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Weekly Trends (October 18 – October 25)

  • 26/10/2021

Macro-environment

BTC future ETF and BTC hit new ATH at above $66,000

  • The BTC future ETF fund saw about $1 billion of trading volume on its first trading day, indicating the demand of traditional investors to invest in cryptocurrency. Having a BTC ETF means that people can add the ETF to their retirement fund (401k); the benefit of it is that most 401k plans are tax-deferred. For example, if your annual income is $60,000 and you contribute $10,000 to your 401k, you will pay income tax for $50,000. With BTC futures ETF, you can invest that $10,000 in Bitcoin. Bitcoin offers higher returns than most current stocks.
  • The ProShares ETF is structured to invest in bitcoin futures contracts traded on the Chicago-based CME, rather than investing in the cryptocurrency directly. The ETF is not BTC and won’t introduce any new demand for bitcoin. However, traders might buy more bitcoin as they look to hedge against the futures price or they expect other people would buy more BTC. Therefore, the introduction of the BTC futures ETF is not the only reason causing Bitcoin to hit new ATH at above $66,000.
  • Other explanations for crypto booming, especially BTC are discussed in the report by Galaxy Digital Research “10 things that show crypto is booming”. A few key points are:
    • Bitcoin is performing well as a inflation-hedged asset. As inflation increases, BTC price increases as well. BTC has become nearly perfectly correlated with rising inflation expectations.
    • Capital rotates back to Bitcoin from DeFi, Alt coins, and NFT. Following the BTC peak in April and market peak in May, the capital flowed to DeFi, then to smart contract platforms such as SOL, AVAX, and LUNA; those coins peaked a few weeks ago in September then declined. The capital flow back to Bitcoin can be seen in Bitcoin Dominance.

  • What happens next is hard to say. More BTC ETF will debut soon. The Valkyrie Bitcoin Strategy ETF (with Justin Sun is the largest strategic shareholder) started trading on Oct 22, but it’s share price sinked on the Friday trading. The situation at this time is quite similar to what happened in April with the Coinbase IPO. But some bad news about China’s crackdown on Bitcoin in May brought down BTC to $29,000. This time, some bad news could cause the BTC price to fall, or there is good news about BTC in the future. What we know is it’s a market cycle. 

Facebook and its crypto wallet Novi

  • Coinbase will provide crypto custody services to Novi, a digital wallet created by Facebook. Users will be able to trade Paxos Dollar (USDP) – a type of stablecoin.  Facebook is piloting its digital wallet for users based in the United States and Guatemala.
  • However, a few hours after Facebook announced its pilot program, five Senators have called for the immediate closure of Facebook’s crypto wallet.
  • Novi wallet was first planned to hold Diem (formally Libra) , a stable currency developed by Facebook. However Facebook’s stable currency has faced numerous challenges from regulators. Most regulators are afraid of Facebook monopoly power regarding its large network of users around the world. If Facebook users are able to make payment instantly from anywhere in the world they don’t need to use any traditional money transfer services (the service provided by banks and controlled by national banks). Therefore, it becomes more difficult for governments to control money flow related to illicit activities. 
  • Moreover, unlike cryptocurrency, which is decentralized, Facebook’s stable currency is centralized (controlled by Facebook), giving Facebook so much power over its users. The recent Facebook’s scandals regarding user data securities and its using algorithm to maximize users time spent on the site to maximize profits (it delivers extreme contents that trigger emotions, including anger) has raised serious concerns among users and regulators.
  • In its effort to develop Metaverse, Facebook plans to change its name next week. The new name will aim to recast Facebook’s focus on becoming a “metaverse company” rather than a social media company. Therefore, the launch of Novi wallet, as a payment method, is an initial step to turn Facebook into a metaverse. On the other hand, the name changing might be a tactic to deviate the company from its current image since the Facebook name has been associated with many scandals over the past few years.

Smart Contract Platform

  • Terra

On October 16, Terra and Abracadabra announced a partnership that aims to take on the incumbents by leveraging their UST and Magic Internet Money (MIM) stablecoins. UST is an algorithmic stablecoin that is collateralized by Terra’s LUNA token. MIN is an over-collateralized stablecoin similar to MakerDAO’s DAI. Users are able to deposit various crypto assets and borrow up to 90% of their value in MIM. The partnership of MIN and UST could mean that we will be less dependent on custodial stablecoins such as USDT, USDC and BUSD. In addition, users can now transfer UST from Terra to Solana and vice versa via Wormhold bridge. 

Terra is set to connect to the Cosmos Ecosystem. The introduction of UST to Cosmos will help accelerate DeFi in that ecosystem. Stablecoins are maybe the most important basic building block for decentralized finance (DeFi), and UST in particular has grown over $2B in total supply this year as it is used in Terra’s growing DeFi ecosystem. The move onto Cosmos should open up further use cases for UST, as well as provide a stablecoin for Cosmos-based applications.

DeFi

  • DeFi 2.0

The first Defi wave started in 2020 with yield farming protocol, which is rental liquidity. The rental liquidity model provides short term incentives (APY or APR) for liquidity providers. The problem arises when farmers (liquidity providers) provide liquidity when the incentives are high, then withdraw their funds as incentives fall, creating unsustainable liquidity. The new liquidity model is “protocol own liquidity” or “protocol controlled value” (PCV). PCV became the central idea for DeFi 2.0. Protocol Owned Liquidity (POL) guarantees users that there is always sufficient liquidity for normal market operation. The POL model generates revenue for the protocol through swap transaction fees and yield farming opportunities.

  • Olympus DAO

Olympus DAO is a new type of DAO or Decentralized autonomous organization. Olympus is a protocol that is responsible for the issuance and management of a fully backed, algorithmic, free-floating stable asset, OHM. It’s native token OHM is not pegged to any currency but is backed by assets held in its treasury. Since its launch, the project has accumulated more than $400M in treasury assets, and has rocketed to over $3B market cap.

Each OHM issued is backed with a $1 value of assets in collateral. Initially, this consisted of just DAI, with every OHM issued having 1 DAI in the treasury as its backing. The protocol has since expanded the treasury to include other assets, such as FRAX, another algorithmic stablecoin, as well as OHM-DAI LP tokens from SushiSwap, and OHM-FRAX LP tokens from Uniswap. Since OHM is not pegged to any asset, its price is allowed to “float”, this means its value is determined by the free market and the value of backed assets. Therefore, OHM has a risk free value (RFV)” that is worth the number of assets backing each token.

Currently, OHM prices are at $984.22, with the current supply of 2,990,619 and a market cap of $2,942,874,704. The RFV of the treasury is $129,408,776 (counting only stablecoins: LUSD, DAI, and FRAX), meaning that OHM is trading at over x43.60 of its RFV. OHM is currently traded at a premium to its treasury, which means that the demand for OHM is high and that the future expectation of earnings distributed to OHM holders is high as well. 

In addition, because issuing new OHM only requires $1 worth of collateral, the premium also represents the amount of OHM that can be minted in the future. For instance, based on the RVF and circulating supply metrics listed above, the protocol can increase the current supply of OHM by 42x

OlympusDAO vs. Olympus Pro

  • OlympusDAO is a decentralized reserve currency protocol based on the OHM token.
  • Olympus Pro is the new industry-standard platform to help protocols acquire their own liquidity. Through Olympus Pro, DeFi protocols can partner with Olympus to add this bond mechanism to their protocols to employ the POL mechanism.

Two key mechanisms of Olympus DAO: Bond and Stake

  • Staking: OHM is staked to mint new OHM.  Once staked, holders will receive the new distributions in the form of sOHM, as well as 90% of the yield generated by the assets in the treasury. The current APY is 8,345.3% with a payment period of every 8 hours. Olympus DAO can pay high interest because each token only needs $1 to back, so it can print a lot more tokens.
  • Bonds: Bonding is the process of selling an asset to Olympus in exchange for discounted OHM that vest over the course of five days. Bonds allow the protocol to accumulate more assets, and grow its treasury. Bonding is an active, short-term strategy, the value of bonds can change quickly as the demands for bonds change. Bond price starts at a certain price, then keeps decreasing when nobody buys the bond. Until someone decides to buy that bond, then the price goes up.
  • Positive ROI: You sell OHM-FRAX LP tokens to get paid by OHM at a discounted price of OHM.
  • Negative ROI: When so many people buy the bond, the ROI turns negative, meaning that the bond price is higher than the market price.

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