This Week In Crypto
This week in crypto: El Salvador makes Bitcoin tax exemptions, Twitter adds BTC tipping, Arbitrum overtakes Polygon for scaling Ethereum, China bans crypto (again), and Alchemix: self-repaying loans.
El Salvador Will Exempt Foreigners from Taxes on Bitcoin
El Salvador, the small Central American nation that recently adopted Bitcoin (BTC) as legal tender, announced that it will not tax foreign investors’ Bitcoin profit and income.
By adopting Bitcoin, El Salvador intended primarily to battle its persistent inflation, but the government also hopes to decrease fees on money sent out of the country, primarily to the United States and other richer nations. Now, El Salvador is trying to attract companies and investors from those countries with significant Bitcoin profits and income to establish headquarters and residency in El Salvador with tax exemptions.
Currently, Puerto Rico reigns as the top location in its hemisphere for crypto investors and crypto-related investment firms to relocate and establish their headquarters. Puerto Rico is under United States jurisdiction, which makes it simpler for investors and companies located in Puerto Rico to do business with customers and companies in the US.
El Salvador may be a more attractive option for non-US citizens and companies that do not intend to do business within the United States. The list of such people and firms may be short, though, as Portugal has established itself as a top crypto tax haven in Europe.
Twitter Adds Bitcoin Transactions
Twitter users are now able to send and receive money, including Bitcoin, using Twitter's new "tipping" feature. All users age 18+ can enable tipping on their profiles, but tipping options vary by location.
All Twitter users with tipping enabled will be able to display a Bitcoin address on their profiles, but only users in the US (excluding Hawaii and New York) and El Salvador will be able to send Bitcoin directly to each other. Twitter has integrated Strike, a third-party consumer app operating on the Bitcoin Lightning Network for handling Bitcoin transactions.
Twitter collects no fees from tips, but most of the apps it has integrated do. Along with Strike, Twitter has integrated Bandcamp, Cash App, Patreon, and Venmo.
Arbitrum: The New Ethereum Bridge That Overtook Polygon
This week, Arbitrum overtook Polygon as the Ethereum bridge with the most relative total value locked in at over $2.7 billion and it has remained among the top ranked bridges since. Arbitrum, which was released for public use on August 31, has exploded in popularity due to its unique combination of security, low transaction costs, and Ethereum compatibility.
Arbitrum is Ethereum's first true layer 2 rollup. A rollup is like a sidechain, except it's trustless, permissionless, and non-custodial – the data is still on the Ethereum blockchain and doesn't rely on another blockchain to process and store transactions.
The rollup batches transactions to be recorded later on the Ethereum blockchain. Arbitrum can do this much more efficiently than other projects because the transaction computation and storage of contracts are performed off-chain. A validator then posts the "rollup block" to the Ethereum blockchain. This rollup block contains a record of a batch of transactions. Using this approach, Arbitrum can offer Ethereum transactions with much lower fees while offering better security than Polygon – at least in theory.
Arbitrum does not have a tradable token. There are rumors that an Arbitrum token release is coming in the future, with current users being allotted tokens through an airdrop.
China Makes Cryptocurrency Transactions Illegal (Again)
On Friday, China’s central bank, the People’s Bank of China (PBOC), declared all cryptocurrency transactions illegal. This is just another entry in China’s recent campaign against cryptocurrency and their growing free market. In the past few months, China blocked the IPO of one of their largest companies, Ant Group; the country banned mining cryptocurrencies, leading to a massive drop in hash rate and migration of miners all over the world; China implemented an extensive crackdown on for-profit private tutoring; and now, China is restating a law from 2013 that states “Virtual currency derivative transactions are all illegal financial activities and are strictly prohibited.”
This isn’t the first time China has put pressure on the crypto market, and it’s not the first time China has outlawed cryptocurrencies altogether. In fact, there have been stories like this out of China 7 times in the past 8 years. When this story came out on Friday, crypto markets dipped roughly 10% but have largely recovered since then, showing China’s influence over the crypto markets has degraded over the years.
Many attribute China’s aggression towards cryptocurrency to the central bank’s development of a virtual Yuan, a state issued cryptocurrency that China can track and regulate.
Alchemix: Self Repaying Loans
Alchemix (ALCX) is a decentralized finance (DeFi) project that launched in February 2021 offering self-paying loans – which means you’re never making a payment on the loan. These loans work by providing collateral in the form of cryptocurrency (presently either Ethereum or the stablecoin DAI), which Alchemix will then use to generate yield on other DeFi projects. The returns on the staked collateral will pay back your loan.
Alchemix currently offers a 400% collateralization ratio on Ethereum, meaning for every 4 ETH you deposit, you can borrow 1 alETH (their wrapped version of ETH). For DAI, the collateralization ratio is half that. The loan lengths depend on the amount borrowed and the yields that Alchemix can derive, and therein lies the downside. Loans can take a long time to pay back; some appear to take 5-7 years to repay.
One of the biggest strengths of loans like this is that there is no risk of liquidation due to price changes; Alchemix affirms that “your only debt is time.” Being able to use Ethereum as collateral allows users to maintain a long position on ETH while gaining the flexibility to reinvest by having access to future yields up front.
Alchemix does come with some measure of risk. The project is very new and has had some bugs pop up like most of DeFi projects do. In June, Alchemix accidentally returned roughly 2,000 ETH to borrowers prematurely, effectively giving those borrowers free money. Although this circumstance was a net positive for the involved individuals, young DeFi protocols that have displayed unplanned behavior should be used with caution.
If you want to learn more about Alchemix, the team has a Medium account with a series of detailed breakdowns.
TL;DR: Alchemix is a DeFi platform offering collateralized self-paying loans; they can do so by deriving yield from other DeFi protocols on your collateral.
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