Last Week in Crypto

Last week in crypto, the first US Bitcoin ETF launched, KuCoin went down (again), All.Art is bringing liquidity to NFTs, and Facebook launched their crypto wallet with Coinbase.

Photo by Sophie Backes / Unsplash
Photo by Sophie Backes / Unsplash

First US Bitcoin Futures ETF Launches

Last week, the first Bitcoin futures ETF launched on the New York Stock Exchange, allowing traditional investors to engage with Bitcoin without onboarding to a specialized crypto exchange. The ProShares Bitcoin Strategy ETF (BITO) debuted to near record breaking performance on many measures. According to Morningstar, BITO had the second highest volume for an ETF on launch day, the second largest assets under management for an ETF on day one, and the second largest first day return among ETF day one launches.

It’s important to note here that buying BITO is not a direct investment in Bitcoin, rather it’s an investment in Bitcoin futures contracts---agreements to buy or sell Bitcoin for a predetermined price.  On opening day, there was just over $1B in trading volume, and Bitcoin itself continued it’s price climb breaking through to a new all time high of $66,999 on Wednesday.

There have been attempts to launch Bitcoin ETFs for years, but the SEC hasn’t made any moves to approve them until recently.  In August, SEC Chairman Gary Gensler suggested his agency would be open to futures ETFs, and on Friday a second ETF launched.  As of now, there is no indication of a timeline for a spot ETF, one that trades on the actual underlying asset.

Bridges up

KuCoin Goes Down Again

KuCoin went down on Saturday during a major shift in the market. KuCoin is a centralized crypto exchange based in Hong Kong that offers leveraged crypto trading to retail customers. Since the outage happened during a time when many traders' leveraged positions were being liquidated, some suspect foul play.

In a massive post on r/cryptocurrency, a KuCoin retail trader laid out his belief that KuCoin profits from liquidating users and saves money by underinvesting in their server infrastructure. The post is fairly convincing, but no one outside KuCoin can be sure of the exchange's motives, and there is evidence that KuCoin's terrible software may have caused the issue on its own.

KuCoin CEO Johnny Lyu made his own Reddit thread to address concerns among traders. Lyu claims that KuCoin does not profit from liquidating user accounts. This is probably true, but there have been cases where crypto exchange executives have used their internal order books to trade against their customers. Since KuCoin's retail customers were affected but its institutional customers were not, it's also possible that KuCoin's outage allowed retail accounts to be liquidated while institutional customers continued to trade.

Is bad software to blame? Lyu claims that KuCoin spends twice as much on cloud infrastructure as similar-sized competitors. In software development, spending more on cloud infrastructure is seen as a weakness of the software. KuCoin spending double the average on cloud services doesn't mean users get double the access to KuCoin's products--it means KuCoin's engineers did a bad job. Then, of course, there's the outage record. Financial services that are executed properly don't go down every week.

Whether KuCoin profits directly from outages or simply accepts them as a consequence of poor software investment, the company did not seem to lose much in the wake of the outage. The market cap of KuCoin Token (KCS) remains steady at roughly $1.2 billion.

CryptoPunks NFTs
CryptoPunks NFTs (Larva Labs)

The All.Art Protocol Brings Licensing and Liquidity Pools to NFTs

All.Art is an upcoming Solana project offering a new approach to non-fungible token (NFT) sales and licensing. All.Art introduces two NFT features: automated market makers (AMM) for NFTs, and tiered licensing for NFT art. All.Art uses its AART token for transactions.

The NFT-PRO Standard

The NFT-PRO standard introduces licensing to NFT transactions. Simply put, All.Art will allow collectors to buy different licenses for the same NFTs, such as a license to display an NFT as a social media avatar.

The standard is broken into three layers:

- Layer 1 is the core data layer for the NFT, with all data stored on-chain. This layer is mandatory, and License Ownership Rights Tokens can be minted here or in Layer 2.

- Layer 2 is an optional licensing layer. NFT creators can include additional licensing terms in this layer and link them back to Layer 1 (and the NFT itself).

- Layer 3 is an optional transaction layer, where the market for the NFT is created.

All.Art explains, "If the creator wants to represent an item in the form of an NFT, Layer 1 metadata is needed. If an NFT is for sale, a contract of a sale or license transfer is necessary, thus Layer 2 is needed. And if sales are happening on-chain through automated market making or auctions, Layer 3 is needed."

Decentralized NFT Swap Pools

Every NFT-PRO has its own cAMM pool

NFT Swap Pools are intended to boost liquidity. All.Art uses what it calls a Capped Automated Market Maker (cAMM), based on the same formula used by UniSwap.

When an artist creates an NFT using the All.Art protocol, All.Art automatically generates a cAMM for that NFT. All.Art also generated License Ownership Rights Tokens (LORTs). These are not fractions of an NFT, but rather licenses for that NFT. During this process, the artist receives 50 LORTs, and 100 LORTs are deposited into the cAMM.

Artist defines license rights

When someone buys an NFT using AART tokens, he or she receives the license ownership tokens. The artist can then swap his or her LORTs into the cAMM liquidity pool in exchange for the AARTs, which can be exchanged for real money.

LORTs are also exchangeable for each other, since they are collateralized in the same unit of exchange.

AART tokens will be available to the public later this year, but whether NFT creators and collectors will adopt the new system (or even understand it) remains to be seen.

Photo by Alexander Shatov / Unsplash
Photo by Alexander Shatov / Unsplash

Facebook Partners with Coinbase for their Crypto Wallet Novi

On Tuesday, Facebook launched their crypto wallet, Novi.  At launch, Novi supports Paxos Dollar (USDP), a stablecoin that hasn’t had the market adoption of their bigger competitors Tether (USDT), Circle (USDC), and Binance USD (BUSD).  Facebook explains that they chose Paxos due to the age of the project, the “important regulatory and consumer protection attributes,” and that its “reserves are fully backed by the US dollar and are held 100% in cash and cash equivalents.”  The company eventually plans to migrate to their own stablecoin, Diem, once it has cleared regulatory scrutiny.  Novi is pitched as “a new way to send and receive money instantly, securely, and with no fees.”

This week, Coinbase published a blog post announcing they will be the custody partner for Novi’s pilot.  Coinbase has a custody service, Coinbase Custody, that “keeps user funds secure with our proprietary, fully segregated cold storage capability for managing private keys.”  Coinbase is one of the few major players in crypto custody right now, as of 06/30/21 they manage $180B in crypto assets.

A few hours after announcing the pilot, lawmakers Brian Schatz, Sherrod Brown, Richard Blumenthal, Elizabeth Warren and Tina Smith signed a letter to Facebook CEO Mark Zuckerberg urging the company to cancel the pilot.  The letter said “Facebook cannot be trusted to manage a payment system or digital currency when its existing ability to manage risks and keep consumers safe has proven wholly insufficient.”