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RelayNode NYC #47 - April 6 - A good crisis resolution system must also minimize moral hazard.

David Gogel

Welcome to RelayNode NYC Area edition! The NYC blockchain ecosystem is growing. Our goal is to harness its energy and innovation for the benefit of New Yorkers and provide a weekly curated list of interesting content, upcoming (virtual) events, and local jobs.

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RelayNode NYC is curated by:  

David Gogel

Founder @GogelX/Definancier, Advisor @Paperchain.io, fmr Associate @Techstars' Blockchain Accelerator, Co-president @Wharton FinTech, Corp Dev @LinkedIn @AIG

Market Stats (as of Sunday, April 5, 10 PM EST)

Q1 2020 is in the books with a vast wave of deleveraging occurring across financial markets. Gold, Bitcoin, and the overall crypto markets outperformed last week and are slowly decoupling from the equities markets.

1 Big Thing: Bailouts & Moral Hazard

What are the consequences of a world in which regulators bailout insolvent companies who spend 96% of their free cash flow on buybacks? What are the consequences of a world in which the government or lenders of last resort bailout risk-seeking startups? How will current policies impact future incentives?

Joe Lonsdale, Founding Partner at 8VC and Co-founder of Palantir, makes the claim that the tech / startup sector doesn’t need government loans:

https://twitter.com/JTLonsdale/status/1246522906231750656

Moral hazard is the idea that a party protected in some way from risk will act differently than if they didn't have that protection. If the public, founders, and investors believe the company will receive a bailout, management may take more risks in pursuit of profit. 

Indeed, the probability of a bailout now determines risk and the risk of loss for creditors is a product of:

  1. The probability that obligor will (absent a bail-out) have to default on its payments to the creditor (PD);

  2. The probability that a bailout will occur (PB); and

  3. The loss gave either bailout (LGB) or default (LGD).

The alternative to creating a moral hazard is a free-market approach to let companies fail when they risk too much, wind down insolvent institutions, and let stronger corporations buy up the debris. In the meantime, the government continues to print money at the expense of taxpayers.

Go Deeper:

What To Read

🌐 Macro / Why Bitcoin?

  • Modern Monetary Theory: Howard Marks, Co-Founder & Co-Chairman of Oaktree Capital, released his latest investor letter explaining that Modern Monetary Theory (federal deficits and debt don’t matter) is here, his worries about inflation, the long-term value of the dollar and its role as the world’s reserve currency.

  • Moral Hazard: In his latest CoinDesk op-ed, Nic Carter, GP at Castle Island Ventures, explains the "Cantillon Insider" effect, leading to more market fragility. “If you eliminate the negative consequences of risk-taking, you reward these risk-seeking entities. Now the calculus is different. The companies taking on leverage and refusing to buy insurance (in the form of capital retained on the balance sheet) outperform in the short and long term, as the government writes them a gigantic free put option in the form of a bailout. The message is very clear: failure and risk-taking is rewarded and encouraged.”

  • What is a Safe Haven? Andrew Gillick from BNC Research and Christopher Brookins from Valiendero Digital Assets explore the changing nature of “safe haven” assets and the resilience of both bitcoin and gold to recover and adapt to a new system state.

  • The Halving: CoinDesk Research published a report on the Bitcoin halving. Further, the team at CoinMetrics present a framework for understanding miner economics and how to best navigate the upcoming block reward halving for Bitcoin, Bitcoin Cash, and Bitcoin SV. 

  • Changing World Order: Ray Dalio describes the cause-effect relationships behind the archetypical rise and decline of the most powerful empires. It is the distillation of the dynamics he saw studying the 3 reserve currency empires (the Dutch, the British, the American) and the 6 other significant empires (Germany, France, Russia, India, Japan, China) over the last 500 years.

📈Crypto Spot & Derivatives Trading

  • CryptoCompare published its monthly report analyzing the trade activity on crypto exchanges. The record-breaking crash of March 12 and 13 drove new all-time volume highs in both the spot and derivatives markets.

  • Binance Research, Binance Trading, and Binance Research explore March data to answer the question will Bitcoin and other cryptocurrencies rebound amidst the macro-uncertainty and flight to alternative assets?

  • Stablecoins reach $7B market cap: Hasu, a cryptocurrency researcher, explains that stablecoins have seen net inflows of ~$2b, a 33% increase. This represents the largest surge in demand ever, in line with the USD’s demand surge in traditional markets. Dollar-backed stablecoin issuers make a profit on the interest they earn on deposited dollars. As interest rates drop to zero, how will issuers cover their costs? JP Koning explains how zero interest rates could hamper the stablecoin business.

  • Clara Medalie and Anastasia Melachrinos from Kaiko explore how the ‘Black Thursday’ price crashes decimated crypto order books, highlighting the role of market depth (size of bid and ask orders) in volatility. 

💰 Funding, M&A, & Exits

  • CoinMarketCap, a crypto data aggregator, was acquired by Binance for a mix of equity and BNB tokens in a deal valued at ~$400M. Brandon Chez, the founder of CoinMarketCap, will be stepping down to focus on his family. William Foxley from CoinDesk recaps the strategic rationale for the acquisition which significantly increases Binance’s access to the top of the funnel for customer acquisition.

  • Coinbase announced it has invested 1.1M USDC in Uniswap and PoolTogether. With Uniswap, the fund has injected 1M USDC into the protocol's USDC/ETH pool. With PoolTogther, Coinbase has invested 100K USDC as a spool sponsor to increase USDC depositors' potential rewards.

  • Keep Network raised $7.7M in a private token sale to support tBTC, an ERC20 token that is trustlessly backed by and redeemable for Bitcoin. It is a way for users to deposit Bitcoin and mint Bitcoin tokens on Ethereum. The private token sale was led by Paradigm. Bloomberg writes tBTC could be used on Ethereum as “collateral to earn interest, trade using leverage or access enhanced financial privacy applications, all without having to sell their Bitcoin.”

🔓 DeFi / OpFi

  • On the path to decentralization: MakerDAO released a post-mortem of the market collapse of March 12-13. Further, Rune Christensen, CEO of the Maker Foundation, presented the Self-Sustaining MakerDAO Initiative that would result in the dissolution of the Maker Foundation, the key entity leading development and governance of MakerDAO. As part of the new Governance Paradigm, Rune discussed 3 core pillars: the creation of processes for (1) elected paid contributors; (2) improvement proposals; and (3) voter delegation.

  • Balancer, an n-dimensional automated market maker, launched on March 31 and now contains ~$190K from 42 liquidity providers across 16 pools. Balancer expands the automated market-making pioneered by Uniswap by allowing the pool to have more than 2 tokens.

💸 STOs / Stablecoins / Tokens / DAOs

  • According to the Block, Figure Technologies paused its blockchain-based HELOC loans due to uncertainty in the mortgage bond market (after previously completing a $150M blockchain-based securitization last month).

🌉 Infrastructure

  • Binance is launching its first bitcoin mining pool. Another example of exchanges moving into ancillary businesses. OKex and Huobi both launched their own mining pools in August and September 2019.

  • Web 2 meet Web 3: Formatic launched Magic, a simple passwordless authentication SDK, leveraging blockchain and decentralized identity under the hood. This gives developers the ability to distribute blockchain keypairs to everyday users.

⚖️Legal

  • According to Stephen Palley from the Block, 11 new putative class actions were filed on April 3 by the Roche Freedman law firm in the Southern District of New York. They separately name Binance, Civic, BProtocol, Status, Block.one, KayDex, Quantstamp, BiBox, TRON Foundation, KuCoin, HDR Global Trading (that is, the BitMEX exchange), and many of their principals, including crypto notables such as Brendan Blumer, Dan Larimer, Vinny Lingham, Binance founder Changpeng Zhao, and BitMEX co-founder and CEO Arthur Hayes. 

🎧 Podcast of the Week

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🎓Highlighted Industry Jobs (non-exhaustive list for NY)

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Nothing written in RelayNode NYC is legal or investment advice and should not be taken as such. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence.