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

September 27, 2021

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.


September 27, 2021

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  1. Cross Chain Liquidity Come on In, the Water is Fine

    September 2021 Meltem Demirors | CoinShares @Melt_Dem / @CoinSharesCo
  2. - 2 - DISCLAIMER & DISCLOSURES Please note that this

    presentation is provided on the basis that the recipient accepts the following conditions relating to provision of the same (including on behalf of their respective organisation). This presentation does not contain, or purport to be, financial promotion of any kind and is not intended to constitute an offer, solicitation or invitation for any securities and may not be distributed into jurisdictions where it is unlawful to do so. Digital assets and related technologies can be extremely complicated. Crypto-currencies can be extremely volatile and subject to rapid fluctuations in price, positively or negatively. Crypto-currencies are loosely regulated and there is no central marketplace for currency exchange. Supply is determined by a computer code, not by a central bank, and prices can be extremely volatile. The digital sector has spawned concepts and nomenclature much of which is novel and can be difficult for even technically savvy individuals to thoroughly comprehend. The sector also evolves rapidly. With increasing media attention on digital assets and related technologies, many of the concepts associated therewith (and the terms used to encapsulate them) are more likely to be encountered outside of the digital space. Although a term may become relatively well-known and in a relatively short timeframe, there is a danger that misunderstandings and misconceptions can take root relating to precisely what the concept behind the given term is. Although produced with reasonable care and skill, no representation should be taken as having been given that this presentation is an exhaustive analysis of all of the considerations which its subject- matter may give rise to. This presentation fairly represents the opinions and sentiments of the CoinShares Group, which is the issuer of this video, as at the date of its issuance but it should be noted that such opinions and sentiments may be revised from time to time, for example in light of experience and further developments, and this presentation may not necessarily be updated to reflect the same. The information presented in this presentation has been developed internally and / or obtained from sources believed to be reliable; however, the CoinShares Group does not guarantee the accuracy, adequacy or completeness of such information. Predictions, opinions and other information contained in this presentation are subject to change continually and without notice of any kind and may no longer be true after the date indicated. Any forward-looking statements speak only as of the date they are made, and the CoinShares Group assumes no duty to, and does not undertake, to update forward- looking statements. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Nothing within this presentation constitutes (or should be construed as being) investment, legal, tax or other advice. This presentation should not be used as the basis for any investment decision(s) which an individual may be considering. Any potential investor in digital assets, even if experienced and affluent, is strongly recommended to seek independent financial advice upon the merits of the same in the context of their own unique circumstances. Crypto assets are a highly volatile asset class. Your capital is at risk. The value of crypto assets can go down as well as up and you can lose your entire investment. Crypto assets may not be covered by financial compensation schemes. The CoinShares Astronaut is a trademark and service mark of CoinShares (Holdings) Limited. © 2021 CoinShares Group. All rights reserved. Note: CoinShares invests in innovative companies building the digital asset ecosystem, focusing on making early stage equity investments in financial technology companies. Note that CoinShares, associated group entities, or the directors of the firm may be investors in one or more of the companies or assets discussed in this presentation.
  3. - 5 - 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
  4. - 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

    photos accessed from Google shiny rock not a rock not a bank “banks”
  6. - 9 - 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

    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
  8. - 11 - 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

    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
  10. - 14 - 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
  11. - 15 - 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
  12. - 16 - 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
  13. - 17 - 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

    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
  15. - 19 - 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

    • 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

    Global Equities Markets 2T 30T Real Estate Crypto 12T Precious Metals Source: River.com M2 Money Supply 40T