


TACTICS TUESDAY:

Tactic #50: How to bet on Total Value Locked with Augur v2

Guest Post: Ben Davidow, Writer for The Augur Edge

How to bet on DeFi TVL with Augur v2

Augur is one of OG bankless protocols on Ethereum, decentralized to the core.

You can think of Augur as a global vending machine that pops out “outcome tokens” in exchange for DAI. These tokens confer exposure to or insurance against any future state of reality.

Outcome tokens may be used for anything from betting and trading to bounty creation and risk hedging. The new financial primitive of outcome tokens represent transferable, programmable, and censorship-resistant shares that payout based on real-world events. 

Markets that trade these shares are called “prediction markets,” as they may produce forecasts on future events, thanks to crowdsourced information and skin in the game incentives. For example, if YES shares on an Augur market on Trump’s reelection are trading at .40 DAI, the market is signaling 40% odds he will win the election. 

Today, we’ll learn how to use newly-launched Augur v2 to bet on what the Total Value Locked in DeFi will be at the end of 2020. 

  • Goal: Place your first trade on Augur v2

  • Skill: Intermediate

  • Effort: ~12 mins

  • ROI: Up to ~100%


Augur v2: The Future of Predicting the Future

Anyone, anywhere, can create or trade markets on anything using Augur.

You can bet on the election, sports, crypto prices, the economy, or how many Twitter followers Kanye will have next month. Any verifiable event in the universe. 

Augur v2 delivers a fresh user experience built on an array of beloved “money legos” including Uniswap, 0x, and MakerDAO.

The coolest part of Augur, though, may be its native oracle.  

An oracle is a mechanism for transferring real-world information onto a blockchain, in the case of a prediction market, the actual event outcome e.g., did the Lakers win? Augur has what may be the most bulletproof oracle known to date, with game-theoretic guarantees that you can learn about here.

What Augur’s new UI looks like

Will DeFi Continue to Defy Gravity?

The Augur market we’ll learn how to trade today is what will Total Value Locked (TVL) in DeFi be at the end of 2020

As you may know, DeFi has been on a tear lately, rocketing to over 4 billion USD TVL. 

Courtesy of defupulse.com

Will this trend hold, accelerate, or . . . reverse?

That’s what our Augur market today will let you predict and profit off of if you’re correct!

How to bet on TVL with Augur v2

  1. Visit Augur’s new UI here.

    When you land there, click on “Connect” in the upper right.

    If you already have MetaMask/Web3, the simplest option is to select “Login with MetaMask/Web3,” but select whichever option you prefer.

  1. With Augur v2, you use DAI to trade. If you don’t have any yet, the UI makes it super easy to get your hands on some. Click your account on the top right and select “Add funds.”

    You can then swap ETH or other assets into DAI or transfer DAI from another wallet or exchange it to your address. Just make sure to keep a little ETH around to cover tx fees!  

Explore the Market

Augur markets let you get long (or short) exposure to DeFi TVL. Specifically, it predicts what the TVL will be at the end of 2020, according to DeFi Pulse. 

It’s a unique kind of Augur market called a “scalar,” where the market question concerns something along with a sliding, numerical scale, and rather than getting an all-or-nothing payout, traders get paid proportionally.

Put simply, if you buy long shares in the market and DeFi TVL ends up a bit higher than the price you bought at, you stand to gain a little profit. If it ends up a lot higher, then you stand to gain a lot.

Meanwhile, if TVL ends up lower than the price you bought, you’ll pay the market.


🧠 For more info on how scalar markets work, see here.

If you prefer to place a simple bet on a YES/NO market instead, you can check out a market like this one on the U.S. presidential election. You can also check out our tactic on Binary Options!


But assuming you want to trade on DeFi TVL, click here to access the market in question. 

Once you land on the trading page, you’ll see something like this:

  • Market Info: market question, terms, expiration date etc

  • Order input box to buy or sell shares of your preferred outcome

  • Current prices for each outcome and historical price chart

  • The order book, listing the market’s open orders

  • Your own orders and positions 

  • The market’s trade history

In our DeFi TVL market, the denomination is in billions rounded to the nearest decimal point. For example, 9.8 signifies $9.8 billion USD.

The market’s lower bound is $1 billion and its upper bound is $20 billion. This means that if the outcome (TVL end of 2020) ends up at or above $20 billion, long positions will pay out the maximum possible amount and short shares will pay out zero.

If the market ends up at or below $1 billion, short shares will pay out their maximum possible amount and long shares will pay out zero. 

Take a look at the outcomes section [3].

The “best ask” is the lowest price you can buy shares (go long) at while the “best bid” is the highest price you can sell shares (go short) at. The midpoint between the best bid and best ask signals what the market thinks DeFi TVL will be at the end of 2020. 

Go long (or short)

If you think that DeFi TVL will be higher than the best ask, then you’ll want to go long. If you think it will be lower than the best bid, you’ll want to go short. 

  1. To go long, click on “buy shares” on the left side of your screen or click on the price under “Best Ask.”

  1. To go short, click on “sell shares” on the left or click on on the price under “Best Bid.”

Once you do so, the order input on the left [2] will populate with your order info:

Feel free to adjust the quantity or limit price or just leave as is! Below the order input, you’ll see max profit, max loss, and estimated transaction fees.

To avoid tx fees, you may place a new limit order rather than filling an existing order, as makers don’t pay fees on Augur thanks to 0x (except when they manually cancel orders). For quicker and near-guaranteed execution, however, filling an order is the simplest option. 

Once everything looks good to you, click the order button at the bottom which will say  “Place Buy Order” if you are going long or “Place Sell Order” if you are going short (brave soul!).

You will then be asked to sign transactions to interact with the contracts and execute the order. 


🗣️ Heads up! We’re living in an expensive time for transactions. If you’re looking to make small bets on Augur, you may be priced out with high fees (try placing a limit order instead to avoid fees!). Also, if it’s your first time using Augur, you will have to sign a handful of transactions that may eat into your profits.

Below: Trying to make a 10 Dai bet on Augur. Fees are estimated to be $20 – $30 😱


Once your order goes through, you’ll see your position under “Positions” [5] as well as on your “Portfolio” page (or if you place a limit order you’ll see it under “open orders”).

You can track your estimated profit/losses over time there as well. 

And there it is! You’re now an official early adopter of open prediction markets.

Congratulations and welcome to the future!

Final note about scalar markets

If you’re taking a long position in a scalar market, then you are taking on Invalid risk, meaning that if that the market resolves as “Invalid” due to an ambiguous or unverifiable outcome, you will get zero payout if you haven’t bought any Invalid insurance.

While this market’s terms have been formulated to minimize this risk, you may wish to buy Invalid shares to insure against this scenario. Note that this risk only applies here if you are taking a net long position. If you are taking a short position in the market, then you get a full payout if the market resolves as Invalid. 

To stay at the cutting edge of DeFi prediction markets, check out Ben’s weekly newsletter The Augur Edge


Author bio

Ben Davidow writes about open prediction markets and is helping develop an Augur integration with Balancer to facilitate easier access for traders.

Check out his newsletter The Augur Edge to stay at the cutting edge of the DeFi prediction market space!


Action steps:


Go Bankless. $12 / mo. Includes archive accessInner Circle & Badge(pay w/ crypto)

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🙏Thanks to our sponsor

Aave

Aave is an open source and non-custodial protocol for money market creation. Originally launched with the Aave Market, it now supports Uniswap and TokenSet markets and enables users and developers to earn interest and leverage their assets. Aave also pioneered Flash Loans, an innovative DeFi building block for developers to build self-liquidations, collateral swaps, and more. Check it out here.


Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

How to trade the ETH perpetual on dYdX

https://bankless.substack.com/p/how-to-trade-the-eth-perpetual-on

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Dear Bankless Nation,

Yesterday I said the bull market’s back. Time to shift the mindset.

Perfect timing for freshly launched ETH perpetual swap from dYdX?

I think so.

This is a power tool for ETH bulls. It’s an inverse perpetual, meaning all the collateral is ETH based, not USDC. Using ETH as collateral means leveraged exposure to ETH.

Not the kind of stuff you’re likely to see at BitMex.

Quick note—like our BTC perpetual tactic, this is advanced stuff so don’t enter this lightly. Trading with leverage can be dangerous. Be careful.

Because it’s DeFi you keep custody of your assets. You can verify the house isn’t betting against you. No shady banker black box.

Bye-bye BitMex.

Your services are no longer needed.

We’re going bankless.

-RSA

P.S. We’ll be sending out a special email later today announcing something big (and this week’s State of the Nation!).

P.P.S. Get up to 55% off dYdX ETH perp trading fees this week…just add bankless code! 🔥


🙏Sponsor: Aave—earn high yields on deposits & borrow at the best possible rate! 


WEEKLY ASSIGNMENT:

Make time to complete this assignment before next week

How to trade the ETH perpetual on dYdX. (Available to non-US residents only).

dYdX is one of the first decentralized ETH perpetual market built on Ethereum—the first was MCDEX. For ETH holders, perpetuals are convenient as they provide efficient price exposure, allow you to deposit ETH as collateral, and enables you to trade up to 10X leverage.

This is basically today’s tactic in video form! 🔥

DeFi Dad walks us through the following:

1️⃣ Why a decentralized ETH perpetual market is important and how it works.

2️⃣ What is the Oracle Price, Index Price, Mid Market Price, and 8H Funding Rate

3️⃣ How to open a position

4️⃣ Recap of risks

👉Check out Bankless YouTube for & tactics by DeFiDad!

👉Check out DeFiDad’s YouTube channel for extended tactics


TACTICS TUESDAY:

Tactic #49: How to trade the ETH Perpetual on dYdX

Guest Post: Corey Miller, Senior Growth Associate at dYdX

If you’re reading this, you probably own ETH. And you’ve probably asked yourself what are the easiest ways to access leverage on it.

While there are plenty of ways to do that in DeFi (primarily by using your ETH as collateral to borrow another asset such as a stablecoin), existing solutions are often both cumbersome and severely restrict the amount of leverage you can obtain. On dYdX, a decentralized exchange for spot, margin, and perpetuals, you can now obtain up to 10x leverage on your ETH without ever touching another token.  

In this tactic, we’ll go over the basics of perpetual markets and how to open an ETH-USD perpetual market position using dYdX. By the end of the post, you will be able to obtain up to 10x leverage on your ETH in a few simple steps.  

  • Goal: Learn how to open, close, and set up a stop for an ETH-USD Perpetual

  • Skill: Beginner/Intermediate

  • Effort: 10 minutes

  • ROI: Variable — depends on how well you trade! 

🤑 As a launch promotion, dYdX is offering 50% off trading fees for all ETH perp users in the first week!


⚠️ Disclaimer: Leverage trading is risky and not recommended for beginner traders. Please rationally judge your investment ability and make decisions prudently once you’re well informed about how Perpetuals work. dYdX Perpetual Markets are not available in the US.


Want more than 50% off? Add another 10% discount to your wallet!

Before you start! dYdX has trading fees but Bankless readers can get 10% off dYdX fees by adding the Bankless code to their wallet.

You can add it here.

Don’t know how to add the code? Watch this video 👇


What is dYdX?

dYdX is an open, permissionless protocol to trade, borrow, and lend crypto-assets. It offers spot and margin markets across ETH, USDC, and DAI pairs as well as perpetual markets for BTC and ETH. Although dYdX is decentralized, the experience of trading on dYdX is very similar to trading on a centralized exchange. It offers professional trading tools and orders, fast trade execution due to its off-chain order books, as well as pays all gas fees for its users once on the platform. 

Perpetual Markets

Perpetuals have been popularized by a number of centralized exchanges over the last few years — allowing users to get synthetic exposure to crypto assets without an expiration date. Perpetuals are the most widely traded crypto product with daily trade volume in the billions of dollars, eclipsing spot trading volume in 2019 as the most popular way to gain crypto price exposure. 

dYdX’s ETH perpetual functions as an “inverse perpetual,” which means that it is collateralized, margined, and settled in ETH, while all orders are calculated in USD.

That means for all users who already have ETH, it is one of the most efficient ways to obtain leverage on ETH in DeFi. 

Key terms to know: 

  • Oracle: The Oracle Price is an aggregate price calculated using on-chain price oracles. Collateralization and liquidations on dYdX are determined using the oracle prices of each asset.

  • Index Price: The Index Price is an aggregate price based on price data from multiple exchanges and is used to trigger stop orders. To provide optimal performance, the index price is managed off-chain to ensure minimal delay and slippage in stop order triggering. 

  • Mid-Market Price: The Mid Market Price is determined by the order book and is simply the midpoint or average between the lowest ask (sell price) and the highest bid (buy price) on the order book. 

  • Funding Rate: Funding rate is the fee paid between longs and shorts for each perpetual market. Longs would pay shorts if the funding rate is positive and vice versa. The funding rate is a mechanism to keep the mid-market price close to the Oracle and Index price. 

For more information on perpetuals, see our in-depth article on The Integral.


How to open an ETH perpetual

  1. Head to dYdX ETH-USD Perpetual Contract Market and connect wallet using MetaMask, Coinbase Wallet, Ledger, or Wallet Connect. 

  1. Click deposit and determine how much ETH you would like to deposit and trade.


👉 Note: Minimum trade size is $200 in ETH! There’s no minimum deposit size but make sure you’re trading with at least $200 in order to access the ETH Perp.


  1. Create a buy or sell order. This can be a market or limit order. Leverage is applied automatically and depends on how much collateral you have in your account. For instance, let’s assume you have 1 ETH  in your account and the price of ETH is $500, meaning the total value in your account is $500. Let’s also assume you want to buy ETH with 5x leverage. You would simply buy $2,500. Leverage is applied automatically using the ETH in your account. 

  1. Sign message to open the order


👉 Note: The interface on the right side of the screen will indicate metrics such as your liquidation price, leverage, PNL, and funding rate.


  1. To confirm your order was filled, click the “FILLS” tab on the bottom right-hand corner of the screen. Once the status is “confirmed,” the trade is finalized and can be viewed on Etherscan by clicking the “TRANSACTION” link.

Close a position

  1. Once a long or short position is open, you can view it in the “position” tab in the bottom right-hand corner of the screen

  1. To close the position, simply click “Close Position” and confirm the amount of the position you want to close. To close your whole position, click “MAX” after clicking “Close Position.”

  1. Sign message to close the order

Set a Stop

A Stop order is used to execute a market order once a certain Index Price has been hit (also known as Trigger Price). This is commonly used to automatically lock in a certain amount of profit or loss once a target price has been hit. 

  1. To set a Stop, click the “STOP” tab on the left side of the screen

  1. Determine the amount of ETH you want to buy/sell once the trigger price is hit. Click “Place Stop Order” and sign the message.

  2. Your Stop order can be viewed in the “ORDERS” tab on the right side of the screen. 

  1. To cancel the order, simply hover over the order and click “CANCEL” and sign the message. 

That’s it! You can now trade dYdX’s new ETH perpetual product.

If you’re interested in learning more about dYdX and their margin trading platform, make sure to follow the team on Twitter or read up on their trading blog, The Integral.


Author bio

Corey Miller is a Senior Growth Associate at dYdX. He previously worked at BlockTower Capital and ScoutVentures, an investment fund providing seed-stage companies with capital and strategic growth. He’s also an Alumnus from the University of Pennsylvania.


Action steps:


Go Bankless. $12 / mo. Includes archive accessInner Circle & Deals(pay w/ crypto)

Subscribe now


🙏Thanks to our sponsor

Aave

Aave is an open source and non-custodial protocol for money market creation. Originally launched with the Aave Market, it now supports Uniswap and TokenSet markets and enables users and developers to earn interest and leverage their assets. Aave also pioneered Flash Loans, an innovative DeFi building block for developers to build self-liquidations, collateral swaps, and more. Check it out here.


Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

The Token Maximalist Thesis

https://bankless.substack.com/p/the-token-maximalist-thesis

Level up your open finance game five times a week. Subscribe to the Bankless program below.

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Dear Bankless Nation,

I love to hear other investors articulate their core thesis.

It helps me sharpen my own thoughts.

The token maximalist thesis from Lasse and Christopher is one such thought-sharpener. They describe it today in their words.

You may find elements here you agree with. Maybe some elements you don’t. That’s perfect. The exercise today is to critically parse through another investor’s view of the world. Weigh it against your own mental models of crypto.

That’s how you level-up.

– RSA


🙏Sponsor: Aave—earn high yields on deposits & borrow at the best possible rate! 


Writer’s Corner

Guest Writers: Lasse Clausen and Christopher Heymann Founding Partners of 1kx

The Token Maximalist

I’m sure many of you know what Blockchains are, but allow me to quickly summarize again to help us establish our thesis. 

Blockchains are actually a simple technology. A blockchain is just a database.

But anyone can download a copy and participate…

…and the participants agree on how entries are added to the database.

Additionally, the entire system is open, transparent, and can be inspected and verified by anyone, at any time. This is important because the result is trust: 

The verifiability of the system establishes trust that the system undeniably does what it says it does, and the consensus of participants about the information in the database establishes an unquestionable truth. 

And for some perspective on how important trust is for society: 35% of US employment is to establish trust (attorneys, law enforcement, auditors, etc.). If you were to extrapolate that to global GDP, you get a somewhat imperfect but still a meaningful $28tn opportunity.

And we believe the market for trust is up for grabs. Trust in governments is at historic lows. Trust in media plunged to all-time lows. Trust in NGOs and business is declining. Only 15% of citizens globally believe that the current system is working.

(Above) Public Trust in US Government by PEW Research Center 2019

If you think about Trust, Trust is omnipresent, intangible and affects almost every aspect of society and commerce.

Imagine: How much blind trust is assumed just in everyday life? Take traffic light crossings as an example. You trust your life that traffic light technology always works. You trust that the 30 other people around you obey the system exactly as expected too. 

How much trust is involved when eating in a restaurant? You trust that health and hygiene regulations are enforced in the restaurant and all the way through the supply chain.

And the delicate balance of trust is far bigger than food poisoning. It was only ten years ago, when trust in the financial system broke down, pushing the global economy to the brink of collapse. 

Currently, the world is witnessing what happens when trust in one’s government breaks down as in Venezuela, Hong Kong, and Chile.

Now because trust is so omnipresent yet intangible, and the feature of blockchains is trust, there are seemingly limitless applications and outcomes from applying blockchain technology to a number of different industries. Which also means that there is a lot of confusion.

You’ve probably noticed, blockchain means a lot of different things to a lot of different people. 

Below we will outline the core themes that excite us most about what we call “crypto”, and we’ll go into a bit of depth afterward with sector examples.

The Internet Of Value

One of our investment themes is the internet of value.

The value of money is based on trust. And since we now have systems that can create trust, these systems can also create money. These types of new money are now programmable and connected in an internet of value. 

Incentives

Programming incentives into blockchain networks can have a powerful effect on behavior. One of the most impactful innovations in human history was the limited liability corporation, which redefined incentives.

I can now run a business while reducing the risk of that venture to the sum of my explicit investment in that venture, whereas before angry customers could burn down my house and everything else I owned. And that subtle change in incentives changed how the world worked, the dominant form of organization in the world today is the limited liability company. 

Likewise, we can now program incentives and therefore desired behavior into a network. This is very powerful…

Digital Cooperatives

…because it has enabled the biggest business model innovation for networks since the beginning of the limited liability corporation.  

To take a step back, we actually think that the incentive structure of a for-profit company is fundamentally flawed. Take Uber for example: Their main goal is to charge the passenger as much as possible while paying the drivers as little as possible. The incentives of the stakeholders are directly opposed.

Blockchain or “crypto” networks establish a non-profit foundation, rather than a for-profit company. Access to use the network as a customer, or the right to work as a supplier, is represented in a digital token, which itself is also an investable and tradeable asset. 

This business model has the potential to be better than free because the token may appreciate in value and grant voting rights and therefore some sovereignty over important decisions that could have serious consequences for the stakeholders. 

So, it’s worth emphasizing, these crypto networks are not companies. And we actually have statements from the SEC that they understand and acknowledge this concept of decentralized networks. Namely when they declared that Ethereum is not a security (essentially meaning it’s not a company) because of its decentralization.

This new “token business model” allows these blockchain networks or protocols to operate without proprietary assets: in fact, in order to create the required trust for the network, the asset/codebase actually must be open-source, transparent and inspectable. 

That also means that the network (or business) is built once and re-used by thousands because anybody can take open source code and copy it for their own use. 

Imagine anyone could have taken Uber’s technology from day 1, innovated on it, and created a thousand other transportation networks. Every village would have its own ridesharing service without Uber and Lyft pocketing $3bn a year from the system.

Open Source Innovation 🚀

Open source explains why innovation is occurring in crypto at a speed unlike anything before. 

In the “legacy economy”, consider how many companies are currently working in parallel on duplicate/competitive products and technologies, behind closed doors. What a colossal waste of resources. Again, in crypto, it’s built once, and then anybody else can reuse it, learn from it and innovate on it. 

Some Specific Sectors

Now I’d like to go into some more specific sectors that are starting to emerge within the crypto economy.

Open Finance (DeFi)

With open finance, also called “DeFi” for decentralized finance, we are seeing the emergence of a frictionless global financial ecosystem with near-zero tx costs, open-source financial instruments, and zero intermediary fees.

This financial system grew quickly to over $3bn in value. It’s an example of the explosive growth these networks can experience. 

Popular applications are Maker, a decentralized reserve bank that lets you mint a stable coin from your collateral, Compound, a decentralized money markets protocol and Futureswap, a futures exchange. 

Again, all of these are open source (and therefore trusted) and without fees but instead indirectly financed by utility and governance tokens.

DeFi even has its own mutual insurance, which allows buying covers against the technology risk of the above financial protocols. 

Nexus Mutual is also an open-source, fee-less network where the value accrues entirely to the participants via the token. All the funds are held transparently on the blockchain and claim assessments and payouts are also public for everyone to inspect, and for token holders in the mutual to vote on.

Our first investment exposure to the DeFi ecosystem was Nexus Mutual, because no matter which one of the applications mentioned previously wins, a portion of the value of this new financial system will be insured via Nexus Mutual’s prevalent insurance protocol. 

Web 3

Another exciting sector is called Web3. 

Decentralization is not just a buzzword, it’s a means to an end: security and sovereignty.

Software is eating the world and becoming ever more important. For large scale software networks of high public importance, the classic vertical corporation isn’t suited anymore, for two reasons: 

One, the complexity. Vertical organizations have a limit of software complexity they can handle. As an example, you can see with Equifax that after a certain size some very serious mistakes happen, often with serious consequences. 

And two, the incentives. A for-profit company ultimately needs to sell the cheapest things for the highest price in the quickest way. In the specific case of Boeing, it tried to beat Airbus to the market while outsourcing critical software functionality to temporary developers as a cost-cutting tactic, which is attributed to the fatal 737Max crashes.  

More specifically, web 3 enables protocol marketplaces to replace monolithic service providers like Amazon Web Services and Microsoft Cloud. Instead of a company, an open-source, fee-less protocol coordinates the supply of computing and data storage resources. 

A most exciting aspect is the perfect competition and innovation that is enabled on the supply side. Anybody can become a supplier within hours as there are no negotiations and agreements to sign. Transaction costs are near zero, and since all the rules and possible behaviors are encoded in the protocol, no trust costs are incurred for monitoring and enforcing against malicious behavior. 

Supply-side driven innovation has already proven itself in one market, which experienced an unprecedented surge from innovation and competition: Bitcoin mining. The global competition in bitcoin’s proof of work computation, which is open to anyone in the world to participate and innovate, has increased mining efficiency 130 fold in only 6 years. 

(Above) Logarithmic chart of efficiency in Megahashes per Joule of various popular sha256 miners

We expect this open and permissionless innovation on the supply side to be a game-changer for cloud computing, and for web 3.0 protocols to completely disrupt and disintermediate the current market.

Payments

Another interesting sector ripe for blockchain disruption is payments. It is estimated that the total economic and social costs of payment processing culminate to 2% of the United States’ GDP, which is close to half a trillion dollars a year.

This massive inefficiency is driven by the legacy credit card networks’ outdated technology, bloated ecosystem, and pricing power over merchants. Considered a financial innovation when introduced in the 1950s, credit card transactions now involve 11 different parties. 

Interestingly, Stripe and Square, both billion-dollar companies and considered “payments innovators” by the public, are actually just one of those 11 parties needed to complete a transaction. 

(Above) US credit card networks

However, below is what the payments industry looks like with Flexa.

Flexa is a 1kx investment that capitalizes on cryptocurrencies as a payment technology and removes all of these intermediaries while reducing the merchant payment processing costs to 1%, with next day settlement to the merchant.

Ease of adoption and low switching costs is Flexa’s second competitive advantage over today’s payment processors.  Merchants can onboard Flexa without buying new hardware or software and no employee training is required. Flexa is a game-changer for retail payments. 

(Above) The Flexa payment network

Terra, also in 1kx’s portfolio, takes a similar approach with a focus on e-commerce payments in Korea and Southeast Asia. Blockchain technology is used to reduce payments costs down to a range of 10 – 60 basis points with a cap of $1 and next-day settlement.

For e-commerce merchants, who operate on razor-thin margins while paying 1.8-2.5% in credit card fees and are starving for working capital, Terra is a lifesaver.

Thesis

As you can see, blockchain is a simple technology with profound implications across all industries. On top of that complexity, blockchain represents a financial system estimated to transact 25x faster than the legacy financial system, with the volatility that would make natural gas day traders dizzy. 

So how do we navigate this space as an investor?

We felt that we needed a simple yet strong thesis that would give us flexibility for this fast-changing space but also a strong conviction when the markets temporarily turn against us. 

Token Maximalist

The best way to summarize our thesis is that we’re token maximalists.

We just have a hard time seeing how for-profit companies are going to compete with open-source token networks in the long-term. Simply put, “Imagine Bitcoin or Ethereum had been private companies”. Nobody would have cared.

Here are three specific advantages that crypto networks hold over for-profit corporations:

1: Better than free. As explained before, the access/work token converts me to a stakeholder instead of just a customer or supplier, with quasi-free unlimited use of the network, potential financial benefit, and a sense of sovereignty through governance participation. 

2. Permissionless innovation. Since there are no gatekeepers and the public is encouraged and incentivized to innovate on top of the network without obtaining permission, a wealth of experiments is carried out that no closed permissioned system can compete with in terms of numbers. And innovation is a numbers game: the more experiments, the likelier a game-changing use case is discovered. For every 10,000 apps in the app store, only one is successful.

3. Trust. If you want to build a large network, you need buy-in from many different parties: users, suppliers, regulators, the media. With trust in business declining, it is much easier for decentralized networks to gather the buy-in from a diverse set of stakeholders. You can see the example of how aggressively the regulators stepped in against Facebook the second it announced their global coin. We were actually surprised how many politicians immediately understood the difference between a decentralized network and a corporate network like Libra.

We’d like to end with this quote, which we think is good to keep in mind when navigating a groundbreaking technology such as blockchains. 

After all, we strongly believe that 1kx returns are possible when investing in such a massively disruptive force, but having a seat at the table of one of the most exciting asset classes in history does require skill and patience.


Action steps

  • Consider: do you agree with the Token Maximalist thesis?

  • What is your thesis for crypto?


Author Bio

Lasse Clausen and Christopher Heymann are the founding partners of 1kx, a token network fund with the thesis of embedding crypto-economic incentives into everything: transactions, computation, storage, prediction, power.


Introducing the newest Bankless Youtube show—Meet the Nation!

A series focused on short interviews with new projects within Ethereum and DeFi.

📺Let’s Meet Ampleforth —The Elastic Supply Protocol with Co-Founder Brandon Iles

Subscribe to Bankless. $12 per mo. Includes archive accessInner Circle & Badge.

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🙏Thanks to our sponsor

Aave

Aave is an open source and non-custodial protocol for money market creation. Originally launched with the Aave Market, it now supports Uniswap and TokenSet markets and enables users and developers to earn interest and leverage their assets. Aave also pioneered Flash Loans, an innovative DeFi building block for developers to build self-liquidations, collateral swaps, and more. Check it out here.


Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

Friday Open Thread: What are the best crypto wallets?

https://bankless.substack.com/p/friday-open-thread-what-are-the-best/comments

What are the best crypto wallets to use…

For DeFi. For Ethereum. For Bitcoin.

For cold storage. For hot storage.

For beginners. For veterans.

For security. For usability.

For mobile. For desktop.

I know each of you have opinions on this. Share them! Tell us why!

What are the best crypto wallets?

Ether: The Birth of the Digital Bond

https://bankless.substack.com/p/ether-the-birth-of-the-digital-bond

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Dear Bankless Nation,

ETH staking is like a bond offering for a new type of digital nation.

Staked ETH is like a crypto T-bill.

People haven’t wrapped their heads around ETH as a digital bond. Certainly institutional investors haven’t. Understandable—it’s not yet here.

But Stefan Coolican sees the future. He’s the president of Ether Capital, a publicly traded company with the foresight to keep ETH on its balance sheet under this thesis: ETH is turning into a productive asset and the world doesn’t yet appreciate it—but they will.

Here’s doing what we do. He’s front-running the opportunity.

This is how he explains Ethereum’s Digital Bond. 🔥

– RSA


🙏Sponsor: Aave—earn high yields on deposits & borrow at the best possible rate! 


THURSDAY THOUGHT

Guest Post: Stefan Coolican, President @ Ether Capital

Understanding ETH as a Productive Asset

Later this year, when Ethereum transitions to staking, $26 billion of Ether will immediately be convertible into yield-bearing instruments. 

When staked, the Ether you hold isn’t a virtual commodity anymore. It is more like a financial asset on which you’re paid dividends or interest. 

If bitcoin is digital gold and ETH is digital oil, staked ETH is a digital bond. 

Staked ETH is unique. Unlike a conventional bond, it has no counterparty risk – there is only protocol risk. Staked ETH gives you yield at the protocol level and not via a counterparty.  Staked ETH is therefore an intrinsic yield instrument.

For the first time ever you can compound your ETH holdings organically without assuming any counterparty risk.

Now, you might think the introduction of yield would be an Aha! moment for traditional finance. But just as traditional finance missed Bitcoin’s “big bang” moment in the early 2010s, the same is happening with staking today

In this piece, I’ll provide some thoughts on the economics of staking, why it brings a unique yield instrument to crypto, what staking means for ETH returns and why traditional finance will inevitably need to pay attention.

Staking – The What and The Why

We all know that blockchains need honest validators.

One way to incentivize this is via proof of work mining. In mining, the incentive to be honest stems from energy-intensive calculations. This is Bitcoin’s model and is currently Ethereum’s model as well.

Another way to incentivize is via proof of stake, which is the model for Ethereum’s transition later this year. In staking, the incentive comes from locking up one’s tokens as a performance bond. 

Compared to mining, staking aims to be not only more environmentally friendly but also more efficient, more secure, and more performant than hardware mining.

Only Staking Creates an Intrinsic Yield Instrument

Both mining and staking are ways to provide security to a blockchain, but only staking creates an intrinsic yield instrument. Why? Because both the capital at risk and the rewards are internal to the protocol. 

Think of staking as security-as-a-service incentivized by yield.

Let’s unpack this. 

Staking on Ethereum will be fairly simple. The steps are:

  1. You have ETH 💰

  2. You deposit ETH into the staking contract 👨‍💻

  3. You run staking software honestly ☑️

  4. You earn more ETH (yay!) 💵

In staking, the staker puts capital at risk in the protocol’s native units. In other words, the ETH that I stake is my investment. 

Mining differs because while mining rewards are internal to the protocol, the investments – ASIC chips and electricity – are external. 

Asset Lending is Not an Intrinsic Yield Instrument

You might think this is semantics. Can’t I generate yield with bitcoin?

Of course you can. You can lend it to someone (or in the case of DeFi, a pool governed by a smart contract). But this entails additional counterparty risk, which effectively decouples the yield from the risk of the protocol. 

Where staking differs from ordinary asset lending is that there is no counterparty risk – the risk profile is internal to the protocol itself.

This makes staked ETH an intrinsic yield instrument, while other proof of work cryptocurrencies like bitcoin are mere commodities. It also means that tokenized lending on Ethereum (e.g., Compound’s cTokens) creates digital bonds but ones that are not intrinsic yield instruments.

Staking and Traditional Finance

Traditional finance understands yield. It understands interest and dividends. It understands cash flow and compound growth.

It does not understand staking!

Why? Investment professionals, bankers, and economists are still just getting used to the concept of Bitcoin. A few years ago, it was routinely dismissed as a fraud and as being used only by drug dealers and money launderers. Now, the conceptual tide has turned somewhat and a popular finance narrative has emerged as a higher risk/reward analog to gold.

And yet, digital gold isn’t enough

Warren Buffet, one of the greatest investors in history, once said that he’d prefer all the farmland in the U.S. to all the gold in the world. Why? 

Simply put, farmland is an asset with compound growth potential. You can generate cash flow and re-invest it, increasing your wealth. Meanwhile, gold is a commodity you can only hold in the hopes of the price going higher. 

But here’s where staking changes the game. With staking, you can make cash off your holdings organically without disposing of your original capital base or incurring additional risk. 

Staking is what moves crypto from digital gold to an asset with compound growth potential. Staked ETH is more farmland than gold.

Staking – What Happens to Price and Yields?

I consistently get asked by Ether Capital’s investors – what will staking do to the price of ETH and what will my yield be? These are difficult questions to answer.

Prices incorporate a myriad of factors, including those pesky animal spirits that we can’t explain. Yields are a function of total ETH staked which we won’t know until launch. Still, here are a few thoughts on both issues.

First, on price: post-staking, ETH will be scarcer than gold and bitcoin in terms of supply issuance

Sources: Kraken Intelligence, Consensys’ ETH2.0 Calculator

Ethereum’s total inflation depends on how much ETH is staked, but the maximum annual figure is only 1.4%. Realistically, we might expect an inflation rate under 1.0%. Note that I have excluded Ethereum’s proof of work mining rewards over the period, reflecting their eventual discontinuation in the context of staking.

I realize, of course, that price isn’t determined uniquely by supply factors. Very simply put, if ETH can retain the demand side of the equation, ETH’s issuance scarcity is likely very bullish for its price.

Second, on staking yield: we might end up seeing double-digit staking rewards in the early days and lower single-digit gross yields as staking becomes more common

Assume early on that relatively few ETH are staked due to it being new (i.e., higher risk) and initially non-transferrable. Let’s also assume that when Ethereum 2.0 is in full production in a couple of years, the number of ETH staked is much higher. 

Source: Consensys’ ETH2.0 Calculator

In the early days staking could be very lucrative – while after some time it could be more akin to inflation protection, plus a margin (still a better return than your negative interest rate bank account). 

The Future of Ethereum’s Digital Bond

Ethereum’s digital bond promises to be a crucial milestone for crypto as an asset class

Think back to Bitcoin’s white paper in 2008. 

Imagine predicting Bitcoin’s global recognition only a few years after launch. Imagine predicting that bitcoin would be a mainstay on CNBC’s ticker tape. Imagine having a $40 billion AUM fund manager extoll the merits of bitcoin in an update to his investors. Those predictions would have been considered outlandish. Yet here we are.

In the same vein, I would argue that staking yield opens the door to similarly fanciful predictions.

Maybe we are not as far away from the days when the Financial Times compares staking yields to yields in treasuries, bonds, and dividend stocks. 

Maybe we are not that far away from ETH’s staking yield serving as a reference for financial products in the same way LIBOR does today. 

Maybe we are not that far away from smart contracts like Maker, Compound, Uniswap and Augur powering next-generation financial infrastructure for the world, all secured by ETH.

Inevitably, even if a small number of these predictions come true, traditional finance will have to take a much more serious look into crypto.

This will include having to grapple with the novel concept of intrinsic yield — protocol risk without counterparty risk, among other things.

With crypto creating a new digital paradigm for a yield instrument, doing your homework now may literally pay dividends in the future.


Action steps


Author Bio

Stefan Coolican is President of Ether Capital Corporation (NEO:ETHC). Ether Capital is an Ethereum ecosystem investor. Previously, Stefan worked as a Director in the investment banking group at Cormark Securities.


Subscribe to Bankless. $12 per mo. Includes archive accessInner Circle & Badge.

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🙏Thanks to our sponsor

Aave

Aave is an open source and non-custodial protocol for money market creation. Originally launched with the Aave Market, it now supports Uniswap and TokenSet markets and enables users and developers to earn interest and leverage their assets. Aave also pioneered Flash Loans, an innovative DeFi building block for developers to build self-liquidations, collateral swaps, and more. Check it out here.


Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

How to bet on DeFi with Polymarket

https://bankless.substack.com/p/how-to-bet-on-defi-with-polymarket

Level up your open finance game five times a week. Subscribe to the Bankless program below.

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Dear Bankless Nation,

I think it’s time to take a look at prediction markets.

Yes, crypto’s talked about them forever.

No, we haven’t found product-market-fit yet.

So talk about them now?

There’s now at least three different attempts at prediction markets in DeFi. We’ll cover them all I’m sure, but today we’re going to show you how to use Polymarket.

Polymarket makes some interesting tradeoffs. It uses Ethereum’s financial infrastructure but keeps its oracle—the thing settling bets—centralized. For Polymarket it’s more about building a UX good enough to for mainstream than about maximal decentralization. (Haseeb makes a case for this type of approach here.)

The coolest thing—you can bet on DeFi markets now.

We’ll show you how.

-RSA

P.S. This is a new tool so please be careful of risks as always—I believe Polymarket uses audited smart contracts from the conditional token framework


🙏Sponsor: Aave—earn high yields on deposits & borrow at the best possible rate! 


Btw, we just released episode 5 of our new Tuesday video show—State of the Nation!

📺 Watch State of the Nation #5: HEDGED special guest Nic Carter!
Where’s the inflation? Crypto dollar ban hammer! And a Coinbase IPO?!?


TACTICS TUESDAY:

Tactic #46: How to bet on DeFi with Polymarket

Guess Post: Shayne Coplan from Polymarket

Polymarket is an information markets platform, where speculators bet on the world’s most highly-debated topics—producing actionable insight on the matters most important to society, and helping people plan better plan for their future. 

Built on Ethereum and using USDC as the underlying currency, in this article we’ll walk you through how you can start using Polymarket to profit from accurately predicting DeFi trends.

All you need is Metamask, USDC, some ETH for tx fees, and you’ll be ready to instantly start trading all the unique DeFi markets and others on topics like Coronavirus and Politics on PolyMarket. Earn cash for being right!

  • Goal: Earn $ for accurately betting on the future of DeFi

  • Skill: Beginner

  • Effort: 5 minutes

  • ROI: 2-10x your wager (if you’re right!)


⚠️ Heads up—Polymarket is in Beta. Like most DeFi protocols and applications, it’s early, so proceed with caution. Don’t put in more than you’re willing to lose!


What’s a prediction market?

The ability to cheaply create, trade, and resolve globally-accessible markets of any type and size is one of the most powerful use cases for blockchain technology.

Often termed “prediction markets”, this phenomenon of markets on everything—be it binary outcome markets, perpetually traded synthetic assets, or scalar markets—remains largely unrealized after a few early, well-capitalized players have struggled to ship products for the last 5 years.

But make no mistake, this vertical of DeFi has a good chance of bringing the industry mainstream and having a profound global impact.

A month ago we launched Polymarket, a product aimed at making this vision a reality.

At first glance, Polymarket is a fully functional, intuitive ‘prediction markets’ platform built on Ethereum using:

  • Ethereum wallets and addresses

  • A stablecoin (USDC) for the underlying currency

  • AMMs (Uniswap and Balancer) for market structure to guarantee tight spreads

Polymarket is the culmination of:

  1. our team’s experience using generalized markets platforms

  2. the study of the relevant academic research,

  3. constant iteration based on user feedback.

We place a strong emphasis on purposeful product design and try our best to give the end-user the magic UX of owning your own money along with the intuitive UX of a well-built web 2.0 product.

OK—that’s the background. Now let’s get to the tactic. First stop, we’ll check out the DeFi markets featured on Polymarket and head to poly.market to make our first trade!

DeFi Markets on Polymarket

Though Polymarket aims to support any type of market one category we’ve focused on early is DeFi.

Below is a list of DeFi markets currently live on Polymarket you can bet on today:

1) What will the USD price of CRV be 2 weeks after Coinmarketcap listing?

Curve is planning to reward all active liquidity providers in Curve AMMs since the protocol’s inception with CRV tokens. CRV isn’t live yet, and a date for when it will be has yet to be announced. Using Polymarket, future CRV recipients can hedge their risk by going Long or Short before the token is even live. They can also calculate their expected earnings via price discovery for CRV tokens when active markets don’t yet exist elsewhere.

2) Will Ethereum 2.0 Phase 0 launch before 2021?

This is one of the most highly debated questions in the Ethereum community. Using Polymarket, anyone can track the real-time likelihood of this deadline being met, can hedge against their ETH position by buying “No” shares, or, more creatively, can strengthen the incentive for the Ethereum core team to meet the deadline by buying up “No” shares, thus making it more lucrative for the developers to Buy “Yes” shares and positively influence the outcome of meeting the deadline.

3. Will Augur v2 launch on or before July 28th, 2020?

Augur has long been one of our team’s favorite crypto projects, and there is a good chance we will integrate Augur markets into Polymarket at some point in the future. Augur announced that their v2 product will launch on July 28th, 2020. Using Polymarket, anyone can track the likelihood of that deadline being met in real-time, and can also hedge their REP holdings by buying “No” shares.

4. What will the USD price of COMP be on September 1st, 2020?

Compound’s governance token, COMP, took a unique path for token distribution. The token, upon listing on decentralized exchanges, skyrocketed in value as only a small portion of supply was available. Using Polymarket, those who own COMP but don’t have liquidity can hedge their risk by buying Short shares.

5. What will the total value locked (TVL) in DeFi be at the end of 2020, according to DefiPulse?

The TVL metric on DeFi Pulse, which tracks the total value of crypto assets locked in prominent DeFi protocols and applications, is synonymous with the growth and success of DeFi.

In the past few months, TVL has been growing rapidly, showing no signs of slowing down. Using Polymarket, DeFi investors can get a real-time, provably-accurate forecast of what the TVL will be at the end of the year, which they can then use to make better investment decisions in the present or to hedge against lower than expected growth in the sector.

How to make a trade on Polymarket

  1. Visit https://poly.market/, scroll down to the Categories or Popular Markets section, and pick your market!

  1. Connect your Ethereum wallet (we suggest Metamask), and make sure you have some ETH for tx fees and USDC for the trade.


📔 If you don’t have USDC, there should be a blue box above the graph that contains a link to buying it on Uniswap like this


  1. Select the outcome you think will resolve to be “TRUE” and input how much you’d like to buy. Pay close attention to your average price and maximum winnings as you decide how much to buy, as they change dynamically to your order size due to the nature of the AMM.

  1. Click “Buy” and sign all the transactions that come up. If it’s your first time trading the market, there’ll be 2 transaction pop-ups. If you’ve traded it before, there will only be one.


👀 If you’d like to get early access to our new onboarding process which streamlines this process, scroll down for an exclusive offer to Bankless subscribers!


  1. Voila, you successfully bought your shares! Now you can follow your positions either in the respective market page under “My Positions”, or on the portfolio page, which will show all your active positions on Polymarket. When the market resolves you can redeem your winnings on the respective market page.

  2. Interested in the market topic but not in trading it? That’s all good—in fact it’s how we expect most people to use Polymarket. On any market, scroll down and learn about the use cases, and enter your email to receive updates about market activity.

That’s it! Easy.


Early Access for Bankless Subscribers 👋

Reach out to hello@poly.market & put Bankless in the subject line, tell us what you like about Polymarket, and get exclusive access to upcoming Polymarket features before they come out.


To stay up to date on Polymarket follow us on Twitter and join our Discord!

Happy betting!


Author bio

Shayne Coplan is an early cryptocurrency adopter from NYC now focused on building Polymarket.


Action steps:


Go Bankless. $12 / mo. Includes archive accessInner Circle & Deals(pay w/ crypto)

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🙏Thanks to our sponsor

Aave

Aave is an open source and non-custodial protocol for money market creation. Originally launched with the Aave Market, it now supports Uniswap and TokenSet markets and enables users and developers to earn interest and leverage their assets. Aave also pioneered Flash Loans, an innovative DeFi building block for developers to build self-liquidations, collateral swaps, and more. Check it out here.


Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

Ethereum: Past, Present, Future | Vitalik Buterin

https://bankless.substack.com/p/ethereum-past-present-future-vitalik

Level up your open finance game five times a week. Subscribe to the Bankless program below.

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🎙️ NEW PODCAST EPISODE

Listen to episode 21 | iTunes | Spotify | YouTube | RSS Feed


Tools from our sponsors to go bankless:

📈 Rocket Dollar – tax shelter your crypto ($50 w/ “BANKLESS“)

💸 Ramp – the fiat onramp for DeFi (mention Bankless!)

💳 Monolith – the holy grail of bankless Visa cards

🌈 Aave – money legos for lending & borrowing


Episode: #21 – Ethereum: Past, Present, Future | Vitalik Buterin
July 13, 2020

Ethereum turns 5 on July 30th! That’s 5 years of history. Five years of progress. Time enough to change the world?

We sit down with Vitalik Buterin and walk through Ethereum’s past, present, and future. Has the vision changed? Has ETH earned its price? What about monetary policy? How’s Vitalik feeling about the future?

Is ETH a triple-point asset?

It seems clear that Vitalik believes the Ethereum community is its strongest asset. This band of Athenians isn’t just here to vanquish foes, it’s here to build a digital civilization for the world. Not burn it down. Build it up. 

Vitalik believes crypto is standing strong as one of the few remaining things that are genuinely international. And as we witness the balkanization of the digital world, the open door to cooperation that Ethereum provides is exactly what humanity needs in order to thrive in the 21st century. 

Happy 5th Birthday Ethereum! 🎂

The world needs you now more than ever. 

Here’s what we cover:

  • How Vitalik’s feeling about Ethereum

  • PAST:

    • Times when Vitalik was far less optimistic

    • Has Ethereum matched the original vision?

    • Identity in an independent digital civilization

  • PRESENT:

    • Does Vitalik like or hate DeFi?

    • Vitalik’s biggest concern for DeFi

    • Thoughts on liquidity mining

    • The goods & bads of speculation

    • Have we earned the price?

  • FUTURE:

    • 3 problems we face now

    • Spartans vs Athenians – who wins?

    • Is Ethereum a nation, a religion, a technology?

    • How Etheruem is like Briton 

  • ETH THE ASSET

    • Is ETH a triple point asset?

    • Solidifying ETH’s monetary policy

  • LIGHTNING ROLLUP ROUND

    • Gas fees are too high?

    • ETH flippening BTC?

    • Low hanging fruit?

    • His favorite ETH killer?

    • And more…

Join us next Monday for a fresh episode!


Resources discussed:


Episode Actions

  1. Review Ethereum timeline (up to 2019)

  2. Listen to our fave episodes on Ethereum

  3. Give us a 5-star review on Apple iTunes!

Also…subscribe to Bankless YouTube to watch State of the Nation every Tuesday.

Subscribe now


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Leave a review on iTunes

Share the episode with someone you know!

Share


Don’t stop at the podcast!


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Subscribe now


Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case

🎙️ Ethereum Opportunity | Chris Burniske

https://bankless.substack.com/p/-ethereum-opportunity-chris-burniske

Level up your open finance game five times a week. Subscribe to the Bankless program below.

Subscribe now


🎙️ NEW PODCAST EPISODE

Listen to episode 20 | iTunes | Spotify | YouTube | RSS Feed


Tools from our sponsors to go bankless:

📈 Rocket Dollar – tax shelter your crypto ($50 w/ “BANKLESS“)

💸 Ramp – the fiat onramp for DeFi (mention Bankless!)

💳 Monolith – the holy grail of bankless Visa cards

🌈 Aave – money legos for lending & borrowing


Episode: #20 – The Ethereum Opportunity with Chris Burniske
July 6, 2020

We sit down in this episode with Chris Burniske to talk about crypto, DeFi, and the Ethereum opportunity. Why are we here? How will crypto make the world better? Where are we going next?

Oh…and is ETH money?

Chris has the incredible ability to drill deep into intricate analysis one moment then zoom out across history to tell us what is means for the future of humanity. Enjoy this conversation with our favorite crypto analyst-philosopher.

We cover:

  • Evolution of token valuations

  • Fixing the inequality of capital

  • Is DeFi a better system for the world?

  • Balancer as a case study

  • Have his views on governance changed?

  • Tribalism!

  • The reason we’re here

  • Going west toward the Infinite Whitespace

  • The Ethereum opportunity!

  • Bullish ETH?

  • Chris’s next book

Join us next Monday for a fresh episode!


Resources discussed:


Episode Actions:

  1. Read our favorite articles from Chris (see above)

  2. Listen to episode 4 on ETH as a Triple Point Asset

  3. Give Bankless a 5-star review on iTunes!

Also…subscribe to Bankless YouTube to watch State of the Nation every Tuesday!


Subscribe to the podcast on iTunes | Spotify | YouTube | RSS Feed

Leave a review on iTunes

Share the episode with someone you know!

Share


Don’t stop at the podcast!


Go Bankless. $12 / mo. Includes archive accessInner Circle & Deals(pay w/ crypto)

Subscribe now


Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case

How to make money playing fantasy football on Ethereum

https://bankless.substack.com/p/how-to-make-money-playing-fantasy

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Dear Crypto Natives,

Most people aren’t like us. They don’t want to think deeply about the nature of money. They don’t want to think about finance at all.

Crypto will pull them in anyway. One niche at a time.

Take this one: did you know the sports card market is $5.4 billion in the U.S. alone?

Billions of dollars spent on physical sports cards. All limited by analog technology and static experiences. Flea markets instead of Uniswap.

For the past 40 years software has been eating the world. Now crypto makes it possible for software to eat scarce goods. And not just eat them—expand them. Make them more immersive.

As software eats the sports card market that’s another niche pulled into crypto…not finance geeks…this time we’re pulling in Cristiano Ronaldo fans.

Fantasy sports meets sports cards meets crypto.

If football is your thing (soccer for you North Americans) you’re gonna love this tactic.

And if it’s not—I want you to get inspired by what SoRare is doing. They’re bringing DeFi to a whole new demographic. Using open finance to create open gaming.

This is one of the 100,000 startup ideas waiting to be built on crypto.

Let’s see figure out how to play fantasy football on Ethereum.

-RSA


🙏Sponsor: Aave—earn high yields on deposits & borrow at the best possible rate! 


TACTICS TUESDAY:

Tactic #41: How to make money playing fantasy football on Ethereum

In this tactic we’re going to learn how to value officially-licensed football player cards on Sorare, how to build a strong team, how to play games every weekend, and how to collect high valued cards that can potentially be sold later for a profit!   

  • Goal: Learn how to collect, build, and play with football collectibles
  • Skill: Beginner-Intermediate
  • Effort: 2-4 hours per week
  • ROI: Some cards are re-selling for 3x!

⚠️ Note: Sorare recently migrated from Loom over to Ethereum so numbers on dApp radar have not been updated to reflect the change.


What is Ethereum’s promise for gaming?

Guess Post by: Brian O’Hagan, an open gaming crypto strategist

Gaming has always been at the bleeding edge of technology. 

Ethereum unlocks new opportunities for gamers to become creators, entrepreneurs, and even service providers. Web3 technologies are evolving the nature of gaming by providing 4 new features:

  1. Digital Ownership: Gamers can actually own and possess their in-game assets on the internet for the first time, unlocking real ownership of assets, and in certain cases turning in-game purchases into profitable investments.
  2. Scarcity: The value of any collectible item, virtual or physical, is largely driven by scarcity. The scarcity (or lack thereof) of a crypto collectible is known by inspecting the NFT contract. In Sorare, different cards have different levels of scarcity, impacting the value of the card.
  3. Provenance: We can now have a complete digital history of the asset from its origins available for anyone to view and verify at any time. It’s particularly useful for digitizing memorabilia. The sports card collection market is worth $5.4 billion in the US alone.
  4. Peripheral markets: In-game items that are represented as tokens can be leveraged in new decentralized applications. In Sorare’s case, some developers could create permissionless lending markets on these cards.

In Sorare’s fantasy football game, the value of player cards is not entirely driven by the player’s status, or the card’s scarcity, but rather by the utility of the card in-game. To understand that, let’s dive into the gameplay and its subsequent microeconomic incentives.  


👉 All of Sorare’s digital collectibles are officially licensed by the football club. The platform currently features 41 licensed clubs on the platform with more added every week!


How to get started with Sorare?

1 – Create your account and understand the game mechanics

Start by creating an account on Sorare, it will take 30 seconds.

When you sign-up, you will be offered a random pack of 10 common cards. These common cards are not real in-game collectibles, they simply enable a free-to-play experience.

With these cards, you will be able to compose your first team and participate in the Rookie league.


👉 Note: You’ll have to verify your email to complete the registration. Once verified, the “Claim 10 free common cards” will be highlighted at the top of the screen in blue!


A team consists of a keeper, a defender, midfielder, attacker, and the extra player of your choice. 

Like for all fantasy sports, your team’s score is based on the real-life performance of your players on that weekend. Results come out every Monday.

Depending on your team’s score, you will earn rewards. Rewards range from rare to unique player cards plus ETH for the Division winners.

Your score and subsequent rewards will depend on the type of player cards you own. More powerful cards give higher multipliers to a player’s score and as each Division has a power cap, you can be assured of only competing against managers of similar strengths to you.

If you wish to experience the play-to-earn experience of Sorare, you will have to invest some time, money and most importantly, you will need to have the skills to build the right football tactics or scout the right players early on. 

2 – Scout players, build your team

Here’s how to start collecting some player cards: 

Each season, 111 player cards per player will be minted as non-fungible tokens.

Here’s how the in-game items (i.e. player cards) are auctioned throughout the season: 

  • 100 rare cards with a starting price of 0.01 ETH → rare cards start with an initial multiplier of 7.2x
  • 10 super rare cards with a starting price of 0.1 ETH → super rare cards start with an initial multiplier of 14.4x
  • 1 unique card with a starting price of 1 ETH → unique cards start with an initial multiplier of 21.6x

You get the gist of it, the scarcer the cards, the higher your player scores (thanks to the bonus).

However, if your player does not compete in real-life during the weekend fixture (let’s say Ronaldo is injured) then your card does not score any points. Therefore, it’s vital to understand the utility of the player in real life (is he injured often, is he on the starting team most of the time, does he score goals or defends well, etc).


👉 Note: You can view player stats, previous SO5 scores, the player’s game schedule, and more by searching the player’s name on Sorare. Here’s Cristiano Ronaldo’s Sorare page for example. You can also view details on specific clubs, countries, and even other managers!


From that perspective, Sorare is one of the first projects on Ethereum where the non-fungible token prices are driven by utility of the card rather than pure collectability or speculation (even though you will find some too).

Here is a breakdown of the card attributes in a detailed video tutorial made by the Sorare Manager, PAP

3 – Start playing

After having bought a team of 5 players, with at least 1 goalkeeper,  1 defender, and 1 midfielder, you will be able to play SO5 (for Sorare5) competitively.

You will see a list of different divisions in which you can compete. The more power (i.e. scarcity and higher levels) you cards have, the more competitive you will be for the top divisions with the highest rewards.

You can enter 1 team per division, so it does make sense for you to collect more than 5 players if you want to compete across multiple divisions.

Different divisions are made available based on the new licensed football clubs and leagues on Sorare. There’s a division that only allows player cards from the Belgian football competition, and there’s one for under-23 footballers.

The most common division is the all-star division, which allows you to compose a team with players from every team.

Below is a visual representation of the different divisions available (as of May 2020).

Once you’ve chosen a division you want to compete in, you will be taken to the team composer to select your team. Don’t forget to choose players based on their expected performances that weekend: will they be playing, are they in form, etc. 


👉 For new players, the rookie league is the best option until you gain your footing.


You might be thinking: how can a fantasy sports game keep running despite these turbulent times with no sport?

Well, the Sorare team found a solution until football resumes: Replay Tournaments! They are replaying game fixtures at random from the 18-19’ and 19-20’ season.

You can find more information about the current game here.

In the case you missed it, Sorare has recently brought to Ethereum: Cristiano Ronaldo, Maradona, and more than 45 officially licensed clubs.

Cristiano Ronaldo’s unique card is currently on sale!

4 – Choose your Manager Strategy

There are three strategies to choose from:

  1. Collectors: Criteria such as the popularity of player IRL, team, nationality, age, specific serial numbers or special editions are all factors driving value for these managers. Despite their willingness to bid higher, they are still likely to be speculating that the cards future value will appreciate materially in the long term. Think of the implications of buying Maradona before he was playing in Europe.
  2. Traders: The objective is simple—buy cheap and resell at a higher price with a focus on short-term. Players are bought and re-listed often based on the player’s real-life form and/or favorable upcoming fixtures. They act here like market makers or liquidity providers for the secondary market. 
  3. Gamers: Gamers are primarily motivated by assembling the most competitive Tournament team(s). This does not mean that there is no financial rationale for this strategy, as it is the in-game rewards that are being targeted to provide the immediate return on investment.

Pick a strategy based on your talents and interest areas.

Final thoughts 

While the potential for DeFi to create an open financial system is one of the driving narratives in Ethereum right now, finance does not necessarily resonate with the majority of people. Andrew Steinwold explains why here.

Statistics from Nonfungible or StateofTheDapps clearly show gaming are still the crypto apps with the most amount of daily active users. More importantly, there’s evidence that these games onboard non-crypto enthusiasts.

I believe that a mainstream game category like fantasy sports, with the right NFT game economics (with prices driven by in-game utility and scarcity) and the biggest sport in the world, could introduce crypto to the masses.

The retail market doesn’t care about ideology, it cares about better products. There are 200 million people playing fantasy sports each year (a number increasing every year), with zero professional infrastructure.

NFTs make it possible for the best fantasy managers to earn money by playing fantasy sports. And it’s just getting started.


Author bio

Brian O’Hagan is Crypto Strategist around Decentralised Finance & Open Games. He’d like to thank PAP for the extra content from his Youtube channel, YNWA for proof-reading, and SorareData for the awesome data!


Action steps


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Aave

Aave is an open source and non-custodial protocol for money market creation. Originally launched with the Aave Market, it now supports Uniswap and TokenSet markets and enables users and developers to earn interest and leverage their assets. Aave also pioneered Flash Loans, an innovative DeFi building block for developers to build self-liquidations, collateral swaps, and more. Check it out here.


Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

🎙️ What’s an Etherean | Nic Carter

https://bankless.substack.com/p/-whats-an-etherean-nic-carter

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🎙️NEW PODCAST EPISODE

Listen to episode #16 | iTunes | Spotify | YouTube | RSS Feed


Tools from our sponsors to go bankless:

  • Multis – bank your business without a bank (1 mon. trial!)
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  • Aave – money lego for lending & borrowing

Episode: #16 – What’s an Etherean? | Nic Carter
June 8, 2020

Nic Carter is one of our favorite writers in crypto. He’s shaped our thoughts on many subjects over the years. Now we got to sit down and talk the challenging stuff. The stuff typical podcasts never as him…we dive right in.

He’s a bitcoin yes…is he an Etherean? He’s bullish on stablecoins…is he bullish ETH value accrual? He thinks free banking is good…does he think Maker is good?

Nic believes in bitcoin values…does he believe in bankless values?

This episode is jam-packed with insights.

Here’s what we covered:

  • Is Nic an Etherean?
    1. What does Etherean even mean?
    2. Are stablecoins good or bad for ETH?
    3. Why the entire point is blockspace demand
    4. How economically dense transactions win
    5. Settlement assurances & property rights
    6. Why crypto banks aren’t all bad
    7. Emerging digital nation states
    8. Will this bankless thing work?

Plus Ryan & David discuss:

  • How David got pepper-sprayed last weekend
  • Bankless as an anti-authoritarian movement
  • Building it up not burning it down

Join us next Monday for a fresh episode!


Resources discussed:


Episode Actions:

  1. Read some Nic Carter articles! (see above)
  2. Catch up on previous episodes (#2, #7, #12)
  3. Pump Bankless by giving us a 5-star review on iTunes!

Subscribe to the podcast on iTunes | Spotify | YouTube | RSS Feed

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How to protect your ETH with Opyn

https://bankless.substack.com/p/how-to-protect-your-eth-with-opyn

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Dear Crypto Natives,

Derivatives drive more volume than spot trading in every market on the planet.

Spot trading? Thats buying on an exchange like Coinbase—a basic trade.

Derivatives? Those are options, futures, and swaps—the advanced stuff.

Bitcoin and the crypto banks started with spot. But today Bitcoin derivatives are 5x the size of spot trading! Derivatives always dwarf spot…eventually.

We’re in the very early stages of the same thing happening in DeFi. Spot first. Now derivatives. Need more evidence? Just look at the growth of Opyn—a new options market & the subject of today’s tactic.

5x just last month! 🔥

So let’s level up on derivatives. They’re not scary when you dig in.

Today’s tactic is a practical way to start—you’re going to use a derivative—an option on Opyn—to protect some ETH against downside price risk. It’ll take you 5 mins.

I think DeFi is going to make derivatives more accessible than ever.

Do this tactic and see if you agree.

-RSA


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TACTIC TUESDAY:

Tactic #40: How to protect your ETH with Opyn

Guest Post: Aparna Krishnan, Co-Founder of Opyn

If you’re long ETH, you’re probably used to ETH prices going up, down, and all around. But if you’re tired of all this volatility and want stability, you can use Opyn to protect your ETH. Keep the upside, and minimize your downside!

With Opyn, you can either reduce your own risk by “buying protection” or de-risk someone else by “selling protection”. In this tactic, we’ll cover what it looks like for someone to protect themselves against ETH volatility using Opyn.

  • Goal: Buy protection on your ETH using Opyn
  • Skill: Beginner / Intermediate 
  • Effort: 5 minutes
  • ROI: Peace of mind & minimize your downside (feel better about holding more ETH!)

What is Opyn?

Opyn is built on a generalized options protocol called the Convexity Protocol.

What are options?

Financial options give the option holder the right but not the obligation to do something. What is that something? Depends on the type of option 😉.

There are two types of options:

  1. Put Options: Put Options give the holder of the option “the right but not the obligation to sell an asset at a pre-specified price”.

    Ex: I have a bunch of Tesla shares and I’m afraid they are going to drop in price as I doubt Elon’s vibe. But I don’t want to sell all my Tesla shares since I work there and hope they might go up in price once Elon’s music skills improve. To protect myself against the possibility of TSLA crashing, I can buy put options on the shares, effectively limiting my downside while keeping my upside!

  2. Call Options: Call Options give the holder “the right but not the obligation to buy an asset at a pre-specified price.”

    Ex: I want to buy Unisocks but I have too many socks right now, so I should probably wait for my laundry machine to put more holes in my socks before I buy the Unisocks. But, what if Unisocks go up in price since the entire DeFi squad wants to buy them? I can buy a call option on Unisocks so that I can still buy them at today’s price a month from now.

With all of that in mind, Opyn currently supports Put Options. So, for the rest of this blog, we’ll be diving deeper into put options. If you’re interested, you can learn more about options payoffs here.

How does Opyn protect me?

Opyn uses protective put options on ETH to allow option buyers to keep their upside while limiting their downside.

If you bought ETH at $100 and hold it, when the ETH price falls below $100, you lose money.

If you buy Opyn protection, you are buying “the right but not the obligation to sell your option at a pre-specified price”.

In this case, let’s assume that the pre-specified price is $100 ”, so if ETH price falls below $100, you can sell your ETH for $100, which is above the market price. The best part is, you can now buy even more ETH with this fat profit!

How do I use Opyn?


Requirements: Desktop browser using Metamask only. You’ll need your laptop and some ETH / Dai / USDC in your Metamask for the following section!


  1. Go to opyn.co 

  1. Scroll down & select parameters in the Hedge ETH risk section
    1. The expiry is the date that your protection will expire on. You are protected until that date.
    2. Strike Price is the pre-specified price that you are guaranteed to be able to sell your ETH at.
    3. The Protection Cost is how much it would cost you to buy 1 ETH worth of protection.

    Choose the parameters that work best and click the “buy” button on that row. This will take you to the “buy” page for that specific protection.

  2. Connect your wallet by clicking the “connect wallet” button in the top right corner

  1. Now click the “continue purchase” button on the center of the screen. The available liquidity on Uniswap tells you the maximum amount of ETH you can protect. For reference, 1 oETH protects 1 ETH. 

  1. Input the amount of ETH that you want to protect and you will see how much it costs to protect that quantity in the box below.

  1. Hit “confirm” and sign the transaction through Metamask to finish your purchase. And that is it! You’re protected. You can check out the transaction on Etherscan. 😎

How do you exercise your option?

If the ETH price falls below the strike price, in this case $160, you can “exercise your option” i.e. “sell your ETH for $160”. You could even go buy more ETH with the profits if you’d like!

How do you sell your option?

You can also cancel and sell off your protection early. Even if ETH price doesn’t fall below $160, but crashes from $200 to $161, it can be profitable to sell your protection early since it is now more valuable than when you bought it. This should help offset some of your losses from the ETH price crash and hence acts as a valuable hedge.


If you want to learn more or run into any trouble join the Opyn Discord!


Further Resources to learn more about Options


Author Bio

Aparna Krishnan co-founded Opyn, a DeFi protection and risk management platform. Aparna joined the Thiel Fellowship after attending UC Berkley where she was an active member of Cal Blockchain – one of the leading student blockchain organizations in the US.


Action steps


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Aave protocol is a decentralized, open-source, and non-custodial money market protocol to earn interest on deposits and borrow assets. It also features access to Flash Loans, an innovative DeFi building block for developers to build self liquidations, collateral swaps, and more! Check it out here.


Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

How to use Gnosis to profit on stablecoins

https://bankless.substack.com/p/how-to-use-gnosis-to-profit-on-stablecoins

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Dear Crypto Natives,

Another money protocol was born last month. A liquidity protocol called Gnosis.

Three reasons it’s worth learning about:

  1. It’s on the trustless end of the spectrumhigh density—like a Uniswap
  2. It takes a new approach to liquidity—not AMM, not orderbook—batch auction!
  3. You can do cool stuff with it today

We’re going to focus on that last part in today’s tactic.

Specifically, how can we use this batch auction mechanism to profit on stablecoin mis-pricing—almost passively?

You’ll remember tactic #34 where we showed you how to do this with automated market makers like Balancer. Turns out we can do it with Gnosis too!

Cool right?

Let’s dive in!

-RSA


🙏Sponsor: Aave—earn high yields on deposits & borrow at the best possible rate! 


TACTICS TUESDAY:

Tactic #39 
How to use
Gnosis to profit on stablecoins

Stablecoins are low-volatility assets that approximately peg the US Dollar. However, in practice, stablecoins tend to deviate from the $1.00 price point. In today’s tactic we’re going to show you how to use the Gnosis protocol through the Mesa exchange front-end to exploit this spread and make a profit. In the the process you’ll learn about the Gnosis protocol—the most trustless Ethereum exchange mechanism since Uniswap.

  • Goal: Provide liquidity to Mesa DEX and slowly earn a spread
  • Skill: Beginner/Intermediate
  • Effort: 10-15 minutes
  • ROI: Variable

Note: the Mesa exchange is still in beta and the Gnosis protocol is new. Be aware of the risks!


Guest post by: Ingamar Ramirez is a freelance writer for Blockchain startups

This is a chart of stablecoins.

Each of the spots where the lines are over $1.00 were opportunities to sell stablecoins at a spread using the Gnosis protocol and earn profits. This tactic will show you how.

But first, what is Gnosis?

Gnosis—the Liquidity Maximization Protocol

The Gnosis Protocol enables trading platforms to execute “ring trades”, which can match three or more people trading multiple assets. Detailed in the image below, this allows their orders to be fulfilled simultaneously when they would not have been able to otherwise.

(Above) Image from Gnosis Developer Portal

Here’s the process:

  1. open orders are all laid out at the beginning of a five-minute batch auction
  2. an open competition for the most optimal settlement solutions is run by solvers to maximize trader welfare and provide single clearing prices
  3. after five minutes, orders are filled and settled on-chain by the time the next five-minute batch auction begins.

That’s it!

Mesa—a front-end for Gnosis

Mesa is the latest frontend built on the Gnosis Protocol and hosted by the DXdao.

While still in beta, it offers a market trading interface (reminiscent to Uniswap) with an additional feature: 

Liquidity Orders 🔥

Liquidity Orders allow users to set a spread at which they are willing to sell their stablecoins for other stablecoins (i.e., 0.3% spread to always sell 100 DAI for 100.3 USDt, or buy 100 USDt for 99.7 DAI). This is predicated on the assumption that your stablecoin is always worth at least $1.00. A liquidity order costs a one-time gas fee but after it you can simply sit back and observe your order’s progress. 🏖️


⚠️ Ideal for large liquidity providers. Liquidity Orders on Mesa are typically ideal for large liquidity providers due to the initial gas fee. However, once this Liquidity Order is submitted, all transactions are gasless indefinitely until you decide to change or terminate your Liquidity Order.


How to submit a liquidity order on Mesa

Let’s submit a liquidity order on Mesa and try this out.

1. Go to Mesa

At the Mesa front page (mesadev.eth.link) you will see a place to trade your crypto on the left, as per usual for DEXes. After connecting your Metamask wallet, click “Balance” to see how funds are deposited into the platform.


2. Load funds

To load wallet funds into the exchange platform, click Enable, corresponding with the stablecoins you wish to deposit for your Liquidity Order.


⚠️ Note: After signing through Metamask, the Enable button will be replaced with a + and – symbol. “+’’ allows users to deposit, while “ – ” allows users to withdraw back to their wallets. You do not need to Enable a coin to withdraw it.


Depositing with Metamask will prompt another signature request, and after your approval you can move on to the next step by clicking the Liquidity tab.


3. Set Liquidity Order

Now you will see the “New Liquidity Order” page, where you can select which stablecoins you wish to include. The more you include, the more opportunities your Liquidity Order will have. Before continuing make sure you select the stablecoins you wish to add to this order.


⚠️ Note: the more tokens to be included in the liquidity order the higher the gas fee.


In the next section, you will be prompted to define the spread. This means inputting the profit you intend to make under the assumption that your stablecoin is worth $1.00. The higher the spread, the less likely the orders will fill. The lower the spread, the more likely orders will fill, but with less profit.

Some things to be aware of:

  • When you hit “Submit Transaction,” you may wish to lower gas fees to save on ETH. However, this may jeopardize order fulfillment, as there is only a 15-minute window for these transactions to be mined. It is recommended to either not lower, or raise the one-time gas fee for your Liquidity Order, so that miners can fulfill the transactions in time.
  • Once your Liquidity Order is submitted, there is no more work to be done. Transactions from here on are gas-free.


4. Sit back & wait

That’s it—your trading work is done.

You can check back periodically to see if profits are gained.

Today, the best way to know if profits are gained is to check the Balances tab and see if your balances have changed. In the future there will be alternate ways to check this.

You can also head back to the “Trade” to view the orders. These are combinations of the stablecoins you selected in the Liquidity tab. There is nothing you need to do here, as it is just for display. However, you can cancel any number of these orders if you so choose. (The Closed tab is for spot orders on the left, or closed Liquidity Order pairs.)

The Future

Gnosis is a liquidity money lego for batch auctions. It maximizes liquidity at low cost for certain types of trades. In four steps steps you were able to execute a liquidity order on Mesa using the Gnosis protocol to profit on stablecoin spread across a range of stablecoins.

No bank. No centralized exchange. Just you and your Ethereum wallet.


💰Want to go deeper and earn more? There’s an incentive program running for liquidity providers to earn GNO tokens as they trade on Mesa. More in Gnosis discord.


Author bio

Ingamar Ramirez is a freelance writer, copy editor, and marketing consultant for blockchain startups. He hosted two seasons of Top of the Block podcast and is currently focused on DAO-related content.


Action steps

  • Understand the basics of Gnosis—a batch auction money protocol
  • Use a Liquidity Order on Mesa to profit on stablecoins when they rise above $1

Go Bankless. $12 / mo. Includes archive accessInner Circle & Deals(pay w/ crypto)

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🙏Thanks to our sponsor

Aave

Aave is an open source and non-custodial protocol for money market creation. Originally launched with the Aave Market, it now supports Uniswap and TokenSet markets and enables users and developers to earn interest and leverage their assets. Aave also pioneered Flash Loans, an innovative DeFi building block for developers to build self-liquidations, collateral swaps, and more. Check it out here.


Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

5 Ways Crypto is like early Visa

https://bankless.substack.com/p/5-ways-crypto-is-like-early-visa

There was a time when Visa was revolutionary tech. How could a plastic card replace real money? People would never accept it. Merchants would never accept it. Banks would never adopt it.

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Dear Crypto Natives,

Does this early 1970’s Visa ad remind you of anything?

This thread from Emanuel drew me in.

There was a time when Visa was revolutionary tech. How could a plastic card replace real money? People would never accept it. Merchants would never accept it. Banks would never adopt it.

It would fail.

But it didn’t fail. It changed commerce. Many of us grew up using plastic—not cash.

Are there parallels between early Visa and modern crypto?

There are! Read on…some of these will blow your mind.

– RSA


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THURSDAY THOUGHT

5 Ways Crypto is like early Visa

Guest Post: Emanuel Coen, creator of Cryptotesters.com

If you’re going bankless, you’ve probably been following the crypto space for a while. In the darkest moments, amidst market turbulences, you might have found yourself asking if and when Ethereum is going to become a core piece of financial infrastructure. We humans are impatient and sometimes fail at recognizing that ambitious projects take time.

Bill Gates said it best…

To make sense of the present, I like to look at the past. Recently, I read David Stearn’s book ‘Electronic Value Exchange’ and I was mind blown by the amount of parallels between the early days of Visa and crypto today.

What is Visa?

Before we look at those parallels, we first must understand what Visa is. Many readers may be surprised to learn that Visa itself does not actually issue cards. Visa is not a bank, nor is it a public utility or a governmental institution. Visa does not extend credit to consumers, nor maintain their accounts. It does not recruit businesses to accept the cards bearing its name, nor does it maintain their accounts. It does not even build or sell those little point-of-sale terminals used to read the cards. So what is Visa, and what does it actually do?

Visa is in essence an enabling organization. For most of its history, it has been a not-for-profit cooperative membership association, owned and governed by the same set of financial institutions it serves. Visa provides an infrastructure, both technical and organizational, in which multiple competing financial institutions can cooperate, just enough, to provide a service that none could have realistically provided alone.

In short, Visa makes money move.

Ok, with that grounding let’s look at 5 ways crypto is like early Visa.

#1 Money Memes 💰

Turns out changing people’s money habits and views on the nature of money has never been easy. Dee Hock, the founding father of Visa knew he had to first get people accustomed to electronic payments before they would trust this new method to exchange value over banknotes and paper checks. That’s why Dee made advertising a personal mission. From media ads to brochures and corporate business cards, everything that had an impact on how Visa was perceived by the public, went through him. “Think of it as money” was Visa’s iconic tagline and first big advertising push. The campaign ran on television, print and other news outlets. Interestingly, it was not just paid for by Visa itself but by all member banks.

Today in crypto, memes are an incredibly powerful method to spread ideas around the utility of crypto. However, we don’t need to rely on firms to run advertisements. In crypto, every investor is a stakeholder and memes like “ETH is money” or “Money Legos” emerge organically as they are created by the community.


#2 Airdrops! 💸

Visa knew that every payment system relies on network effects to become successful. In Visa’s case, that meant growing a merchant base that would accept Visa cards as well as getting credit cards in the hands of users.

To bootstrap a user base, Visa member banks literally airdropped cards to people’s homes and gave them a line of credit without asking any questions. Once users started using these cards, banks learned more on their clients purchasing behaviour and were able to adjust credit lines.

This practice was later made illegal by the US congress. Not only was it controversial at the time to incentivize people to take on debt, the practice was also incredibly insecure as cards were regularly stolen out of mailboxes. Since users didn’t even realize they had been issued a card, the fraud would often only be discovered a month later when they received their first card statement by mail.

Does this remind you of all the phishing schemes in the crypto space and how negatively crypto is often portrayed by the press?

#3 Bad UX 😢

We often talk about bad UX in crypto but it pales against the UX of card payments in the 1970’s.

Let’s go through a typical transaction to see how that’s true. Let’s say you’re the holder of a ‘Visa’ card (called BankAmericard at the time) and want to pay for a TV. Since the transaction amount would have been above the merchant’s floor limit (typically $50 but sometimes higher for airlines and hotels), the merchant had to call their bank (acquirer) and verbally convey the transaction details to get a transaction authorized.

Next, the acquirer would call the issuing bank of the customer, which would manually check:

  • if the card was not on a ‘black list’
  • the user’s current balance, credit limit and purchase history

If everything was in order, the issuer would return an authorization code to the acquirer and the acquirer would give this authorization code to the merchant who was waiting on the line during this entire process. The merchant would then get the customers signature and write it on a ‘sales draft’ along with the authorization code.

The entire process took 15 minutes on average. Don’t ask me why anyone voluntarily chose this payment method.

For the customer, the story ended here but for the banks it continued as the payment was only cleared not settled.

Post-sale, merchants had to send their sales draft to their acquiring bank by mail who had to sort all the incoming drafts manually to chase the payment up with the issuing bank. Finally, the issuing bank would settle the payment through the normal check clearing system.

The process was incredibly prone to error and unsurprisingly, there were always disputes between the banks.

It took a lot of technological innovation and experimentation (there were competing payment networks’) to get the payment experience right. Point-of-sale devices, the magnetic stripe and high-speed communication networks between the authorization centers all eventually helped replacing human authorizers with automated computerized logic but it didn’t happen overnight.

And you thought sending a transaction using MetaMask was hard!

#4 The Revolution 🏴

The creation of Visa was accompanied by a similar feeling of transformation than many have in crypto today. In fact, Dee Hock would certainly be a crypto fan today.

A quote from Dee:

If electronic technology continued to advance, and that seemed certain, two-hundred year old banking oligopolies controlling the custody, loan, and exchange of money would be irrecoverably shattered.

Another:

“Nation-state monopolies on the issue and control of currency would erode…The vast preponderance of the system would fall to those who were most adept at handling and guaranteeing alphanumeric value data in the form of arranged particles of energy.”

Last one:

“Inherent in all this might be the genesis of a new form of global currency.”

Hock had been slowly coming to the realization that “money” had become nothing more than “guaranteed alphanumeric data” and that the traditional competences of banks would start to matter less and less in the decades ahead.

No better way to guarantee alphanumeric value data than on a Blockchain no?

#5 – Credibly neutral 🏳️

Dee knew that in order for banks to join, the network had to be credibly neutral. Afterall, the member banks were competitors at heart. That’s why Visa was formed as a jointly-owned organization (no stocks, dividends) and all accumulated net revenue was used to finance the ongoing work of the operation.

It was crucial to create an organizational structure that would balance out incentives and assure that even small banks had a say in decision making. Thus, at core, the Visa network consists of operating regulations. A series of rules and regulations that govern everything from the physical design of the card, to the fees each party must pay and the rights and responsibilities each party has during a transaction dispute. These rules along with Visa’s role as a sort of judiciary, created the necessary trust between the members that was fundamental for the system to function and grow.

Blockchain’s have these operating principles baked into the protocol and remove the need for mediation in disputes. Moreover, they significantly loosen the requirements for participation. Issuance and settlement must occur according to the credibly neutral rules of the a blockchain protocol—they rules are executed by code and maintained by the social consensus of users.

Interestingly, Hock later said that he always wanted to include participating merchants and even cardholders as full owners in the Visa organization, but the idea was always strongly resisted by the licensee banks.

Final Thought

If Visa is an enabling organization, then crypto is an enabling platform and there are important differences.

In Ethereum’s case, an organization to rule over the network is no longer necessary as blockchains provide economic finality and transactions are not subject to disputes. Furthermore, actors can not only cooperate, Ethereum’s composability means that developers can plug into any existing application to build services that they alone couldn’t provide. Instead of just moving fiat currencies, the Ethereum network moves all sorts of financial assets from fiat currencies to securities and digital collectibles.

Lastly, participation in Ethereum is open to anyone and encompasses individuals just as much as organizations. In other words, crypto networks like Ethereum are the logical next step of the evolution of a value exchange network.

But for all these differences, both early Visa and current crypto have strong parallels. Money memes, airdrops, UX issues, a revolution, and credibly neutrality were important to Visa in the 1970s and are important to crypto today.

How we exchange value is about to change. Again.


Action steps

  • What are the 5 ways Crypto is like early Visa?

Guest Author Blub

Emanuel Coen is the creator of the crypto product comparison platform Cryptotesters.com, showing people who are interested to get started with crypto, which wallet to use or where to buy crypto. More categories such as loans, saving accounts and decentralized exchanges are planned soon.


Subscribe to Bankless. $12 per mo. Includes archive accessInner Circle & Deal Sheet.

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Aave protocol is a decentralized, open-source, and non-custodial money market protocol to earn interest on deposits and borrow assets. It also features access to Flash Loans, an innovative DeFi building block for developers to build self liquidations, collateral swaps, and more! Check it out here.


Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

Crypto-fiat: Mutualistic or Parasitic?

https://bankless.substack.com/p/crypto-fiat-mutualistic-or-parasitic

$9b in stablecoins now….🚀

The question is: are they mutualistic or parasitic to their host networks?

Nic dives into the data, considers arguments, and explores in depth in today’s piece.

Level up your open finance game three times a week. Subscribe to the Bankless program below.

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Dear Crypto Natives,

$9b in stablecoins now….🚀

The question is: are they mutualistic or parasitic to their host networks?

Nic dives into the data, considers arguments, and explores in depth in today’s piece.

I love the way Nic thinks—the analogy of Ethereum as a monetary sovereign is one of my favorite ways of looking at the system and he provides phenomenal depth here.

And here’s what I realized after reading—there’s so much more to discuss!

What if stablecoins become 10x the marketcap of native crypto assets?

What’s the role of trustless economic bandwidth?

Do all these arguments apply to Bitcoin?

So I asked Nic to come on the Bankless podcast to go in-depth. Look for that episode in early June. In the meanwhile, you can tell us what followup questions this article raised for you in the comments section. We’ll hit them in the podcast.

– RSA


🙏Sponsor: Aave—earn high yields on deposits & borrow at the best possible rate!


THURSDAY THOUGHT

Crypto-fiat: Mutualistic or Parasitic?

Post by: Nic Carter, Partner at Castle Island Ventures

Crypto-fiat has exploded in recent months. By this, I mean representations of either bank or system liabilities that circulate in tokenized IOU form on public blockchains. Or as most people know them, stablecoins. They’re quite popular these days:

Source: Coin Metrics

Generally speaking, these tokens target the return profile of sovereign-issued fiat currencies like the US dollar. They achieve this in a variety of ways. The simplest is treating the token as a bearer instrument which entitles the holder to claim an equivalent amount of electronic dollars held by the issuer. The issuer’s willingness to increase and decrease the supply in response to market forces, in conjunction with a willing set of arbitrageurs, ensures that the token generally trades at par.

The second approach involves using more volatile collateral, for instance the “native units” of public blockchains, to create crypto fiat. This is more complex and less efficient, in that more collateral is required to create one unit of crypto fiat, since it fluctuates relative to the peg. In practice parity is maintained through the combination of overcollateralization, programmatic risk management, and interest rates. The non-bank or crypto-endemic nature of the collateral is an obvious selling point. Lastly, you have a model in which a pool of capital providers assumes the role of an ersatz currency board, and is trusted to stump up funds to defend a peg in times of distress (and is rewarded with seigniorage in times of growth). (RSA note—this is DAI’s model)

The precise mechanics of crypto-fiat systems don’t particularly matter for the purpose of this article. Let’s assume that they work reasonably well and will continue to work in the future. The public blockchain that they circulate on doesn’t really matter either — these questions apply to any standard public blockchain where a native unit (BTC, Ether, etc) coexists with dollar-denominated tokens.

Recently, as crypto-fiat tokens have come to represent a larger portion of economic throughput on popular blockchains, questions have emerged as to their potential impact on the underlying systems. Some analysts refer to them as “parasitic” to the systems that they circulate on. The question is this: if crypto-fiat proves more attractive to transactors than the more volatile native unit, does this compromise the security of the system entirely? And what does it mean for the native currency unit?

To assess this question let’s briefly look at the usage characteristics of crypto-fiat. Just how big are they? And are they really displacing native cryptocurrencies?

Crypto-fiat transaction dynamics

Here I will limit the analysis to Ethereum, as it is the home of about 75 percent of outstanding tokenized dollars. Let’s start by looking at stocks.

Source: Coin Metrics

Today, crypto-fiat on Ethereum accounts for just over $7b, compared to Ether’s market cap of about $24b. A non-exhaustive sample of the largest non-stablecoin tokens on Ethereum adds up to about $10b. So Ethereum still has a “top heaviness” ratio (value of non-native tokens / value of native token) of less than 1. It’s occasionally claimed that non-native tokens exceeding the value of the native token would put a chain critically at risk; I see no reason to believe that this would be the case. However, if non-native tokens outpaced the native unit by a factor of say, 5, that might be cause for concern. I expect that top heaviness will be a long-term feature of virtually all token-bearing blockchains.

What of flows? Arguably more important is the actual economic throughput facilitated by these systems. Stablecoins still account for a relatively small (but growing) share of on-chain transactions. Transactions that result in transfers of Ether are still more popular, while other tokens have been marginalized.

Source: Coin Metrics

Arguably most important is the actual value being transacted on-chain. You can see that, despite accounting for fewer transactions, crypto-fiat has come to dominate the transactional throughput in dollar terms on Ethereum. Other ERC20 tokens are almost irrelevant. Note that there’s significant imprecision in this data, and I’m relying on the adjustments the Coin Metrics team makes to avoid self-spends, churn, and spammy behavior types.

Source: Coin Metrics

If you depict it in market share terms, you can see Tether eating into Ether’s territory. Even leaving Tether aside, other stablecoins like USDC, BUSD, and DAI account for a considerable amount of value transacted.

Source: Coin Metrics

The big spikes you see in ‘Other ERC20s’ mostly have to do with tokensales. The first big one is the Augur tokensale and that big cliff in mind-2018 is when EOS went to mainnet. Other spikes include activity relating to ZRX, Enigma, BNB, LEO, and Chainlink. However as tokensales became less popular, and lots of tokens that were merely using Ethereum as a pre-mainnet staging ground moved on to the next stage, the relative influence of ERC20s has declined, and crypto-fiat has rocketed to the fore.

By combining these charts you can infer that stablecoins are satisfying a large amount of transactional value with a relatively small monetary base. Computing a naive velocity figure (a measure of how many times a given unit ‘turns over’ in a year) confirms this.

Source: Coin Metrics

Stablecoins exhibit very high velocities when compared with native units: they are used transactionally much more than generic cryptocurrencies (Bitcoin has a similarly low velocity in the single digits). This isn’t altogether too surprising. We know that stablecoins have effectively taken over the inter-exchange settlement use case and are now treated in many parts of the world as non-bank dollar substitutes.

Lastly, it’s important to note that stablecoin transactions are quite different from Ether transactions. The latter tend to be much smaller, in the tens of dollars, whereas your typical stablecoin transaction settles thousands of dollars worth of value.

Source: Coin Metrics

The installed userbase of stablecoins is still relatively small. As of today only about 1.3m addresses across all the various stablecoins on Ethereum hold over $1 in their accounts; the equivalent figure for Ether is 12 million. So we have a smaller, but extremely engaged userbase of active transactors using stablecoins for large, frequent transactions, on a smaller monetary base. It’s worth caveating again that we can’t know for certain if these are crowding out Ether transactions or merely adding to them; but they all compete for the same blockspace, and ceteris paribus, the larger transaction should be willing to bear a higher fee.

Given that stablecoins have attained such popularity in a relatively short period, it’s not too far-fetched to imagine a world where the vast majority of transactions on Ethereum are dollar-denominated. The exchange risk for the duration of the transaction (or contract) appears to be so unpalatable as to compel transactors into using non-native assets. I don’t know whether the architects of Ethereum envisioned this possibility, but now that it appears possible it’s worth contemplating its implications.

So does the growth of crypto-fiat help or hurt the Ethereum system?

Ether-dollarization

There’s a simple feedback loop that powers cryptocurrency systems. Users find a certain type of blockspace desirable, so they acquire the native unit to transact. They also pay fees in those native units. That reservation demand (holding a native unit for a nonzero time period) is a source of buying pressure. The appreciation in the native unit in turn feeds back into security (and optionally, pools of capital like developer funds) as security is generally a function of issuance and unit price. As security and hence settlement assurances increase, the blockspace becomes more attractive. In a proof of stake world, this is simplified: security is presumed to be a function of market cap. If you can induce transactors to buy, hold, and use the native unit for long term contracts or settlement collateral, that demand should be manifested in price, making the system more secure.

Stablecoins puncture that somewhat. Not only do they potentially replace demand for the native unit as a settlement medium, they also force transactors to juggle multiple currencies—one for actual payments, the other for paying fees. Imagine sending a bank wire and being asked to honor the $10 wire fee in the form of shares of your bank’s stock. You would probably just prefer to pay the fee in dollars. (I should note that proposals exist to liquidate tokens to ETH in the background so users can transact without owning ETH.)

There are exceptions, though. Dai is collateralized by Ether on the backend, so even when employed as a transactional unit, it still manifests reservation demand for Ether. Dai has slightly compromised on this vision of liability-free collateral by introducing USDC, BAT, and Wrapped Bitcoin into the collateral mix, however. For now, the most prominent transactional medium (measured in dollar terms) on Ethereum is Tether, which is backed by dollars in a network of offshore banks. While the Dai approach is far more elegant in terms of maintaining the feedback loop of transactional demand ➡️ reservation demand ➡️ security ➡️ transactional demand, Dai accounts for a relatively small fraction of the stablecoin market. Even certain DeFi use cases that began as the exclusive purview of Dai have begun to be serviced by the more pedestrian, dollar-backed USDC. Dollar-backed stablecoins are simply cheaper to issue. While Ether-backed stablecoins promise a harmonious vision of stable transactional units while retaining the native unit as collateral, it appears that generic fiat-backed stablecoins have the upper hand for now.

Protocols as monetary sovereigns

I find it helpful to think about the problem in the context of nation-states managing their own currencies. They deal with very similar problems: how to enforce a local monopoly for their sovereign currency and ensure it holds its value. Sometimes these states fail in that task and suffer currency substitution on the part of their citizens; this is referred to as dollarization. You might say that, just as in Venezuela, the Kingdom of Ethereum is being threatened with dollarization right now. The question is whether Ethereum has the toolkit to resist this phenomenon or, at least, to de-fang it.

As the local sovereign authority, Ethereum (the protocol) endows Ether (the monetary unit) with certain privileges, the same way the US government gives the dollar privileges. Let’s briefly consider what gives the dollar its strength. It is a conjunction of both explicit privileges and emergent properties which result from systems the US guarantees and maintains.

The dollar’s explicit privileges include:

  • The fact that it’s the sole currency that the Treasury will accept for tax payments
  • Legal tender laws which define Federal Reserve notes effectively as a valid and legal medium in which to settle debts and pay for things
  • The creation by the US government of tax liabilities, forcing businesses and individuals to acquire or retain dollars to pay taxes (if they turn a profit / make sufficient income)
  • The dollar’s exemption from capital gains taxes owing to appreciation in the currency, unlike foreign currencies

There are also some emergent features which backstop the value of the dollar:

  • The US government will only accept dollars in exchange for Treasury bills, widely considered the safest form of government debt
  • Buying securities domiciled in the US like stocks or bonds requires dollars
  • More generally, the US is the effective guarantor of the post-WWII western system of international commerce, causing the dollar to be a settlement medium for trade, both within the US and internationally
  • The US maintains longstanding arrangements with countries like Saudi Arabia in which they agree to denominate the sale of oil in dollars, and in exchange receive protection and military assistance from the US
  • The dollar tends to be more reliable and stable than other currencies, so it is held as a means of preserving purchasing power, even outside the US

Contrary to popular belief, there’s nothing actually stopping Americans from using another currency as a transactional medium, except for the fact that it would be really inefficient, would entail exposure to frictions like capital gains taxes, and transactors would eventually have to acquire dollars for tax purposes anyway. Zeroing in on taxation as the sole driver of the dollar’s value (as many individuals do, when posed the question), is somewhat reductive. While the US does endow the dollar with certain explicit qualities, you could say what it really does is cultivate an environment where it’s generally a good idea to hold dollars. These factors combine to create a very strong reservation demand for the dollar, both within the US and abroad.

It’s also worth mentioning that some countries impose capital controls to prevent their currencies floating on the open market. Instead, they tune the demand side of the equation by effectively prohibiting their citizens from exiting the currency for another. It goes without saying that cryptocurrencies, lacking a government or military, do not have the means to enforce anything resembling capital controls. To the contrary, they are globalized, largely frictionless, and highly portable.

How does Ethereum stack up? It’s not a nation-state and lacks the ability to directly intervene in the economy the way a government might. Moreover it’s inextricably linked to the crypto markets and cannot prevent the free flow of capital. The rise of crypto-fiat can’t exactly be impeded through capital controls. Nevertheless, Ethereum can endow Ether with certain privileges. Borrowing from these common arguments for why Ether will hold value, let’s start with Ether’s explicit privileges:

  • Ether is the default unit for fee payments, and fees are mandatory in order to send a transaction
  • Ether payments are ‘discounted’ relative to tokens: sending ETH requires 21,000 gas whereas tokens require 40,000+ gas
  • A portion of fees paid in Ether will likely be burned (if EIP-1559 is accepted)

Ether’s emergent features are as follows:

  • Ether is collateral in contracts on Ethereum and a settlement medium for intra-protocol applications (like Maker etc.)
  • A significant fraction of Ether may be locked up when proof of stake emerges
  • Ether is the reserve currency for token issuance on the platform (like ICOs) and more generally, as a base currency (alongside Bitcoin) for the crypto market at large
  • Ether is an object of speculation; some people take a position just for the sake of it

To briefly address the less compelling arguments: ICOs appear passé and don’t seem to be returning anytime soon. While many altcoins trade against ETH, their dominant pairs are BTC and increasingly USDT. Speculation alone isn’t a sufficient source of reservation demand at equilibrium, and its presence doesn’t yield any useful analysis. And locking up coins through PoS doesn’t guarantee their appreciation—it is always possible that you have a low-velocity tranche of locked coins with transactors using the remaining non-locked Ether on a short term, as-needed basis. Consider that masternode coins like Dash weren’t spared price depreciation, even though a significant fraction of supply was inert in masternodes.

The most compelling arguments for Ether’s long term value, in my view, boil down to Ether as a necessary asset for fees, and Ethereum’s ability to keep Ether valuable is similar capacity to that of the US and the dollar. The task is to cultivate an environment where it’s generally a good idea to hold and use ETH. More specifically, Ether’s must avoid the joint foes of fee abstraction and settlement medium abstraction.

Fee abstraction

As far as fees are concerned, the Ethereum community seems firmly united against the idea of paying fees in anything other than Ether. It’s worth noting that there is no rule which actually states that a transactor must pay a miner in Ether in order to have their transaction included in a block. They could always make a payment out of band. That said, Ethereum’s protocol itself erects significant barriers to making non-ETH fee payments. Not only are Ethereans highly attuned to the threat of fee abstraction, but Ethereum’s more malleable social contract would likely accommodate a change to the protocol should fee abstraction develop. Already, it looks like EIP-1559, which makes significant alterations to fee logic on Ethereum, will be pushed through.

If you zoom out, insisting that fees be paid in Ether (and then burning them, effectively rewarding holders of Ether at the expense of validator revenue) looks to me like a straightforward form of rent extraction. Imagine an absurd scenario in which the protocol mandated that fees were a colossal 0.5 ETH per transaction. Either transactors would devise an out-of-band method to pay validators (which I would imagine is possible with some creativity, even if the protocol itself forbids it), or they would migrate to an alternative chain without this onerous tax.

While the architects of the Ethereum protocol are free to tinker with it to their pleasure, there’s always the risk that they make the chain unattractive to users. Both the effectively mandatory nature of the fee payment in Ether and then stripping of that fee from validators, and using it to reward holders instead, could discourage putative transactors from using Ethereum. An alternative chain which allowed transactors to pay fees in tokenized USD rather than forcing users to juggle multiple currencies could well use that wedge to seize market share.

Settlement medium abstraction

As with the dollar, there’s nothing which actually requires Ether to be used as the settlement medium on the Ethereum system. And this is really the system feature which is under threat. Fees appear likely to always be denominated in ETH, but fees represent a relatively small fraction of reservation demand, amounting to only 800 ETH per day at current rates. And ETH for fees can be procured on a high-velocity, just-in-time basis, minimizing their demand impact. Far more important is retaining Ether’s status as the dominant transactional medium on chain.

If crypto-fiat becomes firmly entrenched on chain, and marginalizes native units, the valuation of the native unit will suffer. Burns and staking affect the supply side of the equation—what matters is demand. However, Ethereans need not despair. While stablecoins are having their moment in the sun, and eclipsing Ether’s transactional volume for now, they are not perfect substitute goods. Fiat-backed stablecoins carry legal and regulatory baggage which could sting users at any moment. They are not liability free: they depend on an acquiescent set of banks and a benevolent issuer. Counterparty risk is always present. Some on-chain use cases will always require truly native, liability-free collateral.

Poisoned chalice?

The good news is that stablecoins seem to manifest fee pressure for Ethereum. While opinions vary, I am generally of the view that to be sustainable in the long term, as much validator compensation as possible should come in the form of fees (rather than issuance), and that a robust blockspace market is highly desirable. Fees are a form of revenue for the chain, and having revenue streams buys you significant optionality. If you look at just USDT transactions on Ethereum, you can see that periods of heavy load coincide with fee spikes.

Source: Coin Metrics

Note the big spike in Sep. 2019 which manifested in fee pressure with a lag, the trough in January as USDT transactions dropped, and fees creeping up in April as USDT picked up again. Of course there are other confounding variables, so a fuller analysis would be welcome, but copious demand for high-value transactions will always mean willing fee-payers, which is not a bad thing.

One commonly cited drawback of non-native assets on chain is their potential to introduce miner-extractable value (MEV). And if MEV opportunities from non-native tokens grow very large relative to the value of the underlying collateral securing the network, then perhaps an imbalance might develop that could be exploited. The common response is that non-native tokens are not protected solely by crypto-economic measures, but by extra-protocol legal and institutional constraints. For instance, since stablecoins can generally be frozen by their issuers, stealing USDT or USDC might just not be worth it. But then the question is: why bother settling these IOUs on chain, if settlement is in fact a function of the benevolence of the issuer? If these are just paper claims on a database ultimately maintained by a legal corporate entity, why bother with a cumbersome base-layer public blockchain at all, and not a more centralized sidechain?

Ultimately, it appears that some degree of settlement medium abstraction is currently occurring, for a straightforward economic reason—denominating medium and long-term contracts in volatile collateral is simply a sub-par experience. Ethereans should hope that either Ether-backed stablecoins become more prominent, or that custodial stablecoins suffer a series of trust failures, reminding users why liability-free native units are so powerful. The fee abstraction risk appears mitigated for now, but designers should be wary of alternatives. Excessive rent seeking and intermediation may push users towards competitors which welcome stable collateral and maintain a looser attitude to fees.


Action steps


Author Blub

Nic Carter is one of my favorite writers and thinkers in crypto. He cofounded Coinmetrics, an onchain data resource that we use regularlyin Bankless. He was also the first crypto analyst at Fidelity and is now a Partner at VC-firm Castle Island Ventures. His writing was vital to framing how I think about Bitcoin as a value settlement network.


📺Watch Bankless Live at Ethereal Today and Tomorrow

Ethereal is a free virtual conference going on now. Today Ryan & David will be featured on an ETH is Money panel with Eric Conner, Camila Russo, and Anthony Sassano. Tomorrow David is giving a talk on the Protocol Sink Thesis. Don’t miss it!

👉Watch the live stream here!


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Aave protocol is a decentralized, open-source, and non-custodial money market protocol to earn interest on deposits and borrow assets. It also features access to Flash Loans, an innovative DeFi building block for developers to build self liquidations, collateral swaps, and more! Check it out here.


Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

How to start a Moloch DAO

https://bankless.substack.com/p/how-to-start-a-moloch-dao

Today we’re diving into the the world of Distributed Autonomous Organization—herein referred to as DAOs.

Level up your open finance game three times a week. Subscribe to the Bankless program below.

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Dear Crypto Natives,

You know when you put on an old pair of jeans and find $20 in your pocket?

That’s this week on Bankless.

Cause today you’re getting an extra weekly tactic!

Yesterday we covered margin trading in tactic #35. Today we’ll learn how to create a Moloch DAO in tactic #36.

DAOs are awesome—the crypto equivalent of an LLC—a building block for capital.

There are 21.6 million LLCs in America.

How long til there’s millions of DAOs on Ethereum I wonder?

It’s still early days—so let’s level up on Moloch DAOs and front-run this opportunity!

– RSA


🙏Sponsor: Aave—earn high yields on deposits & borrow at the best possible rate!


TACTICS TUESDAY (ON WEDNESDAY):

Tactic #36: How to start a Moloch DAO

Guest post: Cooper Turley, editor of DeFi Rate and MetaClan lead

Today we’re diving into the the world of Distributed Autonomous Organization—herein referred to as DAOs. DAOs are a way for like minded individuals to collectively band together and solve common goals. Thanks to smart contracts, funds are pooled together and governed onchain providing a trustless proposal system to allocate capital using predefined rules.

In recent months we’ve seen the emergence of a number of different DAO frameworks, each with their own sets of benefits and tradeoffs. This tactic will use the MolochDAO framework, largely popularized by DAO’s like MetaCartel due to their simplistic nature and ability to “raqequit” capital at will.

The tactic leverages Moloch V2, an updated framework adding in a suite of new features such as multi-token support, non-voting shares, guildkicks and new proposal types—all of which are described in more detail here.

We’ll dive into the key aspects of DAOs, specifically highlighting what they are good for and what can be done to better manage them and encourage participation. Finally, we’ll show you how to summon your very own Moloch V2 DAO in a few simple clicks using a DAO summoning kit called Daohaus.

  • Goal: Summon a MolochV2 DAO on Daohuas
  • Skill: Intermediate
  • Effort: 10 minutes
  • ROI: ~$5 in transaction fees to spawn a globally accessible distributed fund coordinator

Just DAO It

In the past few months, we’ve seen a rising trend of projects looking to further distribute governance through the introduction of a DAO. By the end of 2020, we’ll see DAOs for major DeFi projects including but not limited to Maker, Kyber, Synthetix and Uniswap. While it’s easy to say that DAOs are on the rise, it’s actually far more interesting to examine what’s going on underneath the hood, specifically focusing on the reason why they add value to any given community.

TLDR: DAOs will not magically engage your community or create one. They are simply a way to better coordinate a group of passionate individuals eager to make a collective impact.

So, what are DAOs even good for? Coordination!

Coordinating capital:

  • Expediting funding to value-added projects or individuals
  • Aligning incentives through skin in the game
  • Creating network effects around a shared value or mission through social signaling (we’re all in this together)
  • Distributing capital allocations across all ecosystem actors

Coordinating community: 

  • Inspiring motivation and participation due to close proximity with other wizards
  • Propagating genuine friendships in a remote fashion.

MolochDAO

To date, the biggest use-case for DAOs has been grant funding. Best exemplified by MolochDAO, nearly $300k in funding was allocated to Ethereum development across over 40 projects which are explained in detail here.  The improvement vs other public funding mechanisms is speed and efficiency, with funds being distributed to a grantee in roughly ~2 weeks thanks to the permissionless management of a DAO.

MetaCartel

Another example—the MetaCartel DAO uses grants to fund consumer-facing Ethereum applications in their earliest stages. While efficiency also plays a role here, receiving a grant from MetaCartel also provides signal of product market fit. This commonly takes the form of helping teams cut down product feedback cycles, get ecosystem feedback and finding what aspects of the project resonate with people and which don’t. MetaCartel helps remove the barrier of not having an audience.

Given MetaCartel grants are typically only $1-5k in size, the value for a grant recipient is mostly about accessing a specialized network of individuals and projects centered around finding new use-cases for Ethereum. Grants to projects like Sablier, DeFi Zap and Kickback—all of which provide novel use-cases to better interface with DeFi and Ethereum at large. (More grant examples here)

So what are DAOs good for?

This growth oriented mindset also places a degree of social pressure on those who receive grants and interface with the DAO. With some grants, half is given upfront while others are milestone based. This places a strong element of social reputation on grantees which is probably more important than the capital itself.

To summarize the question of “what are DAOs good for?” I would answer that DAOs are an excellent way for people to trustlessly coordinate, put skin in the game, and socially encourage one another to put their funds to good use.

What Makes a Successful DAO?

While the obvious success metric for a DAO may be the amount of capital it coordinates, maybe more importantly it’s about the number and quality of unique value-added individuals contributing to DAO.

pet3rpan @pet3rpan_

@shanev At this stage probably what matters is the amount of serious DAO exprimentation attempts. Funds AUM doesn’t really matter, in fact better DAOs do more with less imo.

There’s a common maxim that in order for a business to be successful it must acquire 1000 True Fans—individuals who will support anything and everything that you do.

When it comes to starting a DAO that’s exactly what’s needed—1000 True Fans

There’s a fine line between having too few members and too many members (and thus too much noise)—hence the largely permissioned nature of many popular DAOs in which new members must *prove* themselves through either capital or work in order to become one of the community. Like a pledge.

Ok, now you know the basics. You ready to get started?

Step 1: Find or Create a Community With a Shared Goal

Creating an engaged community is one of the most difficult tasks in starting a DAO. In a world of endless of noise and competition—how does your mission stand out?

Here’s a great way to find the right shared goal:

  • What is the most pressing issue in your environment that’s not being addressed?
  • Who are the players trying to address this problem & what are they failing to do?
  • What is your unique leverage or specialized knowledge that makes you suited to solve this problem?
  • Who are 5 other people (fellow summoners) who can solve this problem?
  • What can you do to incentivize them to solve this problem with you?

One you’ve explored this, there’s a fork in the road. You can either:

  1. Find and join an existing DAO which shares the same goal(s)
  2. Create your own DAO.

Instead of trying to reinvent the wheel, first explore the existing DAOs to see if something already fits your mission. Here’s a quick list of notable DAOs today:

Anything above that resonates with you? The best thing you can do is find their respective forum and figure out the next steps to pledge.


⚠️For more info on how to join any of the DAOs described above, please feel free to reach out to me on Twitter.


Nothing jumping out to you? Time to lay out a blueprint for how you can initiate your own DAO community around a shared goal.

Step 2: Establish Funding Goals

Consider how a shared pool of capital would allow you to better solve these goals:

  • What is the focus of your DAO? (consumer-facing applications, ETH2 development, crypto-gaming, clothing line, etc.)
  • How can you DAO make as big impact with as little funding as possible?
  • Why would others want to help fund your DAO? (incentives, end-goals, etc.)
  • What are the different roles required fund allocation & admin?

Many DAOs are created with too big a vision and far too little support. Don’t be afraid to start small. For instance, instead of solving world hunger, make a DAO which provides food to one underdeveloped neighborhood in an at risk city.

The point here is that while DAOs are commonly pitched as revolutionary, they actually work far better with a very narrow focus. The more refined the focus with tangible steps to creating value-added experiments, the more likely it is that others are will support the mission.

Now that you’ve narrowed down your mission, it’s time to do the damn thing!

Step 3: Summon a DAO

Perhaps the most novel aspect of the MolochDAO framework is the permissionless nature of DAO creation—you just need some basic DeFi skills.


⚠️Aragon or Moloch? People always ask—should I use Moloch over Aragon? This is like asking if you should use iOS over Android. Both are incredibly powerful tools which vary slightly in their edge use cases. Moloch is a bit more open and wild, Aragon is a bit more turnkey and polished. At the end of the day, use whichever stands out to you more and whichever you feel most comfortable with when playing around.


When it comes to the Moloch framework, tool like Daohaus and Pokemol allow you to spin up a DAO in a few simple steps for under $10.

What is Daohaus?

For those unfamiliar, Daohaus is the back-end tool used to input details about your DAO and launch the smart contract. It contains a list of all Moloch-forks along with where to access the front-end associated with each. Pokemol is that front-end access point, and is automatically summoned following the creation of a DAO on Daohaus. Stated another way, Daohaus is where you launch and monitor all Molochs, while Pokemol is where your community will tangibly interact with the DAO.

Using Daohaus to summon a DAOO

First, head on over to Daohaus.club and connect a web3 wallet like MetaMask. On the left hand side of the screen, click the “Summon a DAO” button.

On the top of your screen, you’ll see two modes: Easy and Hard. The TLDR; is that Hard mode allows you to customize more aspects of your DAO like smaller period durations and adding whitelisted tokens—for the most part Easy mode has all the requirements you’ll need to get started.

Please be sure you are summoning a Molcoh V2 which you will see as “Summon Moloch V2” at the top of your screen.

Next, enter in the name and description of your DAO. We recommend keeping your description short and to the point.

When clicking “Next Step” you’ll be brought to the Currency page which allows you to set your base currency and recommended minimum tribute. Please note that one of the great aspects of MolochV2 is that users can pledge as tribute in multiple currencies (which can be added after summoning).

Clicking “Proceed” will bring you to the Proposal Timing Page. This is where you will set the parameters for Voting Period—the amount of time members have to vote on a proposal—and Grace Period—the amount of time members have to raqequit if they do not like the outcome of a vote. A couple quick notes for this section:

  • Ensure that your voting window is long enough for other members to be able to see and act on proposals
  • The “proposal period duration” is the amount of times in which new proposals may enter the queue. This is done to avoid spam and ensure all proposals are issued chronologically.

Click “Proceed” to complete the Deposit Info. With Moloch V2, existing members must “sponsor” or “champion” a proposal to move them through the queue. Quick notes for this step:

  • By requiring a deposit in the base currency set above, the DAO can add an extra level of security that a bond must be posted for a proposal to be voted on. This requires additional capital for someone to sponsor each and every proposal which is unsponsored.
  • The deposit is returned to the sponsor after a vote passes or fails.
  • We recommend setting the deposit at roughly a quarter of the min. tribute size.
  • The processing reward is paid to whoever pushes a sponsored proposal to voting. Given there are now bots to do this, we recommend setting it low, but not low enough that even a bot would not bother processing it.

The last step is to review your existing parameters!


⚠️Note—once summoned the core parameters such as voting and grace periods can not be changed. Additional tokens can be whitelisted after summoning.


Press “Summon!” and approve the MetaMask transaction. Lastly, stand up and take a bow – you’ve just summoned your very own MolochV2!

Here’s the cool thing—all DAOs summoned on Daohaus come with their very own front-end interface called Pokemol. This is where you’ll handle all your proposals, tributes and more!

Conclusion

If you’ve made it this far you are one of the first 1000 people to ever pledge or summon to a MolochDao.

Now that you’re off the ground it’s time to get serious. If you’re looking for guidance on how to better activate a community or put together a suite of documents for your DAO, you might consider hiring Raid Guild—a collective of web3 mercenaries who are about as far down the DAO rabbit hole as you can get.

In the coming year, I fully expect the DAO movement to accelerate. Learning how to coordinate capital in a DAO now will give you the ability to front-run the opportunity.

Remember, there are no requirements to spinning up a DAO. The are meme DAOs like JamesDAO (solely for people named James) and TallDAO (solely for people who are tall)—it just goes to show that it’s not about who can pool the most money, it’s about who can pool the most humans.

If all this is overwhelming don’t worry—Bankless will keep you close to the epicenter of the DAO movement.

And who knows?

Maybe the Bankless community will have its own DAO one of these days.


Action steps

  • Start a DAO to coordinate capital & community around a shared goal

Author Blurb

Cooper is contributes to many projects in Ethereum. As the editor for DeFi Rate and a scout for MetaCartel, he’s kept an eye on the wider DeFi and DAO ecosystems for the better part of a year. He’s currently leading a new project called MetaClan—an eSports DAO focused on enhancing play-to-earn mechanics in crypto games through member-exclusive quests. He’s also Ambassador for Set Protocol and frequently helps projects distill their value proposition as a member of Raid Guild and as the Managing Director of Fitzner Blockchain Consulting where he leads Token Tuesdays with another Bankless writer—Lucas Campbell. To keep up with Cooper, follow him on Twitter.


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Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


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When DeFi meets Rollup

https://bankless.substack.com/p/when-defi-meets-rollup

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Dear Crypto Natives,

Two things are important for scaling crypto money systems.

First, scaling economic bandwidth. Second, scaling transactions per second (TPS). And you have to scale both in a trustless way, otherwise what’s the point?

Is it possible to scale transactions in a separate chain that’s still secured by the base chain? How about the holy grail—what if you want to run DeFi protocols in it?

Turns out it’s a tough problem. Progress has been disappointing.

So when I first heard about rollups I wasn’t optimistic. Another layer 2 scaling solution? Yeah sure. What’s the catch?

So I learned more. I tried it for myself.

Maybe something real here. Maybe the tech crypto’s been waiting for.

I learned that rollups:

  • Didn’t require a new token

  • Didn’t require an Ethereum killer

  • Didn’t require the redesign of DeFi protocols and wallets

  • Didn’t have clumsy exit games and preserved the same user experience

  • Could run Ethereum tokens & smart-contracts at hundreds of TPS

  • Were mere months from production on mainnet—they’re here now

Wow.

So I asked an expert if this stuff was real.

I asked him “can we just put this entire DeFi thing in a rollup?”

This was his response.

– RSA


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THURSDAY THOUGHT

When DeFi meets Rollup

Guest post by: Daniel Goldman, engineer, researcher, and writer at Offchain Labs.

Last year marked the emergence of two new, trendy, Ethereum buzzwords. On the application level, we got “DeFi” projects which leverage smart contracts to offer incarnations of traditional financial services with trustless (or at least trust minimized, or at the very least hopefully-one-day-trust-miminized) properties.  In the parallel universe of scaling protocol design, researchers began making noises about Optimistic Rollup, a layer 2 construction which, if you’re to believe the L2 enthusiasts ( 👋), promises to be more than just a passing fad.

This year (2020 for those who’ve lost track), with a live and lively DeFi ecosystem taking shape, and rollups well on their way to hitting mainnet, a natural question arises: how shall the twain meet?

Can we use rollups to scale the DeFi ecosystem?

Tldr: yes!

Although as one might expect, some new challenges arise.

Overview 

Optimistic Rollups are a layer 2 sidechain construction which seeks to alleviate the burden on Ethereum’s main chain. The basic idea is that instead of validating all transactions on the rollup sidechain, the mainchain simply publishes them and “optimistically” assumes they’re valid unless explicitly challenged.

The core benefit to employing rollups is lower gas costs for users, which translates to more transactions per second (several hundred TPS at least) for the network as a whole. Cheaper transactions also means that certain applications that would otherwise be too gas intensive to even be possible, like privacy solutions that employ complex cryptography, now become feasible. Thus, while rollup itself doesn’t inherently offer privacy benefits, it’s a fitting substrate on which to build privacy preserving technology. Likewise, rollup doesn’t inherently increase transaction latency (speed), but gives a nice environment on which channels, which can offer virtually instant transactions, can be built.

The way Optimistic Rollups handle data gives the constructions some nice simplicity, especially relative to alternative layer 2 protocols. Crucially, this translates to UX for end users that could (and should!) feel nearly identical to that of using layer 1. Likewise, for developers and protocol designers, much of the tools and thought-models they are accustomed to will still be available, though as we’ll see, tackling some challenges around composability may require some additional work.

The User Perspective

From the perspective of a user, interacting with a dApp—DeFi or otherwise—on a rollup will feel nearly identical to using it were it on layer 1. Popular wallets like Metamask and the Burner wallet can be supported, as can block explorers to monitor rollup-chain activity. 

The basic lifecycle of using a rolled-up dapp is as follows:

First, a user deposits some funds (“funds” could be Ether, ERC20s, ERC721s, etc.) onto a rollup chain; this first step mirrors the UX of many layer 1 dApps, in which the user must initially transfer funds into a contract before using it. At this point, a user can issue transactions on the application as they usually would; if the rollup chain is designed to prioritize censorship resistance, getting one’s transaction included doesn’t depend on any more trust, reputation, or goodwill—and doesn’t invite any more potential censorship or front-running—than publishing an L1 transaction. 

When a user wants to bring their assets back to layer 1, they issue a special withdrawal transaction. Here we see a potential difference: recall that Optimistic Rollup’s security model depends on the ability for parties to issue challenges; thus, we need to allow a grace period for any parties monitoring the activity to (potentially) prove fraudulence. This means that once a withdrawal is requested, the user must wait before the funds are accessible again on layer 1; the economic security this mechanism gives is a function of both the amount of stake required to produce rollup blocks and the length of this waiting period (Ed Felten argues here that 3 hours is sufficient). 

With that said, the hope/expectation is that users will rarely, if ever, have to actually wait through this grace period. Third parties can offer to purchase ownership of your pending withdrawal by sending you the equivalent value on layer 1, minus some fee, enabling you to access your funds without having to wait. Thus, as long as such liquidity providers are indeed available, and with an interface that abstracts the complexity away, even withdrawals will hit UX parity with layer 1.


📢 I’m told Offchain Labs is going to release a demo of Uniswap using rollup technology w/ MetaMask support next week! They call it Arbiswap. I expect this’ll be a bit like Unipig with some added magic. I intend to try it give my thoughts so stay tuned! – RSA


The T-word

Okay, but is Optimistic Rollup really trustless? In short, yes.

Any user can use a rollup in strictly trustless fashion if they opt to, and if they don’t, their security guarantees are still strong.

To eliminate any trust-exposure, anyone (user or otherwise) can become a validator, letting them verify for themselves that nobody is trying to cheat, and prevent them from doing so if they are. This amounts to running some additional software that has to “look in” at least once every dispute period. For users not running validators, fraudulent transactions (theft of funds, say) are only possible if 100% of the validating parties are in on the crime and colluding with each other. In other words, as long as there is one honest validator out there—be it another user, an exchange, application developer, a block explorer, a wallet provider, or a pseudo-anonymous teenager in their basement—or, even if all parties are malicious, so long as they aren’t all colluding with other to collectively lie consistently, the whole rollup chain is safe from malfeasance. Once fraud is proven, the bad actors get their security deposit slashed, some portion of which is given to the fraud-provers; this incentivizes honest validation, and puts a price on trying to inconvenience other validators with deliberate dishonest actions. 

The Developer Perspective 

Shifting to the perspective of application creators, we happily find that much of the developer experience of building and deploying rolled-up dApps will also feel fairly familiar; developer tools and libraries like truffle, web3, and ethers.js can be reappropriated for development in the rollup context. Additionally, contracts deployed to a rollup chain can still be written in Solidity, with only a few restrictions

The biggest difference, then, in designing and reasoning about rolled-up applications has to do with questions of composability, something particularly relevant to DeFi apps.

The Composability Challenge

One of the more celebrated—and occasionally alarming—features of DeFi applications is their ability to compose with each other, directly and permissionlessly integrating fellow financial services. This radical interconnectivity effectively comes “for free” for Ethereum contracts on layer 1, with the downside, of course, being the scaling bottleneck. As we partition activity into separate layer 2 environments, interoperability across different layer 2 chains, while not lost, becomes more of a challenge.

To steal an analogy: if layer 1 apps are housemates, apps on separate rollup chains are friends living in different houses in the same neighborhood. I.e., their living quarters are less crowded, but now, communicating and making plans isn’t as simple as meeting in their common space.

Consider the example of PoolTogether, a no-loss lottery DeFi application. PoolTogether’s contracts manage the random lottery winner selection and dispersion of funds; the funds themselves consist of interest generated by Compound, a distinct (and pre-existing) application; and the asset itself (for one of its pools) is Dai, issued by a separate contract still.  This interconnectedness is all seamless with the three of them living together on layer 1.

But what if all three contracts were on separate rollup chains?  

Migrating assets like DAI from one rollup to another is no hurdle, and looks very similar to moving between regular L1 contracts. Buying a PoolTogether lottery ticket, however, entails using PoolTogether to deposit assets onto Compound, which, if PoolTogether and Compound are on separate chains, isn’t possible with one simple transaction. The PoolTogether rollup needs a new strategy to access and “listen” for updates on the Compound rollup. In some other cases, we can imagine that two contracts may both want the power to talk to the other bidirectionally; or perhaps in some cases, we may only require one side to get occasional, periodic “updates” from another. 

The rollup-communication toolset here is analogous to the methods for communication across Layer 1 blockchains, or across different shards in the context of a system like Eth2. In short, there are many different approaches fit for different use cases, each with their own levels of technical complexity and/or UX tradeoffs, depending on specific needs. The technical details are out of scope here, but the UX tradeoffs tend to involve things like asking users to wait longer to get their transactions confirmed and/or publishing multiple transactions to get their one desired action accomplished. 

To tortuously overextend the analogy: should the friends migrate from house to house? Shout at each other out of their windows? Relay messages via some intermediate, common house? Chat directly with each other digitally (which is fast, but requires more advanced telephonic technology)?

There are many possibilities, but suffice it to say that communicating across different rollups won’t ever be as simple as chatting face to face.


Worth noting—cross-rollup communication is still easier…

Nicely enough, cross-shard and cross-rollup communication are both easier than communication across two arbitrary chains in at least one way: they have a common frame of reference—the beacon chain for ETH 2.0 and the underlying L1 for rollups. 


In the alternative extreme, we can imagine a situation where we put a whole bunch of applications—all of DeFi, say, on one giant rollup chain. Here, the complications of cross-rollup interoperability vanish; Compound and PoolTogether can speak to each other on layer 2 as freely as they would on layer 1.

The only problem with this vision is it undercuts the very scalability gains we sought after to begin with. Layer 2’s scalability comes in large part from partitioning and localizing work that would otherwise have to be performed globally; a single, busy rollup becomes harder to validate, and brings us closer to the problem we sought to avoid. In other words, we don’t want to move out of one overcrowded house only to overcrowd a new one.

Perhaps, then, the ideal scenario lies somewhere in between: applications which benefit from (or require), composability with each other can choose to move in together on a common rollup chain, while communicating with other chains via the appropriate means as needed. 

(Above) Apps may cluster into rollup districts based on their need to maintain for close communication ties—the same ways populations tend to cluster in regions and cities

Ultimately, a key value proposition of layer 2 is the permissionless experimentation that can take place; applications and users can opt in to local environments based on the services and interactions they anticipate they’ll need, giving them access to new features and lower fees while alleviating broader network congestion.

As far as layer 2 constructions go, Optimistic Rollups are far and away the top contender for delivering these benefits while preserving much of the core UX users have come to expect. The questions around facilitating interoperability are important considerations at this stage, as scaling solutions become usable and we approach the next phase in evolution of decentralized finance.


Author bio

Daniel Goldman is a Software Engineer, researcher, and writer at Offchain Labs.


Action steps

  • Review: what benefits can rollups bring to DeFi protocols?

  • Consider: do rollups give us early insight into what Eth2 sharding will be like?


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Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

🎙️ #7 – Ether’s Value Mechanisms

https://bankless.substack.com/p/-7-ethers-value-mechanisms

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🎙️NEW PODCAST EPISODE

Listen to episode 7 | iTunes | Spotify | YouTube | RSS Feed

Episode: #7
April 13, 2020

Ether has some native mechanisms that contribute to its scarcity and value. David and Ryan explore these value mechanisms and compare/contrast them with money printer go brrrr.

This episode covers:

  • 1. Scarcity mechanisms and fair games

  • 2. Ether’s value mechanisms

  • 3. How USD will fare vs. ETH

—–

Tools from our sponsors to go bankless:

  • Rocket Dollar – tax shelter your crypto ($50 w/ “BANKLESS“)

  • Monolith – holy grail of bankless Visa cards

  • Aave – money lego for lending & borrowing

  • Zerion – portal to your DeFi portfolio

—–
Resources Mentioned:

—–
Episode Actions:

  1. Listen to previous episodes to get a firm foundation!

  2. Read these

    1. The Final Puzzle Piece to ETH’s Monetary Policy

    2. Ether is equity

  3. Watch Conway’s game of Life

  4. Give Bankless 5 stars on iTunes

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Leave a review on iTunes

Share the episode with someone you know!

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The Moneyness of Bitcoin and Ethereum

https://bankless.substack.com/p/the-moneyness-of-bitcoin-and-ethereum

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Dear Crypto Natives,

I think the author of today’s post would consider himself open but also somewhat skeptical of the idea that ETH is good money—Ethereum has to prove it.

Perfect.

Good thought-pieces should test our assumptions. Groupthink is boring.

And it’s clear Bitcoin and Ethereum are taking different paths to moneyness.

Hardness vs. utility?

Meme vs. economy?

Banked vs. bankless?

Scarcity vs. security?

Calcification vs. evolution?

There are many lens to compare these monetary experiments. Josef gives us his.

– RSA


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THURSDAY THOUGHT

The Moneyness of Bitcoin and Ethereum

Guest post by: Josef Tětek, analyst at TopMonks

The past two years have been a period of healthy crypto cleansing. Most of the altcoins fell from grace and their ATHs by more than 90%. Bitcoin has gradually reclaimed its throne with 60%+ in market cap dominance. For some, this is a clear sign of Bitcoin slowly becoming the best contender for the role of global non-fiat money. On the other hand, the fast-moving Ethereum DeFi development is nothing to be scoffed at.

In this text I’d like to analyze two approaches to achieve moneyness:

  • Bitcoin’s approach is to focus on solidifying the foundation of monetary base; further aggregates may come later and only on 2nd layers/sidechains

  • Ethereum’s approach is to aim at further monetary aggregates: lending, borrowing, derivatives; monetary base is a dynamic tool that shouldn’t stay in the way of developing the aggregates

Monetary aggregates

The fundamental difference between Bitcoin and Ethereum lies in their quite opposite understanding of what constitutes money. In today’s fiat currency world, money isn’t actually one definite thing. Usually we talk about money in context of various monetary aggregates, where the individual aggregates have various levels of liquidity and counterparty risk.

 It’s useful to view today’s money as an inverse layered pyramid:

(Above) Bitcoin community focuses mostly on the base money qualities, while Ethereum as a community focuses more on the further aggregates.

At the bottom of the inverse pyramid lies the Monetary base—this is the cash we carry around in our wallets, plus reserves of commercial banks held at the central bank. Monetary base is the narrowest definition of money, as it’s the ultimate clearing instrument: if you hold cash as a citizen or reserve at central bank as a bank, there is no risk of counterparty failure. 

On the other hand, if you hold a deposit at your bank (as a citizen) or an overnight deposit (as a bank), there is a slight counterparty risk—the depository institution can go insolvent or bankrupt. This is one of the reasons why American commercial banks started to hoard excess reserves after the financial crisis, as the trust between the banks evaporated (the other main reason for the sustained high level of excess reserves is the fact Fed started paying an interest on the reserves).

The reason for the shape of an inverse pyramid lies in the nature of a fractional reserve system—banks are able to issue loans in multiples of the held reserves, and further aggregates like M2 are mostly based on trust and credit rating of the issuing institutions. The further you move up the aggregate pyramid, the more trust is required and the less liquid (immediately exchangeable for the lesser levels of the pyramid) the assets are. 

(Fun fact: Ethereum’s aggregates’ pyramid would be in an opposite shape, due to overcollateralization. But this may change in the future if a model of money markets without overcollateralization is developed.)

The M1 and further aggregates are what we actually handle most of the transactions with. All over the world, people and businesses handle more and more of the payments via wire transfers and credit/debit cards and less with physical cash.

Let’s summarize this section and move on the implications for Bitcoin and Ethereum. We’ve learned that:

  • today’s money has no single definition: it’s a spectrum with various levels of trust and liquidity across individual layers

  • while monetary base has least trust assumptions and is the most liquid of the aggregates, M1-M3 is where the monetary utility lies


Want an overview of base money and M1-M3?

🎙️Listen to “Ether the triple point asset” Episode #4 of the Bankless Podcast


Bitcoin’s path to moneyness

As I indicated on the monetary aggregates diagram, Bitcoin is mostly focusing on having the solid monetary base first and foremost. Let’s go through the evidence briefly:

  • prevailing hard money narrative and broad popularity of Plan B’s Stock to flow model (which is just an applied version of the hard money narrative); halving is one of Bitcoin’s sacred days (others: Pizza day, White paper day, Genesis block day)

  • strong focus and historical success of decentralized governance (UASF and No2X grassroots initiatives)

  • continuing discussion and analysis of Bitcoin’s future security budget (as written on by Nic Carter, Dan Held, Hasu and yours truly)

  • payments scalability: startups building on Bitcoin tech stack focus mainly on payments scalability and fungibility improvements (Samourai, Wasabi, Strike, Lightning Labs, Square Lightning SDK)

  • social scalability: Bitcoin’s focus on store of value and payments aspects may be seen as unambitious, but this focus ensures Bitcoin’s position as a natural Schelling point of global non-fiat money; since only soft forks are used to include changes in the protocol, there is little need to pay attention to ongoing governance discussions (with headaches like in what language should the discussions take place?)

  • decentralization scalability: Bitcoin full nodes can be run on general consumer hardware and the blocksize limit has been kept low to ensure users with average internet connections can sync and keep up with the blockchain size; there is an increasing selection of node-in-a-box solutions (check the overview by Bitcoin Magazine)

  • conservative approach to protocol upgrades: softfork activations only, and rigorous peer-review process; even relative “no-brainers” like Schnorr signatures take years to implement

All in all, the Bitcoin community has adopted a very conservative and transparent approach towards its protocol development, mostly out of concern of damaging the broad consensus and Bitcoin’s Schelling point attributes. The solid monetary base foundation is the priority—further aggregates can be developed on second or third layers (Lightning, Liquid, Debnk etc). Store of value utility arising from a clear and reliable monetary policy seems to be the main driver of global adoption in the past years.

This has of course elicited some critique from those that don’t see the point in such conservatism and has lead to various forks (mostly money-grabs like BCH/BSV), new projects (Ethereum) and a good measure of memes.

(Above) Meme author Fiskantes

Parker Lewis from Unchained capital provides a good summary of Bitcoin’s path to moneyness in his “Bitcoin obsoletes all other money”: 

But remember that scarcity for scarcity sake is not the goal of any money. Instead, the money that provides the greatest constant will facilitate exchange most effectively. The monetary good with the greatest relative scarcity will best preserve value between present and future exchanges over time. Relative price and relative value of all other goods is the information actually desired from the coordination function of money, and in every exchange, each individual is incentivized to maximize present value into the future. Finite scarcity in bitcoin provides the greatest assurance that value exchanged in the present will be preserved into the future, and as more and more individuals collectively identify that bitcoin is the monetary good with the greatest relative scarcity, stability in its price will become an emergent property.

Ethereum’s path to moneyness

In contrast to Bitcoin, Ethereum takes an opposing approach to moneyness—that is if we take the DeFi movement as Ethereum’s best and lasting product-market fit. Let’s go through the evidence briefly:

  • focus seems to be mainly on the utility side of moneyness—not SoV or payments as such, but actually using the native token (ETH) as the “economic bandwidth” within the decentralized ecosystem

  • Ethereum’s monetary policy is fluid and focused on maximizing chain security (instead of predictable inflation); this is why there is no hard cap and no clear inflation curve for the future—instead, we have a “minimum necessary issuance” social contract

  • HW and bandwidth-heavy nodes—running and syncing full ETH node from scratch is notoriously hard and about 70% of the nodes are run in hosted cloud services such as AWS; on the other hand, it seems this is being addressed with dedicated node-in-a-box solutions, in a similar fashion to Bitcoin; also noteworthy is experimentation with economic incentives for node runners (eg. Pocket Network) (RSA note: Eric Wall’s tweet linked above is him syncing and replaying all Ethereum transactions from scratch which is unnecessary imo—using fast sync is practically just as secure and takes 1 day—see details on this)

  • as David Hoffman explains, there are/will be 3 ways how ETH engineers scarcity: DeFi, staking, and fee burns; this reinforces the thesis that Ethereum’s path to moneyness is an iterative work in progress (2 out of 3 mentioned mechanisms are not in existence yet)

  • in the same article, David Hoffman points out that the concept of money has historically been heavily intertwined with debt (citing Graeber’s Debt: The First 5000 Years), and DeFi protocols bring about precisely this feature to make ETH money—ETH as a standard of deferred payment

Ethereum has always operated in a “move fast and break things” fashion, where multiple use cases are tried in parallel and what sticks is then iterated upon. DeFi seems to be a thing that has stuck so far, and various DeFi services have attracted a sustained inflow of ETH as their “economic bandwidth”:

Above source: DeFi Pulse

DeFi services are usually praised for their permissionless nature (at least some of them) and composability (the possibility of mutual interaction and synergy). 

My opinion is that the real game-changers that DeFi services bring to the table are the transparency and auditability. As Ryan Sean Adams points out in the recent discussion in Ivan on Tech podcast, we cannot audit the collateral and internal operations of Coinbase or Kraken—but we can do that with MakerDAO or Compound. The speed with which the bZx exploit audits came about is a cause for celebration, not for condemnation of the vulnerable protocols. Mt. Gox had been insolvent for 2+ years and no-one knew. bZx got exploited and everybody knew within hours. 

DeFi as a source of moneyness for ETH has a strong ally on its side: the absurd state of the modern financial system that is anything but open, borderless and inclusive. Even centralized “crypto banks” have to conform: Kraken’s futures trading is prohibited in 36 countries—including United States, even though Kraken is a US-based company! Moreover, the risk of keeping assets like BTC or ETH with custodians may prove to be an ultimate Achilles’ heel of the monetary revolution—the establishment can simply confiscate the asset, as happened in the 1930s with gold

On the other hand, DeFi still has a lot of work ahead to truly turn ETH into money. 

First, there will always be a trade-off between functionality and decentralization. Simple protocols like Uniswap can work as complete contracts, but is that true for advanced stuff like money markets? With governance and admin keys, there will always be a risk of regulatory action or governance attack.

Second, the composability and protocol interplay bring about both new opportunities and headaches. Nobody saw the flash loans attacks coming. Many more sophisticated attacks are coming as the DeFi space keeps on innovating. The features of transparency and permissionless interaction also introduce a huge honey pot. While insurance protection through Nexus or Opyn may help a bit, the premiums are going to be huge if the attacks happen regularly. So the teams need to be sure they attract exploiters through bounties, not honey pots.

Third, DeFi is still a niche and may be a thing of the inner circle of sophisticated Ethereans. There are multiple reasons to think this: Maker, Compound and other services have most of the value locked by a handful of whales; when the ETH price rises, the ETH locked-in-DeFi metric falls (summer 2019 and Feb 2020); the ETH locked-in-DeFi doesn’t grow exponentially over time, as usually happens with startup-like trends—the growth is +3000% for 2018, but only +52% for 2019 and falling so far in 2020. At this point, DeFi has attracted 2.6% of all ETH in circulation. Nice, but still a niche.

Summary

Both Bitcoin and Ethereum have a strong chance to become world’s first digital money without any government involvement. Both have to overcome their potential weaknesses in the coming 5 years: 

  • Bitcoin has to survive its hard-coded monetary policy: 2 halvings in the next 5 years will show how that works out. Increasing the “transaction density” through heavy economic activity on sidechains and 2nd layers is critical. Auctioning of future blockspace through futures contracts would help as well (if there is demand for predictable future settlement).

  • Ethereum has to prove it can achieve moneyness on a constantly shifting monetary base. If the shift to Eth2 works out as envisioned, the focus on governance eradication and monetary policy automation should follow. There should be no strong leaders in decentralized money protocol, no matter how charismatic.

Both Bitcoin and Ethereum also need to create pockets of circular economies, without a dependence on the fiat on/off-ramps. This is especially true for Bitcoin—in order to establish itself as a future monetary base, its users need to start thinking in bitcoins/satoshis as a natural unit of account.

Outside of the scope of this article are various interoperability plays, that might bring joint success of both Ethereum and Bitcoin as money. One of the possible futures is that Bitcoin is the natural monetary base, while Ethereum provides the monetary aggregates and utilizes Bitcoin via trust-minimized pegs like tBTC and renBTC. As we saw in the recent weeks, the future is quite unpredictable and often very wild. Recent developments point to mankind entering a new era, both in global markets and social dynamics. Hopefully there will be a demand for global non-fiat money in this brave new world.

Post scriptum: This text was written in large part before the massive Bitcoin and Ethereum sell-off in mid-March 2020. While those events don’t change any of my viewpoints expressed in the article, I concede that current DeFi services (mainly MakerDAO) have shown their fragility, as they are susceptible to failure in the event of a black swan event (namely a failure of the incentivization model in the face of network congestion and market sell-off). However, in this space every failure is also a learning opportunity and if the current class of DeFi services collapse, better ones will stand on top of their shoulders.


Author bio

Josef Tětek is an analyst at TopMonks—a software development house and startup incubator. He’s active on Twitter and Hacker Noon. He’s written some excellent Bankless articles including “Rise of the Cryptodollar”.


Action steps


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Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

How to create a bankless DAO

https://bankless.substack.com/p/how-to-create-a-bankless-dao

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Dear Crypto Natives,

Organizations are a collection of contracts.

Modern organizations like corporations and non-profits settle in the legal system.

The legal system is maintained by the state. Nation-states are expensive, they’re prone to corruption, they’re geographically limited, they’re non-digital, and they require monopoly of violence to enforce.

Still, nation-state legal systems are a useful settlement layer for humanity—as long as they avoid dysfunction and corruption. The U.S. for example has strong property laws, corporate laws, and is stable enough to assume its laws will be enforced with reasonable neutrality.

But there’s a new settlement layer in town. It’s called Ethereum. It comes with a property rights system, a settlement layer, and a money system—it’s a new social coordination tool for the world.

While it isn’t nearly as flexible as the nation-state legal system (it can’t make decisions that require human judgement for example) it has other advantages—it’s digital, programmable, jurisdiction-less, and accessible to all internet citizens. Rules are transparent too. And it’s efficient—no armies, banks, or bureaucrats required.

And what if we combined the best of the legal settlement system with the best of digital settlement system? Can we create organizations that span both worlds?

That’s what we’re doing in today’s tactic.

We’re going to create a DAO that spans both worlds.

We’re going to summon a programmable, extensible, and globally accessible digital entity with legal docs, bank accounts, and capital coordination tools for $4.

This will blow you away.

-RSA


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TACTICS TUESDAY:

Tactic #31: How to create a bankless DAO

Today we’re going use an OpenLaw Smart Agreement to create a DAO on Ethereum without a bank. This DAO includes a basic legal wrapper making it useful for the planning phase of a new venture with co-founders. It includes a way to designate founders, to pool capital in ETH or stablecoins, and to vote for future actions as DAO shareholders.

  • Goal: Deploy a DAO using a Founders Agreement to Ethereum

  • Skill: Intermediate

  • Effort: 30 mins

  • ROI: $4 in transaction fees for globally accessible digital company—not bad



How to create a bankless DAO with OpenLaw

Guest post: The OpenLaw team, creators of the OpenLaw public library

Ethereum is challenging common assumptions on how money works, emerging as a leading platform to launch digital, financial products (and even systems) operated entirely by code. 

Similarly, it is also becoming a launchpad for digital organizations, or “DAOs”, that stand to benefit from this emergent soup of financial products.  Traditional notions about how to best organize ourselves in an increasingly digital market is being challenged by these new organizations.

But what exactly are DAOs, and how do they relate to bankless financial products? 

Organizations are contracts (so are DAOs)

To repeat a well worn idea: organizations are contracts. By extension, DAOs are also a collection of contracts; this time both traditional and digital ones. These contracts are designed to enable online communities to coordinate and exchange digital monies and assets to accelerate social or commercial activity (such as DeFi charged savings often covered here on Bankless). 

If you’re familiar with public equity markets, you might have come across links on company websites to “Organizational Documents,” which true to their name, spell out the rules of a company and its financial operations. From this core, a company might grow out layers of legal commitments, resulting in the web or “nexus of contracts” that comes to define it.  

Therefore, by looking over a set of legal agreements, one can quickly grasp the existence of an organization and how it is programmed to operate into the future.  For legal engineers, this may not come as any surprise, but this whole “nexus” theory begs for programming languages like Solidity (the programming language of Ethereum), which can reflect legal agreements as computable conditions that move money and update other legal states without banks. Legal agreements expressed in Solidity that define permissions and other rights among digital accounts are quite relevant to the field of DAOs.

DAO legal wrappers

With recent upgrades on the OpenLaw public library, which is free to use with an email account, we have made it easier than ever to dive into the world of Ethereum, financial programming, and DAOs, allowing anyone to easily upgrade their orgs. and other legal interests into self-executing smart contract code. We call these smart agreements. (RSA—we used OpenLaw smart agreements to tokenize ourselves in Tactic #19

At their most fundamental, smart agreements serve as the bridge between the potentially autonomous code of smart contracts and the people that interact with it, fusing together code and law. 

For example, a payment invoice in the traditional, web2 sense, is just a string of text that instructs an employer to instruct their bank to likely instruct another bank to update a ledger account of how much money you have.  A smart invoice, on the other hand, would simply ping an employer to sign a payment from their browser wallet in the sum of say, USDC or DAI stablecoins, which would then create digital records and settle in minutes rather than potentially days of daisy-chained-bank-instructions

Intrigued?  Now imagine this speed and predictability applying to all payments for all legal contracts without banks, as well as all the other organization ops that could be similarly streamlined.

Let’s create a DAO

To give more folks access to smart legal agreements that plug into operational primitives on Ethereum, such as “DAOs” and other experimental digital associations, the OpenLaw team has synthesized a quick set of lo-code/lo-legal forms for the Bankless community to test out and get started—so let’s create a DAO!

Use Case

We’re going to start your DAO where most entities start: at the planning stage.

Say you have a group of founders who want to contribute capital to start a venture—an app, a consulting service, a game clan, a podcast, a capital pool—this smart agreement can be the genesis that allows you to collectively pool capital and conduct capital-weighted voting on next steps—without a bank!

Here’s what the “Smart Founder Agreement” sets up for your proto-company:

Step 1: create an OpenLaw account

Create an OpenLaw account and login. (RSA—use a private email if you wish!)

Step 2: Fill out Founder Agreement details & send to co-founders

Navigate to the Smart Founder Agreement here and fill out details.

Any org. setting up a new business on Ethereum can benefit from basic templates to record their plan among founders, and deploy code to hold money as they figure out business goals. To this end anyone can fill out the Smart Founder template on the OpenLaw library to execute a basic founders’ agreements to hash out terms for a new business venture, and deploy a related Moloch DAO (some examples) to carry on financial ops in Dai (default) or any other ERC-20 token.

Fill out details like:

  • Company Name (name of entity)

  • Legal structure set (mark “no” to determine later otherwise select a type)

  • Proposed venture (describe the business in general terms)

  • Effective Date of Accord (agreement date)

  • Founders (all founder emails—they’ll all need OpenLaw logins + ETH address)

  • Who is signing off for this? (enter your ETH address to hold this contract)

Click “Send Contract” on the top menu. This will route the contract to founder email addresses for signature with their ETH address. Once all parties have signed you can deploy the DAO to the Ethereum mainnet.

Step 3: Deploy DAO to Ethereum mainnet

After you and your co-founders sign you’ll be able execute the smart contract and deploy to mainnet. Click “Execute” to deploy the contract and summon the DAO.

To summon a DAO is an expensive operation as far ETH contracts go, costing 6.5m gas, which is about $4 at standard gas rates of 3.5 gwei. But consider you just summoned a globally accessible digital company complete with legal documents, bank accounts, and capital coordination tools!

👉Here’s how your deployed organization will look in code

Step 4: Vote on proposals & add contracts

The resulting Moloch DAO has a basic dapp interface to vote and make proposals on its verified smart contract to move money among founders and business partners, as seen in this deployment on the etherscan ‘explorer’, and can make transactions among DAO members using Ethereum. (The OpenLaw team will soon offer dashboards and similar interfaces to make it even easier to anchor these companies on Ethereum.)  

OpenLaw markup language can also quickly spin legal wrappers to Moloch DAO functions, and pretty much any DAO or Ethereum actions for that matter, as seen in the following simple form to submit a voting proposal with e-signed statements (resulting Ethereum transaction here):

👉Here’s a form to submit a capital funding request from the DAO

Further, founder decisions can be programmed from OpenLaw forms where legal descriptions, records of e-signatures, and approvals from stakeholders is desirable before a vote is stamped onto Ethereum:

👉Here’s a form to submit a vote on the capital funding request

Founders can vote for the proposal by signing with their ETH account.

With these starter tools for bankless orgs on Ethereum, members of a new venture or group of developers seeking grants can very easily make collective decisions on the root, or nexus, of a simple Moloch DAO program and Founders Agreement stored on OpenLaw (resulting DAOs also bears a matching stamp from OpenLaw database).  From there, more sophisticated legal and digital programs might be useful, and Openlaw and The LAO team are forging ahead to build legal templates and money rails to fund these orgs that live and thrive on smart contracts.

How cool was that?

You’ve unlocked a new skill. You now have the ability to summon a globally accessible digital capital coordination tool. The bankless organization is a new money lego to add to your set. And it’s just getting started.

Yep. DeFi gives your superpowers.


Action steps


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🙏Thanks to our sponsor: Aave Protocol 

Aave protocol is a decentralized, open-source, and non-custodial money market protocol to earn interest on deposits and borrow assets. It also features access to Flash Loans, an innovative DeFi building block for developers to build self liquidations, collateral swaps, and more! Check it out here.


Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

🎙️ #6 – DeFi Trust Spectrum

https://bankless.substack.com/p/-6-defi-trust-spectrum

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🎙️NEW PODCAST EPISODE

Listen to episode 6 | iTunes | Spotify | YouTube | RSS Feed

Episode: #6
April 6, 2020

Different Ethereum applications require different amounts of trust, depending on how each app is designed. This episode discusses how to think and measure the trustlessness of each app, and where the humans and computers meet. 

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  • Zerion – portal to your DeFi portfolio

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Resources Mentioned:

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Episode Actions:

  1. Give this podcast 5 stars in iTunes!

  2. Evaluate protocols on the DeFi Trust Spectrum

  3. Read these:

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Share the episode with someone you know!

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Ethereum will eat Wall Street’s settlement layer

https://bankless.substack.com/p/ethereum-will-eat-wall-streets-settlement

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Dear Crypto Natives,

Notice anything different about this Bloomberg terminal?

There’s a lot there I know.

You’re looking at a bond that’s been issued to a NASDAQ traded restaurant corp called Fat Brands—a company that franchisees over 400 restaurants.

Pretty normal stuff right?

Wait…what’s that in the bottom right corner? An ETH address? Was this $39.7m corporate bond issued on ETHEREUM?

Couldn’t be. Ethereum is just for geeks.

But wait…

Here’s the ETH address of FAT Brands LLC the bond issuer.

Here’s the $39.3m of bond cash on ETH (purchase price less principal reserves).

Here’s tranche A and tranche B2 on Ethereum.

This is legit. OMG Bloomberg terminals using Ethereum for asset settlement!

Interest paid via stablecoin to ETH addresses.

A $40m bond last month and $500m in the pipeline.

Is this the beginning of Wall Street replacing its settlement layer with Ethereum?

Why Ethereum?

And what’s it like to buy one of these bonds?

I asked someone who’s done it.

Josh Johnson a Bankless reader, crypto aficionado, and accredited investor (you have to be accredited to buy a U.S. security) shares his personal experience today. 🔥🔥🔥

– RSA

P.S. I need your help to translate articles like this—give a DAI to the Translations grant


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THURSDAY THOUGHT

Ethereum will eat Wall Street’s settlement layer

Guest post: Josh Johnson, Machine Learning Engineer and Crypto Aficionado

A few weeks ago I was on the phone with my broker from Fidelity.  Somehow, in the midst of moving money between my financial institutions and making trades I had accidentally placed orders with more money than I actually had in my account.  A few days prior to speaking to the representative I had received a letter stating that if I didn’t transfer enough funds by the end of the week they would liquidate enough assets to cover the shortfall. 

I asked the person on the other end of the line, “How was this possible? Why was I allowed to place a trade when I didn’t have the money?”

She didn’t really have a good answer. Basically, she stated that Fidelity is able to allow people to place a trade without the money as long as they believe that it will be paid by settlement time.  Somehow, I had stumbled into a loophole that I came to find out was not that unusual and I was reminded that I don’t really own the assets in my brokerage.

The problem of traditional finance and settlement

The problem of tracking ownership of assets is a difficult one, not just for brokerages.  Cap tables are often tracked in spreadsheets and can get fat-fingered. Rehypothecation and short-selling can lead to more shares existing than should.  Then there’s the whole story of Dole Food, where shareholders ended up owning about 33% more shares than were supposed to exist.  It’s a challenge because there’s no one global representation of the state of ownership at any point in time.  But if you’ve been in crypto for any period then you’ve probably heard all of this and know of several companies trying to tackle this problem with a blockchain: t-Zero, Securitize, etc.  However, I would wager that you haven’t heard about one company that is already using Ethereum’s mainnet to solve this problem in the niche finance space of securitized business lending: Cadence. (RSA: these are the guys issued the bonds from the intro)

Looking for high yield in a low yield world

Before diving into their solution, I’d like to give you a rundown of how I found Cadence and what their business provided me as an investor. 

We’ve obviously been in a low interest environment for at least a decade and the past few weeks indicate that this period will remain for the indefinite future.  So, where do investors go to get yield? How do retirees, like my parents, make a reasonable cash flow on a lifetime’s worth of savings? Gone are the days of making 5% on bonds and other low risk lending.  Peer-to-peer lending, once seen as a way for retail to tap into bank lending returns, has now been crowded out by the very institutions it was meant to replace. As rates have fallen, investors have had to seek yield in higher risk assets: high yield dividend stock, lower grade bonds, and real estate.  Where do you turn when money is cheap and the world is flush with dollars?

One place that I decided to look was in small business financing. For those small businesses that need short-term cash flows to pay suppliers and payroll while their invoices float, they are willing to pay a higher lending rate.  These businesses are usually collateralizing their accounts receivables or other assets to get access to short-term financing. And this provides a fairly good risk-to-reward for investors looking to diversify their passive returns. I think of these investments as a way to fill out my risk profile since the returns are uncorrelated to equities and other high yield investments.  There are a number of companies out there that allow accredited investors to invest in these assets but they often require a large amount of capital or don’t have a transparent view of their asset flows. Then I stumbled onto Cadence. They made it easy to invest with as little as $500, they were integrated with Bloomberg terminals, their website was intuitive and they offered competitive returns.  And then I learned that they use Ethereum mainnet under the hood. Sold! I had to give them a try.

I’ve been investing with Cadence for over 6 months now and have been pleasantly surprised by the performance of my investments and the ease of use.  I’ve invested in 11 deals, and the return rates generally range from 9% to 12% APR. The returns have been inline with expectations and I can rollover into new rounds as the old ones mature.  The duration of each deal ranges from 1 month to 1 year but is typically 3-6 months. They are sourced by various loan originators that have a specific industry focus—transportation, small to medium sized businesses, Mexican small biz, even crypto lending.

(Above) Figure 1. Investment Example

(Above) Figure 2. Example loan offering structure

Gradual replacement of underlying infrastructure

When I talked with the founder, Nelson Chu, I asked him “Why place these deals on Ethereum?”  He stated that they use Ethereum so that each person’s wallet serves as a “complete reflection of their transaction activity, it becomes a perfect audit trail.” 

Think about that! A perfect audit trail. The crypto community has been talking about this idea for years. And we are now seeing that dream become a reality. On mainnet.  Each investor gets their own ethereum address with ERC-20 tokens that represent their allocation of the specific investment. They can go to Etherscan and view those tokens. The term sheet of the deal points to the particular contract on Ethereum representing all owners (pseudonymously) and their allocations.  

Now, don’t get over-excited.  This isn’t DeFi like we know it.  This isn’t trustless. There is still an intermediary with Cadence.  If they fat-finger a contract’s allocations, they can just publish a new one. 

These mainnet contracts serve more as a parallel structure that keeps track of the global state of ownership at any point in time.  There’s nobody that has to keep track of how many shares are getting Doled out (see what I did there?). Nobody that’s updating a spreadsheet.  Ethereum automates the backend for them.

But there’s a long term strategy that Nelson has in mind. When it comes to bigger deals like the one they just completed on the whole business securitization of Fat Brands, institutions expect that these securities will be tradeable. 

Here’s what he said:

“So we actually have a path towards the securitization of an asset that people actually want to trade vs. others [who] are just tokenizing things that people have no interest in liquidity for. So when a trustee needs to make distributions, when a bank wants to make a secondary market, the tokens will have a much bigger role to play to know who owns what when.” 

This could mean that investors will be able to trade ERC-20 tokens on mainnet that represent loan contracts, and therefore, cashflows.

Mainnet as a Strategic Advantage

Securities. On. Ethereum. Today.  And virtually nobody is talking about it. But this is Cadence’s strategic advantage. They can lower the cost of these deals, provide auditability, and automate their backend with Ethereum today. 

Not every business needs to be a DeFi business. Not every business will start out being trustless. But gradually, people will see that having a global ledger that is transparent and open will give them a strategic advantage over their competitors.  As Chu put it:

“It’s a long game we’re playing. We just got the trustee comfortable with the fact that we’re even issuing a digital security to begin with! As long as we can prove we make their lives easier and they make more margin, the chance of adoption is higher.” 

I believe this is how we will see the traditional financial infrastructure move to Ethereum. It will be in pockets, those pockets will connect and work seamlessly together. Building and reinforcing liquidity on each other and making it easier and easier to transact, audit, trade, and invest.



Author bio

I am a machine learning engineer by day, a dad by night. I bought my first Bitcoin in 2013 just as Mt. Gox was collapsing and luckily heard about Ethereum while it was still a project.  I’ve been a part of Ethereum since genesis and consider myself an active user and investor in the space. I’ve remained in Ethereum through thick and thin because I believe in what this community stands for and want to see us bring an open, permissionless financial infrastructure to the world. You can catch me on Twitter @joshuahjohnson .


Action steps

  • Consider: what are the benefits of traditional assets on Ethereum?

  • Will this be positive of negative for the value of ETH?


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🙏Thanks to our sponsor: Aave Protocol 

Aave protocol is a decentralized, open-source, and non-custodial money market protocol to earn interest on deposits and borrow assets. It also features access to Flash Loans, an innovative DeFi building block for developers to build self liquidations, collateral swaps, and more! Check it out here.


New to the Bankless program? Start here.


Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

Introducing Bankrupt!

https://bankless.substack.com/p/introducing-bankrupt

Dear Crypto Natives,

It’s come to my attention that many of us haven’t made any real money in crypto in over two years. While Bankless focuses on an a rosy future for crypto our recent experience has been one pain and disillusion.

We’re tired of the optimism. It’s exhausting.

That’s why today….and in consultation with my trusted advisors Udi Wertheimer and Justin Sun…I’m introducing a newsletter for the rest of us.

Introducing….

Bankrupt—the ultimate guide to crypto failings

Each week you’ll get:

  • Moody Monday: rundown of failing crypto projects & people to dislike

  • Trolling Tuesdays: a tactic on how to troll projects that are actually delivering

  • Thankless Thursday: a teardown of an Ethereum project DeFi plebs love

This program is designed to teach you how to equivocate solid projects with obvious scams, to engage in pessimistic groupthink, and to dismiss facts with artful rhetoric.

Learn from articles such as:

  • “Why ETH is NOT money”

  • “How ETHEREUM is worse than TRON”

  • “Why DEFI will never work and there’s no way to prove it will”

  • “10 things Ethereum promised but never shipped”

Let’s stew on failed projects and dropping prices together.

Get started with Bankrupt today.

Don’t level up. Level down.

Subscribe to Bankrupt.

– RSA


Subscribe to Bankrupt


How to make BANK flipping crypto collectibles

https://bankless.substack.com/p/how-to-make-bank-flipping-crypto

Level up your open finance game three times a week. Subscribe to the Bankless program below.

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Dear Crypto Natives,

In the early days of the internet we’d prefix everything with e. You shopped using eCommerce and you sent customers eNewsletters.

Somewhere along the line we dropped the e—the internet became the default.

We call them cryptocollectibles today. But give them a decade or so….we’ll just them collectibles. Crypto will become the default.

Continuing from tactic #28—you’re stuck inside so go explore something new!

Today we’re going to explore something new—how to stack ETH by flipping collectibles. The guy who wrote this does it for a living.

Sound weird?

I’ve got news—the 2020s are gonna get weirder. And the weird shall inherit the earth.

So let’s get weird. Let’s get bankless. Let’s front-run this crypto collectible thing.

-RSA


🙏Sponsor: Aave—earn high yields on deposits & borrow at the best possible rate! 


TACTICS TUESDAY:

Tactic #29: How to make BANK flipping cryptocollectibles

Guest post: Matty from dclblogger.com, crypto NTF trader & educator

In today’s tactic you’ll start learning how to spot opportunity & make money in NFTs. (Note: NFTs = cryptocollectibles, they’re the same thing)

  • Goal: Learn how to spot potential buy and sell opportunities for NFTs
  • Skill: Intermediate
  • Effort: Consistent work—many hours spent researching then $ to burn while learning
  • ROI: Immense. 10-30%+. I’ve made 400% in some cases.


A intro on how to spot opportunity & make money in NFTs

In 2017-2018 my cryptocurrency ‘HODL’ strategy taught me a valuable lesson.

You won’t make any money unless you sell.

So I decided to learn how to use my SKILL to consistently increase my net worth.

No more did I simply hodl coins but started looking for opportunities to buy and sell NFT’s (also know as CryptoCollectibles) to make ETH or MANA profits. This way, I could increase my portfolio as an additional way to accumulate. Similar to day trading.

(Above) Feb to September 2018 Trading in Decentraland. Mine is the top wallet.

Why do people buy NFT’s?

NFT projects are predominantly games that have tokenized assets. Like Gods Unchained Cards where each card is an NFT token and can be traded on the blockchain or Axie Infinity Pets (see tactic #28) where each can be bred, trained and battled in a massive pet universe.

Some of these assets have sold for $10s of thousands!

(Above) This Atlas ID #8840817 from Gods Unchained sold for $31k in December—listing here

People buy NFT’s for all kinds of reasons. The billion dollar Fortnite skins industry proves that people love to collect rare digital items to showcase their achievements and represent themselves in the digital world.

In some other projects like Decentraland, you can own one of 45,000 Private Lands and build things in VR!

An NFT can be used to represent all kinds of things. Skins, swords, access tokens, digital lands, digital pets—there’s people even selling digital businesses and games as NFT tokens on Decentraland!


⚠️Tip: Want to learn more about NFTs? Read the NFT Bible by OpenSea.


Unlike fungible tokens (bitcoin, ethereum, gold, etc) where each coin has the same worth as the other, Non Fungible Items are assets where each item cannot be simply traded for another. That’s where the term ‘NFT’ comes from. Non Fungible Token.

You cannot simply trade a Land with coordinates 43,56 with another with coordinates 49,60. One crypto kitty is always different to another.

So EACH have different values ranging from a couple of dollars to hundreds of thousands of dollars.

In between these trades, there is profit for those that understand the market.

This is where flippers like us come into play.


Flipping NFTs for Profit—Case Studies

👉Here are a few NFT flip examples ranging from a few hundred to $10k’s in profit.


How to spot what’s hot

There are many NFT games out there. And people are finding their own ways to make money.

Learning each project and spotting opportunities takes time. You need to learn which stage of the project is at, where growth seems to be happening, what the safe market price is to buy something and make sure you can sell at a profit immediately.

A lot of people buy thinking the value will go up and they’ll sell in a few months for a profit. Rarely does it go that way.

Strategy—Buy in Bulk & Sell Individually

Scout the trading channels for sellers that are trying to sell large quantities of items and offer them a bulk price. Larger investors can’t be bothered listing individual items and waiting for each to sell. When you put money on the table for ALL of their portfolio, it’s very hard to turn an offer down.

After you’ve researched and are up to date on market values of items, you want to try pick them up at a price you know you can sell immediately for 10-30% profit.


⚠️Tip: Use nonfungible.com to keep track of NFT sales history.


Let’s take Decentraland land for example.

This set of 3 lands sold for almost 35,000 MANA. (MANA is the currency of Decentraland)

That’s around 11,700 MANA each. We know that historically lands connected to roads, (grey lines), have easily sold for 15,000 to 20,000 MANA each.

Even if you take the low end of 15,000 MANA, that’s a profit of 3,300 MANA a parcel. 10,000 MANA = $250 USD!

Do that on a larger scale and you’re making $1,000’s sometimes $10s of thousands per trade.

Rely on Skill, not just Hodling

As you get better at scouting opportunities, negotiating, finding buyers, networking and keeping on top of strong markets, you’ll make more money.

This is a much better strategy in my opinion to simply Hold MANA or other coins. Other assets trade in ETH. So instead of holding say, 10 Eth, you can continue trading digital assets and increase that to 15 ETH, sometimes 4-5x!

As this requires skill not just luck, you can actively get better at improving your portfolio positioning.

The Risks and Rewards

There is ample upside to trading NFT’s.

  • Little competition as it’s a new industry.
  • Huge money making potential. A few have made 6 figures profit within a year or two doing just this.
  • Pioneering a completely new and emerging industry.

You also get to understand market activity at a level most don’t. So once bigger projects start transacting millions of dollars daily, you will be in a GREAT position to trade and make money.

Risks?

There are plenty.

  • NFT’s are a new industry, you have to make sure you’re working with well funded projects.
  • Ideas might seem great but after a pre-sale, there’s usually a big volume drop off as interest dies down. If volume decreases big time, you’ll just be left with tokens that no one wants to buy.

That’s why my number 1 rule is volume. I only trade in high volume projects. Decentraland and Gods Unchained come to mind. They transact 100’s of Eth weekly so I know I can get a small % of that.

Hold long term or flip?

Sometimes you get extremely rare items at a great price.

For example, I bought the name ‘SatoshiNakamto’ for my Decentraland Avatar. For a Crypto VR project that might one day attract 10s of thousands, hopefully millions of users, this name might be BIG dollars.

The name ‘Crypto’ just sold for 61,000 MANA—that’s $1,500 USD!.

(Above) This Decentraland Name just sold for $1,500 5 days ago

Sometimes you get items you can make a sweet 30-50% of profit on and increase your stack big time.

I’ve had trades where I’ve made 300k to 400k MANA in a single day!

That’s a lot of money. MANA was trading at 10 cents for a long time so getting a quick $40k USD is huge.

I can immediately re-invest that to a bigger deal and continue flipping.

In time you will learn how and when to sell.

The future for NFT’s

NFT’s have only grown since their rise to fame with CryptoKitties. From digital land projects to digital pets. Even digital wearables and names, all kinds of things are popping up where people are buying for $1,000’s.

(Above) Decentraland Bundle of items and names—12k Mana starting price is over $360!

The future looks bright as the space is also attracting institutional investors like DCG and Coinbase. (RSA note—even the Winklevoss twins recently launched an NFT market)

As funding comes in, innovation will thrive and people are creating all sorts of mechanisms like RocketNFT—get a loan using your NFT as collateral—or even NFT renting.

Imagine renting a popular sword for a tournament?

People are even working on sharding or creating fractions of NFT’s to be traded on an exchange! So you can own a share of a popular $10,000 USD NFT!

The future seems bright and if you’re getting involved in this now, you will be way ahead of the game if a giant like Atari or Pokemon come to the wonderful world of NFT trading.


Author Blub

Matty has spent the last 2 years buying and selling NFTs or CryptoCollectibles. He runs dclblogger.com in an effort to bring NFT awareness to investors. There are more opportunities than simply holding crypto currencies.


Action steps


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🙏Thanks to our sponsor: Aave Protocol 

Aave protocol is a decentralized, open-source, and non-custodial money market protocol to earn interest on deposits and borrow assets. It also features access to Flash Loans, an innovative DeFi building block for developers to build self liquidations, collateral swaps, and more! Check it out here.


Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

🎙️ #4 – Ether: The Triple Point Asset

https://bankless.substack.com/p/-4-ether-the-triple-point-asset

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🎙️NEW PODCAST EPISODE

Listen to episode 4 | iTunes | Spotify | YouTube | RSS Feed

Episode: #4
March 23th, 2020

There are three asset “superclasses”
– Store of Value
– Capital Asset
– Commodity Asset

Join Ryan and David as they explore the boundaries between asset types, and discover where Ether lies in relation to these three classes. 

Additionally, Ryan and David compare and contrast the economic and financial institutions that make up the world we know, and how they relate to these three classifications. 

Links mentioned in podcast:

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4 things to expect in the corona era -Bankless

https://bankless.substack.com/p/bankless-covid-19-prep-plan

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Dear Crypto Natives,

Suddenly everything’s different. We’ve entered a new era.

And what’s worked in the past isn’t certain to work in the future.

The big banks are saying U.S. GDP will end the year at -1.5% with unemployment at 5.25%. That’s bad, but not terrible.

You think they’re right?

Conventional wisdom says stocks are a buying opportunity now.

You believe them?

How about these:

It’s just a flu?

What if their models are wrong.

We need more than conventional wisdom.

We need unconventional wisdom for unconventional times.

Here’s a few things to expect next.

This is your bankless COVID-19 Prep Plan.

– RSA


🙏Sponsor: Aave—earn high yields on deposits & borrow at the best possible rate! 


THURSDAY THOUGHT

4 things to expect next…

People are in a habit of making predictions at the beginning of the year. That’s hard. Who knows what a year will hold?

It’s probably more useful to make predictions as we’re exiting one era and entering another. This is a new era—the corona era. Historians will have a better name for it someday. But whatever they call it then, this new era will shape our lives now in even more profound ways in the decades to come.

Here are 4 things I expect to happen next.

1. Things will get uglier.

Things will get uglier for a time.

We haven’t contained the virus. The U.S. and many other western countries reacted late. Hospitals will be overrun and deaths will number in the millions—all this despite our social distancing efforts.

(Above) Total cases and total deaths from Coronavirus as of March 19th—exponential growth

Governments and companies now face an ugly tradeoff. Social isolation is the only way to contain the virus right now. Yet the more social isolation the higher the toll on the economy.

The markets started seeing it in late February—the S&P dropped almost 30% since then. That’s bad—but we’ve seen worse. In the Great Recession we dropped 50%. It took 6 years to get back to highs. Our great grandparents saw much worse than that—stocks dropped 90% during the Great Depression and didn’t fully recover until 1954—over 25 years later!

What’ll this one be before it’s over? A 4.3% drop in GDP and 10% unemployment like 2008? Or a 30% drop in GDP and over 20% unemployment like 1929? Something less? Something inbetween?

It’s hard to tell. But you should assume things will get uglier. Faced with bad options and in an attempt to avert a Depression governments will bring wheel out their secret weapon—the money cannon.

2. Central banks will print a lot of money.

Fiat currency supply has increased 10x over the last 20 years. The Fed printed more than $3 trillion to get us out of the Great Recession alone. They literally called it into existence by adding a few digits to their centralized banking ledger.

(Above) Global fiat base money supply increases since 1970 sourced by Crypto Voices

In crypto money of course the money printing is set by algorithm and maintained by social consensus. If someone changes the algorithm to print more and you don’t like it, you don’t have to accept their fork. Social consensus means opt-in.

Fiat has no such constraint. Fiat can issue 5% one year and 80% the next. Central banks can print money to bail out Wall Street, or Corporate Executives, or a Favorite Industry, or a Persuasive Politician, or, occasionally—the people. You want to fork? Sorry. They put you in jail for that.

Is there any greater power than the power to create money?

And governments around the world will use this power like they’ve never used it before. Not all of the issuance will be a bad. Maybe some is even necessary.

Regardless.

Tens of trillions will be printed. The QE and fiscal stimulus and industry bailouts and exotic buybacks during the Great Recession will look quaint in comparison.

And yet…

3. People will want dollars.

A liquidity crisis. That’s the first phase of an economic downturn of this type. And dollars are the most liquid asset that exists. It’s the money with the highest moneyness. The money you panic into. The global reserve currency. The king.

Everyone wants to own the king during a liquidity crisis. So they sell their other assets and buy dollars. This influx of demand increases the price of dollars relative to other currencies and relative to other assets.

(Above) U.S Dollar Index measures the value of dollars relative to other currencies—USD is up!


But it’s not just liquidity they’re after.

Part of the reason there’s a rush to dollars is because so much global debt is denominated in dollars. If you have debt in dollars, and you’re suddenly facing an uncertain world, you want to be sure that you have dollar reserves in order to pay off your debt.

We saw a similar effect with DAI on a smaller scale over the past couple of weeks. DAI price shot up as high as $1.08. Why? Because Maker Debt holders needed DAI to pay off their DAI-denominated debt. USDC doesn’t help if your debt is denominated in DAI, just like Australian Dollars don’t help it your debt is denominated in U.S. Dollars.

Oil? Mostly denominated in US dollars—every country on earth has future oil debt. That’s why currencies like Australian Dollars are getting crushed by USD right now.

(Above) Australian dollars losing over 15% relative to U.S. dollars over the past several weeks

Even though the Fed is bound to print tens of trillions in the next couple years people still want dollars. Not just for legacy reasons either. Japan, China, Europe—their money printers burn hotter and spit out cash even faster than USA.

In the land of the blind USD is the one-eyed man so he gets to be king.

At least for now.

4. Crypto will rise.

Crypto has shown recent correlation with stocks during this liquidity crisis phase. When stocks went down, so did crypto. The correlation between the two asset types has never been higher.

(Above) Correlation between S&P vs BTC/ETH is higher than ever. It’s above .6 now. That’s 2x higher than anything before. We’re in a flight to liquidity like 2008. Will this last? Not in the next phase, not w/ the money printers firing up.

But we won’t always be in the liquidity crisis phase.

Markets operate on cycles. De-leveraging is an important phase of that cycle. Once it wanes people will pause to look at their infinite-issuance dollars and their 0% interest savings accounts and wonder if these are the best places to store value through the rest of the 2020s.

They’ll see what we’ve seen.

A money system that’s bankless. Not centralized, but permissionless, available to any citizen of the internet.

They’ll see monetary assets like Bitcoin and Ether that aren’t subject to the whims of central bankers and an open financial system that’s replacing banks with code.

They’ll see crypto monies with issuance at 1%.

They’ll see opportunities to earn double-digit interest on stablecoins.

They’ll see 1,000 reasons to log into a crypto bank or use an Ethereum address.

We’re seeing hints of this last one already. $150m new USDC stablecoins were issued in the past week alone. People are exiting ETH and BTC but instead of transferring dollars back to their WellsFargo accounts they’re keeping them in crypto. For them, the crypto money system—crypto banks, Ethereum addresses, crypto wallets, DeFi—are proving more useful for dollars than their legacy counterparts.

(Above) Stablecoin growth over time—massive recent growth (h/t Nic Carter)

That’s how it will happen.

The utility of the crypto money system will continue to grow.

The separation of money and state will become more attractive.

The central bankers will drop the ball in big ways.

And crypto will rise.

Final Thought

Don’t panic, position. Prepare for the new normal. Then get ready for things to get uglier, central banks to print, people chase dollars, and finally…for crypto to rise.

No, we’re not certain of these things. We’re betting on them.

The 2020s belong to crypto.

This has been your bankless COVID-19 prep plan.


Action steps


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🙏Thanks to our sponsor: Aave Protocol 

Aave protocol is a decentralized, open-source, and non-custodial money market protocol to earn interest on deposits and borrow assets. It also features access to Flash Loans, an innovative DeFi building block for developers to build self liquidations, collateral swaps, and more! Check it out here.


New to the Bankless program? Start here.


Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.


Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

How to make money in crypto gaming

https://bankless.substack.com/p/how-to-make-money-in-crypto-gaming

Level up your open finance game three times a week. Subscribe to the Bankless program below.

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Dear Crypto Natives,

How much would you pay for something that looked like this?

What if I were to tell you over $1m worth of these things have already been sold. Average price? Almost $6 each.

3xhuman breeds and sells these digital creatures as his job. In today’s tactic he shares how he makes money doing it.

Why’s this so cool?

eSports was getting huge before coronavirus. Now that traditional sports are canceled and much of the world is stuck inside for months, I expect we see eSports 🚀.

And this is more than eSports.

Crypto gaming is an eSport that allows players to unlock open economies. It’s DeFi + gaming. You can grind Small Love Potions by playing Axie, then sell them on Uniswap. You can breed Axies together, then sell them for profit on OpeaSea.

This stuff is super early, but the potential is massive. And there’s already people making a living doing it.

You’re indoors now, the real world’s a bit chaotic at the moment—this is the perfect time to take a break and level up on crypto gaming.

Opportunity awaits.

-RSA


🙏Sponsor: Aave—earn high yields on deposits & borrow at the best possible rate! 


TACTICS TUESDAY:

Tactic #28: How to make money in crypto gaming

Guest post: @3xhuman, Blockchain eSports player & DeFi Wizard

Learn how you can start making money in a friendly ecosystem while playing blockchain games (in this article I will use Axie Infinity as an example). We are going to learn how to evaluate Axies, how to fight with them, and how to create new, higher-quality Axies to sell for profit!

  • Goal: Learn how to breed, trade, and fight Axie Infinity internet monsters

  • Skill: Intermediate—Advanced

  • Effort: 8-16 hours (be persistent!)

  • ROI: 10-50% (my personal is above 33%)


Requirements: Metamask and ETH in your account for this tactic.


How it started for me

I loved playing MMORPGs as a young boy. I earned glory and recognition from other players by being the best. But glory isn’t everything. I also played games to earn loot. 

It was Kal Online that taught me in-game items are worth real money. Every week, guilds fought against each other to conquer the castle. Rulers had access to larger resources. These were economic wars.

I found myself earning as much as my parents from games like Kal Online at the age of fifteen. Earning entailed selling the loot I earned from killing monsters.

This primed me for crypto markets. I spent time trading and learning everything I could in crypto. But after years of doing this as a burnt BitMEX, I started looking for something where I could use knowledge about crypto markets but combine it with a passion to play games.

I knew there was opportunity in the intersection of blockchain games and crypto markets. I wanted to combine those two worlds.

I found the right game

Finding the right game wasn’t easy. Games of chance like CryptoKitties were never interesting for me. I was looking for a game that allowed players to be competitive.

I learned that Axie has a fully, player-owned economy that allows players to seamlessly sell and trade their game assets for digital currency. That’s how I got into Axie in January 2019. That month I bought a PC streaming setup. I invested around 15 ETH and made Axie portfolio management my daily work. I loved it.

You should know that Axie was a completely different game at that time, with some bad mechanisms. I like to say that an Axie portfolio is like a start-up. You have to be vigilant. You need to know the market, your customers, and adjust the product to the change in the market conditions and customer expectations.

(Above) Some personal stats, over 12 ETH in profit via in-game market, not including OTC

How to get started with Axie

Here’s everything you need to know about getting started with Axie to make money.

1) Buy your Axie team & create an account

Axie Infinity is one of the first blockchain games that introduced a mobile application, but it’s also available to download on PC, Mac, Android or iOS.

You need to have at least 3 Axies in your MetaMask wallet to start. Axies can be purchased on the official marketplace here.

To start I’d recommend buying the most basic team first, any cheap Axies are fine. This is risk mitigation, you want to see if you like the game before making bigger investments.

Once you have your first 3 Axies, you can create an account:

  1. Go here

  2. Log in with Metamask

  3. Create your account with email and password

  4. In the mobile app provide the same email and password that you just set
    (that’s how your Metamask account is connected with the mobile application, so you don’t need to have a web3 wallet all the time with you)

2) Understand the game mechanics

Like any game, to make money you have to understand the game mechanics. So let’s look deeper into these the mechanics behind Axie.

What Are Axies?

Axies are (mostly) cute internet monsters that players can battle, collect, and raise. Each Axie has different traits that determine their role in the battle and the whole game ecosystem (e.g. mystic traits).

Statistics

Each Axie has 4 stats: Health, Morale, Skill, and Speed.

  • Health: The amount of damage your Axie can take before being defeated

  • Morale: Morale increases the critical strike chance. It also makes entering last stand more likely and adds more last stand “ticks”

  • Skill: Skill adds damage when an Axie plays multiple cards at once (combo).

  • Speed: Speed determines turn order. Faster Axies attack first. Speed also decreases Axie’s chance of being the victim of a critical strike.

Body Parts

Each Axie has 6 body parts: eyes, ears, horn, mouth, back, and tail.

Horns, Mouths, Backs, and Tails determine which cards an Axie can use in battle.

Each body part also adds stats, depending on the class of the part:

  • Plant: 3 HP + 1 Morale

  • Aqua: 3 Speed + 1 HP

  • Reptile: 3 HP + 1 Speed

  • Beast: 3 Morale +1 Speed

  • Bug: 3 Morale + 1 HP

  • Bird: 3 Speed + 1 Morale

Classes

Each Axie has a class (similar to “types” from Pokemon). Each class is weaker and stronger against other classes.

When calculating damage, the card class of the attacking move is compared to the Axie class of the defender. This means that a Bird card used to attack a Beast Axie will deal 20% additional damage. A Beast card used to attack an Aquatic Axie will deal 20% less damage.

Now that you’ve learned the basics you’re ready to fight with them.

Battle System Mechanics

The Axie battle system is a turn-based card game where the goal is to eliminate all of your enemy’s team (3 Axies). Each turn, a player must strategically play cards that maximize their chance of winning.

More on battle mechanics:


Getting your first strong Axie team

Now you’re ready to create your first strong Axie team. Due to the mechanics of the game, most new players field teams consisting of 1 “defender” and 2 “attacker” Axies. The defender (the tank) should be placed in the front of your team, so it draws incoming attacks.

(Above) My tank Axie high HP tank Axie is placed in front to aborb attacks. Each Axie can draw from a pool of 4 potential cards in battle. Each card comes from a body part—Mouth, Back, Tail, and Horn.

You need a “defender” (often referred to as a “Tank”) Axie which can be defined as: the most adept at absorbing damage—High HP stat (50+), as well as having at least 2 high shield cards (Def 70+). More is better, but that can also be a lot more expensive (this is your chance to gain ETH if you choose to be a breeder).

(Above) Example of a defender Axie—my tank

⚠️Tip—Almost all plant class cards are good tank cards (Pumpkin, Zigzag, Yam). Reptile and aquatic cards can also be tank cards (Tiny Dino, Hermit). Self-healing cards such as Shiitake and Rosebud can make a tank more resilient. You can find a full list of cards here.


You’ll need an “attacker” Axies, commonly referred to as “DPS”. In general attacker Axies have the following traits: 2 cards with 100+ damage, sacrifice survivability (HP & shield) for damage output.

(Above) Example of good damage-dealing Axie.

⚠️Tip—Speed can be useful on damage dealing Axies, allowing them to incapacitate an Axie before it can attack. The skill stat adds damage to combos. Bird & Beast cards are almost always good damage-dealing cards. Morale increases the chance of a critical strike, dealing 100% more damage on an attack. This makes high morale Axies (generally beast and bug Axies) good fits for the damage dealer role.


Ok, now that you know how to put together a strong team let’s go through the basics of Axie price evaluation (better move combination = higher demand and price) so you can determine what to buy for your first team.

3) What can you do with Axies and how can you earn?

Like real-world pets, Axies can be bred to create new offspring. The offspring can be used in battle, breed new offspring, or can be sold on marketplace (in-game or OpenSea). In order to manage the Axie population, breeding has certain resource requirements. 

Each Axie can be bred 7 times (maximum). Breeding costs about .002 ETH, as well as Small Love Potions ($SLP). Small Love potions can be earned by playing the game in PvE Adventure mode, with bots as well as the PvP Arena with real people. Once you earn them, you can sync them to your wallet on this page.

In the graphic above, 1 potion = 100 Small Love Potions ($SLP). The cost to breed two Axies will be based on the breed count of both parents. For example, two Axies that have 5 breeds each will require 1,600 Small Love Potions to breed. Note: tagged Axies (Origin & MEO) do not require Love Potions to breed, but still limited to 7 breeds each.

If you want to engage in breeding, you should ensure permanent access to high-tier, virgin Axies, so that production costs are lower for you (SLP-wise).

On February 11th, the cheapest Virgin Axie (0 breeds) costed around .0189 ETH, which is over 9 times the breeding cost. This means that there is a clear path to earning in Axie Infinity, one way or another.

Here’s where it gets interesting in the intersection of gaming and DeFi—Small Love Potions are ERC-20 tokens which can be bought and sold on Uniswap. So, if you don’t want to use your potions to breed, you can instantly sell them and take profit.

Let’s walk through the three main ways to earn with Axie:

  • Collector Approach

  • Breeder Approach

  • Battle Approach

A) Collector Approach

If you’d like to create a collection, and you don’t care much about battle consider an investor approach. If you believe that Axie Infinity is a game you can grow 10x or more, buy rare and unique Axie and hold them. With the popularity of the game, your rare Origin or Mystic Axies should also gain in value. Some have already sold for more than 50 ETH.

(Above) You can see more price data on the Axie market from NonFungible.com site


What Axies are considered ‘collectible’?

– Tagged Axies (Origins, Meo, Meo II, Axies with Mystic parts)
– Low ID Axies
– Mint Condition (Virgins, Low Breed Count)
– Special Number ID (e.g. #420, #50000, #11111)
– Agamogenesis (more about them)


⚠️Tip—Rare class Axies like reptiles, birds will be more valuable as Origins and Mystic from regular class Axies like plant, aquatic or beast. Low ID =  1-100. Decent low < 10 000. Mystic Axies that are also good battlers will be more valuable than ‘any mystic’ e.g. plant Axies with DPS move set.


B) Breeder Approach


Genetics

Each Axie has 6 body parts, as well as body shape. For each part, an Axie possesses 3 genes—a dominant (D), recessive (R1), and minor recessive gene (R2). The dominant gene is what determines the body part that is physically present on the Axie.

When breeding, each gene has a chance to be passed down to offspring:

  • Dominant (D): 37.5% chance to pass this gene to offspring.

  • Recessive (R1): 9.375% chance to pass this gene to offspring.

  • Minor Recessive (R2): 3.125% chance to pass this gene to offspring.

You don’t need to count all of this in your head! You can use this calculator to look up the probabilities when breeding 2 Axies. While you can’t see the R1 and R2 (recessive genes) on the main website yet, you can view them using this extension built by one of our community members, Freak.


⚠️Tip—There are some parts like Holiday skins and Mystic that cannot be passed down through breeding. As of January 2020, these are Mystic parts and body parts from our special Holiday breeding events.


How is the Axie Class Calculated?

There are no recessive genes for the class. Each baby has a 50% chance of inheriting each of their parents’ class when born. So, a Beast/Aquatic pair would have a 50% chance of producing a Beast and a 50% chance of producing an Aquatic. If both parents have the same class, the baby is guaranteed to be of that same class.
Many players aim to create strong Axies for battle when breeding, which means aiming for good Defenders, Attackers, or Support Axies. I showed you some Axie archetypes (Tank, Damage dealer) above. Let’s walk through an example.

How Long Does It Take For An Axie To Become An Adult?

Axies take 5 days to reach maturity. After 3 days, you can morph your Axie to the petite form and see what genes it has. After 2 more days, you’ll be able to morph it into an adult and use it in battle!

How To Know What To Breed And How To Sell Your Axies

  • Be active on discord and social media—earn a good reputation.

  • Learn from others (what people have, what they breed, and what will be easy to sell)

  • Breed Axies that will be good in battle, demand is high for them, more people can afford them as they are cheaper than Origins and Mystic Axies (in general)

Example—I wanted to breed a strong damage dealer. As a first step, I scanned my collection for Axies that when bred together, would have a good chance of producing an Axie capable of dealing a lot of damage. In particular, I was looking for high morale Axies. This means cards that had either a high attack or a good combo of moves, that can make even more damage than the amount display on cards. This would allow them to get more damage done by dealing critical strike or get me more energy points.


⚠️Tip—Always read the card descriptions because many cards affect each other for better results. You want to know this and take it into consideration when breeding.


I settled upon the two Axies above. Both Axies have a high morale stat. I generally consider above 50 as high and with 52-61 being very high. They both have my favorite move set, with Imp and Ronin, so I will be able to deal a large amount of damage and at the same time, gain more energy points for future moves.

One of them was a 3 and the other was bred 2, so the breed cost is 700 SLP + .002 ETH. I was very confident that the baby would have a higher value, so I went ahead and did the breed! Keep in mind that some players just want to create the most beautiful babies (purely aesthetic)! Beauty is in the eye of the beholder (sometimes).


⚠️Tip—There are some parts that cannot be passed down through breeding. As of January 2020, these are Mystic parts and body parts from special Holiday breeding events.


C) PVE & Tournament Approach

If you want to minimize risk (any new Axie is a risk of failure and the possibility that the offspring will be a weak Axie despite valuable parents) then you can still earn by winning tournaments and fighting PvP and PvE. Here the entry threshold is higher. A Team able to pass the PVE game and grind SLP is worth about 0.3 ETH, a Team able to win fights with other players is worth around 0.6-1.5 ETH, a tournament team can be worth 2 ETH or more. In addition, to win tournaments you need to have your own unique strategy that can only be developed by devoting hours to playing.

Final Thoughts

The best strategy is to combine all the above approaches in a way that suits you. Remember that blockchain games like Axie are in alpha and beta. Playing them in a profitable way means adapting to changing conditions and constantly looking for market advantages. Being a professional blockchain game player is not an easy task, you have to devote a lot of time to it. However, if you are looking for challenges and you have the soul of a player—try, maybe it will be your dream job as it is for me.


Author Blub

@3xhuman has been a crypto enthusiast since 2012. He currently spends his time on the intersection of the blockchain gaming market and DeFi. Follow him on twitter and medium.


Action steps

  • Pick a crypto game like Axie (Gods Unchained is another good one) to dig into

  • Build a game portfolio and start earning money


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