Cross Chain Liquidity: Come On In, The Water is Fine!

This is a talk I gave at Messari MainNet on Mon, Sept 20, about Cross Chain Liquidity.

Transcript

1. Cross Chain Liquidity
   Come on In, the Water is Fine
   September 2021
   Meltem Demirors | CoinShares
   @Melt_Dem / @CoinSharesCo
   

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2. - 2 -
   DISCLAIMER & DISCLOSURES
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3. What is liquidity?
   

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   WHY DOES LIQUIDITY MATTER?
   Sell Orders Depth
   Buy Orders
   Number of Sell Orders Number of Buy Orders
   Tightness
   • Liquidity involves the trade-off
   between the price at which an
   asset can be sold, and how quickly
   it can be sold
   • Liquid assets can be sold rapidly,
   with minimal loss of value,
   anytime within market hours
   • In traditional markets, speculators
   and market makers provide
   liquidity
   • More liquidity leads to tighter bid
   ask spreads, and lower liquidity
   leads to wider spreads
   Spread
   Volume
   

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5. - 6 -
   `
   TRADFI MARKETS ARE NGMI
   Reconciliation
   Price Discovery
   Execution
   Margining & Clearing
   Settlement
   Reconciliation
   Price Discovery
   Execution
   Margining & Clearing
   Settlement
   Reconciliation
   Price Discovery
   Execution
   Margining & Clearing
   Settlement
   The existing trade lifecycle requires intermediaries to constantly
   move data between proprietary data structure
   BROKER A BROKER B BROKER C
   

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6. What is crypto?
   

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   BITCOIN TURNS COMPUTATION INTO MONEY
   Source: Stock photos accessed from Google
   shiny rock
   not a rock
   not a bank
   “banks”
   

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   AND PUT A PRICE ON IT
   Source: Blockchain.info
   0
   100
   200
   $0
   $35,000
   $70,000
   1/2/15 1/2/17 1/2/19 1/2/21
   Millions
   Price Hash Rate
   TH / sec
   • The bitcoin network is the world’s most
   secure, independent financial network
   • The demand for block space is a function of
   the demand for secure financial
   transactions
   • Ethereum extended this concept by
   introducing financial computation, in the
   form of smart contracts
   • Newer, emerging L1 protocols are
   introducing different models for pricing
   network computation by offering different
   security guarantees or opting for certain
   measures of centralization
   

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   BLOCK SPACE IS A SCARCE ASSET
   Source: Blockchain.com; Etherscan.io
   0
   50
   100
   1/1/16 1/1/17 1/1/18 1/1/19 1/1/20 1/1/21
   Thousands
   Block size, in bytes
   0
   60
   120
   7/14/16 7/14/17 7/14/18 7/14/19 7/14/20 7/14/21
   Millions
   Mempool size, in bytes
   Demand for Bitcoin Block Space is Cyclical Demand for Ethereum Block Space is Persistent
   

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    AND IS PRICED AS SUCH
    Source: Blockchain.com; Etherscan.io
    $0
    $125
    $250
    9/21/18 9/21/19 9/21/20
    $0
    $40
    $80
    9/21/18 9/21/19 9/21/20
    Bitcoin Tsxn Fees Ethereum Tsxn Fees
    Average Transaction Fee
    

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11. - 12 -
    BLOCKCHAIN COMPUTE IS BECOMING A FUNGIBLE ASSET
    Source: IMGflip meme, made by yours truly
    • For a commodity to be tradeable you need to be able to
    move it around to where it’s needed in a cost effective
    manner
    • The ability to move “financial compute” from one
    chain to another (via bridging and L2’s) opens up the
    potential to make financial functions themselves
    fungible
    • Prior to this, the effort and time required to rebuild a
    specific application on a new chain would likely have
    defeated any compute savings.
    • With dozens of L1’s and L2’s, there are now faster,
    cheaper alternatives that support the same types of
    financial compute
    

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12. Can Liquidity be a Fungible Asset?
    

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    THERE IS NO FREE LUNCH
    throughput cost
    speed
    To optimize for scalability in financial compute requires inherent trade-offs
    in regards to decentralization and security
    Objectives
    

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    PUTTING DOLLARS ON CHAIN
    Source: CoinGecko
    • Putting dollars on chain has created
    liquidity in the absence of PBs, banks,
    and other traditional credit providers
    • The top three are the highest by
    market cap, but are all centralized and
    therefore exposed to banking and
    regulatory risk
    • While the sheer volume of stablecoins
    in circulation is impressive, 90% of the
    trading volume still comes from Tether
    • Most stablecoins have extremely low
    velocity because they are used
    passively
    Crypto Dollar Volume and Velocity
    $0
    $40
    $80
    0.00
    0.50
    1.00
    Billions
    Market Cap Velocity
    

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    MOVING ASSETS ACROSS CHAINS
    Source: DeFiPulse, retrieved 9/19/2021
    1.4% of Bitcoin is on Ethereum
    $0
    $7
    $14
    0
    150
    300
    9/1/20 12/1/20 3/1/21 6/1/21 9/1/21
    Billions
    Market Cap BTC, thousands
    But 95% of it is Custodial
    wBTC HBTC RenBTC Other
    

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    BRIDGING LIQUIDITY TO L2
    Source: L2beat.com;
    $0
    $2
    $4
    6/23/21 7/14/21 8/4/21 8/25/21 9/15/21
    Billions
    • There is currently $4B of Ethereum-
    based L2 TVL, which is dominated by
    Arbitrum who makes up 2/3 of this
    volume
    • L2 solutions fully or partially derives
    their security from layer one Ethereum
    so that users do not have to rely on the
    honesty of L2 validators for the security
    of their funds.
    • A wide mix of platforms and
    applications are pushing Ethereum
    activity to L2, including the exchange
    dY/dX
    Ethereum L2 is Growing
    

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    ALL ASSETS WILL BECOME FUNGIBLE
    Source: Dune Analytics
    • $7.8B in TVL has been bridged away from L1
    Ethereum thus far, with 2B of that bridging
    volume taking place over the last 20 days
    alone
    • Over 45,000 addresses have bridged away
    from ETH – this is not limited to a small set of
    power users, but rather, widely available and
    widely utilized across the DeFi landscape
    • As more bridges get built, we expect these
    volumes to grow as users seek speed, ease of
    use, and availability (of financial compute)
    Arbitrum
    Polygon
    Avalanche
    Fantom Anyswap
    Solana Wormhole
    Harmony
    Optimism
    NEAR
    Assets Bridged Away from Ethereum
    

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    ALL ASSETS WILL BECOME FUNGIBLE
    Source: CoinGecko, DeFiPulse, L2Beat, CoinShares Research
    $2T asset class
    $127B | ~6%
    Stablecoins
    $15B | ~1%
    Wrapped Assets
    $7B | <1%
    L2 & Bridges
    The demand for blockchain-based
    financial compute will exceed the
    available supply for some time to
    come
    As the asset class grows, so will the
    migration of assets across various
    protocols as users and devs alike
    find new ways to leverage cheaper,
    faster financial computation
    

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    NOW, ANYONE CAN BE A MARKET MAKER
    • Literally anyone who holds a crypto asset and
    has a risk appetite can MM via LPs and AMMs
    • Because all assets settle with finality to the
    network, liquidity is hyper-fluid and migrates
    quickly to capture juicy yields
    • Apes gain edge solely through market
    intelligence, speed, and high risk tolerance –
    and scale can sometimes hinder edge
    Liquidity 1.0: Boomers in Blazers Liquidity 2.0: Degenerate Apes
    • Becoming a MM requires significant risk
    capital as well as adequate regulatory capital
    • Because market microstructure varies by
    asset type, firms tend to specialize in specific
    markets (commodities, FX, equities, etc)
    • Firms gain edge through proprietary order
    flow, technology / infrastructure, and
    relationships
    

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20. - 21 -
    PUTTING THE FUN IN FINANCIAL COMPUTATION
    Come on in to the Liquidity Pool
    

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21. - 22 -
    CRYPTO MARKETS ARE JUST THE BEGINNING
    106T
    Global Equities Markets
    2T 30T
    Real Estate
    Crypto
    12T
    Precious Metals
    Source: River.com
    M2 Money Supply
    40T
    

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22. CONTACT US
    www.coinshares.com
    md@coinshares.com
    @Melt_Dem | @CoinSharesCo
    

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