While there is truth to this statement, it applies to much more than digital assets. For example, it applies to the pieces of paper that governments issue and call "currency" or to the mix of chemicals placed on a canvas and referred to as "art".

What is clear is that a number of active market participants strongly disagree with the ‘you’ll lose all your money’ narratives and to play devils advocate, we wanted to attempt to decipher how and why certain digital assets have value.

For starters, let's categorize digital assets in two categories:  

(1) currencies that facilitate transactions and/or offer a store of value,  

(2) technologies that have a broader use case (AMMs, DEXs, NFTs, etc).

Currencies & transactions

There are a number of competing protocols in this space – the goal is to facilitate transfers faster, cheaper and in a more secure manner than what currently exists. For decades the SWIFT wire system has been the standard in financial markets. If you need to move money across jurisdictions, you send a wire and know that your funds will reliably reach their destination.

Anyone who has transacted in BTC, USDT, LTC, etc knows the days of the wire are numbered. Interface challenges aside, it’s a far superior mode of transaction than a wire. Now if you have a faster, cheaper, more secure way to transact, is that worth something?

A number of developers have created tokens to solve this problem – the values of these tokens depends substantially on network effects. If the technology offers an improvement and thus users are willing to transact in a given token and it becomes widely circulated, it will have value. Increasingly, these types of tokens’ utility is to facilitate transactions, but may not always represent value beyond the transaction.

Everything else (!)

Everything else is where we think things get more and more interesting. Teams of developers, as is common in the technology space, are determined to solve big problems. Whether it’s decentralizing organizations, while still offering deep corporate governance, like DAO’s or removing the need for brokerage firms to provide liquidity – AMM’s.

Delving deeper, we can examine a token like Uniswap. Uniswap is a decentralized exchange and facilitates the trading of digital assets, very similar to a bank. However, Uniswap does this in a far more efficient manner. To look at it another way, Uniswap and Coinbase have similar trading volumes, but Uniswap has 38 employees vs the 1200+ at Coinbase. So take the UNI token, which allows you to participate in the earnings, governance and growth of a trading platform that functions far more efficiently than one of its major competitors. Do you believe that token has some value?

In summary

Don’t get caught up in the headlines. Value means different things to different people. Innovation that disrupts will always face pressure from those being disrupted.

Keep doing your homework and decide for yourself what has value - here is a great post that attempts to consider digital asset valuation in a traditional finance sense by applying P/E ratios.

Finally, we'll leave you with Camilla Russo’s interview with Arca’s CIO Jeff Dorman, which is a must-listen.

“The Bull Market is Intact for the Next 10 to 20 Years; We are in a Secular Shift:” Arca’s Jeff Dorman

Listen to this episode from The Defiant on Spotify. In this week’s episode, I interview Jeff Dorman, chief investment officer at Arca, an investment management firm focusing on digital assets. Jeff has been valuing assets for the past 20 years, from investment-grade bonds, to high-yield debt and eq…

SpotifyCamila Russo

The energy consumed in the process of mining for Bitcoin and other digital assets that utilize the proof-of-work (PoW) approach is significant, and this issue has certainly been in the spotlight given various actions taken by the Chinese government to limit mining in the country, as a potential catalyst for the market adjustment that happened in May, and due to a number of statements from everyone’s favourite celebrity CEO, including this one:

The issue is complex & poorly understood

The Financial Times has taken a strong position on the topic, reinforcing the 'dirty currency' narrative. Many of the arguments that cover this issue have focused on electricity consumption, which is different from the carbon footprint generated by Bitcoin mining. Harvard Business Review offered a good breakdown of this here.

The HBR article points out a relatively unique characteristic about the energy needs of Bitcoin mining - that it can be mined far from where it is ultimately used. In most cases, energy consumption and generation need to be relatively close from a geographical standpoint. The opportunity here is that we could optimize energy that is currently wasted for uses such as Bitcoin mining, creating value from something that yields zero-to-negative value today:

"Just imagine all the unused energy that is being wasted every single day, and being able to get energy and converting it into a secure, sound money system for the planet..." - Jack Dorsey @ The ₿ Word

What is clear is that identifying the right points of comparison is critical in any argument about Bitcoin’s energy consumption. Salient views are also emerging - here's one from Nic Carter:

Motivation to do better is a good thing

As we look at all available information, attaching the 'dirty currency' narrative to the industry seems premature and inherently unfair, but misconceptions will continue to circulate.

There is an important and sometimes overlooked point made in the video above - the digital asset space should have a valid claim on some of society’s resources if it creates value for society. Dan Morehead of Pantera Capital provided a deep analysis of blockchains & ESG in his most recent shareholder letter in a long but worthwhile read:

ESG Is The Little Bighorn Of Bitcoin Skeptics | Pantera

Pantera

All in all, the recent dialogue has been great for forcing the issue - the digital asset industry can and should continue to decrease its associated carbon footprint - as should all industries on the planet, given what humanity is facing on the climate front. Debates will proliferate, but the fact that this discussion is now front and center is a very good thing for the future of digital assets.

In May 2021, China reiterated its ban on crypto at a meeting of the State Council's Financial Stability and Development Committee chaired by Vice Premier Liu He. The Vice Premier vowed a crackdown on bitcoin mining and trading, citing both a financial risk to citizens and the energy consumption around mining. This week, Chinese authorities have been pushing harder to enforce their ban.

What does a ban on crypto in China mean?

Bitcoin mining has historically been heavily situated in China. Until recently, China accounted for between 65% and 75% of all Bitcoin mining.

The above chart shows that the hash rate, a measure of the computational power used per second by the Bitcoin network, has fallen more than 50% from its peak in mid-April. It’s now at its lowest level since November 2020.

Given this ban and the global decrease in hash rate, the difficulty for Bitcoin mining has gone down. In other words, mining Bitcoin is a whole lot easier with fewer miners in the pool fighting for block rewards (bitcoins).

Enter stage left: The Americas

A decreased global hash rate creates new opportunities for further decentralization of Bitcoin mining. Canadian and US-based mining operations are scrambling to set up new equipment and infrastructure in order to capture mining rewards while Chinese miners plan their mining migrations to neighbouring countries.

With a more lucrative potential, mining companies are able to experiment with renewables and cleaner energies for long term sustainability. El Salvador has recently passed legislature to legitimize bitcoin as legal tender. They are now planning to mine bitcoin with power generated from volcanoes. Canadian mining company, Hut 8 has updated their corporate mandate to reduce the carbon footprint from mining as they continue to use a hybrid energy model. US-based, Square has partnered with a Blockstream to use solar energy to mine bitcoin.

Summary

Given the much needed shift in global energy usage, corporations and governments around the world are pushing for a net-zero carbon future. Governments have created offset programs to fund research into renewable resources - Bitcoin mining is a fantastic way for new and existing companies to take advantage of these credits, while making the entire Bitcoin network more secure, sustainable and decentralized.

As the Bitcoin hash rate begins to ramp back up, it will be interesting to note the geographical make up of miners. Miners from China will likely continue to set up in neighbouring countries with cheap energy and new miners in the West will build infrastructure to mine with renewables like geothermal, nuclear, solar, wind and hydroelectric. The key takeaway here is that there will likely be a net increase in new miners, with the global hash rate will growing to greater levels over time.

A decentralized autonomous organization (DAO), sometimes called a decentralized autonomous corporation (DAC), is an organization represented by rules encoded as a computer program that is transparent, controlled by the organization members and not influenced by a central government. A DAO's financial transaction record and program rules are maintained on a blockchain.

~Wikipedia

At first glance, this seems like a lot to unpack, but the principles are clear:

• The entity is meant to be self-regulating, which means governance consists of a set of rules that will be enabled once a certain requirement has been met - for example, an investment decision based on predetermined criteria
• Being non-hierarchical stems from a DAO not having a top-down management structure, so programming rules and the stakeholders decide the fate of the company and a blockchain helps ensure continuity, transparency, and decentralization
• The trustless nature of a a permissioned blockchain, compared to a public chain, ensures those who have “bought into” the DAO are in control and the ultimate beneficiaries, which in effect performs the fiduciary obligation of the organization

The Maker DAO story

Bitcoin can be viewed as the first ever fully-functional DAO - it has a pre-programmed set of rules, functions autonomously and is coordinated through a distributed consensus protocol. Since then, the use of smart contracts has been widely enabled on the Ethereum protocol, which has brought the creation of DAOs closer to the general public and shaped their current look.

Anyone interested in DAOs should review the story of Maker, widely viewed as one of the most prominent and successful DAOs created to date.  

A widely anticipated implosion in early 2020 led to many (premature) calls for its demise, but the issues identified are important and will make DAOs stronger in the future.  Today, there is a vibrant ecosystem around Maker, and the story is clearly far from over!

Is the company of the future a DAO?

A common example of a failed DAO in action was “The DAO,” an investor-directed venture capital vehicle, which had record high token sales in 2016, offering what seemed like an innovative approach - the fund would cut out the principal-agent dilemma and through that put the power and returns back into the hands of the investors and token holders. Didn’t quite work out that way.

That said, like any market, we are seeing increased maturity, particularly now, where decentralized finance (DeFi) is becoming increasingly accepted. A DAO can be the leading layer of the organization or be implemented as an autonomous part within an organization. Often, in its current forms, a DAO fulfills the role of the former, rather than the latter. All of this can be tailored to the needs of the owners and the governance that was created by them.

In many ways, we can assume that the DAO is one of the many first movers into the field of autonomous organizational structures, paving the way for decentralized business models in the future. Look out.

Summary

DAOs provide another layer of separation from the handcuffs that come with centralized finance and traditional institutions. By decentralizing organizations and automating various processes, civil society institutions can truly serve their target audience in ways that are both beneficial and transparent.

~ Investopedia

Leverage (or the use of debt) to amplify returns has always been a major part of investing, irrespective of asset class. It's a major part of daily life as well. Most people have used debt to purchase a home or car.

Using leverage in financial markets takes the concept one step further, since in most cases you are using funds to purchase a liquid asset (a stock/bond) that can be quickly sold to pay back the borrowed capital. Banks and other lenders are willing to offer capital with minimal scrutiny on the borrower since their collateral (stock/bond) is liquid and easily transferable, unlike a home or car.

Leverage in crypto

In crypto this concept is taken a leap further for a few reasons…

1) Since markets are liquid 24/7/365, a lender or exchange can automatically reduce or liquidate your position any time and any day to cover a shortfall if/when a position moves against the borrower. They don't need to wait for the stock exchange to open in the morning. Put another way, lenders have very little risk to the borrower. Which is why crypto exchanges are willing to offer market participants such high leverage (up to 125x on some exchanges).

2) Crypto volatility means fortunes can be made (or lost) very quickly. This “opportunity” has created a segment of retail traders that are taking on massive amounts of leverage to express highly speculative views. If your trade moves even a couple % against you, you can and will be completely wiped out (rekt). If the trade moves in your favour, you can make a fortune. Just search wall street bets and you’ll find people on both sides of this.

3) Regulation (or lack thereof) means that many crypto exchanges can offer instant leverage to retail investors with minimal restrictions or due diligence. This is actively changing given the age of this industry, as we have recently seen exchanges limit the overall leverage a trader can take.

What does all this mean for the markets?

Many believe that until leverage comes down, markets will remain very volatile.

Each time we see a 1% or 2% drop in a digital asset, there is a leveraged investor seeing a 10% or 20% or 100% drop. That move often leads to a forced liquidation which creates further downward pressure which forces additional liquidations and we go into a spiral of sorts - aka: deleveraging.

While merely an opinion, volatility of this scale is not a good look for a currency. It has a damaging effect on the store of value argument for coins like Bitcoin.

On the other hand, capitalists believe markets are meant to be free. And this freedom to profit (via leverage or not) comes with the risk of loss.

Summary

At Avicenna, we believe a one size fits all approach can be somewhat naive. Depending on your understanding, portfolio and objectives, leverage may or may not make sense. If you don't understand the risk, you should take a moment to educate yourself or steer clear. It is never worth risking what you can't afford to lose. More importantly, it is best not take margin trades using leverage that you do not understand the consequences of.

As the digital assets industry continues to evolve and regulatory bodies wake up to these markets, we will start to see a more calmer crypto volatility index. We are testing waters and learning the ropes every day. These teachings will provide a much deeper understanding to form jurisprudence around digital assets for nation states and government bodies like the SEC, thus legitimizing the entire sector.

It was only a matter of time.

As the early success of the relatively few VCs who have been actively working in the digital asset space becomes clear, everyone is waking up to the idea that crypto should be an area of massive interest.

Of course, some notable firms such as a16z have been investing in the space for a long time, having been early investors in Coinbase and one of the first VCs that established a dedicated crypto platform. US-based funds such as Paradigm and Pantera have also emerged as category leaders.

That said, even in areas where lots of high-quality development work is already happening, the venture asset class has not necessarily piled in… yet. Evidence is showing that this is changing quickly - for example, an article from April 2021 that lists the 10 biggest venture rounds in crypto is already out of date.

“Nothing is more compelling than peer pressure from the likes of Michael Saylor, Elon Musk and the stampede of institutional money charging into the market. VCs must have a position or a view on crypto, or risk missing the biggest market opportunity in a generation.”~Jehan Chu, founder of Kenetic

VC funding for crypto and blockchain startups in the United States has now eclipsed other regions, according to the recently published Blockchain Venture Capital Report by Cointelegraph Research, despite the lack of regularity clarity for the market in the country.

Here is some other notable commentary from the report:

• Blockchain private equity has outperformed traditional private equity across one-, three- and five-year horizons
• The crypto landscape has been likened to the early days of the internet market in the 1990s and early 2000s - where the internet boom led to the initiation and subsequent rise of sectors like e-commerce and social media, the blockchain space has been touted to drive innovations such as decentralized finance and the decentralized web
• With blockchain touted as having similar global business process disruption capabilities as the internet, notable participants in the mainstream arena now appear keen to interact with the emerging technology

“It’s an opportunity of a generation that VCs can hardly miss.” ~Xinshu Dong, partner at IOSG Ventures

The token economy also offers new types of exposure for investors - the opportunity to acquire cryptocurrencies that could appreciate in value within a short period, along with activities such as staking, protocol governance, and node operations, to name a few. Essentially, there is the rare opportunity to be both an investor and a participant in these emerging ecosystems.

What does this all mean for retail investors looking to invest in the space? Quite a bit, in our opinion - here are a few things to consider:

• Asset values may rise given competition for deals
• The quality of teams working in the space will continue to improve beyond the shift from traditional finance that we are already seeing
• Visibility and data availability for projects will increase, but projects might be exposed to the public later than they have been historically
• The sophistication of valuation approaches will continue to improve
• Additional legitimacy will build in the space as notable investors put skin in the game

These are just a few of the changes that we anticipate - for more insight from one of the top minds in crypto, we'd suggest you have a listen to this interview with Chris Dixon of a16z, who is one of the most prolific investors in the space.

Here at Avicenna, we get many questions about ‘what else’ people should consider buying - other than BTC & ETH - after they’ve started to dip their toes into the crypto ecosystem. In a previous post, we talked about the idea of investors now being able to directly create a diversified basket of exposure to assets with asymmetric upside.

This is essentially the thesis of the Venture Capital industry - the winners win big, and the losers are easily forgotten as a result. The simple fact that we can compare the economics of crypto to the economics of an early investment in a venture-backed startup - and that everyone has access to the economics of crypto - is incredible.

The playbook

Here’s one way to think about it - would you be prepared to lose all of a $10,000 investment if making $100,000, $500,000… or potentially $5M from that single investment if possible? Your answer to this question may be yes, but this is where we believe there is a real opportunity to execute on a better playbook:

1. Start with the total amount of money you want to allocate to this strategy
2. Get smart about how you want to allocate (e.g., top 3 yield-generating DeFi tokens, top 10 cryptocurrencies by market cap, x-month price appreciation, etc)
3. Decide on whether you want to be broad or narrow in your diversification (ie whether you want to allocate across 3-5, 7-10, or 10+ assets)
4. Identify reasonable price targets for each of your selected assets
5. Start building your portfolio

With a strategy like this, you don’t have to be right on a single asset (there are so many!), allowing you to get exposure to multiple potential upside scenarios which essentially protect you against the (very real) downside risk that comes with any of these assets. For example, Theta was a high flyer only a few months ago…

Ape in, intelligently

Allocating capital this way will increase your chances of success, and allow you to learn about these assets in a way that will improve your ability to invest in them over time. You can choose to boost your return profile by selectively doubling down (ie increasing your position) on outperforming assets over time, particularly as your knowledge and conviction improves. And if all of this seems like way too much, you can take an easier approach - albeit with less control on which assets you select and double down on over time - by taking a look at TokenSets and selecting a portfolio.

A consideration for maximalists

Consider that, for the month of April, which was a relatively neutral month for crypto, several altcoins increased in value by over 100%, while BTC was down slightly. In March, we saw five coins that increased in value by more than 500%.

May was obviously a very different month, but opportunities remain - we still saw significant increases in altcoin values (ex. $MATIC), but at a different scale and with a different set of coins hitting the top 10. The bottom line is that there is no single answer to the ‘Beyond BTC’ (and ETH) question, but there is no doubt that taking an intelligent and diversified approach to investing in this ecosystem is a great way to start building your exposure and knowledge. But let's not buy too many coins named after dogs.

Stablecoins are a class of cryptocurrency that are generally backed by a reserve asset, like the US dollar. Examples of stablecoins backed by USD include USDT, USDC, and BUSD.

In recent years, stablecoins have become an important component of the digital asset ecosystem. Given the minute-to-minute volatility in assets such as bitcoin and ethereum, the market relies on stablecoins to provide a medium of exchange and store of value. Stablecoins offer the digital convenience and security of cryptocurrencies with the stability of fiat.

Stablecoins provide stability using different mechanisms…

1 – Fiat Collateralized Stablecoins – maintain a fiat reserve like the US dollar or precious metals like Gold, Silver, oil, etc. These reserves are maintained by an independent custodian and regularly audited. Examples include Tether (USDT) and PAX Gold (PAXG).

2 – Crypto-Collateralized Stablecoins – backed by other cryptocurrencies. Given the potential volatility in the cryptocurrencies in the reserve accounts, these coins are typically over-collateralized. MakerDAO’s DAI is the most prominent example of this type of stablecoin.

3 – Algorithmic Stablecoins – use algorithms to balance the circulating supply of the asset. The algorithm issues more coins when the price increases and buys them off the market when the price falls. Empty Set Dollar (ESD) and Ampleforth (AMPL) are two examples of algorithmic stablecoins.

Now that we have that out of the way…..we can consider the question how is a stablecoin impacted by inflation??

Inflation risk

It depends on your goal, what you’re measuring inflation against and what type of stablecoin you’re holding.

If you have a dollar pegged stablecoin, then you will move in lockstep with USD (assuming the collateral mechanism works) which will be exposed to the inflation that US policymakers are intent on ignoring because nobody wants to turn off the money printer - brrrrrrr.

USD inflation may be a palatable risk if you’re living in Argentina, but may not be your ideal scenario if you live in the US and are determined to avoid fiat debasement.

If you’ve found your way to crypto as an alternative to fiat monetary systems – using USD stablecoin for anything beyond a medium of exchange is likely not the solution you’re after. As a store of value, something like a gold or commodity backed stablecoin may be a better solution for you. A few options to consider: Pax Coin (PAXG), Tether Gold (XAUT), Certified Diamond Coin, Petrodollars, LODE.

However it’s important to note an asset backed coin will display the volatility of the asset that underlies it.

To summarize

Fiat inflation should have a proportionate impact on fiat based stablecoins, since their goal is to match a fiat value. You may have better luck hedging your inflation risk with a volatile, commodity backed stablecoin.

In other words, the inflation rate of the US dollar will match the inflation rate of USDC or USDT. As more brrr happens, some of that brrr (USD) will be converted to stablecoins which will make trading cryptocurrencies more liquid. Similar to asset price inflation (stonks only go up), we saw a slightly more delayed digital asset price inflation among cryptocurrencies – altseason as it were and the euphoria associated with it.

Perhaps the best way to manage inflation is to just buy BTC, ETH, real estate, art or gold (not investment advice)?

Where Bitcoin Fits in the New Monetary Order - CoinDesk

The third part of The Breakdown’s Money Reimagined series looks at the role of bitcoin and USD stablecoins in the new global monetary order.

CoinDeskMuyao Shen

Crypto whales are wallet addresses that hold over 1,000 bitcoins. The concept of whales in financial markets are nothing new. By holding a significant portion of an available asset, a whale reduces the volume that’s freely traded by the rest of the market. This results in a combination of increased volatility and decreased liquidity.

What happened?

Let's start from the top, when our boy Elon joined in on the energy-related FUD (fear, uncertainty, and doubt) and kicked off the recent bitcoin sell-off.

The price of bitcoin on May 12th, 2021 was trading at nearly $59k before Elon tweeted Tesla's intention to stop accepting bitcoin as a form of payment. This sent the price plummeting to $47k on the same day. If that wasn't enough, Elon added the cherry on top when he replied to @CryptoWhale's tweet a few days later, "Indeed".

Speculators immediately understood this as validation that Tesla would be selling their remainder (~$1.4 billion worth of) bitcoins. See below for a timeline of tweets along the bitcoin price chart.

But what else?

Even though Elon played a pivotal role in this sell-off, there were other factors at play here. In the same week, we saw new regulations on cryptocurrencies in China. This was an expanded version of the same regulations that were set out in 2017 by China, essentially banning any services associated with crypto to be allowed by any institutions operating in China. This means that any crypto lending, insurance, staking, etc. would also be banned in China.

Enter stage left: the real sell-off

It has been widely understood that a large portion of Bitcoin mining occurs in the Xinjiang province of China due to the overabundance of coal reserves which makes energy consumption cheaper in the region. With regulatory action looming over the miners in China, these Bitcoin whales (holding upwards of 10,000 BTC) synchronized selling with Elon's tweeting.

During this time, our on-chain Bitcoin research showed massive daily inflows of 10-20k bitcoins to exchanges. This was quickly followed by market sells and over 800,000 liquidated leveraged accounts in under 24 hours.

Please, no more FUD!

Even though the price action on bitcoin has not been favourable, we believe what has transpired is overall very good for the future of Bitcoin (and renewables).

Everything we know about Bitcoin and why we entered into this movement remains unchanged. Miners (and retail) panic sold, other miners began transitioning their operations to other countries and holy smokes, a ton of people bought the f-ing dip.

An opportunity

With more crackdowns in China, doors around the world have opened to further decentralize the future of Bitcoin. We believe this poses an immense opportunity to redistribute Bitcoin around the globe with a greater importance on utilizing renewables for mining.

Wen moon, wen lambo?

Nothing in the macroeconomic backdrop has changed. In fact, things look sharper than ever. We have seen more reports around increased inflation, higher levels of state-backed censorship, and dollar devaluations. Current prices look cheap against a bullish long term outlook (not investment advice).

Don't be silly

Please stop buying $-coins... or at least, if you are going to buy them, do so for their respective value propositions vs pure speculation. People have asked us which coins are under $1 right now so that they can buy them up. You need to be smart with your investments – if it comes easy, it will go more easily. Do your own research or invest with a fund that does research into alternative digital assets.

In summary

If you scrolled down to this, just read the whole thing, it's not long. Again, we want to reiterate our point of view that the long term future of Bitcoin and crypto feels healthy and exciting.

Most people following the crypto space have heard of Ethereum and Binance smart contracts before. They are the underlying technology behind many decentralized finance (DeFi) tokens and protocols like Aave, Compound, Autofarm and others.

But the Bitcoin network does not inherently support smart contracts in this traditional sense. There are however, discrete log contracts (DLCs) which can be natively executed on the Bitcoin network.

What are DLCs?

DLCs or discrete log contracts are essentially multi-sig transactions that are settled over the Bitcoin network. Some people refer to them as invisible smart contracts because there is no real way to differentiate them from normal Bitcoin transactions. Irrespective of a smart contract, all the transactions are settled over the Bitcoin network. DLCs are not a new phenomenon however there has been more infrastructure development around Bitcoin smart contracts (in the form of DLCs).

How do DLCs work?

Two parties send funds to a multi-signature address. In order to settle the transaction, an oracle (a third-party arbitrator) would sign the contract with a signature that corresponds to the hash of the winning outcome. The person with the hash that corresponds with the oracle’s signature can then withdraw the funds from the contract.

DLC use cases

There are many use cases for smart contracts. The easiest representative usage would be for betting; sports, elections with more complex financial derivative markets in the future. You could for example, open a call option on a market equity, say APPL, with a defined strike price of $603.50, expiring in 12 months and the DLC could settle the winners and losers.

Here is an example of Nicolas Dorier using a DLC to bet on the 2020 US election winner:

Summary

Discrete log contracts are yet another use case in favour of Bitcoin. With the Lightning Network sidechain, Bitcoin transaction fees are essentially zero and instantaneous and now with a larger adoption of DLCs, these smart contracts can be settled in near real-time over the Lightning Network and ultimately settled over the Bitcoin network ledger. Meaning, in addition to holding BTC as a store of value, the entire financial derivatives market could be automatically settled over Bitcoin also.

With Bitcoin topping the network effect and store of value leaderboards, and with a looming increase of adoption in smart contracts via DLCs – Bitcoin is truly becoming the digital asset of the future.

Have a listen to this podcast episode where Preston Pysh talks about Bitcoin smart contracts with key influencers:

While the broader world is grasping the growing divide between traditional and digital finance, the digital finance world is increasingly growing divided between the roles of CeFi (Centralized Finance) and DeFi (Decentralized Finance).

While others offer a far more eloquent breakdown of the differences, it can be summed up simply as trusting a company or organization to offer and execute on services (CeFi) or entrusting the technology/code through the open source community to ensure services are as offered (DeFi). Examples of CeFi include traditional banks like RBC or platforms such as Binance. DeFi would include lending platforms like Compound and Aave or Decentralized Exchanges (DEX) like UniSwap (UNI) and PancakeSwap (CAKE).

In our experience, crypto purists land on the side of DeFi. Believing that a user governed open source platform will constantly evolve to meet users’ needs. In the ideology - “of the people, by the people, for the people.” They tend to especially side on DeFi projects built on the Ethereum protocol.

On the other hand, few can argue with the impact CeFi has had on digital asset ecosystems. Providing a somewhat familiar on ramp/off ramp and quickly packaging products and solutions that the market needs.

Our thoughts

From Avicenna’s perspective, there is a role for both. The exponential growth we saw in 2020 was highlighted by DeFi’s innovation and ingenuity, but simultaneously supported by the mainstream users that embraced CeFi service providers like Coinbase, Binance and Kraken.

It is important to highlight that the future adoption of crypto into mainstream finance is heavily predicated on the success (and failures) of CeFi, CeDeFi and DeFi. There will be winners and losers; however, we are currently seeing degenerative gambling (degens) where many investors jump into projects at scale for a quick exit (ape in). It reminds us of the ICO days from the crypto bubble in 2018, and feels like another necessary evil that will get peoples' foot in the door. As you learn more about new DeFi projects, staking, yield farming and lending, it's important to be mindful of the risks associated with each of them.

"A cypherpunk is any individual advocating widespread use of strong cryptography and privacy-enhancing technologies as a route to social and political change. Originally communicating through the Cypherpunks electronic mailing list, informal groups aimed to achieve privacy and security through proactive use of cryptography. Cypherpunks have been engaged in an active movement since the late 1980s."

~Wikipedia

Much has been made of the ‘movement’ around crypto.  Those who believe tend to really believe and there’s lots of justifiable chatter about the increasing self-interest in promoting cryptocurrencies by those who hold cryptocurrencies.  Hard to argue that at least some of this has a self fulfilling feel to it, and ‘maximalism’ certainly persists:

The original Cypherpunks

These strong beliefs must be grounded in something, right?!  Absolutely - the crypto movement is not a fluke or accident.  According to a fascinating story about one of the original Cypherpunks:

Bitcoin was the culmination of decades of accumulated research and discourse within the Cypherpunk community.  

The reality is, the crypto movement got started and continues to grow on the back of a fast-growing and committed group of believers. The Cypherpunks matter because they were the original rebels, told constantly that this would never succeed, shunned by friends and governments, who continued to soldier on.  

The story continues to say:

To synthesize and implement the myriad ideas Bitcoin was based on, that person or group of people would have required a unique combination of expertise spanning public key infrastructure, academic cryptography, P2P network design, practical security architecture, and privacy technology. They would likely have been deeply engrained in the Cypherpunk community and adjacent to the figures who proved to be major influences on cryptocurrency. Finally, they would have needed the ideological conviction and hacker ethos to ‘roll up their sleeves’ and anonymously build a real-world version of ideas that had previously been relegated to the realm of theory.

Unpacking the ethos

Here are a few thoughts that are important to take away:

• The original Cypherpunks were fundamental to the creation of Bitcoin, and came from a diverse and multi-faceted set of backgrounds
• Those who submit to this ethos are committed to significant and systemic change, are willing to work hard to make this change happen and are not solely motivated by money
• There is a consistent thread here that relates to independent and open financial systems and solutions, which are not controlled by any government entities

Recently, Avicenna wrote about the emerging Decentralized Finance (DeFi) economy and the Cypherpunk mentality is well reflected in what is happening there.  Smart and committed people, motivated by a financial future that is open and provides more opportunity for the participation of the masses, are building new financial ecosystems by the minute.

There are deep-rooted beliefs driving the crypto economy that are grounded in openness, true connectivity, and access for all. New Cypherpunk movements are propping up everywhere, and while the ecosystems they are creating may look niche right now, they matter!