February 9th, 2019 | Max Hinchman
In this new posting of exploring the Polkadot ecosystem we take a look at a new DeFi protocol called Laminar.
So DeFi… it might seem complicated but the very basics of it have to do with the fact that people that are holding onto ETH but don’t want to sell because they think the value is going to go up in the future. But they want to be able to borrow against some of their holdings for whatever other purpose. This is where products like MakerDAO and Compound come in provide an outlet for crypto asset holders to borrow against their ETH holdings. People can also use their digital asset for staking or liquidity pools and earn interest. This has set things in motion for DeFi and now there is roughly a $1 billion total locked in DeFi smart contract platforms.
New products are being developed, but the big moves are going to be made once interchain transactions are facilitated. Transactions currently are strictly limited to within blockchains. Similar situation to when an American goes to China and discovers that literally no one accepts Visa. Bitcoin can’t transact with Ethereum and so on. There are solutions in the works, however. Polkadot, is a protocol, that is aiming to solve this issue by providing (figuratively and literally) the bridge between different blockchain networks. This interconnectivity of the different blockchains is what is going to ultimately unleash the potential of these new networks.
Laminar is a new DeFi protocol that is building with the interchain operability in mind by building alongside Polkadot. On Laminar’s website Medium page, it describes itself as “Laminar is a VC backed decentralized finance protocol company. It aims to create an open finance platform that will provide better access to trading instruments, and enable developers to build more open financial services.”
So, what does this mean? The main thing to keep in mind when assessing the blockchain projects is if more value can be created by replacing a centralized intermediary with code maintained by a network of participants engaged in a crypto-network game called a consensus mechanism. Crypto-networks are networks built on top of the standard internet protocols that use blockchain (or other distributed ledger technology) to update state and then use cryptocurrencies to incentivize the network participants to maintain the network.
In the case of Laminar, they are building on top of the Ethereum blockchain, so transactions are recorded on the Ethereum blockchain. Laminer is offering what are essentially Forex trading services and products for their customers. Their 3 products are the following:
1) Synthetic asset protocol (completed): It is a decentralized Forex platform and is the core product offered by Laminar. The protocol mints a Euro or Japanese Yen denominated asset called a Flow Token, by a user depositing select USD stablecoins as collateral. When a user wants to exchange the USD stablecoin for a EUR/JPY denominated asset, they must offer collateral that covers 100% of the amount of the amount borrowed. In addition, there is a second party called liquidity providers. The liquidity providers provide an additional amount to liquidity pool for risk management purposes and make money through the bid-ask spread of the orders. The Laminar smart contract regularly reassesses the value of positions created in order to make sure it accurately reflects the actual market exchange rate between the USD and the EUR/JPY. Any position that is deemed as below the minimum collateralized requirement are at risk of being liquidated.
2) Collateralized Margin Trading Protocol (in development): This is where things get interesting. It allows traders to take a leveraged long or short Euro/JPY position against the base currency, USD. From the Laminar Gitlab page: “Can be used as a hedge against future price fluctuation e.g. an importer, who might need to pay JPY to supplier in 2- month time, can use a 10x leverage with 10% margin hedging for the full risk expecting price fluctuating within 10%”. Derivatives were originally developed to minimize the risk for parties involved in a trade. The same risk management tools are now being offered in the crypto world.
3) Money Market Protocol (in development): Laminar takes it another step and offers a money market platform for traders. Token holders can deposit assets into a liquidity pool and the protocol, through its interconnectivity with other lending platforms like Compound, will offer the same tokens for other lending platform’s liquidity pools. This shares some similarities with the money market funds in the traditional finance world. In traditional finance, a money market fund invests in highly liquid high rated short-term securities like commercial paper or repo securities.
This product is complex so it is targeting the sophisticated players just like most of the other DeFi projects. The protocol is combining the market making, derivatives trading, and money market products that are found in typical financial institutions. As of this point there is no one that is offering a similar type product in the crypto space. This three in one type of offering is unique.
What I like I about this project is when I think about the “what if” crypto’s vision for the crypto-economy materializes. There are going to be so many different coins for many different services and people are going to need to be able to exchange one coin for another. To put it into perspective, the Forex market is by far the largest financial market in the world with trillions of dollars being exchanged everyday. Now imagine the potential size of crypto and the different projects operating all with their own tokens being exchanged constantly everyday. The fact of the matter is that financialization is not just a part of the crypto economy, it is the crypto economy. The management of these different digital assets are going to be a giant industry itself if the crypto vision becomes reality. Laminar offers a glimpse into that coin management future with their three different products.
Chris Dixon, of Andreesen Hortwitz’s crypto fund, mentioned in the Unchained Podcast is that we are in the midst of seeing the line between the digital and physical world become thinner and thinner. What we used to called E-mail or E-commerce is basically just regular mail and regular commerce for most people. The problem is that the transactions for in the digital world are still based on old school physical world infrastructure. Crypto is looking to be the centerpiece of the new digital financial system. It is safe to assume that there will be new markets in the future that we can’t even imagine at this point. For example, the Forex market that we know today, that transacts trillions of dollars a day, has only existed in for the last 30 years. In 1988 the daily transaction volume was roughly $750 billion vs $3.5 trillion today. Change takes place quickly.
It really easy to get excited about all of the possibilities ahead in crypto because the space is changing so quickly. But there are still many unanswered questions.
The biggest question I have is what happens when the central banks release their own respective digital currencies. I guess this is all dependent upon the continued stability of the tokens but would a merchant really accept a Euro denominated token minted by a protocol versus the Digital Euro issued by the ECB? I guess this a question for stablecoins in general. Is there a unique value proposition for a stablecoin versus a central bank issued digital currency?
Then there is the added risk of the over financialization in the crypto economy. Vitalik Buterin was quoted in 2018 as saying “But I’m skeptical that people involved in cryptocurrency are better people than people involved in the banking system.” He adds, “If crypto succeeds, it’s not because it empowers better people. It’s because it empowers better institutions.” I am a fan of crypto obviously. But I wonder what the social impact on a tokenized economy looks like.
These tokens aren’t simply a stable medium of exchange like standard currencies. My own opinion is that we view them more so like a stock than currency. When any of us purchase a token or receive a token we are emotionally expecting to see the value of the token go in one direction, up. With this in mind, I wonder what the world would like look if everyone was paid in stock options versus hard currency. Everyone would act like a ruthless CEO looking to boost the stock price over the next quarter. The chances of things turning into a complete shitshow versus an economic utopia are much more likely.
In addition, the whole DeFi space at the moment is entirely dependent on the success of Ethereum. To repeat what was mentioned earlier in the article, the foundation of the DeFi space are ETH holders that don’t want to liquidate their ETH holdings because they think it is going to rise in the long term. The space is venturing further into the unknown by creating synthetic assets based off of minted token backed by Ethereum. I am not saying that DeFi products are on the same level as the complex derivatives from 2008 crash but those products were structured with the belief that the underlying securities properly mitigated risk. So in DeFi’s case, everything is great JUST AS LONG as Ethereum holds its value. But I guess you can take it a step further and say that everything in crypto is great JUST AS LONG as Bitcoin holds its value. I guess it’s a moot argument….
Recommended Additional Reading
Disclaimer: Investing in cryptocurrencies and related projects is highly risky and speculative, and this article is not a recommendation by the writer to invest in cryptocurrencies or crypto-related organizations. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions.
Комментарии
Отправить комментарий