Trading “paper U.S. stocks” on the blockchain is unreliable

FTX lists equity tokens of Tesla, Apple, etc.

Uniswap lists the Forex pair XSGD/USDC.

The capital management platform lists the DeFi Pulse Index (DFI).

MakerDAO is experimenting with introducing more physical assets as collateral for DAI.

The blockchain world is introducing more and more transaction targets, a process that is very similar to the evolution of traditional financial markets. The blockchain world is becoming diversified in terms of the dimension of asset classes, but at the same time, the core assets that really have value in this world are being augmented and diluted in various forms.

U.S. stock tokens have little to do with U.S. stocks

On December 4, Terraform Labs, the team behind the South Korean stablecoin project Terra, launched the Mirror Protocol project. It is a Synthetix-like synthetic asset protocol that allows users to gain, or lose, from price fluctuations by tracking the price of the underlying asset.

The emergence of Mirror made the industry excited, “You can now trade US stocks on Uniswap!” But in fact, the “U.S. stock tokens” on Mirror have little to do with U.S. stocks.

The “U.S. stock tokens” on Mirror are synthetic assets in the form of mAssets, such as mAAPL, which is a synthetic asset based on the price of Apple stock.

The generation of mAssets is based on the over-collateralization of stablecoins. Users have to purchase the stablecoin UST on Mirror and then generate the required mAssets by overcollateralizing the UST or other mAssets assets. This process has the same liquidation risk as staking assets to generate DAI on MakerDAO.

The only intersection between mAssets and U.S. stocks is at the price level, i.e., tracking U.S. stock prices, although, as I understand it, Mirror has no mechanism to ensure that mAssets necessarily anchor or return to U.S. stock prices.

Holding mAssets does not imply ownership of the corresponding shares to receive dividends.

In addition, as mentioned above, the value of mAssets is not dependent on physical U.S. stocks, so mAssets are a class of assets derived from “U.S. stock prices” rather than “U.S. stocks”.

Compared to US stock trading, mAssets allows users to speculate on “US stock prices” 7*24 hours without having to do KYC or AML, and the trading volume does not need to be the whole stock, but can be split into small amounts for trading.

“Tokenization” seems to lower the compliance and transaction threshold for users. However, in fact, the compliance channel between the traditional financial market and blockchain world is not so easy to be opened.

-Before supporting equity token transactions, FTX has to cooperate with Digital Assets AG, a compliant investment company.

-Grayscale’s bitcoin, Ethereum and other trust products need to be provided by Coinbase Custody, which has received regulatory approval to provide custody services.

-Paypal is required to obtain a “conditional” BitLicense license before offering buy, sell and pay services for the four cryptocurrencies.

These facts all point to the fact that the compliance requirements in the blockchain world are no less than in the traditional financial world, and that even the movement of assets between the two worlds needs to be coupled with additional regulation because of the money laundering and terrorism financing risks involved.

The reason why assets like mAssets have a lower trading threshold is that they are actually a “sub-asset” compared to the “underlying asset” US stocks. And one of the features of the evolution of the blockchain world is that new “sub-assets” are constantly being minted.

Leverage the underlying asset and use one as many

Another feature of the evolution of the blockchain world is leveraging.

After Ether 2.0 staking launching, many node service providers emerged in the market. Users will get staking tokens after staking ETH on some node service providers, and the staking tokens represent: first, the ownership of staked ETH; second, the right to handle staked ETH, such as letting ETH flow and selling ETH.

In such staking scenarios, the underlying asset is staked for a share, while part of the interest of the underlying asset is minted in the form of a token. In addition, some third-party platforms may promise users a higher rate of return than depositing tokens for interest. All these phenomena are augmenting the underlying assets.

Incentivizing user behavior is one of the more common practices in the blockchain industry. For example, the aforementioned “sub-assets” are used to incentivize users to stake, lend, trade tokens, or provide liquidity to trading pairs.

At the end of May this year, Compound launched liquidity mining, where users can get governance tokens COMP by lending assets on the platform. Thus, a large number of users started to lend themselves on Compound, or lend tokens from Compound to other platforms for liquidity mining, to make use of the assets several times.

In this process, staked tokens may also be involved in multi-level staking or lending. For example, staking USDC on platform A to obtain aUSDC, then aUSDC can, in turn, be used for liquidity mining on platform B to obtain baUSDC, and baUSDC can, in turn, be staked in liquidity mining or lending on other platforms …

So, during the prevalence of DeFi liquidity mining, we often see synthetic assets like yyDAI+yUSDC+yUSDT+yTUSD.

Whether it is the “additional issuance” of the underlying assets, or the repeated use of assets to generate multi-level “nesting assets”, it is the constant leverage on the underlying assets.

The more assets are derived, the more scarce the underlying assets become.

As Weibo users put it “There may soon be short-period ownership (leasing) transactions of real bitcoins for various businesses (collateral, proof of pooling, etc.). The more paper bitcoins there are, the more scarce real bitcoin will become, and being able to own a real BTC for a short period of time (like 24H) will come at a high price in the future.”

Conclusion

There are barriers between blockchain and the traditional financial world, but there is liquidity in both assets, information, and equity, and there is always an incentive for different markets to find an outlet to connect to each other.

The blockchain world is minting “paper U.S. stocks” and the traditional finance world is minting “paper bitcoin.” FTX is introducing equity tokens, Mirror is introducing U.S. stock tokens, and Grayscale’s bitcoin and Ethereum trusts are doing great …

The development of the blockchain market, and the financial market as a whole, has increasingly shown the trend of trading concepts and future interests in order to exchange for cash flow in advance, or arbitrage, in which the underlying assets are “increased” and the value is “diluted”.

The trading and investment behavior of the market should still return to simplicity, the closer the distance between the trading asset and the underlying asset, the better. In addition, bubbles and leverage should be moderate.

Article from BBnews

Translated by Yang(Mengyan Finance)

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Yang

Yang

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To translate some latest policy and issues on blockchain and fintech happened in China