Pantera Blockchain Letter, October 2020
PAYPAL INTEGRATES CRYPTO
PayPal recently announced they are launching a new service that enables customers to buy, sell, and hold cryptocurrency directly from their PayPal accounts. They are also planning to break into the crypto-payments sector by allowing users to fund purchases with crypto at PayPal’s 26 million merchants worldwide.
This is one of the biggest developments for the industry this year.
PayPal has 300 million active users. That’s 300 million people who will have a direct onramp to cryptocurrency in the coming weeks.
In aggregate across PayPal, Robinhood, and Cash App, that’s 350 million people who can instantly participate in crypto without having to go through a multi-day/week onboarding process for a crypto exchange. That was a major issue all throughout the 2017 bull market. Investors wanted exposure but it was an arduous and cumbersome experience.
This development fits into a broader theme of companies adapting to stay relevant. The demand for cryptocurrency is there, and many companies can’t afford to lose market share to competitors who are offering cryptocurrency services when they don’t.
Riding on the back of regulatory developments like the OCC’s notice that nationally chartered banks can custody cryptocurrency, we’ll likely begin to see more legacy companies offer cryptocurrency services for their customers.
Square’s Cash App — discussed next — only gives access to Bitcoin. PayPal’s offering supports Bitcoin, Ethereum, Bitcoin Cash, and Litecoin.
SQUARE’S CASH APP
Square’s Cash App got out to an early lead in this space. In Q1 2020, Square purchased $306mm in bitcoin, up 72% from Q4 2019. Square purchased almost a quarter of the total amount of bitcoin created in that quarter. (A year ago, Square’s Cash App was reportedly buying less than 10%.)
That was before the block reward halving which occurred in May of this year. Under the assumption they were consuming the same number of bitcoin throughout Q2 as they were in Q1, Cash App would be buying around 40% of all newly-issued bitcoin.
You can go round and round with pundits on valuing bitcoin. One thing that is certain — when the net supply goes way down — and demand is constant — the price goes up.
BITCOIN ON CORPORATE BALANCE SHEETS
Bitcoin received strong endorsement over the past couple months with two major public companies allocating portions of their treasuries to bitcoin. In September, MicroStrategy announced yet another significant purchase of bitcoin, totaling $425mm invested in the leading digital currency. Square announced they put 1% of their total assets into bitcoin, amounting to $50mm or 4,709 bitcoins at the time of purchase. This is what Square had to say in a public note about their investment rationale:
“Given the rapid evolution of cryptocurrency and unprecedented uncertainty from a macroeconomic and currency regime perspective, we believe now is the right time for us to expand our largely USD-denominated balance sheet and make a meaningful investment in bitcoin.”
Square and MicroStrategy actively hedging against the debasement of paper currencies is important validation for bitcoin.
The fact that their stock prices subsequently jumped on news of their bitcoin allocations is a strong indication for the digital currency. It’s historically been the case that public companies announcing integrations of blockchain or crypto have seen their stocks rally.
With all these new entrants in the space like Paul Tudor Jones, Jim Simons, and even Stone Ridge who recently disclosed their $115mm bitcoin investment, it paves the way for more institutional adoption.
There’s a well-known video called “Leadership From A Dancing Guy” which dissects how a movement is started, gains momentum, and ultimately succeeds. The key takeaway is that a movement doesn’t succeed because of its initial leader. Rather, it’s the first follower and the subsequent followers who make it work. The more who join in, the less risky it is to take part in it. Those who were on the fence before, have fewer excuses as the movement grows.
The recent trend of public companies converting portions of their fiat-denominated treasuries into bitcoin is an indication that the movement is building momentum.
DEFI GROWTH METRICS — BY JOEY KRUG
There has been a surge in growth of decentralized finance this year. There are two main metrics you can look at, one is how much value is locked up in these DeFi protocols, and the other is how much trading volume is actually happening. Two years ago, there was only a couple of hundred million locked up in DeFi projects. Now there is over $12 billion. This year alone, the value locked in DeFi has risen over 1,500%.
This year, decentralized exchanges (DEXes) have seen unprecedented growth. There have been many days where the leading DEX, Uniswap, has facilitated more trading volume than Coinbase. In fact, for the month of September, Uniswap did more volume than Coinbase. This is something we didn’t expect would happen this year — eventually, but probably not by now. Two years ago, trading volume was just a rounding error. It was basically non-existent for the most part. Now, decentralized exchanges are trading about $22 billion a month, and that’s before scalability is really even here yet. Once scalability is resolved, DEX trading volumes will snowball, and in some cases surpass centralized exchange volumes consistently. It’s already happening for certain trading pairs and assets.
These graphs remind me of a classic line in Hemingway:
“Two ways. Gradually, then suddenly.”
— Ernest Hemingway, The Sun Also Rises, 1926
We’ve been investing in DeFi for years. DeFi happened gradually, then suddenly.
DECENTRALIZED FINANCE STACK — BY JOEY KRUG
If you’ve tried to research how DeFi works and what the various components of the ecosystem are, you probably saw many references to vegetables, farming, and even Japanese cuisines.
We’d like to help make sense of the DeFi landscape. Below is an overview of the core components of the ecosystem with project examples.
Separately, we’d like to invite you to join us for our conference call on November 3rd at 9:00am PST, Deconstructing DeFi — a discussion of the DeFi ecosystem to better understand the long-term value of the space. Acala co-founder and CEO Ruitao Su and Alchemy co-founder and CTO Joe Lau will join us for the discussion.
You can register via this link: https://info.panteracapital.com/general-information-conference-calls
These are basically interfaces that will allow you to interact with the decentralized finance ecosystem. Yearn.Finance and InstaDApp are examples of two main options at this point. With Yearn, you basically give them your money and they manage it. You can do this for ETH or various stablecoins, and they’ll charge you a small fee on it.
InstaDApp is more of a “do it yourself” platform. It’s sort of more like the E-Trade model. You go there, they show you all the different things you could invest in, and you choose the ones that you like. It’s sort of like a broker or a bank, but it’s decentralized and you have control over your own money.
Decentralized Derivatives Exchange
Decentralized derivatives exchanges are really important for the ecosystem. Keep in mind, most value in the traditional financial system is in derivatives. Vega is one of our portfolio projects that is launching a decentralized derivatives exchange and they’re supposed to go live sometime in the next few months. Injective is another portfolio project that recently launched.
What has propelled DeFi forward this year has been investors borrowing and lending crypto assets using protocols like Compound, Maker, and Aave. Many investors have been lending out their assets to generate additional yield on their holdings at rates of 5–15% or even more in certain cases.
Decentralized exchanges allow for peer-to-peer exchange of crypto assets without the need for a middleman. They are non-custodial, meaning users don’t forfeit control over their tokens to the exchange. Different types of DEXes have created innovative ways of swapping in and out of tokens. For instance, Uniswap removed the concept of an order book altogether and introduced liquidity pools that allow for instantaneous swaps. In September, DEX trading volume exceeded $25bn.
These are marketplaces that connect merchants and consumers together without the need for a third party intermediary. An example of this type of marketplace is Origin which allows developers to create decentralized versions of companies like Airbnb or Uber.
When we first entered the space, everyone was talking about how crypto is going to be used for payments, it would be used for remittances, etc. But it didn’t really happen for a long time. Now it’s beginning to happen with projects like Terra and the abundance of stablecoins like USDC. The total value of the stablecoin market now exceeds $20bn.
Terra is based in Korea and they power a lot of payment volume there. They process over $4bn in annualized TPV or payment volume. They’ve actually gotten product market fit using crypto for payments in the Korean market and they’re eventually going to expand outside of there.
Oracles help you get real world data into the blockchain. If you imagine a new parallel financial system, it does need to know some data about the real world. Augur uses oracles to figure out things like who won an election? Or what was the price of something when it closed on the Friday closing bell. Chainlink uses oracles for things like what’s the price of ETH? What’s the price of OmiseGO token? Whatever it is, it gives you those prices on chain.
The very bottom of the stack is layer one or the actual blockchain are you building on. Ethereum is definitely the market leader right now. People are working on a bunch of different ways to scale Ethereum. There’re lots of competitors to Ethereum. Projects like Polkadot, NEAR, and Cosmos are similar platforms that are much more scalable at the moment. Most or all of those are actually working on bridges to Ethereum to get data to and from the Ethereum network. Down the line, we might have a world where there are some projects built on Polkadot, some on NEAR, and some on Ethereum, all interacting with each other.
FILECOIN NOW LIVE
An excerpt from “Why Amazon’s Margin is Filecoin’s Opportunity” — an article written by Pantera Co-CIO Joey Krug three years back:
Jeff Bezos has a great saying: “Your margin is my opportunity.” Essentially, it means he can out-compete almost any business in industries he enters using Amazon by undercutting the competition and doing it cheaply at massive scale.
While most hardware has migrated to the cloud, resulting in developers paying services like AWS for storage and computation as opposed to buying their own hardware, the costs for these have not decreased down to hardware margins. Instead, as hardware has migrated to cloud centers, margins have become more like software margins. So whereas profit for hardware companies is typically pretty small, with services like AWS, it is closer to software-level margins. Put simply, Amazon’s most profitable part of the business has fat margins, which is definitely someone else’s opportunity.
“Someone” or something like Filecoin’s.
Filecoin raised $257mm from their ICO which ended in September 2017 and the project launched this month. The platform aims to be the next-generation marketplace for data storage and retrieval, basically a peer-to-peer marketplace for data storage. Filecoin could rival centralized services like AWS, with much of the value proposition predicated on the cheapness of the product. Now that the project is live and functioning, let’s take a look at the cost statistics. We’ll use https://filstats.com as our data source.
At the time of writing, the cost for 1GB per month is $0.0025. Given current retrieval times, it’s more appropriate to compare Filecoin with AWS Glacier versus its speedier alternative, AWS S3. In a recent tweet by Filecoin, they cited that storing 1,000GB on AWS Glacier for a year would cost $48.00, whereas that same amount would cost $3.16 with the top-rated Filecoin miner. From a price standpoint, Filecoin wins, full stop. And as latency issues hopefully resolve over time, we could see it rival AWS S3 and other services with faster retrieval times.
One of the big questions has been “well, how much can you actually store on Filecoin? Can you store any amount of data you want like how you can on Amazon?” The answer is a pretty resounding yes. The amount of storage capacity in Filecoin is insanely large, it’s about 700 Pebibytes (PiB). And with over 600 miners and more joining the network to provide storage capacity, we’ll see that number increase over time.
PORTFOLIO COMPANY UPDATES:
Injective Protocol Enables Trustless Cross-chain Derivatives
Injective Protocol allows anyone to create and trade derivative markets that are trustless and resistant to front-running through its decentralized exchange (DEX) infrastructure. Injective Protocol currently supports perpetual swaps and Contract For Difference (CFDs), and will support futures, margin, and spot trading. Users can create new markets with only a price feed, thereby opening up a long tail of markets currently under-served by centralized exchanges.
Injective Protocol uniquely operates across multiple chains, including Ethereum, Cosmos, and Polkadot, while enabling trade execution and settlement on its layer-2 protocol. As a result, Injective allows users to access cross-chain yield generation. Binance recently listed Injective Protocol’s native token (INJ), which can be used for a range of functions, including protocol governance, exchange fee value capture, collateralization, liquidity mining, and staking.
NEAR Goes Live
NEAR Protocol aims to provide a highly scalable, low-cost platform for developers to build decentralized applications. As a general-purpose layer 1 protocol, NEAR addresses scalability through sharding techniques and proof-of-stake implementation. Since NEAR’s mainnet launch, the protocol has successfully transitioned to on-chain community governance and enabled a trustless Ethereum bridge for moving assets and data between chains. The NEAR community is seeing healthy growth in developer activity. Examples of applications being built on NEAR:
- Flux, an open market protocol enabling developers to create markets
- Mintbase, a platform that makes it easy for anyone to create non-fungible tokens
- ZED RUN, a futuristic horse-racing game where users can trade, breed and race digital horses
Zcash Developments Ahead Of First Halving In November
Zcash is a digital currency and store-of-value that focuses on preserving privacy, which can be overlooked as an important aspect of building a new financial system. Corporations need to keep transactions private to protect customers and thwart competitors. Individuals naturally want financial privacy, whether from a neighbor or a hostile government. Privacy is also critical to fungibility, meaning that an asset’s individual units can be used interchangeably — a desirable property for a healthy currency.
Zcash has been at the frontier of privacy for digital currencies that exist on open and semi-transparent blockchains, led by a team of leading cryptographers and early digital currency pioneers.
Two questions we often hear about privacy-capable coins like zCash are: 1) what if it’s used for criminal activity? and 2) will it get adoption by mainstream users? A research report from the RAND Corporation found that less than 1% of dark markets accepting cryptocurrency had any mention of Zcash, potentially not surprising given that Zcash is designed to be compatible with anti-money laundering requirements. As one example of that, Gemini, a NYDFS-regulated cryptocurrency exchange, now supports privacy-enabled deposits and withdrawals of Zcash. The total amount of Zcash involved in private transactions has also nearly doubled over the past year. You can spend Zcash today to purchase ice cream at Baskin Robbins through Flexa’s SPEDN app.
Similar to Bitcoin, Zcash is a deflationary asset with finite supply and regular “halving” events, where the asset’s inflation rate is effectively cut by half. Bitcoin’s first halving was in November 2012, which was followed by an increase in Bitcoin’s price from $12 to nearly $1,150 within a year. The first Zcash halving will occur this November. You can follow a live countdown here.
MACRO GRAPHIC OF THE MONTH
I thought this graphic was very well-done — capturing the myriad of economic impacts of the policy response to the virus on every region of the globe in one easy-to-read visual.
BITCOIN’S 12TH BIRTHDAY
Saturday is Bitcoin’s 12th birthday.
I believe Satoshi’s white paper will change the world — in so many wonderful ways: financial inclusion, property rights, migrants no longer working an entire month just to pay their remittance company, refugee identity/direct aid transfers, etc.
The mind-blowing bit is that revolution was sparked by just 3,192 words.
Bitcoin: A Peer-To-Peer Electronic Cash System easily fits on the wall of a small conference room in our HQ.
To share a sense of how distilled the genius in the paper is, we’ve shown how few words it took to convey this powerful idea to the world. The word count of the bitcoin white paper is shown below in relation to globally-influential texts:
My favorite — it took Satoshi only 5% as many words to completely describe and define the entirety of the project as were used in Blockchain for Dummies. Go figure.
If you are interested in subscribing to Pantera Bitcoin Fund, you can find information on investing here.
Pantera Bitcoin Fund provides institutions and high-net-worth individuals quick, secure access to large quantities of bitcoin — without the burdens of buying and safekeeping them. The Fund features daily liquidity and very low fees.
If you are interested in digging deeper on any of these themes or our funds, please contact Pantera’s Capital Formation team at +1.650.854.7000 or [email protected].
Take care everybody,
“Put the alternative back in Alternatives”
BLOCKCHAIN HEDGE FUNDS
Our investment team hosts monthly conference calls to help educate the community on blockchain. The team discusses important developments that are happening within the industry, and will often invite founders and CEOs of leading blockchain companies to participate in panel discussions. Below is a list of upcoming calls for which you can register for via this link.
- Thematic Call: Deconstructing DeFi
- Introduction to Blockchain Investing
This letter is an informational document and does not constitute an investment recommendation, investment advice, an offer to sell or a solicitation to purchase any securities in Pantera Bitcoin Fund Ltd (the “Fund”) or any entity organized, controlled, or managed by Pantera Bitcoin Management LLC (“Pantera”) or any of its affiliates and therefore may not be relied upon in connection with any offer or sale of securities. Any offer or solicitation may only be made pursuant to a confidential private offering memorandum (or similar document) which will only be provided to qualified offerees and should be carefully reviewed carefully by any such offerees prior to investing.
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Traduction de l’article de Pantera Capital : Article Original