Money Reimagined: The Coinbase Catalyst

The week was all about Coinbase’s booming first-quarter revenue results, which delivered an ideal precursor to the public listing of its shares next week. The news inspired this week’s column on how that much anticipated event will feed investor demand for other crypto projects. 

After reading it, check out this week’s “Money Reimagined” podcast. With guests Rebecca Liao of Skuchain and Aditya Menon of Tallyx, we dive into the nerdy but vital field of trade finance. 

Without letters of credit, global trade would not happen. (And you thought the Suez Canal was important.) Yet, millions of suppliers worldwide are unable to tap into the trade finance industry’s highly complex, opaque system of risk management. It’s a problem Skuchain and Tallyx are trying to solve in different ways. Blockchain projects like theirs offer a healthy reminder that beyond the razzamatazz of crypto markets and celebrity non-fungible tokens, meaningful impact is possible if you work hard at the core problems faced by real-world entities.

Following its spectacular Q1 earnings report Tuesday, Coinbase’s historic stock market listing next week – which some estimates value at $100 billion – will likely stir investors to seek out alternative bets on “this crypto thing,” opening a new fundraising opportunity for startups in the space.

It’s FOMO, among VCs...

This is a version of the “fear of missing out” that afflicts venture capital investors and which, in the process, drives tech development. A wave of crypto FOMO is poised to infuse yet more money into the crypto startup community – arguably the hottest hotbed of innovation right now – as these early-stage investors seek out “the next Coinbase.”

Valuations are rising across the industry…

Kraken, a crypto exchange, is raising funds at a valuation target of at least $10 billion – making it a  “decacorn” – and Blockchain.com recently raised $300 million at a $5.2 billion valuation. 

Money is flowing into NFTs.... 

Non-fungible tokens pioneer Dapper Labs, the team behind the wildly popular NBA Top Shot platform, recently closed a $305 million round including a Who’s Who in professional basketball as investors. 

And DeFi could be next…

Although the end of last year’s “DeFi Summer” slowed the once booming VC inflows into decentralized finance, the Coinbase FOMO effect could now revive them, for two reasons:

But will the same VCs win again? 

With their “old boy club” connections, Silicon Valley’s money men often act as gatekeepers, which means the path to a mega-initial public offering isn’t very democratic. Small investors are excluded from profitable ventures and startups’ access to funding can be more about who you know than what. 

The ICO alternative to that model failed… 

During the 2017 run-up, some touted token sales as a way for both startups and small investors to bypass the Silicon Valley old guard. But the U.S. Securities and Exchange Commission’s crackdowns against unregistered securities offerings to unaccredited investors put a stop to that. Wealthy, accredited investors continue to hold a built-in advantage.

There’s a new alternative…

It’s called the “fair launch,” an idea pioneered by DeFi developer Andre Cronje, who did not reserve for himself or his co-founders any pre-launch tokens for the Yearn protocol they developed. 

It’s supposed to level the playing field…

The approach means founders aren’t easily accused of pumping their books or – in a theory admittedly untested by law – of selling a security. All players – the founders and their supporters, big or small – only make money in the token if they buy it after launch and its price rises.

That has spawned the idea of ‘fair launch funding’…

Cronje’s approach so impressed Ian Lee of IDEO CoLab Ventures that he launched the “Fair Launch Capital” initiative, inviting DeFi investors to help with pre-launch outlays for code audits and bug bounties. This no-strings-attached funding, Lee argues, improves the wider DeFi ecosystem and, as the rising tide lifts all boats, boosts the value of all their holdings. 

Time will tell whether this radical approach to making a profit catches on. But if it works, and the Coinbase FOMO money flows into such projects, then maybe those who want crypto innovation to proceed can get their cake and eat it too: the money needed to drive it and a fairer distribution of the opportunities that flow from it.

Among the many wonderful charts Shuai Hao contributed to CoinDesk Research’s Q1 Review , this one about the progression of bitcoin issuance since the cryptocurrency’s beginnings stood out to me.

The yellow line shows total bitcoin supply shaping as it should, leveling off as the “halvings” every 210,000 blocks reduce the size of the reward distributed to miners from 50 down to its current 6.25 in more or less four-year intervals. 

But look at the blue lines, which show the variance of total daily issuance, and how that narrows over time. That trend speaks to the idea that the bitcoin mining market is becoming increasingly efficient, which makes it more secure and predictable and improves bitcoin’s status as a store or value.

A key point here: the Bitcoin protocol’s periodic difficulty adjustment, which alters the proof-of-work puzzle miners must solve to close out a block and keeps average block time running as close as possible to 10 minutes, is not perfectly in sync with changes in the hashing power to which it responds. Instead, the protocol takes stock of hash power every 2016 blocks and then tweaks difficulty up or down accordingly. 

During that interim period, miners have an opportunity to add more hashing power, with more and/or more efficient machines, and gain an advantage over others to proportionately win more rewards. But the advantage only lasts until enough competitors have also added more hashing power to exploit the same discrepancy and, in doing so, removed it.

The fact that variance in daily bitcoin issuance has gotten thinner over time shows this periodic window of opportunity has narrowed because the new miners’ advantage keeps getting competed away. In other words, Bitcoin is getting closer and closer to a perfect market. 

The story here is a big one: As the Bitcoin network grows – with rising prices, a rising user base, and rising hash power – the competitive economic system that drives its underlying security model is evolving toward an ever-more efficient state. It’s an excellent example of how the right incentive system can foster behavior that improves the functioning of a decentralized system. 

Peter Thiel said what?

The billionaire investor’s off-hand remark at the Nixon Foundation event – yes, there is an entity named after the disgraced U.S. president – spurred an angry response from bitcoiners. How dare a guy who’s supposedly all in favor of bitcoin malign it this way!

But maybe Thiel had a different agenda…

I tend toward the latter interpretation. Contextless takes on social media lose the nuance. 

If Thiel had said, “I do wonder whether China is using Bitcoin as a financial weapon against the United States,” rather than suggesting Bitcoin might be a Chinese financial weapon, it could be more easily read as a shrewd assessment of geopolitical reality. 

It wasn’t a critique of Bitcoin but a reminder that by its mere existence, as a decentralized alternative to the existing financial system, Bitcoin poses a challenge to all governments but especially to the world’s financial hegemon, the U.S. 

It’s a legitimate argument that China is selectively applying policies around Bitcoin that could heighten the pressure the U.S. faces from that challenge while protecting its own closed financial system. How else to explain why Beijing turns a blind eye to so much domestic mining activity – which contributes to Bitcoin’s systemic efficiency gains, described above – but restricts cryptocurrency exchanges? 

So, no, Bitcoin was not created as a Chinese weapon. But that doesn’t mean China isn’t choosing to use it as one. And if so, it’s probably a good idea for the U.S. government to listen to Thiel and figure out whether to fight that weapon or co-opt it for its own defenses.

Unlike the bitcoin market, which has failed to hold a break above the psychologically important $60,000 level, ether is enjoying an ebullient April. On Thursday, Ethereum’s native token hit a new all-time high of $2,153, and as of publication remained comfortably above $2,000.

As per this April 2 account from CoinDesk market reporter Omkar Godbole, the first impetus for the gain in ETH was something fundamentally important: the big news that Visa would start processing Ethereum-based USDC stablecoin payments. 

Yet, there were also signs the ETH breakout was accompanied by a lot of sentiment-driven buying of other cryptocurrencies, activity that seems more detached from fundamentals. In particular, XRP hit a two-month price high in the wake of the ether rally, as Godbole also reported. 

This is the same token that’s under investigation by the SEC for being an illegal security, and yet folks are buying it. You can’t blame ether for this rather incongruous behavior. It’s just unfortunate that strong ETH gains often coincide with broad-based “altcoin rallies,” moves that tend to feel more like momentum pumps than sustainable gains.  

To pour a little more rain on Ethereum’s parade, Chainalysis analyst Philip Gradwell produced research showing thin committed demand for ETH at those higher levels. He told CoinDesk TV this may suggest ether doesn’t have much support above $2,000, even if there were lots of buyers at $1,800.

UPDATE (April 12, 14:02 UTC): Corrected eleventh paragraph to say Andre Cronje developed Yearn, not Aave.

UPDATE (April 21, 17:58 UTC): Amended 7th paragraph to clarify that Kraken is seeking funds at a valuation of at least $10 billion.