Jacquelyn Melinek

<div id="highlights-block_61927fa6e348a" class="highlights">
 <ul>
 <li>“This new fund and its size are reflective of crypto being the most exciting frontier in technology,” the co-founders said </li>
 <li>The firm’s portfolio includes 40 different investments to date, such as companies like Uniswap, FTX, Fireblocks, BlockFi and Matrixport, according to its website</li>
 </ul>
 
</div>



Crypto-focused investment firm Paradigm is launching a new $2.5 billion venture fund, Matt Huang and Fred Ehrsam, the company’s co-founders and managing partners, announced on Monday.&nbsp;



The investment will be used to “continue investing in the next generation of crypto companies and protocols.” The fund will also operate alongside Paradigm’s existing flagship fund, the co-founders said.



“This new fund and its size are reflective of crypto being the most exciting frontier in technology. Over the past decade, crypto has come a long way. But cryptocurrencies are still owned by less than ten percent of the global population,” Huang and Ehrsam wrote in a blog <a href="https://www.paradigm.xyz/2021/11/paradigms-new-venture-fund/" target="_blank" rel="noreferrer noopener">post</a>.&nbsp;



“The journey is just beginning, and the potential of crypto has never been more clear,” they added.



<div class="wp-block-image"><figure class="aligncenter size-full"><img loading="lazy" width="512" height="341" src="https://cms.blockworks.co/wp-content/uploads/2021/11/Paradigm.jpeg" alt="" class="wp-image-11150" srcset="https://cms.blockworks.co/wp-content/uploads/2021/11/Paradigm.jpeg 512w, https://cms.blockworks.co/wp-content/uploads/2021/11/Paradigm-300x200.jpeg 300w, https://cms.blockworks.co/wp-content/uploads/2021/11/Paradigm-386x257.jpeg 386w, https://cms.blockworks.co/wp-content/uploads/2021/11/Paradigm-392x261.jpeg 392w, https://cms.blockworks.co/wp-content/uploads/2021/11/Paradigm-329x219.jpeg 329w, https://cms.blockworks.co/wp-content/uploads/2021/11/Paradigm-80x53.jpeg 80w" sizes="(max-width: 512px) 100vw, 512px" /><figcaption>Fred Ehrsam and Matt Huang; Source: Paradigm</figcaption></figure></div>



The company declined to provide additional comments beyond the blog post when requested by Blockworks on Monday.



In recent months, the firm has led token sales and investment rounds for automated market maker <a href="https://cms.blockworks.co/osmosis-closes-21m-token-sale-led-by-paradigm/" target="_blank" rel="noreferrer noopener">Osmosis</a> and decentralized derivatives exchange company, <a href="https://cms.blockworks.co/paradigm-leads-65m-round-for-decentralized-exchange-dydx/" target="_blank" rel="noreferrer noopener">dYdX</a>, Blockworks previously reported.&nbsp;



Paradigm invests in crypto companies, protocols, and currencies from early stage to late-stage and stages in between.



The firm’s portfolio also includes 40 different investments to date such as companies like Uniswap, FTX, Fireblocks, BlockFi and Matrixport, according to its <a href="https://www.paradigm.xyz/portfolio/">website</a>.



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Paradigm Launches $2.5 Billion Crypto Fund

Casey Wagner

As Circle <a href="https://blockworks.co/news/circle-kills-spac-plans" target="_blank" rel="noreferrer noopener">reevaluates its plans to go public</a>, USD Coin has been quietly losing stablecoin market share to competitors Tether and Binance USD over the past six months. 



Circle currently holds about 31% of the total market share for stablecoins, down from 37% six months ago, according to data compiled by <a href="https://www.blockworksresearch.com/data?category=stablecoins&amp;chart=stablecoin-market-share" target="_blank" rel="noreferrer noopener">Blockworks Research</a>. 



Tether currently holds around 47% of stablecoin market share, while Binance has about 16%. Both Tether and Binance have taken over more of the market share in the past six months, with Binance USD gaining around 4.5% and Tether increasing its market share by around 1%.&nbsp;



“That may be one reason why Circle had been in a rush to go public, if underlying trends below the surface — market share loss vs. overall stablecoin market share as a percent of crypto has been steadily rising — are less positive,” Rich Falk-Wallace, CEO of Arcana Analytics, said.&nbsp;



The switch-up in market share is in part due to issuer location and how they interact with the broader market, Falk-Wallace said.&nbsp;



“It&#8217;s related to offshore versus onshore market share in that Binance and other offshore centralized exchanges are taking share versus DeFi, which is where USDC has relatively greater exposure,” he added.&nbsp;



Based on Uniswap trading volumes, which can give a general look into total DeFi activity, DeFi trading volumes are down around 30% more than CeFi trading volumes over the past six months, Falk-Wallace said.&nbsp;



“Centralized exchanges don&#8217;t have huge USDC volumes, [but] some CeFi exchanges have very large Tether volumes,” Falk-Wallace said. “USDC&#8217;s low use in centralized exchanges may be because it is owned by a JV with Coinbase, so there&#8217;s a competitive angle to Binance, for example, not using USDC, versus Binance&#8217;s very large BTC-USDT and BTC-BUSD markets, which trade around $2 billion to $4 billion per day.”&nbsp;



Binance recently transitioned stablecoin balances held on the exchange to <a href="https://blockworks.co/news/binance-to-rename-all-stablecoin-holdings-to-busd" target="_blank" rel="noreferrer noopener">BUSD as a default</a> and allows withdrawals of various stablecoins across multiple blockchain networks.



USDC is <a href="https://blockworks.co/news/usdc-is-coming-to-cosmos-in-2023" target="_blank" rel="noreferrer noopener">expanding to more networks</a> but for now remains concentrated on Ethereum, where about 77% of the circulating supply is held compared to 40% of the USDT supply. Around 46% of USDT is held on the layer-1 chain Tron, Falk-Wallace said, with the network serving as a low-cost conduit to sling tether back and forth between exchanges.



“Ethereum total value locked has declined meaningfully, while Tron total value locked has actually done well,” he added. Total value locked (TVL) on Ethereum has declined by roughly 75% over the past year, although still six times larger than Tron’s TVL which has remained range bound between about $4 billion and $6 billion <a href="https://defillama.com/chain/Tron" target="_blank" rel="noreferrer noopener">according to DeFi Llama</a>. 



On a backdrop of declining market share, Circle, which announced it was <a href="https://blockworks.co/news/circle-kills-spac-plans" target="_blank" rel="noreferrer noopener">killing its SPAC plans</a> on Monday, said it is still determined to become a publicly traded company in the future. The third quarter of 2022 marked the company’s first profitable quarter, the issuer also said. 



“We are disappointed the proposed transaction timed out, however, becoming a public company remains part of Circle’s core strategy to enhance trust and transparency, which has never been more important,” Circle CEO Jeremy Allaire said in a <a href="https://www.prnewswire.com/news-releases/circle-and-concord-acquisition-corp-mutually-agree-to-terminate-proposed-business-combination-301694560.html?tc=eml_cleartime" target="_blank" rel="noreferrer noopener">statement</a>.



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Circle To Stay Private for Now as Rivals Gain Market Share

Ben Strack

Silvergate’s customer deposits are safe, according to the cryptocurrency bank, adding that the company has “a resilient balance sheet and ample liquidity.”



In a letter addressed to shareholders, CEO Alan Lane said Monday that Silvergate’s “entire investment securities portfolio” can be used as collateral for additional lines of credit, if needed — and could “ultimately be sold should we need to generate liquidity to satisfy customer withdrawal request.”



<a href="https://www.linkedin.com/pulse/our-commitment-risk-management-compliance-silvergate-bank/?trackingId=OeqWKqJPQN%2B1oOqfZH73YA%3D%3D" target="_blank" rel="noreferrer noopener">The letter</a> came as Silvergate’s stock sank about 8.5% Monday after Morgan Stanley downgraded its shares to “underweight” from equal weight, according to a <a href="https://www.coindesk.com/business/2022/12/05/crypto-bank-silvergate-cut-to-underweight-at-morgan-stanley-following-ftx-collapse/" target="_blank" rel="noreferrer noopener">CoinDesk report</a>.



Morgan Stanley analysts estimated Silvergate digital deposits are down 60% so far in the fourth quarter versus the quarter prior. The bank faces pressure on net interest margins and net interest income, analysts, as it needs to fund outflows via securities sales and wholesale borrowing.



A Morgan Stanley spokesperson did not immediately return a request for comment, and a Silvergate spokesperson declined to comment beyond the chief executive’s letter.&nbsp;



California-based Silvergate is a federally regulated bank that has been working with institutional investors in digital assets since 2013. Its real-time payments platform — the Silvergate Exchange Network (SEN) — handled $112.6 billion in US dollar transfers <a href="https://blockworks.co/news/silvergate-shares-crash-more-than-20-on-earnings-miss-stablecoin-launch-delay" target="_blank" rel="noreferrer noopener">during the third quarter</a> — a 41% decrease from the prior quarter.



The stock, down about 53% in the past month, has been heavily weighed upon — along with its peers — following the collapse of crypto exchange FTX.&nbsp;



Lane said in the letter that speculation and misinformation abounded as the FTX saga unraveled, adding that Silvergate did extensive due diligence on FTX and Alameda Research.&nbsp;



“When Silvergate received payments directed to Alameda Research and credited it to the account of the same name, this was consistent with the instructions from the sender of the wire and industry practice,” Lane said.&nbsp;



If the bank detects unexpected or concerning activity, he added, it is investigated and a suspicious activity report may be filed.



<h3>Other analysts more bullish on Silvergate&nbsp;</h3>



BTIG analyst Mark Palmer told Blockworks via an email Monday that he remains bullish on Silvergate.&nbsp;



“While we expect [fourth quarter] deposits to decline sequentially in the aftermath of the FTX episode, we continue to believe the Silvergate Exchange Network offers a unique value proposition to its crypto-focused clients by enhancing their capital efficiency and we expect it to remain relevant going forward,” he said.&nbsp;



David Rochester, an analyst at Compass Point Research and Trading, reiterated the firm’s buy rating of Silvergate in a Dec. 1 research note, but lowered its price target from $50 to $40.



The stock’s price hovered around $24 as markets closed Monday.&nbsp;



“While we still view [Silvergate] as a buy over the next year, we acknowledge the greater likelihood of continued near-term stock price volatility as the extent of the current contagion from the FTX bankruptcy comes to light,” Rochester said. “But our expected base case remains that recent market disruption eventually subsides, and such stabilization could support stable digital deposit levels beyond the impact of the recent market turmoil, which should drive share price outperformance from current levels.”



<h3>A timeline of Silvergate’s status since the FTX chaos&nbsp;</h3>



Silvergate’s stock plunged 23% on Nov. 8 — the day Binance CEO Changpeng ‘CZ’ Zhao tweeted that the exchange was considering buying FTX “amid a liquidity crunch.”&nbsp;



Binance soon backed out of the potential deal, and FTX filed for bankruptcy on Nov. 11. That day, Silvergate CEO Alan Lane said in a statement that the company’s relationship with FTX was limited to deposits.



Silvergate’s total deposits from all digital asset customers totaled $11.9 billion, as of Sept. 30, and FTX represented less than 10% of those.



Lane added that week that the company uses its balance sheet to “provide liquidity for our clients while maintaining a strong capital position in excess of the well-capitalized status required by federal banking regulations.”



Palmer repeated his buy rating of Silvergate in a Nov. 15 research note, saying that the stock price’s decrease was driven in part by some assertions critical of the company on social media.&nbsp;&nbsp;



“Such statements demonstrated a lack of understanding of SI’s status as a regulated bank, the particulars of its balance sheet, and the mechanics of the Silvergate Exchange Network (SEN) and the SEN Leverage platform,” he said.



Around the same time, institutional crypto trading platform FalconX said <a href="https://blockworks.co/news/falconx-drops-bank-silvergate" target="_blank" rel="noreferrer noopener">it wouldn’t route transfers through Silvergate</a> out of an “abundance of caution.” A FalconX spokesperson later told Blockworks that Silvergate settlements were set to be reinstated.



In a Nov. 16 <a href="https://www.businesswire.com/news/home/20221116006033/en" target="_blank" rel="noreferrer noopener">press release</a>, Silvergate said its deposits stood at $9.8 billion, which excludes deposits by FTX and its affiliates. The company added its SEN network continues to operate and was processing $1.9 billion in daily volume quarter-to-date, compared to $1.2 billion in the prior quarter.



“Silvergate, and its entire banking platform, were purpose-built to withstand periods of market volatility,” a spokesperson told Blockworks at the time.



<a href="https://blockworks.co/news/crypto-bank-silvergate-says-blockfi-exposure-limited-to-20m" target="_blank" rel="noreferrer noopener">Silvergate said last week</a> its exposure to BlockFi, which <a href="https://blockworks.co/news/blockfi-files-for-bankruptcy" target="_blank" rel="noreferrer noopener">filed for bankruptcy</a>, amounted to less than $20 million in customer deposits, as of Nov. 28. The crypto bank added that it had no investments in BlockFi.



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Silvergate CEO: Crypto Bank Has ‘Ample Liquidity’

Jeff Garzik

The recent <a href="https://blockworks.co/news/ftx-bankrupt-hacked-investigated-a-timeline-of-events" target="_blank" rel="noreferrer noopener">revelations</a> surrounding cryptocurrency exchange FTX and its Siamese twin Alameda Research strongly indicated that CEO Sam Bankman-Fried and regulators had a common target in their sights — DeFi. 



I remain concerned that regulators and institutions will lump DeFi with its more centralized counterparts — the latter describing a category that includes exchanges like FTX, <a href="https://blockworks.co/news/7-critical-events-in-the-celsius-bankruptcy-case" target="_blank" rel="noreferrer noopener">crypto lender Celsius</a> and others that bring conventional organizational structures and familiar user interfaces to crypto. 



DeFi, on the other hand, greatly reduces the points of failure and has proven itself remarkably resilient. The differences matter. In the rush to “<a href="https://www.wsj.com/articles/regulate-crypto-or-itll-take-down-the-economy-fraud-reporting-know-your-customer-loophole-energy-disclosure-ftx-bankman-fried-ftx-11669123750" target="_blank" rel="noreferrer noopener">do something</a>,” careless conflation and inattention to nuance will most certainly leave everyone worse off — with bad policy, stunted innovation and a more fragile financial system. 



<h3>Making the rules</h3>



Most participants in crypto <a href="https://blockworks.co/news/sec-under-gensler-crypto-power-grab-effective-protection" target="_blank" rel="noreferrer noopener">aren’t anti-regulation so much as anti-arbitrariness</a>. They like their rules — and rulemaking — clear, open, narrow, reliable and consistent.



In contrast, SBF undertook <a href="https://www.bloomberg.com/opinion/articles/2022-11-09/ftx-s-unraveling-may-allow-defi-to-grow#xj4y7vzkg" target="_blank" rel="noreferrer noopener">no small amount of effort</a> to guide the government toward broad regulation that would have been hostile to DeFi. Exploiting the tendency to confuse visibility with leadership, SBF even earned <a href="https://www.foxbusiness.com/markets/sec-chairman-gary-gensler-met-with-head-ftx-months-before-collapse" target="_blank" rel="noreferrer noopener">a much-coveted meeting</a> with SEC Chair Gary Gensler where, it is alleged, discussion of an SEC-approved centralized crypto trading platform took place. 



As FTX was founded just over three years ago, it’s difficult to remember any other company that reached for — let alone so firmly grasped — the lever of regulatory capture quite so early in its history. With powerful, centralizing forces in the public and private sectors operating in closed-door environments, a near-perfect inversion of DeFi’s values took place.&nbsp;



<h3>DeFi means transparency and reliability&nbsp;</h3>



With crypto’s basic technologies, we are able to publish indelible transaction data and unstoppable software. The data is publicly available on consensus-managed general ledger that is highly tamper-resistant, with its records becoming more secure over time as the blockchain grows.



The smart contracts run unerringly as designed once published, with the code free to inspect. That’s why a heavy investment in <a href="https://twitter.com/VesperFi/status/1577711800807821312" target="_blank" rel="noreferrer noopener">independent audits</a> is vital. 



Now, consider these benefits apart from their controversial, misunderstood category — cryptocurrency writ large, and DeFi in particular. When done soberly, it’s hard to imagine why any regulator or auditor would actively work to discourage examination and adoption of such technologies.



<h3>All bugs, technical and financial, are shallow&nbsp;</h3>



They say that with enough eyeballs, all bugs are shallow — that is, easy to bring to light and remedy. This is true of both software code and financial fraud. For those reasons, it would be far more difficult to execute an FTX-like fraud within a DeFi environment. At the very least, it would be caught by humans or code well before an eleven-figure crater formed. 



That’s because smart contracts do not bend or break rules. You cannot spoof balances. Reserves are viewable and provable. All activity is 100% transparent. Any type of lending or otherwise collateralized position can and will be liquidated if it becomes unhealthy. Further, if any DeFi project wants to engage in <a href="https://www.nansen.ai/research/blockchain-analysis-the-collapse-of-alameda-and-ftx" target="_blank" rel="noreferrer noopener">rampant self-dealing</a> in an FTX/Alameda-like scenario, its code would have to be 100% transparent about this intention. 



Notably, Alameda and FTX did partake in some DeFi activity…and those loans were repaid, in full, precisely because the code saw FTX as just another user. No handshakes. No special deals. Just code.



While DeFi’s critics may often point to high-profile “rug pulls,” these events speak to the relatively small, freewheeling “degen” culture and a brand-new market’s predictable level of bad behavior than it does DeFi itself. <a href="https://blockworks.co/news/what-comes-next-for-terra-ecosystem" target="_blank" rel="noreferrer noopener">Last May’s high-profile case of Terra/LUNA</a>, a failure often laid at the feet of “DeFi,” involved a project that lacked transparency and possessed financial controls only slightly worse than FTX. Still more “DeFi hacks” can be attributed to improper code audits or <a href="https://blockworks.co/news/cross-chain-bridge-thefts-top-1b-in-2022" target="_blank" rel="noreferrer noopener">flaws in bridges</a>, or connective infrastructure between projects. All things being equal, if we evaluate the best of DeFi with the best in conventional finance and centralized crypto services such as FTX, DeFi wins on the basis of transparency and reliability. 



<h3>DeFi’s way forward</h3>



“Only a crisis — actual or perceived — produces real change,” wrote economist Milton Friedman in an introduction to Capitalism &amp; Freedom. “When that crisis occurs, the actions that are taken depend on the ideas that are lying around.” Friedman was talking about political ideas and, frankly, that’s <a href="https://www.wsj.com/articles/regulate-crypto-or-itll-take-down-the-economy-fraud-reporting-know-your-customer-loophole-energy-disclosure-ftx-bankman-fried-ftx-11669123750" target="_blank" rel="noreferrer noopener">the very last place we should look for solutions</a>.



Conversely, politicians and regulators should look to the best of DeFi for its promising technologies, highly mature projects, thriving proofs-of-concept, and provable early success.&nbsp;



We are working toward a future where it is impossible for humans to corrupt finance. Setting aside passions and prejudice, we welcome a discussion with lawmakers and institutions on the way to a better and more transparent future. 



Jeff Garzik is the CEO and co-founder of <a href="https://bloq.com/" target="_blank" rel="noreferrer noopener">Bloq</a> and the co-founder of DeFi platform <a href="https://vesper.finance/" target="_blank" rel="noreferrer noopener">Vesper Finance</a>. He was one of the earliest volunteer developers for Bitcoin.



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DeFi Should Transcend Power, Promotion and Politics

Maple Finance has cut ties with Orthogonal Trading after it said the company was “operating while effectively insolvent” and accrued liabilities of more than $30 million.&nbsp;



Orthogonal Trading had mischaracterized its financial position to M11 Credit&#8217;s pool over the last four weeks before saying on Saturday that it was unable to meet loan repayments, according to M11 Credit and Maple Finance. 



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">We believe that Orthogonal Trading purposefully misstated their exposure and has therefore severely breached contractual agreements. 2/3&mdash; M11 Credit (@M11Credit) <a href="https://twitter.com/M11Credit/status/1599765439831162880?ref_src=twsrc%5Etfw">December 5, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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A Maple spokesperson told Blockworks that there were no signs of the insolvency, noting that financials in recent weeks were “misrepresented” and principal payments gave the appearance of solvency.



“Misrepresentation like this is in violation of Maple’s agreements and all appropriate legal avenues to recover funds will be pursued including arbitration or litigation as necessary,” Maple said in a statement Monday.&nbsp;



Pool delegates on Maple’s platform are responsible for managing due diligence on borrowers and are consistently exploring ways in which assets can be further verified, a spokesperson added.



An Orthogonal Trading spokesperson did not immediately return a request for comment.&nbsp;



Orthogonal Trading&#8217;s current liabilities are $31 million across four loans in the M11 Credit USDC pool. M11 Credit has restructured the loan book and closed many loans early, according to Maple.



Orthogonal Credit, which operates separately from Orthogonal Trading, said in a <a href="https://medium.com/@orthogonal_trading/statement-from-the-orthogonal-credit-team-december-5th-2022-1b0ba93335ab" target="_blank" rel="noreferrer noopener">blog post</a> it had no knowledge of the latter entity misrepresenting its exposure to FTX and its inability to repay an outstanding loan in the pool that matured on Sunday.&nbsp;



“Orthogonal Credit has no insight to or influence over the market making and trading activities undertaken by the trading business,” the firm wrote. “In light of this development, the credit team is actively seeking strategic solutions to continue to provide credit-as-a-service across self-custodial decentralized finance protocols.”



Maple <a href="https://www.maple.finance/" target="_blank" rel="noreferrer noopener">aggregates</a> capital on behalf of large borrowers. Founded in May 2021, Maple <a href="https://blockworks.co/news/maple-finance-originates-1b-of-loans-in-10-months" target="_blank" rel="noreferrer noopener">hit $1 billion in loans in its first 10 months</a> and has now issued more than $1.9 billion in loans, according to its website. Total deposits are now roughly $125 million.&nbsp;



The several lending pools managed by distinct pool delegates are siloed to prevent activities in one pool from impacting others, a spokesperson told Blockworks.



Crypto investment firm M11 Credit <a href="https://blockworks.co/news/maple-finance-launches-40m-lending-pool" target="_blank" rel="noreferrer noopener">revealed the launch of a $40 million institutional lending pool</a> on Maple in August — its third on the platform.



Orthogonal Credit maintains a separate “Orthogonal Trading — USDC01” pool, which, despite its name, does not contain loans to the Orthogonal trading arm.



Orthogonal Credit wrote in its Monday blog post that assets in the USDC01 pool are protected by Maple’s smart contract infrastructure and separate from Orthogonal Trading. The pool’s three active loans are to Portofino Technologies AG, a financial infrastructure technology company incorporated in Switzerland, Wintermute Trading Limited, a major market maker, and Reliz Ltd., a Maltese marketing agency.



“We do not anticipate any impact to lenders in the pool as all loans remain active with no current signs of distress,” according to Orthogonal Credit. “Loan repayments will be made over the coming months with all available cash being used to facilitate withdrawal requests from the pool.”



Orthogonal Credit did not immediately return a request for further comment.&nbsp;



<h3>A product of FTX contagion</h3>



The news comes as the crash of crypto exchange FTX continues to send ripple effects through the crypto ecosystem.&nbsp;



Maple said in <a href="https://maple.finance/news/update-from-maple-and-delegates-regarding-alameda-and-ftx/" target="_blank" rel="noreferrer noopener">a statement on Nov. 9</a> — two days before <a href="https://blockworks.co/news/whats-next-for-ftx-and-its-customers-after-bankruptcy-filing" target="_blank" rel="noreferrer noopener">FTX filed for bankruptcy</a> — that borrower exposure to FTX and its native token, FTT, was limited.



A week later, Maple reported that while the past six months had “stress-tested” borrowers on the platform, many remained well-capitalized and able to withstand shocks.&nbsp;&nbsp;



“Maple and delegates anticipate that borrowers will service their loans as expected,” the company said at the time.&nbsp;



Still, pool delegates de-risked to avoid “second-order” impacts of the FTX collapse, Maple added. A total of 37 loans to 12 borrowers totaling $227 million from the week prior had been reduced to 24 loans to 10 borrowers, totalling $129 million.



While many risk mitigations are built into the Maple platform, the contagion in this instance was difficult to avoid, Maple said.&nbsp;



Any fees generated in this pool ahead of its expected closure in the first quarter of 2023 are set to go toward recovering funds for lenders in the M11 Credit pool.



Maple’s MPL token was down about 24% in the past 24 hours, as of 12:15 pm ET Monday.



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Maple Finance Says Orthogonal Hid FTX Exposure

Jon Rice

Nexo, a digital assets platform which offers lending services and an exchange, said it will gradually phase out US operations as a direct result of a “dead end” in its attempts to gain clarity from US regulators.



In a statement, Nexo claimed it had engaged in “more than 18 months of good-faith dialogue with US state and federal regulators” — but, despite “rhetoric to the contrary,” it could not reassure customers that “regulars are focused on their best interests.”



Starting Tuesday, the company added, its flagship interest-bearing investment products will no longer be available to existing clients in eight more states: Indiana, Kentucky, Maryland, Oklahoma, South Carolina, Wisconsin, California and Washington. The yield-bearing offering had already ceased operations in New York and Vermont.



Lending platforms in the US have been under scrutiny by state regulators, especially following the collapse of <a href="https://blockworks.co/news/7-critical-events-in-the-celsius-bankruptcy-case" target="_blank" rel="noreferrer noopener">Celsius</a> and <a href="https://blockworks.co/news/qa-restructuring-expert-talks-voyager-bankruptcy" target="_blank" rel="noreferrer noopener">Voyager</a>. When Coinbase attempted to launch a lending program in 2021, the SEC issued a Wells notice — which informs the recipient that it intends to sue in court. Coinbase subsequently abandoned the Lend effort, with a terse note explaining the SEC decision: &#8220;We don’t know why.&#8221;



Nexo noted in its update that it took a variety of actions over the last couple of years to attempt to stay in compliance with US regulations, including registering its token sale with the SEC, exiting New York markets, and refusing new funds from US customers into its Earn Interest product when BlockFi — another crypto lender that recently <a href="https://blockworks.co/news/blockfi-bankruptcy-highlights" target="_blank" rel="noreferrer noopener">sought bankruptcy protection</a> — was ordered to undertake similar action, in February 2022.



Multiple crypto companies and mainstream finance stalwarts have expressed their frustration that US regulations remain unclear. At Money20/20 in October 2022 , May Zabaneh — the VP of PayPal&#8217;s blockchain and cryptocurrency division — said that &#8220;There has to be some clarity that comes out, some standards, some ideas of the dos and the don&#8217;ts and some structure around it&#8230; otherwise that mainstream adoption will really be inhibited.&#8221; 



Brad Garlinghouse of Ripple <a href="https://www.cnbc.com/2021/04/30/ripple-ceo-says-the-us-lacks-regulatory-clarity-on-cryptocurrency.html" target="_blank" rel="noreferrer noopener">told</a> CNBC last year that although in &#8220;markets like Singapore and even parts of Korea where there really has been a thoughtful government-led effort to define and have clear regulatory frameworks around cryptocurrencies&#8230; Ironically, here in the United States they have not provided that same clarity.&#8221;



Paul Grewal, the Chief Legal Officer at Coinbase, explained in a <a href="https://www.coinbase.com/blog/the-sec-has-told-us-it-wants-to-sue-us-over-lend-we-have-no-idea-why" target="_blank" rel="noreferrer noopener">blog</a> post referencing their doomed Lend product that &#8220;After our initial meeting, we answered all of the SEC’s questions in writing and then again in person. But we didn’t get much of a response. The SEC told us they consider Lend to involve a security, but wouldn’t say why or how they’d reached that conclusion.&#8221;



Blockworks has reached out to Nexo for comment.



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Nexo Crypto Lending Platform To Cease US Operations

Sebastian Sinclair

November’s combined NFT sales volume across the five top marketplaces clocked roughly $394 million, the lowest recorded this year.&nbsp;



Data provided by DappRadar and compiled by NFT gaming platform Balthazar DAO show volume across OpenSea, Magic Eden, X2Y2, LooksRare and Solanart dipped more than 20% collectively compared to the previous month of October.&nbsp;



November <a href="https://bltzr.gg/balthazar-nft-marketplace-update/" target="_blank" rel="noreferrer noopener">extended</a> the declining trend as the demise of major exchange FTX shook faith in digital assets at the beginning of the month, which also rocked spot market prices.



Marketplaces were chosen based on the highest all-time volume recorded, Balthazar said. Representatives for all five marketplaces did not immediately respond to requests for comment.



Magic Eden, the only outlier of the five recorded platforms and Solana’s largest marketplace, managed to ride out the turmoil with a 60.9% increase in sales volume month over month.



“Blue-chip Solana-based NFT projects, including DeGods and y00ts, have seen positive price appreciation for the year, spotlighting the faith that traders and investors have in this sector of the NFT market,” an analyst at Zerocap told Blockworks.



Interestingly, the less popular Solana-based NFT marketplace, Solanart, was the worst affected among the top five — declining 93% from $6.25 million in October to just <a href="https://dappradar.com/solana/marketplaces/solanart" target="_blank" rel="noreferrer noopener">$410,000</a> by November.



While sales overall have been on the decline, John Stefanidis, Balthazar’s CEO and co-founder, remains upbeat on the nascent technology, which took off in earnest toward the end of last year.



“What we&#8217;ve seen is obviously a decline in sales largely for…images and art, but what we’re starting to see is really cool and different applications of NFTs,” he said in a statement.



Macroeconomic factors including rising interest rates, contracting disposable incomes and market volatility were affecting people’s decisions to wait for future NFT use cases, which ultimately translated into fewer sales, Stefanidis added.



The shift in market sentiment since a historic rise in late 2021 and early 2022 — where the value of the entire NFT sector sat around <a href="https://blog.chainalysis.com/reports/chainalysis-web3-report-preview-nfts/" target="_blank" rel="noreferrer noopener">$40 billion</a> — has also impacted the market share of some of its biggest players.



<h2>Who’s who in the NFT zoo</h2>


<div class="wp-block-image">
<figure class="aligncenter size-full"><img loading="lazy" width="570" height="300" src="https://cms.blockworks.co/wp-content/uploads/2022/12/NFT-November-2022-Sales-Volume.jpg" alt="" class="wp-image-41166" srcset="https://cms.blockworks.co/wp-content/uploads/2022/12/NFT-November-2022-Sales-Volume.jpg 570w, https://cms.blockworks.co/wp-content/uploads/2022/12/NFT-November-2022-Sales-Volume-300x158.jpg 300w, https://cms.blockworks.co/wp-content/uploads/2022/12/NFT-November-2022-Sales-Volume-428x225.jpg 428w, https://cms.blockworks.co/wp-content/uploads/2022/12/NFT-November-2022-Sales-Volume-470x247.jpg 470w, https://cms.blockworks.co/wp-content/uploads/2022/12/NFT-November-2022-Sales-Volume-389x205.jpg 389w, https://cms.blockworks.co/wp-content/uploads/2022/12/NFT-November-2022-Sales-Volume-80x42.jpg 80w, https://cms.blockworks.co/wp-content/uploads/2022/12/NFT-November-2022-Sales-Volume-50x26.jpg 50w" sizes="(max-width: 570px) 100vw, 570px" /><figcaption>Source: Balthazar, DappRadar</figcaption></figure></div>


Marketplace OpenSea, which had thrived on the success of its early mover advantage, witnessed a 1.6 percentage point decline in its market share for November when compared to the prior month. It still commands a dominant lead at 44%, DappRadar and Balthazar data shows.



Magic Eden and LooksRare, meanwhile, snatched up 12.1 and 2.5 percentage points respectively to increase their share of November’s sales volume.



To kick off December, unique active wallets engaging with all five platforms have also dipped considerably. OpenSea has witnessed a 47% decline in user activity while Magic Eden is down about 12.5% in the first days of the month.&nbsp;



Solanart’s UAW has dipped 25% in the previous four days, while LooksRare and X2Y2 have dropped 41% and 64% respectively, representing a slow start to the last month of the year.



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NFT Sales Volume Drops 20% in November

Shalini Nagarajan

Liquidators appointed to oversee Three Arrows Capital’s bankruptcy said the crypto hedge fund’s co-founders Su Zhu and Kyle Davies are still not cooperating for information, forcing them to investigate and recreate records on their own.



They’re instead providing extensive interviews to media outlets, said liquidator Russell Crumpler. He highlighted conversations with <a href="https://www.bloomberg.com/news/articles/2022-07-22/three-arrows-founders-en-route-to-dubai-describe-ltcm-moment" target="_blank" rel="noreferrer noopener">Bloomberg</a> and <a href="https://www.cnbc.com/video/2022/11/16/three-arrows-capitals-kyle-davies-blasts-ftx-over-the-collapse-of-the-crypto-hedge-fund.html" target="_blank" rel="noreferrer noopener">CNBC</a> in a <a href="https://pacer-documents.s3.amazonaws.com/115/312810/126022478737.pdf" target="_blank" rel="noreferrer noopener">presentation</a> to the bankruptcy court on Friday.



The presentation also included screenshots of tweets posted by Zhu and Davies, made in reference to FTX’s collapse. These were used to indicate both are open to talking publicly, but not to court-appointed liquidators.



Davies appears to have a different version of the story, saying in a <a href="https://twitter.com/KyleLDavies/status/1598964000556953600" target="_blank" rel="noreferrer noopener">tweet</a> on Saturday that the firm’s liquidators refused to engage them “constructively.”



“We invite the liquidators to engage us positively, constructively, and without threats. That would be in the best interest of creditors,” he added.



Liquidators have so far taken over assets worth $35 million in fiat currencies and seized some $2.7 million from forced investment redemptions. They have also taken control of several exchange accounts, over 60 types of digital tokens. The recovered tokens are being held in a custody account under the liquidators’ control.



A more tangible item in liquidators’ crosshairs is the $30 million from the sale of <a href="https://twitter.com/jenwieczner/status/1559185722405711872" target="_blank" rel="noreferrer noopener">the “Much Wow” super yacht</a>, which was allegedly purchased using borrowed funds from 3AC.



Accounts identified by the liquidators showed multiple transfers were made from the fund to pay for the super yacht. But the shipbuilder ultimately terminated the contract because the final amounts owed weren’t paid, and it was resold. Proceeds from the sale are with the shipbuilder but will be redistributed to the Cayman Islands entity, also called “Much Wow,” to which it was registered.&nbsp;



Zhu and Davies have so far communicated with liquidators only twice via teleconference, according to the presentation.&nbsp;



“Founders’ limited cooperation has led to only cursory disclosures of assets and certain agreements,” they said, adding that there has been no complete transfer of records despite a protocol being agreed upon.



Counsel from the law firm representing 3AC’s co-founders didn’t return Blockworks request for comment by press time.



At the time 3AC filed for bankruptcy, the location of either co-founder wasn’t known. It still remains that way, but liquidators alleged in the presentation that they may either be in Bali or the United Arab Emirates — two areas where it’s difficult to impose foreign court orders.&nbsp;



A Singapore high court has ordered the co-founders to cooperate and provide all books, papers or other records in their possession within a week.



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3AC Liquidators File $30M Claim for ‘Much Wow’ Super Yacht

In a “mutual decision,” Circle and its planned special purpose acquisition company (SPAC) partner Concord have pulled the plug on plans to go public, the companies said Monday.&nbsp;



The SEC had not granted Circle and Concord approval to move forward. The approval process, while lengthy, is essential, according to Circle CEO Jeremy Allaire. Concord tapped its SPAC division, Concord Acquisition Corp., for the deal.&nbsp;



“From my perspective, I believe that the SEC has been rigorous and thorough in understanding our business and many novel aspects of this industry,” Allaire wrote in a <a href="https://twitter.com/jerallaire/status/1599755838566338560?s=20&amp;t=FPRkU_goqGA8VH5lz3a5Ag" target="_blank" rel="noreferrer noopener">tweet</a> Monday. “This kind of review is necessary to ultimately provide trust, transparency and accountability for major companies in crypto.”



Circle, which first revealed its SPAC ambitions in July 2021, delayed its plans twice — before canceling them all together. The most recent deferral came just last month, when the stablecoin issuer said the deal would be pushed to January 2023, according to an <a href="https://www.sec.gov/Archives/edgar/data/1824301/000121390022066194/ea167444-pre14a_concord.htm" target="_blank" rel="noreferrer noopener">SEC filing</a>.&nbsp;



“We are disappointed the proposed transaction timed out, however, becoming a public company remains part of Circle&#8217;s core strategy to enhance trust and transparency, which has never been more important,&#8221; Allaire said in a <a href="https://www.prnewswire.com/news-releases/circle-and-concord-acquisition-corp-mutually-agree-to-terminate-proposed-business-combination-301694560.html?tc=eml_cleartime" target="_blank" rel="noreferrer noopener">statement</a>.



Circle is now profitable, closing the third quarter of 2023 with a net income of $43 million — the “best financial position” the company has ever been in, Allaire said.&nbsp;



The delay comes as stablecoins continue to <a href="https://blockworks.co/news/stablecoin-regulation-ramps-up-across-the-globe-with-new-bis-guidance" target="_blank" rel="noreferrer noopener">attract interest</a> from regulators, although the recent blow-up of <a href="https://blockworks.co/news/bankman-fried-puts-off-house-testimony-on-ftx" target="_blank" rel="noreferrer noopener">offshore exchange FTX</a> has dominated the conversation around crypto rules in recent weeks.&nbsp;



“The recent market disruptions, while costly for many, were not systemic events,” Jon Cunliffe, chair of the CPMI and deputy governor for financial stability at the Bank of England, said in a July <a href="https://www.bis.org/press/p220713.htm" target="_blank" rel="noreferrer noopener">statement</a>, presumably referring to the depegging of algorithmic stablecoin UST in May.



“Such events could become systemic in the future, especially given the strong growth in these markets and the increasing linkages between crypto assets and with traditional finance,” Cunliffe added.



Showing proof of reserves — likely to be a key component of any stablecoin legislation that is passed in the US — is a transparency move Circle has leaned into. The issuer released its first monthly report for USDC reserve assets in 2018. 



Learn more: <a href="https://blockworks.co/news/what-are-proof-of-reserves-and-can-they-build-back-trust" target="_blank" rel="noreferrer noopener">What Is Proof of Reserves and Can It Build Back Trust?</a>



“As policy and regulatory requirements evolve and as better reporting opportunities arise, we intend to adjust our approach and continue to enhance transparency into our operations to give the market even more confidence,” the company <a href="https://www.circle.com/blog/new-levels-of-detail-in-the-monthly-usdc-attestation" target="_blank" rel="noreferrer noopener">said</a> at the time.



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In Post-FTX World, Circle Kills SPAC Plans

Former FTX CEO and founder Sam Bankman-Fried (SBF) said Sunday he would be willing to testify before congress, but only once he has “finished learning” about the implosion of his crypto empire.



SBF was asked by chairwoman of the House Financial Services Committee, Maxine Waters, to attend a hearing on Dec. 13 to explain his side of events.&nbsp;



Appearing before congress would likely ratchet up pressure against the former FTX CEO and increase the spotlight on exactly what occurred over that past month and <a href="https://blockworks.co/tag/ftx">how the exchange was able to fall apart</a> so quickly.



“We appreciate that you&#8217;ve been candid in your discussions about what happened at FTX,” Waters <a href="https://twitter.com/RepMaxineWaters/status/1598693811252875264?s=20&amp;t=V6XT9iLJgt2XAvUcjPtrrA">tweeted</a> at Bankman-Fried on Friday. Waters added that his willingness to speak up will help affected stakeholders, including customers whose digital assets remain locked on the platform.



The representative for California&#8217;s 43rd congressional district was <a href="https://twitter.com/iamDCinvestor/status/1598700475230175232?s=20&amp;t=V6XT9iLJgt2XAvUcjPtrrA">criticized</a> by some in the crypto community for appearing servile and obsequious. Congressional relationships with Bankman-Fried were often friendly, and his willingness to engage with elected officials has been painted as an attempt to regulate the industry in a manner that would have been friendly to his failed exchange.



Bankman-Fried’s relationships with politicians have been under scrutiny since he made substantial donations to specific members of the Democratic Party. Bankman-Fried claims to have made similar donations to the Republican Party, but to have avoided publicizing them.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">You, as the Chairwoman (or the Committee itself), can just subpoena him to testify. No need to ask nicely on Twitter. It&#39;s House Rule XI clause 2(m). But I&#39;m sure you already knew that.&mdash; Jeremy Hogan (@attorneyjeremy1) <a href="https://twitter.com/attorneyjeremy1/status/1598717704247967748?ref_src=twsrc%5Etfw">December 2, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



In a <a href="https://twitter.com/SBF_FTX/status/1599511560384225281?s=20&amp;t=V6XT9iLJgt2XAvUcjPtrrA" target="_blank" rel="noreferrer noopener">tweeted response</a> to Waters’ request, Bankman-Fried said he would head to Washington DC only when he was ready, and following a review of events.



The refusal to testify voluntarily comes despite Bankman-Fried’s multiple mainstream media interviews which he used to deflect some of the heat over his role in FTX’s implosion, including with <a href="https://www.cnbc.com/video/2022/12/01/sbf-says-didnt-commit-fraud-post-ftx-collapse--interview-cnbc-crypto-world.html">CNBC</a> and <a href="https://abcnews.go.com/US/ftx-crypto-collapse-ceo-sam-bankman-fried-denies/story?id=94215046">ABC News</a> last week.



Both interviews have been criticized for their softball approach to questions over Bankman-Fried’s role in the commingling of customer funds with Alameda — estimated to have blown an $8 billion hole in FTX’s balance sheet.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Translation: he doesn&#39;t mind lying to Andrew Ross Sorkin or George Stephanopoulos, but lying to Congress under oath is less appealing. <a href="https://t.co/DZTyzMwn9s">https://t.co/DZTyzMwn9s</a>&mdash; Jake Chervinsky (@jchervinsky) <a href="https://twitter.com/jchervinsky/status/1599521955622707200?ref_src=twsrc%5Etfw">December 4, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



It’s not known whether this postponement is a result of legal advice SBF has received, or if house members will seek to compel his testimony.



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Bankman-Fried Puts Off House Testimony on FTX

John Gilbert

Global energy shortages, cycles of hoarding, closing business and declining purchasing power can be traced back to poor monetary policy. For decades now, we spent more than we had and promised more than we could deliver. And now it looks like Friedman was right — you can’t increase the money supply without increasing inflation. Individuals and nations are struggling to break out of this spiraling cycle — and even leveraging the threat of war to avoid it. This series will explore how we got here and what blockchain stablecoins need to provide a better reserve currency and a more stable world.



<h2>Part 1: What’s broken</h2>



<div class="wp-block-media-text alignwide is-stacked-on-mobile" style="grid-template-columns:30% auto"><figure class="wp-block-media-text__media"><a href="https://blockworks.co/news/how-broken-monetary-policy-fuels-instability"><img loading="lazy" width="1024" height="576" src="https://cms.blockworks.co/wp-content/uploads/2022/12/Untitled-design-5-1024x576.png" alt="How Broken monetary Policy Fuels Instability" class="wp-image-41102 size-full" srcset="https://cms.blockworks.co/wp-content/uploads/2022/12/Untitled-design-5-1024x576.png 1024w, https://cms.blockworks.co/wp-content/uploads/2022/12/Untitled-design-5-300x169.png 300w, https://cms.blockworks.co/wp-content/uploads/2022/12/Untitled-design-5-768x432.png 768w, https://cms.blockworks.co/wp-content/uploads/2022/12/Untitled-design-5-1536x864.png 1536w, https://cms.blockworks.co/wp-content/uploads/2022/12/Untitled-design-5-428x241.png 428w, https://cms.blockworks.co/wp-content/uploads/2022/12/Untitled-design-5-464x261.png 464w, https://cms.blockworks.co/wp-content/uploads/2022/12/Untitled-design-5-389x219.png 389w, https://cms.blockworks.co/wp-content/uploads/2022/12/Untitled-design-5-80x45.png 80w, https://cms.blockworks.co/wp-content/uploads/2022/12/Untitled-design-5-50x28.png 50w, https://cms.blockworks.co/wp-content/uploads/2022/12/Untitled-design-5.png 1600w" sizes="(max-width: 1024px) 100vw, 1024px" /></a></figure><div class="wp-block-media-text__content">
<h3><a href="https://blockworks.co/news/how-broken-monetary-policy-fuels-instability" target="_blank" rel="noreferrer noopener">How Broken Monetary Policy Fuels Instability</a></h3>



Why unstable money isn’t safe for the world and how to understand monetary policy
</div></div>



<h2>Part 2: What are people doing today about it?</h2>



<div class="wp-block-media-text alignwide is-stacked-on-mobile" style="grid-template-columns:30% auto"><figure class="wp-block-media-text__media"><a href="https://blockworks.co/news/the-investors-guide-to-stablecoins/"><img loading="lazy" width="1024" height="576" src="https://cms.blockworks.co/wp-content/uploads/2022/12/Investor-Guide_Stablecoins_v01-1024x576.jpg" alt="Investor Guide to Stablecoins" class="wp-image-40777 size-full" srcset="https://cms.blockworks.co/wp-content/uploads/2022/12/Investor-Guide_Stablecoins_v01-1024x576.jpg 1024w, https://cms.blockworks.co/wp-content/uploads/2022/12/Investor-Guide_Stablecoins_v01-300x169.jpg 300w, https://cms.blockworks.co/wp-content/uploads/2022/12/Investor-Guide_Stablecoins_v01-768x432.jpg 768w, https://cms.blockworks.co/wp-content/uploads/2022/12/Investor-Guide_Stablecoins_v01-1536x864.jpg 1536w, https://cms.blockworks.co/wp-content/uploads/2022/12/Investor-Guide_Stablecoins_v01-428x241.jpg 428w, https://cms.blockworks.co/wp-content/uploads/2022/12/Investor-Guide_Stablecoins_v01-464x261.jpg 464w, https://cms.blockworks.co/wp-content/uploads/2022/12/Investor-Guide_Stablecoins_v01-389x219.jpg 389w, https://cms.blockworks.co/wp-content/uploads/2022/12/Investor-Guide_Stablecoins_v01-80x45.jpg 80w, https://cms.blockworks.co/wp-content/uploads/2022/12/Investor-Guide_Stablecoins_v01-50x28.jpg 50w, https://cms.blockworks.co/wp-content/uploads/2022/12/Investor-Guide_Stablecoins_v01.jpg 1600w" sizes="(max-width: 1024px) 100vw, 1024px" /></a></figure><div class="wp-block-media-text__content">
<h3><a href="https://blockworks.co/news/the-investors-guide-to-stablecoins/" target="_blank" rel="noreferrer noopener">The Investor’s Guide to Stablecoins</a></h3>



A dive deep into the types of monetary policy alternatives that stablecoins offer
</div></div>



<h2>Part 3: What is the right way forward?</h2>



<div class="wp-block-media-text alignwide is-stacked-on-mobile" style="grid-template-columns:30% auto"><figure class="wp-block-media-text__media"><a href="https://blockworks.co/news/what-is-an-inflation-hedge-finding-stability-in-todays-market/"><img loading="lazy" width="1024" height="576" src="https://cms.blockworks.co/wp-content/uploads/2022/12/The-inflation-hedge-1024x576.png" alt="The inflation hedge" class="wp-image-41089 size-full" srcset="https://cms.blockworks.co/wp-content/uploads/2022/12/The-inflation-hedge-1024x576.png 1024w, https://cms.blockworks.co/wp-content/uploads/2022/12/The-inflation-hedge-300x169.png 300w, https://cms.blockworks.co/wp-content/uploads/2022/12/The-inflation-hedge-768x432.png 768w, https://cms.blockworks.co/wp-content/uploads/2022/12/The-inflation-hedge-1536x864.png 1536w, https://cms.blockworks.co/wp-content/uploads/2022/12/The-inflation-hedge-428x241.png 428w, https://cms.blockworks.co/wp-content/uploads/2022/12/The-inflation-hedge-464x261.png 464w, https://cms.blockworks.co/wp-content/uploads/2022/12/The-inflation-hedge-389x219.png 389w, https://cms.blockworks.co/wp-content/uploads/2022/12/The-inflation-hedge-80x45.png 80w, https://cms.blockworks.co/wp-content/uploads/2022/12/The-inflation-hedge-50x28.png 50w, https://cms.blockworks.co/wp-content/uploads/2022/12/The-inflation-hedge.png 1600w" sizes="(max-width: 1024px) 100vw, 1024px" /></a></figure><div class="wp-block-media-text__content">
<h3><a href="https://blockworks.co/news/what-is-an-inflation-hedge-finding-stability-in-todays-market/" target="_blank" rel="noreferrer noopener">What Is an Inflation Hedge? Finding Stability in Today&#8217;s Market</a></h3>



Why unstable money isn’t safe for the world and how to understand monetary policy
</div></div>



<h2>Part 4: What will the future look like?</h2>



<div class="wp-block-media-text alignwide is-stacked-on-mobile" style="grid-template-columns:30% auto"><figure class="wp-block-media-text__media"><a href="https://blockworks.co/news/what-it-takes-to-tokenize-the-world/"><img loading="lazy" width="1024" height="576" src="https://cms.blockworks.co/wp-content/uploads/2022/12/What-it-takes-to-tokenize-the-world-1024x576.png" alt="What it takes to tokenize the world" class="wp-image-41090 size-full" srcset="https://cms.blockworks.co/wp-content/uploads/2022/12/What-it-takes-to-tokenize-the-world-1024x576.png 1024w, https://cms.blockworks.co/wp-content/uploads/2022/12/What-it-takes-to-tokenize-the-world-300x169.png 300w, https://cms.blockworks.co/wp-content/uploads/2022/12/What-it-takes-to-tokenize-the-world-768x432.png 768w, https://cms.blockworks.co/wp-content/uploads/2022/12/What-it-takes-to-tokenize-the-world-1536x864.png 1536w, https://cms.blockworks.co/wp-content/uploads/2022/12/What-it-takes-to-tokenize-the-world-428x241.png 428w, https://cms.blockworks.co/wp-content/uploads/2022/12/What-it-takes-to-tokenize-the-world-464x261.png 464w, https://cms.blockworks.co/wp-content/uploads/2022/12/What-it-takes-to-tokenize-the-world-389x219.png 389w, https://cms.blockworks.co/wp-content/uploads/2022/12/What-it-takes-to-tokenize-the-world-80x45.png 80w, https://cms.blockworks.co/wp-content/uploads/2022/12/What-it-takes-to-tokenize-the-world-50x28.png 50w, https://cms.blockworks.co/wp-content/uploads/2022/12/What-it-takes-to-tokenize-the-world.png 1600w" sizes="(max-width: 1024px) 100vw, 1024px" /></a></figure><div class="wp-block-media-text__content">
<h3><a href="https://blockworks.co/news/what-it-takes-to-tokenize-the-world/" target="_blank" rel="noreferrer noopener">What It Takes To Tokenize the World</a></h3>



Why unstable money isn’t safe for the world and how to understand monetary policy
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<h2>About Our Sponsor</h2>



<div class="wp-block-media-text alignwide is-stacked-on-mobile" style="grid-template-columns:30% auto"><figure class="wp-block-media-text__media"><a href="https://blockworks.co/news/about-our-sponsor-reserve/"><img loading="lazy" width="1024" height="576" src="https://cms.blockworks.co/wp-content/uploads/2022/12/Slide-16_9-24-1024x576.png" alt="About Reserve" class="wp-image-41042 size-full" srcset="https://cms.blockworks.co/wp-content/uploads/2022/12/Slide-16_9-24-1024x576.png 1024w, https://cms.blockworks.co/wp-content/uploads/2022/12/Slide-16_9-24-300x169.png 300w, https://cms.blockworks.co/wp-content/uploads/2022/12/Slide-16_9-24-768x432.png 768w, https://cms.blockworks.co/wp-content/uploads/2022/12/Slide-16_9-24-1536x864.png 1536w, https://cms.blockworks.co/wp-content/uploads/2022/12/Slide-16_9-24-428x241.png 428w, https://cms.blockworks.co/wp-content/uploads/2022/12/Slide-16_9-24-464x261.png 464w, https://cms.blockworks.co/wp-content/uploads/2022/12/Slide-16_9-24-389x219.png 389w, https://cms.blockworks.co/wp-content/uploads/2022/12/Slide-16_9-24-80x45.png 80w, https://cms.blockworks.co/wp-content/uploads/2022/12/Slide-16_9-24-50x28.png 50w, https://cms.blockworks.co/wp-content/uploads/2022/12/Slide-16_9-24.png 1600w" sizes="(max-width: 1024px) 100vw, 1024px" /></a></figure><div class="wp-block-media-text__content">
<h3><a href="https://blockworks.co/news/how-broken-monetary-policy-fuels-instability" target="_blank" rel="noreferrer noopener">Reserve</a></h3>



Reserve Protocol aims to protect consumers from the effects of high inflation and hopes to one day eradicate it.
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Stabilize Money, Stabilize the World

The Investor’s Guide to Stablecoins

When inflation runs rampant in an economy, it is difficult to find a lifeboat that can reliably protect you from volatility. A <a href="https://www.entrepreneur.com/business-news/are-stocks-your-best-hedge-against-runaway-inflation/391460">JPMorgan conference</a> recently conducted a survey and 47% of respondents listed commodities as the most effective inflation hedge. 27% listed equities, 10% listed securities and 17% listed other.



But this survey was conducted when many believed our current inflation to be transitory. Now, inflation appears to not only be persistent, but global. The landscape has changed. Russia’s invasion of Ukraine, the economic slowdown in China, and the rising US dollar have all driven volatility in the commodities market. Traditional inflation hedges have all seen similar effects.&nbsp;



In our previous two articles of this series, we learned that the world needs asset-backed currencies that can resist censorship and provide long-term purchasing power. But to better understand what type of assets are required, we need to understand how investors and everyday people hedge inflation.&nbsp;&nbsp;



<h3 id="series-table-of-contents"><a href="https://blockworks.co/news/stabilize-money-stabilize-the-world/">Stabilize Money Stabilize the World</a> </h3>



Part 1:&nbsp;<a href="https://blockworks.co/news/how-broken-monetary-policy-fuels-instability">What’s broken</a> Why unstable money isn’t safe for the world and how to understand monetary policy Part 2:&nbsp;<a href="https://blockworks.co/news/the-investors-guide-to-stablecoins">What are people doing today about it?</a> A dive deep into the types of monetary policy alternatives that stablecoins offer Part 3:&nbsp;<a href="https://blockworks.co/news/what-is-an-inflation-hedge-finding-stability-in-todays-market">What is the right way forward?</a> A guide to the various inflation hedging tactics and how they can be used in stablecoins Part 4:&nbsp;<a href="https://blockworks.co/news/what-it-takes-to-tokenize-the-world">What will the future look like?</a> A look at how tokenization will change the stablecoin ecosystem About our sponsor:&nbsp;<a href="https://blockworks.co/news/about-our-sponsor-reserve">Reserve</a> A video explaining the Reserve Protocol



<h2>What is an inflation hedge?</h2>



An inflation hedge is any investment intended to protect the investor from the effects of a currency&#8217;s increasing money supply and decreasing purchasing power. Popular hedging strategies typically include physical assets with limited supplies and are not only reserved for the investing class. Citizens of nations with hyperinflated currencies need inflation hedges to conduct business and survive the rising cost of living.



While it is natural to assume that harder assets are less resistant to inflation, not all provide the same degree of protection. Macroeconomic forces make it difficult to predict how these assets will perform compared to a declining currency.&nbsp;&nbsp;&nbsp;



So investors typically aim to create a diverse portfolio with various investments to hedge inflation effectively. At times, this may include advanced options and derivatives trading strategies. But for this article, we will compare the effectiveness of six asset classes: fiat, commodities, bonds, real estate, digital assets, and others.&nbsp;



<h2>Fiat</h2>



Fiat currencies <a href="https://www.bitstamp.net/learn/crypto-trading/inflationary-vs-deflationary-currencies/">are naturally inflationary</a>, so how can they be inflationary hedges? Citizens in nations with currencies facing much higher inflation rates can hedge their investments by buying another fiat currency inflating at a lower rate.&nbsp;



For example, a citizen of Argentina is unlikely to buy more of their national currency, the peso, to hedge against inflation. The peso is a notoriously weak fiat currency that constantly loses value through centralized, controlled monetary policies. Venezuelans swap their peso for the US dollar to hedge the peso’s inflation.



Even though the US dollar is also losing purchasing power, it&#8217;s declining at a much lower rate, meaning that by buying USD with bolivars, you&#8217;ll lose less money over time. This is, of course, assuming you have an easy and affordable way to exchange your local fiat for USD, something that the Reserve app is making possible.



In this environment, buying the currency with a lower inflation rate can keep more of your purchasing power than if you just kept your local currency.&nbsp;



<h2>Digital assets (cryptocurrencies)</h2>



Cryptocurrency advocates have long argued that digital assets are some of the best ways to hedge against inflation. Their fixed supplies or deflationary mechanics are inherently designed to make the currencies anti-inflationary.&nbsp;



However, not all digital assets are intended to replace fiat currencies. Some, like bitcoin, are considered digital stores of value — a digital equivalent to gold. Bitcoin evangelists argue that energy expended to produce bitcoin provides important security for a scarce asset. But because it represents a new asset class, the market for these standalone digital assets is highly volatile — resulting in significant price swings in short periods.&nbsp;



Secondly, some experts believe that <a href="https://www.forbes.com/sites/kenrapoza/2022/09/09/bitcoins-inflation-hedge-case-is-dead-crypto-leader-heading-to-12k/?sh=52c143bd4d8a">&#8220;Bitcoin is not immune to macroeconomic factors.&#8221;</a> Meaning that despite having a fixed supply, these forces influence demand in a similar way that they influence the stock market.&nbsp;&nbsp;



2022 is tracking at an 8.2% inflation rate, and BTC is down 59.46% YTD. That means that $100 from January this year is now worth $91.8, but $100 worth of bitcoin is worth $40.54.&nbsp;



Bitcoin holders will point to the asset&#8217;s long history of price appreciation to argue that it makes for a better inflationary hedge in the long run. But in times of great volatility, the asset provides poor purchasing power. Someone in Argentina is less inclined to use bitcoin to buy a bag of groceries when it is down 20% that day.&nbsp;



Read more: <a href="https://blockworks.co/news/how-broken-monetary-policy-fuels-instability">Why Unstable Money Isn’t Safe</a>



<h2>Commodities&nbsp;</h2>



Commodities have traditionally been a reliable inflation hedge. According to Vanguard, commodities rose by <a href="https://www.cmegroup.com/insights/economic-research/2022/commodities-as-an-inflation-hedge.html">7% to 9% for every 1% of unexpected inflation</a> over the last decade. The universal and persistent demand of this asset class makes it inherently valuable. But while they may be a great addition to an investment portfolio, they do not offer consumers a solution to their declining purchasing power.&nbsp;



For example, when inflation fears are high, supply constraints make physical gold more expensive than its spot price. If someone in a hyperinflationary environment wants to buy gold for the purpose of retaining purchasing power, they need to pay the premium and hope that the spot price continues to rise. This becomes a difficult gamble for families that simply want to put food on the table. Similar supply and storage constraints make commodities like oil even more difficult to use as a hedge in this environment.



<h2>Government Bonds</h2>



Government bonds, unlike stocks, are fixed-income debt instruments backed by the issuing government. Though the potential rate of return is generally lower than investing in stocks, bonds can provide a steady and predictable stream of income from the borrower.&nbsp;



Government bond yields have an inverse relationship with the market, so investors often use them to hedge against the risk of recession. The Federal Reserve has implied that economic growth needs to decline more to prevent runaway inflation. The Fed hopes to achieve this through raising interest rates and thereby increasing the cost to do business.&nbsp;



If the Fed succeeds, then bonds may offer a hedge against the declining economy, but if it fails, bonds can only offer an inflationary hedge if the interest rate outpaces inflation.&nbsp;



<h2>Real estate</h2>



Investing in real estate can be one of the best ways to hedge against inflation, but there are a couple of caveats. The first is timing. Investing in real estate during times of high inflation can be a poor decision because the interest rates on loans are likely to be quite high, making it an increasingly expensive debt to pay off.



The reality in this scenario is that real estate prices are lower during these times. Those with access to capital have a major advantage and are able to buy real estate outright.



Those that bought houses on mortgages leading up to the <a href="https://www.investopedia.com/terms/f/financial-crisis.asp">2008 Financial Crisis</a> likely didn&#8217;t do well, but those that bought during the crisis are likely reaping huge rewards today.



Timing is everything with real estate. It&#8217;s best to only add real estate when it can either generate income in the form of rentals or when you&#8217;re in a strong financial position, allowing you to buy at low prices and wait for a good time to sell.



<h2>Finding stability in a diverse portfolio of stable assets</h2>



Realistically, the best inflation hedge would be a portfolio full of stable assets that have steady value and can generate passive income for the investor. However, assembling a portfolio full of stable assets is easier said than done, with every asset sector facing fairly large price swings.



People have historically done this in a variety of different ways. One of the most popular arising in the last 20 years or so is the “60-40” portfolio of diversified equities and bonds. The theory is that if 60% of the portfolio is made up of growth stocks and real estate, then it will capture the gains of a growing economy. The latter 40% of government bonds help protect the portfolio from regional recessions.&nbsp;



The dragon portfolio is a new alternative to the 60-40 investing strategy. It was developed to account for two opposing economic environments. The first, represented by a serpent, is an era of great economic expansion — sustained by technological advancements and global trade. The second, represented by a hawk, is a prolonged era of deflationary change. As the serpent grows old and over-inflated with bad debt and poor monetary policy, the hawk makes its strike and the world undergoes a painful period of restructuring.&nbsp;



The dragon is a representation of both creatures and is designed to grow wealth throughout the entire cycle. It is still new and hasn’t been adequately tested. It comprises 24% equities, 19% gold, 18% commodities, and 18% fixed income.&nbsp;



But to properly assist people in retaining purchasing power, there needs to be a way to make inflation hedges portable.



This is why Reserve&#8217;s end goal is to facilitate digital currencies backed by baskets of stable-value assets, providing an alternative to the reliance on a fiat monetary system.



<h3>Reserve&#8217;s inflation hedge philosophy</h3>



Reserve hopes to empower people across the world to not only choose their own monetary policy, but make their own. They want to create a free market of asset-backed stablecoins that can offer a better alternative to the broken fiat system — one that is equally stable in the short run, and much more stable in the long run.&nbsp;



The assets that will back RTokens may vary by use cases, and could be a combination of digital assets such as ETH, BTC and other stable DeFi assets, as well as tokenized versions of real-world assets such as commodities and real estate.



<h2>Up Next</h2>



Read <a href="https://blockworks.co/news/what-it-takes-to-tokenize-the-world/">What It Takes To Tokenize the World</a> to learn how tokenization will change the stablecoin ecosystem.



This content is sponsored by <a href="https://reserve.org/en/">Reserve</a>

What Is an Inflation Hedge? Finding Stability in Today’s Market

Bessie Liu

After centralized exchange FTX plunged into bankruptcy in November, investors have been cautiously evaluating their ventures into the cryptocurrency space.



Nevertheless, some large funding deals are still closing.



The largest is digital assets market maker Keyrock, which received a $72 million injection from investors including Ripple, SIX Fintech Ventures and Middlegame Ventures.&nbsp;



Ripple’s director of institutional markets Maxime Fages says that this investment was made after observing Keyrock’s “global success” over the past three years.



“Under the leadership of Kevin, Jeremy and Juan, Keyrock has established themselves as a key player in the space by building scalable, enterprise grade solutions and taking a regulatory first approach,” Fages said.



This latest Series B round will be used to invest in infrastructure development for scalability and also work on licensing across Europe, US and Singapore, Keyrock said.



Another company which received a significant amount of money this past week is Web3 developer platform Fleek.



Fleek closed a $25 million Series A led by Polychain Capital with additional investments from Protocol Labs, Arweave, Coinbase Ventures and Digital Currency Group, just to name a few.



The latest funding will help launch Fleek Network, its latest Web3 content application, in 2023.&nbsp;



“With Fleek Network, we will be empowering developers and organizations with an easy and seamless mechanism for Web3 hosting and content delivery that will help deliver on the promise of creating a truly decentralized internet,” Harrison Hines, co-founder and CEO of Fleek, said.



Cross-chain bridge protocol Across also raised a significant amount of money this week. The project, which focuses on bridging between rollup chains and Ethereum mainnet and is powered by UMA, secured $10 million from Hack VC, Placeholder and Blockchain Capital.



The latest funding will bring the protocol’s valuation up to an estimated $200 million.



Other notable funding rounds this week include:



<ul><li>Enterprise-grade staking technology provider Kiln secured 17 million euros in a financing round led by Illuminate Financial.</li><li>Software solution designer Daylight received a $3 million seed investment co-led by Framework Ventures and Chapter One.</li><li>Jupiter Exchange, an alternative asset exchange using fractional NFT technology, closed $5 million in seed funding led by White Hilt Capital.</li></ul>



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Funding Roundup: Wary Investors Still Cutting Checks for Crypto

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The world’s economic and societal structures aren’t very stable at the moment — or very safe. Supply chains aren’t working and the global energy shortage is growing — causing cycles of hoarding and unrest.



This economic and political instability, though, did not arise in a vacuum. It is rooted in the monetary system underpinning the post-industrial age. In short, it&#8217;s broken — and for many reasons. But fundamentally, instability is increasing across the world because the value of money is increasingly unstable. As people suffer from bank runs and hyperinflation, they turn against the authorities who failed to protect their wealth. It&#8217;s why people in Lebanon are <a href="https://www.aljazeera.com/news/2022/9/15/what-is-behind-lebanons-bank-robberies-explainer">robbing their own banks</a> and the Chinese government has redoubled efforts to <a href="https://www.reuters.com/world/china/china-bank-protest-stopped-by-health-codes-turning-red-depositors-say-2022-06-14/">squash bank protests with Covid restrictions</a>.&nbsp;&nbsp;



If we want to fix the world by fixing our money, we have to make it stable. This core problem is why governments, institutions, and innovators in DeFi are increasingly looking to stablecoins as a solution. And it is why Reserve is partnering with Blockworks in producing this series on stabilizing the world. They believe that stable money is asset-backed money.&nbsp;



In part one of this four part series, we will explain why money lost its backing and why we need a stable alternative.&nbsp;



<h3><a href="https://blockworks.co/news/stabilize-money-stabilize-the-world/">Stabilize Money Stabilize the World</a> </h3>



Part 1:&nbsp;<a href="https://blockworks.co/news/how-broken-monetary-policy-fuels-instability">What’s broken</a> Why unstable money isn’t safe for the world and how to understand monetary policy Part 2:&nbsp;<a href="https://blockworks.co/news/the-investors-guide-to-stablecoins">What are people doing today about it?</a> A dive deep into the types of monetary policy alternatives that stablecoins offer Part 3:&nbsp;<a href="https://blockworks.co/news/what-is-an-inflation-hedge-finding-stability-in-todays-market">What is the right way forward?</a> A guide to the various inflation hedging tactics and how they can be used in stablecoins Part 4:&nbsp;<a href="https://blockworks.co/news/what-it-takes-to-tokenize-the-world">What will the future look like?</a> A look at how tokenization will change the stablecoin ecosystem About our sponsor:&nbsp;<a href="https://blockworks.co/news/about-our-sponsor-reserve">Reserve</a> A video explaining the Reserve Protocol



<h2>Why money lost its backing</h2>



<h3>Bretton Woods Monetary System</h3>



The Bretton Woods system of monetary management was the last time any country issued a currency that was backed by an asset. It was called the gold standard. And from 1941 to 1971, other countries could redeem $35 for an ounce of gold.&nbsp;



The reason it ended was simple. The Vietnam War led the US to spend more than it had. And like depositors during the era of free banking, nations lost faith in the US government’s ability to honor withdrawals. But as requests to redeem US notes for gold started to increase, the Federal Reserve ended the policy to honor those redemptions. In principle, the decision is not very different from a centralized crypto exchange freezing withdrawals when it is on the brink of insolvency. It needed time to find a solution.



This decision combined with a decade of running unsustainable budget deficits for the war contributed to an economic recession and historic levels of inflation — peaking in 1976 at 12%. And while it was dialed back by the end of the decade, the damage to the US dollar was done. It has <a href="https://www.reuters.com/business/with-inflation-gold-notes-cards-find-their-way-into-americas-wallet-2022-04-27/">lost 86% of its purchasing power</a> since 1971.



<h3>The buying power of one dollar over time</h3>



<figure class="wp-block-image"><img src="https://lh6.googleusercontent.com/Z3T54EjxZ4KOkUpjtOPoGGZjAwq0Powlqfq2drhVXKJ21rVbLs96zSx6M_KNlj01nvbDoVeIiuBW70CntpJvhjQ0azbq2_bmtoLCx2tDjjEmaNQXCHsXQU6cr7RrwMri2RKUFN2q8_91f6tJqmGG2GCSue8WTO6Kc9eN4nnTJOA4mfNRYQ2Rp1M-XP9YjDKC" alt=""/></figure>



Source <a href="https://www.officialdata.org/us/inflation/">Officialdata.org</a>



<h3>Rise of the petro-dollar</h3>



In <a href="https://www.nytimes.com/1974/06/09/archives/milestone-pact-is-signed-by-us-and-saudi-arabia-acclaimed-by.html">June 1974</a>, shortly after removing the dollar from the gold standard, the US made a deal with Saudi Arabia to price oil in US dollars. This agreement created a de-facto oil peg for the US dollar. In return, the US agreed to a military alliance that promised weapons and military aid to the Saudis.&nbsp;



This trade agreement increased global demand for dollars, which set in motion a series of network effects that solidified it as the world&#8217;s reserve currency.&nbsp;



<h3>How the US exports inflation to other countries</h3>



Because the US has been able to keep its status as the world reserve currency, its inflationary monetary policy influenced economies around the world.



At a GDP of $20+ trillion, the US is estimated to have the largest economy. Many countries such as China and Turkey have built their economic growth on the US’ increasing demand for exports. The global demand for US dollars as a reserve currency combined with US consumer demand for lower prices pressures these export dependent&nbsp; economies to <a href="https://www.kansascityfed.org/research/economic-bulletin/price-pressures-for-us-exporters-and-a-strong-dollar-have-increased-inflation-in-foreign-countries/">devalue their currency</a> to compete for US imports. So if US inflation increases as it has over the past year, it becomes more difficult for these countries to keep the cost of their goods low. To stay competitive, they end up enacting new monetary policies that increase inflation at a higher rate than the US.&nbsp;



For example, Turkish annual inflation climbed to a new 24-year high of 85.51% in October 2022. This was in large part the result of rate hikes and a long history of monetary policy geared at keeping export prices low. Countries around the world have felt similar pressures as fears of insolvency have triggered violent bank runs in Lebanon, China, Venezuela and Argentina.&nbsp;&nbsp;



Each spike in inflation has a lasting effect on a currency&#8217;s purchasing power. Like with the US inflation in the 1970s, it is difficult to reverse course. With no promise of returning to a monetary policy of asset-backed currency, the fiat system will continue to erode the purchasing power and safety of money around the world.



<h3>How one central bank changed money&nbsp;</h3>



The root problem to this story is not simply that the dollar lost its backing, it is the mechanism that enables it. The erosion of purchasing power and safety across the world is directly linked to the unbridled ability for a centralized minority to enact monetary policy. It is ultimately the governance and enforcement of that policy that determines its fate and safety.&nbsp;



As with the US, the power of its enforcement lies with its military-backed trade alliances. It frees the US from the checks and balances other countries and institutions face, as there is no international regulatory authority that can chase down Fed policymakers for misappropriation of funds. And as a result, every decision they make impacts economies throughout the world.&nbsp;



<h2>What is a monetary policy and what makes it safe?&nbsp;</h2>



At the most basic level, a monetary policy is a set of rules or decisions that determines how a currency is created, destroyed, backed and managed. For example, the Fed creates and destroys money through its <a href="https://www.investopedia.com/articles/economics/10/understanding-the-fed-balance-sheet.asp">balance sheet</a>. And it manages the flow of money by setting interest rates.&nbsp;



Alternative systems, such as Bitcoin, embed its policy in the code. It can only be changed if a majority of network nodes agree to fork it. The code determines how many coins will ever be in existence and sets the conditions needed to issue and transfer coins.&nbsp;



Monetary policy safety is measured at two levels. On the first level, it is measured by the degree to which it protects its currency from losing value and accessibility. People need to be able to use their money without fear of a bank refusing access or a hacker stealing funds. And those same people need to trust that the value will stay consistent over time.



On the second level, it is measured by how the policy is governed. If policy is governed by a single entity, such as the Federal Reserve, versus a decentralized consensus, then there is greater risk of losing its backing to a commodity like gold or another currency.&nbsp;



Alternatively, if the governance mechanism is too rigid, it may not be able to meet the needs of a global economy.&nbsp; Critics of the bitcoin standard argue that once block rewards are gradually lowered, miner fees will not be enough to incentivize a diverse set of validators willing to secure the network of 21 million bitcoin. They argue that the protocol will ultimately need to change if it wants to gain widespread adoption.&nbsp;&nbsp;



<h2>The stablecoin solution</h2>



Every digital asset that is classified as a crypto currency represents an alternative monetary policy. But very few have ventured to provide greater price stability than the US dollar. Stablecoins are the only class of cryptocurrencies that attempt to provide a stable alternative to the fiat system — with some even offering greater purchasing power protection.&nbsp;



For example, in march of 2021, the Reserve Protocol launched its first stablecoin, the Reserve Dollar (RSV) and the Reserve app to help people in Latin America protect their livelihood from hyperinflation. When the local national currency is inflating 6% per week, inflation of 2% to 8% per year on a dollar stablecoin offers an easier, safer way to preserve purchasing power.



Currently 670,000 registered users access more than 25,000 merchants, transacting more than $300 million monthly with the RSV stablecoin — unlike most volume in crypto, which is speculation, this is all real commerce. The primary uses are payroll, p2p payments, remittances and merchant shopping. The Reserve app is available in Argentina, Venezuela, Panama, Peru and Colombia and will be launching soon in Mexico.&nbsp;



The community behind the Reserve Protocol believes that the need for an inflation and censorship resistant currency goes beyond the countries experiencing hyperinflation. Humanity collectively spends too much time, and often fails, to preserve their spending power over the long term. The world needs alternatives to fiat and centralized money systems, which is why Reserve updated their protocol so that anyone can launch a decentralized asset backed stablecoin. But to really evaluate the potential for any of these new or existing stablecoins to succeed, we need to examine the different types of existing stablecoins.



<h2>Up next&nbsp;</h2>



Read the <a href="https://blockworks.co/news/the-investors-guide-to-stablecoins/">The Investor’s Guide to Stablecoins</a> to learn how to measure the safety of a stablecoin issuer’s monetary policy.
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This content is sponsored by <a href="https://reserve.org/en/">Reserve</a>

How Broken Monetary Policy Fuels Instability

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In this <a href="https://blockworks.co/news/stabilize-money-stabilize-the-world/">Stabilize Money, Stabilize the World</a> series, we have explained why we need a new monetary system and why it needs to be able to import the inflation resistance of hard assets into a useful, fungible stablecoin. But to achieve this grand objective, we need to tokenize real-world assets. Despite the challenges ahead, <a href="https://reserve.org/en/">Reserve</a>, the protocol for launching asset-backed stablecoins, believes this future is possible. 



<h3 id="series-table-of-contents"><a href="https://blockworks.co/news/stabilize-money-stabilize-the-world/">Stabilize Money Stabilize the World</a> </h3>



Part 1:&nbsp;<a href="https://blockworks.co/news/how-broken-monetary-policy-fuels-instability">What’s broken</a> Why unstable money isn’t safe for the world and how to understand monetary policy Part 2:&nbsp;<a href="https://blockworks.co/news/the-investors-guide-to-stablecoins">What are people doing today about it?</a> A dive deep into the types of monetary policy alternatives that stablecoins offer Part 3:&nbsp;<a href="https://blockworks.co/news/what-is-an-inflation-hedge-finding-stability-in-todays-market">What is the right way forward?</a> A guide to the various inflation hedging tactics and how they can be used in stablecoins Part 4:&nbsp;<a href="https://blockworks.co/news/what-it-takes-to-tokenize-the-world">What will the future look like?</a> A look at how tokenization will change the stablecoin ecosystem About our sponsor:&nbsp;<a href="https://blockworks.co/news/about-our-sponsor-reserve">Reserve</a> A video explaining the Reserve Protocol



Assets like <a href="https://www.flowcarbon.com/">carbon credits</a> and <a href="https://www.parcl.co/">real estate</a> are already moving on-chain. Even <a href="https://credix.finance/">car loans</a> now exist on the blockchain. As this ecosystem matures and finds some regulatory harmony, these tokens may provide the portability and stability needed in backing stablecoins that can retain greater purchasing power than fiat currency.&nbsp;&nbsp;&nbsp;



But this technology has central points of failure. Like fiat-based stablecoins, tokenized assets need a third-party intermediary to guarantee one-to-one backing and price equivalence. For example, the Venezualen government attempted to create an oil-backed currency called the Petro. But it failed to match the price of oil because the government had no redemption policy or market mechanism that would allow them to maintain a peg.&nbsp;



Despite these obstacles, the number of innovative solutions is endless — from using ChainLink price oracles to make synthetic assets, to tokenizing fractional ownership of real assets, and even issuing tokenized securities and treasuries. The number of potential approaches makes predicting the future of asset-backed stablecoins hard to predict.&nbsp;



The future can go one of two ways. In this article, we will explore the different approaches to tokenization and how they could fit into a monetary system of asset-backed stablecoins.&nbsp;



<h2>Tokenized property</h2>



The real estate market is an industry primed for tokenization. Historically, buying real estate is one of the best financial decisions anyone can make. The problem is that <a href="https://www.cnbc.com/2021/11/10/home-prices-are-now-rising-much-faster-than-incomes-studies-show.html">rising house prices have outpaced wages</a> and subsequently put buying a house out of reach for many people across age and demographic spectrums.



<a href="https://cointelegraph.com/nonfungible-tokens-for-beginners/what-is-tokenized-real-estate">Tokenized real estate</a> can allow people to own a share of a piece of real estate for as little as $1. As the price of that piece of real estate rises and falls, owners of the token are free to buy and sell as they please. A buyer may even, overtime and on their own schedule, purchase all the shares of a home and own it outright.



There is, however, a downside to this. It can further exacerbate the over-financialization of the real estate market by inviting more speculation from both retail and institutions. It is still in a nascent stage, so it could prove the opposite by providing greater price discovery.



How it works



Fractional ownership and synthetic assets are two popular approaches to real estate tokenization. In the first approach, companies like RealT fractionalize property entities into tokens on the Ethereum blockchain. Those tokens then entitle the owner to a share in revenue generated from that property. The fractionalization requires a formal legal process that employs a property manager to maintain properties on behalf of investors. They are responsible for finding tenants, collecting rent and paying the investors.&nbsp;



Synthetic assets, on the other hand, have no connection to the physical world. Platforms like Synthetix and Parcl combine decentralized price oracles like ChainLink with a system of overcollateralization to imitate the value of physical products on digital exchanges.&nbsp;



Pros and cons&nbsp;



Fractional ownership and synthetic assets have their advantages and disadvantages when it comes to their utility as stablecoin collateral. Fractionalized ownership requires more counterparty risk. And if a stablecoin commits to using these assets in a portion of the collateral basket, the stablecoin issuer needs to rely on companies like RealT to enforce contracts between multiple parties.&nbsp;



Synthetic assets have less counterparty risk; however, they are not backed by hard assets and have their own set of smart contract and platform incentive challenges. Synthetic assets use yield farming incentive mechanisms and gamification to provide stabilized value. These assets may work well in bull markets because there is less sell pressure on the crypto being used as collateral. In bear markets, liquidity providers face greater risk of liquidation and possibly impermanent loss. So if platforms become illiquid, their synthetic assets may lose value.&nbsp;



Another example of real estate assets might also include land in the metaverse. Similar to synthetic assets, and the 1990s explosion of dot-com real estate valuations, metaverse land value would be inherent to incentive mechanisms and network effects of the digital world they inhabit. A big unknown is the price stability of metaverse land in the future.



If price speculation is the fundamental force driving demand of a tokenized asset, then it will pose greater risk to stablecoins. Ideally, the issuer of an asset backed stablecoin would be able to collateralize tokens that have ample liquidity and direct utility in the real world. Tokenized energy may offer the best of both worlds.&nbsp;&nbsp;



<h2>Tokenized energy</h2>



Gas and energy has proven to be one of the greatest inflationary hedges post-pandemic lockdowns. As of <a href="https://www.tradingview.com/chart/Dvauw0KB/?symbol=AMEX%3ABNO">Nov. 18, 2022</a>, the United States Brent Oil Fund LP (BNO) is up 36% over one year. In comparison, the Nasdaq Index 100 (NDX), is down 29%.&nbsp;



This inverse relationship to the stock market could provide great stability to a basket of diverse assets. But as previous attempts such as Venezuela&#8217;s oil backed Petro has shown, tokenizing oil is very difficult. The market is more restricted than gold and real estate.&nbsp;



Tokenized energy could offer a more portable alternative that not only offers an inflationary hedge, but also incentivizes green energy. Powerledger.io is working on a way to tokenize green energy into granular <a href="https://cointelegraph.com/news/power-ledger-launches-renewable-energy-credit-marketplace-in-se-asia">credits that can be exchanged across the energy grid</a>. For example, someone with a private solar panel would earn these credits for contributing green energy to the power grid. In return, the owner could use the credits to pay for their own energy usage and then sell any excess tokens back to the grid or another exchange.&nbsp;



If the energy grid was properly decentralized across many public and private energy producers, this type of tokenization could offer the least counterparty risk to any of the alternatives. However, in a future where energy is monopolized, this type of tokenization could provide centralization risks.&nbsp;



For a stablecoin to capture the inflationary hedge of a diverse investment strategy like the dragon portfolio, it needs access to tokenized assets like securities, bonds and loans. All of these require centralized issuing mechanisms like fiat-backed stablecoins and tokenized commodities, but they vary in their degree of centralization and risk.



<h2>Tokenized securities and Treasurys</h2>



Tokenized securities, for example, are dependent on companies using them to raise funds. And unlike ICOs, they are done in a regulatory environment. A few popular security token platforms are <a href="https://www.inx.co/">INX</a> and <a href="https://www.oasispromarkets.com/">Oasis Pro Markets</a>. Companies can use these platforms to access liquidity and raise funds in a similar way to how they issue shares in a public offering.&nbsp;



The risks associated with the investment are similar to purchasing shares from a stock exchange.&nbsp;



In addition to tokenized securities, companies like <a href="https://backed.fi/">Backed Finance</a> have started tokenizing Treasurys. Their approach does add risk because they tokenize the Treasurys through purchasing them and promising to hold a one-to-one backing. The tokens are only sold to participants who pass full know-your-customer (KYC) and anti-money laundering (ALM) checks and will have the ability to mint and redeem token securities for the underlying asset. Backed’s method of tokenization enables an asset-backed stablecoin protocol to allocate a portion of its collateral to short-term bonds.&nbsp;



In addition, Frigg.eco is tokenizing green bonds. They also require KYC/AML for purchases and have created the ability to buy and sell tokens in a liquid secondary market. They are working with Norwegian-government-backed developer Malthe Winje to refinance the <a href="https://www.agatobwe.eco/">Agatobwe</a> hydroelectric plant in Rwanda, with debt on Ethereum.



<h2>Tokenized credit</h2>



Real-world credit can also be tokenized through lending platforms such as <a href="https://goldfinch.finance/">Goldfinch</a> and <a href="https://truefi.io/">TrueFi</a>. These platforms can offer access to yields from real companies that are vetted at rates meaningfully higher than in core DeFi. This could offer yields uncorrelated with the crypto industry and potentially offer the fixed income needed to make up a dragon portfolio.&nbsp;&nbsp;&nbsp;



Property, energy, Treasurys, securities and credit are a few of the possibilities that could complement core DeFi assets in diversified, asset-backed stablecoins.&nbsp;



While the <a href="https://twitter.com/jackchong_jc/status/1574745695654797312">tokenization of global assets is only beginning</a>, the potential to return safe asset backing to the global monetary system is promising.&nbsp;



In a future where stable currencies compete in the open market, participants will be able to choose their preferred monetary policy regime. The future could host lots of different stablecoins, pegged to dollars, euros or an index like the CPI or the S&amp;P, with unique features targeting different “jobs to be done” and maybe eventually a global reserve currency that retains its value indefinitely and isn’t too volatile.&nbsp;



The permissionless <a href="https://reserve.org/en/">Reserve Protocol</a> enables this asset-backed currency revolution, for idealists, heroes and capitalists.



This content is sponsored by <a href="https://reserve.org/en/">Reserve</a>
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What It Takes To Tokenize the World

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<h2>Introducing Reserve</h2>



<iframe loading="lazy" width="560" height="315" src="https://www.youtube.com/embed/JOy0wCVhnwM" title="YouTube video player" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture" allowfullscreen=""></iframe>



<h2>Series Table of Contents</h2>



Part 1:&nbsp;<a href="https://blockworks.co/news/how-broken-monetary-policy-fuels-instability">What’s broken</a> Why unstable money isn’t safe for the world and how to understand monetary policy Part 2:&nbsp;<a href="https://blockworks.co/news/the-investors-guide-to-stablecoins">What are people doing today about it?</a> A dive deep into the types of monetary policy alternatives that stablecoins offer Part 3:&nbsp;<a href="https://blockworks.co/news/what-is-an-inflation-hedge-finding-stability-in-todays-market">What is the right way forward?</a> A guide to the various inflation hedging tactics and how they can be used in stablecoins Part 4:&nbsp;<a href="https://blockworks.co/news/what-it-takes-to-tokenize-the-world">What will the future look like?</a> A look at how tokenization will change the stablecoin ecosystem About our sponsor:&nbsp;<a href="https://blockworks.co/news/about-our-sponsor-reserve">Reserve</a> A video explaining the Reserve Protocol



<h2>The protocol and services</h2>
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The <a href="https://reserve.org/">Reserve protocol</a> is a self-service, permissionless factory where anyone can build, deploy and govern their own asset-backed stablecoins (RTokens), which can be integrated within DeFi and real world commerce.



Their long-term goal is to create non-inflationary currencies that remains stable both month-to-month as well as century-to-century. In addition to their protocol, Reserve also launched a pay app called the <a href="https://reserve.org/en/app/about_app/">Reserve App</a>. It is a user-friendly way for ordinary people to buy RTokens with their local currencies and use them in locally. More than $300m a month is transacted on the platform, mainly real people and companies using Reserve to escape inflation.

About Our Sponsor: Reserve

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Kwenta: Perpetuals Powered by Synthetix

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<h2>Why Sponsor Permissionless 2023?</h2>
If you’re serious about crypto, you have to be at Permissionless. Permissionless brings together DeFi builders, DAO participants, protocol developers, crypto companies, funds and institutions, and more. It’s a true crypto-native’s paradise, where you’ll have the opportunity to showcase your offerings and form lasting connections with the community.
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