There was so much Nifty News this week that a second round-up was necessary to catch up on the latest nonfungible token (NFT)-related news.
FLUF World and Snoop Dog partner for charity
FLUF World, Beyond VR studio and Snoop Dogg teamed up to raised over $1 million via a one-day charity NFT auction on behalf of the Kiwi nonprofit organization Auckland City Mission.
Seven FLUF World NFTs were paired with seven limited-edition Snoop Dogg-themed Burrows designed by Beyond and sold on OpenSea. The partnership with the rapper included a 500 Snoop Dogg studio drop announced this past week.
What. The. Fluf.
Over $1 Million NZD raised in just 12 hours in our @SnoopDogg Burrow & Fluf Auction for the @AKcitymission. We’re blown away
Thanks to our partner @beyondvrgames, all who gave generously and everyone who tuned in to show their support.
Non-Fungible Labs, who own FLUF World first made a Christmas donation of$100,000 to Auckland City Mission last month. Just as Fluf avatars can find a home in Burrows in the metaverse, Aukland City Mission helps locals in need of housing.
Adidas Originals
Adidas Originals launches the ‘adidas for Prada re-source’projectin collaboration with digital artist Zach Lieberman on SuperRare. A majority of the proceeds from the NFT sales will be donated to Slow Factory, a non-profit organization and institute dedicated to improving sustainability and environmental literacy.
Adidas and Prada invite their communities to share anonymized photographs to the open-Metaverse NFT project. 3,000 community-sourced artworks will be chosen and minted as NFTs. Digital artist Zach Lieberman will then compile the images as tiles in a single mass-patchwork NFT design. Contributors will maintain full ownership rights over their individual NFT tiles.
Introducing adidas for @Prada re-source —an ambitious first-of-its-kind NFT project featuring user-generated and creator-owned art, in collaboration with digital artist @zachlieberman.
On the eve of UNICEF’s 75th anniversary, the UN children’s agency launched its largest 1,000 data-driven NFT collection in support of internet connectivity at schools. So far $740,000 has been raised.
The first 1,000 NFT pieces raised $550,000, and the pre-sale for a limited-edition piece and four others last week at a St. Moritz auction raised $140,000. UNICEF also secured an arrangement with secondary auction platforms to receive 20% royalty of all future sales, which brought in the additional $50,000 in one week, according to the organization. This royalty structure may allow UNICEF to continue raising funds for its Giga school-connectivity initiative via re-sales for years to come.
Source: Patchwork Kingdoms
WAX to airdrop 10M NFTs
WAX recently reached 11 million total wallets accounts on the WAX platform and decided to celebrate by airdropping a total of 10 million free NFT collectibles to the first 10 million wallet holders. This is the largest single NFT drop to date, according to the company, and will allegedly emit zero carbon emissions.
The free NFTs span 10 different digital pins, each marking a different moment in WAX’s history. From its launch on Mainnet in 2019 to its WAX Cloud Wallet launches and its collaboration with AMC and Spiderman.
Twitter, on the other hand, announced its rollout for NFT, hexagonal avatars. For now, only paid subscribers of Twitter Blue using iOS, which costs $2.99 per month, have access. Twitter users were quick to point out, however, that anybody can simply right-click-save any NFT from a Twitter profile, mint it, and then use it as their avatar.
The Bitcoin network difficulty is determined by the overall computational power, which co-relates to the difficulty in confirming transactions and mining BTC. As evidenced by the blockchain.com data, the network difficulty saw a downfall between May and July 2021 due to various reasons including a blanket ban on crypto mining from China.
The Bitcoin (BTC) network has recorded a new all-time high mining difficulty of 26.643 trillion with an average hash rate of 190.71 exahash per second (EH/s) — signaling strong community support despite an ongoing bear market.
BTC network difficulty. Source: Blockchain.com.
However, as the displaced miners resumed operations from other countries, the network difficulty saw a drastic recovery since August 2021. As a result, on Jan. 22, the BTC network recorded an ATH of 26.643 trillion.
Data from BTC.com estimates that the network will continue to grow stronger by attaining another ATH in the next 12 days — with a network difficulty of 26.70 trillion.
Estimated BTC network difficulty in the next 12 days. Source: BTC.com.
In the last four days, F2Pool has been the highest contributor to the hash rate by mining 88 BTC blocks, followed by Poolin at 76 blocks. As of yesterday, the average fee per transaction is roughly $1.58, a value that historically peaked at $62.78 back in Apr. 2021.
Despite the federal pressure for tighter monetary policies around cryptocurrencies, Bloomberg commodity strategist Mike McGlone suggests that BTC has a fighting chance to come out on top as investors recognize its value as a digital reserve asset.
As Cointelegraph reported, McGlone believes Bitcoin is in a unique position to outperform in an environment where stimulus reduction is usually considered negative for risk assets:
“Cryptos are tops among the risky and speculative. If risk assets decline, it helps the Fed’s inflation fight. Becoming a global reserve asset, Bitcoin may be a primary beneficiary in that scenario.”
The year 2022 is here, and banks and the traditional banking system remain alive despite decades of threatening predictions made by crypto enthusiasts. The only endgame that happened— a new Ethereum 2.0 roadmap that Vitalik Buterin posted at the end of last year.
Even though with this roadmap the crypto industry would change for the better, 2021 showed us that crypto didn’t destroy or damage the central banks just like traditional banking didn’t kill crypto. Why?
To be fair, the fight between the two was equivalently brutal on both sides. Many crypto enthusiasts were screaming about the coming apocalypse of the world’s financial systems and described a bright crypto future ahead where every item could be bought with Bitcoin (BTC). On the other hand, bankers rushed to defend the traditional role of the banking system, accusing the blockchain technology of low performance and lack of compliance.
Both of the parties were wrong in their predictions.
Equal game
Luckily, neither crypto nor traditional banking was destroyed, although they wished to. On the one hand, none of the major crypto projects has stayed away from the tightest integration with banks. The United States-based crypto exchange Kraken received a banking license and the Coinbase IPO process speaks for itself as it’s a 100% game, according to the banking/financial system rules. Most of the top projects use the services of only a few banks: Signature, SilverGate, Bank Frick — concentrating settlement and imposing banking principles of working with crypto.
On the other hand, the banking community created in-house ecosystems for crypto projects. Visa introduces crypto advisory services to help partners navigate through the crypto world. Amazon Web Services (AWS) wants “to be the AWS of crypto.” Switzerland proposes banking services for working with the crypto. SolarisBank even offers an API for crypto projects. The largest American banks and exchanges are launching services related to cryptocurrencies. In El Salvador, Bitcoin is recognized as a means of payment, which (theoretically) implies the need for international financial organizations to be ready for settlements in Bitcoin with El Salvador.
Humankind. Throughout the entire history of humans, plenty of new techs couldn’t have immunity from being controlled by the state authorities directly or indirectly through corporations. Radio, TV, internet, social networks — all started with the idea of free dissemination of information and eventually came up against the fact of total control. The same story is happening now with blockchain, and there is no chance that it will change in the future.
For the most part, people try to exaggerate the risks and reduce the likelihood of a good outcome. In my opinion, that is the reason that has severely limited and continues to limit people from accepting cryptocurrencies. But, as I said, this way of thinking is part of human nature.
Still, why does centralization defeat decentralization? It took some time for the world government to understand that blockchain technology could be not only a problem but a powerful tool for accomplishing political interests. So the blockchain, originally designed as a powerful freedom tool, received an utterly reverse implementation, turning into a tool for money control to a previously unthinkable extent. Like nuclear technology, humans use it both for peaceful and military purposes; the blockchain holds two sides of good and evil.
At first glance, the crypto had to take a step back from the initial positions of the “hawks.” In exchange, it received widespread recognition, distribution and a considerable number of users around the world — it seems to be a fair reward and a victory over those who predicted an imminent demise.
I believe that the significant growth of related Regtech technologies, designed to speed up compliance processes and all possible checks, has led to crypto acceptance by traditional finance. These projects with the solutions for conducting Know Your Customer (KYC) / Anti-Money Laundering (AML) showed a crypto response to the banks: companies like Chainalysis, Onfido can build KYC operations more efficiently while maintaining the full legality of the processes.
The newly-established startups could not follow the path of low-efficiency compliance in banks, which is a break in almost any process. Still, to conduct business in a legitimate field, they made compliance on their own, but more efficiently.
But will CBDCs destroy crypto? We should stop talking about the destruction of anything but instead think about future potentials. Central bank digital currencies (CBDCs) have problems to be solved, particularly issues of interoperability. With the incompatibility of CBDC issued in different countries, the ability to convert them mutually and the slowness of many processes related to the government, we won’t be able to talk about a quick solution.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Alex Axelrod is the founder and CEO of Aximetria and Pay Reverse. He is also a serial entrepreneur with over a decade of experience in leading technological roles. He was the director of big data at the research and development center of JSFC AFK Systems. Prior to this role, Alex worked for Mobile TeleSystems, the largest telecom provider in Russia, where he headed the antifraud and cybersecurity systems development.
Solana (SOL) price may fall to $70 a token in the coming weeks as a head and shoulders setup emerged on the daily timeframe and possibly points toward a 45%+ decline.
The chart below shows that SOL price rallied to nearly $217 in September 2021, dropped to a support level near $134 and then moved to establish a new record high of $260 in November 2021. Earlier this week, the price fell back to test the same $134-support level before breaking to a 2022 low at $87.73.
SOL/USD weekly price chart featuring head and shoulders setup. Source: TradingView
This phase of price action appears to have formed a head and shoulders setup, a bearish reversal pattern containing three consecutive peaks, with the middle one around $257 (called the “head”) coming out to be higher than the other two around the $200 to $210 (left and right shoulders).
Meanwhile, SOL’s three peaks have stood atop a common support level at $134, called the “neckline.” A fall below it signals an extended downtrend to the level at length equal to the maximum distance between the head and the neckline.
In SOL’s case, the distance is around $137, which puts its head and shoulders price target at nearly $170.
The trend so far
The bearish outlook came as SOL price dropped by more than 22% this week and currently the altcoin is around 55% from its record high, much in line with other large-cap digital assets, including Bitcoin (BTC) and Ether (ETH).
BTC/USD vs. ETH/USD weekly price chart. Source: TradingView
At the center of the ongoing crypto market decline is the U.S. Federal Reserve’s decision to unwind its $120 billion a month asset purchasing program followed by three or more interest rate hikes spread throughout 2022.
The central bank’s loose monetary policies had assisted in pumping the crypto market’s valuation from $128 billion since March 2020 to as high as $3 trillion in Nov. 2021. Therefore, the evidence of tapering has been influencing investors to limit their exposure in over-pumped markets, including Solana, which had gained nearly 12,500% since March 2020.
As a result, if the crypto market continues declining in the sessions ahead, SOL will also be at risk of validating its head and shoulders setup.
SOL’s short term outlook
While SOL’s longer timeframe chart leans toward a prolonged bearish setup, its short-term outlook looks comparatively bullish.
That is primarily due to two factors. First, SOL price has fallen to a critical support level of $116 that was instrumental in limiting its downside attempts in September 2021. And second, its daily relative strength index (RSI) dropped to below 30 — a classic buy signal.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.
Similar to traditional loans, flash loans are expected to be paid back in full eventually. However, there are also marked differences.
In typical lending processes, a borrower loans money from a lender. The amount is expected to be paid back in full eventually, with interest, depending on the terms discussed between the lender and the borrower.
Flash loans operate on a similar framework but have some unique terms and premises:
When it comes to flash loans, the borrower is required to repay the full amount of the loan before the completion of the transaction.
If this rule is not followed, the transaction is reversed by the smart contract and the loan is nullified as if it never took place at all.
Unsecured loan
Unlike a traditional loan, a flash loan is an unsecured loan, meaning no collateral is needed.
However, this does not imply that the flash loan lender does not get their money back in case of non-payment. In a traditional loan, collateral is typically put up to ensure that the lender receives the money back in the event of non-payment.
Flash loans, however, happen within a very short timeframe (usually a few seconds or minutes). This means that while no collateral is needed, the borrower must return the full amount they borrowed right away.
Instantaneous transactions
As opposed to longer processes for traditional loans, flash loans are processed faster, thanks to smart contracts.
Getting a traditional loan approved usually is a long process. A borrower must submit documents, wait for approval, and pay the loan back in agreed increments within a stipulated period that may run into days, months or years.
On the other hand, a flash loan is expedited in an instant, which means that the loan’s smart contract must be fulfilled during the transaction for which it’s lent out. Therefore, the borrower is required to call on other smart contracts, using the loaned capital to perform instant trades.
The kicker: All this must be done in a few seconds before the transaction ends. Hence, the name: flash loans.
Coming every Saturday, Hodler’s Digest will help you track every single important news story that happened this week. The best (and worst) quotes, adoption and regulation highlights, leading coins, predictions and much more — a week on Cointelegraph in one link.
NFT and virtual property-focused firm Animoca Brands secured $358 million worth of funding earlier this week at a valuation of $5 billion.
The company said the fresh funds will go towards financing strategic acquisitions and investments, product development, and IP accumulation. The firm has gone from strength to strength over the past 12 months, raising more than $216 million in 2021, while its valuation has more than doubled since its previous capital raise in October.
A key area of focus for Animoca is GameFi, with the firm pointing to research suggesting that the video gaming sector will grow to around $829 billion by 2028. The firm is also invested heavily in the virtual property and Metaverse space, with The Sandbox metaverse being one of its prime jewels.
Bitcoin’s price dropped a hefty 7.5% in the space of 12 hours to briefly sit around $38,000 in the early hours of Friday morning (UTC). During the depths of the selloff on Tuesday, BTC’s price fell below $35,000.
It is unclear what sparked the sharp price dip and whether it is purely crypto-related or a symptom of a larger trend across the traditional financial market. However, it is quite certain that, while BTC and other assets are down, crypto influencers will be flocking to Twitter to cheesily ask their followers if they have “bought the dip yet?” like they do every single time the markets are in the red.
One potential reason for Bitcoin’s downfall could be that bears are trying to tank the price so that they hit their targets before their futures contracts expire. The InvesetAnswers Twitter account, which has over 85,000 followers, suggested that bears “need #Bitcoin under $41,000 to pocket $132 million in gains” by Friday.
While the crypto market may have cooled in January, it appears that the NFT sector is booming with countless investors who are aping into tokenized collectibles, among other things.
It was reported on Monday that top NFT marketplace OpenSea had reached a new all-time high in terms of monthly volume after it topped $3.5 billion. At the time of writing, the figure stands at a whopping $4.3 billion, suggesting an average daily volume of around $204 million in January so far.
The surge in NFT trade volume appears to be led by the price increases of several Yuga Labs projects such as the Bored Ape Yacht Club, the Mutant Ape Yacht Club and the Bored Ape Kennel Club.
Reports surfaced at the start of this week regarding a crafty 22-year-old college student from Indonesia who made around $1 million selling NFTs depicting five years’ worth of selfies.
Semarang-based computer science student Sultan Gustaf Al Ghozali converted and sold nearly 1,000 selfie images as NFTs on OpenSea. According to Ghozali, he took photos of himself, either standing or sitting in front of his PC for five years, as a way to look back on his journey to graduation.
He set the initial price for each NFT selfie at $3 without expecting interest from serious buyers, but the project exploded in popularity on the back of support from prominent members of Crypto Twitter.
Microsoft announced on Tuesday that it is acquiring gaming giant Activision Blizzard for $95 per share at a valuation of $68.7 billion, with the deal slated to close in the 2023 fiscal year.
Activision Blizzard boasts a strong list of iconic gaming series such as Call of Duty, Overwatch and World of Warcraft. Activision titles will be added to Microsoft’s Xbox and PC Game Pass service.
Microsoft noted that the acquisition will help the company provide the “building blocks for the Metaverse.” CEO and chairman Satya Nadella explained:
“Gaming is the most dynamic and exciting category in entertainment across all platforms today and will play a key role in the development of metaverse platforms.”
Winners and Losers
At the end of the week on Friday, Bitcoin (BTC) is at $38,651, Ether (ETH) at $2,807 and XRP at $0.68. The total market cap is at $1.80 trillion, according to CoinMarketCap.
Among the biggest 100 cryptocurrencies, the top two altcoin gainers of the week are Perpetual Protocol (PERP) at 3.62% and BitTorrent (BTT) at 2.04%.
The top three altcoin losers of the week are Harmony (ONE) at -35.08%, Loopring (LRC) at -34.25% and Kadena (KDA) at -32.04%.
“Most crypto assets currently use distributed ledger technology (DLT), it might be that this changes as the technology and industry evolve. Therefore, the government proposes to remove the reference to DLT from the definition of qualifying crypto assets.”
“Bitcoin is in a unique phase, I think, of transitioning from a risk-on to risk-off global digital store of value, replacing gold and becoming global collateral. So, I think that’s going to be happening this year.”
Mike McGlone, senior commodity strategist at Bloomberg
“To date, the DeFi space has been used primarily for speculative activities. Users invest, borrow and trade crypto assets in a largely unregulated environment. The absence of controls such as Know Your Customer (KYC) and Anti-Money Laundering rules, might well be one important factor in DeFi’s growth.”
Agustín Carstens, general manager of the Bank of International Settlements (BIS)
“We made the move to the corporate balance sheet on a Bitcoin-standard back in August of 2020, and since then, we’re up more than 300 percent on our initial investment. […] It’s really done its job of protecting us against inflation and it worked as we intended it to.”
“While most tend to focus on high-profile ransomware attacks against big corporations and government agencies, cybercriminals are using less sophisticated types of malware to steal millions in cryptocurrency from individual holders.”
“The reason why regulators have to limit advertising is probably because of such high demand. Most of our users come from word of mouth anyway. […] So, I don’t think it’s going to have a huge impact.”
After trading sideways for most of the week, Bitcoin’s price nosedived on Thursday and continued lower on Friday. BTC dropped from $43,596 down to $38,251 inside of Thursday, according to Cointelegraph’s BTC price index, before reaching new six-month lows on Saturday. January has largely been a downward and sideways month for Bitcoin’s price action, which is not unlike its historical price performance during the month.
One report Cointelegraph covered this week, however, sees potential for further crypto adoption in 2022. Digital currency exchange Crypto.com produced a report showing a large uptick in crypto industry participants in 2021. According to the firm, there were 295 million crypto owners at the end of 2021, up from 106 million in the first month of the year. Crypto.com believes crypto ownership could surpass 1 billion this year.
“Nations can no longer afford to ignore the growing push towards crypto by the public,” the report said.
Crypto.com revealed details about its security breach that resulted in the loss of roughly $33.8 million worth of digital assets on Monday. The firm initially halted withdrawals on the platform and revoked all customer two-factor authentication (2FA) tokens after spotting “unauthorized activity on a small number of user accounts.”
In a statement on Thursday, Crypto.com said that 483 accounts had been compromised, with “4,836.26 ETH, 443.93 BTC and approximately US$66,200 in other currencies” stolen from clients.
The firm stated that it has now implemented an additional layer of protection in which a new whitelisted withdrawal address must be registered within 24 hours before the first withdrawal. It is unclear if that solution will soothe the users who had their funds drained already.
The Monetary Authority of Singapore (MAS) issued a new set of guidelines on Monday for digital payment token (DPT) providers, barring them from marketing their services in public places, such as on public transportation, social media platforms and broadcast and print media.
MAS also warned the public of the high-risk nature of crypto assets as it introduced new guidelines that will apply to all registered crypto service providers as well as those that are in a transitional period. The guidelines stipulated:
“MAS stresses that DPT service providers should conduct themselves with the understanding that trading of DPTs is not suitable for the general public. These Guidelines set out MAS’ expectation that DPT service providers should not promote their DPT services to the general public in Singapore.”
In a recent interview, European Securities and Markets Authority vice chair Erik Thedéen raised concerns over the growing use of renewable energy in Bitcoin mining.
Thedéen asserted that Bitcoin mining has become a “national issue” and sounded the alarm over crypto potentially undermining climate change goals. He specifically took aim at proof-of-work (PoW) mining, which is primarily used by Bitcoin and a few other forked altcoins.
He advocated for proof-of-stake (PoS) as a better, energy-efficient alternative, with some commentators suggesting that he could be a secret Ether bull waiting for the rollout of Eth2 later this year. (As a refresh: Eth2 will transition the Ethereum network from PoW to PoS.)
“We need to have a discussion about shifting the industry to a more efficient technology,” he said.
Before investing your valuable resources, you should assess blockchain projects based on various factors, including community, use case, the team and longevity, among other factors.
2021 was a sort of “coming-of-age” for many layer-one (L1) blockchain protocols because the growth of decentralized finance (DeFi) and nonfungible tokens (NFTs) forced users to look for solutions outside of the Ethereum (ETH) network where high fees and network congestion continued to be barriers for many.
Protocols like Fantom (FTM), Avalanche (AVAX) and Cosmos (ATOM) saw their token values rise and ecosystems flourished as 2021 came to a close. Meanwhile, popular projects like Polkadot (DOT) underperformed, comparatively speaking, despite the high expectations many had for the sharded multi-chain protocol.
FTM/USDT vs. AVAX/USDT vs. ATOM/USDT vs. DOT/USDT daily chart. Source: TradingView
Setting aside the specific capability that each protocol offers in terms of transactions per second and time to finality, here are several factors that may have played a role in DOT’s laggard performance when compared to other L1 competitors.
Interoperability is a key factor
One of the major themes of 2021 was cross-chain interoperability between separate blockchain networks, with a bridge to Ethereum being the most important connection to establish due to the fact that a majority of projects currently run on the network.
Protocols like Fantom, Binance Smart Chain, Avalanche and Harmony developed cross-chain bridges and this led to a noticeable bump in their token price, total value locked and on-chain activity.
Despite the fact that Polkadot was specifically designed to offer multi-chain support as a “layer-zero” meta protocol, there was no major release of a bridge that connected Polkadot with Ethereum in 2021 and this left the protocol unloved by crypto traders looking to engage with DeFi and NFTs.
Cosmos, likewise, didn’t see the release of a major bridge that connected its ecosystem with Ethereum, but there were minor integrations like the addition of Ether as a collateral asset on Terra which demonstrated that cross-chain compatibility was possible.
The late launch of parachain auctions
As 2021 came to a close, all of the previously mentioned networks were seeing a healthy amount of activity and cross-protocol interactions while projects on Polkadot were still finalizing their preparations to launch on the mainnet.
This was in part due to the fact that the parachain auctions for Polkadot didn’t begin until November 11 when Moonbeam (GLMR), an Ethereum-compatible smart contract parachain, secured the first slot.
DOT saw its price rise to an all-time high of $55 on Nov. 4 as those interested in contributing to the parachain auctions secured their tokens, but by the time the auctions had officially started its price was already on the downslope toward a low of $23.28 on Jan. 10.
Moonbeam official went live on the Polkadot network on Jan. 11 and has managed to rack up more than 1 million transactions as users were finally able to transfer ERC-20 tokens into the Polkadot ecosystem.
⚡ ONE MILLION TRANSACTIONS ⚡️ Moonbeam hits 1M tx on the network! Moonbeam is lighting up @Polkadot’s ecosystem with new integrations, 100k+ wallets, 700+ ERC-20 tokens & 1M GLMR tokens locked with collators.
A third factor that may be weighing on the popularity and price of DOT is confusion about what the token is used for and what benefits it provides to token holders.
Thinking about selling my $DOT. I don’t see the purpose of the project anymore, many of the cool projects that were going to build on it migrated to $MATIC or so.
On many of the competing networks, the native token is used to conduct contract actions such as token transfers or swaps whereas protocols that are in the Polkadot ecosystem use their native tokens to pay for gas.
Aside from being used to participate in parachain auctions, the main uses for DOT include staking to support the operation and security of the network and for use in governance votes.
While governance abilities are important for the overall health of blockchain protocols, the average cryptocurrency users still haven’t shown much enthusiasm for participating in votes and are more interested in things like gaming, DeFi and NFTs.
Multiple layer-one solutions are launching developer and liquidity incentive programs and up and coming DeFi protocols are still offering high yield staking opportunities. Currently DOT offers 13.94% APR to stakers and its possibly that this is not enough to satisfy the appetite of yield farmers who are looking to get more bang for their buck.
The long-term outlook for Polkadot remains strong and the project has an active and dedicated community of followers to go along with an experienced development team led by Ethereum co-founder Dr. Gavin Wood.
The launch of Moonbeam might indeed mark a turning point for DOT as cross-chain compatibility is now live and other parachain projects should start to launch on the mainnet shortly, but it remains to be seen how long it will take the network to catch up to its L1 competitors who have a head start on cross-chain interactions and increased on-chain activity.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.
Decentralized finance, known as DeFi, is a new use of blockchain technology that is growing rapidly, with over $237 billion in value locked up in DeFi projects as of January 2022. Regulators are aware of this phenomenon and are beginning to act to regulate it. In this article, we briefly review the fundamentals and risks of DeFi before presenting the regulatory context.
The fundamentals of DeFi
DeFi is a set of alternative financial systems based on the blockchain that allows for more advanced financial operations than the simple transfer of value, such as currency exchange, lending or borrowing, in a decentralized manner, i.e., directly between peers, without going through a financial intermediary (a centralized exchange, for example).
Schematically, a protocol called a DApp (for decentralized application), such as Uniswap or Aave, is developed in open source code on a public blockchain such as Ethereum. This protocol is powered by smart contracts, i.e., contracts that are executed automatically when certain conditions are met. For example, on the Uniswap DApp, it is possible to exchange money between two cryptocurrencies in the Ethereum ecosystem, thanks to the smart contracts designed to perform this operation automatically.
Users are incentivized to bring in liquidity, as they receive a portion of the transaction fee. As for lending and borrowing, smart contracts allow those who want to lend their funds to make them available to borrowers and borrowers to directly borrow the money made available by guaranteeing the loan with collateral (or not). The exchange and interest rates are determined by supply and demand and arbitrated between the DApps.
The great particularity of DeFi protocols is that there is no centralized institution in charge of verifying and carrying out the transactions. All transactions are performed on the blockchain and are irreversible. Smart contracts replace the intermediary role of centralized financial institutions. The code of DeFi applications is open source, which allows users to verify the protocols, build on them and make copies.
The risks of DeFi
Blockchain gives more power to the individual. But with more power comes more responsibility. The risks DeFi are of several kinds:
Technological risks. DeFi protocols are dependent on the blockchains on which they are built, and blockchains can experience attacks (known as “51% attacks”), bugs and network congestion problems that slow down transactions, making them more costly or even impossible. The DeFi protocols, themselves, are also the target of cyberattacks, such as the exploitation of a protocol-specific bug. Some attacks are at the intersection of technology and finance. These attacks are carried out through “flash loans.” These are loans of tokens without collateral that can then be used to influence the price of the tokens and make a profit, before quickly repaying the loan.
Financial risks. The cryptocurrency market is very volatile and a rapid price drop can occur. Liquidity can run out if everyone withdraws their cryptocurrencies from liquidity pools at the same time (a “bank run” scenario). Some malicious developers of DeFi protocols have “back doors” that allow them to appropriate the tokens locked in the smart contracts and thus steal from users (this phenomenon is called “rug-pull”).
Regulatory risks. Regulatory risks are even greater because the reach of DeFi is global, peer-to-peer transactions are generally anonymous, and there are no identified intermediaries (most often). As we will see below, two topics are particularly important for the regulator: the fight against money laundering and terrorist financing, on the one hand, and consumer protection, on the other.
The FATF “test”: Truly decentralized?
As of Oct. 28, 2021, the Financial Action Task Force (FATF) issued its latest guidance on digital assets. This international organization sought to define rules for identifying responsible actors in DeFi projects by proposing a test to determine whether DeFi operators should be subject to the Virtual Asset Service Provider or “VASP” regime. This regime imposes, among other things, Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) obligations.
The FATF had initially considered, last March, that if the decentralized application (the DApp) is not a VASP, the entities “involved” in the application may be, which is the case when “the entities engage as a business to facilitate or conduct activities” on the DApp.
The new FATF guidance drops the term “facilitate” and instead adopts a more functional “owner/operator” criterion, whereby “creators, owners, and operators … who retain control or influence” over the DApp may be VASPs even though the project may appear decentralized.
FATF, under the new “owner/operator” test, states that indicia of control include exercising control over the project or maintaining an ongoing relationship with users.
The test is this:
Does a person or entity have control over the assets or the protocol itself?
Does a person or entity have “a commercial relationship between it and customers, even if exercised through a smart contract”?
Does a person or entity profit from the service provided to customers?
Are there other indications of an owner/operator?
FATF makes clear that a state must interpret the test broadly. It adds:
“Owners/operators should undertake ML/TF [money laundering and terrorist financing] risk assessments prior to the launch or use of the software or platform and take appropriate measures to manage and mitigate these risks in an ongoing and forward-looking manner.”
The FATF even states that, if there is no “owner/operator,” states may require a regulated VASP to be “involved” in DeFi project-related activities… Only if a DeFi project is completely decentralized, i.e., fully automated and outside the control of an owner/operator, is it not a VASP under the latest FATF guidance.
It is regrettable that a principle of neutrality of blockchain networks has not been established, similar to the principle of neutrality of networks and technical intermediaries of the internet (established by the European directive on electronic commerce more than 20 ago).
Indeed, the purely technical developers of DeFi solutions often do not have the physical possibility to perform the checks imposed by the AML/CFT procedures in the design of current DApps. The new FATF guidance will likely require DApp developers to put in Know Your Customer (KYC) portals before users can use the DApps.
Application of security law?
We are all familiar with the legal debate that has become classic when it comes to qualifying a token: Is it a utility token, now subject to the regulation of digital assets (ICOs and VASPs), or is it a security token that is likely to be governed by financial law?
We know that the approach is very different in the United States where the Securities Exchange Commission (by applying the famous “Howey Test”) qualifies tokens as securities that would be seen as digital assets in Europe. Their approach is, therefore, more severe, and this will certainly result in more prosecutions of “owners” of DeFi platforms in the U.S. than in Europe.
Thus, if DeFi services do not involve digital assets, but tokenized financial securities as defined by the European Markets in Financial Instruments Directive (MiFID Directive), the rules for investment services providers (ISPs) will have to be applied. In Europe, this will be a rare case as the tokens traded would have to be actual financial securities (company shares, debt or investment fund units).
However, national regulations are likely to apply. For example, in France, it will be necessary to determine whether the regulation on intermediaries in various goods (Article L551-1 of the Monetary Code and following) applies to liquidity pools.
Indeed, pools allow clients to acquire rights on intangible assets and put forward a financial return. Theoretically, it would no longer be excluded that the Autorité des marchés financiers (AMF) decides to apply this regime. As a consequence, an information document will have to be approved by the AMF before any marketing.
However, in practice, there is not one person who proposes the investment, but a multitude of users of the DApp who bring their liquidity in a smart contract coded in open source. This brings us back to the test proposed by the FATF: Is there an “owner” of the platform who can be held accountable for compliance with the regulations?
The MiCA regulation
On November 24, the European Council decided its position on the “Regulation on Cryptoasset Markets” (MiCA), before submitting it to the European Parliament. It is expected that this fundamental text for the cryptosphere will be adopted by the end of 2022 (if all goes well…).
The draft EU regulation is based on a centralized approach by identifying a provider responsible for operations for each service, which does not work for a decentralized exchange platform (like Uniswap) or a decentralized stablecoin.
We should think about a legal system that takes into account the automated and decentralized nature of systems based on blockchain, so as not to impose obligations on operators who do not have the material possibility of respecting them or who run the risk of hindering innovation by removing the reason for progress: decentralization.
Europe has already shown itself capable of subtle arbitration in matters of technological regulation if we refer in particular to the proposal for a European Union regulation on artificial intelligence. This approach could serve as a source of inspiration.
Regardless of the balance chosen by the regulator, investors should become as informed as possible and pay attention to the technological, financial and compliance risks before undertaking a DeFi transaction.
As for DeFi application developers and service providers in this field, they must remain attentive to regulatory developments and cultivate a culture of transparency in their operations to anticipate regulatory risk as much as possible.
This article was co-authored by Thibault Verbiest and Jérémy Fluxman.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Thibault Verbiest, an attorney in Paris and Brussels since 1993, is a partner with Metalaw, where he heads the department dedicated to fintech, digital banking and crypto finance. He is the co-author of several books, including the first book on blockchain in French. He acts as an expert with the European Blockchain Observatory and Forum and the World Bank. Thibault is also an entrepreneur, as he co-founded CopyrightCoins and Parabolic Digital. In 2020, he became chairman of the IOUR Foundation, a public utility foundation aimed at promoting the adoption of a new internet, merging TCP/IP and blockchain.
Jérémy Fluxman has been an associate at international law firms in Paris and Luxembourg in the fields of private equity and investment funds, as well as at a Monaco law firm since 2017. He holds a master II in international business law and is currently an associate at the Metalaw firm in Paris, France where he advises on fintech, blockchain and crypto-finance.
Welcome to the latest edition of Cointelegraph’s decentralized finance newsletter.
Following a bearish decline for many of the leading decentralized finance (DeFi) tokens, it is within the fundamental news where the optimism for growth and prosperity lies. Read on to hear about the most impactful DeFi stories of the last seven days.
What you’re reading is the shorter, snappier version of the newsletter. For the full roundup of DeFi developments across the week delivered directly to your inbox, subscribe below.
Secret Network offers $400M community fund scheme
Secret Network, a privacy-oriented layer-one blockchain, announced the launch of a $400 million funding pot this week in a bid to expand their application and network infrastructure, and tooling mechanisms in addition to accelerating adoption for their native token, SCRT.
Comprising a $225 million ecosystem fund and a $175 million accelerator fund, the capital raise was supported by a number of existing partner organizations, including BlockTower Capital, Arrington Capital and Fenbushi Capital.
The $400 million fund is the first of an expected series of deployments within the Shockwave Initiative, a global growth strategy, announced by the company on Jan. 12. The initiative is focused on the expansion of its ecosystem, including fostering and incubating the roll-out of decentralized privacy applications on its platform, as well as expanding the utility and adoption of the SCRT token, to overall become a fully comprehensive privacy hub for Web3.
Secret Foundation founder Tor Bair told Cointelegraph that the capital will be used to “scale privacy-first, decentralized applications to global adoption by millions of users,” as well as emphasizing the importance of Web3 technology, stating that “privacy technologies are essential to ensure that Web3 will be empowering and open, rather than an extension of the failures of Web 2.0.”
Also in the news recently was Secret Network’s issuance of Pulp Fiction-themed nonfungible tokens in partnership with iconic filmmaker Quentin Tarantino. The collection is set to debut seven previously-unseen handwritten chapters of Tarantino’s screenplay of the 1994 classic, with more details on the first sale expected to be made public on Jan. 24.
Despite the fanfare around the launch of these tokens by fans and the wider film community, production company Miramax filed a lawsuit on Nov. 17 accusing director Quentin Tarantino of copyright infringement in pursuing this NFT venture, citing that it interferes with their own visions of future NFT launches and is simply a cash-grab that could potentially devalue the film’s reputable public image. The case remains ongoing at the time of writing.
1inch Network expands to Avalanche and Gnosis Chain
Decentralized exchange aggregator 1inch Network announced its intention to roll out the 1inch Aggregation Protocol and 1inch Limit Order Protocol this week on Avalanche and Gnosis Chain, respectively, and as such, expand their foothold within the DeFi sector.
An initial list of protocols will become immediately available via 1inch on cross-chain network Avalanche such as 1inch Limit Order Protocol v2, Aave, SushiSwap, Trader Joe and KyberSwap, among others.
Similarly, those protocols immediately accessible on Gnosis Chain, formerly known as xDai Chain, via 1inch, include 1inch Limit Order Protocol v2, Curve v1, and SushiSwap.
1/ In life, we often have to choose between two options both of which may seem important to us.
But what if we could go for both options at once? Sounds fantastic, doesn’t it?
“1inch’s main goal is to offer users the best deals across the blockchain space,” stated Sergej Kunz, 1inch Network co-founder, continuing to remark that the expansion to Avalanche and Gnosis Chain “will offer 1inch users more options for cheap and fast transactions.”
According to analytical data from DeFi Llama, the Avalanche ecosystem currently holds $9.77 billion in total value locked (TVL), the majority of which is dominated by Aave, Benqi and Trader Joe with $2.48 billion, $1.35 billion, and $1.21 billion.
On the other hand, Gnosis Chain is currently recording a TVL of $206.8 million, largely accumulated in the last three months from projects including Curve, SuperFluid and RealT, which have amassed $62.9 million, $54 million and $31.3 million, respectively.
Token performances
Analytical data reveals that DeFi’s total value locked slightly decreased by 8.29% across the week to a figure of $114.63 billion, continuing along with the wider market decline.
Following an overwhelming bearish 24 hours for DeFi’s leading tokens, all price results are negative this week and will be ranked by market capitalization.
Terra (LUNA) registered minus 8.15%. Avalanche (AVAX) fell sharply by 18.73%, while Wrapped Bitcoin (WBTC) pulled back 9.3%. Stablecoin Dai (DAI) suffered a similar fate down by 0.06%, while Chainlink performed the worst out of the top five, taking a 21.8% hit.
Interviews, features and other cool stuff
Thank you for reading our summary of this week’s most impactful DeFi developments. Join us again next Friday for more stories, insights and education in this dynamically advancing space.
Miners can burn virtual currency tokens using the proof-of-burn (PoB) consensus mechanism.
Proof-of-burn is one of several consensus mechanisms blockchain networks use to verify that all participating nodes agree on the blockchain network’s genuine and legitimate state. A consensus mechanism is a collection of protocols that use several validators to agree on the validity of a transaction.
PoB is a proof-of-work mechanism that does not waste energy. Instead, it works on the idea of allowing miners to burn tokens of virtual currency. The right to write blocks (mine) is then awarded in proportion to the coins burned.
Miners transmit the coins to a burner address to destroy them. This procedure uses few resources (aside from the energy necessary to mine the coins before burning them) and keeps the network active and flexible.
Depending on the implementation, you may burn the native currency or that of an alternate chain, such as BTC. In exchange, you’ll get a payout in the blockchain’s native currency token.
However, PoB will reduce the number of miners, just as it will reduce the token supply because there will be fewer resources and less competition. This leads to the obvious problem of centralization since large miners are granted too much capacity, allowing them to burn massive amounts of tokens at once, drastically impacting price and supply.
To get around this problem, a decay rate is frequently utilized, which effectively decreases individual miners’ total capacity to validate transactions. PoB is similar to PoS in that both need miners to lock up their assets to mine. Unlike PoB, stakers can get their coins back after they quit mining with PoS.
In cryptocurrency, the buyback works the same way, by purchasing tokens from the community and putting them in the developers’ wallets. As a result, unlike coin burning, which permanently destroys the tokens circulating in the market, the buyback does not permanently eliminate their tokens.
Winners and Losers
