Exchange Everything

Market Recap

A Better Week For Crypto

Exchange Everything

Humans are only species that have successfully coordinated their activities to scale their capabilities far beyond their physical selves. Something we believe has been integral to this is the peaceful exchange of resources (real, financial, human, informational). It started as simply as trading one raw material for another and has progressed to more complex trades such as a share certificate that confers rights and ownership over a company. Our ability to coordinate and exchange with one another, especially at a low cost (or with minimal friction), is key to our species survival and progress going forward.

A peaceful means of coordinating means more trust, and therefore more exchange.

The ability to exchange value is something everyone should have access to. In the world we live today; however, there seem to be limitations to what certain people can exchange. It's a given that almost anyone can exchange their time for money, above that are people who have the freedom to exchange their money for a recurring stream of revenue (bond, income-generating property or a share) and above that are more complicated transactions such as the ability to use idle assets or invest money in other jurisdictions.

Our exchange infrastructure of today, the NASDAQ, JSE, NYSE or LSE, are siloed by their jurisdiction, controlled by gatekeepers that decide when or who can exchange. Listing an asset on one of these exchanges comes with a heavy price tag, and keeping the asset on the exchange requires ongoing administrative tasks and expenses. This exchange infrastructure is simply inadequate for the digital age. Liquidity deserves to be liquid, be fluid, and have the ability to participate in growth wherever it may be; unfortunately, our current exchange infrastructure limits this.

The digital age will require a global, censorship-resistant, apolitical platform for the exchange of value. A platform where value of all kinds, whether it be ownership of a network, a claim on someone's time or even storage on someone's computer, can be traded 24/7/365.

Everything Will Be Tokenised

What exactly is tokenisation? Tokenisation is the process of replacing traditional means of ownership such as title deeds for a property and share certificates for a company with scarce, irreplaceable cryptographic tokens. Unlike the large pile of paperwork that usually confers ownership, these tokens are a more transparent and cost-effective means of conferring ownership.

Every transfer or update to any given asset represented by a token is processed, executed and settled by Ethereum. Ethereum, in this sense, replaces basic yet expensive redundancies and tamper-resistant measures with math-based rules enforced by thousands of computers distributed across the globe.

The tokenisation of assets will become a no brainer for any issuer of any financial product. There is no sound argument against tokenisation. Issuers of financial instruments will be met with two options. They can use the expensive and time-consuming traditional recourse deterring guarantees when manufacturing trust or use the cheaper, more transparent, and efficient rails behind tokenisation. Not only does this offer the described benefits, but it will also expose issuers to global liquidity and communities.

We will go as far as to say that by 2030 issuing financial instruments on incorruptible, permissionless, open, public blockchains will be an industry standard. The biggest question posed to financial institutions who don't utilise these new trust facilitating platforms will be, 'what do you have to hide' or 'why do you choose to be shady and opaque when a transparent alternative exists'.

The use of blockchains for ownership will become as commonplace as the use of auditors for publicly listed entities.

Our Investment in Uniswap

When thinking about investing in crypto thematics such as decentralised exchanges, our approach is relatively simple. Identify the market leader and deploy capital. There are many decentralised exchanges (DEX's) out there, but non that have developed network effects and user buy-in better than Uniswap. Uniswap is the clear market leader of a thematic with a huge addressable market and the potential to fundamentally change the way people exchange assets.

Uniswap was created by Hayden Adams after a comment by the creator of Ethereum, Vitalik Buterin. Uniswap received its initial funding through Ethereum grants, unlike many other exchanges that performed Initial Coin Offerings or private early-stage investor rounds. The UNI token, the governance token of the Uniswap network, was airdropped to users of the exchange. This is an excellent example of a "fair launch" and equitable distribution of network tokens.

Creating a global exchange where people are incentivised to provide liquidity is no easy feat. 

The biggest challenge developers face when building exchanges on Ethereum is that they can't build traditional order book exchanges. This meant Hayden Adams and his team needed to implement a new means of facilitating price discovery. This led to the creation and use of an Automated Market Maker (AMM) exchange.

What Are Automated Market Makers?  

AMM's replace the traditional order book approach for pricing assets with a pricing algorithm. You can think of it as a robot that can always provide a quote or price between two assets.

The algorithm is a mathematical formula known as the constant function. Uniswap has recently made upgrades to their AMM; however, at its most basic, it looks something like this x * y = k, where x is the amount of one token in the liquidity pool, and y is the amount of the other. In this formula, k is a fixed constant, meaning the pool's total liquidity always remains the same.

The Uniswap ecosystem is unlike traditional exchanges that have intermediaries sitting between the end-user and the exchange itself. With Uniswap, you can be a buyer or seller of assets, and you have the freedom to provide liquidity and make markets. So instead of buying assets through Charles Schwab, who then take YOUR idle assets and make markets on NYSE or NASDAQ and earn fees for doing so, you now just eliminate Charles Schwab and earn for yourself.

The Uniswap stakeholders are developers, users/traders, liquidity providers and issuers of financial instruments. The Uniswap exchange presents a classic reflexive opportunity; each stakeholder is directly incentivised to perform an action that directly incentivises another stakeholder.

The stakeholders of the Uniswap ecosystem feed off and benefit from one another. Liquidity providers can take idle assets and put them into liquidity pools; this increases available liquidity and reduces slippage for traders, which fosters more exchange volume and, therefore, increases liquidity providers' returns. Issuers of financial instruments also participate in this circular economy due to the ease and low cost of listing a new financial instrument on Uniswap, which again means a wider variety of tradable assets for traders and more opportunities to make markets for liquidity providers.

Uniswaps Staggering Growth and Future:

The entire decentralised exchange landscape has witnessed incredible growth, processing over $155 billion of trading volume in May 2021, up from just $13 billion in August 2020.

Zooming out even further, the growth is even more jaw-dropping. Have a look at the monthly DEX volume grouped by year. January 2019 volume was $39 million, its incredible to see how far this technology and its usage has come.

Uniswap leads the charge as both the most used exchange by trading volume and number of traders. Currently, Uniswap is accountable for over 50% of all decentralised trading volume and has over 223 000 traders.

Whilst Uniswaps growth shows no signs of slowing down, it certainly has its hands full when looking at potential competitors. Competitors will come in three forms; either straight up AMM's built on Ethereum like SushiSwap or Balancer, order book exchanges such as Serum built on faster blockchains or liquidity aggregators such as 0x or 1inch.

Concluding Thoughts

The argument for DeFi just got a whole lot sounder. In the last three weeks, almost $1 trillion in market capitalisation was wiped out of the crypto market. If this happened anywhere else, everything would reach a grinding halt, such as in a country like South Africa. Exchanges would be out of action, and lending would dry up almost instantaneously. The point is the little guy would get recked. So the question remains how did DeFi fair?

Whilst exchanges like Coinbase went down and who knows what is happening on Blockfi, DeFi alternatives stood tall. Lending and trading continued without a hiccup, nothing broken, and no one went out of business. This is a profound signal of antifragility developing in DeFi, and it further gives credence to the idea the future will, in fact, be decentralised. 

Whether Uniswap is the winner over the long run still remains to be seen. However, it possesses all the ingredients to continue being a dominant force in the decentralised exchange industry. It is governed by its community of users who should be able to constantly adapt Uniswap to stay relevant in a rapidly changing environment.

If Uniswap is successful, it may just become the exchange of everything; the implications of this would be immense for Uniswap holders. UNI tokens would give you a voice over the very rule set that the world uses to exchange value, both financial and non-financial.

Notable Articles and News Stories This Week:

Ray Dalio Bought Bitcoin

Ray Dalio, the founder of the world's largest hedge fund, Bridgewater Associates, has openly stated that he has bought bitcoin. He believes that the U.S. dollar is on the verge of a devaluation event similar to the level seen in 1971 when it went off the gold standard. In such an occurrence, bitcoin, which according to Dalio, possesses characteristics very similar to gold, will look increasingly attractive as a savings vehicle. He even went so far as to say, "Personally, I'd rather have bitcoin than a bond" in an inflationary scenario. 

Watch the interview with Ray here

Biden to Propose $6 Trillion Budget

President Joe Biden is expected to propose a $6 trillion budget for the fiscal year beginning in October. According to people familiar with the plans, it will propose strategies to modernise the nation's infrastructure and expand the government's role in providing healthcare, education, and other social services. According to the Wall Street Journal, this budget would put the U.S. on a path to spend $8.2 trillion by the end of 2031. The plan has been met with both celebrations from the Democrats and criticism by the Republicans. It will be interesting to watch how this will affect the economy over the medium to long term. 

Read more about the budget decision here

Carl Icahn Eyes Potential $1.5B Crypto Investment

Carl Icahn, the billionaire investor and one-time sceptic of crypto, has stated that he plans on investing as much as $1.5 billion in digital currencies going forward. Icahn once compared bitcoin and other digital assets to the 18th century Mississippi land bubble that crashed stock markets in Europe. However, more recently, he has gone on to state that crypto assets are "here to stay in one form or another" and that any criticism around cryptoassets having no underlying value is a "little wrong-headed."

Read more here

Whilst we all have the option to look, to seek to understand, it’s often easier not to. Bitcoin, Ethereum and distributed ledger technology are complex systems that require significant due diligence. At Etherbridge, we aim to lower the barriers to understanding this fast-growing digital economy.

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This is not financial advice. All opinions expressed here are our own. We encourage investors to do their own research before making any investments.