TBW #49: Don't miss the train

Read all about The Big Whale's 49th Premium newsletter.

To devour this week

🖊️ Editor's editorial
🗣 Our exclusive news
🔶 What's DeFi really for?
⚔️ The ERC-4337

Don't miss the train 😎

"For the past few weeks, we've been seeing things accelerate on cryptos. Demand from institutional investors is on the rise."

This sentence comes neither from a Web3 fund, nor from the boss of a crypto company, but from the CEO of Euronext, which is none other than the main financial centre in Europe (Paris, Dublin, Lisbon stock exchanges, etc.).

Stéphane Boujnah uttered it on Tuesday at Euronext's annual conference in Paris, where the cream of European finance was gathered. 🇪🇺

Contrary to what many people think, the subject of cryptos is far from being neglected by banks, funds, family offices and even insurers.

The scandals of 2022 and the fall of FTX have obviously tarnished the sector's image, but a growing number of financial players are interested in it because they have realised that it is a structuring subject.

They are even more interested in 2023 because the markets have fallen sharply and there are opportunities. Bitcoin and other crypto-assets have lost more than 60% of their value in the last twelve months 😏

Should we rush into it? Of course not. But the fact that the head of Euronext is raising the subject (there was also a dedicated round table) shows that things are moving. And very quickly.

The most important thing, for individuals and businesses, is to be ready when everything accelerates.

Our exclusive news 🗣

👉 Crypto influencers: towards strict supervision?

The fall of FTX has not only prompted the French authorities 🇫🇷 to get tough with crypto players (cf. the recent law speeding up the timetable on PSANs). Influencers in the sector are also being targeted. A draft law aimed at "combating scams and abuses by influencers on social networks" will be examined in session at the National Assembly on 27 March.

Rarely enough to be highlighted, this is the result of the cross-party work of two MPs: Arthur Delaporte (PS) and Stéphane Vojetta (Renaissance). According to our information, this proposal has also received the support of the government.

If the text is passed 🗳️, influencers not registered with the Autorité des marchés financiers (AMF) will be banned from promoting crypto projects. Those who are registered will only be able to work with companies that have the right to communicate in France (via obtaining a PSAN registration with the AMF).

"The idea is not to ban talking about crypto-assets, but to put a stop to undeclared promotions and the associated abuses", explains Arthur Delaporte. "A large part of the influencer audience is made up of vulnerable people or people with little financial education, and it's a question of protecting them," he adds.

According to the text, an influencer is defined as "any natural or legal person who, for consideration or in exchange for a benefit in kind, produces and disseminates content via a means of electronic communication that is intended, through the expression of his or her personality, to promote goods, services or any cause whatsoever".

France is not the only country to take an interest in the subject of influencers. In the United States, several stars such as Kim Kardashian ($1.2 million fine) were recently penalised for promoting projects without notifying their audience.

In Europe, the MiCA regulation, which is due to be finally adopted in April (mandatory entry into force by 2026), provides for the supervision of the activity of crypto influencers.

What is decentralised finance really good for?

Between fantasy and reality, we surveyed experts and project developers to find out what it really changes (or will change).

Few subjects fascinate as much as decentralised finance (DeFi). Since the first projects appeared in 2017, the debate has been ongoing.

For its proponents, it's a playground for innovation and the creation of a more inclusive financial system. 🙌

For its detractors, it's more a symptom of an ultra-financial, speculation-driven ecosystem. 🤑

What is the reality? As is the case almost every time, things are a little more nuanced.

To grasp what DeFi brings, we first need to understand what we're talking about.

DeFi is an alternative financial infrastructure based on the characteristics of blockchain protocols, i.e. decentralisation and transparency.

In its "purest" form, it allows financial services to be operated without going through a central authority, usually a bank. With DeFi, you can get a loan or invest your savings without going through Deutsche Bank or BNP Paribas. 🏦

The best-known DeFi applications are Maker (decentralised stablecoin), Aave (loans without intermediaries) or Uniswap (digital asset exchange without intermediaries). But how many people are actually using them?

"DeFi is still in its infancy. Whether it's the number of applications or the number of users, the figures are very low," explains Stanislas Barthélémi, crypto expert for KPMG. Only 400,000 to 600,000 people use them on average each month (chart below). "It's clearly a niche within the crypto ecosystem", he continues.


Unique monthly users of DeFi protocols. Source: Dune Analytics

Currently, DeFi is mainly used by traders to borrow more cash without going through centralised exchange platforms (Binance, Coinbase, etc.). 📈

Taken from this angle, we're a long way from a system that would correct the shortcomings of traditional finance, particularly in terms of accessibility and impact on the real economy.

It's a fact: no one borrows stablecoins by placing cryptos as collateral in Aave to finance a property purchase or entrepreneurial project. Why not? Mainly because you have to place as much (if not more) capital as collateral as the sum borrowed.

"We certainly have to mourn the passing of this type of DeFi use, at least in the short term," bellows one expert. "To offer a truly inclusive borrowing system, we would have to develop sub-collateralised loans that would be repaid via small monthly instalments, but players would have to bear the risk of the borrower defaulting," he continues.

This implies that traditional credit specialists would have to be involved in this infrastructure (insurers in particular), which is not very compatible with Web3 philosophy. And even if the players in the sector wanted to, the expertise is still far from being there...

"We're still in the very early days of decentralised finance, so it's not surprising to encounter these kinds of obstacles", stresses Stanislas Barthélémi. "However, we must not lose sight of the fact that DeFi offers financial tools that the average person would never have had access to in the traditional world," he adds. 👍

The example of Uniswap is interesting in this respect: the application allows any token to be listed on the platform so that it can be exchanged for other securities without an intermediary. In the traditional world, 'listing' on the stock market can be much more complicated. Above all, being listed on one financial centre does not mean you can be listed everywhere.

Uniswap (and more generally DEX aggregators such as Paraswap) is a very important milestone in the ecosystem that is being put in place.

Among the other major projects, we can also mention Lido, which tokenises the deposits that secure Ethereum ($9 billion in immobilised value) and Curve ($5 billion) positioned on the exchange of assets of the same value.


The largest DeFi projects ranked by fixed asset value (TVL). Source : DeFiLlama

As for less mature applications, but with interesting potential, we can mention GMX ($600 million) or dYdX ($370 million), decentralised exchange platforms with an order book (designed on Arbitrum for GMX, Starkware and soon Cosmos for dYdX).

All these projects enable financial transactions to be carried out without entrusting the funds to third parties (non-custodial). "Where DeFi is already a great success is in the fact that it dispenses with intermediaries," points out Stanislas Barthélémi.

Now, it needs to become more efficient to justify its status as an alternative infrastructure.

From the "crypto-casino" to the real economy

And the task looks set to be quite considerable. "There are still a lot of flaws in DeFi in terms of risk, efficiency and accessibility, especially for institutional players," argues Paul Frambot, co-founder of Morpho, a protocol that optimises deposit and borrowing rates on Aave and Compound. "If we're honest, DeFi is still a kind of crypto-casino with no rules," he points out.

For the French entrepreneur, however, DeFi is full of promise and perhaps connected to the real economy. "That's what we're working on", he explains.

Paul Frambot mentions in particular the possibility of "plugging into" the "repo" (Sale and Repurchase Agreements) market, i.e. refinancing, to which only a few institutional financial players currently have access.

The repo rate is the rate at which central banks lend to commercial banks. If end savers cannot benefit from the same conditions, it is mainly because of the number of financial intermediaries who each take the equivalent of a small commission. 💰

"By eliminating these intermediaries, we could greatly optimise the efficiency of the system for the benefit of individuals at the end of the chain", Paul Frambot believes. "Traditional finance works poorly for operational reasons, DeFi is a response that can improve the existing infrastructure."

A relevant use case: corporate finance

The interweaving of DeFi with traditional finance seems to be one way forward for most experts, mainly through the use of decentralised stablecoins, such as the DAI dollar (issued by Maker) or the agEUR (issued by Angle).

Currently, any organisation can issue a stablecoin if it holds sufficient currencies (euros, dollars, etc.) to guarantee the stability of its token. One example: Circle with its USDC stablecoin backed by dollars.

But this could go beyond currencies: the same logic could apply to securities (shares, bonds, ETFs, etc.) with interesting consequences for companies and their financing.

"It is very difficult today for many companies to use certain securities (such as commercial papers) as collateral against cash," says Pablo Veyrat, co-founder of the Angle protocol.

"It would be entirely conceivable to place these securities in Angle in exchange for issuing euro stablecoins. Using your long-term assets to finance your short-term activity, that's a very concrete use case for DeFi," assures the entrepreneur. 🤝

According to him, the tokenisation of financial securities is not yet widespread because of the difficulty of setting up such solutions and also their cost. For example, you have to pay blockchain oracles to monitor the prices of tokenised assets. "On top of that, you have to have liquidators capable of repaying the debt and recovering the tokenised products if their value falls", he continues.

In short, what's missing is a whole specialised ecosystem that doesn't yet exist... But things are moving, and Ondo Finance is one of the players making things happen. The US company issues tokens backed by ETFs representing US Treasury bonds managed by asset management giant BlackRock.

Swiss firm Backed Finance, meanwhile, provides access to tokenised index funds also held by BlackRock. By acquiring Backed Finance's bCSPX tokens, investors can gain exposure to the iShares Core S&P 500 UCITS, the ETF that tracks the performance of the 500 largest US companies listed on Wall Street's flagship index.

The future of traditional finance?

For Adam Levi, co-founder of Backed Finance, DeFi makes it easier to access investments 24 hours a day (whereas the traditional market is only open for a few hours on working days) and whose settlements are executed in complete transparency in less than five minutes. ⏱

Fees are also much lower than using brokers who take their commission.

Adam Levi is not alone in this view. BlackRock boss Larry Fink said in early December that the next revolution for the markets will be driven by the tokenisation of financial securities, also touting "instant settlement" and "lower fees".

"It's pretty incredible what Backed has managed to do," Pablo Veyrat points out, "I hope the project holds up legally because there are still a lot of regulatory uncertainties..." 😓

Backed assures that it is compliant with the Swiss "DLT" law of 2021. This now recognises digital assets in the same way as traditional financial assets, allowing them to be tokenised. This law is one of the first in the world to clarify this aspect. Is this enough for the development of products like Backed?

"This product is legal in Switzerland... but only there for the time being," moderates William O'Rorke, a partner in the French law firm ORWL, which specialises in disruptive technology law. "For this token to be distributed on other markets, other national regulators will have to authorise it, not to mention the risk of requalification as we have seen in the United States", he fears.

According to our information, several applications have been filed by Backed in Europe. The answer will be in a few weeks' time for one of the most eagerly awaited applications for the DeFi ecosystem...


ERC 4337: what this new standard will (really) change

This new Ethereum standard will make it easier to manage digital wallets. But as several experts on the subject point out, the "revolution" some are predicting will have to wait.

The article is available here 🐳

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