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The year is 2022 & the month is September, and we’re probably in a recession.

Probably because we’re still hopeful, foreclosures haven’t kicked in, unemployment is still the lowest, and the government hasn’t declared recession. 

On the other hand, Crypto & Stock prices paint a different picture, as there has been carnage across the board. Stocks are down by up to 90% & crypto projects are down by even 99.99% in a few cases.

 While stocks have a clear path to recovery as the revenue grows, what’s the revival case for Crypto?

Crypto came with a few firm promises, which lit up a beacon of hope for folks fed up with the current financial system, such as

#1 – Decentralization

#2 – Self Custody

#3 – Cost

How many make a use case and are adoptable on a wide scale?

When covid appeared, everything tanked, but due to stimulus, we saw unprecedented growth in valuations across every asset class. For the sake of this article, I’ll focus on Crypto. 

Why was Crypto worth 3T, and would we ever go back? 

First, on the valuation, the UK economy is worth less than 3T, and the Market cap of Apple is around 3T while Microsoft is 2T ( at its current stock price)

Crypto, UK, Microsoft & Apple. Who contributed to or changed lives the most and deserves this trophy? 

Now that we’re not closing NFT whitelists in minutes, it’s time to revisit Warren Buffet’s 1992 letter where he mentioned the famous warning.

“It’s only the tide goes out that you learn who’s been swimming naked.” 

Bitcoin was born after the ’08 recession as a hedge against fiat. 

This is bitcoin’s first test if that promise holds.

Past promises of cheaper transfers globally didn’t hold up, so we moved to the storage of value instead, which I buy as we’ve seen currencies being destroyed in many countries & hit hard by inflation.

Most people regard USD or Gold as a refuge, but volatility aside, bitcoin provides a perfect use case for value storage.

While crypto sceptics are thrashing Crypto left and right, where do we stand? 

Have we found the AHA moment, and is it good for anything rather than pure speculation because you can tell fairy tales for a while before the audience realizes it’s just a fairy tale?

So what’s the Crypto use case? 

We went through ICO, Defi, and NFT cycles, but neither of them is yet to make an impact on the masses. 

While building a startup, you’ve to be 10x better ( to have some edge); here we are talking about an entire industry.

Is Crypto making your life better by 10X?

So far, it looks like these are just better casinos with more games to play, the ability to have an alpha & more importantly, 24/7 without any jurisdictional requirement (yeah, I’ve heard of KYC 😉  

So the question of the decade is 

What’s the problem we’re ultimately solving?

And please, it’s not banking the unbanked or expensive wire transfers. 

I’ve generally kept myself away from crypto projects & cycles, but I think we’re onto something now as the pieces seem to be coming together. You don’t have to explain bitcoin to people anymore, and the silk road isn’t the first thing that comes to mind with bitcoin. 

Now that we’ve got passengers on board, can we sail in the right direction?

Web3 concept has been talked about for a few years but started to pick up recently, and as a sceptic, it’s easy to write it off as any other cycle. Because Why?

There are many answers to Why?

• They want to keep custody of their data
• They want ownership of the network.

Combine tokenization with a product with PMF, and you can take off. 

Personally, this is an opportunity for us to build the next generation of the internet. Web3 where you’re not the product

However, stocks are down by up-to 90% & crypto projects are down by even 99.99% in a few cases. While stocks have a clear path to recovery as the revenue grows, what’s the hope for crypto?

Today is the 10th anniversary of bitcoin Genesis block!!! Here is the screen shot

The first Bitcoin block of 50 bitcoins was mined on January 3rd, 2009 12:15 PM CST with the following hash.

0x000000000019d6689c085ae165831e934ff763ae46a2a6c172b3f1b60a8ce26f

Here is the link to 1st transaction

Bitcoin Genesis Block

Concept of Bitcoin was introduced by a pseudo entity Satoshi Nakamoto through a white paper on 31st October 2008. This genesis block was mined on the principles laid out in that white paper

On 3rd Jan’09, The London Times ran a cover story entitled “Chancellor on Brink of Second Bailout for Banks”. This title was quoted and embedded into the very first transaction ever to be included in the new Bitcoin blockchain, by Satoshi Nakamoto.  The block containing this transaction is called “The Genesis Block”

This note has been interpreted as both a timestamp and a comment on the instability caused by fractional reserve banking.

First recipient of the bitcoin transaction was Hal Finney, a cyberpunk who created the first reusable proof of work system ( RPOW) in 2004. He was probably the first person to download the software upon release & was transferred the first set of 10 bitcoins from Satoshi on 12th Jan’09. This was the first ever transfer that took place on bitcoin network.

Bitcoin has sparked a movement or a strong debate in existence of programmable money that leads to open & financial financial system.

It’s been a roller coaster ride. I got involved 7 years ago & thought late to the party. 10 years since first bitcoin transaction & I still think we’re early to the party

Industry has been growing daily defying any resistance internally & externally. This is probably the most undisputed financial technology innovation till date. It’s not just the tech, but combines economical, financial, political & philosophical movement.

Biggest strength of bitcoin is that it’s running now for 10 years in a row with 100% uptime, without a single fraudulent transaction that exists today & not deviating from its original monetary issuance schedule. Only 20% more bitcoins will be issued over next 10 years. In comparison, we’ve no clue how much of government issued fiat will exist even in next 12 months. I am really a fan of the transparency, where I can predict with a very high degree of certainty that every 10 mins, a bitcoin block will be created.

So unless the bitcoin network disappear which I find slightly hard to believe at-least over next 10 years or governments start putting a check on their money printing press, there will be a serious competition for storage of value. I suspect majority of the governments will give up on their currency & adopt another currency. It’s similar to languages where major languages have a network effect. With every passing day, confidence is bitcoin is growing & the pedigree that bitcoin has achieved over it’s competitors is unprecedented

Though we’re very far from where we should be, today’s the day to celebrate the bitcoin genesis block’s 10th birthday. Looking forward

#Happy10thGenesisBlock

Preface

Bitcoins was a hope of beacon in the world of crazy inflation that’s impacting every one. Since bitcoin isn’t tied to any country monetary policy it’s only worth what believe it to be worth it. Though it has consistency outperformed every legacy asset on a longer time horizon, it’s still far from mass adoption and one the major reason is price fluctuation.

Here are some of the bitcoin price crashes

2017 was the craziest year for cryptocurrencies where we saw crazy gains of 10,000X but 2018 wiped off everything. This led to party moment for few but a nightmare for many.  Fingers on the argument that bitcoin as a storage of value were raised & classic example of tulip mania was back in the market. It’s hard to argue with the pessimists because bitcoins doesn’t have any underlying fundamentals behind it. More & more negative media however has attached a taboo towards this revolutionary technology through which money can be programmed.While I personally have seen crashes multiple times over last 7 years, it’s tough to see market take a toll like this. Overall I am bullish on the cryptocurrencies however sanity has to prevail. It’s hard to deny the advantages cryptocurrencies provide but price volatility is keeping them off field for many serious players. While it’s exciting to see the upside swings, not everyone has an investor mindset. Since majority of the countries regulations are hostile towards cryptocurrencies, volatility keeps the institutional investors further away.  There has been one thing certain about bitcoins & that’s volatility. There are many funny memes & jokes around but the following one is my favourite

A boy asked his bitcoin-investing dad for 1 bitcoin for his birthday.

Dad: What? $15,554??? $14,354 is a lot of money! What do you need $16,782 for anyway?

There is an interesting case of token velocity which is super high when someone is using it as the currency and doesn’t want to hold. In case of cryptocurrencies, if you’re holding for long you’ll get a HODLER ( Hold On for Dear Life). HODLERS are generally regarded as highly respectable in the industry because they’re considered to be in for the long vision rather than flipping. Everyone loves to HODL, however the scary swings aren’t for the faint hearts. 

Read more on HODL here

Welcome Stable Coin which does take care of the volatility problem by being pegged to a fixed value such as fiat or commodity. This is the answer to every day users who don’t want to be exposed to price movements. It does fulfil the basic functionalities of money which are

1. Means of exchange  
2. Unit of Account
3. Storage of value

Transaction in cryptocurrencies have been complicated due to fluctuations & stable coins are supposed to put a stop to that. It’s almost impossible to transact in exact amount. Stable coin prime job is to protect the immutability of the transaction value. This also makes a strong case for cryptocurrencies and graduates it into a mature storage of value. 2018 has been a good year for stable coins which mushroom growth of stable coin provider. Everyone have their own way of approaching the solution but majorly they can be divided into two which are further subdivided into two. The two solutions are first divided by the way they’re designed and then by the virtue of their functionality. Overall they serve the same purpose, provide stability in the price of the user-desired assets.

There are two major types of stable coins philosophies

#1 – Centralized

#2 – Decentralized

Centralized coins are the one where there is a centralized entity keeping possession of the assets while in decentralized case, it’s generally a smart contract stabilizing the value.

Centralized

Centralized coins are issued through a financial institute who has the custody of the asset backing them. There are two major types of assets which are considered colletral while issuing stable coin

1. Fiat
2. Commodities

Fiat backed

This is the most common type of coin where the stable coin is issued against fiat currency by a centralized financial institute. Here are the features of fiat-backed stable

• It’s value is pegged to a fiat currency such as USD in a fixed ratio such as 1 stablecoin would be equal to 1 USD. USD is the most common pair but other pairs are also available.
• Financial institutes at any time is in the possession of the fiat currency backing the coin.
• Transaction may run off-chain or it’s own private or dedicated public chain
• Total collateral should be equivalent to circulating supply at any given time.

Technical wise, this is the most simplest way to issue a stable coins since the financial institutes just issues coins based on the amount they’ve. They are tradeable on exchanges and redeemable by issuing financial institutes. Trust in the entity backing is super important. Financial institutes does have an incentive in increasing the fiat backing because they can earn interest on the money without any risk. Even at 2% interest for 1 billion deposit, they’re earning 20M/year risk free. Cash handling cost is much lower than this making it a cash cow the financial institute. Cost involved are generally occured by the financial institutes anyways. We’ll see more and more financial institutes issuing similar kind of stable coins.Due to centralized nature, if the financial institute backing the coin has any problem, it’ll have directly impact on the the stable coin issued by them.

Commodities backed

Similar to fiat, there are stable coins which value is pegged to commodities they’re backed by. Most popular form of commodity is gold followed by silver, but we’ll be able to see other precious metals & petroleum based coins as well.

• It’s value is pegged to an asset such as gold in a fixed ratio such as 1 stablecoin is equal to .01 ounce of gold. Gold is the most popular but silver and other exotic commodities are also being issued.
• Financial institutes at any time is in the possession of the commodities  backing the coin.
• Transaction may run off-chain or it’s own private or dedicated public chain
• Total collateral should be equivalent to circulating supply at any given time.

Technical wise, it isn’t difficult either but the fluctuating price of underlying asset does require financial management and generally the storage cost is higher as compared to fiat. Commodities which are generally supported by stablecoins has to be fluid and tradeable on exchanges. They are tradeable on exchanges and redeemable by issuing financial institutes. Trust in the entity backing is super important. Having higher deposit strengthen the balance sheet which empowers the financial institute be leverage. Similar to fiat-backed stable coins, we’ll see more of commodity based coins as well.

Decentralized Stablecoins

Decentralized coins are not controlled by a single entity but more by code that stabilizes the value. There are multiple 3rd parties who have to participate in order for the value to be stable.

Cryptocurrency backed

Most common form of decentralized stable coin are backed by cryptocurrency. There isn’t major difference between cryptocurrency and fiat backed stable coins in terms of logic but due to nature of the transaction everything is done through smart contract & is on-chain. User put up their funds as collateral which is generally significantly higher than the stablecoin issued to cover up in case there is a flash crash. Despite higher loan to value, there are still liquidation events which even has more impact on the price and has lead to black swan events.

Here are some of characteristics of stablecoins

• Value is pegged to fiat but it’s pegged by a cryptocurrency
• No centralized body is in control of collateral but it’s locked through smart contract & is executed on-chain
• There are additional supplementary instruments and concept of oracle which keeps the price stable. These oracles have act more like a bounty hunter which is looking for liquidations and make a small profits whenever it is able to execute properly

Though it’s very similar to any centralized stablecoins in terms of mechanics, risks are far higher. Biggest risk is code exploitation which can lead to collapse of entire system. Though there are constant audits, but still history is full of breaches and hacks. Here the stakes are much much higher. Smart contract doesn’t execute by itself but requires a third party execution so the system has to rely on them. If they fail to act in time, liquidations might not happen in time destroying the peg value.  Easiest option is to have a very high value of collateral with respect to loan however it may make tit unattractive since investors are looking to leverage up not the other way around.

Seigniorage (algorithmic)

They’re similar to a Decentralized Autonomous Organization ( DAO) which controls issuance and pricing, which are referred to as seigniorage-style (or algorithmic) stablecoins. They’re completely digitalized and non-dependent on any collateral whatsoever. Supply, demand & target price is controlled by the code which makes it truly decentralized and no regulatory oversight. Both of these features increases its ability to scale as compared to counter part solutions since there are not any additional collateral requirement with supply increase

Here are the major features

• Full decentralized,
• High scalable,
• Executed on-chain,
• Cheaper to maintain the price immutability due to lack of collateral requirement

It operates on the basic principle of supply and demand where coins are issued if there is enough demand & destroyed if the demand drops. This issuance and destruction keeps the price stable. Generally if the price goes down. Bonds are issued and if the price goes up seigniorage shares are issued. This is most exciting form of stablecoins but haven’t been in production yet.

There are also creative proposals on how to achieve stability while keeping the decentralization property and it’s a work in progress.

Concerns:

1. Stable coins aren’t stable

There hasn’t been a single example of stable coin that have been successful at keeping the exact peg for extended period of time. Multiple times they’re traded few percent above or below their actual value. Theoretically they’re great but they’re prone to market fluctuations as well. In one case, value of a stable coin has dropped by 70%.

1. Do they bring stability ?

Bitcoin does have a connection with alternative coins when it comes to price movement so generally the overall market doesn’t move much with respect to  each other. Bear and bull markets are correlated. Stable coins adds a different dimension to market pricing where people can bring in fiat and take a short/long position making the market extremely unstable. So with stable coins, the term shouldn’t confused with the fact that it’ll bring stability to the market. It just keeps the value stable for the holder of that specific coin

    3.  Vulnerable

It is a new concept and haven’t been tested over long period. There are chances that one of them will break causing a spiral downward market crash. It has happened in the past but they were not as popular at that time having minimal impact. Even decentralized coins are prone to hacks Stable coins generally require us to trust a central third party. In case of centralized coins, there are always risk of custodial going illiquid.

Pursuit to perfection

Cryptocurrencies basic moto is decentralization but there isn’t a fool proof system to get  a perfect solution. We’re far from perfection but we have came a long way. Stable coins are on the rise with over 2 dozens companies working on the solutions. Every has a unique approach and hopefully we’ll have a perfect solution soon. Stable coins are the holy grail of crypto and is a necessity piece in the puzzle. With extreme volatility in cryptocurrencies, it would encourage people to get in and out of the market whenever they want. None of the solutions are reliable so they’ should be only treated as an ad hoc solution. Right now it’s limited to startups, but bigger financial institutes will move into the game and I won’t be surprised if countries start issuing their own digital currencies on the principle of cryptography. Rome wasn’t built in a day & future won’t be either. It’s an evolution towards better & better