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Welcome to Crypto Long & Short! This week, Benjamin Dean, director of digital assets at WisdomTree, explains why the big benefits of blockchain infrastructure go beyond the prices of Bitcoin and Ether. Then, Malte Klieman, Senior Blockchain Engineer at Forecasting Technologies, discusses better ways to do on-chain governance using "Futarchy." As always, get the latest crypto news and data from CoinDeskMarkets.com. – Benjamin Schiller, head of opinion and features at CoinDesk |
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The Benefits of Assets Tokenization |
At a time when the prices of many cryptocurrencies are rallying strongly, one big, recent development is underappreciated. Tokenization of "real world assets" has also been surging. To understand what this development means and the potential benefits of tokenizing these assets, we need to reframe how we view the digital assets ecosystem. We frequently here questions like: 'What is the price of ether?', 'how correlated are digital assets with other asset classes?', 'what allocation should I make to this asset class in a diversified portfolio?'. While questions like these are interesting, they all pertain to digital assets as an asset class in and of itself. Another way to view the space is to see the various networks (e.g. the Bitcoin, Ethereum or Solana networks) as digital infrastructure. Similar to how TCP/IP or POP3/SMTP are protocols for building and commercializing services, digital asset networks are the foundation layers on which financial services (and other services) can be deployed and made available. Asset tokenization is one such example. To quickly define this term, asset tokenization means using distributed networks and the databases that form a component of these networks to register interactions between parties. The most tangible example seen in recent years is the emergence of stablecoins, mostly tokenized U.S. dollars. There are many ways to structure these stablecoins. One popular model is to accept U.S. dollar deposits, typically invested in U.S. Treasuries, and then issue U.S. dollar tokens against those holdings (e.g. USDC, USDT). The outstanding supply of these tokens currently stands at approximately US$150 billion – up from almost nothing five years ago. |
Source: https://www.theblock.co/data/stablecoins/usd-pegged/total-stablecoin-supply This product-market fit has now been established, and now the question is: If one can issue U.S. dollar tokens, why couldn't one issue other currencies or assets on-chain? This is the core of what the tokenization trend seeks to provide. Another example is U.S. Treasuries. There is currently around $750 million in tokenized U.S. Treasuries, up from a base of almost nothing just two years ago. These tokenized T-bills have one advantage over traditional stablecoins: they generate and deliver a yield. More generally, tokenized assets provide the potential for 24/7 exchange, faster settlement time (T+0) and greater accessibility as they could be used by anyone with a cell phone (for example). These examples and others, including tokenized gold, demonstrate how digital asset networks are used as the underlying digital infrastructure for distributing financial services. When viewed through this lens, we can consider what other value-add services could be delivered via digital asset infrastructure, instead of measuring the successes of these networks by the price of their native cryptocurrency.'An ideal outcome from the use of this technology would be for a faster, cheaper, more transparent and accessible financial system for all.' |
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How to Design Better On-Chain Governance |
The topic of on-chain governance has always been contentious. While off-chain governance is generally perceived as clunky, on-chain governance has allowed developers to build increasingly complex protocols allowing users to sway a network's direction. But these are all essentially games which, if misconfigured or providing the wrong incentives, can steer the chain towards disaster. In "What is Futarchy? — Trading the Future," Freiderike Ernst, the cofounder of Gnosis, highlights the standard methodologies of on-chain voting. As the "one vote per person" paradigm is vulnerable to Sybil attacks on permissionless networks (one person can split their capital over multiple accounts and cast multiple votes), a user's voting power is usually weighted by the token amount they hold. Lotteries and token curated registries use the same method to avoid Sybils. Robin Hanson proposes a new governance model called futarchy, in which decisions are made based not on votes, but the results of prediction markets on the organization's welfare measure, which is an indicator of the network's growth or demise. Participants of the market will bet on the future value of the welfare measure. Betting is usually implemented using outcome tokens, each of which represents one particular outcome of the market and whose monetary value is determined by the eventual welfare measure. Good predictions are rewarded and bad predictions result in losses. Using outcome tokens, participants can even bet on the value of the welfare measure contingent on the implementation of the policy. For example, a participant can make a bet that pays a profit if the policy is implemented and the welfare measure increases by a certain amount, but is voided if the policy is not implemented. For a publicly-traded company which chooses the stock price as their welfare measure and is considering firing their CEO, the upshot is that the organization obtains two predictions, the future stock price if the CEO is let go and the future stock price if the CEO is retained. As you can see from the chart below: |
With futarchy, the decision that results in the highest possible welfare measure is implemented. As the final stock price prediction contingent on the CEO getting the ax is higher than the prediction contingent on the CEO being retained, the CEO is removed from the company. This takes all the emotion out of the decision process and allows the organization to make rational decisions based on what's commonly referred to as the "wisdom of the crowd" to improve their values.' Market Makers for Prediction Markets Implementing a market-maker to facilitate trades between participants poses some challenges. If we want to use futarchy to evaluate more complex contingencies, markets quickly rise to tens of hundreds of tokens. Here, the "thin market problem" rears its head: There are not enough participants to properly correct the probabilities of this many outcomes. The natural solution is an automated market maker (AMM). A straightforward solution is the cost function implementation of the logarithmic market scoring rule. Unfortunately, this implementation does not allow ad-hoc changes of the liquidity, usually resulting in a market that is either too shallow to accommodate all participants or too deep to actually produce meaningful results. The liquidity-sensitive logarithmic market scoring rule (LS-LMSR) mitigates this problem, but the solution introduces new defects, the most severe of which is an arbitrage vulnerability which occurs in all scoring rule market makers except LMSR.
The crypto mainstay constant function market makers (CFMM) such as Balancer handle the liquidity aspect better by allowing LPs to dynamically deposit and withdraw liquidity, and are more familiar to crypto natives, but suffer from the same issue as LS-LMSR. However, it turns out that during their prediction market days, Gnosis appears to have found a CFMM implementation of the LMSR which combines the best of both worlds.
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- Malte Kliemann, Senior Blockchain Engineer, Forecasting Technologies |
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From CoinDesk Deputy Editor-in-Chief Nick Baker, here is some news worth reading: |
- BLACKROCK: BlackRock, that titan of conventional finance, has driven the crypto narrative in a big way since mid-2023. That's when it emerged that BlackRock planned to seek approval for a bitcoin ETF in the U.S. Bitcoin (BTC) traded below $30,000 at the time, but just surpassed $73,000 as it rode a wave of excitement over the bitcoin ETFs from BlackRock and others that U.S. regulators let begin trading this year. BlackRock's application, it turns out, was a spark that ignited a gigantic rally. Comments last week from its head of digital assets suggest you shouldn't hold your breath expecting BlackRock to transform the rest of the crypto industry anytime soon. Robert Mitchnick said BlackRock customers are, in terms of cryptocurrencies, overwhelmingly focused on bitcoin, and "a little bit Ethereum." For every other crypto asset, demand is "very, very little," he said, according to CoinDesk's Helene Braun. He sought to counter a misconception in the crypto business that BlackRock wants to enter a range of crypto services. "That's really not what we're focused on."
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Tokenization for the real world