cryptocurrency
Flash Loans: The Seemingly Risk Free, Instantly Repaid Lending Trend Taking Over DeFi
January 27, 2022
It’s a loan that can never be defaulted on, is paid back in seconds, and brings massive return potential. There are no qualification minimums for the borrower, no collateral needed, and minimal risk for the lender. That’s because the loan is funded and repaid in the same transaction.
This type of lending is highly prevalent in the NFT market, where JPEGS are being bought and sold for hundreds of thousands, sometimes millions of dollars, according to a source close to deBanked.
The source, who recently made the switch from nearly a decade in traditional finance to being a major proponent in the web3 online community, said that this type of funding is particularly dominant with the purchasing of CryptoPunks— a collection of ten-thousand NFTs that can cost upwards of $10 million each.
A flash loan is atomic, meaning that it is indivisible. In computer science, things are atomic when they must be executed in full in-order for a particular thing to take place.
Due to the way smart contracts on the blockchain work, if the contract is broken, it’s nulled. With flash loans being written on smart contracts, the funds are immediately sent back to the lender if anything out of the ordinary occurs in the funding process. Thus, the loan can never be defaulted on.
A hypothetical real-world example of this could be an auto dealer flipping vehicles. If a dealership borrows money to purchase two-million dollars of inventory that they already have buyers for, they could work it into the contract with the lender that the only way the funds would be released is if every car in that inventory is sold for a predetermined amount. If the lender, dealer, and buyers all hold up their end of the deal, the funding can instantly take place and then be repaid.
In what some have called ‘lending on steroids’, the movement of money in flash loans is tremendous. According to Aave, an open source and non-custodial liquidity protocol, flash loans as high as $200,000,000 have been reported as funded and repaid.
It’s seemingly a lender’s dream, a set-it and forget-it smart contract that does all the work without risk. But the purpose of the loan may not be known. For example, a flash loan for $532 million last October had the appearance of being used to finance the most expensive NFT purchase in history. The problem? Both the borrower and the lender were the same person.
Which all begs the question, why is a loan necessary in the first place if the borrower can repay it in the same transaction? Perhaps because it eliminates counter-party risk in a type of transaction considered among the most risky, crypto. The cost of a flash loan, borrowing funds for mere seconds, is probably more attractive than a flash loss, in which the other side doesn’t live up to the terms of the deal and in a flash… is gone.
El Salvador Partners with DeFi Lending Platform for Bitcoin-Backed SMB Loans
January 21, 2022
El Salvador continues to be an unprecedented experiment of mainstream crypto use. The small Latin American country that shifted its national currency to Bitcoin alongside the US dollar in June is now partnering with Acumen, a DeFi lending platform, to power Bitcoin-backed loans.
“Basically what we are doing is an alliance with the government,” said Andrea Maria Gomez, a Project Manager for Acumen. “[The government] is not backing anything. They are just giving us the channels for which we will reach the small and medium enterprises.”
CONAMYPE, an acronym in Spanish that represents the national commission for medium and small enterprises, already offers business financing. Rates for this are generally high, and just like in the US, the qualifications to get financing are extensive. With Bitcoin-backed loans, it seems that the funding process will be the thing that affects El Salvadoran merchants the most.
“We work through a stable doc so investors put their crypto in there, we convert it into a stable coin, and what we eventually loan out to the end user is dollars,” said Gomez. “So we don’t give Bitcoin or Solana or anything like that, we give them dollars.”
“For [merchants], it’s easier,” Gomez continued. “You are not depending on the volatility of a coin, you just have dollars.”
Just like in the US, funders borrow money at high rates from banks, resulting in the cost of financing being pushed down to the final borrower. In a government that has Bitcoin as an official currency, Acumen can lend Bitcoin backed dollars at a lower rate than what’s already being offered in the marketplace.
“What we are doing, this is like an initial run, is we are going to contribute one fund to CONAMYPE for them to be able to [lend] at a lower rate,” said Gomez. “We can provide at a lower rate because in crypto, the capital is loaned at a lower rate.”
When asked about the lack of digitally-native people in El Salvador, Gomez stressed that the application process doesn’t require a crypto-enthused business owner. “Business owners don’t need to understand the tech or go to a wallet to ask for the loan. It’s a regular loan to them. The difference is, the source of the funds is coming from this protocol.”
The El Salvadoran government is confident that these loans will open up access to capital to small businesses who would have no alternative source for funding. Mónica Taher, Technological & Economic International Affairs Director at Government of El Salvador, shared her thoughts with deBanked about the vision for this plan down the line.
“The Bitcoin small loans for Salvadoran businesses will re-energize the economy by allowing the unbanked to have the opportunity to have access to digital money and create a credit history,” said Taher.
This Just In: Crypto Transactions Aren’t Tax Free
January 20, 2022
Patrick White, CEO, Bitwave“I don’t always believe people that say they are surprised about having to pay taxes on crypto. There’s a field on your tax form to say where you’ve made money doing illegal things. If you sell drugs, there’s a place to report how much money you’ve spent selling drugs. The IRS doesn’t care. Everything is taxed in this country.”
There is no such thing as too many crypto transactions when it comes to accounting purposes according to Patrick White, CEO of Bitwave. Bitwave operates the software that does the accounting for major blockchain companies and retailers who have taken crypto as payment.
White says that the high volume of crypto transactions aren’t coming from individuals sending digital assets back and forth, but rather from the companies that host the infrastructure of these transactions.
“It’s not just trading, trading is fun and we all love the rat race that is trading, but where it’s a lot more interesting is how some of our customers who are in the NFT space are seeing millions of revenue transactions a month.”
These sites like OpenSea, a client of Bitwave, are seeing sky high amounts of these types of transactions. When asked about the cost of accounting for an individual doing ten-thousand trades a month, White laughed.
“Ten-thousand trades a month is nothing,” he said.
White spoke of an instance which is seemingly a common occurrence in the crypto world. “We had a customer who when we were running their [transactions], I couldn’t figure out [an issue] with one of their months. I went to go look at the data, and they had turned on a Binance bot and without even realizing it, they didn’t know this, they accidentally had 200,000 trades in a month. The volume is incredible.”
When asked about how digital assets have impacted the accounting world, White stressed that the amount of transactions have resulted in companies appearing larger than they are from a transactional-perspective. According to him, some of his clients are doing as many transactions as some of the largest companies in the world.
“[One client] is a one-year old company that is doing the volume of a sixty year-old retail business, it’s unheard of.”
When asked further about the difference of cost in accounting digital assets versus dollars, White explained that it isn’t much different than how larger companies have maintained their books for some time.
“No matter what, if you are a high frequency trader and you’re making hundreds of millions of trades a year, you will need software to deal with that,” said White. “I wouldn’t say that [the amount of transactions] are increasing costs across the board, it is a cost that you would already be expected to [have].”
When asked about the apparent vacuum of crypto-native accountants, White seemed to cast blame on the approach of the information. When hiring, he says he finds more value in people with engineering experience over accounting experience, and blockchain experience over anything else.
“[Other accountants] are trying to apply finance 1.0 things to this crypto world,” said White. “We look for good engineers. A good engineer can figure anything out, a bad engineer with accounting experience can’t. We’re looking for blockchain experience, as blockchain [technology] is more difficult than accounting in many ways.”
While most businesses will file extensions this time around and finish their taxes in October, White believes that blockchain accounting will become more widespread as new firms leverage the infancy of the space and settle into their niches.
“Cottage industries will come up in order to enable the IRS,” said White. “I don’t expect the IRS to build this technology or this understanding in-house. There will be people and businesses that will do it for them.”
With the IRS’ decisions about taxing crypto having the potential to change at any notice, White stressed the necessity for malleability when developing this kind of accounting technology in such an unpredictable space.
“We’ve designed Bitwave from the very beginning to be able to rapidly adjust to the new laws that are coming out,” he said. “Even back then, it was very obvious that we couldn’t build this tech in such a way that it is inflexible.”
Dorsey Focuses Tweets on Bitcoin and Anti-Web3 Since Leaving Twitter
January 18, 2022
Jack Dorsey’s departure from Twitter didn’t leave him without a job. He’s still the CEO of Square (now Block), a payments company that is one of the largest small business lenders in the country. Still, all that extra time on his hands must mean he has plans in the works, especially since he believes hyperinflation is right around the corner.
If his tweets are any indication, Dorsey is focused mainly on Bitcoin as both an answer to inflation and as a counter to the burgeoning “web3” concept attributed mainly to projects on the ethereum blockchain.
“You don’t own ‘web3.’ The VCs and their LPs do,” Dorsey tweeted on December 20. “It will never escape their incentives. It’s ultimately a centralized entity with a different label. Know what you’re getting into…”
“The VCs are the problem, not the people,” he later added.
His comments rubbed some in Silicon Valley the wrong way.
I’m officially banned from web3 pic.twitter.com/RrEIAuqE6f
— jack⚡️ (@jack) December 22, 2021
Since being “banned by web3,” Dorsey announced that Block is building an Open Bitcoin Mining System to help make mining more distributed and efficient. A tweet thread he shared by Block Hardware Manager Thomas Templeton explained exactly what that means:
“We want to make mining more distributed and efficient in every way, from buying, to set up, to maintenance, to mining. We’re interested because mining goes far beyond creating new bitcoin. We see it as a long-term need for a future that is fully decentralized and permissionless.
We started by digging into two big questions. 1) What are customer pain points today? 2) What are the specific technical challenges? We spoke with members of the mining community to learn more about their experiences. Here’s what we’ve found so far:
1/ Availability. For most people, mining rigs are hard to find. Once you’ve managed to track them down, they’re expensive and delivery can be unpredictable. How can we make it so that anyone, anywhere, can easily purchase a mining rig?
2/ Reliability. Common issues we’ve heard with current systems are around heat dissipation and dust. They also become non-functional almost every day, which requires a time-consuming reboot. We want to build something that just works. What can we simplify to make this a reality?
3/ Performance. Some mining rigs generate unwanted harmonics in the power grid. They’re also very noisy, which makes them too loud for home use. Unsurprisingly, all miners want lower power consumption and higher hashrates. What’s the right balance of performance vs other factors?
Developing products is never a solo journey, and evaluating existing tech is always part of our practice. For this project, we started with evaluating various IP blocks (since we’re open to making a new ASIC), open-source miner firmware, and other system software offerings.
We are interested in performance *and* open-source *and* our own elegant system integration ideas. Which tech and which partners should be on our list to consider? We’ve learned so much just from these preliminary conversations and we want to keep this going.
Team. We’re incubating this investigation within Block’s hardware team and are starting to build out a core engineering team of system, asic, and software designers led by @afshinrezayee. A few of the open roles are Electrical Engineers, Analog Designers, and Layout Engineers.
Thanks for engaging with our work. If you have questions, want to share more feedback about the pain points or missing features of the existing mining solutions, or know someone we should be talking to about our open roles, you can reach us at miningsystem (at) block (dot) xyz”
As for inflation, well Dorsey’s not so shocked that the number continues to tick upwards.
damn Santa didn't take the transitory inflation away https://t.co/P1CFEIQyNV
— jack⚡️ (@jack) January 12, 2022
HODL! How Crypto Can Make IRAs Attractive to Young People
January 14, 2022
“I’ll be honest, I don’t know if I have had a client under the age of 25.”
Tom Tantillo, an IRA Specialist with NuView Trust, thinks that cryptocurrencies can be the way to finally get younger people excited about investing for retirement. As the emergence of web3 has opened up the door to parts of the financial world for many who would otherwise had never have taken part, Tantillo believes that the same can now be mimicked in IRAs.
“Everyone loves paying less taxes, and everyone loves giving less money to Uncle Sam,” said Tantillo. “[However] the main thing is getting young people excited to save for retirement, because it’s not sexy.”
According to Tantillo, a self-directed IRA with digital assets creates a perfect balance of risk and reward for a digitally native investor. Much like mutual funds or traditional stocks, crypto packaged alongside other conservative investments can create big returns in portfolios.
“If you put 2-3 percent of your portfolio into crypto, just the top ten ones off market cap, not going crazy or anything, you can boost your portfolio returns past the S&P 500 average and up to 16 percent.”
After NuView’s investor’s retreat last week, Tantillo claims that after inquiring about feedback from clients, the highest rated panel at their event was the three hour panel dedicated to digital assets. “Clients were like, ‘this cryptocurrency stuff, I don’t know much about it, but I’m interested and I want to get started.’”
Not only do digital assets provide a trendy appeal to retirement investing, they also provide the technology element that younger people see as a sense of legitimacy in a financial product. Tantillo believes that although the potential for digital assets is astronomical in terms of changing the investment mindset of younger people, he also is aware that the current system and demographics in retirement savings are holding the innovation back to a certain extent.
“The whole reason why I educate myself on this is so I can stay ahead,” he said. “That’s what I encourage everyone to do. I don’t want to be that old parent asking their son or daughter how to use tech, I don’t want to fall behind.”
With the maximum contribution in most IRAs being no more than $6,000, Tantillo argues that it’s almost a no-brainer for a financially intelligent crypto enthusiast to bank on digital assets for retirement. “You can do quite a lot of damage with $6,000,” he said. “If you put $6,000 of Bitcoin in an IRA six years ago, you’d be chillin.”
elfDAO, the Crowdfunding Campaign to Buy Gifts for Kids
December 22, 2021
Move over ConstitutionDAO, the latest Decentralized Autonomous Organization, known as elfDAO, is seeking to leverage the power of crypto-fundraising to “fund, organize, and donate gifts to institutions, orphanages, and low-income neighborhood centers [in order to] bring holiday joy to as many children as possible.
It can all be accomplished through an ethereum wallet and an app where the DAO holds the funds, where more than $30,000 was raised in the first 24 hours since the campaign went live. That’s enough to pay for approximately $1,200 gifts for kids.
“We are not formally affiliated with ConstitutionDAO,” a representative of the DAO said, “however, many members of our advisor team were previously part of the core team at ConstitutionDAO. We are so grateful for their guidance.”
The idea for the campaign came from Byeongjun, @bjmoonn on twitter, who was eager to build something meaningful. From there, a team was assembled to turn the concept into reality.
“This is entirely a charitable endeavor,” the representative said. “All funds raised, apart from the 2.5% of funds raised to cover overhead costs (1% for multi-signature wallet and Juicebox gas fees, 1.5% for enDAOment, our fiscal sponsor’s transaction fees) will go towards charitable causes. All overhead costs will be transparently documented and none will be used to compensate the core team — leftover operational funds will be contributed to charity.”
The deadline to contribute is December 31st. The hope is that the DAO will raise $1 million, enough to buy gifts for 40,000 kids.
Some of the logistical questions will be decided by votes cast by the contributors.
“Contributors ($GIFT token holders) will vote on our initial governance proposal, which will set the specifics for how charity proposals and voting by token holders will work,” the representative said.
Contributions can be made via elfDAO.
For full disclosure, I have personally made a donation to the DAO, but I am not a core team member, advisor, or otherwise affiliated with the project.
RadioShack is Launching a Crypto Swap
December 19, 2021
If you had RadioShack on your 2021 DeFi bingo card, congratulations, you’ve won. The company announced that its “mission is to be the first protocol to bridge the gap in mainstream usage of DeFi” and it plans to do this, apparently, by launching a swap.
RadioShack wants to compete with the likes of Uniswap, a smart-contract-based crypto exchange where users can “swap” tokens without having to register on a formal exchange like Coinbase.
The business is a gold mine, according to RadioShack.
“The concept of a swap stands out first and foremost as the place of low-hanging fruit – fruit that is spinning off incredible levels of net profit,” the company said. “Profit not just from speculation like Bitcoin or other cryptocurrencies, but ones born out of trading fees. Some existing swaps like Uniswap or Sushiswap reportedly are doing $1-$7 million net profit per day! They are the current profitable forces of nature in the DeFi world.”
Use of a “swap” is how tokens issued by the ConstitutionDAO crowdfunding saga leaked out into the publicly tradeable marketplace, for example. What was supposed to be a “governance token” to vote on where a copy of the United States Constitution would be held, instead turned into a tradeable novelty asset (like pogs or baseball cards) with a soaring value, all because of decentralized swapping. More than $100 million worth of the novelty governance tokens stemming from the failed bid to buy the Constitution were traded just in the last 24 hours alone, according to Coinmarketcap.com.
“RadioShack DeFi is focused on the early majority,” the company said. “It will become the first to market with a 100 year old brand name that’s recognized in virtually all 190+ countries in the world.”
NFT Owner’s Typo Costs $297K
December 13, 2021It seems the only thing blockchain technology can’t promise is a solution to human error.
The owner of an NFT Bored Ape Yacht Club #3547 got their decimals mixed up on Saturday when they sold the token for 0.75 eth, or 1% of its market value, by mistake. In an attempt to sell the token for 75 eth, or $300,000, the NFT was sold in error to an automated buyer in a call option-like purchase for $3,066, according to CNET.
After the purchase, the buyer dumped ten times the amount paid for the NFT into gas fees to process the transaction instantaneously, a move that prevented any chance of the error being remedied.
“How’d it happen? A lapse of concentration I guess,” the seller of Bored Ape #3547 told CNET. “I list a lot of items every day and just wasn’t paying attention properly. I instantly saw the error as my finger clicked the mouse but a bot sent a transaction with over 8 eth [$34,000] of gas fees so it was instantly sniped before I could click cancel, and just like that, $250k was gone.”
Members of the NFT legal community spoke to deBanked about how this type of stuff is all too common and unfortunate, but just comes with the territory of an unregulated financial space.
“It’s a pretty typical problem here in the Wild West,” said Jacob Martin, an attorney specializing in NFTs and author of the NFT Tax Guide. “It’s user error, not platform error. It sucks, but it is what it is.”
The Bored Ape NFT collection is one of the most sought after collections on the blockchain, with entry level tokens being worth about $200,000. While this error may have been able to be fixed in the world of traditional finance, the unforgiving nature of the blockchain world allows errors like this to be cashed in on by opportunistic purchasers.
Back in August, another Bored Ape was accidentally sold for $26,000. When the seller offered the purchaser almost double that to return the NFT, the new purchaser flipped the token to another user for $150,000.
In November, Cryptopunk #7557 which at the time was worth $19 million, was accidentally listed for $19,000. It immediately sold without remedy for the error.
When asked if regulation would help remedy errors like this in the future, some NFT legal gurus were weary about turning to government for solutions to user-committed blockchain errors.
“I don’t think it’s about regulation, it’s about education,” Shekinah Apedo, an attorney who serves as a Compliance SARs Analyst for Bittrex and NFT legal consultant to numerous companies, told deBanked. “The point of decentralization is that there’s no middleman or institution to run to when an error occurs, like one may do with a typo during a bank transaction. Education is necessary and warnings involving risk should be made known.”
“Cigarettes are legal but they are required to have warning labels,” Apedo continued. “Perhaps, regulation involving warning labels or advertising the risks of being your own bank as an NFT and crypto trader or investor would be good for the mainstream public.”
