Breaking Banks
Episode 498: Meet Breaking Chains Crypto
Thu Jun 15 2023Description
Breaking Banks is a global fintech radio show and podcast that explores the personalities, startups, innovators, and industry players driving disruption in financial services. The first episode of Breaking Chains Crypto discusses the current landscape and reasons why the battle of the L2s is just beginning. South Korea is shown to be a fertile ground for producing notable DJs. The hosts discuss their locations in Bangkok and Dubai, highlighting the crypto activity in those areas. The past year has seen significant events in crypto, including fraud cases involving FTX, Celsius, BlockFi, Three Arrows, and Veriluna. There is a need for better risk management and trust within the crypto ecosystem. 2022 serves as a wake-up call for expectations around behavior in the crypto space. Lessons learned from previous market cycles may not prevent future mistakes due to new participants entering the market. Finance, whether traditional or crypto, relies on trust and character when it comes to managing capital.
Insights
Trust and Risk Management
Trust is a key factor in investing, as it involves believing that the person managing your capital will act responsibly. Crypto markets lack some of the risk management and instrument sophistication found in more mature markets.
Market Manipulation
The lack of depth and liquidity in the crypto market makes it vulnerable to manipulation by big players. Regulators should focus on addressing market manipulation in crypto, particularly regarding market making, exchange custody, and venture capital under one umbrella without segregation or controls.
Trends in Crypto Technology
AI and zero knowledge (ZK) are significant trends in the industry. NFTs are being integrated into DeFi protocols, and gaming might be the next frontier for blockchain technology.
Korea's Influence and the Future of Blockchain Technology
Korea has a history of contributing to big up moves in tokens. The NFT market brought web2 users into web3 and expanded the value proposition beyond DeFi.
Web 3.0 and the Challenges of Regulation
Web 3.0 is a trusted network that enables decentralized financial services through crypto. The current crypto ecosystem lacks regulation and safety rails, making it difficult for institutions to participate.
Smart Contracts, Regulation, and Industry Progress
Smart contracts provide provable ownership and define multiple counterparties. Regulation is a major challenge for the industry due to public perception and recent debacles like Sam and FPX.
Market Manipulation and Trust Issues
Fraud can occur regardless of regulation, and history has shown that nefarious activity can happen on a large scale. Regulators need to find a balance between allowing growth in the industry while protecting users from manipulation.
Implications of FTX Fallout and Industry Progress
FTX undermined the whole industry, leading to wider spreads, shallower market depth, higher volatility, and greater uncertainty. Cleaning out bad actors and improving the industry is a positive development for the technology and its potential impact on global finance.
Conclusion
The SEC is cautious about going too hard on inflation and wants to see wage inflation catch up. There are positive signs in the market, such as decreasing inflation numbers and Eurozone avoiding recession.
Chapters
- Introduction
- Trust and Risk Management in Crypto Markets
- GTX Exchange and Market Manipulation
- Trends in Crypto Technology
- Korea's Influence and the Future of Blockchain Technology
- Web 3.0 and the Challenges of Regulation
- Smart Contracts, Regulation, and Industry Progress
- Market Manipulation and Trust Issues
- Implications of FTX Fallout and Industry Progress
- Conclusion
Introduction
00:06 - 07:34
- Breaking Banks is a global fintech radio show and podcast that explores the personalities, startups, innovators, and industry players driving disruption in financial services.
- The first episode of Breaking Chains Crypto discusses the current landscape and reasons why the battle of the L2s is just beginning.
- South Korea is shown to be a fertile ground for producing notable DJs.
- The hosts discuss their locations in Bangkok and Dubai, highlighting the crypto activity in those areas.
- The past year has seen significant events in crypto, including fraud cases involving FTX, Celsius, BlockFi, Three Arrows, and Veriluna.
- There is a need for better risk management and trust within the crypto ecosystem.
- 2022 serves as a wake-up call for expectations around behavior in the crypto space.
- Lessons learned from previous market cycles may not prevent future mistakes due to new participants entering the market.
- Finance, whether traditional or crypto, relies on trust and character when it comes to managing capital.
Trust and Risk Management in Crypto Markets
07:10 - 14:04
- Trust is a key factor in investing, as it involves believing that the person managing your capital will act responsibly.
- Crypto markets lack some of the risk management and instrument sophistication found in more mature markets.
- There are tools available for options trading and pricing in crypto, but the problem lies in bilateral agreements and collateral constraints for regulated institutions.
- The lack of liquidity providers in the space hinders options trading.
- Suspicions about counterparty representations and accuracy can be resolved bilaterally or trilaterally, but new agreements with certain individuals may be unlikely due to past history.
- Background checks on key players in the industry reveal SEC sanctions and other issues, indicating a need for greater maturity in crypto markets.
- Crypto markets may attract higher-end institutions that are forgiving and willing to take risks.
- The GTX exchange aims to trade claims on assets.
GTX Exchange and Market Manipulation
13:36 - 20:23
- The emergence of the GTX exchange, which will trade claims on crypto assets, is an interesting idea.
- Suzu and Kyle have become prominent figures in the crypto space due to their clean reputation compared to others involved with retail money.
- There are founders who were declared dead or lost during the market collapse.
- Tereluna is considered dead in the water and unlikely to recover.
- 2022 has shown that allowing inexperienced individuals to manage money in the crypto market is problematic.
- The lack of depth and liquidity in the market makes it vulnerable to manipulation by big players.
- Regulators should focus on addressing market manipulation in crypto, particularly regarding market making, exchange custody, and venture capital under one umbrella without segregation or controls.
- Shorting anything in this market is difficult due to easy liquidation.
- FTX was a major driver of volume before the fallout, but now the books are very thin.
Trends in Crypto Technology
19:53 - 26:44
- FTX was the driver of volume and the best place to trade
- Open AI's chat GPT and ZK zero knowledge are major topics of interest
- Web 3VCs are pivoting to AI
- ZK rollups have pushed zero knowledge research forward
- Chat GPT provided an accurate interpretation of a medieval poem
- AI and ZK are significant trends in the industry
- Aptos had a successful launch despite challenging market conditions
- Optimism token reached an all-time high due to its unique features
- App talks and Best still building smart contract platforms to compete with Ethereum
- Move programming language and Facebook Libra Prime generate excitement among VCs
Korea's Influence and the Future of Blockchain Technology
26:18 - 33:00
- The price jump in Ethereum in 2016-17 was contributed by Korea.
- Korea has a history of contributing to big up moves in tokens.
- Gangnam Style is considered one of the greatest things that came out of Korea.
- There are several one-hit wonder blockchains from the ICO era.
- The tech wars between third-generation blockchains and Layer 2 solutions are just starting.
- The NFT market brought web2 users into web3 and expanded the value proposition beyond DeFi.
- The financialization of everything on the internet is happening, thanks to blockchain technology.
- A lot of capital has entered the blockchain space, attracting talent from various backgrounds.
- We now have better talent, including PhDs and researchers, entering the space.
- DeFi is getting people excited about tokenization and enabling real-world asset trading and borrowing through tokens.
- NFTs are being integrated into DeFi protocols, and gaming might be the next frontier for blockchain technology.
Web 3.0 and the Challenges of Regulation
32:32 - 39:58
- Tokenization and securitization have become possible in Web 3.0, allowing for trading and borrowing against tokens.
- NFTs are being used in some DeFi protocols, and gaming may be the next frontier for Web 3.0.
- The internet has been driven forward by gamers, and their influence may continue in the next generation.
- Web 3.0 is not solely focused on financialization but also explores use cases beyond it.
- Web 1.0 was an untrusted network, while Web 2.0 built on that with centralized payment systems.
- Web 3.0 is a trusted network that enables decentralized financial services through crypto.
- Crypto is here to stay because a trusted network requires a trustless payment system.
- Building a layer one solution was necessary to address problems faced in the DeFi ecosystem and attract institutional investors.
- The current crypto ecosystem lacks regulation and safety rails, making it difficult for institutions to participate.
- Commingling assets on-chain with sanctioned addresses poses risks for institutions due to regulatory concerns.
Smart Contracts, Regulation, and Industry Progress
39:34 - 46:43
- Aave, Uniswap, Aave, Compam, Nicadau have remained stable throughout the credit crisis.
- Smart contracts provide provable ownership and define multiple counterparties.
- In case of default or contract exploitation, there is no recourse in smart contracts.
- Tornado Cash allows for proving the cleanliness of money deposited.
- Regulation is a major challenge for the industry due to public perception and recent debacles like Sam and FPX.
- Gari Gensler's affiliation with Sam may lead to over-correction in regulation.
- Regulators should aim to protect users while also facilitating capital market formation.
- Meetings between regulators and industry players are not necessarily nefarious but serve as information exchange.
Market Manipulation and Trust Issues
46:16 - 53:03
- FTX had an onshore business and an offshore business, with the onshore business being regulated and solvent.
- Fraud can occur regardless of regulation, and history has shown that nefarious activity can happen on a large scale.
- Users of these platforms should be aware of the risks involved.
- The fraud at FTX involved multiple people who were aware of the assets being taken off the platform for manipulation purposes.
- Market manipulation statements made by influential individuals like Elon Musk have faced weak enforcement.
- Securities law enforcement against powerful individuals has been lax.
- Bitcoin and Ethereum are not securities, but Coinbase is, so market events caused by statements about Coinbase should be held accountable.
- Regulators need to find a balance between allowing growth in the industry while protecting users from manipulation.
- FTX's actions have damaged trust in the crypto native industry, benefiting traditional financial services institutions.
- Traditional financial firms have the resources to scale up digital asset custody and trading better than anyone else in the industry.
- FTX's actions have led to wider spreads, shallower market depth, higher volatility, and increased uncertainty.
Implications of FTX Fallout and Industry Progress
52:45 - 59:36
- FTX undermined the whole industry, leading to wider spreads, shallower market depth, higher volatility, and greater uncertainty.
- Claims against FTX are now directed towards other platforms like Falconex.
- Trust in the crypto-native ecosystem has been completely destroyed.
- Henry Arslanian left PWC crypto practice and co-founded nine blocks capital.
- The era of head-learning the industry is over, benefiting older individuals with experience in risk management and compliance.
- Cleaning out bad actors and improving the industry is a positive development for the technology and its potential impact on global finance.
- Significant progress has been made in tech crypto across various areas such as ZK, Cosmos, NFTs, DeFi, etc.
- Despite concerns about money crypto, there is great excitement about the state of technology in the industry today.
- Crypto markets show correlation with traditional markets but also exhibit independent movements due to being considered a risk asset.
- Correlations between risk assets are high but liquidity moments are finite in the crypto market.
- Breaching $30,000 could lead to increased leverage and potentially reaching $100k this year.
- Macro backdrop appears solid with decreasing inflation and cautious approach by SEC to avoid damaging the economy.
Conclusion
59:17 - 1:01:37
- The SEC is cautious about going too hard on inflation and wants to see wage inflation catch up.
- There are positive signs in the market, such as decreasing inflation numbers and Eurozone avoiding recession.
- The right entry point for owning risk assets is uncertain, but there may be a pullback followed by a rally.
- The hosts express excitement about future episodes with guests from traditional finance and DeFi/Web3 industries.