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ETHE & GBTC (Grayscale) Frequently Asked Questions

It is no doubt Grayscale’s booming popularity as a mainstream investment has caused a lot of community hullabaloo lately. As such, I felt it was worth making a FAQ regarding the topic. I’m looking to update this as needed and of course am open to suggestions / adding any questions.
The goal is simply to have a thread we can link to anyone with questions on Grayscale and its products. Instead of explaining the same thing 3 times a day, shoot those posters over to this thread. My hope is that these questions are answered in a fairly simple and easy to understand manner. I think as the sub grows it will be a nice reference point for newcomers.
Disclaimer: I do NOT work for Grayscale and as such am basing all these answers on information that can be found on their website / reports. (Grayscale’s official FAQ can be found here). I also do NOT have a finance degree, I do NOT have a Series 6 / 7 / 140-whatever, and I do NOT work with investment products for my day job. I have an accounting background and work within the finance world so I have the general ‘business’ knowledge to put it all together, but this is all info determined in my best faith effort as a layman. The point being is this --- it is possible I may explain something wrong or missed the technical terms, and if that occurs I am more than happy to update anything that can be proven incorrect
Everything below will be in reference to ETHE but will apply to GBTC as well. If those two segregate in any way, I will note that accordingly.
What is Grayscale? 
Grayscale is the company that created the ETHE product. Their website is https://grayscale.co/
What is ETHE? 
ETHE is essentially a stock that intends to loosely track the price of ETH. It does so by having each ETHE be backed by a specific amount of ETH that is held on chain. Initially, the newly minted ETHE can only be purchased by institutions and accredited investors directly from Grayscale. Once a year has passed (6 months for GBTC) it can then be listed on the OTCQX Best Market exchange for secondary trading. Once listed on OTCQX, anyone investor can purchase at this point. Additional information on ETHE can be found here.
So ETHE is an ETF? 
No. For technical reasons beyond my personal understandings it is not labeled an ETF. I know it all flows back to the “Securities Act Rule 144”, but due to my limited knowledge on SEC regulations I don’t want to misspeak past that. If anyone is more knowledgeable on the subject I am happy to input their answer here.
How long has ETHE existed? 
ETHE was formed 12/14/2017. GBTC was formed 9/25/2013.
How is ETHE created? 
The trust will issue shares to “Authorized Participants” in groups of 100 shares (called baskets). Authorized Participants are the only persons that may place orders to create these baskets and they do it on behalf of the investor.
Source: Creation and Redemption of Shares section on page 39 of the “Grayscale Ethereum Trust Annual Report (2019)” – Located Here
Note – The way their reports word this makes it sound like there is an army of authorizers doing the dirty work, but in reality there is only one Authorized Participant. At this moment the “Genesis” company is the sole Authorized Participant. Genesis is owned by the “Digital Currency Group, Inc.” which is the parent company of Grayscale as well. (And to really go down the rabbit hole it looks like DCG is the parent company of CoinDesk and is “backing 150+ companies across 30 countries, including Coinbase, Ripple, and Chainalysis.”)
Source: Digital Currency Group, Inc. informational section on page 77 of the “Grayscale Bitcoin Trust (BTC) Form 10-K (2019)” – Located Here
Source: Barry E. Silbert informational section on page 75 of the “Grayscale Bitcoin Trust (BTC) Form 10-K (2019)” – Located Here
How does Grayscale acquire the ETH to collateralize the ETHE product? 
An Investor may acquire ETHE by paying in cash or exchanging ETH already owned.
Source: Creation and Redemption of Shares section on page 40 of the “Grayscale Ethereum Trust Annual Report (2019)” – Located Here
Where does Grayscale store their ETH? Does it have a specific wallet address we can follow? 
ETH is stored with Coinbase Custody Trust Company, LLC. I am unaware of any specific address or set of addresses that can be used to verify the ETH is actually there.
As an aside - I would actually love to see if anyone knows more about this as it’s something that’s sort of peaked my interest after being asked about it… I find it doubtful we can find that however.
Source: Part C. Business Information, Item 8, subsection A. on page 16 of the “Grayscale Ethereum Trust Annual Report (2019)” – Located Here
Can ETHE be redeemed for ETH? 
No, currently there is no way to give your shares of ETHE back to Grayscale to receive ETH back. The only method of getting back into ETH would be to sell your ETHE to someone else and then use those proceeds to buy ETH yourself.
Source: Redemption Procedures on page 41 of the “Grayscale Ethereum Trust Annual Report (2019)” – Located Here
Why are they not redeeming shares? 
I think the report summarizes it best:
Redemptions of Shares are currently not permitted and the Trust is unable to redeem Shares. Subject to receipt of regulatory approval from the SEC and approval by the Sponsor in its sole discretion, the Trust may in the future operate a redemption program. Because the Trust does not believe that the SEC would, at this time, entertain an application for the waiver of rules needed in order to operate an ongoing redemption program, the Trust currently has no intention of seeking regulatory approval from the SEC to operate an ongoing redemption program.
Source: Redemption Procedures on page 41 of the “Grayscale Ethereum Trust Annual Report (2019)” – Located Here
What is the fee structure? 
ETHE has an annual fee of 2.5%. GBTC has an annual fee of 2.0%. Fees are paid by selling the underlying ETH / BTC collateralizing the asset.
Source: ETHE’s informational page on Grayscale’s website - Located Here
Source: Description of Trust on page 31 & 32 of the “Grayscale Ethereum Trust Annual Report (2019)” – Located Here
What is the ratio of ETH to ETHE? 
At the time of posting (6/19/2020) each ETHE share is backed by .09391605 ETH. Each share of GBTC is backed by .00096038 BTC.
ETHE & GBTC’s specific information page on Grayscale’s website updates the ratio daily – Located Here
For a full historical look at this ratio, it can be found on the Grayscale home page on the upper right side if you go to Tax Documents > 2019 Tax Documents > Grayscale Ethereum Trust 2019 Tax Letter.
Why is the ratio not 1:1? Why is it always decreasing? 
While I cannot say for certain why the initial distribution was not a 1:1 backing, it is more than likely to keep the price down and allow more investors a chance to purchase ETHE / GBTC.
As noted above, fees are paid by selling off the ETH collateralizing ETHE. So this number will always be trending downward as time goes on.
Source: Description of Trust on page 32 of the “Grayscale Ethereum Trust Annual Report (2019)” – Located Here
I keep hearing about how this is locked supply… explain? 
As noted above, there is currently no redemption program for converting your ETHE back into ETH. This means that once an ETHE is issued, it will remain in circulation until a redemption program is formed --- something that doesn’t seem to be too urgent for the SEC or Grayscale at the moment. Tiny amounts will naturally be removed due to fees, but the bulk of the asset is in there for good.
Knowing that ETHE cannot be taken back and destroyed at this time, the ETH collateralizing it will not be removed from the wallet for the foreseeable future. While it is not fully locked in the sense of say a totally lost key, it is not coming out any time soon.
Per their annual statement:
The Trust’s ETH will be transferred out of the ETH Account only in the following circumstances: (i) transferred to pay the Sponsor’s Fee or any Additional Trust Expenses, (ii) distributed in connection with the redemption of Baskets (subject to the Trust’s obtaining regulatory approval from the SEC to operate an ongoing redemption program and the consent of the Sponsor), (iii) sold on an as-needed basis to pay Additional Trust Expenses or (iv) sold on behalf of the Trust in the event the Trust terminates and liquidates its assets or as otherwise required by law or regulation.
Source: Description of Trust on page 31 of the “Grayscale Ethereum Trust Annual Report (2019)” – Located Here
Grayscale now owns a huge chunk of both ETH and BTC’s supply… should we be worried about manipulation, a sell off to crash the market crash, a staking cartel? 
First, it’s important to remember Grayscale is a lot more akin to an exchange then say an investment firm. Grayscale is working on behalf of its investors to create this product for investor control. Grayscale doesn’t ‘control’ the ETH it holds any more then Coinbase ‘controls’ the ETH in its hot wallet. (Note: There are likely some varying levels of control, but specific to this topic Grayscale cannot simply sell [legally, at least] the ETH by their own decision in the same manner Coinbase wouldn't be able to either.)
That said, there shouldn’t be any worry in the short to medium time-frame. As noted above, Grayscale can’t really remove ETH other than for fees or termination of the product. At 2.5% a year, fees are noise in terms of volume. Grayscale seems to be the fastest growing product in the crypto space at the moment and termination of the product seems unlikely.
IF redemptions were to happen tomorrow, it’s extremely unlikely we would see a mass exodus out of the product to redeem for ETH. And even if there was incentive to get back to ETH, the premium makes it so that it would be much more cost effective to just sell your ETHE on the secondary market and buy ETH yourself. Remember, any redemption is up to the investors and NOT something Grayscale has direct control over.
Yes, but what about [insert criminal act here]… 
Alright, yes. Technically nothing is stopping Grayscale from selling all the ETH / BTC and running off to the Bahamas (Hawaii?). BUT there is no real reason for them to do so. Barry is an extremely public figure and it won’t be easy for him to get away with that. Grayscale’s Bitcoin Trust creates SEC reports weekly / bi-weekly and I’m sure given the sentiment towards crypto is being watched carefully. Plus, Grayscale is making tons of consistent revenue and thus has little to no incentive to give that up for a quick buck.
That’s a lot of ‘happy little feels’ Bob, is there even an independent audit or is this Tether 2.0? 
Actually yes, an independent auditor report can be found in their annual reports. It is clearly aimed more towards the financial side and I doubt the auditors are crypto savants, but it is at least one extra set of eyes. Auditors are Friedman LLP – Auditor since 2015.
Source: Independent Auditor Report starting on page 116 (of the PDF itself) of the “Grayscale Ethereum Trust Annual Report (2019)” – Located Here
As mentioned by user TheCrpytosAndBloods (In Comments Below), a fun fact:
The company’s auditors Friedman LLP were also coincidentally TetheBitfinex’s auditors until They controversially parted ways in 2018 when the Tether controversy was at its height. I am not suggesting for one moment that there is anything shady about DCG - I just find it interesting it’s the same auditor.
“Grayscale sounds kind of lame” / “Not your keys not your crypto!” / “Why is anyone buying this, it sounds like a scam?” 
Welp, for starters this honestly is not really a product aimed at the people likely to be reading this post. To each their own, but do remember just because something provides no value to you doesn’t mean it can’t provide value to someone else. That said some of the advertised benefits are as follows:
So for example, I can set up an IRA at a brokerage account that has $0 trading fees. Then I can trade GBTC and ETHE all day without having to worry about tracking my taxes. All with the relative safety something like E-Trade provides over Binance.
As for how it benefits the everyday ETH holder? I think the supply lock is a positive. I also think this product exposes the Ethereum ecosystem to people who otherwise wouldn’t know about it.
Why is there a premium? Why is ETHE’s premium so insanely high compared to GBTC’s premium? 
There are a handful of theories of why a premium exists at all, some even mentioned in the annual report. The short list is as follows:
Why is ETHE’s so much higher the GBTC’s? Again, a few thoughts:

Are there any other differences between ETHE and GBTC? 
I touched on a few of the smaller differences, but one of the more interesting changes is GBTC is now a “SEC reporting company” as of January 2020. Which again goes beyond my scope of knowledge so I won’t comment on it too much… but the net result is GBTC is now putting out weekly / bi-weekly 8-K’s and annual 10-K’s. This means you can track GBTC that much easier at the moment as well as there is an extra layer of validity to the product IMO.
I’m looking for some statistics on ETHE… such as who is buying, how much is bought, etc? 
There is a great Q1 2020 report I recommend you give a read that has a lot of cool graphs and data on the product. It’s a little GBTC centric, but there is some ETHE data as well. It can be found here hidden within the 8-K filings.Q1 2020 is the 4/16/2020 8-K filing.
For those more into a GAAP style report see the 2019 annual 10-K of the same location.
Is Grayscale only just for BTC and ETH? 
No, there are other products as well. In terms of a secondary market product, ETCG is the Ethereum Classic version of ETHE. Fun Fact – ETCG was actually put out to the secondary market first. It also has a 3% fee tied to it where 1% of it goes to some type of ETC development fund.
In terms of institutional and accredited investors, there are a few ‘fan favorites’ such as Bitcoin Cash, Litcoin, Stellar, XRP, and Zcash. Something called Horizion (Backed by ZEN I guess? Idk to be honest what that is…). And a diversified Mutual Fund type fund that has a little bit of all of those. None of these products are available on the secondary market.
Are there alternatives to Grayscale? 
I know they exist, but I don’t follow them. I’ll leave this as a “to be edited” section and will add as others comment on what they know.
Per user Over-analyser (in comments below):
Coinshares (Formerly XBT provider) are the only similar product I know of. BTC, ETH, XRP and LTC as Exchange Traded Notes (ETN).
It looks like they are fully backed with the underlying crypto (no premium).
https://coinshares.com/etps/xbt-provideinvestor-resources/daily-hedging-position
Denominated in SEK and EUR. Certainly available in some UK pensions (SIPP).
As asked by pegcity - Okay so I was under the impression you can just give them your own ETH and get ETHE, but do you get 11 ETHE per ETH or do you get the market value of ETH in USD worth of ETHE? 
I have always understood that the ETHE issued directly through Grayscale is issued without the premium. As in, if I were to trade 1 ETH for ETHE I would get 11, not say only 2 or 3 because the secondary market premium is so high. And if I were paying cash only I would be paying the price to buy 1 ETH to get my 11 ETHE. Per page 39 of their annual statement, it reads as follows:
The Trust will issue Shares to Authorized Participants from time to time, but only in one or more Baskets (with a Basket being a block of 100 Shares). The Trust will not issue fractions of a Basket. The creation (and, should the Trust commence a redemption program, redemption) of Baskets will be made only in exchange for the delivery to the Trust, or the distribution by the Trust, of the number of whole and fractional ETH represented by each Basket being created (or, should the Trust commence a redemption program, redeemed), which is determined by dividing (x) the number of ETH owned by the Trust at 4:00 p.m., New York time, on the trade date of a creation or redemption order, after deducting the number of ETH representing the U.S. dollar value of accrued but unpaid fees and expenses of the Trust (converted using the ETH Index Price at such time, and carried to the eighth decimal place), by (y) the number of Shares outstanding at such time (with the quotient so obtained calculated to one one-hundred-millionth of one ETH (i.e., carried to the eighth decimal place)), and multiplying such quotient by 100 (the “Basket ETH Amount”). All questions as to the calculation of the Basket ETH Amount will be conclusively determined by the Sponsor and will be final and binding on all persons interested in the Trust. The Basket ETH Amount multiplied by the number of Baskets being created or redeemed is the “Total Basket ETH Amount.” The number of ETH represented by a Share will gradually decrease over time as the Trust’s ETH are used to pay the Trust’s expenses. Each Share represented approximately 0.0950 ETH and 0.0974 ETH as of December 31, 2019 and 2018, respectively.

submitted by Bob-Rossi to ethfinance [link] [comments]

3 Stablecoins Enterprise Executives Need To Know And Why

3 Stablecoins Enterprise Executives Need To Know And Why

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The digital asset space is undergoing a transformation and is trying to adapt to new and wider interest from large non-financial companies like Facebook, Samsung, Walmart, BMW, Shell and Nestle. Those companies, along with large financial services institutional players like J.P. Morgan, UBS and Fidelity, create enormous demand for tradable assets running on both public and private blockchains. These non-financial companies are usually less risk-averse than are the experienced traditional finance institutions. Thus, to embrace the new technology, they must rely on stable, reliable and scalable instruments like stablecoins. These new assets are ideally suited to service the expanding payments industry, a primary blockchain use case, and digital assets exchanges.
Having price stability when trading and exchanging digital assets is important and effectively creates additional channels for global remittance as well as better price efficiency.
But what are stablecoins in a nutshell? They are digital assets designed to have a stable value and extremely low volatility. Usually, they are backed by fiat currency – in most cases, the US dollar, digital assets or a physical commodity like gold or silver. There are projects that aim to completely remove the need for physical collateral and that rely on algorithms to dynamically adjust supply. The goal is that the price should not drastically fluctuate at any moment in time.
Recently, several interesting stablecoin projects came out, and they are pushing the boundaries of digital assets. For example, the NYC-based exchange Gemini is issuing GUSD but also applying for an ATS (Alternative Trading System) license, which will create a unique opportunity for the GUSD to reach newly tokenized assets and private placements.
Another two projects coming from the corporate world are JPM Coin, run by the powerhouse J.P. Morgan, and Fnality’s Utility Settlement Coin, which is backed by a plethora of banks like UBS, BNY Melon, Barclays and HSBC. Both seem to have the same aims, a similar reach and the same potential customers. It will be interesting to see if they cooperate at some point.
  1. Tether
One of the most important benefits of stablecoins is that, if widely adopted by a large number of crypto exchanges, they create an opportunity for price hedging and risk management that is several times cheaper than hedging versus fiat. Currently, the most used in trading stablecoin is Tether. The USDT is pegged to the US dollar and widely used to create crypto markets on more than 25 of the most popular cryptocurrency exchanges. Founded in 2014 by the founders of the Bitfinex exchange, Tether is now the sixth most liquid crypto asset, with a market cap of $3.9 billion. The asset is available mostly on crypto exchanges that don’t have the New York-based BitLicense and reside mostly outside the US.

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Recently, Tether was in the news when the New York Attorney General started a case against Bitfinex and its Hong Kong founding company iFinex for using Tether reserves to mask a missing $850 million. Strangely, this high-profile investigation had minimal effect on Tether’s stability. It dropped to $0.85 but recovered to its usual dollar parity of $0.99 – $1.01.
Being vital to the crypto trading ecosystem, Tether aims to be as widely available as possible. It is available on numerous networks like OMNI (Bitcoin), ERC20 (Ethereum) and Tron. To get a sense of how fragile everything is, last week Poloniex wanted to move $50 million between networks. However, instead of printing the needed amount, it issued $5 billion in new tethers, which surprised the whole market. Eventually, it was made clear that this was an issue with the decimals, or what the trading world knows as “fat fingers”.

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Why it is important: Considered by many to be the main driver behind the bull run of Bitcoin’s price, Tether is vital for the crypto community because it is widely spread and adopted by exchanges. It makes up 75% of the total Bitcoin trading market, so it is also regarded as probably the biggest liability in the industry. Many experienced traders are wondering what would happen to the Bitcoin price and volatility if USDT availability is restricted. The interested parties will watch closely on July 29th, which marks the next appearance in the New York courtroom.
  1. Facebook Libra Coin
The stablecoin that has taken all the attention lately comes from Facebook and is a vital instrument in the Libra Association’s plan for its new global payment infrastructure. Facebook’s grand vision is to establish a global payment network among the 18 million merchants on its platform and among its 2.6 billion users. Interestingly, the first companies invited to the Libra Association formation all seem familiarly related; well, you don’t start something that big with complete strangers, do you? Maybe the overall goal is to replicate the WeChat/Tencent model in the western world but instead of using CNY, Libra plans to use a basket of low-volatility assets (bank deposits and government securities) denominated in multiple currencies like USD, GBP, EUR and JPY.
Last week, its co-creator, David Marcus, was in front of the Senate Banking Committee and the House Financial Services Committee, answering tough questions about regulation, trust and privacy. Generally, the Senate and Congress were supportive of the innovation and technology direction that will position the US as the leader in payments. However, they remain highly skeptical of the governance and execution of the Libra project in relation to handling data privacy. With fresh memories of 2008’s financial crisis, most members of Congress were asking themselves, “What will happen if Libra goes down and we have to bail it out?” Which leads to the question: How do you bail out the finances of 2.6 billion people?
Another concern is the fact that the governing body of the Libra Association is being established in Switzerland. This creates the possibility of regulatory arbitrage between US and Swiss laws. For example, securities lawyers in the US might consider the Libra token to be a security, which might not be the case for their Swiss colleagues. With all the signs of ETF (Exchange Traded Fund) or Money Market funds, this can’t be too far. The Libra stablecoin reserve will grow based primarily on two sources: the investors who will initially buy the Libra Investment Token ($LIT) and any other retail users who would convert any type of fiat to use the payment network.
In comparison to another stablecoin issued by a large corporation (J.P. Morgan’s coin), the Libra carries a different sentiment. When J.P. Morgan announced its JPMC, nobody reacted too harshly. Of course, J.P. Morgan doesn’t have the same privacy issues that Facebook does and is generally known to do well in exactly this: banking services with currencies.
An interesting use for the Libra network, once live, will be to serve as the Layer 2 network to permissionless protocols like Bitcoin and Ethereum. This way, the open and trustless networks can communicate/exchange value and assets with the Libra permissioned stablecoin.
Why it is important: Libra is moving waters in DC. This last week, the President tweeted, US Treasury Department Secretary Steven Mnuchin held a press conference and two days were spent in Washington with the Senate and Congress. One thing is clear: cryptocurrencies, Bitcoin and blockchain received prime-time attention. In terms of what comes out of Libra, only time will tell. The sentiment is that it will be heavily regulated, maybe closer to being a bank. Thus, the Libra token will look like CBDC (Central Bank Digital Currency).
  1. Dai
Building on the Ethereum protocol, the team at MakerDao created Dai to be a stable and decentralized currency fueling the new wave of DeFi (Decentralized Finance) applications. It uses an instrument known as Collateralized Debt Position (CDP), which allows you to lock your Ether assets into their smart contract and receive a loan denominated in Dai from the MakerDao system. In essence, the Dai is pegged to the US dollar but backed by Ether. Having Dai on the Ethereum protocols enables many financial services applications which otherwise wouldn’t exist due to the cryptocurrencies’ high volatility. Having Dai issuance and usage completely open is key to trustless financial services.
Currently, many discussions are taking place about the protocol stability fee. This is the interest rate, currently at 20.5%, that all users must pay back to the system when closing their CDP positions. One might argue that this is too high and the current CDPs are overcollateralized. It seems like this is true. The current collaterization ratio is around 390%. For $81 million in debt, there is $320 million in collateral.

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The Dai is an important instrument in the DeFi ecosystem built on Ethereum. Currently, it is being used on protocols like dYdX, enabling decentralized margin trading; 0x Protocol, the open-source marketplace for crypto tokens; Uniswap, the exchange for swapping ERC20 tokens; Dharma, the open protocol for building apps that allow for the borrowing and lending of digital assets; and many more.
There are three main issues of which Dai users must be aware:
Why it is important: Nevertheless, piece by piece, the Open Finance infrastructure, with stablecoins at its core, is being built and is “eating up financial services” as we know them. Slowly but surely, all the existing financial tools will have their own open sources and trustless tokenized equivalents.
A growing concern about stablecoins is how they could be classified by agencies like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). For example, Basis’s stablecoin, despite raising $133 million, couldn’t escape the SEC classification as a security and had to shut down. Depending on how one reads the current regulation, one could classify the stablecoins as "swaps" under the CFTC regulation or as "demand notes" under the SEC. If you talk to experienced securities lawyers, the answer is always “it depends”.
Still, similar to other markets in which we saw interesting and innovative financial instruments, not all stablecoin projects will survive. The winner will be the one with the most user adoption, highest volumes, largest liquidity and lowest volatility. Last but not least, it should operate within an approved regulatory framework which will guarantee exchange listings and wider organic exposure.
It will be interesting to see if Facebook’s Libra receives regulatory approval, as this might pave the way for the long-awaited Bitcoin ETF.

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submitted by evseevam971 to u/evseevam971 [link] [comments]

Overview of Asset-Backed Tokens

Overview of Asset-Backed Tokens


https://preview.redd.it/xkr918vqkjl11.png?width=1084&format=png&auto=webp&s=0ddee44da9e6ae06026ea4c9b7243c11e05e03fd

What are asset-backed tokens?

Asset-backed tokens, a growing class of tokens, are by definition worth exactly what they are backed by. For instance, a representative token that corresponds to a real-world asset such as a unit of fiat currency, a security or even gold, will be valued at a 1:1 ratio. They are assets represented as tokens to be transferred and traded trustfully on a blockchain. Although tokens, most of the asset-backed tokens are classified as securities throughout the globe. More obvious is the tokenization of real estate, art, derivatives markets, attention, and other non-fungible assets that are currently festering in illiquid markets that are ripe with middlemen who assume counterparty risk. With $256 trillion of real-world assets in the world, the opportunity for asset-backed tokens is truly massive, especially with regards to asset classes like real estate and fine art that have historically suffered from limited commerce and liquidity.
Asset-backed tokens also offer an alternative to traditional cryptocurrencies (e.g. stablecoins), as well as traditional crypto investing (e.g. crypto-trackers, coin traded indices). Various kind of asset-backed tokens have emerged these past months, and we aim to provide with a short overview of these.

Various kinds of asset-backed tokens

· Fiat Stablecoins: Tether (USD backed), EURS by Statis (EUR backed), TrueUSD (USD backed)
Fiat stablecoins are crypto-assets that maintain a stable value against a target price (e.g. USD). Different kind of stablecoins exist (e.g. asset-backed, algorithmic and hybrid). Stablecoins aim to solve the volatility challenge posed by cryptocurrencies. Volatility, among others, is one of the key factor preventing the widespread adoption of cryptocurrencies as a mean of payment. With cryptocurrencies subject to large fluctuations, business owners are less tempted to accept digital currencies. With stablecoins, whether backed by fiat or real world assets, blockchain entrepreneurs are facilitating the massive adoption of cryptocurrencies.
· Metal Stablecoins: Digix Gold Tokens (Gold backed), Goldmint (Gold backed), Tiberius (Backed by a basket of physically-deliverable metals)
Similar to fiat stablecoins, metal stablecoins maintain a stable value against a selected metal. For instance, in the case of gold, they are issued tokens representing a value of gold (for example 1 gram of gold equals 1 coin). The gram of gold is stored by a trusted custodian (preferably third party), and can be traded with other crypto holders. Gold has proved itself as a stable asset over the past decades, and gold stablecoins are one of the most interesting alternatives to fiat ones at the moment.
· Cryptos: C20 (Top 20 weighted market cap backed), TaaS (Tokenized Crypto Asset Management), BCAP (Tokenized VC Fund), Trakx Crypto Trackers
Asset-backed tokens allow for the creation of tokenized investment vehicles where the token represent shares into the fund. Several crypto funds with different strategies have appeared, with the specific goal to invest in assets related to the cryptocurrency and blockchain space. These companies may invest into Bitcoin, Ethereum, Ripple, Litecoin and other major cryptocurrencies directly. They may purchase altcoins at ICO or pre-ICO sales. Some funds invest in emerging blockchain startups, others still invest in companies that benefit from the boom in crypto. Some more, like Trakx, aim to offer simple and cheap crypto passive investment solutions.
· Real estate, art and other real-world assets: Property Coin (Real Estate backed), Maecenas (Tokenized Art Platform), KWHCoin (Clean energy backed)
Tokenization is also happening with real things like KWH of energy, art, real estate, and even identity. It brings tremendous efficiency by creating liquidity pools thereby eliminating liquidity premium and driving price discovery. Asset-backed token, when regulated, will bring a truly new opportunity to these very illiquid asset classes.
· Equity and Debt tokens: tZero (Preferred equity token), Kairos Class T (Equity asset-backed), Steem Dollars (Debt token)
Equity and debt tokens represent ownership in a real-world security, whether that is equity, debt. As a fundraising vehicle, security tokens allow companies to raise capital without having to lean on investment banks and stock exchanges as intermediaries. Given the oversight from regulatory bodies that security tokens are subject to, investors are able to invest in an opportunity without worrying about lack of transparency and potential scams.

Why good practices are important

Examples above also include some disputable asset-backed tokens. Some, although widely used (such as Tether), have come to a point where the community is heavily doubting their real backing. Our view is that good practices in this domain are important if we would like to see emerging a real asset-backed token market. At Trakx, our plan is to implement good practice in terms of transparency and management of our crypto-trackers:
• With reserves maintained in one-to-one ratio, Trakx.io crypto trackers should not face any market risk such as liquidity crunches and Black Swan events.
• One-to-one backing of offers the benefit of an easy understanding for non-technical users
• Trakx.io will offer a total transparency of its reserves. At any given time, the balance held in reserves will be equal to the number of crypto trackers in circulation, and easily verifiable. As the custodian of the backing asset, Trakx.io will act as a trusted third party responsible for that asset. The corresponding total amount of crypto held in reserves for crypto trackers will be proved by regularly publishing our balance and undergoing periodic audits by renown professionals (Big 4).
  • Market makers will be able to intervene and benefit from arbitrage opportunities, always guaranteeing that our crypto tracker trade at their net asset value.
Trakx is building a one-stop shop for Crypto Trackers. Discover more about our project on our website and social media channels, such as Telegram http://t.me/trakx_io.
submitted by Trakx_io to Trakx [link] [comments]

Explaining why Ripple XRP has the most realistic potential in the CryptoVerse

"Ripple Consensus Ledger (RCL) basics
RCL is a “record book” that keep tabs on Trustlines and IOUs (and more).
IOUs
· Every account on RCL can issue an IOU.
· IOU = “I owe you” in short. A token representing an amount owed to someone.
· For example, I can issue USD.roborovskii or EUR.roborovskii or XAU.roborovskii, basically anything except XRP which is the reserved native token.
· If you have 10 USD.roborovskii in your RCL account. It would mean that I (roborovskii), owe you 10 USD as recorded on RCL.
· IOUs issued by another person are seen as USD.anotherperson, EUR.anotherperson, XAU.anotherperson, etc.
· Note that on RCL you may not see USD.anotherperson (the name), but the actual account’s public address (USD.rxxxxxxxxxxxxxxxxxxxxx).
· IOU tokens issued by different accounts (people or gateways) are treated as different tokens even if their symbols are the same. I.e. USD.roborovskii is different from USD.anotherperson
Trustlines
· A trustline is simply the amount in which you are willing to trust another party for.
· E.g. The amount in your bank account can be seen as IOU tokens, and what you have is basically a “trustline” of at least that amount extended to the bank. If you only dare trust your bank for a maximum of 10,000 USD. Then your trustline can be said to be 10,000 USD extended to your bank. And you would never hold more than that in your account.
· Trustlines on RCL - You make a deposit of 1000 USD to Bitstamp through a bank transfer. You NEED to set a trustline to Bitstamp on RCL for at least 1000 USD, or Bitstamp will not be able to credit 1000 USD.bitstamp (IOUs) to your RCL account.
· Once you do, Bitstamp would then be able to send 1000 USD.bitstamp to your RCL account.
· It is a common problem that new users forget (or do not know how) to set the trustlines. They transfer the money to the gateway, and wonder why they are not credited on RCL.
· E.g. If you do not set a trustline to me, I can never send you any IOUs. If you set a trustline to me for 100 USD, then I can only send you 100 USD.roborovskii maximum and not more than that. A network of trustlines bridged by orderbooks and market-making On RCL there are orderbooks where currency (or IOU) pairs are traded by market-makers and traders (examples):
USD.bitstamp : BTC.bitstamp
USD.gatehub : EUR.gatehub
USD.bitstamp : USD.gatehub
Remember that USD.bitstamp and USD.gatehub are treated as different tokens.
(Ideally, tokens with the same name would be valued at 1:1, but in reality, this isn’t so - due to the differentiated number of trust participants and valuation. E.g. 10,000 people trust and use USD.gatewayX, but only 100 people trust and use USD.gatewayZ. The USD token for gatewayX would naturally be valued more than gatewayZ due to more participation, thus more volume in orderbooks and more liquidity.)
The problem: If you had 1000 USD.bitstamp and you want to pay your friend 100 USD, you will NOT be able to send him the 100 USD.bitstamp if his RCL account does not have a trustline setup to Bitstamp. Perhaps he only has a trustline setup to Gatehub. In this case, he can ONLY receive USD.gatehub. This problem of sending IOUs to someone with different trustlines is where bridging comes into effect.
For the following example of bridging USD to USD, let's assume the exchange rate is an ideal 1:1
1) When you send your friend 100 USD.bitstamp on RCL, he would receive 100 USD.gatehub through the orderbooks that are filled by the market-makers and traders.
2) If you had a friend in Japan who only trusted JPY.MrRipple, sending him 10 USD.gatehub would bring out an option for him to receive 1137 JPY.MrRipple. This again is bridged by the orderbooks trading the pair USD.gatehub : JPY.MrRipple.
What is, and why XRP?
XRP is Ripple Consensus Ledger’s (RCL) native token. It is not issued by any account and was created together with RCL with a finite quantity of 100 billion; no more XRPs will ever be created again. The number of XRPs will decrease over time as it is consumed for every single transaction that is made. Being a counter-party free token, you do not need any trustlines to send or receive XRPs.
XRP is used when you:
1) Activate an account on RCL (open a wallet): 20 XRP reserved
2) Create a trustline: 5 XRP reserved
3) All transactions (buy/sell/bid/ask/send/cancel): Variable transaction cost The variable transaction cost increases as the load on the network increases. This acts as an antispam measure to prevent attacks on the network.
Towards a reserve currency
As the native currency on the network with no counter-party dependence, XRP would naturally be the bridge currency of choice between entities with no direct trustlines. With the ability to provide no more than 2 degrees of separation to both entities, costs can be reduced greatly by avoiding multiple hops across orderbooks. See https://ripple.com/xrp-portal/
Banks & Market-makers
It is a common misunderstanding that banks will (as a business entity) hold XRP. The main holders for XRP are market-makers (MM). Market-makers bridge currency pairs as well as XRP through arbitrage algorithms. To do that, they need to hold various currencies and XRP on the Ripple network (RCL). Profit in MM is greater with higher network utility, and will likely be very profitable given the volume of global remittance. While MMs themselves may be subsidiary of banks, it is more likely that they are managed like investment funds. Private investors will place money with these MMs (e.g. Japan-Asia MM Fund, India-Singapore MM Fund, Asia-Europe MM fund) for earnings. Therefore, the risk of holdings are placed onto investors in exchange for profit made from network utility through market-making. Addressing volatility: The percentage volatility is high today simply because the number of participants (holdings of XRP) is comparably low. This can, and will likely be addressed through higher participation and thus pricing. If you look at bitcoin today, the % change isn't as high as other alt coins that have lower participation. More participants, higher price, less volatility.
In essence, banks won't use XRP directly. MM+RCL = RC-Cloud. Ripple Connect links them to this cloud.
RC-Cloud : The combination of RCL + Market Makers as a black box solution. This is essentially what they have termed the "Ripple Solution". This is a solution to the fact that banks as a business entity do not want to hold large amounts of any digital currencies in their books. Using RC-Cloud the risk of digital currency holdings are placed onto market-makers who in turn profit from network utility. To the banks, whatever volatility happens in digital currencies are transparent to them (in the cloud), and they are only interested in the inputs and outputs (remittance utility).
Added this link in case anyone's wondering how profitable market-making is - https://ripple.com/insights/the-life-of-a-ripple-market-make
Note that in 2014-2015, RCL's volume is not nearly as high as it is today. With global remittance utility, you can only dream of how much profit MM funds will reap.
The Intrinsic Value of XRP
Market-makers require funds to fill the orderbooks. The more funds they have, the larger their “net” will be in capturing arbitrage opportunities.
With high global remittance utility, the need for liquidity/volume will also reflect that. This gives opportunities for market-makers to earn higher profits. The less market-makers there are, the bigger the cake they can each take. Naturally, more market-makers (or investors) will come on board to grab their share, bringing in more MM-funds and thus also raising the XRP price. This naturally increases liquidity/volume on the orderbooks to meet that need. The cycle essentially creates an organic balance in the system of utility, liquidity/volume and thus token pricing. While there will always be ebb and flows, the organic direction is towards balance.
The intrinsic value of XRP therefore depends on the utility of the network (at the moment targeting global remittance as the core) as well as its position as the ideal bridge currency on RCL." - roborovskii
Below is some more great information in video form... https://www.youtube.com/channel/UCWHF2ZrEGPeRhkSRub1O6PA?app=desktop
Every companys' success depends on the people they hire and Ripple are the most top notch in this aspect.. They're gathering highly qualified people with great minds. Hell they even got the guy who was once the Prime Minister of Defense and Minister of Economics & Technology in Germany. As well as Swift employees to understand Swift inside and out. The German brings an extensive network of global politicians, technologists and bankers to the table, he was even rumored to be a potential candidate to replace his former boss, German Chancellor Angela Merkel at one point. This company looks great from top to bottom. I wasn't the biggest fan before but after understanding it I feel I should share.
submitted by JoJoFool to Ripple [link] [comments]

TLDR: Bitcoin will win in the end and volatility is not an issue.

It seems like the most common argument I see against bitcoin is the day to day volatility makes it a bad currency. Even though it still has all the features built in necessary to be used as a transactional currency I agree that at this point it is still too volatile. This talk does a good job of explaining the growth cycle of bitcoin and why this volatility is to be expected and will settle down over time.
Bitcoin has to grow in market cap by several orders of magnitude before it can really be a stable store of value and that takes time but I believe it will happen because it has better characteristics of money than anything else that exists currently. That is all it needs, to be slightly better than current money and over time it will be adopted just like how gold took over for thousands of years as the most trusted form of money because it was the only thing that had the fundamental characteristics of money.
Currently it would be better to think of bitcoin as a commodity, as it grows volatility is decreasing and eventually it will level off once it has reached market saturation and there are better exchanges for liquidity and arbitrage in place (Second Market, Fortress, ETF, etc.). Once it has reached market saturation it should be relatively stable as compared to other fiat currencies (USD, EUR, CNY, etc.).
Some core features of bitcoin that make it different (and better) than any other currency on the planet;
1) Open source - The full bitcoin source code is posted on github and available to anyone for review. It is an open source protocol just like TCP/IP, HTTP, SMTP, etc. that anyone can contribute to and improve. This means bitcoin is highly adaptable and flexible and can be improved over time and have new features integrated into it. Eventually people will be using bitcoin without even realizing it, just how they use the protocols I just mentioned whenever they access a webpage or send an email.
2) Decentralized - I would invite you to watch this segment by Chris Odom on the relation between bitcoin and bittorrent. Basically bitcoin cant be shut down because there is no central point of failure.
3) Deflationary & Divisible - Bitcoin is hard coded at a limit of 21,000,000 bitcoins ever and each bitcoin can be divided into 100,000,000 units. That means that each unit has the ability to expand to hold a near endless amount of value and since there is a hard cap on the total supply the demand is what dictates the price of individual units. 21,000,000 may seem like a lot of but if bitcoin were to take over just 10% of the value of gold (not to mention remittances, wealth storage, tax havens, dark markets, etc.) it would have to swell to well above $10,000 or even $100,000 per unit. It really is a modern day gold rush because there is only so much that will ever exist.
It really takes weeks of research to fully understand what makes bitcoin a better form of money. I have done my best to break it down and simplify it but there is really so much more to it (I haven't even discussed the fact that it opens up automated contracts, direct property transfer, zero trust voting, autonomous corporations, etc. etc. etc. there is a whole world of potential that was never before possible because people couldn't figure out zero trust systems. This problem has been solved and the world will never be the same, you cant uninvent bitcoin just like you cant uninvent the internet, the car or the nuclear bomb. It exists now and there is no going back).
If it is something that interests you I would highly recommend digging deeper as I have only scratched the surface. If not, feel free to ignore it, it will keep doing its thing behind the scenes, slowly (or maybe very very quickly) chipping away at the current model.
submitted by LifeinCircle to Bitcoin [link] [comments]

Explaining Ripple XRP

"Ripple Consensus Ledger (RCL) basics
RCL is a “record book” that keep tabs on Trustlines and IOUs (and more).
IOUs
· Every account on RCL can issue an IOU.
· IOU = “I owe you” in short. A token representing an amount owed to someone.
· For example, I can issue USD.roborovskii or EUR.roborovskii or XAU.roborovskii, basically anything except XRP which is the reserved native token.
· If you have 10 USD.roborovskii in your RCL account. It would mean that I (roborovskii), owe you 10 USD as recorded on RCL.
· IOUs issued by another person are seen as USD.anotherperson, EUR.anotherperson, XAU.anotherperson, etc.
· Note that on RCL you may not see USD.anotherperson (the name), but the actual account’s public address (USD.rxxxxxxxxxxxxxxxxxxxxx).
· IOU tokens issued by different accounts (people or gateways) are treated as different tokens even if their symbols are the same. I.e. USD.roborovskii is different from USD.anotherperson
Trustlines
· A trustline is simply the amount in which you are willing to trust another party for.
· E.g. The amount in your bank account can be seen as IOU tokens, and what you have is basically a “trustline” of at least that amount extended to the bank. If you only dare trust your bank for a maximum of 10,000 USD. Then your trustline can be said to be 10,000 USD extended to your bank. And you would never hold more than that in your account.
· Trustlines on RCL - You make a deposit of 1000 USD to Bitstamp through a bank transfer. You NEED to set a trustline to Bitstamp on RCL for at least 1000 USD, or Bitstamp will not be able to credit 1000 USD.bitstamp (IOUs) to your RCL account.
· Once you do, Bitstamp would then be able to send 1000 USD.bitstamp to your RCL account.
· It is a common problem that new users forget (or do not know how) to set the trustlines. They transfer the money to the gateway, and wonder why they are not credited on RCL.
· E.g. If you do not set a trustline to me, I can never send you any IOUs. If you set a trustline to me for 100 USD, then I can only send you 100 USD.roborovskii maximum and not more than that. A network of trustlines bridged by orderbooks and market-making On RCL there are orderbooks where currency (or IOU) pairs are traded by market-makers and traders (examples):
USD.bitstamp : BTC.bitstamp
USD.gatehub : EUR.gatehub
USD.bitstamp : USD.gatehub
Remember that USD.bitstamp and USD.gatehub are treated as different tokens.
(Ideally, tokens with the same name would be valued at 1:1, but in reality, this isn’t so - due to the differentiated number of trust participants and valuation. E.g. 10,000 people trust and use USD.gatewayX, but only 100 people trust and use USD.gatewayZ. The USD token for gatewayX would naturally be valued more than gatewayZ due to more participation, thus more volume in orderbooks and more liquidity.)
The problem: If you had 1000 USD.bitstamp and you want to pay your friend 100 USD, you will NOT be able to send him the 100 USD.bitstamp if his RCL account does not have a trustline setup to Bitstamp. Perhaps he only has a trustline setup to Gatehub. In this case, he can ONLY receive USD.gatehub. This problem of sending IOUs to someone with different trustlines is where bridging comes into effect.
For the following example of bridging USD to USD, let's assume the exchange rate is an ideal 1:1
1) When you send your friend 100 USD.bitstamp on RCL, he would receive 100 USD.gatehub through the orderbooks that are filled by the market-makers and traders.
2) If you had a friend in Japan who only trusted JPY.MrRipple, sending him 10 USD.gatehub would bring out an option for him to receive 1137 JPY.MrRipple. This again is bridged by the orderbooks trading the pair USD.gatehub : JPY.MrRipple.
What is, and why XRP?
XRP is Ripple Consensus Ledger’s (RCL) native token. It is not issued by any account and was created together with RCL with a finite quantity of 100 billion; no more XRPs will ever be created again. The number of XRPs will decrease over time as it is consumed for every single transaction that is made. Being a counter-party free token, you do not need any trustlines to send or receive XRPs.
XRP is used when you:
1) Activate an account on RCL (open a wallet): 20 XRP reserved
2) Create a trustline: 5 XRP reserved
3) All transactions (buy/sell/bid/ask/send/cancel): Variable transaction cost The variable transaction cost increases as the load on the network increases. This acts as an antispam measure to prevent attacks on the network.
Towards a reserve currency
As the native currency on the network with no counter-party dependence, XRP would naturally be the bridge currency of choice between entities with no direct trustlines. With the ability to provide no more than 2 degrees of separation to both entities, costs can be reduced greatly by avoiding multiple hops across orderbooks. See https://ripple.com/xrp-portal/
Banks & Market-makers
It is a common misunderstanding that banks will (as a business entity) hold XRP. The main holders for XRP are market-makers (MM). Market-makers bridge currency pairs as well as XRP through arbitrage algorithms. To do that, they need to hold various currencies and XRP on the Ripple network (RCL). Profit in MM is greater with higher network utility, and will likely be very profitable given the volume of global remittance. While MMs themselves may be subsidiary of banks, it is more likely that they are managed like investment funds. Private investors will place money with these MMs (e.g. Japan-Asia MM Fund, India-Singapore MM Fund, Asia-Europe MM fund) for earnings. Therefore, the risk of holdings are placed onto investors in exchange for profit made from network utility through market-making. Addressing volatility: The percentage volatility is high today simply because the number of participants (holdings of XRP) is comparably low. This can, and will likely be addressed through higher participation and thus pricing. If you look at bitcoin today, the % change isn't as high as other alt coins that have lower participation. More participants, higher price, less volatility.
In essence, banks won't use XRP directly. MM+RCL = RC-Cloud. Ripple Connect links them to this cloud.
RC-Cloud : The combination of RCL + Market Makers as a black box solution. This is essentially what they have termed the "Ripple Solution". This is a solution to the fact that banks as a business entity do not want to hold large amounts of any digital currencies in their books. Using RC-Cloud the risk of digital currency holdings are placed onto market-makers who in turn profit from network utility. To the banks, whatever volatility happens in digital currencies are transparent to them (in the cloud), and they are only interested in the inputs and outputs (remittance utility).
Added this link in case anyone's wondering how profitable market-making is - https://ripple.com/insights/the-life-of-a-ripple-market-make
Note that in 2014-2015, RCL's volume is not nearly as high as it is today. With global remittance utility, you can only dream of how much profit MM funds will reap.
The Intrinsic Value of XRP
Market-makers require funds to fill the orderbooks. The more funds they have, the larger their “net” will be in capturing arbitrage opportunities.
With high global remittance utility, the need for liquidity/volume will also reflect that. This gives opportunities for market-makers to earn higher profits. The less market-makers there are, the bigger the cake they can each take. Naturally, more market-makers (or investors) will come on board to grab their share, bringing in more MM-funds and thus also raising the XRP price. This naturally increases liquidity/volume on the orderbooks to meet that need. The cycle essentially creates an organic balance in the system of utility, liquidity/volume and thus token pricing. While there will always be ebb and flows, the organic direction is towards balance.
The intrinsic value of XRP therefore depends on the utility of the network (at the moment targeting global remittance as the core) as well as its position as the ideal bridge currency on RCL." - roborovskii
Below is some more great information in video form... https://www.youtube.com/channel/UCWHF2ZrEGPeRhkSRub1O6PA?app=desktop
Every companys' success depends on the people they hire and Ripple are the most top notch in this aspect.. They're gathering highly qualified people with great minds. Hell they even got the guy who was once the Prime Minister of Defense and Minister of Economics & Technology in Germany. As well as Swift employees to understand Swift inside and out. The German brings an extensive network of global politicians, technologists and bankers to the table, he was even rumored to be a potential candidate to replace his former boss, German Chancellor Angela Merkel at one point. This company looks great from top to bottom. I wasn't the biggest fan before but after understanding it I feel I should share.
submitted by JoJoFool to CryptoCurrencies [link] [comments]

Explaining Ripple XRP

"Ripple Consensus Ledger (RCL) basics
RCL is a “record book” that keep tabs on Trustlines and IOUs (and more).
IOUs
· Every account on RCL can issue an IOU.
· IOU = “I owe you” in short. A token representing an amount owed to someone.
· For example, I can issue USD.roborovskii or EUR.roborovskii or XAU.roborovskii, basically anything except XRP which is the reserved native token.
· If you have 10 USD.roborovskii in your RCL account. It would mean that I (roborovskii), owe you 10 USD as recorded on RCL.
· IOUs issued by another person are seen as USD.anotherperson, EUR.anotherperson, XAU.anotherperson, etc.
· Note that on RCL you may not see USD.anotherperson (the name), but the actual account’s public address (USD.rxxxxxxxxxxxxxxxxxxxxx).
· IOU tokens issued by different accounts (people or gateways) are treated as different tokens even if their symbols are the same. I.e. USD.roborovskii is different from USD.anotherperson
Trustlines
· A trustline is simply the amount in which you are willing to trust another party for.
· E.g. The amount in your bank account can be seen as IOU tokens, and what you have is basically a “trustline” of at least that amount extended to the bank. If you only dare trust your bank for a maximum of 10,000 USD. Then your trustline can be said to be 10,000 USD extended to your bank. And you would never hold more than that in your account.
· Trustlines on RCL - You make a deposit of 1000 USD to Bitstamp through a bank transfer. You NEED to set a trustline to Bitstamp on RCL for at least 1000 USD, or Bitstamp will not be able to credit 1000 USD.bitstamp (IOUs) to your RCL account.
· Once you do, Bitstamp would then be able to send 1000 USD.bitstamp to your RCL account.
· It is a common problem that new users forget (or do not know how) to set the trustlines. They transfer the money to the gateway, and wonder why they are not credited on RCL.
· E.g. If you do not set a trustline to me, I can never send you any IOUs. If you set a trustline to me for 100 USD, then I can only send you 100 USD.roborovskii maximum and not more than that. A network of trustlines bridged by orderbooks and market-making On RCL there are orderbooks where currency (or IOU) pairs are traded by market-makers and traders (examples):
USD.bitstamp : BTC.bitstamp
USD.gatehub : EUR.gatehub
USD.bitstamp : USD.gatehub
Remember that USD.bitstamp and USD.gatehub are treated as different tokens.
(Ideally, tokens with the same name would be valued at 1:1, but in reality, this isn’t so - due to the differentiated number of trust participants and valuation. E.g. 10,000 people trust and use USD.gatewayX, but only 100 people trust and use USD.gatewayZ. The USD token for gatewayX would naturally be valued more than gatewayZ due to more participation, thus more volume in orderbooks and more liquidity.)
The problem: If you had 1000 USD.bitstamp and you want to pay your friend 100 USD, you will NOT be able to send him the 100 USD.bitstamp if his RCL account does not have a trustline setup to Bitstamp. Perhaps he only has a trustline setup to Gatehub. In this case, he can ONLY receive USD.gatehub. This problem of sending IOUs to someone with different trustlines is where bridging comes into effect.
For the following example of bridging USD to USD, let's assume the exchange rate is an ideal 1:1
1) When you send your friend 100 USD.bitstamp on RCL, he would receive 100 USD.gatehub through the orderbooks that are filled by the market-makers and traders.
2) If you had a friend in Japan who only trusted JPY.MrRipple, sending him 10 USD.gatehub would bring out an option for him to receive 1137 JPY.MrRipple. This again is bridged by the orderbooks trading the pair USD.gatehub : JPY.MrRipple.
What is, and why XRP?
XRP is Ripple Consensus Ledger’s (RCL) native token. It is not issued by any account and was created together with RCL with a finite quantity of 100 billion; no more XRPs will ever be created again. The number of XRPs will decrease over time as it is consumed for every single transaction that is made. Being a counter-party free token, you do not need any trustlines to send or receive XRPs.
XRP is used when you:
1) Activate an account on RCL (open a wallet): 20 XRP reserved
2) Create a trustline: 5 XRP reserved
3) All transactions (buy/sell/bid/ask/send/cancel): Variable transaction cost The variable transaction cost increases as the load on the network increases. This acts as an antispam measure to prevent attacks on the network.
Towards a reserve currency
As the native currency on the network with no counter-party dependence, XRP would naturally be the bridge currency of choice between entities with no direct trustlines. With the ability to provide no more than 2 degrees of separation to both entities, costs can be reduced greatly by avoiding multiple hops across orderbooks. See https://ripple.com/xrp-portal/
Banks & Market-makers
It is a common misunderstanding that banks will (as a business entity) hold XRP. The main holders for XRP are market-makers (MM). Market-makers bridge currency pairs as well as XRP through arbitrage algorithms. To do that, they need to hold various currencies and XRP on the Ripple network (RCL). Profit in MM is greater with higher network utility, and will likely be very profitable given the volume of global remittance. While MMs themselves may be subsidiary of banks, it is more likely that they are managed like investment funds. Private investors will place money with these MMs (e.g. Japan-Asia MM Fund, India-Singapore MM Fund, Asia-Europe MM fund) for earnings. Therefore, the risk of holdings are placed onto investors in exchange for profit made from network utility through market-making. Addressing volatility: The percentage volatility is high today simply because the number of participants (holdings of XRP) is comparably low. This can, and will likely be addressed through higher participation and thus pricing. If you look at bitcoin today, the % change isn't as high as other alt coins that have lower participation. More participants, higher price, less volatility.
In essence, banks won't use XRP directly. MM+RCL = RC-Cloud. Ripple Connect links them to this cloud.
RC-Cloud : The combination of RCL + Market Makers as a black box solution. This is essentially what they have termed the "Ripple Solution". This is a solution to the fact that banks as a business entity do not want to hold large amounts of any digital currencies in their books. Using RC-Cloud the risk of digital currency holdings are placed onto market-makers who in turn profit from network utility. To the banks, whatever volatility happens in digital currencies are transparent to them (in the cloud), and they are only interested in the inputs and outputs (remittance utility).
Added this link in case anyone's wondering how profitable market-making is - https://ripple.com/insights/the-life-of-a-ripple-market-make
Note that in 2014-2015, RCL's volume is not nearly as high as it is today. With global remittance utility, you can only dream of how much profit MM funds will reap.
The Intrinsic Value of XRP
Market-makers require funds to fill the orderbooks. The more funds they have, the larger their “net” will be in capturing arbitrage opportunities.
With high global remittance utility, the need for liquidity/volume will also reflect that. This gives opportunities for market-makers to earn higher profits. The less market-makers there are, the bigger the cake they can each take. Naturally, more market-makers (or investors) will come on board to grab their share, bringing in more MM-funds and thus also raising the XRP price. This naturally increases liquidity/volume on the orderbooks to meet that need. The cycle essentially creates an organic balance in the system of utility, liquidity/volume and thus token pricing. While there will always be ebb and flows, the organic direction is towards balance.
The intrinsic value of XRP therefore depends on the utility of the network (at the moment targeting global remittance as the core) as well as its position as the ideal bridge currency on RCL." - roborovskii
Below is some more great information in video form... https://www.youtube.com/channel/UCWHF2ZrEGPeRhkSRub1O6PA?app=desktop
submitted by JoJoFool to CryptoCurrency [link] [comments]

ELI5 for Bitshares X

Chapter 1: DEFINITIONS
Can it be possible to pay for your coffee in dollars with your phone but without any intermediary between you and the coffee shop?
We'll get to it but first a few definitions to avoid ambiguity:
  1. "Bitshares X" is a Decentralized Autonomous Company (DAC). Bitshares X being a DAC is not crucial here so if you are not familiar with the concept of DACs then for now you can think of it as a money payment business similar to PayPal or Visa.
  2. "btsx" is a share in the Bitshares X business. You could think of it as a currency unit but for now it is easier to think of it as a share in a business.
  3. "bitUSD" is a concept that does not have a direct analogy in the current financial system so it might be a bit difficult to grasp at first. bitUSD is an asset that represents as many btsx as there are needed to be worth one USD. So if the current market price of btsx is 0.028 USD per btsx then one bitUSD represents 34.48 btsx (=1/0.029). If the price moved to 0.050 USD per btsx then one bitUSD would represent 20.00 btsx and so on.
Chapter 2: PRIMARY PURPOSE
The primary purpose of the Bitshares X system is the ability to generate bitUSD (and other similar assets like bitEUR, bitGold etc). bitUSD is useful because (by definition) it has the same purchasing power as fiat USD and at the same time is as easily transferable as bitcoin.
So how can bitUSD come into existence? In essence by matching into pairs two kinds of people:
As we will see in Chapter 4 the side effect of this matching happens to be our primary purpose: the bitUSD.
Chapter 3: STANDARD WAY
Imagine two people: Alice and Bob. Each of them owns a balance in btsx (in other words both have a long position in btsx). And for both of them the base currency is USD (which means they have bought their btsx with USD and their main concern is valuation of btsx in terms of USD).
Let's assume that Alice prefers stability and is worried that the value of her btsx [relative to USD] might fall soon and she would like to hedge against it: she wants the value of her btsx [relative to USD] to be maintained in case the market price of btsx falls. In other words she would like to hedge her long position in btsx.
Bob has the opposite view: he is confident that market price of btsx will rise soon and he would like to take advantage of his prediction: he wishes he had more btsx than he already has so that he could profit from the predicted price rise even more. In other words he would like to leverage his long position in btsx.
If btsx was a standard crypto-currency Alice in order to execute her hedge would have to sell all of her btsx and keep her wealth in USD for a while (at least until she decides the danger of btsx falling further in value [relative to USD] is over and it's safe to convert her wealth back into btsx).
Also, if btsx was a standard crypto-currency Bob in order to take advantage of his prediction would have to borrow USD (or in some other way get USD funds) and buy some extra btsx to increase the amount of btsx he already has and then he would have to hold this increased amount of btsx for a while (at least until he decides his prediction of btsx rising further in value [relative to USD] is no longer valid and then to reduce his btsx holding to its original size and sell the extra btsx to pay back his USD debt).
Chapter 4: P2P WAY
But maybe there is a smarter way to do this. Consider this:
Let's assume Alice finds Bob and says "Hey, Bob, I know you like the risk so here are my btsx, please take care of them. I don't care how many btsx will be left when I come to get them back. All I care is that they maintain their value in the future as it is now."
And Bob says: "That's fine, I'll be glad to do that. So I am taking your btsx and here is a receipt you need to show me in the future to claim your btsx back. I cannot promise how many btsx will be left but I can promise that their dollar value will be as it is today."
Both parties should be happy to make a deal because this way they both get what they initially wanted: Alice is hedged in case the market price goes down and Bob is able to keep the profits from Alice's btsx in case the market price goes up. Obviously the opposite is also true: Alice will have to give up any gains on her btsx in case the market price goes up and Bob will have to cover (using his own btsx) Alice's loss in valuation on btsx in case the market price goes down.
And here comes the final trick: we can see that Alice's part of the deal with Bob has a constant revaluation in terms of USD so we can package it as a separate asset and call it "bitUSD". What's more, we can make it transferable to other people - this is possible as from Bob's perspective it doesn't really matter who the counter-party is, all he really cares for is that his part of the deal is unchanged.
Chapter 5: IMPLEMENTATION
[This chapter is a bit technical and can be skipped if you are not curious what is under the hood of Bitshares X. The crucial thing is to understand the idea presented in Chapter 4, this chapter only describes how this idea is implemented in Bitshares X. The only tricky part here is how to force Bob to deliver on his promise.]
How can the relationship between Alice and Bob be implemented inside Bitshares X? Let's try to translate it into financial terms:
  1. Alice's and Bob's complementary needs are matched together by the system inside Bitshares X. This can be easily done through the standard bid/ask matching.
  2. Alice converts her btsx into bitUSD, i.e. she sells her btsx for bitUSD. And now she is free to do with her bitUSD whatever she wants: she can keep it or sell it (for fiat USD or btsx) to anyone who is willing to buy. This way bitUSD is released into the world.
  3. The amount of btsx received from Alice gets "frozen" inside the system and now we need Bob to take care of its dollar value. By taking up this role Bob becomes the actual issuer of the bitUSD that Alice has released into the world.
  4. To perform his part of the deal, Bob is required to supply an amount of btsx equal to the "frozen" btsx received from Alice and these sums together will make a collateral which will be needed in case Bob is not able to deliver on his promise (thus the collateral is twice as big as the initial value of the issued bitUSD, theoretically it could be smaller than that but safety is a priority for us here).
  5. Bob just like Alice can easily free himself from the deal but in a bit different way than her. To terminate his part of the deal Bob uses his own btsx to buy on the market the same amount of bitUSD that has been initially issued by him. The important thing is that it does not need to be the same bitUSD he has issued: it can be any bitUSD existing in circulation.
  6. Now that Bob has equal long and short positions in bitUSD the following things happen simultaneously. First: Whatever is left from the collateral is returned to Bob - this way he is forced to accept any losses or profits resulting from the contract. Second: Bob's long and short positions in bitUSD cancel out so they can be safely removed from the system. And when this happens the amount of bitUSD initially issued by Bob ceases to exist.
  7. In case things go wrong for Bob and the collateral gets close to being insufficient the system automatically uses the collateral to buy back the bitUSD on Bob's behalf and then it unwinds Bob's position using the sequence of events described in [6].
Chapter 6: MARKET PEG
The existence of market peg means that in real life the bitUSD is what we wanted it to be, i.e. that one bitUSD is valued by the free market at one USD at all times. The definition of bitUSD implies that it should be the case but how can we be sure that the free market respects that?
Let's introduce Eve. She doesn't hold any btsx, doesn't even care about the Bitshares X concept, all she wants is a small but risk-less profit. Eve holds some USD she can use to apply the following strategy:
  1. If the price of bitUSD is well below one USD Eve does the following: with her USD she buys bitUSD and then with her bitUSD she buys btsx and then immediately sells her btsx for USD. She is sure to make a profit as USD has more purchasing power than bitUSD so she can buy btsx low and sell high. She ends up with more USD than she initially had.
  2. If the price of bitUSD is well above one USD Eve does the following: with her USD she buys buys btsx and then immediately sells her btsx for bitUSD and then sells her bitUSD for USD. She is sure to make a profit as bitUSD has more purchasing power than USD so she can buy btsx low and sell high. She ends up with more USD than she initially had.
So this is a classic arbitrage that effectively makes the price of bitUSD gravitate to one USD. This is why:
  1. If the price of bitUSD is well below one USD every time Eve decides to arbitrage her action will increase demand for bitUSD, thus increasing the price of bitUSD.
  2. If the price of bitUSD is well above one USD every time Eve decides to arbitrage her action will increase supply of bitUSD, thus decreasing the price of bitUSD.
Chapter 7: ASSUMPTIONS
Let's examine what kind of assumptions we needed to make to arrive at this point. It looks like there are only three of them:
  1. At all times the market cap of Bitshares X needs to be above zero so that its shares can be used to backup the issued bitUSD.
  2. There always needs to be an Alice and a Bob among Bitshares X shareholders so that bitUSD can come into existence.
  3. There needs to be an Eve, i.e. there needs to be liquidity on the btsx/bitUSD, btsx/USD and bitUSD/USD markets to allow arbitrage to keep the market peg.
Notice that we've made no assumptions about the stability of the btsx price [relative to USD]: it can be extremely volatile and the system still works. In fact the volatility can be quite helpful as it makes Alice and Bob need each other even more.
Chapter 8: THE BIG QUESTION
Actually, we've made one more little assumption: that the Bitshares X system is at all times somehow aware of the market price of btsx [relative to USD]. This can be easily done by providing a constant feed from outside sources (e.g. coinmarketcap.com). But the trick is it may turn out that even this is not necessary: the market consensus can turn out be so strong that all market participants who do not respect it will incur financial losses and thus will be discouraged from trading btsx/bitUSD outside a close proximity of the btsx/USD market rate.
A couple of years ago Bitcoin asked this question: can a currency have value without any assets backing it up? The answer so far is "yes".
Now Bitshares X asks this question: can a prediction market successfully exist with no settlement date and no delivery of the underlying asset?
If the answer turns out to be "yes" - that will be a major breakthrough: it will mean Bitshares X can exits totally free from outside dependencies.
If the answer turns out to be "no" - then Bitshares X has a solid back-up plan: the use of an external feed to supply the btsx/USD rate into the blockchain. In this case Bitshares X will turn into a prediction market betting on the future price of its own shares (with bets being between Alice and Bob).
Whatever the answer is the main purpose of Bitshares X will still be achieved: bitUSD is created and once we have that you'll be able to pay for your coffee in dollars with your phone but without any third-party intermediary.
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