Square pegs, round holes
Square’s new DeFi platform tbDex
Square is developing a new open-source decentralised exchange protocol in order to improve the ability and access for average users to on/off-ramp to/from fiat and cryptocurrencies. This is a much needed service — so much in fact that it’s what we do — and have done so since 2013! However, the aim of this protocol is to give transactions as close to zero-knowledge as possible when dealing with trusted centralised parties required for the fiat aspect of exchanges.
It aims to use a social trust to establish a means to manage transaction risk, a reputational system (feedback), as well as decentralised identification (DIDs) and verifiable credentials (VCs) to establish a real-world identity and reputation on the platform for other users. The protocol is indifferent on anonymity and instead leaves it to the two parties to decide on the minimum information required to conduct a trade.
The protocol is part-wallet, part-DeFi platform that connects users to participating financial institutions (PFIs) — who they define “can be, but are not limited to, fintech companies, regional banks, large institutional banks, or other financial institutions”.
When a user/wallet wants to exchange one currency for another they are essentially broadcasting their request to a list of PFIs who can establish communication and messaging for the exchange of necessary documentation for that trade’s requirements. Requests can be filtered by the level of verification that each PFI requires in order to facilitate a trade. Know-Your-Customer checks would still be required by some, however, the hope is that reputable KYC providers will give the credential to users that can trade with others who can trust their KYC has been conducted properly and can be trusted.
Overall this is really really disappointing. This isn’t anything new, it is leveraging the idea of a ‘protocol’ to recreate what Paxful or LocalBitcoins have been doing for years inside an app — fully ‘capturing’ the user. Moreover, the idea that one party will provide KYC that others can use is laughable — why on earth would anyone take on the costs and then the risks of performing KYC on someone who can then use it indefinitely with other traders?
The system would be heavily abused as any nefarious actor would only have to trick one provider before being given a free pass. Specialised VCs will pop up that would offer a clean KYC credential for a fee. I imagine this outline has been created by a team that has not had much if any experience of dealing with crypto-buyers in a P2P manner. They do outline some of the risks the asymmetrical relationship when dealing with fiat and crypto exists but do not offer any solutions. While this sounds exciting and cool, ultimately PFIs are still centralised data holders and regulated entities in countries that would already define them as such.
This is decentralised in name alone and would require just as much regulation and oversight from some authority as there is now. There is some consolation that this is the very first whitepaper that will be iterated on, but as a starting off point, I’ve got cause for concern. It is such a shame as LondonLink would be a prime example of a PFI that could be of great value to the protocol, we’re established, have great feedback and reputation, and have the capabilities to provide the full suite of KYC and AML requirements, but as I currently understand it, the risks would far outweigh the benefits.
This is such a shame, and I know that as someone that works at a company that this protocol is kind of taking a shot at some of you may be wincing that I’m just bashing something new that could take me out of a job! For what it is worth (and if you believe me) this really is not the case, I have acknowledged for a while that the role of a broker (especially in crypto) is one that will be gone sooner rather than later — I’ve even considered turning my professional life into some sort of meta-performance artwork wherein I only ever work jobs that are less than a few years away from disappearing, HGV driver, bank teller, a useless middle-manger somewhere. You get the idea.
What this has made me consider more is not that this protocol is wrong or lacking but rather our legacy systems are simply not fit for purpose anymore. I had to pay the DVLA for a lost logbook recently. They required a cheque as the form of payment — no other option given — that’s nuts. That simply is not where the world is or going. Estimating and then paying taxes assumed in 18 months advance is again unbelievable — if you overpay then a deduction or payment back to you takes who knows how long and wouldn’t include any sort of inflation uplift — a free loan to the government from you. I’ve had 7 different jobs that have overlapped and paid varying amounts, both as self-employed and employee, since I graduated from university as well as moved something like 9 times in less than 5 years — all in London — this is a pretty normal sort of timeline for my colleagues and friends. As someone who got into crypto at university before having to deal with these legacy systems in earnest — none of them make much sense and are muddied processes relying on a sort of static lifestyle that isn’t real anymore (unless you’re a homeowner). The thDex is a nice step in the right direction but is trying to placate the concerns of everyone along the spectrums of centralised to decentralised, fiat to crypto. It’s creating a grey middle ground where everyone is just a little uncomfortable. Great.
El Salvador Bitcoin City
Presidente Bukele is at it again, destabilising the dollar and causing untold misery by giving the population of El Salvador free bitcoin. This time the dastardly fella is issuing ‘Bitcoin Volcano Bonds’, a veiled attempt to launch a sovereign nation attack on the dollar and IMF via a $1 billion government bond that will be used to fund the first infrastructure projects for a new city — the Bitcoin City — the utter villain.
The new city concept boasts no; property, capital gains, income, payroll and council/municipality taxes, but does have 10% VAT. There is also a claim the city will produce zero emissions as it will be powered by geothermal energy from the nearby volcanoes.
The first bond will be available in early 2022 with a coupon rate of 6.5%. The revenue will be split 50:50 between purchasing bitcoin and investing in the country’s volcano mining operation. The purchased bitcoin will be held for at least 5 years at which point, if the value of bitcoin has increased, 50% of the bitcoin profits will be paid out quarterly. This will be the first bond to be issued and with an estimated total cost of $17 billion for the city project, more will likely follow.
The bond will be issued on the Liquid Network — a bitcoin sidechain developed by Blockstream — which is being used for tokenising securities. Blockstream claim tokenised securities can be traded 24/7, have higher liquidity, lower costs for issuers and can be made available for smaller investors — in the case of the Bitcoin Volcano Bond the minimum buy is $100. Blockstream have recently issued their own mining security, BMN, which similarly issued notes that represent a share in their mining operation, with the intent to be something of a ‘bitcoin booster’ by returning the principal as well as a share of the earnings of the mining operation during the 3-year term.
Do we need a comment here? This makes sense, right? In the country that has adopted bitcoin as legal tender, why wouldn’t they start issuing bonds denominated in bitcoin? The project itself seems a bit pie-in-the-sky type thinking and there will be some issues along the way — the rollout of lightning wallets and payment systems in El Salvador hasn’t been quite as easy as some would like you to think — but it’s working, and assuming a nation of diverse individuals to suddenly understand and get on board with a technology that throws seasoned developers is a bit far-fetched. So why not? Why can’t this work? I’m trying to think of reasons why not and I can’t think of any that aren’t short-term issues. There may be issues at one of the mining operations, a delay caused by incremental weather — but the underlying idea and investment thesis seem sound. El Salvador has already firmly planted itself in the head of most early bitcoin adopters as somewhere to eventually go and when they do, a new city that is designed for people like them in mind is potentially adding to the value proposition. That residency program is really starting to look a bit more appealing, however, this is more because I’m tired of the cold and dark and constant gaslighting by politicians and media in the UK rather than the new city announcement.
A 6.5% annual rate is on the higher end of normal on bitcoin staking and lending platforms currently in the market, so it’s not too much of a stretch for some to make the leap over — one could almost consider it diversifying. A large swath of bitcoiners are content/committed/zealous to have some of their bitcoin locked up for at least a few years, if that’s the case, then the proposition of getting a return and a share of mining profits (which have been extraordinary in the last decade) and it can help build a new city that aligns closely to my radically crypto-anarchist persona then — why not?
Currently, El Salvador does have a traditional bond on offer that returns 13%, so investors will be investing in the Bitcoin bond for the extra ‘b’. The Bitcoin Bond is structured as a traditional bond and will be down to the investor or team on how and if this bond is within their mandate and if the exposure to bitcoin is a compelling reason to invest. The IMF has not taken well to the plan, reiterating its disdain for bitcoin as legal tender citing ‘significant risks’ and the country should end the government bitcoin trust used to convert bitcoin to dollars and vice versa for locals. Sounds like the IMF is pleading not to be made redundant. They have provided a loan to the Central American country which comes with some tight strings attached. Why is El Salvador being punished for trying an alternative?
A lot of this comment is whys and why nots? And I’ve kind of talked my way around by doing so. Initially, I was skeptical and dismissive, and still am a bit, it’s a fanciful idea, one that is built on excitement and hope for the future but also something to be scoffed at by finance commentators and mouthpieces. But I’ve got to remind myself that these are the same lot that was completely ‘blindsided’ by inflation. Inflation has been obvious for several months now and there were ample warning signs even before the pandemic. This could be one of the catalyst moments, wherein if the Bitcoin Volcano Bond is even remotely successful, more governments will start offering bitcoin bonds in the future. Turkey next?
Let me put my money where your mouth is
Lightning again, and it will continue to be Lightning until it sinks in.
Here’s developer, and all-around great guy, Ben Arc getting slapped by a lightning-enabled slapping machine during a Livestream.