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Smart Contracts

Smart Contracts

Smart Contracts

These irrevocable computer programs generally deployed on a blockchain and which automatically execute a set of predefined instructions offer considerable leverage to a multitude of contractual relationships. Their applications are very numerous.

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Smart Contract : a definition

The ‘smart contracts’ are computer protocols that facilitate, verify and execute the negotiation or the execution of a contract. They usually have a user interface and emulate the logic of contractual closes. Most of the time, they deploy on a blockchain.

Behind this concept of smart contract, the key idea is to guarantee the contract power, no longer by law but directly by computer code. As with every computer program, the complexity is variable from one smart contract to another. Some are implementing simple conditions, like a « IF » Excel function (if such a condition is met, then the contract is executed-or “if this then that”) while other smart contracts are much more complex. In fact, smart contracts have ambition to replicate all the clauses and rules that allow companies to operate. Then we talk about DAO, acronym of Decentralized Autonomous Organization’ (read our article published February 7).

History 

Often associated to the Ethereum protocol which is positioned as a Bitcoin programmable version which widens considerably the field of decentralized applications, the word « smart contracts » was invented by the computer scientist Nick Szabo in 1993, to highlight the importance to bring “highly evolved practices” to the contract law, but was inspired by some researchers like David Chaum. Nick Szabo thought that the specification, the verification and the operation, thanks to cryptographic protocols and some other digital security mechanisms can make a big improvement compared to the traditional law that supervises the contracts associated with their different clauses. Some researchers emphasized the interest that smart contracts can bring in terms of security. This was done in parallel to David Chaum and some other researchers of the financial cryptographic community that have emphasized the interest of cryptographic protocols in order to ensure digital money confidentiality, the identification information and the digital signature of the contracts. Development of smart contracts is also and finally coming from a lot of efforts for improving operations in several industries using digital technology. 

With the advent of the distributed consensus protocols and crypto currencies created to allow borderless, secured, resistant to censorship and programmable digital assets trades, it is a whole technological sector that is opening to smart contracts coding. Ethereum is the best known protocol dedicated to smart contracts coding, but it is not the only one anymore, and smart contracts can now be deployed with a lot of other competing blockchains (EOS, Tezos, NEO ,…).

Smart contract operation

A smart contract is proposing a digital equivalent to the paper contract. During the smart contract operation, all the steps of validation are recorded in the blockchain (the most used being Ethereum nowadays). This process allows to secure all the data by preventing their modification or their deletion ex post.

In practice, an overwhelming majority of the smart contracts are used to automate security trades under the form of crypto assets. All accounting entries relative to digital assets trade operations are systematically recorded in the blockchain. Then, all assets transfers are both public, predictable and irrevocable. Anyone can check on the blockchain the correct execution of the contract and determine who owns the asset.

So, smart contracts guarantee an extremely loaded set of performance conditions that leave no room for doubt or confusion. Conditions are very clearly set and the code interpretation is unequivocal, on the contrary to human interpretation that let room for negotiation or the discovery of a legal vacuum. Indeed, the blockchain aims to eliminate uncertainty and randomness as much as possible, or the contingent, so that substitute to the confidence, confidence that is always correlated to the system fallibility, the notions of insurance and guarantee. Insurance and guarantee are produced by calculation iteration whose results are considered statistically satisfactory. Therefore, it is the human domain that is gradually disappearing to the benefit of automated processes, not based on deliberation but on certification. 

Most of the smart contracts are standardized (like for the paper contracts), for which we have the possibility to use templates. The smart contract standard the most widespread is known under the ERC-20 name, and its main function is to allow tokens creation (digital assets, crypto currencies) on the Ethereum network.

Strengths and weaknesses

Strengths

Public blockchains offer strong opportunities to deploy smart contracts in an extremely secured way. Today, it does exist hundreds of ERC20 tokens (as for example crypto currencies created by a ERC20 ‘smart contract’) for which the total valuation represents several billions of dollars.

Strengths (advantages) of smart contracts are multiple. They allow to :

  • Secure an agreement between two counterparts (or several) thanks to the transparency and immutability of blockchains
  • Automate payments and eliminate unpaid risks, often observed in the context of a traditional contract 
  • Drastically reduce the costs for elaborating, the follow up and the contract signature (example of contracts with lawyers or notaries

Weaknesses

However, smart contracts have disadvantages (weaknesses) for which experts are working on. The major one remains the risk of failures inherent to each computer program.

Smart contracts code is very often ‘open source’, but if the code is poorly designed, it gives room to hackers to take advantage at the expense of other users. 

The most well known ‘hacking’ is ‘The DAO’ one which implied a loss equivalent to dollar 150 million (in ethers). Following this famous hacking, the Ethereum community decided to make the painful choice of rewriting ex post the transactions history in the Ethereum blockchain in order to dispossess the hacker of his booty and to restore the stolen ethers to the victims.

That kind of problem asks the question of blockchains immutability (« Code is Law ») facing the need to re-introduce human intervention, even in a smart contract framework.

A doctrine does exist, saying and upholding that it could be possible to introduce a sort of additional governance to blockchains, driven by a keen play on smart contracts in order to define some different possible arbitrage scenarios in case of emergency. On the contrary, pure Bitcoin enthusiasts are more keen to protect as much as possible these ecosystems from human and political intervention.

Smart contracts examples

Several blockchains let the possibility to deploy these contracts. Of course, the most well known is Ethereum, which already includes a large number of decentralized applications through the use of smart contracts. But some other promising protocols such as EOS, Tezos, NEO Cardano, Cosmos and some others are also conceived and able to compute smart contracts. 

For now, the most mature smart contracts are computed on Ethereum.

We can find out some of different types depending on economic sectors such : 

  • Decentralized monetary exchanges : 0x, OmiseGo, MakerDAO
  • Games on Blockchain : Cryptokitties, My Crypto Heroes, Etheremon 
  • Gambling : FCK, Playtowin, FunFair
  • Decentralized Cloud : Storj, iEx.ec
  • Predictive markets platforms : Augur, Gnosis

And many others…

Conclusion

The smart contracts economy is still embryonic but seems to have a very bright future. Numerous decentralized applications in the healthcare sector, in the insurance, or supply chains (pharmaceutical ones, food industry, cosmetics, etc…) are currently under development. In the coming years, it is actually probable to have proposals of significantly different organizations from today (with current versions of paper contracts and applications governed by trusted third parties). It will be an economy in which crypto assets will play an essential role.  

About the editor…

A passion : Economics, behavioural finance and emerging digital assets

Yves started his career in the asset management in 1986 where he worked at different positions as manager of equity funds and diversified funds. at Crédit Commercial de France and later, at Barclays group in Paris. In 1998, he took the lead of equity funds and diversified funds, then of the whole fund management business at the French team of the Dutch Robeco group  before joining Natixis Asset Management in 2012 as Director of the Equity Investment business unit. Yves left Natixis AM in 2018 to start as an independant player for professional investors and corporates (advisor and fund raiser).

He likes to engages in sports that test his endurance like running and swimming, Yves is also fascinated by social sciences, and more specifically by history and economics. But this is the economics mechanisms behavioural aspect and the markets behavioural analysis that are a constant source of thought and discussion. Since few years, the blockchain issue and emergence of crypto assets is a new field of passion and opportunities for him.

Yves Maillot

Financial markets and asset management

Yves Maillot

Financial markets and asset management

Understand ICO, STO and IEO

The ICO is a financial innovation that constitutes an important step in the transformation process triggered by the blockchain. It turns things up and down and especially the traditional relationship to property.In this article, for a second time, we are also going to analyse STO and IEO.

Real assets tokenization : use case in the real estate

Among all real assets, properties are very good candidates for tokenization, a mechanism that will facilitate democratization of investing on those assets. Because tokenization allows becoming a real estate owner for only a few hundred euros, without any loan.

Understand ICO, STO and IEO

Understand ICO, STO and IEO

Understand ICO, STO and IEO

The ICO is a financial innovation that constitutes an important step in the transformation process triggered by the blockchain. It turns things up and down and especially the traditional relationship to property. In this article, for a second time, we are also going to analyse STO and  IEO.

This article is intended for readers who have already acquired a certain level of knowledge in the field of Blockchain and cryptocurrencies. If the article seems indigestible, do not hesitate to choose another difficulty in the box below wink

Difficulty of the article:

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1/ What is an ICO ?

On the listed equity market, in the image of IPO (Initial Public Offering or what it’s called an equity issue for a company listing on the stock exchange), an ICO (Initial Coin Offering) corresponds to an entry of a digital token on the primary market. Even before setting up the promised service, at the very start of the project, the right of use is therefore sold in advance through the issued token. In this way, an entrepreneur can raise funds by selling in advance a future right of use.

Therefore, we can distinguish 2 different types of stakeholder for that kind of operation :

  1. a/ The project’s contributors who are rewarded through the token and the projects’ founders who keep a share of the tokens and who obviously get a business valuation
  1. The investors (who acquire the token in the quest of capital gains) and also consumers (they often play both roles) who buy a future ‘utility’.

A financing through an ICO intuitively applies more to the ‘services economy’, without being restrictive.  

 We have to however note that ICO is not a prerequisite for a successful  blockchain project.

For history, the first ICO took place in July 2013 with Omni (‘open-source’ platform), which was followed in 2014 by the famous Ethereum ICO USD18 million project.

Figures

It was in 2017 that ICOs emerged with increasingly raised funds, thanks to an enthusiasm drawn by the strong gains of Bitcoin and other crypto- currencies prices. In 2017, starting from USD 64 million distributed among ten projects in April, to USD 1.5 billion distributed among 197 different projects in December, the number of ICOs and the raised funds increased rapidly. According to Coindesk, at the end of 2017, the success of the blockchain projects was so strong that funds raised through ICOs greatly surpassed that raised through the traditional way (venture capital) with (USD797 million compared to  USD235 million).

 

                                                                                      NUMBER OF ICOs and MONTHLY AMOUNT RAISED – 2017- 2018

Following the sharp Bitcoin price drop during the first half of 2018, obviously, amounts raised in the second half decreased dramatically too with an average funding raised per operation close to UDS 3.3 million. However, the number of transactions remained high (see the chart – source Coindesk- Techcrunch), which shows the blockchain world dynamism.

Characteristics of an ICO

An ICO includes its own key features that distinguish it from other traditional financing :

  • Free circulation of tokens enables the market to directly value the associated use function
  • Financing through an ICO allows to raise funds for projects that might probably  never have seen the light of day through traditional financing channels and investors to intervene on stories they might not have access to. So, this type of financing (ICOs) are a virtual unfiltered form of Crowdfunding pushed to the extreme, but through its own ‘platform’ for each project carries, without any aggregator, and so; without any centralized interference.
  • ‘Peer-to-peer’ access to large amounts of money reduces the barriers to entry. Lower cost access to existing ‘open source’ infrastructures fosters competition.
  • Using tokens enables aligning interests in this new ecosystem. 
  • Finally, several existing issues inherent to capitalist business and traditional financing are avoided (conflicts of interests : between shareholders and debt creditors – let read research by Stiglitz and Weiss -1981) but some others are rising, especially the potential conflict of interest between tokens holders and consumers–users (of the same tokens).
  • ICO democratises risk capital. Furthermore, the investor can also benefit from the utility of the token and can also take profit from it as a user (early adopter). The barrier between professional investors and individual token holders is removed. But it raises important questions about wise projects selection, and above all, protecting individual investors.
ico
ICO risks:

  • Opportunities and money flooding in ICOs that multiplied in 2017 have highlighted  their limits and risks. The investors projects selection and the excessive enthusiasm due to all crypto assets prices increase made obviously appear the characteristics of a bubble mechanism :
  • Capitalizations surge attracted too many (too) ‘early stages’ projects to finance, projects which were insufficiently  prepared
  • This phase also generated an obvious overvaluation of too many projects and even pushed meaningless stories
  • To the extreme, numerous scams and frauds appeared and broke out, and,
  • The lack of regulation of these operations caused big disappointments

These periods never last long, the natural selectivity combined with price fall becomes one day a saving event which helps to clean up and professionalize the market.

 

What is a good ICO ?

As many scams somewhat tarnished the image of the blockchain and crypto-assets, it is needed to look at an ICO project’s financial and strategic analysis with seriousness and rationality despite the risk and uncertainties specific to high potential segments emerging projects.

 Here below few analysis key points which combined :

a/ traditional analysis key points of a start-up as :

  • Team composition and experience
  • Business model and market addressed
  • Technology competitiveness – barriers to entry
  • Competitive environment

b/ specific analysis key point of an ICO  start-up (with a ‘token financing’)

  • Analysis of the role of the token in the Business Model
  • Initial token offer : monetary policy, destruction mechanism (tokens ‘burning process’)            
  • Targeted  operations  ‘road-map’
  • Use of the funds raised
  • Visibility within the ecosystem and specialized media
  • Building and development of a community: a community can carry the project forward in difficult times. Building up a community around the initiative is essential.
2/ STO and IEO

Face to ICO issues that were sometimes hard lived during the euphoria period in 2017, and some disappointments, especially because of the lacking regulation and well adapted legal status, but also because of failures and frauds for some projects during this period (one estimate that only less than 10% of the smart and robust projects survived the purge phase of 2018), is flourishing ‘asset tokenization’ on the called  STO form (Security Token Offering) since 2019.

STO :

Simply said, a ‘security token’ is a digitalized and exchangeable share on a blockchain. A STO operation constitutes a first step to a larger scale financial (or real estate property) tokenization – see the article published March 31 about real asset tokenization.

The main advantage essentially lies in a connection with positive law, easier when it’s about a ‘security token’ instead of a standard crypto asset or a ‘utility token’ for example. Indeed, the nature of the rights associated with a ‘no blockchain security’ is well referenced on a legal basis. Under the French law, it is worth mentioning that through a blockchain, existing financial unlisted securities ‘peer-to-peer’ trades were authorized since 2018. This mechanism can enable increased assets liquidity and will improve the financial system’s operational efficiency, among other things thanks to the fluidity of operations and to the possible and large processing costs cutting.

Finally, let’s mention the IEOs (Initial Exchange Offering) which are growing for some time. It is about a kind of a token offering or an ICO but the operation is directly administered by a crypto platform (exchange). A facilitation (but also centralization in some extent) of the offering and information  mechanism is then brought by this way.

Conclusion

Following the innovative and highly speculative ICO, use and development of Security Tokens through STO are representing an important step in the ‘assets tokenization’ wave. Thanks to the creation of new rights, modular and ‘peer-to-peer’ exchangeable, these new models will allow emergence of new asset types and new business models.

About the editor…

A passion : Economics, behavioural finance and emerging digital assets

Yves started his career in the asset management in 1986 where he worked at different positions as manager of equity funds and diversified funds. at Crédit Commercial de France and later, at Barclays group in Paris. In 1998, he took the lead of equity funds and diversified funds, then of the whole fund management business at the French team of the Dutch Robeco group  before joining Natixis Asset Management in 2012 as Director of the Equity Investment business unit. Yves left Natixis AM in 2018 to start as an independant player for professional investors and corporates (advisor and fund raiser).

He likes to engages in sports that test his endurance like running and swimming, Yves is also fascinated by social sciences, and more specifically by history and economics. But this is the economics mechanisms behavioural aspect and the markets behavioural analysis that are a constant source of thought and discussion. Since few years, the blockchain issue and emergence of crypto assets is a new field of passion and opportunities for him.

Yves Maillot

Financial markets and asset management

Yves Maillot

Financial markets and asset management

Understand ICO, STO and IEO

The ICO is a financial innovation that constitutes an important step in the transformation process triggered by the blockchain. It turns things up and down and especially the traditional relationship to property.In this article, for a second time, we are also going to analyse STO and IEO.

Real assets tokenization : use case in the real estate

Among all real assets, properties are very good candidates for tokenization, a mechanism that will facilitate democratization of investing on those assets. Because tokenization allows becoming a real estate owner for only a few hundred euros, without any loan.

Real assets tokenization : use case in the real estate

Real assets tokenization : use case in the real estate

Real assets tokenization : use case in the real estate

Among all real assets, properties are very good candidates for tokenization, a mechanism that will facilitate democratization of investing on those assets. Because tokenization allows becoming a real estate owner for only a few hundred euros, without any loan.

This article is intended for readers who have already acquired a certain level of knowledge in the field of Blockchain and cryptocurrencies. If the article seems indigestible, do not hesitate to choose another difficulty in the box below wink

Difficulty of the article:

CHOOSE ANOTHER DIFFICULTY
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Real assets tokenization 

Generally speaking, tokenization means the registration of an asset and its rights on a token in order to allow instantaneous and secured ‘peer-to-peer’ trades and administration in a blockchain. Then, a new era is opening for real estate assets : their digitization

The tokenized asset ‘the token’ has numerous advantages :

  1. It can be transferred ‘peer to peer’ on the Internet like a crypto-currency. It means that it can be sent to another person without any third party approval and without any need of monitoring by the issuer.
  2. It has the specific characteristics of the blockchain : it means that it is not falsifiable, that transactions can be monitored in an ‘unchanging’ ledger and that security of the transactions is guaranteed.
  3. It can be coded by the issuing entity, and so it can represent a voting right, a medium of payment, a property title, a dividend, etc
  4. It has liquidity : meaning that you can buy and sell it any time on platform exchanges at a real time price determined by supply and demand.

    Concretely, tokenization of a real estate asset is a digital copy issue of a property title integrating the rights and obligations attached. This digitized version of the property can be shared in several tokens. We can then imagine for instance the disposal of a residential property at a value of 1 million euros divided in 1 000 tokens with a nominal price of € 1 000 each.

    Tokens are also issued during regulated issuances operations through STO (« Security Token Offering »). Those tokens are sold to investors on the primary market. Then, the second step is a tokens registration on a secondary market exchange by the issuer. Therefore, he will be able to take profit from the digitalized asset appreciation and also from its underlying right. The capital appreciation will be possible thanks to the income yield paid but also thanks to the price change of the underlying property. .

    Tokenization provides numerous advantages, specifically for the transmission of assets between sellers and buyers and also for reducing friction during phases of creation and trades. In the context of the Ethereum ecosystem (or for any other blockchain technology 2.0 generating ‘smart-contracts’), it brings numerous possibilities as well, particularly because of the utility tokens features. Smart-contracts brings transparency and goods trades globalization all in benefiting from the security of the platforms on which they are deployed.

    Thanks to tokens representative of real estate assets, savers that wish to invest in those type of investments but who do not have enough money, could acquire a « share » of a property while benefiting from the income yield .

    Thanks to this digital material, this new ‘real estate market ‘ through dedicated tokens will give possibilities to people as investment diversification beyond current national borders. For instance and currently, it can be really difficult for investors based in Asia to invest in unlisted US properties. Tomorrow, those assets will be exchanged on platforms accessible to all. .Accessibility, 24/7, including during financial markets closing hours will allow transfers and trades without any limits .

    Examples

    Tokenized real estate transactions are already existing, as some examples show it in Switzerland, United States and more recently in France. The tokenization is realized for now through Ethereum tokens and corporates that own the underlying properties. The tokens owners do not directly hold the property but it is a dedicated company, created on the purpose, that is holding it. In the US, we use LLC structures (or Limited Liability Company) and In France, it is usual to invest through the specialized status of SCPI.

    Tokens used are called ERC 20 (on the Ethereum platform), a standard in the blockchain ecosystem. Each of them are representative of one share of the capital of the company, knowing that the company is only owning the property in its balance sheet.

    1/ Tokenized residential real estate

    For the first time, a residential real estate asset has been tokenized by a specialized company called Real IT in 2019 in the US. The price was estimated at $60 000 and the House “9943 Marlowe RealToken” located in Detroit (Michigan) has been shared between hundreds of different investors who own security tokens worth $ 63 each. Owners are daily gaining $30 of income that gives an annual yield of 13 %.

    We have several assets in Detroit that are available directly on the platform now. Each of them produce different levels of yield and the attached tokens have different prices depending on the underlying property. 

    2/ Tokenized professional real estate

    In Switzerland, the real estate company BrickMark has acquired a building worth $ 134 million (in January 2020) and has used the blockchain to tokenize each property share and for reselling each ‘brick’ of this building located BahnhoffStrasse in Zurich.

    Earlier in 2019, the Swiss company Blockimmo, based in Zoug,had also tokenized a building in order to sell it on the blockchain. The total value of the tokens sold has been priced at CHF 3 million.

     Conclusion :

    Thanks to the strengths of the blockchain (quick transfer, unchanging record , absolute security) and thanks to the possibilities offered by smart contracts, a new world with strong possibilities are opened to the real estate market, both professional and residential. It will help to democratize it. The flexibility that allows the tokenization of real estate assets will help to create a new category of property owners.

     

    About the editor…

    A passion : Economics, behavioural finance and emerging digital assets

    Yves started his career in the asset management in 1986 where he worked at different positions as manager of equity funds and diversified funds. at Crédit Commercial de France and later, at Barclays group in Paris. In 1998, he took the lead of equity funds and diversified funds, then of the whole fund management business at the French team of the Dutch Robeco group  before joining Natixis Asset Management in 2012 as Director of the Equity Investment business unit. Yves left Natixis AM in 2018 to start as an independant player for professional investors and corporates (advisor and fund raiser).

    He likes to engages in sports that test his endurance like running and swimming, Yves is also fascinated by social sciences, and more specifically by history and economics. But this is the economics mechanisms behavioural aspect and the markets behavioural analysis that are a constant source of thought and discussion. Since few years, the blockchain issue and emergence of crypto assets is a new field of passion and opportunities for him.

    Yves Maillot

    Financial markets and asset management

    Yves Maillot

    Financial markets and asset management

    Understand ICO, STO and IEO

    The ICO is a financial innovation that constitutes an important step in the transformation process triggered by the blockchain. It turns things up and down and especially the traditional relationship to property.In this article, for a second time, we are also going to analyse STO and IEO.

    Real assets tokenization : use case in the real estate

    Among all real assets, properties are very good candidates for tokenization, a mechanism that will facilitate democratization of investing on those assets. Because tokenization allows becoming a real estate owner for only a few hundred euros, without any loan.

    Decentralized Finance in motion

    Decentralized Finance in motion

    Decentralized Finance in motion

    DeFi or Decentralized Finance gives opportunities. Recently, few traders took the chance of using this new financial system by realizing winning arbitrages on substantial volumes through crypto ‘flash loans’.

    This article is intended for readers who have already acquired a certain level of knowledge in the field of Blockchain and cryptocurrencies. If the article seems indigestible, do not hesitate to choose another difficulty in the box below wink

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    DeFi and crypto loans

    In the article published February 2nd, we described  Dapps, DAO and Decentralized Finance. DeFi is an alternative to the traditional banking and financial system. This system that uses  blockchain and crypto assets recently breaches a key level as the value of cryptos involved in different DeFi services jumped above one billion dollars. 

    To reach this level, Decentralized Finance has particularly benefited from  crypto credit and loans services quick growth. 

    Indeed,  those services make  possible now to lend and to get loans without using the traditional banking and financial system. They have seen the use of them particularly rising recently. Inclusion of a simple mechanism (algorithm that let interest rates fluctuate in real time depending on market conditions) mainly explains why it succeed recently.

    Having said that, this mechanism  automates convergence between supply and demand, and makes the use of the order book obsolete, friction point not to be overlooked in a small liquidity market environment .

    But remains a concern today about this activity growth.  

    Yes because those services are money consuming. A borrower should give more as collateral  than the amount he is borrowing in order to avoid counterpart risk. The guarantee is usually greater than 1.5 times the total money borrowed.

     

    DeFi

     

    Solution : the ‘flash loans’ 

    Because the inventiveness of the blockchain ecosystem is huge !

    Some services offer the possibility now  to do what is called a ‘flash loan’ – or ‘instant loan’  in crypto currency without the need of a guarantee. These  operations are working without any counterpart risk !

    This prowess is possible thanks to the way the lend is structured. 

    How does it work ? The person who is borrowing should also contract, use and refund  money during a single transaction on the blockchain. With this structure, the counterpart risk  is zero because the money is lent only if the three operations (borrow, use and refunding) are executed  definitely and simultaneously .

    Flash loans are innovative because  each time someone get a lucrative but money consuming  investment idea, can ask to obtain it. These lends are possible only if the lucrative idea comes true and only if it can run without  going through several transactions. 

    Arbitrages opportunities 

    Specialized traders in the Decentralized Finance took the opportunity  of this new tool large potential (high scale arbitrage operations)between different services of the ecosystem. 

    It has been recently mentioned several  times two ‘arbitrage operations’ as some traders took the opportunity of this new  way of borrowing money to ‘steal’ funds to the loan services department of bZx.

     

    Decrypt one of these operations

    By using borrowed money, some traders succeed to manipulate the prices of some unliquid crypto currencies on different decentralized platforms and blur bZx about the value of the crypto currencies without triggering warnings. Following those operations, bZx administrators have frozen their businesses to identify and compensate weaknesses of the service. 

     

    What did happen exactly ?

    The first attacker started by contract a flash loan of 10 000 ETH (roughly 2,3 million euros) on DyDx, an exchange that is offering this kind of crypto lending service. Then, he sent half to Compound in order to borrow 112 WBTC (Wrapped BTC),and the other half to bZx, in order to short 112 WBTC (and consequently to bet on the price fall). Finally, he sent 112 WBTC from Compound to Uniswap for converting them at a low price. The described operations allowed to profit from the short position to refund the flash loan at a very low price. 

    It took only few seconds and cost only $ 8,71 of transactions costs to win $360 000 ! Let note that the beauty of the operation is coming from the fact that the smart guy has realized all the operations in one single transaction. Thanks to specificity of flash loans that do not need collateral and cannot be realized if the operation is not done into one single bundle transactions. The attacker –trader has been forced to prepare thoroughly all the operations plan. Pure malice or great operations ( this type of operations should be heavily punished on the regulated financial markets) ? 

    It seems possible that the trader succeed to shun verification processes that are bridges between DeFi blockchain protocols and underlying data under control, especially the involved asset prices. 

    In fact, the success of the operations is built on the base of the strong interoperability between services. This is showing the strength and the weakness of Decentralized Finance.

    DeFi

     

    What should be kept in mind ?

    1. Due to the strong ecosystem interoperability, new financial products can have a large and powerful impact. Paradoxically, the DeFi large exposure should allow it to gain resilience. Different services must be updated or abandoned.
    2. But DeFi services are in fact not really and fully decentralized as shown by the bZx administrators and actions they decided to launch. Then, before each any use of service, it is strongly recommended to audit to assess the power of the administrators and the related risk.

    Conclusion

    Decentralized Finance is still a stammering ecosystem for which flaws and errors can exist, meaning that investment funds involved in these protocols are potentially at risk. But because of its sharp ramp up, DeFi is now a new universe that banking, financing and tech players cannot leave besides. However, at the same time, historical and emerging players must be warned about the associated risks to these new markets.

     

     

    About the editor…

    A passion : Economics, behavioural finance and emerging digital assets

    Yves started his career in the asset management in 1986 where he worked at different positions as manager of equity funds and diversified funds. at Crédit Commercial de France and later, at Barclays group in Paris. In 1998, he took the lead of equity funds and diversified funds, then of the whole fund management business at the French team of the Dutch Robeco group  before joining Natixis Asset Management in 2012 as Director of the Equity Investment business unit. Yves left Natixis AM in 2018 to start as an independant player for professional investors and corporates (advisor and fund raiser).

    He likes to engages in sports that test his endurance like running and swimming, Yves is also fascinated by social sciences, and more specifically by history and economics. But this is the economics mechanisms behavioural aspect and the markets behavioural analysis that are a constant source of thought and discussion. Since few years, the blockchain issue and emergence of crypto assets is a new field of passion and opportunities for him.

    Yves Maillot

    Financial markets and asset management

    Yves Maillot

    Financial markets and asset management

    Understand ICO, STO and IEO

    The ICO is a financial innovation that constitutes an important step in the transformation process triggered by the blockchain. It turns things up and down and especially the traditional relationship to property.In this article, for a second time, we are also going to analyse STO and IEO.

    Real assets tokenization : use case in the real estate

    Among all real assets, properties are very good candidates for tokenization, a mechanism that will facilitate democratization of investing on those assets. Because tokenization allows becoming a real estate owner for only a few hundred euros, without any loan.

    WHAT IS LITECOIN?

    WHAT IS LITECOIN?

    WHAT IS LITECOIN?

    This article is intended for readers who have already acquired a certain level of knowledge in the field of Blockchain and cryptocurrencies. If the article seems indigestible, do not hesitate to choose another difficulty in the box below wink

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    Introduction and historical 

    Following Bitcoin and its two main ‘Forks’, Bitcoin Cash and Bitcoin SV (see article published December 6, 2019 ), Ethereum and XRP (see article published January 23, 2020), ranked by the size, Litecoin is currently the sixth largest crypto currency now.

    Litecoin has been created and coded through an ‘open source’ client on Git Hub, October 7, 2011 by Charlie Lee, formerly employed by Google. In fact, Litecoin coding comes from Bitcoin coding modification (a Fork of Bitcoin)

    -In April 2017, the Litecoin foundation has been created in Singapore in order to promote Litecoin.

    -February 18, 2018, Litecoin realized its first Fork, Litecoin Cash, which has been realized by a group of developers, independant from the Litecoin foundation.

    -In July 2018, Google has added Litecoin to its currency exchange module.

    Google shearch volume for Litecoin and Bitcoin Halving

    Source : Google Trends

     

    General characteristics

    Litecoin allows instant payments all over the world for low costs (close to zero). Like with Bitcoin, Litecoin is also an ‘open source’ network, fully decentralized and without any central authority. Then, Litecoin users can control their own accounts, through a fully secured manner and also through a cryptographic system backed by a mathematical resolution.

    But compared to Bitcoin, the Litecoin transactions are generated and confirmed faster; they also benefit from a much more efficient warehousing. Additionnally and compared to her ‘Grand sister’, Litecoin is a medium of payment and transfer that has proven himself.

    But beyond the transactions efficiency and speed, the major points that characterized Litecoin conception are fully comparable with those of Bitcoin, as Litecoin is a Fork of Bitcoin. 

     Let see now a list of its main characteristics :

    • Maximum Quantity of coins to be issued : 84 000 000 units
    • Quantity issued : 62 983 450 units as of 08/05/2019 (or 74.9% of the maximum units to be issued)
    • Decimalization: each Litecoin is divided by hundred million smaller units, equivalent to 8 decimals (like the Satoshis for Bitcoin)
    • Algorithm : Scrypt
    • Type of proof : POW (‘proof of work’) equivalent to the mining process for Bitcoin
    • Halving every 840 000 blocks , or every 4 years
    • Last halving occured August 5, 2019 and halved the block reward to 12.5 Litecoins per block (from 25 previously).
    • End of mining : Year 2142 (during the previous halving, roughly 21 million Litecoins to be mined remained )
    • Unanonymous Crypto currency

     

    What are the major differences with Bitcoin ?

    Because we can find some differences between Litecoin and Bitcoin :

    • Litecoin network is targeting a block every two minutes and thirty seconds compared with the ten minutes needed for Bitcoin.
    • Transaction fees are very small, even compared with those of Bitcoin.
    • The modified interface allows coins mining from anywhere and any computer. Therefore, mining Litecoin is possible with a standard harware equipment. 
    • The mining algorithm can be executed and run simultaneously and with the same computers than those that are mining Bitcoins.
    • And above all, transactions confirmation is going much faster

    About the transactions, they are recorded on a specific Litecoin blockchain.

    Up until 2016, the Litecoin blockchain recorded an average of 7500 daily transactions, a daily volume of 10 000 000 Litecoin units and a confirmation time lapse of 2.5 minutes. 

    In 2018, number of daily transactions rose up to 200 000 roughly.

     

    Mining Litecoins

    Similarities with Bitcoin are also clear concerning the mining, as Litecoin can be mined individually or by combined players, called pools (or polls of mining).

    Identically, the rate of Litecoin units issued follows the same logic, that is a quadratic function that reduces by half every 840 000 blocks (Halving), or approximately every four years, and this up to a total of 84 millions LTC.

    The SCrypt algorithm that is used by Litecoin was conceived in such a way that its memory consumption is high, and in such a way to hamper repeated new ASIC (hardware used to mine coins). Nvertheless, new ASICs have been launched in order to use the Scrypt algorithm, like with Bitmain L3.

     

    At a price of $78.84 (as of 02/13/2020 – see chart ), Litecoin market capitalization is USD 5.051 Billion

     

    Graphique du Litecoin depuis 2014

      About the editor…

      A passion : Economics, behavioural finance and emerging digital assets

      Yves started his career in the asset management in 1986 where he worked at different positions as manager of equity funds and diversified funds. at Crédit Commercial de France and later, at Barclays group in Paris. In 1998, he took the lead of equity funds and diversified funds, then of the whole fund management business at the French team of the Dutch Robeco group  before joining Natixis Asset Management in 2012 as Director of the Equity Investment business unit. Yves left Natixis AM in 2018 to start as an independant player for professional investors and corporates (advisor and fund raiser).

      He likes to engages in sports that test his endurance like running and swimming, Yves is also fascinated by social sciences, and more specifically by history and economics. But this is the economics mechanisms behavioural aspect and the markets behavioural analysis that are a constant source of thought and discussion. Since few years, the blockchain issue and emergence of crypto assets is a new field of passion and opportunities for him.

      Yves Maillot

      Financial markets and asset management

      Yves Maillot

      Financial markets and asset management

      Understand ICO, STO and IEO

      The ICO is a financial innovation that constitutes an important step in the transformation process triggered by the blockchain. It turns things up and down and especially the traditional relationship to property.In this article, for a second time, we are also going to analyse STO and IEO.

      Real assets tokenization : use case in the real estate

      Among all real assets, properties are very good candidates for tokenization, a mechanism that will facilitate democratization of investing on those assets. Because tokenization allows becoming a real estate owner for only a few hundred euros, without any loan.

      Bitcoin valuation and the Gold price (4)

      Bitcoin valuation and the Gold price (4)

      Bitcoin valuation and the Gold price (4)

      This article is intended for readers who have already acquired a certain level of knowledge in the field of Blockchain and cryptocurrencies. If the article seems indigestible, do not hesitate to choose another difficulty in the box below wink

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      confirmed

      Bitcoin is a medium of payment but its core price is based on the  store of value concept that makes it comparable to Gold

      Bitcoin  is not yet fully used as a medium of payment (number of Bitcoin users as a mean of payment is estimated at roughly and only 30 million people all over the world) because of somewhat high average transactions fees, especially for low criticality transfers and long validation periods (several minutes). In this article, we’ll be focused on a Bitcoin analysis as a store of value (see the article published 21 November 2019) and as a transaction value.

      Bitcoin and Gold are both stores of value – Pricing  Bitcoin compared it to Gold

      As a store of value and scarce asset (number of bitcoins issued limited to 21 million units by 2140), the crypto currency would then act as ‘Gold 2.0’ as we have mentioned in the previous article. By continuing to compare Bitcoin and Gold, let assume that the total value of all bitcoins in circulation   (equivalent to the market capitalization for securities) would equal the total value placed in Gold .

      Assuming this, the bitcoin’s value would then be the result of the following equation :

      = (Value of Gold x market share in %)/number of bitcoins in circulation

      Assuming that the total amount of Gold is close to USD 9400 billion  (on the base of a Gold price at $1550 as at January 3, 2020) and that the total number of bitcoins that have been created  is roughly 18 millions , we get the following figures (see the table below for different market shares) :

      In other words, assuming that the current market price  of $7450 and a market capitalization of USD136 billion , Bitcoin only represents a little bit less 1,5% of the total value of Gold (or 136/9400).

      As shown by the above table, and taking the assumption of a Bitcoin that would represent  5% of the total value of Gold (meaning that the Bitcoin and other crypto currencies investments would represent  an average 5% of all investments), the unit value of a bitcoin would be about 26 000$

       

      Bitcoin pricing if its use becomes transactional

      If Bitcoin becomes a transactional mean (largely used to carry out transactions) and combined the functions of storing value and the one of medium of payment, let’s have a look on how to price it by using the well known quantity theory of money equation :

                                                                       MV=PQ 

      with

      M : the quantity of money in circulation

      V : velocity of circulation of money  (the number of times money ‘changes hands’ over a certain period)

      P : the price of money

      Q : the quantity of money

      Through this equation, the Bitcoin value can be estimated by forecasting the demand generated by the underlying resource distributed by the network (product PQ could be equated to the network revenues), divided by the available monetary base (in bitcoins).

      Transactional value

      The former equation may be summarized by the equality Supply= Demand with supply consisting of available money multiplied by velocity of circulation of the money (MV) and the demand that is equivalent to the wealth produced by the network (PQ). So, the monetary mass should equalize the network value creation   (as for fiat currencies that should equalize the macro total Gross Domestic Product).

      About the Bitcoin velocity, it is difficult to estimate a good assumption given its very high volatility . It is therefore obvious that its velocity used to be higher than the velocity of traditional currencies (fiat) because of infatuation and strong speculation. Then, a velocity 7 to  8 times larger than one of Fiat monetary mass seems credible.

      Without elaborate too much about the needed calculation for this approach, but  :

      1/by combining a Bitcoin velocity level (assumption of 7.5x greater than the  dollar US velocity)

      2/ By estimating a share of the total GDP generated by the Bitcoin network,

      We do obtain a price of  $25 000 $ per Bitcoin unit, knowing that this value is very sensitive to the different parameters  

      Total value = Store of value  + Transactional value

      If Bitcoin becomes more widely used as a store of value and as a transactional tool, the approach is simply to add both valuations. By combining and give more details to the formula, one way to express is to calculate the average velocity for each of the two uses, weighted by the demand associated with each use respectively The Bitcoin’s velocity would then be expressed as follows :

       

      V= (storage value x demand ‘store of value’) + (transactional value x demand ‘ transactional value’)/ (demand ‘store of value’ + demand ‘ transactional value’) 

      The benchmark ‘store of value’ is expressed by a market share of 5% of the Gold value (hypothesis as mentioned before) equals to $ 470 billion.

      Assumptions for the transactional value are considering a network that represents 4% of the total GDP  ($3170 billion), given a Bitcoin network GDP (revenues) of $3550 billion with an average velocity of 3

      So,   V= (470+(3×3170))/3550=2.81 that gives Bitcoin market cap of 3550/2.81=$1263 billion  and, Considering the 18 million bitcoins in circulation , Bitcoin value must be equal to 1 263 000/18= $70 166   a superior price to the simple sum of the store of value (linked to Gold) added to the transactional value, as calculated before (26000$+25000$).

      Conclusion

      All the calculations tell that Bitcoin price  has a room to rise if we consider its potential to replace (or ‘co replace’) Gold, the traditional asset haven / store of value, and also the potential function of transactional value of the first crypto currency.  Obviously, one can bring criticism to the calculations given assumptions that are used, and can bring criticism because other competing protocols and crypto currencies are not taken into account.  

      Tough Bitcoin has a legitimacy and is now a benchmark in this new digital asset class, Bitcoin could be tackled with success by some other projects. It has been the case with Ethereum in some extent. Of course, this potential scenario could reduce the intrinsic and fundamental value of Bitcoin.

      About the editor…

      A passion : Economics, behavioural finance and emerging digital assets

      Yves started his career in the asset management in 1986 where he worked at different positions as manager of equity funds and diversified funds. at Crédit Commercial de France and later, at Barclays group in Paris. In 1998, he took the lead of equity funds and diversified funds, then of the whole fund management business at the French team of the Dutch Robeco group  before joining Natixis Asset Management in 2012 as Director of the Equity Investment business unit. Yves left Natixis AM in 2018 to start as an independant player for professional investors and corporates (advisor and fund raiser).

      He likes to engages in sports that test his endurance like running and swimming, Yves is also fascinated by social sciences, and more specifically by history and economics. But this is the economics mechanisms behavioural aspect and the markets behavioural analysis that are a constant source of thought and discussion. Since few years, the blockchain issue and emergence of crypto assets is a new field of passion and opportunities for him.

      Yves Maillot

      Financial markets and asset management

      Yves Maillot

      Financial markets and asset management

      Decentralized Finance in motion

      DeFi or Decentralized Finance gives opportunities. Recently, few traders took the chance of using this new financial system by realizing winning arbitrages on substantial volumes through crypto ‘flash loans’.

      Real assets tokenization : use case in the real estate

      Among all real assets, properties are very good candidates for tokenization, a mechanism that will facilitate democratization of investing on those assets. Because tokenization allows becoming a real estate owner for only a few hundred euros, without any loan.