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December 6, 2022

Collateral problems; liquid staking; Goldman Sachs

Welcome to Swarm Markets’ media memo. This weekly update provides comments from Swarm Markets’ co-founders, Philipp Pieper and Timo Lehes, on key industry news that has caught our eye, plus our own developments. 

Comments available on the following news items:

  • Crypto must fix its collateral problem to return confidence to the sector
  • Staking is the diversification crypto investors need
  • The digital assets boom is just beginning

Crypto needs to fix its collateral problem

The damage done by multiple crises this year in crypto will only be repaired if the sector looks to adopt solutions to the specific issue that caused those crises – in other words, crypto needs to fix its collateral problem. 

Not everyone in crypto is guilty of the bad practices exhibited by a few. But the sector has to work hard now to reflect solutions that recognise the biggest mistake which has been exposed in the past year – leveraged crises. 

For us this means creating collateral confidence. The crises of FTX, Celsius and others were all leverage crises. The sector needs more confidence about on-chain collateral in terms of issuance and attestation, in order to facilitate activities such as trading, lending and staking.

While some firms are offering new ideas such as Proof of Reserves – these only go so far they only provide singular snapshots rather than giving consistent proof of collateral. Invariably it means more collaboration with regulators to oversee ongoing collateral obligations. 

Regulators will reach this conclusion in the same way as they did for banks during the financial crisis and act accordingly. It’s incumbent upon the sector to stay ahead of this and provide solutions that return confidence to the market. 

It’s time for crypto investors to diversify

Ongoing market malaise is impacting investor portfolios. With too much focus in crypto on the growth element of tokens, it’s time for crypto investors to start looking at alternative ways to grow their wealth.

Crypto valuations are severely depressed when compared with the highs of a year ago. But the market has moved on and, just as in investing in traditional markets, crypto investors need to consider alternative ideas.

For us this means looking closely at the benefits of staking. In the current low-yield paradigm, liquid staking is a potentially attractive total return product for investors to consider. 

Liquid staking has a big benefit over self staking in that it lowers the barrier to entry for investors and removes quite a bit of the rigamarole. Wait times and long lockup periods are not ideal in the current environment, especially when we’re seeing self-custody soar in the wake of various platform failures. This also makes exchange staking undesirable as the level of centralisation is problematic for many who are concerned about the stability of these operators.  

Liquid staking bypasses these issues by allowing users to participate at lower levels while making redemption seamless thanks to derivative token issuance. It provides access to the benefits of staking – i.e. earning a yield – without exposing users to the risks we’ve all come to be wary of in recent months. 

The hard work of creating a digital asset ecosystem is underway

There’s a growing list of major institutions looking to create ecosystems for digital assets to work within, which could be the defining trend for the future of DeFi. 

Amid the noise of high-profile collapses and market issues in the crypto space this year, the quiet work of building a totally new and profoundly important market for digital assets is well underway. 

In the past few days alone we’ve seen two high profile projects get underway. In Switzerland and Hong Kong, HashKey Digital Asset Group is partnering with SEBA Bank to offer digital asset management products and services. And in the US, none other than Goldman Sachs has just unveiled a digital asset platform with the European Investment Bank (EIB). 

These are not trifling organisations – they are major institutional financial players. It speaks directly to what is going to be a revolutionary financial trend of the 2020s – the digitisation of real world assets (RWAs) and expansion of a global ecosystem for those digital assets, making transaction, custody and interoperability a seamless process for institutions and users alike.   

There is likely to be a marked shift away from speculative asset bubbles of the early days of crypto toward the institutional adoption of DeFi technologies to provide these solutions to real and tangible assets that already have massive existing markets.