July, 2022 - Trusting Disruption by Deltec

Why We Need Fiat Backed Stablecoins

Posted on July 28, 2022July 28, 2022 by Jean Chalopin

Cryptocurrency carries this cryptic veil around it. Its coins allure investors new and veteran, far and wide, hoping to strike digital gold by gambling with its infamous volatility. Stablecoins, however, suffer from a keen lack of volatility.

Likely you know about Bitcoin, Ether, and the sporadic rollercoaster affecting their prices. Less likely you know about the intrinsic details and uses of fiat-backed stablecoins, and why regulators of the traditional banking world appear to like them.

This article walks you through stablecoins, from their basic mechanics to their incredible uses as digital coins pegged to respective fiat currencies.

What Are Stablecoins?

Stablecoin is an umbrella term referring to any cryptocurrency (crypto) whose value is pegged to the value of an external asset, often a fiat currency.

Popular crypto, such as Bitcoin, provide the essential benefit of removing all intermediaries in your daily use of cash. This opens up “banking” to any one person living on the globe. Yet a key weakness is the volatility inherent to most crypto coins as our world adjusts to this new asset class.

Enter stablecoins, whose aim is to remain, well, stable. How a stablecoin achieves this depends on the coin.

We have four common types: fiat-backed, commodity-backed, crypto-backed, and algorithmic. Each type maintains a reserve of an external asset “backing up” the stablecoin’s value. Algorithmic refers to an unbacked or partially-backed coin primarily using algorithms to manipulate supply and demand to maintain the often 1:1 peg against the external asset.

Understanding Fiat-Backed Stablecoins

The base mechanic of a fiat-backed stablecoin feels almost too simple. When a user wishes to exchange their tokens, they simply return them as they receive the fiat equivalent from the coin’s reserve. The exact dollar-to-coin count is maintained, and the peg, unaffected.

Yet fiat-backed stablecoins possess certain nuances which must be addressed.

First, any fiat-backed stablecoin derives its value from the value of its reserves. Whether these are in euros or in US dollars, both the regulators and investors must feel confident in the coin’s ability to maintain its (likely) 1:1 peg.

Second, fiat-backed stablecoins must remain free of theft- or hacking-related events, in addition to providing regular reserve audits. A recognized accounting firm needs to audit their reserves. Further, the coin operator itself would benefit from a complete audit.

For example, popular USD-pegged stablecoin Tether, with a current market capitalization of 66 billion USD, intends to undergo a full audit of its reserves. Amazingly, this transparent and forthright attitude seems to have caught regulators off guard, with Tether’s CTO Paolo Ardoino calling for immediate regulation.

Third, its transaction fees must stay minimal, with 24/7/365 capability. This feels obvious to many, but remains after all a prominent reason as to why Satoshi Nakamoto truly unleashed the cryptocurrency phenomenon in 2009.

Uses of Fiat-Backed Stablecoins

There are four common uses for incorporating stablecoins into your portfolio.

Saving

Volatility makes fortunes, but it also kills. Every investor’s goal is to use it intelligently and avoid destroying their savings.

When not investing in traditional equities, funds, or cryptocurrencies, stablecoins represent an ideal safe haven void of intermediaries and high fees. Utilizing a secure, offline, “cold” digital wallet helps here if you would like to keep the bulk of your savings in a digital, Swiss-like vault.

Transfering

Wire transfers continue to earn notoriety for their high transfer costs, often approaching 100 USD equivalent depending upon the bank, the country, and the destination. Further, the concept of waiting two or more days for receiving money already belonging to you, such as any receivable, seems inconceivable thanks to the advent of cryptocurrency.

Stablecoins and their creators remain aware that stablecoins represent the “cash” portion of any digital portfolio. Thus transferability continues to be a priority alongside liquidity. For both Tether and USD Coin stablecoins are going to have zero transaction costs in the near future–in addition to instant transferability.

Staking

Unique to cryptocurrencies, “staking” refers to the process of locking your stablecoins into a “deposit” onto the blockchain. Effectively, you’re leasing your stablecoins over to the host blockchain in order for said blockchain to operate.

This is how Proof-of-Stake competes against Bitcoin’s Proof-of-Work. With the former, those users, or “validators,” who have staked their coins with the blockchain earn rewards as the chain uses their coins to validate new transactions onto the block. Users are chosen at random, though with larger deposits favored over smaller ones.

Proof-of-Work operates as it sounds. Many “miners” compete to solve the hash puzzle necessary for adding the next block of transaction data to the blockchain. The work itself, replicated by many competing miners across the globe, proves the transaction’s authenticity.

Staking applies to stablecoins as certain blockchains prefer stablecoins, such as Tether or USD Coin, over more volatile counterparts (i.e., Bitcoin, Ether, Algorand). Alternatively, the recipient blockchain may use the staked stablecoin as a guarantee for another coin or more volatile asset.

Source: Whiteboard Crypto

Establishing Liquidity

A rapidly rising vanguard of stablecoins, liquidity pools represent a new area in which holders earn attractive yields well above traditional interest rates.

Bundles of stablecoins are pooled together from many different lenders, similar to staking, and facilitate various Decentralized Finance (DeFI) activities operating under software protocols called “smart contracts.” Think of these pools as smart programs using the digital currency lent to them in useful or novel ways.

For example, a liquidity pool could support the Ether-Tether currency trading pair. In exchange for lending your Tether coins to this pool, you might earn a yield up to 18% by taking a cut from the overall transfer fee revenue.

However, stablecoin holders take on the key risk of losing their principal (Tether) value. The asset pair in that pool must maintain a total constant value. Since Tether shall always equal one US dollar, you sacrifice value stability in exchange for a possibly incredible yield. In other words, if the value of the Ethereum coin falls, your Tether is sold off in a bid to increase Ether demand inside your specific liquidity pool.

The Bottom Line

Stablecoins tackle the two key issues affecting fiat currencies: fees and intermediaries. They offer zero or limited fees and the complete removal of all institutional intermediaries.

The core strength of blockchain technology is its public immutability. The global community contributes to the operation and honesty of blockchains, and thereby, stablecoins. They are community-managed, always-active mediums of exchange.

Yet the vast majority of global trade continues to use one fiat currency or another. One glaring reason for this: a lack of regulator guidance. For the time being, this also means a bind to fiat, but one without centralization, volatility, fees, delays, and wire transfer horror stories.

Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.

The co-author of this text, Conor Scott, CFA, has been active in the wealth management industry since 2012, continuously researching the latest developments affecting portfolio management and cryptocurrency. Mr. Scott is a Freelance Writer for Deltec International Group, www.deltecbank.com.

The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees. This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service, or offering. It is not a recommendation to trade.

TerraUSD and The Next Era of Stablecoins

Posted on July 23, 2022July 23, 2022 by Jean Chalopin

On May 9, 2022, the TerraUSD (UST) algorithmic stablecoin crashed, losing nearly all of its value. What does this mean for stablecoins?

Hardly the end. If anything, it reflects the continuously increasing interest in crypto that has been growing since 2009. In order for any asset to fall, it first has to rise.

While this seems incredibly obvious, the longer context helps investors understand the “sticky” trend that is crypto. Crypto is a new asset class that investors globally are considering as part of their investment portfolios as well as for payment means. Collateralized stablecoins are primarily used for transactional purposes and in lending products.

Bitcoin’s price movement since 2009 felt haphazard and lackadaisical until 2020. In other words, naysayers appeared smart until the price reached over 61,000 USD during the height of the post-covid recovery. We also say institutional investors entered into the space strongly. Yet the pursuant correction reintroduced general skittishness into the hearts of experts and novices alike.

Collateralized stablecoins exist to address that problem through more guaranteed stability than an algorithmic stablecoin like UST can. For transactional purposes, this means peer-to-peer payments can occur without third-party intermediaries. Unlike with payments using Bitcoin, a collateralized stablecoin does not face volatile swings and are seen more as digital fiat by many.

We believe regulators appreciate guarantees, particularly when they come with financial backing. And in the case of collateralized stablecoins, it’s a matter of “telling, not asking.”

Despite TerraUSD’s unfortunate crash, regulators in both the USA and the EU continue to work towards a framework that will support fiat-backed stablecoins. Why? What is fiat-backed?

This article delves into the actually-not-so-complicated world of stablecoins. More importantly, it shows their future virtually etched into the proverbial and historical stone.

Goodbye, TerraUSD

Maybe see you later. But likely, no.

TerraUSD represented a keen entrepreneurial vision and the hope to stay away from all things fiat. Much of the crypto community may have seen this as admirable, and something worth supporting.

After all, if you didn’t know what the word “inflation” meant before this year, you do now.

Inflation shows the paralyzing dark side of fiat (traditional) currencies–that central banks control their respective supplies and demands on (educated) whims.

Algorithmic stablecoins seek to do the same, using algorithms controlling supply and demand. Too expensive? Create some additional supply (“mint” coins). Too cheap? Retract some coins or give holders an incentive to convert other crypto into the cheaper stablecoins. Natural arbitrage helps as well.

However, there’s a glaring weakness. You can’t dictate demand–it’s not a dictator-coin.

For this reason, TerraUSD’s Luna Foundation Guard (LFG), or the body responsible for maintaining the stablecoin’s 1:1 peg to USD, lost the war. It held a chest once containing up to 70,736 bitcoins.

When Bitcoin’s price did what it does (fall), this collapse in reserve value translated into UST’s collapse as well.

While investors appreciate the idea of abandoning the “machine” of fiat currency, they evidently did not fully believe in UST’s capacity to stabilize its peg without recourse to another cryptocurrency–Bitcoin.

Thus, TerraUSD crashed back to Earth. Fiat-biased regulators noticed.

The Regulators’ Concerns

Even though they could have kicked stablecoins while they were down, we, surprisingly enough, observed the opposite response.

On June 30, 2022, the EU Council released a press release effectively approving the use of fiat-backed stablecoins.

Their point remains simple and honest: Crypto has experienced something of a “wild west,” which has no place in the future of finance. They give a slight dig by loosely tying this wild west to algorithmic or other coins having no relation to fiat whatsoever.

Yet they also rubber stamp fiat-backed stablecoins holding reserves at least approaching 100% of the value of stablecoins in circulation. If the point is to keep a 1:1 fiat peg in the quest of guaranteeing safety in a dog-eat-dog crypto world, then keep some fiat in reserves.

After TerraUSD, it’s clear: don’t gamble your reserve value. Even gold is down by more than five percent year-to-date, as of this writing.

Therefore, the European Banking Authority (EBA) will require stablecoin issuers “to build up a sufficiently liquid reserve, with a 1/1 ratio and partly in the form of deposits.”

Stablecoin issuers, crypto-assets, and crypto-asset service providers shall fall under a common regulatory framework for the first time. While this may spell doom for algorithmic stablecoins and possibly other altcoins (unbacked, alternative coins), it does bring stablecoins into the realm of permanency.

America’s Joining the Party

On the other side of the Atlantic, the United States also signaled its implicit approval of fiat-backed stablecoins.

Nellie Liang, undersecretary for domestic finance, remarked that a holistic approach to including stablecoin issuers into the greater banking fold remains vital. The focus seems squarely upon the quality and consistency of their reserves.

In the words of Ms. Liang, stablecoins have the “potential to really fundamentally reform payments.”

The Next Era

Stablecoins are here to stay. Stablecoins are here for tomorrow.

As a global society, we’re evidently not yet ready for abandoning fiat currency. The term value still implies some relation to either the euro, the swiss franc, the British pound, the US dollar, and so on. We’re not at a point of saying eight terras or three bitcoins.

However, stablecoins bring alongside them far smaller transaction fees as they eliminate the intermediaries known to bog down everyday wire transfers. Traditional banks, and their regulators, will have to adapt.

What Are Crypto Bridges?

Posted on July 7, 2022July 7, 2022 by Jean Chalopin

Crypto bridges are also referred to as blockchain bridges or cross-chain bridges. They connect two blockchains, enabling users to send cryptocurrency from one chain to the next.

If you have some Bitcoin and want to spend it like it was Ethereum, you can do so by utilizing a bridge. Since most blockchain assets are incompatible with one another, crypto bridges create synthetic derivatives representing assets from secondary chains.

We will discuss how bridges work, the two major types of bridges, and a few current bridge options for use. Let’s get right to it.

Crypto Bridges Explained

One of the most pressing issues facing the blockchain space is the inability of different blockchain networks to work together. Blockchain projects are generally fluid and efficient at what they do; however, each blockchain becomes limited by the walls that it has built around its domain.

The resulting problem is a lack of liquidity translating into higher transaction costs and limited systems. Ultimately, we have real-world-like congestion.

Crypto bridges solve this problem by allowing two blockchains to communicate with one another and alleviate congestion through teamwork. This communicate can be in the form of:

Token transfers
Smart contracts
Data exchange
Feedback and instructions

Different blockchains mint their respective native tokens, with each operating under a different set of rules.

The crypto bridge is a neutral arbiter between the two, allowing users to (in theory) seamlessly switch between them. By having access to multiple blockchains but only requiring the use of a single network, bridges allow for an enhanced crypto space experience.

The crypto bridge concept is like a Layer 2 solution, which is built on top of the Layer 1 base network but is designed to address the lack of network interoperability. It works independently from the Level 1 networks it bridges.

How Do Crypto Bridges Work?

While they can convert smart contracts and send various kinds of data, their most common function remains to transfer tokens between chains.

For example, there was no interoperable bridge between Bitcoin and Ethereum. These two massive crypto networks have different rules and protocols. However, through a crypto bridge, Bitcoin users can transfer their BTC coins to the Ethereum network and now receive added functionality that they would otherwise not have. These Bitcoin-Ethereum bridge users can purchase ETH tokens and make low fee payments.

A user who has Bitcoin and wants to transfer some of their holdings to Ethereum utilizes the crypto bridge, holding their Bitcoins and creating an equivalent amount of ETH for the user to conduct transactions. No crypto actually moves between the chains.

The amount of BTC that is being exchanged for ETH is locked in a smart contract allowing the user to gain access to an equal quantity of ETH on the other side of the bridge. This functions similarly to a traditional swap.

If they desire to convert their usable ETH back into BTC, then the ETH that remains available for use will be burned, and the equivalent amount of BTC will be returned to the user’s Bitcoin wallet.

If there was no bridge and a user wanted to do the same process, they would have to convert their Bitcoin to ETH on a trading platform, withdraw the purchased ETH to their wallet, and then make a second deposit into another exchange. However, this process is time-consuming, and the amount of fees needed to complete this process could remain significant.

Two Types of Blockchain Bridges

There is an implicit downside resulting from certain blockchain bridges, and this is centralization.

One attractive virtue that has brought so many to the blockchain space is its decentralized nature. No central entity makes decisions about a cryptocurrency the way central banks control a fiat currency.

However, with a crypto bridge, the user must release their control of the coins that they wish to use on the other side of the bridge, and this release is in the hands of the bridge owners. This process is like a wrapped token. wBTC is a quantity of Bitcoin that is “wrapped” in an ERC-20 contract. It has the same functionality as an Ethereum token.

These are called “Trust-Based Bridges” (custodial), and while they are centralized, they are economical and efficient options for transferring a large amount of crypto.

Yet the number of reliable bridges is limited. All wrapped bitcoin (wBTC) is held in the custody of BitGo. Users who choose less well-known trust-based bridges are increasing their risk, and therefore it’s an unattractive transfer method for smaller traders.

There are also “Trustless Bridges” (noncustodial), or decentralized crypto bridges, that are intended to make users feel safer when they are transferring their coins to other networks. A trustless bridges is a solution that operates like a decentralized blockchain network that validates the bridge’s transactions.

If a user is concerned about their coins being turned over to others, then the use of a trustless bridge provides more peace of mind. Bridged assets using “Wormhole” are held only by the protocol, making it more decentralized. Hardline decentralization advocates may argue that trust-based bridges like wBTC make them less secure than the decentralized alternatives.

Bridges open new markets and support a multichain future, but there are security challenges. February 2022 saw a $326 million exploit of the nascent Wormhole bridge, showing that decentralized bridge assets might not be safer.

Choosing a Crypto Bridge

Crypto bridges have become easier to use. DeFi protocols are integrating them into platforms to make token swapping much more manageable.

Porting assets to another blockchain provides several benefits. The new blockchain may be faster and cheaper than the native blockchain. Ethereum has high transaction fees, and while it is still a proof-of-work system, it’s also slow.

However, if users bridge to a Layer 2 network like Polygon or Arbitrum, they can trade ERC-20 tokens at a fraction of the cost and not sacrifice their Ethereum token exposure.

Investors could also use bridges to benefit from markets that only exist on other blockchains. For example, the DeFi protocol Orca is only available on Solana, but it supports wrapped ETH.

Major Crypto Bridges

The following list includes some prominent crypto bridges in operation that can be used to transfer your crypto assets and more.

Multichain (Formerly AnySwap)

This bridge system is famous for providing features beyond just transferring crypto. Once Multichain is connected to a wallet, the user can see all of their balances and the different types of coins. These balances can easily be transferred from one currency to another.

Multichain operates its own node network based on Secure Multi-Party Computation (SMPC). Multichain does have some limitations, and there are specific blockchains where transfers can only be made to particular destinations, but a double hop can be made if necessary to reach the desired network.

Binance Bridge 2.0

This is a decentralized bridge that offers a large selection of tradable cryptos. It supports several popular blockchainssuch as Ethereum, TRON, and Solana (35 in total). The bridge is easy to access for those trading on Binance (both the US and international versions) right from their app. The bridge wraps listed and unlisted tokens as “BTokens,” and these wrapped tokens can be used with the BNB Chain’s ecosystem for DeFi, decentralized games, the metaverse, and more.

Celer cBridge

cBridge is accessed from Binance and is a good alternative if you don’t want to use the Binance Bridge 2.0.

cBridge is like other trustless bridges. There are a variety of blockchains and other cryptos that it allows users to interact with. If you are not a Binance user, then you will have to connect a wallet to cBridge before you can conduct any transactions.

No matter which bridge you choose to use, you should check what are the limitations and fees before conducting any transactions. Smaller transfers vary a lot between the different bridges, so be aware beforehand and make sure you check the bridge’s reputation and update status.

Final Thoughts

The blockchain space has always been defined by its decentralization. This factor’s prominence supersedes the importance of making other operative improvements, including scalability and interoperability. A network’s developers are naturally resistant to making significant network changes, especially if it deviates from the philosophy of decentralization.

Outsiders creating blockchain bridges have realized this need and are have signaled that developers are seeing its importance. These crypto bridges and the interoperability they bring are moving the world toward a broader crypto economy. They should be embraced and become part of the layer one network’s protocol, ensuring the dedication they deserve.

The co-author of this text, Robin Trehan, has a bachelor’s degree in economics, a master’s in international business and finance, and an MBA in electronic business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltec.io.

What Are Stablecoins?

Posted on July 7, 2022July 7, 2022 by Jean Chalopin

Stablecoins function as cryptocurrencies whose respective values are pegged to an underlying currency, commodity, or another financial instrument. Most often, stablecoins exist to maintain a stable value over time and provide a solid alternative to those unwilling to risk the elevated volatility of major coins such as Bitcoin or Ethereum.

The two largest stablecoins by market capitalization, Tether (66 billion USD currently) and USD Coin (56 billion USD), came to massive popularity through their mandates of remaining pegged to the US dollar.

They succeed by capitalizing on three central pillars:

1. Operate as a medium of exchange, not speculation

2. Maintain a peg to an external asset throughout all market situations or cycles

3. Hold reserve assets or utilize a tested algorithm able to maintain supply

When one of these fails, the stablecoin fails. For example, Terra Luna famously crashed after holders lost confidence in the coin’s ability to maintain its peg.

Speculations abound concerning the reason. Was it from a seemingly arrogant refusal to use fiat reserves? Or was it all down to an organized attack against one of its co-founders? Either reason remains possible, and each highlights the risk inherent to a digital asset yet to be perfected.

This article dives into the nuances of stablecoins against more popular cryptocurrencies and the types of stablecoins. Let’s get to it.

Understanding Stablecoins

Like the name, these coins operate with the primary intention of remaining stable. Their value derives not from the speculation of unbacked cryptocurrencies inherent to Bitcoin or Ethereum but from the performance of the pegged asset.

Any stablecoin forms a digital representation of something else, most often a fiat currency, and amongst currencies, most often the US dollar. It’s the digital copy of a hard asset.

Let’s break down the three pillars discussed above.

Medium of Exchange, Not Speculation

Within crypto portfolios, stablecoins form the “cash” portion. Stablecoins are currency. They must remain exchangeable to fiat currency, for example, at any time—with this conversion effectively guaranteed through sufficient reserves.

Popular cryptos enjoy no such banking. Instead, they grow or decline in value according to the general market’s sentiment towards them, the soundness or popularity of their underlying “proof-of” consensus mechanisms, the competition, inflation, money supply, and so on.

Since popular cryptos typically do not represent equities or similar assets having balance sheets, income statement, or cash flow statements, investing here translates to speculating.

Constant Peg

A peg refers to maintaining a constant ratio relative to an external asset. The most common peg remains “1:1” (one-to-one) against the US dollar.

How a stablecoin maintains this peg is up to the crypto, though the final say goes to the relevant regulator. There are algorithmic or crypto-based methods for keeping this peg, yet nothing surpasses actual fiat reserves. For example, if a hypothetical coin has 1 million coins in circulation, then it should have 1 million US dollars with an approved custodian.

Reserves Matter

Stablecoins earn their appeal by targeting risk-conscious yet crypto-friendly investors. Risk must remain limited.

With the advent of upcoming regulation in the USA and the EU, regulators intend to pressure stablecoins to adopt either a 100% fiat currency reserve or close to it. Any fractional reserve banking here shall ultimately be elevated well above that for a traditional fiat currency; above 100% is also likely in this competitive and developing space.

Types of Stablecoins

While stablecoins do vary, there are four common types of underlying collateral structures: fiat-backed, crypto-backed, commodity-backed, and algorithmic.

Fiat-Backed (Off-Chain)

This is typically 1:1 against fiat currency, the most popular form, and the one likely to earn regulatory approval. Since the backing remains a non-crypto asset, it’s also referred to as an off-chain asset or coin.

Fiat collateral remains in reserve within a financial institution, giving this stablecoin a centralized proponent. For more casual investors, centralized vs. decentralized matters little. Yet stronger crypto enthusiasts may want to stick to the guide ethos of crypto that is decentralization.

Crypto-Backed (On-Chain)

These coins are backed by another cryptocurrency instead of fiat. Since everything stays within crypto, this type of stablecoin is referred to as on-chain.

However, the reserve cryptocurrency is likely prone to higher volatility. The target stablecoin is then over-collateralized. Instead of keeping 100% of its value in reserve, you’ll often find 150% to 200%.

For example, MakerDAO’s Dai stablecoin is pegged to the US dollar at a 1:1 ratio but 150% of the value of the Dai coins issued is retained by MakerDao through Ethereum. It’s best to think of it as a loan of Dai coins granted only after sufficient Ethereum is received.

Algorithmic

These coins may or may not utilize reserve assets. Instead, they rely upon supply and demand factors to control its price through contracting or expanding supply when needed. The algorithms behind their respective coins determine supplies and drive prices.

However, this approach remains by far the most risky. If the algorithm fails, then the coin becomes virtual trash overnight, like with Terra Luna.

Further, algorithmic coins may utilize a reward-based system paying returns when above their set pegs. What happens then, if a coin

Courtesy of DeFi, NFT & Web3 Insights by The Defiant

Commodity-Backed

Like with fiat, these coins use external assets to safeguard their values. You can have collateral such as gold, oil, real estate, or another underlier.

Naturally, the values of these coins fluctuate more widely than seen with fiat-backed counterparts. For this reason, the most popular commodity continues to be gold. Paxos Gold enables holders to exchange their coins for cash or physical gold with each coin representing one ounce.

Wrapping Up

Despite their emerging nature, stablecoins continue to showcase a bright future ahead. Newer crypto investors may see algorithmic coins as too speculative—and rightly so—but fiat-backed coins are earning their way into modern portfolios.

This year’s bear market provides an opportunity and the first real test for stablecoins worldwide. While Bitcoin falls by more than 50% year-to-date, Tether continues to uphold its peg and the case why it should be part of your portfolio.

EU Council Agrees to Regulate Crypto-Assets

Posted on July 5, 2022July 7, 2022 by Jean Chalopin

In the late hours of June 30^th, 2022, the EU Council issued a seemingly succinct and ordinary press release aside from sporadic bits of bold text. However, it marked the official start of a new financial era for crypto-assets worldwide, with Europe leading the charge.

What is “MiCA,” the Markets in Crypto-Assets proposal?

The proposal brings crypto-assets, its issuers, and its service providers into a common regulatory framework for the first time. The proposal treats crypto like fiat currency and weighs it against the fiat currencies of Europe. This includes popular cryptocurrencies and stablecoins.

It strives to “protect investors and preserve financial stability, while allowing innovating and fostering the attractiveness of the crypto-asset sector.”

In other words—it marks the location of the white start line before the marathon.

Prior to 2022’s bear market, the price of Ether on December 31, 2021, for example, was 3,683 USD, an extraordinary run from its launch at around 1 USD in September 2015. Similarly, the market capitalization of Tether—the unofficial premier stablecoin—stood at approximately 78 billion USD.

What does MiCA mean for the future? What kind of growth should we as investors expect?

MiCA, Unwrapped

We found six key points requiring further analysis and discussion.

Consumer Protection

“With the new rules, crypto-asset service providers will have to respect strong requirements to protect consumer wallets and become liable in case they lose investors’ crypto-assets.”

In crypto’s wild beginning, filled with hacking stories and hackers galore, no meaningful consumer protections existed. Hence, the hackers.

Now, crypto-asset service providers remain liable for lost crypto and failing to protect consumer wallets. Likely, most providers will take out insurance—as is done by many popular exchanges currently—protecting against theft, hacking, and similar calamities.

Carbon Footprint Tracking

“Actors in the crypto-assets markets will be required to declare information on their environmental and climate footprint.”

Within two years from the formal adoption of this proposal, the European Commission must provide a report detailing the environmental impact of crypto-assets and what minimum sustainability standards may be necessary.

Proof-of-stake (randomly selected “stakers” validate blockchain nodes) improves upon proof-of-work (all “miners” compete to validate first) by eliminating the energy consumption of the latter. However, it also eliminates some of the top-notch security inherent in hundreds of thousands of Bitcoin miners.

This clause introduces potential insecurity into the fate of proof mechanisms, which we’ll touch upon later in this article.

Anti-Money Laundering

“MiCA requires that the European Banking Authority (EBA) will be tasked with maintaining a public register of non-compliant crypto-asset service providers.”

Providers who maintain a parent company in countries listed on the EU list of nations considered at high risk for money laundering or on the EU list of non-cooperative jurisdictions for tax purposes must implement “enhanced checks” in line with the EU AML framework.

This carries the no-nonsense and no-tolerance approach to money laundering from fiat currencies to crypto counterparts.

Stablecoins in the Spotlight

“MiCA will protect consumers by requesting stablecoins issuers to build up a sufficiently liquid reserve, with a 1/1 ratio and partly in the form of deposits….every so-called ‘stablecoin’ holder will be offered a claim at any time and free of charge by the issuer.”

In addition, all stablecoins intending to operate within Europe and with European residents shall be supervised by the European Banking Authority (EBA), with a physical presence in the EU mandatory.

The bottom line: stablecoins wishing to operate in the EU must remain infallible and open themselves to liability should they fail their mandate of stability.

Immediate Regulation

“Under the provisional agreement reached today, crypto-asset service providers (CASPs) will need an authorisation in order to operate within the EU.”

Further, national authorities will be required to regularly transmit relevant data concerning the largest CASPs to the European Securities and Markets Authority.

This immediately acts upon nefarious or less-than-holy actors in the European crypto space. It supplies the groundwork for the great push forward supporting legitimate crypto-asset and stablecoin providers.

NFTs Saved for Later

“Within 18 months the European Commission will be tasked to prepare a comprehensive assessment and, if deemed necessary, a specific, proportionate and horizontal legislative proposal….”

Non-fungible tokens (NFTS) are digital assets representing real, non-fungible assets like art or collectibles. At this time, the EU Council is not treating NFTs like cryptocurrencies, defined as crypto-assets in this context.

Instead, we have the wait-and-see approach. Regulation down the road remains entirely possible.

The Deltec View

We saw five separate, clear themes behind the EU Council’s proposal driving the future growth of crypto-assets worldwide.

A Vote of Confidence

Despite 2022 marking a fantastic Bitcoin crash (Ethereum too), this proposal by the EU Council delivers an incredible vote of confidence for experienced, new, and prospective crypto-asset buyers. It paves the way for mass adoption and strives to give crypto a badge of legitimacy.

Bad Actors, Digital or Otherwise, Are Unwelcome

Hacking coupled with money laundering paired with market manipulation creates an unhappy love triangle. The EU Council treats the darker side plaguing crypto-assets seriously. We expect little mercy, swift action, and possibly the demise of altcoins that fail to meet their standards.

Yet each instance of justice also promotes greater crypto adoption. If the public bodies of the EU can demonstrate solid control over crypto-assets, then they have indirectly cemented them as part of the modern portfolio.

Proof-of-What?

While the original proof-of-work designed by Bitcoin’s Satoshi Nakamoto remains the most secure blockchain consensus mechanism, it comes with a hefty environmental price tag. Perhaps, this tag is too much.

With carbon footprint tracking and standardized reporting becoming necessary, could proof-of-stake supersede proof-of-work? Could another proof mechanism take over instead?

Consumers, Protected

The “Wild West” philosophy fails to apply in Europe, because, there is no American frontier in Europe. Geography aside, the EU wants to use a harsh, take-no-prisoners approach to criminal actors in the financial and digitally financial realms.

A major, if not primary, deterrent slowing the adoption of crypto-assets was the lack of any bank balance protection. The USA touts the Federal Deposit Insurance Corporation (FDIC), protecting up to $250,000, while the EU maintains deposit guarantee schemes (DGS), reimbursing up to €100,000.

In the current proposal, crypto-asset service providers become liable for damages as a way to recoup consumer losses. This also opens the road for later public protection of certain crypto-assets, such as Bitcoin or Ethereum, in the event of a service provider’s demise.

Keep Stablecoins Stable

Regulators seem to view stablecoins (i.e., Tether, USD Coin) more favorably than traditional cryptocurrencies owing to their limited volatility and ethos of remaining pegged to a fiat currency such as the US dollar.

However, the language inside this proposal quietly condemns the recent insecurity surrounding stablecoins. The recent demise of Terra Luna, possibly due to a personal attack on one of its co-founders, likely caught the attention of the EU Council.

Here, the same council provides a road to redemption. Stablecoins can exist in Europe, but only through vetted, deposit-backed methods proven to maintain liquidity and free currency exchange.

The Metaverse: Immersive or Intrusive?

Posted on July 1, 2022July 1, 2022 by Jean Chalopin

There are two emerging metaverses. The real metaverse based on Web3 technologies such as blockchains. Second, the dystopic metaverse being built by Big Tech, which extends everything going wrong with the original “Web.” The second is much more immersive but also more intrusive—lacking digital property rights.

The metaverses’ goal is to include as many people as possible through virtual worlds where gaming converges with VR and AR. The metaverse is a collection of ideas, hopes, and fears about the future. It’s a framework that makes sense, showing the direction we are hurling toward.

A single game or social media platform cannot be “The Metaverse.” It can only connect to something larger than itself that interacts with other verses, particularly on an economic level, making the immersiveness and ubiquity of technologies like AR and VR possible.

A permissionless system like the crypto world remains the secondary goal. However, the problem here is that, if confronted with a borderless and permissionless super economy, regulators would prefer to choose Big Tech, giving up autonomy and providing centralized control. They would also prefer to incorporate CDBCs (Central Bank Digital Currencies) over cryptocurrencies as the latter are, in some cases, impossible to regulate.

The great user experience and hardware that big tech supplies feel compelling to the typical user, but the “Open Metaverse” must improve on that, and quickly. We will describe the way to this autonomous future and the hurdles delaying the open metaverse.

Online Growth

When asked to explain the internet, most may do so from a personal perspective. However, any answer provided now remains different to what was given given in the 1990s, the decade marking its infancy.

The metaverse currently stands at the same precipice. Where is it going? How will it get there?

Web 2.0 development felt significant but ultimately siloed. As we move into Web 3.0, we enter a phase of open-source development long in the making. For example, between 2015 and 2021:

NFTs went from zero trading volume to $17 billion
Daily active users of Minecraft and Roblox grew from $20 million to $150 million
“Virtual skin” revenue grew from $5 billion to $54 billion

The Metaverse’s Potential

As the convergence of Web 3.0 happens, changes will come slowly but speed up exponentially. Since there are two competing metaverses, the pioneers and active participants on the permissioned (Big Tech) and un-permissioned (Web 3 blockchain) teams will conflict with one another as they beach build their vision.

Despite this, the web of our children and grandchildren will hold value, possibility, and wonder exceeding our current imagination. But will they be able to take control of their data without having to give up the internet’s benefits that make it the innovation that it is?

The Creation of Virtual Worlds

In an open metaverse, a virtual world is a simulated space with people, not corporations, forming its core of open-ended possibilities. This differs from a game that has set rules and goals.

Users retain independence and free will within the society being built around them. They explore and expand through participation in local societies and economies.

This convergence of time, value, and resources is what creates the communal utility. Whether digital or physical, any community can thrive given these building blocks.

Worlds Interlinking

Building a metaverse is a monumental task from both the resource and user engagement standpoints. There are a few well-capitalized metaverses attempting to build their respective “verse” from the ground up.

Decentraland, the Ethereum-based metaverse, started in 2015 and is the grandfather agnostic platform selling land for casinos, Japanese shopping centers, or the metaversal headquarters of Sotheby’s.

The Sandbox is the next ETH-based competitor holding relationships with Deadmau5 and the Walking Dead. But it is not at all dead with a Softbank-led series B funding round that raised $93 million, giving it a $2.5 billion valuation, with virtual real estate’s portion totaling $144 million (the highest in the space). The most of any metaverse.

Somnium Space is backed by the Facebook-famous Winklevoss Twins and is positioned as the high-end metaverse optimized for VR.

CryptoVoxels is popular for digital art and has islands of communities. It’s accessible from a smartphone with no VR headset necessary.

Bit.country does not have land scarcity, but an infinite number of interoperable worlds. It’s the closest thing to an accurate representation of an open metaverse.

Like in the real world, culture is the fabric that ties a digital society together. It is a shell until populated.

Each “verse” will have its own culture and customs. Decentraland had a first-of-a-kind four-day Metaverse Festival. Somnium Space has its Sky City Concert Hall.

These worlds will need to connect to be a true metaverse. Auki Labs has invented a way to effortlessly share AR (augmented reality) experiences across devices and applications, making it a true social experience.

Virtual World Colonization

Web 3.0 has digital rights and ownership tags, borders and virtual land plots. And there are already a wide spectrum of uses for digital lands.

Or these lands can be rented for simpler, more commercial reasons, such as creating passive revenue (i.e., ATM feesand advertising). Alternatively, the land can be sold through an NFT. The Sandbox has 12,000 landowners.

The next step requires the development of virtual structures and governments. Will there be zoning? Will there be jurisdictional differences and disputes? Will there be planning?

Separate verses within a metaverse necessitate some foresight to ensure harmony and to create bridges between diverse communities.

This is done with open standards, cross-chain NFTs, and populating more than one world with a single personalized avatar. These are the required developmental steps vital for giving the metaverse expansive depth.

Finance in an Open Metaverse

Our hope is that DeFi will be driven by the application layer of the metaverse. The current MetFi is like the metaverse; a layer above the real world, yet it’s always the base, application layer that matters most.

This layer enables the financial inclusion of creators, gamers, and other digital natives with their wealth not in traditional finance. MetFi is all-encompassing, with services, products, and protocols connecting non-fungible and fungible tokens within a wider ecosystem. With this layer and its tools, pioneers can create a parallel economy for users of the various metaverses.

Identity Through Avatars

As the metaverse grows, so too does its need for identity solutions. This will likely happen through avatars and wearables becoming more fluid and context specific.

Identity is what makes us unique. How we are identified shall be unique as well. Then, our avatar’s ownership must be indisputable.

In the real world, you create several personalities, reacting to different individuals, that are potentially pseudo-anonymous. It’s possible to do the same in the metaverse, but this brings an ethical question: Should anonymity remain permitted?

FilterYa brings the digital and real worlds together by providing a digital identity and replicating your actual self in the digital beyond. Similarly, CryptoAvatars creates NFT Avatars through a Virtual Reality Modeling (VRM) format that can be used in Twitch, Meet, and Zoom33, among others.

Summary

As we move into the metaverse, we contend with several questions at once. Do we want to turn over our rights and control to Big Tech, or do we want the metaverse to remain open? For the user who wishes to be free, the open pathway makes more sense. With the Web 3.0 pathway, your data is yours, not the property of a corporation.

Financial services may similarly come from centralized authorities, or they may come from a new system utilizing cryptocurrencies. NFTs may form a key pillar of this new system by allowing for fractionalization and democratizing access to capital.

Finally, the idea of the self will be tested. How identity is thought of will be in question. Will a digital identity be one and the same as a real-world identity? Will anonymity bear with it moral consequences?

All futures are possible with the metaverse. It’s important that we retain the right to choose the future best for us.

The Multi Asset Bitcoin Protocol, Taro

Posted on July 1, 2022July 7, 2022 by Jean Chalopin

When Bitcoin (BTC) was created, the anonymous inventor Satoshi Nakamoto had a vision of displacing the current monetary structure. That vision now leads us to “Taro.”

Bitcoin was a novel idea. The blockchain provides a way to transfer value securely and transparently between users using a distributed public ledger. Value remains in the form of BTC. Early investors who saw the potential have done incredibly well.

However, Bitcoin lacked the ability to transfer anything besides itself (digital currency). Since Bitcoin’s introduction, other projects, most notably Ethereum, have built additional functionality into their network’s “Layer One,” or its base network. In other words, a crypto’s underlying and primary infrastructure.

This functionality includes smart contracts, which allow for the transfer of more than just the native token of the network. Further, Bitcoin suffers from a bottleneck limiting the number of possible transactions per second.

To address Bitcoin’s transactions per second deficiency, the Layer Two Lightning Network was created. Lightning works together with Bitcoin’s Layer One by removing transactions from the bottleneck’s queue. It bundles a set of transactions into a single transaction, and then sends this bundle onto Bitcoin’s network.

Security and transparency remain while transaction throughput increases alongside a decreasing cost per transaction.

In addition, Bitcoin recently upgraded its Layer One through Taproot. This upgrade adds further security and speed through an enhanced coding language used in writing Bitcoin’s transaction parameters. Combining Lightning with Taproot yields a new protocol available to Bitcoin called Taro.

The Introduction of Taro

In April 2022, a new Bitcoin network protocol was announced by Lightning Labs that intends to compete with the multi-asset capabilities of Ethereum and similar blockchains. This Taproot-powered protocol can issue assets on Bitcoin’s blockchain, which then benefit from Lightning’s bundling service.

This protocol represents a significant shift for the Bitcoin network. Taro allows the network to not just transfer BTC but makes it capable of processing multiple asset types through Lightning. Any currency applies here.

Taro accomplishes this by utilizing the stability and security of the Bitcoin network and its Taproot upgrade, while incorporating the speed, efficiency, and scale possible with the Lightning Network.

How Lightning Will Expand

Taro allows Bitcoin to become a value protocol, enabling app developers to integrate their assets beside BTC in Dapps that remain on-chain and facilitated with the Lightning Network.

Taro expands the Lightning Network’s reach, enabling more users to utilize the network while driving more volume and liquidity for Bitcoin. Taro allows people to easily transfer fiat currencies for bitcoin using apps. Enhanced volume provides the necessary economies of scale while giving node operators more in routing fees.

Dollar “Bitcoinization”

Lightning Labs considers Taro a step towards what it refers to as the “Bitcoinization” of the dollar. It allows for the issuing of stablecoins using the secure and decentralized blockchain Bitcoin. And it allows users to avail themselves of Lightning’s fast and low-fee global payments network.

Taro’s Specifics

Taproot remains the heart of Taro. This upgrade creates a new tree-style structure enabling developers to embed into transactions arbitrary asset metadata. Taproot and Taro use what are called Schnorr signatures to improve Bitcoin’s scalability. Schnorr signatures work with multi-hop transactions on the Lightning network.

With their launch of Taro, Lightning Labs also released a set of Bitcoin Improvement Proposals (BIPs) that they hope to later adopt, and which would further enhance the capability of the network.

Still, Lightning Needs More

2021 was a big year for the Lightning Network. It saw significant growth. Users from Latin America and West Africa came on board quickly and en masse.

Developing nations benefit significantly from the Lightning Network’s peer-to-peer transactions featuring low fees and instantaneous settlements by removing financial intermediaries.

There are several emerging market startups and users who want to add stablecoin assets to the Lightning Network. For example, we have “Bitcoin Beach” from El Salvador. This desire is the reason for Taro.

Taro enables wallet developers to give access to users with a USD-dominated balance, a BTC-dominated balance, or any other asset in the same wallet. They can send any currency across the Lightning Network.

The more users that are brought onto the network and transfer fiat currency, the easier it will be for them to also obtain Bitcoin. This is how Lightning Labs believes Taro can bring Bitcoin to billions of users.

How Does a Taro Over-Lightning Transfer Work?

Let’s assume Amanda and Brad have a Lightning-USD channel with $100 of capacity (both have a balanced $50 worth of inbound liquidity). Connie and Dan have a similar L-USD channel with $50 each in inbound liquidity available.

If Brad only has a channel with Connie, Amanda can still send $20 of Lightning-USD to Brad, who will charge a small routing fee in BTC, and then sends the $20 worth of BTC to Connie, who then forwards the L-USD to Dan and also charges a small routing fee.

Taro can interoperate with the BTC-only Lightning Network without changing anything. It only requires the first and last hops to have sufficient Lightning-USD liquidity.

This functionality avoids creating a bootstrapped, new network to transfer new assets. It ensures that Bitcoin remains the foundational medium for all currency transactions conducted on the network. This structure also incentivizes growth promoting Lightning Network’s BTC liquidity, allowing it to serve multiple asset transactions.

What is the Origin of Taro?

Taro relies on the new scripting behavior of Taproot, which was added to the Bitcoin Network as a soft fork in November 2021. Taproot allows developers to embed additional arbitrary asset metadata.

Graphic courtesy of Lightning Engineering

This means that more data can be sent with a single transaction.

There is no additional burden on the full nodes
No burning of Bitcoin is needed via the OP_Return opcode
Taro assets inherit all of the same double-spend protections of normal Bitcoin transfers
Additional functionality of transferability over the Lightning Network is also given

The Lightning Network was created as a payment channel network and therefore has faster settlements and lower transaction fees than other blockchains. It retains these properties even as the network grows. When Stablecoins are brought to the Bitcoin network via Lightning, we receive:

Users who want to access financial services
App developers who desire new tools in their arsenal
Node operators who can earn more in fees
Issuers who want to provide a better experience to their users

The Major Benefits of Taro’s Taproot-Native Design

The full list of benefits can be found in the Taro protocol BIPs. The major benefits of this modern Taproot-native design are as follows:

Scalability

An essentially unlimited amount of Taro assets can now be contained within a single Taproot output.

Programmability

Developers are able to program transfer conditions into Taro assets with an unlocking script. This script is like normal unspent transaction outputs (UTXO) of Bitcoin.

Usability

Wallets are smart enough to prevent their users from sending the wrong asset by mistake through asset-specific addresses.

Auditability

Taro’s tree structure allows for efficient supply audits to be conducted within a wallet (locally) as well as within the chain of an issued asset (globally).

Taro’s Pathway Forward

While the announcement of Taro is exciting, much needs to be done. The initial step of launching Taro came with it a series of BIPs, as discussed above.

The next goal is to receive feedback from Bitcoin’s community and the users of its Lightning Network. From there, Lightning Labs must build the necessary tooling that will enable developers to issue and transfer desired assets on the chain. The final required step is to build functionality into Lightning that will enable developers to open Taro asset channels, which can then be used with the Lightning Network.

Presently, Lightning Labs is working on all these goals in tandem.

Taro Is Exciting

The companies building tools on the Lightning Network will be able to integrate the Taro protocol using app integration or through similar methods. Taro can also issue assets on Lightning, which lets users globally harness the decentralization and security Bitcoin provides while working with other currencies or coins.

The protocol is focused on enabling fiat-stablecoin transfers using the Lightning Network, but Taro, as is proposed, is a more general asset issuance and transfer protocol.

Summary

The Taro Proposal is revolutionary for Bitcoin. It adds the functionality that other chains have but to a network with the widest use.

Further, the Lightning Network and Taro interact seamlessly. This is because Taro has accounted for possible pushback from the major parties involved. If the Lightning Network can fulfill its goals for the Taro protocol, we will very likely see new assets transferred on the Bitcoin Network soon.