We Were Warned About Terra LUNA

Prior to the great Terra LUNA meltdown of May 2022, there were warning signs to investors. This came from some notable crypto experts. The main problem was not about the team or developers. They actually have a solid project team with great ideas. It was more about the design of the stablecoin that worried critics. Terra developed an algorithmic stablecoin called UST (Terra USD) that has no actual commodity or asset backing its value. Instead it relies on minting tokens that peg its value to the US Dollar (USD).

In order to meet its peg to the USD, users must purchase Terra’s main coin called LUNA. UST is minted by burning LUNA, and users can hold UST in a DeFi protocol called Anchor to earn yields on interest up to ~20% (has fallen to 18% as of writing). It is a high earning interest rate that attracted investors to flock to UST. This includes many crypto influencers who also urged their followers to put their UST on the Anchor protocol and earn money.

The second problem with this system, is the sustainability of the Anchor protocol in being able to pay users the interest on their deposited UST. It turns out there were liquidity problems that exposed the protocol before. It was back in May 2021, during the cryptocurrency market crash that UST fell to as low as $0.96. That means a deposit of $1,000 would go down to $960 (a loss of $40) not including any yield on interest. This happened once again in May 2022, and this time the price of UST has gone well below the May 2021 mark. As of posting the value of UST was $0.1101 (Coinmarketcap). If you had deposited $1,000, the value will go down to $110.10 or about 90% of your money’s value was lost.

In order to return the peg back to $1, UST needs to be burned to mint more LUNA. During the meltdown that was what happened, but it hyper-inflated the supply of LUNA in the open market pumping into the trillions. This led to a drastic fall in LUNA prices as a “bank run” started with users dumping their UST. The Luna Foundation Guard (LFG) then stepped in by selling reserves in Bitcoin (and other assets supposedly) to try to mitigate the free fall of UST. It just was not enough because more users were selling off their UST than holding. On the Anchor protocol, the UST locked value fell from $14 Billion to under $5 Billion (and still falling as of writing).

Investment and crypto analyst Lyn Alden was one of the experts who warned about Terra’s UST. In a report from Daily HODL:

“Unlike a crypto-collateralized stablecoin, there is no specific threshold where UST breaks. However, if LUNA gets small relative to UST, the probability of an algorithmic bank run increases… Many of them would liquidate their BTC for cash since their positioning at the time was meant to be a stablecoin.” 

The fall of UST did affect Bitcoin prices, as the LFG had to sell off its reserves in BTC. The worst case scenario seems to have played out because it dragged several assets to the downside (UST, LUNA, ANC and Bitcoin). The LFG reserves would not be enough to cover restoring the peg to USD unfortunately.

She also cites some worries about the Anchor protocol:

“Then there’s the unsustainable Anchor yield timebomb. The time bomb is not about how well-managed the yield decline will be. It’s about what happens to UST demand structurally, when the primary demand driver (artificially high Anchor yields) no longer exists.”

In other words, Anchor did not appear to have the money to cover the interest payments. The payments would be coming from money borrowed using the protocol. However, there were more lenders than borrowers, so there was no balance. The yields were so high it could not be sustainable to pay in the long run.

Another warning about Terra LUNA came from Kevin Zhou of Galois Capital. He was one of the critics to sound the alarm and warned the public. Zhou told Coindesk:

“Even if it happened in slow motion, even if it was something like a bank walk, it was more about this thing not being solvent.”

Solvency was indeed an issue. To quote Zhou, “mechanism was flawed, and it didn’t play out as expected.”

There is also a crypto YouTube channel Coinsider that reported about the risk with Terra LUNA and UST. You can check the video which was made back in March 18, 2022 prior to the meltdown. The analysis was spot on and very informative. It may have also helped some people make the right decision of not investing in LUNA/UST or using the Anchor protocol.

What happened to Terra was catastrophic, and probably the worst if not one of the worst collapses in crypto history. Many people have lost money in the Anchor protocol with their UST deposits, while holders of LUNA now have a worthless (under $1) coin that once was valued at over $100 per coin. Regulators are aware of this problem and they could now begin to apply regulations that require money earning protocols to register or comply with financial rules for consumer protection.

The lesson from all this is to be careful when depositing your money into a DeFi protocol. Anchor was not the first protocol to fail like this. Iron Finance had their own meltdown that should have been another warning sign about high interest protocols. It was even endorsed by public personalities, making it more attractive to users which makes it even more problematic. The problem exposed in these systems is that during extreme market volatility, the algorithmic stablecoins were not able to keep the peg to USD. There was nothing the protocol can do when you have a bank run.

Sometimes when it sounds too good to be true (e.g. high interest on deposits), it probably is. It can be risky when big money is involved. Research the project thoroughly and listen to both sides to get a better understanding of the risks involved, and not just the benefits.

Disclaimer: This is opinion and not financial advice. The information provided is for reference and educational purposes only. Always DYOR to verify information.

IGOs – Crypto, Metaverse, DeFi and Gaming

Launchpads to crypto gaming platforms are gaining traction. The method they use for funding is called an IGO (Initital Game Offering) that are like the ICOs (Initital Coin Offerings) in crypto and an IPO (Initial Public Offering) in traditional finance. IGOs are based on cryptocurrency like NFTs (Non-Fungible Tokens), which are issued to represent unique digital assets. NFTs can represent content like art and collectibles, which encompasses the gaming industry. NFTs issued in gaming can be in-game rewards, loot boxes, prizes and game characters. These have unique traits that determines their value. NFTs also establish ownership of a digital asset via a blockchain.

IGOs help to fund new gaming projects using launchpads like Enjinstarter. One of the big reasons IGOs are becoming popular is the rise of the metaverse. This is not the same ‘metaverse’ that Big Tech companies like Facebook (i.e. Meta) are building. Though they intersect in some aspects like with shared virtual worlds (e.g. VR, AR), the crypto metaverse is decentralized and open. Big Tech’s metaverse are like silos with their own ecosystems, but they may connect to the crypto metaverse with regards to NFTs. Other than that, there are still differences with respect to their purpose.

The use of NFTs in the metaverse is a big factor in crypto gaming projects. Developers are not just building fancy virtual world games. They are adding value to it using cryptocurrency in the form of NFTs and gaming tokens. The NFTs are the unique items users collect from playing games. Their value is based on their uniqueness, and this adds value. This can be a unique armor or weapon that gives a gamer advantages or they can be special powers. In traditional gaming these objects are also available but not tokenized like NFTs. When it is in the form of an NFT, it can be traded or sold by the gamer.

Tokens are also another feature of crypto games. Using a Play-To-Earn model (e.g. Axie Infinity), players earn the tokens from playing the game. For example, if the player wins a round, they can earn tokens as a reward for their victory. These tokens can then be put to work in DeFi protocols to earn money. This brings another aspect that is not found in traditional games, so these are enticing users to try something new.

IGOs are for investors who want to jump into a project from the start. It is an opportunity to get into what might become the next big thing in gaming. These have the potential for huge ROI (Return On Investments), depending on the amount invested. There are risks involved since the project might fail, so potential investors should do their research before participating in an IGO. A good project is one that has a great idea, but also make sure that it has a credible team and reasonable tokenomics.

It is also important to check if the project follows regulatory compliance, otherwise there could be problems in the future. This is true if the launchpad is not fully decentralized, since regulators can come after the platform’s owners.

IGOs may only be relevant until new techniques for funding replace them. For example, ICOs were eventually replaced by STOs (Security Token Offerings) and IDOs (Initial DEX Offerings) due to regulatory concerns. Those who get in early are usually the ones who benefit the most from these projects. An IGO is a great opportunity worth exploring for investors interested in earning from the next generation of gaming.

Disclaimer: This is not financial advice. The information provided is for reference or educational purposes only. Please do your own research always to verify facts.

(Photo Banner Credit: JÉSHOOTS)

VISA Gets Into NFT With CryptoPunks

VISA has announced the purchase of a CryptoPunk NFT (Non-Fungible Token) worth approximately $165,000 (~50 ETH this August 18, 2021). Perhaps the most unlikely thing you would expect VISA (the financial credit company) to invest in. VISA is apparently bullish on NFTs, or could this just be another signal to show they are “in the know” or “part of the gang”? CryptoPunk NFTs are original digital artwork made by Larva Labs. These are unique collectible characters that have verified ownership on the Ethereum blockchain. They are not physical objects at all, but purely digital. They look just like icons or emojis, not at all like the works of art you would see in a gallery.

This shows that VISA is getting in on the DeFi (Decentralized Finance) market with NFTs. According to their recent tweet:

“Over the last 60 years, Visa has built a collection of historic commerce artefacts—from early paper credit cards to the zip-zap machine. Today, as we enter a new era of NFT-commerce, Visa welcomes CryptoPunk #7610 to our collection”

NFTs like CryptoPunks, despite looking like mediocre art, hold plenty of value. A typical CryptoPunk can bid over $20,000 while the more in demand will bid in the millions of dollars. That shows that there is a big market for these collectibles and the buyers have plenty of money to spend. This is not your basic retail market where items cost a few dollars. This is a big money market, and it has attracted VISA’s attention.

What makes CryptoPunks desirable as a collectible is their uniqueness. A CryptoPunk character (i.e. Punks) is algorithmically generated by computer, not manually created by a human artist. There are also different types like Apes, Zombies and Aliens. Each CryptoPunk character has their own set of attributes and their metadata are recorded on the Ethereum blockchain. That also includes the proof of ownership to the holder of the NFT.

It seems like VISA will hold this NFT for the collection purposes. It will hold the CryptoPunk for historical records, perhaps to document a time when NFTs first emerged. This will surely be valuable in the future, whether NFT continue to become successful or not. Just owning a piece of history is valuable in itself, so VISA is going to look back on this as having a memento to that timeline. Overall the NFT market continues to grow. According to Forbes, the NFT market grew 1,785% In 2021. It is now the fastest growing sector in DeFi that is also gaining pop culture adoption and VISA is jumping on board.

Moving forward, it looks like VISA is also on the horizon ready to enter new partnerships and projects related to NFTs. As a payment processor, VISA can help bridge the traditional finance market with the DeFi space. That opens a world of opportunities for buyers, sellers and developers.

Meme Coins – Opportunity Or Stupidity?

I am convinced that the rise of Meme Coins in the cryptospace is nothing innovative like DeFi (Decentralized Finance), but more a distraction. If the pumps going into these coins were instead going to legitimate projects, perhaps the market would be better off. Perhaps I am wrong, but when you think about it, why do coins like Dogecoin (DOGE) have a market cap of $40+ Billion (as of June 15, 2021)? I feel the same way about hard forks that could have injected more liquidity into the original coin, but instead are diverting funds away to an offshoot. There is plenty of hype behind it, and it can be fueled by public figures who have influence (e.g. Elon Musk for Dogecoin).

After the Dogecoin hype, the Meme coin mania continues with Shiba Inu (SHIB), Safemoon (SAFEMOON), Cumrocket (CUMMIES) and more dog themed coins. At first glance many would think there is no particular utility for these coins. SHIB actually wants to help protect the Shiba Inu dog breed, so it has a specific cause. Other than that it seems like a pump and dump scheme. CUMMIES offers a crypto for adult themed entertainment. SAFEMOON claims to be a DeFi token despite its classification by some exchanges like Coinmarketcap as a Meme Coin.

Critics say that these coins lack fundamentals when it comes to money supply. If you look at Dogecoin, it has no supply limit which means that it is highly inflated. Others implement a sort of burn mechanism to deflate the supply, but the total circulating supply is already very high (in the billions). It doesn’t seem to make much sense that the circulating supply is so high, but you can buy them cheaply because they are barely 1 cent in value. Buying at such low prices appears to be a bargain but with no limit to money supply, prices just don’t really increase unless there is some scarcity or deflation.

Meme Coins do not really have any ground breaking purpose other than transfer value on a blockchain. The coins target specific use cases like causes and communities for the purpose of the coin. That already gives it a use case, but it is not like other projects that have a more serious purpose. Instead, developers of Meme Coins are doing it more for fun. They were meant to be a joke for good humor. It surely does not seem like a wise long term investment or even for storing value. It can all be lost when a big bag holder dumps the market. Then you have to wait for more people to come in with their money, but there are no guarantees that will happen.

For starters, most of these coins were copied from existing projects. Since many of the top crypto are based on open source code, it is easy to copy them and create a new crypto. Dogecoin was copied from both Bitcoin and Litecoin. Another path for Meme Coin developers is the issuance of a token using a standard like ERC-20 on the Ethereum blockchain (e.g. SHIB) or a BEP-20 token issued on Binance Smart Chain (BSC). The reason they are called a meme is because they don’t offer any specific purpose other than “going to the moon”, which is the term for making money in the cryptospace. Some Meme Coin developers offer their rationale behind their coin, but many of these talking points do not have solid proof or evidence behind the theory.

The main concern is that when these coins pump, they can as easily dump. That would leave the newcomers as the bag holders until new money pumps. It is a sort of Ponzi scheme since liquidity is determined not by utility, but from hype. Those who came late give their money to those who came early during a dump, leaving newcomers rekt (i.e. losers). The system will not be sustainable unless you have new people who put money in the coins. So far, it seems to be working and there is a reason why.

First there is a community driven market that is keeping these coins alive. Without the network effect, there would be no further liquidity in these markets. There are evangelists and shillers of each coin who propagate the benefits of putting money. These groups are all over the Internet on social media sites like Instagram, messaging apps like Telegram and video streamers on YouTube. The power of the network is exponential, and this is what has led to market caps that are in the billions. There is a belief system around most crypto, including Bitcoin, and this also helps to drive Meme Coins. A lot of the enthusiasm with DOGE was led in part by tweets from Elon Musk. Entrepreneur Mark Cuban also added to the hype by accepting DOGE as payment for his Dallas Maverick’s sports merchandise.

Second motivation is the money. Obviously, there is plenty of money to be made just by looking at the market cap of the top Meme Coins. It gives many the belief that there is a chance to become rich, and that has already happened to some people. There are reports that a Goldman Sachs executive quit their job after striking it rich with Dogecoin. There are people who will get rich, but others will lose a lot of money. Those who are mortgaging their homes or selling their cars just to get into Meme Coins should be aware of the risks from price volatility in the cryptospace. There are no guarantees with Meme Coins. It is like gambling when you place your life savings in a coin with the hopes that it will increase in future value. Always put no more than what you are willing to lose, as the saying goes.

Meme coins add a new dimension to the cryptospace. I call it distraction because of the amount of capital it has taken away from the rest of the market. There is approximately $48+ Billion (based on Coinmarketcap data in June 2021) total value in Meme Coins. Some would say that money would have been better off going into Bitcoin or Ethereum. It can be an opportunity for the wise when used as a way to earn quick money from a small amount invested. You can have a million of some of these Meme Coins for less than $20 initial investment. It does become stupidity when you decide to invest all your money into one Meme Coin. There are other coins where that money could have been yielding higher profits and earning from DeFi protocols.

In seems you cannot stop people who are motivated by community and money. Greed backed by a strong support system will keep the belief in Meme Coins alive. Some jurisdictions are taking a harsh stance on Meme Coins. Regulators may determine the momentum moving forward. The SEC in the US has the power to restrict trading in Meme Coins if they deem it to be more harm than good for investors. What could be good news is if some of these Meme Coins actually do succeed not just from new users, but in accomplishing a purpose. Dogecoin is seeing some form of development in the works. In any case, be very careful with Meme Coins. Anything is possible, but it can go either way. Do plenty of research and understand the risks involved. There is just no way of knowing what will happen.

Disclaimer: This is not financial or investment advice. The information is an opinion piece for reference purposes only. Always do your own research.

Tokenizing Stocks Is The Next Financial Instrument

Binance is offering a new financial instrument on its digital exchange. They are offering a way to purchase fractions of a company’s shares using a tokenized stock trading service. This will provide stock traded equities in financial markets for investors. Binance will begin with Tesla stock on their exchange. The instrument is called a Binance Stock Token, and this allows users to buy a stock or a fraction of a share and earn dividends as well. The prices will be settled in Binance’s BUSD stablecoin token.

For users who have no access to financial markets, they now have an opportunity to own as little as 1/4 of share in an equity like Tesla (TSLA). There is no more need to purchase several stocks when you can have just a fraction and earn from it. This gives exposure to the non-traditional crypto investors who don’t have to wait for other platforms to offer the service.

S = Shares of A Stock
p = Price of the Stock
b = BUSD

b = S(p)

The user will purchase the stock in BUSD prices (b).

Binance claims that they are not creating synthetic assets to offer as stock. They have an asset that is backed by a depository portfolio of underlying securities, which is also managed by a German investment firm. In order to follow compliance, the service is not available to all jurisdictions and only where the exchange is allowed to offer such a service. Those interested will definitely be required to submit a KYC/AML document for legal purposes.

Two things that I can expect to see:

  1. Increase in BUSD trading as a result of the tokens use for investing in stocks. BUSD prices will not surge because it is pegged 1:1 with the USD.
  2. Open up the stock market to first time investors who have never had exposure to equities. This allows users who were either not allowed to trade because of lack of funds or not have access to stock investments to get their chance.

It is interesting to note if other DeFi products will follow that can interact with the Tesla stock. Binance also has its native Binance Smart Chain(BSC) which uses smart contracts that can lock tokenized stocks in a different protocol and earn from it. Some DeFi protocols may even accept tokenized stocks as collateral, depending on how valuable it is in the market.

This can also further boost Tesla stock prices as it has seen a phenomenal surge. Binance can gain more investors while helping bring Tesla stocks higher. While the trends look good for Tesla, investment always involves risk so users must do their due diligence and research always before investing.

Disclaimer: This is not financial advice. The information provided is for educational and reference purpose only, not for making investments. Do your own research always.

Who Let The DOGE Out?

When investing in cryptocurrency, the fundamentals seem very important. How then can a coin that was meant to be a meme remain so popular it has a market cap over a $1 Billion (as of this writing)? That is a lot of value for something that has no distinct utility or feature, yet has captured a large share of the market. It is certainly FOMO for noobs. Meme coins were meant to be just for fun, and that is the image many have of Dogecoin. Yet there are some things about Dogecoin that are actually fundamentally what cryptocurrency should be all about.

First and foremost, this is not financial advice. This is for reference and informational purposes only. Cryptocurrency is very volatile and there are risks to consider when investing. This is not a direct promotion of Dogecoin, the cryptocurrency or investing in a digital asset. Instead this is a look into why it is popular and how it fits in the current cryptocurrency landscape. With that said, what is all the fuss about Dogecoin?

What Is DOGE Coin?

A meme coin is a cryptocurrency that is not meant to be taken seriously. It does not serve any purpose other than for exchanging and trading. It can be used as a form of payment for tipping or just a way to exchange value over a blockchain. It doesn’t have the core principal of being a store of value like Bitcoin, or an application development platform like Ethereum. First released in December 6, 2013, Dogecoin was just meant to be a simple P2P (Peer-to-Peer) electronic payment software like Bitcoin. The cryptocurrency got its name from the popular Doge meme which features a Shiba Inu dog as the logo. DOGE is the listing name used for the digital asset.

DOGE, while not anything sophisticated, did not initially have any sort of application other than P2P. It is based on open source software from the cryptocurrency Luckycoin and Litecoin. DOGE uses the scrypt algorithm with a PoW(Proof-of-Work) consensus mechanism. There are 127 billion coins in total supply with a 1 minute block time. The block reward for miners is 10,000 DOGE per block produced. Unlike other cryptocurrency, Dogecoin’s founders (Billy Markus and Jackson Palmer) have not continued promoting or even associating with DOGE. They have pretty much been on the sidelines, but DOGE has flourished in part due to its community.

Pump And Dump

While Dogecoin seems like a fun and trendy cryptocurrency that is nice to have, it is also notorious for pump and dump schemes. This has been encouraged in large part by users from Reddit, social influencers and public personalities that include Elon Musk. All it takes is a tweet from a well known personality, and DOGE prices on the market surge. These pumps do not seem to follow any sort of fundamentals other than the encouragement of influencers.

DOGE became a TikTok trend in July 2020, promoted by fans of the popular social media app. It began going viral as users began to spread the word through the platform. This was a push to pump up the price of DOGE and it worked. DOGE volume spiked by 683% after TikTok user urged a buying spree pump. Another surge occurred when Elon Musk tweeted in support of the cryptocurrency. That led to the value of DOGE to surge from $0.003 to $0.005. What do you think happens with all the viral videos on TikTok and tweets from Musk? It creates attention, and people will either Google search Dogecoin to learn more or ask someone they know about it. This type of news is not something you would expect on mainstream media.

These pumps are usually followed by dumps, as can be observed from the latest that occurred in 2021. This was a result of the Gamestop Short Squeeze in which retail investors were temporarily shut off from buying stocks for Gamestop. This led to users urging a pump for DOGE because at least they can buy it freely without any restrictions. It was more about making a statement to the establishment by some, but more people probably did it in order to make gains. That was exactly what happened and then came the dump. During this time (January 28, 2021) DOGE surged by 1,100% to an ATH of $0.082 but would dump a few days later.

In these pumps, many were motivated to see the price surge. However, once it reaches the highs it is really hard to control people from taking profits. After all, DOGE does not really have the same value for HODLing as BTC. You can hold thousands of DOGE in your bag, which really does not seem to be worth much. When prices surge it becomes valuable for converting to fiat, like winning money from a casino. Unfortunately this does not end well for noobs who probably got into the pump craze with no idea what was about to happen. They probably expected that their investment was going to go up, but not realizing that when others cash in the prices go back down and they can lose their initial investment.

DOGE Is In Theory What Cryptocurrency Should Be

While many would berate and laugh DOGE off as just a meme coin used for fun, it actually does have fundamental features of a cryptocurrency. People will be surprised that Dogecoin is capable of many things that modern banking systems cannot do. Dogecoin takes the innovations from blockchain technology and applies it to a community driven environment. Despite not having a platform of its own, what matters is that it provides the basic needs for cryptocurrency which is the direct and decentralized P2P transfer of value. There are also no barriers to purchase it that require proof of documentation, like with other financial assets.

Transactions in DOGE are cryptographically secured, which is important in cryptocurrency. Dogecoin uses a blockchain to allow two people to exchange or trade without knowing each other personally and without requiring permission from a third party to conduct a transaction. Today before we can purchase an item with a credit card, it actually requires permission from the issuer of the card. They can stop a transaction any time they want since it is under their control. This can happen to certain individuals who credit institutions may want to limit or target for any reason.

Dogecoin is highly decentralized after all. It is not controlled by any one entity or organization. Its founders cannot even shut it down and it is open source and available to everyone. There are no constraints to access the source code which users can do with as they wish. No one is going to stop you from buying or selling DOGE, because there are is no censorship against a user. Instead you have a permissionless and trustless system like Bitcoin that is peer to peer at best. Many do not realize that you can also use DOGE to transfer money across borders, but of course when you convert it to fiat it is your responsibility to meet KYC requirements from digital exchanges.

Banks take days or longer to settle payments. With Dogecoin it can be done much faster and at a lower cost as well. There are no middle men or third party to pay when conducting a transaction between two users. If Bob wanted to tip Alice with DOGE, he can do so directly to Alice’s digital wallet with no one to prevent the transaction or require arbiters to facilitate it. The Dogecoin blockchain network provides a neutral service users need to transfer value. So during any pump and dump, the blockchain is still being used to record all transactions in a transparent and immutable manner.

Takeaways And Closing Thoughts

Dogecoin is for the most part the simplest blockchain decentralized app for cryptocurrency. What started out as something just for fun, turns out to have a large following. What this did is foster a community of individuals that brings power to the people. We can see how much that is the case when influencers and public figures join in to participate in pushing the price of DOGE higher. Through social media and the Internet, information spreads faster and coordination becomes easier as the network provides the necessary infrastructure to allow that. Just be careful though when you participate, things can quickly change if you commit more than what you are willing to lose during pumps. It is not a good idea to invest life savings, pay checks or even mortgage a house just for DOGE. Think rationally and it should be fine.

DOGE as a digital asset is not actually worthless like so many penny stocks. It is cheap, but due to its popularity is gaining the attention of the mainstream. Many digital exchanges (e.g. Binanc) and wallets (e.g. Exodus) do support DOGE, which is why it can be purchased by many people. Developers of the Flare blockchain have announced their support for DOGE, which could introduce smart contracts to Dogecoin users. There is also interest in the gaming community to use DOGE, for online gambling, tips and purchasing game items (e.g. badges, powers, etc.). Ren has provided a path for DOGE into DeFi with their renDOGE token. This can bring more applications for DOGE when it comes to liquidity for cryptocurrency lending, payments and trading.

The interest in Dogecoin is going to help sustain the digital asset as something of value to users. This keeps the momentum of holding the coin for longer terms. What Dogecoin showed is that through a coordinated effort by a decentralized community, the market can drive the prices. That is what free market laissez-faire economics should be all about. People are free to enter and leave the market at their own will. When DOGE is surging there is no one group or individual who can stop people from buying it, like what Robinhood did with Gamestop (the reasons are due to how the current financial system works). DOGE is not to be treated as a sure bet financial instrument by any means though, it is a risk that must still be evaluated. With these new possibilities and opportunities coming to Dogecoin, who is to say it is worthless and only for pump and dumps.

Disclaimer: This is not financial advice. The content shared is for informational purposes only. Please do your own research always before investing in cryptocurrency.

The Double-Spend That Never Was

On Thursday, January 21, 2021, news outlets began circulating reports of a Bitcoin double spend flaw which led to an 11% drop in the price of the digital asset. This would have been a major exposure of a flaw in the blockchain … except it never was. In fact, what happened or reportedly occurred would be a part of how Bitcoin is supposed to work. It is hard to explain the full details unless you get technical, but let us try to explain it in simpler terms.

First, what is a “double spend“? This was the problem Bitcoin’s creator Satoshi Nakamoto was able to solve for digital currency. Prior to that, it was a problem in computerized electronic payment systems that other developers had proposed solutions for. Since computers are digital, when currency is created it can be easily copied just like a file made in Excel or Word. If you have a file that represents your money in a computer, without any means of control a user can create infinite copies and spend it all they want. It is possible to use the same digital money to purchase two different items, so long as there is no system checking for it.

Nakamoto solves the problem by implementing a blockchain to support provenance and verification. That means that the amount of currency like Bitcoin (BTC) that a user holds, is determined by a mechanism that is verified through a consensus or agreement. In this case it is called Proof-of-Work (PoW) on the Bitcoin blockchain. You have nodes (computers) called miners that run software which run algorithms to try and solve a complex puzzle to discover a block for validation. The block contains transactions that are verified based on cryptographic hashes that can be traced back to what is called a genesis block. If it can be verified, then it is added to the blockchain.

Before a block is added, there is a competition among the miners to try and discover a number called the nonce. This is what is needed in order to validate a block. The miner who discovers it first will become the block validator and will receive a reward in return for their effort. The miners also collect fees for helping to validate transactions on the network. No transaction is ever allowed to pass unless it goes through a consensus among the miners on the network. Double-spends are prevented by the miners through this verification and validation process which also includes confirmations.

Bitmex Research first reported the incident in a tweet of a potential double-spend that occurred in the wild. They were the ones who also pointed out that it was a double-spend, but here is the problem. It was unconfirmed and the researcher who discovered it should have probably waited for what is called a chain reorganization, which is a part of the blockchain’s protocol. It is true that a BTC could appear to be spent two times on different transactions. It must undergo a series of confirmations, usually 6 but it could be more (depends on network activity). This was mentioned by Satoshi Nakamoto in the Bitcoin White Paper.

It is possible for two blocks to be mined simultaneously on the blockchain. This creates a temporary anomaly that can be observed by anyone who has access to the mempool of a Bitcoin node. There is a built-in feature in the code that corrects this problem. It is part of a chain reorganization in which the nodes must add the valid block to the longest chain, or the main network. You can see two transactions that appear to have spent the same BTC, but after the chain reorganization and block confirmation it is resolved. Only one of those blocks that contain the transaction will be valid and added to the blockchain. The other block will be orphaned and not validated.

Many cryptocurrency and blockchain experts like Andreas Antonopoulos, Bitfinex CTO Paolo Ardoino, Coin Metrics Bitcoin Network Data Analyst Lucas Nuzzi and later, even Bitmex Research all agree that it was not a double-spend that occurred. There are counter points though, especially from among the Bitcoin SV (BSV) camp who do have some thoughts of their own. What we know for sure is that only one of the transactions has been verified and validated on a block. The user tried to use a feature called Replace-By-Fee (RBF) in which you can speed up a transaction by paying a higher transaction fee which invalidates a previous transaction that was sent out. What happened here was the lower fee somehow made it to valid block first, perhaps because of the timing. The user had waited too long and by the time the higher paying transaction fee was sent the previous one had already been added to a block on the longer chain which validates it first.

Should we be worried that an actual double-spend can occur? It is always good to be alert and aware of what is happening. While the code does what it is supposed to do, there will be bad actors who may try to exploit these types of attacks to see if they can get past the logic. What will be proof or testament to Bitcoin’s legitimacy as a cryptocurrency is how these measures will stand against the test of time. As long as it is working, it will help the network to remain secure and operational. Until the next news, HODL.

Bitcoin Wrapped In Ether – Yummy!

You can take two good things and combine them together to get the best of both. In LA’s streets you can get what some would consider one of the city’s iconic sandwiches. It is the hotdog wrapped in bacon. It brings you the meaty flavor of a hotdog with the greasy goodness of bacon. Now think about the top digital asset Bitcoin (BTC). What would you wrap it with if you were to compare it to a hotdog wrapped in bacon? How about Ether (ETH), the Ethereum blockchain’s token. BTC is your hotdog, while ETH is your bacon. It actually exists and it is called Wrapped Bitcoin (WBTC).

Wrapping one cryptocurrency with another uses the hotdog wrapped in bacon example as a simpler way to illustrate an analogy. Wrapping in this sense means to create a protocol to represent one cryptocurrency on another cryptocurrency’s blockchain. BTC can be represented on the Ethereum blockchain by issuing an ERC-20 token called WBTC. This allows BTC integration with smart contracts that can be traded on the Ethereum network using the ERC-20 standard.

In Wrapped Bitcoin, BTC is locked into a smart contract and issued as WBTC. This allows BTC holders to access DeFi systems on the Ethereum blockchain. It is as good in value as BTC which is verified by a Proof-of-Reserve system. This ensures a 1:1 peg between the issued or minted WBTC tokens and BTC. The actual BTC is still on the Bitcoin blockchain since you cannot store it on the Ethereum blockchain. The BTC is taken under the custody of the WBTC token issuer, so it is not directly with the WBTC token holder. It is maintained by a group called the WBTC DAO, who are the custodians of the BTC. The group’s members include blockchain-based organizations like BitGo, Ren and Kyber.

What is the purpose of WBTC?

As mentioned earlier, it is primarily for giving BTC holders a way to gain access to the DeFi markets. A large portion of the DeFi space uses the Ethereum blockchain and BTC is not directly compatible with it. It is a bridge that allows BTC holders to use DeFi protocols to provide liquidity or participate in other services that yield returns. WBTC is a way to bring the value from BTC into the DeFi space without having to convert BTC to ETH. BTC (as of 2020) has the largest cryptocurrency market cap and this is crucial in helping bring liquidity to the DeFi space as well as expanding on the collateral types available.

This is a great way for BTC holders to take part in the DeFi markets. Many BTC holders have plenty of value stored, but are not able to use it if they are HODLing. DeFi provides ways for cryptocurrency to earn even while HODLing, using decentralized protocols like Uniswap, Curve and Yearn. Most DeFi protocols will only support ERC-20 or ETH since they execute from smart contracts on the Ethereum blockchain. WBTC is a protocol that allows BTC to be wrapped in an Ethereum ERC-20 token. Holders would not need to convert their BTC to ETH during this process.

Minting WBTC

To enter the DeFi space, Bitcoin holders would have to deposit their BTC into a smart contract of a WBTC issuer (e.g. BitGo, Coinsquare, etc.). This can be a digital exchange or DEX (Decentralized Exchange) that accepts BTC. Once the BTC has been deposited, WBTC tokens are minted that have a 1:1 value to the BTC that was deposited. Once the holder receives their WBTC, they can now use it for loan collateral, providing liquidity and swapping for other tokens. Digital exchanges will most likely require a KYC (Know Your Customer) in compliance with the law before the WBTC can be issued. On a DEX or over-the-counter it is not required (check with the exchange requirements always). The WBTC can be cashed out to either BTC or ETH.

Another way to get WBTC is through a DEX like Uniswap. Instead of depositing BTC into a smart contract, anyone who holds ETH can purchase WBTC. It requires connecting a digital wallet like Metamask to perform the transaction with ETH. The WBTC is already available in the market and it does not require BTC for purchase in this case. Since WBTC is an ERC-20 token, it can be purchased with ETH very easily.

Other Uses For WBTC

WBTC can be put to use in DeFi yield farming protocols. This allows WBTC holders to put their digital asset for lending and trading purposes. In return, the WBTC holders earn yields as a their return on investment. These yields are fees collected from the transactions. Rewards can be issued in the form of governance tokens, which allow the holders to participate in digital governance through voting. This provides holders a way of participating in decisions that govern these protocols.

Yield farming requires the holders to deposit their WBTC. In return, they are issued another token. Examples of these tokens include SNX (Synthetix token), REN (Ren Project token) and BAL (Balancer token). The tokens are specific to which protocol is used by the yield provider. To learn more about yield farming, there is an article on Coindesk that explains it a little bit further. (Link here)

The Best Of Both

Wrapped Bitcoin brings the best of two blockchains. It is a way to interoperate between two digital assets at the protocol layer. The value of Bitcoin and the decentralized applications on Ethereum. BTC is the digital asset while ETH is the protocol that utilizes it for liquidity, trades and financing. The Ethereum blockchain is serving as a transaction layer that can bring more capital into diverse markets. Bitcoin can provide the capital, as institutional investment grows in the digital asset. WBTC provides a way for investors to bring capital for yielding returns using the Ethereum blockchain.

Disclaimer: This is not financial advice, just reference. Do your own research always to verify information.