What does a $27.5 million MKR sale mean for Maker governance?

This week, Dragonfly Capital and Paradigm purchased $27.5 million worth of Maker tokens as an investment and entry into the governance of Dai. Maker tokens are mostly used for collecting fees through interest payments and Dai liquidation penalties, and being able to vote for changes in the ecosystem.

Maker has already had issues with a single voter being able to determine the outcome of things like interest rates and the release of improvements, but how much power exactly will this $27.5 million give the new whales?

To get a good understanding of how this new investment can effect governance, we need to understand how Maker’s votes are tallied and how much of the total supply $27.5 million buys.

The total supply of MKR is 1 million and each token is worth around $480, giving the coin a total market cap of $480 million. Owning $27.5 million worth in MKR would be owning 5.7% of the total supply. This was apparently a joint purchase, therefor it is unclear whether the purchase will be split between the investment firms or if they will be on the same page when it comes to voting.

5.7% of the supply is not going to determine the vote in a vacuum, but what really matters is the voter turnout. Unfortunately, I don’t have historical data on Maker governance, but on their voting dashboard, I can see the past two votes. The previous vote to adjust debt ceilings, Dai savings rate and the interest rate had  119,000 MKR in support with a top voter contributing 55% of the voting power.

119,000 MKR * 0.55 = 65,450 MKR (one voter’s power)   /    65,450 * 480 = $31,416,000 (the same voter’s MKR value)

As you can see, $31 million is pretty close to what Dragonfly Capital and Paradigm purchased, and they would easily be able to take a major spot in governance if others didn’t show up.

Still, votes aren’t executed by the majority in Maker – the number of MKR in support of the new vote has to surpass the number of MKR in the previous vote in order to be executed. Where voting power matters more is when there is a spectrum from either no change to a (x) amount of change.

In the end, these new investors will be whales capable of subjecting their will upon Dai holders, but it’s not as much their fault as it is voter participation. According to Etherscan, there are 16,593 MKR addresses and only 8 hold over 1% of the total supply, 2 of which are Maker’s own contracts which I don’t believe vote. The remaining 6 whales hold about 23% of the total supply.

 

 

DeFi projects like Synthetix and Chainlink are addressed in the Cryptocurrency Act of 2020

A recently surfaced bill called the “Cryptocurrency Act of 2020” aims to delegate regulators power over blockchain based currency, and doesn’t fail to mention recent DeFi innovations in the literature. Specifically, the bill classifies synthetic derivatives, like those used on Synthetix exchange, as cryptocurrencies.

“synthetic derivatives that are determined by decentralized oracles or smart contracts; and collateralized by crypto-commodities, other crypto-currencies, or crypto-securities.”

Along with the clarification of synthetic derivative products, the Cryptocurrency Act defined what decentralized oracles are, probably because of their increased usage in DeFi projects.

“A ‘decentralized oracle’ means a service that sends and verifies real world data from external sources outside of a blockchain and submits such information to smart contracts that rest on the blockchain, thus triggering the execution of predefined functions of the smart contract.”

There are two protocols that come to mind when thinking of decentralized oracles and synthetic derivatives – Synthetix and Augur. Surely, there are many others that operate similarly, but these two might be the most well known.

Synthetix and Augur are both built on the Ethereum network and are classified fall under a decentralized finance category. Not only are they DeFi, Synthetix is a relatively new DeFi exchange that not many mainstream crypto traders are aware of or have participated in.

The feds have been notoriously behind the times when it comes to regulating in the crypto space, so it’s a bit surprising (and flattering) to see that they are keeping a close eye on the DeFi space. At the same time, it makes you wonder how closely they plan on monitoring decentralized products that have no fiat on ramping. Both Synthetix and Augur operate much differently than regulated exchanges do, with no KYC policies, no day trading limits, potential for leverage and the list goes on.

Sentiments of excitement and fear are being thrown around Twitter as people celebrate theF recognition and wonder what it will entail.

 

 

 

FTX’s exchange token FTT is now compatible with the Binance Chain

A few hours ago, Sam Bankman-Fried announced on Twitter that FTX’s exchange token, FTT, is now dual-compatible with the Ethereum and Binance blockchain networks.

”We’ve just enabled BEP2 FTT deposits and withdrawals. FTT is now dual-listed as an ERC20 and BEP2!” – Tweeted Bankman-Fried, CEO of FTX exchange

The news comes shortly after Binance announced investing in the FTX exchange and taking a long position on the FTT token. The companies are calling the collaboration a “strategic investment,” as FTX will help provide liquidity and develop products.

From the press release, it seems like Binance is providing FTX cash for tangible services. The exchanges are very different as Binance’s flagship site does not trade derivative products, which is mostly what FTX is made up of. Binance Futures, which is a derivatives exchange, still only lists ETH and BTC pairs.

It is unclear what FTT being compatible with the Binance chain will accumulate to in the immediate future other than making it easier to support on their exchange. Binance already supports so many tokens that it likely would be able to accept FTT as the ERC-20 token that it has been. Mostly, what it looks to be is FTX co-signing their new partner’s network.

For right now, FTX leads in diverse derivative products over any exchange, and Binance is probably looking for some pointers.

“The FTX team has built an innovative crypto trading platform with stunning growth. With their backgrounds as professional traders, we see quite a bit ourselves in the FTX team and believe in their potential in becoming a major player in the crypto derivatives markets.” – Changpeng Zhao, CEO of Binance

Decentralized exchanges aren’t yet fully decentralized yet, please stop saying they are

Decrypt is a great crypto news outlet that I read on a daily basis, but something that they posted today triggered me a bit. “A truly decentralized exchange is about to go live,” read the title of their piece on an exchange called DeversiFi.

Their basis in calling this a “truly decentralized” exchange is that governance is handled by a decentralized autonomous organization, (DAO) that controls power through a system of checks and balances. This feature by itself doesn’t make the exchange decentralized as there can be other centralized factors. On top of that, Maker already has a similar system in place for Dai, where people holding Maker can essentially govern the Dai token.

Unfortunately, in order to prove my point, I will have to tear down just how non-decentralized DeversiFi is, even though I like their product. First off, 1/3 of their pairs trade against USDT, a coin that is (supposed to be) backed 1:1 with dollars. Trading with a coin that only has value because an organization is holding funds to back it is inherently centralized. Not to mention, USDT is one of the riskier backed stablecoins.

Second, they advertise “unmatched liquidity” thanks to “hybrid architecture” built off on the backend of a centralized exchange. We confirmed with DeversiFi that they do infact pull liquidity from decentralized exchanges.

“We pull liquidity from centralised exchanges, meaning that essentially it is DeversiFi that takes any counterparty risk instead of the trader,” said Ross Middleton, CFO at DeversiFi on their Telegram.

He continued to say that their model will be able to handle thousands of trades per seconds. Speed is a reason why many decentralized exchanges opt to being hybrid. “Fully” decentralized exchanges have problems with liquidity and speed.

Either way, it is not a completely decentralized exchange based solely off of the fact that they trade USDT pairs. But it’s not just them, there are no truly decentralized protocols in DeFi currently. In order to be completely decentralized, according to Kyle Kistner, an exchange has to have decentralized price feeds, margin calls, provide decentralized liquidity, determine interest rates, administer platform developments and updates all in a decentralized manner.

Kistner is one of the only people in the DeFi space to put out a criteria for decentralization, he also is a founder of the bZx protocol. We reached out to him to confirm our opinions and he believes that DeversiFi is not fully decentralized. That being said, he also says it doesn’t fit into his rating metrics because it is an exchange, not a protocol.

“STARKs have an element of centralization to them, as do matching engines. I wouldn’t say that it (DeversiFi) is 100% decentralized,” Kistner told me on Telegram.

All of this is not to say that being fully decentralized is the only way to go, but to differentiate between a marketing tactic and reality. People in crypto love decentralizing all of the things, but we are not at a place where that is a reality.

This article was updated to include quotes from Kyle Kistner and DeversiFi representatives

Bitcoin and Ethereum maximalists are both wrong

If you have delved into crypto Twitter, you’ve surely seen a few influencers with a bio that says “Bitcoin maximalist,” or “Ethereum maximalist.” This means that the only crypto they see working out in the future is either Bitcoin or Ethereum. When I see this, it makes me question whether they know what a smart contract is or not, because Bitcoin and Ethereum clearly have different purposes.

The only argument you can make for maximalism 

Maximalism is subjective, based off of a person’s values. For instance, if the only thing you cared about was price increasing as fast as possible, Bitcoin might be your best bet. I could definitely see how a pure investor would be a Bitcoin maximalist as it has proven to perform better than any other crypto, including Ethereum, by a long run.

If you are thinking about what tech will have the biggest impact on the world, Ethereum makes more sense. Transactions are potentially faster, you can build an entire financial infrastructure inside of it, and since governance is liberal there is more room to develop.

Even though I can understand these perspectives, “maximalists” must understand that there is more than one role to fill in this industry. In consumer tech, Apple maximalists think the user experience matters most, Android maximalists think innovation and accessibility matters most. AMD maximalists value productivity and Intel maximalists value gaming. You will find super-fans of each, even though each product fulfills different roles.

Blockchain isn’t just about investing in a coin or building with a coin, it’s about both. This, again, is why I feel like maximalists are actively choosing not to look at the bigger picture.

Why you shouldn’t be a Bitcoin maximalist

Bitcoin doesn’t have smart contracts. This is an immeasurable difference because it essentially adds a programming language to Ethereum. Smart contracts allow people to build lending protocols, decentralized exchanges, stablecoins, social media sites, and more all within Ethereum.

There is a difference between gold and Amazon. In this situation, Bitcoin is gold and Ethereum is Amazon. Bitcoin’s scarcity is a huge factor in its price action, where as Ethereum depends on value settled within its ecosystem.

I like to compare Ethereum to Amazon because they both experienced what some people refer to as a bubble and others call a growth cycle. Amazon survived the dot com bubble, but was stagnant for many years after. Jeff Bezos was quoted in an interview saying that everyone was talking about their stock performance, but he was never worried because he knew his model was profitable and provided a unique service.

Ethereum’s bubble happened in 2017 during the ICO craze which has tons of similarities to the dot com craze. Just like how everyone thought they could solve the world’s problems with the web during the dot com bubble, everyone though they could solve the worlds problems with blockchain applications in 2017. Many credit the ICO craze to  Ethereum’s invention of smart contracts, because it allowed people to create blockchain projects that do things other than transfer money.

Like Amazon, Ethereum is proving its use case through steady growth. The most obvious area where Ethereum has been useful is by constructing the decentralized finance (DeFi) ecosystem. This allows people with Ethereum based tokens to lend, borrow, and exchange with one another. While prices of cryptos have fluctuated to extremes since 2017, value locked in DeFi has shown consistent growth. You would not be able to build this type of ecosystem on Bitcoin, because it does not have smart contracts.

DeFi total value locked

 

Why you shouldn’t be an Ethereum maximalist

Ethereum’s brand is nowhere near the level of Bitcoin’s. This is super important because people don’t actually understand the technology behind either assets yet, but they are being recommended to invest in crypto.

Bitcoin is the asset that people can get their hands on easily. They don’t need to fully understand it, but by sending Bitcoin from one wallet to another without a bank, a significant fee or processing time, they are able to understand why people think it’s cool.

People didn’t understand the web in the late 90s, and they still don’t today, but they use it so much that it doesn’t matter to them. Bitcoin is the most popular thing in crypto because people have found practical uses for it, mostly through investing. The two major draws to Bitcoin right now is as a store of value and as a relief from the banking system.

Though Bitcoin’s price is volatile, it continues to prove that it will not go away and die. People thought that Bitcoin was over after the 2018 crash, but it came back around in 2019 and almost reached the previous $20k high. Bitcoin needs to keep proving people wrong in this manner in order to maintain its relevancy as a store of value.

Blockchain is the internet of finance, and Bitcoin is the crypto where people can see tangible results. People want to have a bank-free place to keep money and Bitcoin gives that to them, plus decent returns. The funny thing is, they can store their value offline in any crypto, but Bitcoin’s brand is so prevalent that newcomers will choose it over alternatives a majority of the time.