The Block Research - May Research Report

1 Institutional Digital Asset Derivatives Market
Research Latest Research

& Analysis
THEBLOCKCRYPTO.COM Research May 2020 THEBLOCKCRYPTO.COM

Research Latest Research & Analysis
Content 3 Research Team

4 Monthly Overview
15 Macro
• Institutional Digital Asset Derivatives Markets
• An analysis of the value transferred in Tether
• Unpopular pedantic opinions, and don’t sleep on
asset-backed open finance
• Oracles: a key element of DeFi
• Can DeFi oracles be better?
51 Projects
• $22 million: dYdX’s perpetual bitcoin swap market
reports a volume bump days after launching
• Uniswap: The state of the market
• Atomic swaps and CoinSwaps: safe and private
asset exchange
• A Ponzi scheme styled after MMM is driving Ethereum
network congestion
74 Company
• Bitfinex made $21M in Q1, LEO exchange token burns
suggest
• A close look at the activity of Argent’s 20,000 wallets
• Square offers the most profitable bitcoin business among
publicly traded U.S. companies
• Mapping the Institutional Digital Asset
Infrastructure space
• Examining the blockchain gaming industry
107 Trends
• Charting blockchain investments during the
COVID-19 pandemic
• The race to become the first digital asset full prime
broker is on
• How much longer before payment giants move in on the
stablecoin market?
• The year of options and the clear winner
THEBLOCKCRYPTO.COM
Research Research Team
Larry Cermak Matteo Leibowitz Ryan Todd

Director of Research Research Analyst Research Analyst
Steven Zheng John D’Antoni Mike Rogers

Research Analyst Research Analyst Research Analyst
Mika Honkasalo Omkar Shanbhag

Research Intern Research Intern
THEBLOCKCRYPTO.COM
May 2020 Latest Research & Analysis
Monthly Overview
5 May by the numbers
Research THEBLOCKCRYPTO.COM
VIEW ONLINE
• Numerous macro indicators, such as on-chain volume, spot and

derivatives volume and website traffic are reaching 10-month highs
• Since early February, the total issued supply has grown by
94% — f rom $5.68 billion to $11.0 billion
Value Settled
Total adjusted value settled, which is a proxy for economic through-
put, saw an increase of 20.7% in May and saw a 10-month high.
The average daily value settled on Bitcoin increased from $1.75
billion to $2.25 billion. For Ethereum, the value settled jumped from
$1.49 billion to $1.66 billion.
Source:
Coin Metrics,
The Block
In terms of value settled purely in the chain’s native asset (BTC or

ETH), Bitcoin settled 5.4 times more in April than Ethereum.
Source:
Coin Metrics,
The Block
Stablecoins
Since early February, the total issued supply has grown by

94% — f rom $5.68 billion to $11.0 billion. The fastest stablecoin
growth in history coincides with the global liquidity crunch stem-
ming from the coronavirus panic and its economic impact.
In May, the stablecoin supply grew from $9.6 billion to $11 billion.
It’s not immediately clear whether the new supply comes from new
demand or whether it is existing money that was already on ex-
changes and is now being converted into stablecoins.
Source:
Coin Metrics,
The Block
The adjusted transaction volume hit an all-time high in May and

reached $48.2 billion.
Source:
Coin Metrics,
The Block
Source:
Coin Metrics,
The Block
Dai saw, by far, the highest velocity in May — t he supply changed

hands more than 10.5 times. BUSD and HUSD, the stablecoins of
Binance and Huobi, changed hands 7.2 and 6.0 times, respectively.
The least-utilized stablecoins relative to their size are the Gemini
dollar and TrueUSD.
Miner Revenue
The third in the Bitcoin’s history took place on May 11 and the min-
ing reward was subsequently reduced from 12.5 BTC per block to
6.25. Despite the halving, miners generated $366.4 million in revenue
in May, representing a month-over-month decrease of only 11%.
Source:
Coin Metrics,
The Block
Source: Coin Metrics,The Block
Transaction fees, however, increased significantly and reached

8.3% of the total revenue compared to 1.5% in April. That was the
highest monthly transaction fee share since January 2018.
Source: Coin Metrics,The Block
Spot Exchanges
After last month’s decline, the cryptocurrency traded volumes saw

a 20% increase in May. According to The Block’s volume index, the
volume for May came in at $106.1 billion compared to $88.5 billion
in April.
Source: CryptoCompare,
CoinGecko, The Block
Binance continues to have the largest market share — t he exchange

captured 54% of the legitimate traded volume in May. Coinbase
pulled 10.5% of the volume, followed by Kraken (6.5%), Bitstamp
(6.1%), LMAX Digital (5.1%), and Bitfinex (4.2%).
Source: CryptoCompare,
CoinGecko, The Block
Exchange Traffic
Similarly to volume, Web traffic on cryptocurrency exchanges also

saw an increase in May and hit a 10-month high. According to the
data from SimilarWeb, cryptocurrency exchanges (both spot and
derivatives) recorded a total of 114.0 million website visits in May,
a month-over-month increase of 14%.
Source: Similarweb
Binance had the largest number of estimated visitors in April, with

about 26.1 million. They were followed by Coinbase with 23.6 mil-
lion and BitMEX with 9.0 million. Binance, Coinbase, and BitMEX
drew 51.5% of the total trafﬁc in May.
Source: Similarweb
OKEx, Indodax, and Bittrex saw the largest month-over-month traf-

fic increases while Coinbase, Bitfinex, and Bybit saw the mildest
increases.
GBTC
The daily average volume of GBTC, a closed-end fund that invests
exclusively in bitcoin, saw an eye-whopping growth of 86% in May.
This marks a 10-month high.
Source: Factset, The Block
Futures
Bitcoin futures reached a peak of $5.35 billion on February 14,
which was quickly followed by a sudden decline to less than $2
billion. Since then, the open interest has been recovering gradually
and reached $3.54 billion by the end of May.
Source: Skew, The Block
The monthly volume of Bitcoin futures reached yearly highs in May,
which came down to about $558 billion.
Source: Factset, The Block
The ratio between spot volume and futures volume has increased
from less than 2.3 to more than 5 now, which indicates that the fu-
tures volume is growing faster relative to spot volume.
With about 23.4% of the aggregated open interest, OKEx holds the
lead as the largest bitcoin futures exchange. BitMEX, which was
overtaken by OKEx in March, now has 22.5% of the total aggregat-
ed open interest, followed by Huobi (15.2%) and CME (11.9%).
Source:
Skew,
The Block
On the regulated exchange front, CME’s open interest reached an

all-time high in May, while the volume increased by 82% month-
over-month. The average daily volume in May was $395 million
compared to $217 million in April. Bakkt’s volume in May was more
than 12 times lower than CME’s and its open interest was more
than 40 times lower.
Source:
Skew,
The Block
Options
Aggregated open interest for Bitcoin options reached a new all-time
by the end of May — a bout $1.15 billion. Deribit continues to mo-
nopolize Bitcoin options, with 77% of the aggregated open interest.
The exchange is followed by CME, which added $150 million of
open interest in the last month.
Similarly to open interest, the volume for options reached an all-

time high in May and grew by more than 100% month-over-month.
Macro
16 Institutional Digital Asset Derivatives Markets
25 An analysis of the value transferred in Tether
31 Unpopular pedantic opinions, and don’t sleep on

asset-backed open finance
35 Oracles: a key element of DeFi
43 Can DeFi oracles be better?
VIEW ONLINE The evolution of digital asset derivatives
While early crypto exchanges offered various types of margin and

futures products, today’s digital asset derivative market is primarily
dominated by perpetual contracts. These are derivative contracts
that never expire and do not need to be rolled over from month to
month to keep the position.
Pioneered by BitMEX in 2016, the perpetual market has seen a

number of new launches across non-regulated pure-play crypto
exchanges that offer various forms of leverage, collateral, and liq-
uidation mechanisms. The perpetual swap market continues to be
the most liquid product to gain exposure to digital assets.
Such markets also dwarf spot exchange volumes on a daily basis,

with total aggregate daily volumes reaching as high as $45 billion
in March.
It’s worth emphasizing that historically, the bulk of the product in-
novation within digital asset derivatives has happened among the
offshore, non-regulated pure-play crypto exchanges, with BitMEX’s
creation of the perpetual serving as the prime starting point.
These pure-play crypto derivative markets offer the unique charac-

teristic of 24/7 access practically anywhere in the world, with collat-
eral that can be sent and used within minutes by way of margining
in cryptocurrency. They also operate without clearinghouses in the
traditional sense, with the exchanges themselves providing that
function by way of automatically liquidating posted collateral – sim-
ilar to that of a margin call.
More recently, several non-custodial futures and options products –

where users maintain control and transparency over their collateral
– have launched on Ethereum. These new products offer the ad-
vantage of no counterparty risk (although they shift the risk profile
to technical and protocol concerns).
Last month, three separate non-custodial exchange platforms re-

leased perpetual swap products seeking to replicate BitMEX’s
margin trading-induced success. While volumes continue to pale
in comparison to those supported by centralized marketplaces, the
growing allure of permissionless and non-custodial features – along
with the entrance of professional liquidity providers – suggests that
non-custodial exchanges may ultimately serve a non-trivial role in
the broader market structure.
The characteristics of both centralized and non-custodial digital

asset derivatives offer arguable operational efficiencies relative to
more traditional derivative exchange counterparts. But they also
present clear challenges for institutional investors that operate un-
der strict regulatory and fiduciary responsibilities to their client’s
capital. For many of these investors, the counterparty risks of trad-
ing on these offshore non-regulated crypto exchanges, or engaging
with non-custodial contracts with opaque risks and inability to offer
proper KYC/AML protections, are still too high.
Fortunately, several CFTC-regulated exchanges now offer bitcoin

derivative products, be that futures or options, with CME Group
leading the way in bringing more traditional institutional flow into
the digital asset derivative market through its bitcoin futures and
options products.
In a recent study titled The Institutional Adoption of Digital Asset

Trading by Acuiti, an analytics platform for the global derivatives
market, the firm surveyed senior executives from the buy-side, sell-
side and proprietary trading groups specialized in traditional deriv-
atives trading, clearing and execution to better understand what is
holding back institutional adoption of digital asset trading.
Among a number of common concerns ranging from counterpar-

ty-risks to career risks, the survey found that in the short-to-me-
dium term, the institutional market of digital asset derivatives is
expected to “grow in-line with the expansion of offerings by existing
institutional exchanges.” Indeed, while the term “institutional inves-
tor” can be defined in a number of ways – and with less regulatory
restrictions in regions such as Asia – for the purpose of this piece,
we focus on the digital asset derivative products that that tradi-
tional institutional money (hedge funds, asset managers, and pro-
prietary trading shops) can trade today, and the service providers
(banks, clearing parties, liquidity providers) that can clear or exe-
cute those products (namely bitcoin futures and bitcoin options).
Market Size
Similar to the equity markets in the late 1990s and early 2000s,
liquidity across digital asset derivatives remains quite fragmented
and primarily within offshore non-regulated exchanges.
Historically, regulated bitcoin futures open interest has made up ~5

-6% of the total amount of outstanding futures open interest, al-
though, in April, CME bitcoin futures cleared more than 10% of the
total mix for the first time.
Similar to bitcoin futures, the lion’s share of volume and open inter-
est among bitcoin options resides within non-regulated products.
While CME Group and ICE’s Bakkt recently launched CFTC regu-
lated bitcoin option products, non-regulated exchange Deribit con-
tinues to own the market with more 85% of total the aggregated
open interest as of April.
Notably, open interest among CME bitcoin options has materially

picked up in May, with more than $172 million worth of open inter-
est outstanding on May 18, or ~14% of total bitcoin option open
interest, according to Skew (discussed further below).
CFTC Regulated Bitcoin Contracts
Since the initial launch of CBOE and CME bitcoin futures in De-
cember of 2017, there have only been a handful of other exchang-
es that have received CFTC approval to offer bitcoin futures and
options products. This list includes Intercontinental Exchange’s
Bakkt, ErisX, LedgerX and, as of last month, Bitnomial. Outside of
bitcoin-specific products, ErisX announced last week that it would
launch physically-settled Ether futures contracts – a first of its kind
in the U.S.
CBOE ultimately discontinued its bitcoin futures product in May

2019. And with the paltry reception to Bakkt’s physically-settled
bitcoin futures product (Bakkt notional value of outstanding open
interest <2% of CME bitcoin futures OI), CME Group’s product has
become the clear winner to date.
When considering the disparity in success in terms of volume and

open interest among CME’s bitcoin product vs. CBOE and Bakkt’s,
the fact that CME’s product launched with 5 bitcoin per contract
(instead of CBOE’s 1 bitcoin per contract) likely allowed for deeper
liquidity for institutional clients.
In relation to Bakkt, the fact that CME’s contracts are cash-settled

has likely played a significant role in getting key Futures Commis-
sion Merchants (FCMs), or the partners to take deposits and clear
trades. In fact, as of last week, CME Group reported that more than
24 FCMs support bitcoin futures clearing, with a number of inter-
dealer brokers and liquidity providers publicly servicing the product
as well.
Some of these intermediaries, liquidity providers, and clearing ser-

vices are listed in (fig.7) Pg.22
It’s previously been reported that Goldman has cleared CME bit-
coin futures for clients. Other banks, like Morgan Stanley, have
eyed more varied swap contracts, allowing clients to expand out-
side of one-size-fits-all standard 5 bitcoin per contract available
at CME. Considering that CME Clearing has 68 clearing member
firms, representing some of the more recognized and well-capi-
talized financial institutions in the world, this network likely aided
CME’s ability to bring on key clearing partners for the bitcoin product.
fig.7
Contrast that with the physically-settled bitcoin futures space –

where Bakkt first launched – and it’s likely significantly more chal-
lenging to get these key FCM partners comfortable with clearing
and settling physically-settled bitcoin futures.
Outside of the early success of CME bitcoin futures, CME bitcoin

options have also recently been on a tear, with more than 83% of
the options volume last week originating from institutional block
trades (minimum of 5 contracts), or registered Eligible Contract
Participant institutions that privately negotiate transactions outside
public auction markets.
Interestingly, block trades and exchange for physical transactions

(EFPs) make up < 5 bps worth of total contract volume on the fu-
tures side.
Putting The Early Success of CME Bitcoin Products In Context
CME’s bitcoin futures market is coming up on its 30th month of

operation, and it’s hard to view the product launch as anything but
a success. Last week, the product hit record highs in the total out-
standing number of large open interest holders (71), placing it in
the 75th percentile among the total number of large open interest
traders across the ~250 other listed futures products that hit the
CFTC COT report.
And in terms of measuring its initial success relative to the launch

of gold bullion futures in 1974, it’s actually outperforming that prod-
uct in its early days in terms of total inflation-adjusted value of
volume, as well as the total notional value of open interest relative
to the total value of the underlying spot supply.
Within one year of CME launching its gold bullion futures in 1974,
volume in March of 1975 was ~$52.5 million. Three years later in
1977, gold futures volumes reached a record ~$233 million in no-
tional value (13,712 contracts, at 100 troy ounces per contract, per
an ounce of gold price of $159).
This compares favorably to bitcoin futures volumes, which have

existed less than three years and saw ~$400m in volume just yes-
terday – and on an asset with a total supply value of under $200
billion.
VIEW ONLINE
• The aggregate value of transactions conducted in Tether has

increased for four consecutive quarters
• Approximately $212 billion in value transferred through the sta-
blecoin in 2019
• Tether issuance on Omni has declined 14% YTD, while the sup-
ply for both Ethereum and Tron has grown by 151% and 118%
respectively.
The aggregate supply of stablecoins recently crossed the $10 bil-

lion mark for the first time. Demand for digital dollar alternatives
has been soaring in 2020, with the total supply of stablecoins surg-
ing 79% since the beginning of February.
The same week that the total value of stablecoins crossed $10 bil-
lion, Visa CEO Alfred Kelly publicly acknowledged that digital cur-
rency backed by fiat is a real emerging payment technology – and
one that’s additive to the payment ecosystem.
Source: Coin Metrics The Block Research
Tether, the dominant stablecoin by market capitalization, makes up

approximately 85% of the market share, with over $9 billion in total
supply.
In this piece, we examine Tether and review the value transfer tak-
ing place across each of the networks it is hosted on (Omni, Ethe-
reum, Tron).
Value settled on Tether (Q/Q)
For our analysis, we used Coinmetric’s ‘Adjusted Transaction Vol-

ume’. The metric estimates the actual economic throughput while
attempting to remove activity connected to mixers, self-churn, pri-
vacy enhancements, spam, and change outputs
The aggregate value of transactions conducted in Tether has in-

creased for four consecutive quarters. In 2019, approximately $212
billion in value was transferred via the stablecoin. The most sub-
stantial quarterly increase was Q1 ‘19 into Q2 ‘19, when Tether’s
settlement value increased 220%, from $17.4 billion to $55.7 bil-
lion.
At the beginning of 2019, Omni was virtually the sole network that
Tether transactions were taking place, accounting for 98% of the
value transferred in Q1 ‘19. Omni’s dominance declined over the
subsequent quarters, and by the third quarter of 2019, Ethereum
had overtaken Omni in value transferred in Tether. In the last quar-
ter (Q1 20), the value of Tether transmitted over Omni declined to
$3 billion, making up only 11% of the value for the quarter.
On the contrary, Tether transferred on Tron – which launched in

April 2019 – has seen increases in its use. Over the past quarter,
the network surpassed Omni in value transferred at $9.8 billion
compared to $8.5 billion. The supply of Tether further reflects the
value activity for both networks held on each. On May 7, 2020, the
amount of Tether issued on Tron surpassed Omni for the first time
at $1.4 billion compared to $1.3 billion on Omni.
The demise of Tether issuance on Omni can be seen by its decline

of 14% year to date in supply, while the supply for both Ethereum
and Tron has grown by 151% and 118%, respectively.
To date, the value transferred in Tether has varied considerably
on a daily basis, as can be seen in the large swings in percentage
change.
However, when scaled out on a longer time horizon, we can see

that Tether’s transaction value and total supply has recently in-
creased, coincidingly. Year-to-date, the 30-day moving average of
Tether’s transaction value has increased by approximately 93%,
from $693 million to more than $1.3 billion.
Median & average transaction values
The first week of Tether on Tron was removed due to outliers to get
a better idea of the overall trend.
The average transaction value for Tether on Omni and Ethereum

has remained relatively consistent and similar since early October
2019. Since then, the average transaction value for Tether on both
Omni and Ethereum has been $8,715 and $8,303, respectively.
Tether on Tron in Q4 2019 had an average transactional value of

$40,855 compared to $8,510 on Omni and $8,887 on Ethereum.
The average transaction value on Tron has also surged recently;
on May 13, its 30-day moving average surpassed $20,000.
The median transaction value for Tether on Omni has relatively
been the most consistent, slightly declining from $1,004 in Q3 19 to
$884 in Q4 19 and then $877 in Q1 20; however, it has rebounded,
and the current median transaction value is $998.
When looking at the median transaction value of Tether on Tron,

there’s still large variability across weeks.
In the first quarter of 2020, the median transaction value was near-
ly 0, which suggests the majority of its transactions have been of
little value. The majority of its value transferred during this quarter
was likely driven by exchanges moving large sums. Comparably,
the median Tether transaction size on Omni in Q1 20 was $877 and
$501 on Ethereum.
The different median and average sizes provide us with insight that
even though the unit of account is the same (Tether), each network
sees variations in use.
asset-backed open finance.
VIEW ONLINE By now everyone has given their Goldman Sachs take in response
to the firm’s painfully tired use of pre-2017 arguments against bit-
coin in its hotly-anticipated client-facing call on the US Economic
Outlook & Implications of Current Policies for Inflation, Gold and
Bitcoin (can view the deck here). But here’s mine: contrary to what
the tweets and headlines will tell you, this call was not fully repre-
sentative of what “Goldman Sachs really thinks of bitcoin.”
Rather, the presentation was more akin to “Leaked documents

show what Goldman Sachs junior/mid-level wealth management
analyst, tasked with throwing together a justification for recom-
mending client portfolios not hold Bitcoin, thinks of Bitcoin.” There,
I fixed it for you Fortune.
Pedantic, sure. But I would be remiss if I didn’t point out that the
portion of the presentation dedicated to cryptocurrencies was ex-
plicitly directed as the view of Goldman’s Investment Strategic
Group, a group that sits within the wealth management arm of the
firm, and not its Global Investment Research or Global Markets
business lines. And in fairness to the two call participants that
drove 90% of the presentation and call (Jason Furman, Professor
of Economic Policy at Harvard Kennedy School and Jan Hatzius,
Chief Economist and Head of Global Investment Research at Gold-
man), everything before the 5 minute rushed reciting of the bitcoin
slides (updated COVID data, US economic data, card spending,
apple mobility data, mortgage applications, labor data, Goldman’s
updated Economist growth forecasts, etc.) felt quite informative
and well-researched. (fig 2) pg.19
Lost in the well-deserved collective eye-roll over ISG’s arguments

presented against bitcoin -- are we really still talking about lack of
scarcity due to forks? -- was a more interesting argument the pre-
sentation made to not allocate into gold on a strategic or tactical
basis for client portfolios. Given bitcoin’s macro thesis, the very
thesis that brought in the likes of Paul Tudor Jones, is largely pred-
icated on it being perceived as “digital gold,” and a hedge on the
“great monetary inflation,” Goldman could have just ended the deck
there and saved us all the pain. And arguably they would have had
somewhat of a compelling argument!
I’ve talked about this in several columns over the past few months,
but I continue to be in the camp that those cementing money print-
er go brrr => inflation here we come => and this is all great for
bitcoin still sit in the cart before the horse territory. As Goldman
points out in its deck, historically gold: 1) has not consistently
outperformed during periods of high inflation, while equities have
100% of the time, 2) gold’s correlation to core and headline infla-
tion is very unstable, fluctuating between .75 and -.55 (avg .05), 3)
and in periods of significant equity drawdowns, US treasuries and
higher-quality bonds have outperformed gold performance.
From the context of portfolio allocation, I can at least follow this

logic in their recommendation to not allocate to gold, and instead
overweight to equities and some high-quality bonds.
One thing the industry can take solace in is the fact that ISG clear-
ly has been fielding questions and growing interest from high worth
individuals about allocating into bitcoin. Enough interest to warrant
speeding through dated half-baked slides in the last 5 minutes of
a broader research-driven discussion on the economic impacts of
COVID-19. But still, progress! After years of touting digital gold,
and hard scarce money narratives, the time has finally come for a
once in a generation event that might provide some narrative hard-
ening for this young asset class. In today’s memetic driven mar-
kets, widely perceived narratives actually places the cart properly
behind the horse.
Don’t sleep on asset-backed open finance
An Ethereum-based service that allows users to convert real-world

assets into crypto-assets quietly launched earlier this week.
Dubbed Centrifuge, the service has tested a number of pilots in the
past that highlight ways to use smart contracts to unlock efficien-
cy gains within secured lending of factored accounts receivables
(claims on payments for goods and services that have been ren-
dered or delivered, but not paid for).
I walked through one of the pilots in an earlier column this year

which tested the business assumption for Spotify artists to tokenize
earned, but uncollected streaming revenue, by pledging a toke-
nized representation of accounts receivables (factoring), and re-
ceiving a cash advance loan from the pledged collateral in minutes
from a system run by smart contracts. Centrifuge sits in the sell-
side function of connecting asset originators to non-custodial credit
facilities such as MakerDAO (and others in the future) in order to
receive asset-backed financing.
While only pilots, the launch of Centrifuge seems to paint a path to
where Open Finance lending protocols could one day be used for
all sorts of asset-based, and structured product lending functions.
Hot take, but this feels more innovative and actually useful than
say 50% leverage on ether holdings that the current non-custodial
lending systems offer.
Securitized-asset backed financing is a fascinating blue ocean

to capture for smart contract enabled finance because of its size
and importance in the global financial plumbing. According to S&P
Global, global structured finance crossed more than $1 trillion
worth of volume in 2019.
An underappreciated development from the Centrifuge news this

week is that if successful, the service could also enable a much
larger collateral base to enter into non-custodial credit facilities.
The by-product of which for something like MakerDAO would be a
new collateral base (while not fully “trustless”) that could support
billions and billions of incremental dollars worth of DAI supply.
VIEW ONLINE
• Oracles that provide price data to the blockchain are the corner-
stone of most DeFi projects
• Incorrect oracle designs can lead to the loss of user funds, as
was the case with the second bZx attack
• Among the main DeFi protocols, Maker has the most decentral-
ized oracle system, on which dYdX relies, whereas Compound
uses a centralized feed
Oracle Architecture
Oracles are data providers for smart contracts. Essentially, they

are used to obtain the price of an asset outside the blockchain,
given that:
• Not all assets are traded on decentralized exchanges (DEXs);

• Compared to centralized exchanges (CEXs), significantly less
liquidity on DEXs opens the door to price manipulation.
Oracles are more important for DeFi projects that offer lending,
margin trading, and derivative services. “The oracle” refers to an
entire system consisting of:
• The oracle smart contract, allowing the end-user to take the re-
quired data from it;
• Feeds/reporters that supply data to the oracle’s smart contract;
• The sources from which feeds collect data.
The data source element is, perhaps, the easiest component of

an oracle structure to explain. Put simply, it is an API request to
the platform, such as an exchange. However, the platform may not
return the correct value in response. If technical problems occur,
it can return incorrect data, leading to a collapse of the DeFi pro-
tocol. To avoid this outcome, it is better to use more than one data
source – therefore, the data obtained from various sites are aggre-
gated into one median value.
Further, having received a specific value, feed sends data to the

oracle’s smart contract. As with the exchange’s sources, one feed
may not be enough for operational work. In the event that a price
feed is compromised or disabled, the protocol will not receive the
correct data, which could also lead to its collapse. Thus, the solu-
tion is to create a feed network, the data from which are aggre-
gated to the median value. Many projects at the beginning of their
existence opt to keep a centralized feed with the prospect of transi-
tioning to a decentralized network in the future.
The oracle smart contract, in turn, is a source of data for the DeFi
protocol. Aggregation of data from feeds as well as storage of the
current value occurs in the smart contract. Smart contract functions
may also include various additional protocol protection measures
against possible attacks. Today, the most common measures are
sanity checks and time delays.
Oracle Attack Vectors
The design errors of at least two oracles have already posed a risk
to the user funds. Past incidents include the Synthetix KRW oracle
incident and the second bZx attack.
In the first case, only two APIs were used to obtain the KRW price.
An error occurred in one of the APIs led to an increase in the
KRW price as well as in the profit of one of the bots to more than
$1 billion. If the bot owner had not agreed to cancel the deal, all
the profit earned would have been distributed as debt to all Synth
minters. This problem would not be possible if more sources were
used.
Source: Ethereum blockchain
The second case refers to an attempt to over-decentralize a project
— in this instance, bZx used the Kyber Network as an oracle.
The Kyber Network is a non-custodial exchange built on the Ethe-

reum blockchain, hence it has less liquidity and greater opportu-
nities for manipulation than centralized counterparts. These draw-
backs were used by the attacker, who managed to manipulate
the price of sUSD with a flash loan, resulting in losses of $640k.
The possibility of such an attack was previously described by
samczsun, but the measures taken by bZx in the oracle’s smart
contract were insufficient.
Source: Ethereum blockchain
Currently, DeFi projects have not encountered a situation wherein

the feed was compromised. This fact, as well as the simplicity of
centralized feed implementation, has led some projects to use a
single feed totally controlled by its members. Other projects may
not have feeds at all – within their smart contract, oracles read
data from other oracles.
It is also quite common that projects use data from oracle provid-
ers. Oracle providers allow access to required data by creating
incentivization to increase the number of feeds. However, a large
number of feeds does not eliminate the problem of malicious activi-
ty. It makes sense to use a kind of consensus algorithm – the same
as in blockchains – to make the system work as intended. Of the
oracle providers, Chainlink is the most commonly used (it will be
used by Synthetix and bZx), although Tellor and Band Protocol are
also present.
Oracles in Main DeFi Protocols
The most mature Defi protocols (Maker, Compound, dYdX) require

asset prices that are used within them. Each of the protocols has
its own approach. Below, we take a close look at each one:
SCD Maker
SCD Maker – set to ride off into the sunset on May 12 – was one
of the first to create a stable system of oracles. The correct proto-
col operation requires ETH (to calculate the collateral-to-debt ratio
and to trigger liquidations) as well as MKR (to charge Stability Fee)
prices. Once prices were collected from the source, the median
value was applied to them. For ETH, the price sources are ETH/
USD pairs from Coinbase Pro, Bitstamp, Gemini, and Kraken. MKR
uses MKR/ETH pairs from Bitfinex, Kyber, and OKEx, and each
price is multiplied by the median ETH/USD to obtain the price in
the USD.
These feed prices, controlled by pseudonymous Maker individuals,

influencers, and active community members, are sent to their own
smart contracts.
Source: mkr.tools
Each feed sends its own price to the contract, causing an update
in the oracle’s smart contract. Feeds update prices if more than six
hours have passed since the last dispatch or the current price has
changed by 1%. For the oracle contract — medianizer — to accept
the price, the feed should be a part of its whitelist.
Currently, there are 14 ETH and 5 MKR feeds in the whitelists. For
the medianizer price to be considered accurate, it is necessary to
achieve a quorum: at least 7 (for ETH) or 3 (for MKR) feeds must
have the last update of the price no later than 6 hours. In addition,
the MKR price is not taken directly from the medianizer, but from
the OSM contract. This contract receives the medianaizer price
with a delay of one hour, giving MKR holders time to react to a pos-
sible vulnerability in the protocol before the price is updated.
MCD Maker
Launched on November 18, the updated version of Maker stores
the prices of all collateral (ETH, BAT, USDC, BTC) in USD, as well
as the recently added ETH/BTC price. The MKR price is no longer
needed, because the Stability Fee is now paid in DAI and MKR is
destroyed through a Flap auction. The price sources for oracles are
as follows:
• Bitcoin’s price in dollars is taken as BTC/USD pairs from Bit-

stamp, Bittrex, Coinbase Pro, Gemini, Kraken;
• The USDC price is now $1 and, instead of feeds, is controlled
by MakerDAO. In the future, feeds will consider it as the division
of the BTC/USD price by the BTC/USDC median taken from Bi-
nance, Coinbase Pro, Poloniex;
• The price of ETH in dollars is obtained as ETH/USD from Coin-
base, Bitstamp, Gemini, Kraken, as well as ETH/BTC from Bi-
nance and ETH/USDT from Bitfinex with the subsequent conver-
sion of the latter to USD;
• BAT’s price in dollars is taken as BAT/USDC from Coinbase, as
well as BAT/BTC from Binance and Bittrex, and BAT/KRW from
Upbit converted to USD;
• ETH’s price in Bitcoin is taken as ETH/BTC pairs from Binance,
Bitfinex, Coinbase Pro, Huobi, Poloniex, Kraken.
Unlike SCD, feeds do not send prices to their contracts separately.

To interchange with each other, they use the Scuttlebutt network,
the data from which goes directly to the medianizer via a relay-
er-account. For a quorum, the relayer needs to send information
from 13 feeds. After the medianizer sets the value, prices for collat-
eral pass through OSM with a one-hour delay before entering Mak-
er. The pseudonymous individuals holding feeds on SCD are also
joined by feeds from Maker, dYdX, 0x, Set Protocol, Gnosis.
Source: Ethereum Blockchain, Coinbase
Apparently, one of the organizations got two feeds; ergo, the total
number of feeds reached 20. Moreover, MCD opened up opportu-
nities for monetization of the oracle. The data that the feeds supply
to the medianizer are available only for addresses in the whitelist One
of the last executive votes added Set Protocol and dYdX to the oracle
BTC/USD whitelist, and tBTC was added to the ETH/BTC whitelist.
Compound
A key feature of Compound is that asset prices are denominated
in ETH. The feed is completely centralized and sends all prices to
one oracle contract. The prices of stablecoins SAI, DAI, USDT and
USDC are calculated using Maker’s oracle for ETH/USD. Sources
for BAT, REP, ZRX, WBTC are Coinbase Pro, Bittrex, Poloniex, and
Binance.
The feed sends new prices to the oracle when they change by
1%. If the price value is altered by more than 10% within an hour,
another transaction should be sent manually, which will allow
the price to go beyond this limit. For this purpose, an additional
“Chad” account stored in a cold wallet is used. This account cannot
change the price of the oracle itself but changes the price used as
the point to set pricing limits.
To liquidate the potential single point of failure as a centralized

feed, Compound is developing the Open Oracle System. For great-
er security, such a system divides the feed into four parts. The
recent announcement of Coinbase makes its Reporter a part of the
feed-in system.
dYdX
Unlike Compound, this protocol denominates the prices of all as-

sets in USD.
The price of ETH is taken from the Maker SCD medianizer. The
USDC price is hardcoded at $1. The DAI price is equal to the me-
dian between $1, the Oasis mid-price of 0.01 WETH of depth on
each market side, and the price from the Uniswap of the WETH/DAI
pool. As Uniswap and Oasis trade WETH/DAI, the price is first con-
verted to DAI/USD with ETH/USD from SCD Maker medianizer and
is then used to establish a median DAI price. The DAI price update
is called manually by dYdX to prevent DEX manipulations.
Together with calling the price update, dYdX sends the boundar-
ies within which the received price should be nested in order to be
updated.
The recently launched perpetual BTC contract will take the price
from the BTC/USD medianizer of MCD Maker. Instead of creating
its own oracle system, dYdX opted to use the existing one.
The Optimal Oracle
In 2019, amid growing interest in DeFi, there was demand for pric-
es of assets outside the blockchain ecosystem. Key events for the
oracle sector are:
• Mainnet launches of oracle providers;

• Maker upgrades to MCD, including a new oracle system;
• Compound developments aimed at decentralizing its oracles.
At the same time, the trust in on-chain oracles like Kyber Network
and Uniswap has weakened this year while Maker has slowly mor-
phed from a data consumer to an oracle provider.
It is worth noting that Maker’s feeds already have connections to

data sources of assets that it doesn’t support (for example BNB/
USD or LINK/USD) but it also provides access to ETH/BTC and
BTC/USD price data to third party projects. Despite the fact that
Maker’s oracle system is not fully permissionless due to restrictions
for those who can act as a feed, it currently gives the impression of
being the most mature and yet simple in terms of its maintenance.
VIEW ONLINE
• Currently, most DeFi protocols, as well as oracle providers, use

a federated model for their oracles
• Uniswap v2 introduced secure oracles only with on-chain prices
yesterday
• In Q2 2020, UMA will be launched with a new oracle design that
uses voting and a variable-fee policy for protocol operation
As The Block Research explored in a recent report, both Maker

and Compound have a common feature: data is collected from a
third-party source and then sent to a smart contract.
Given the significance of oracles for DeFi protocols, the third-par-

ty data feeds are chosen either directly by the protocol or through
governance frameworks. This approach is known as a federated
model, which stands out because small similar parts of the sys-
tem are combined to obtain a common result, i.e. data from feeds
are aggregated into relevant value inside an oracle contract. The
approach seems the most obvious to use, though it’s not the most
effective.
Firstly, for all the feeds’ work to be reflected on-chain, a lot trans-
actions have be sent, which creates significant levels of blockchain
congestion. One might recall Black Thursday when, because of a
sharp drop in ETH and BTC prices, gas prices rose significantly in
part because of Chainlink oracles’ need to provide updates. Chain-
link oracles were consuming ~20% of gas in Ethereum.
Second, feeds may be compromised or have insufficient incentive

to perform honestly. This issue is partially addressed by the time
delay before the oracle contract receives the price, as implemented
in MCD Maker. However, the time delay, in turn, leads to a case in
which the system may be undercollateralized because undercollat-
eralized positions are not liquidated during the delay.
Chainlink and ‘LINK Marines’
As an oracle provider, Chainlink uses a federated model. It is ca-

pable of receiving data from various APIs upon request, along with
the ability to take the price from an oracle contract. However, most
features – ones that would be Chainlink’s edge – are still in devel-
opment, such as:
• Blockchain agnosticism;
• Use of TEE (Intel SGX) for higher security;
• Reputation system and staking requirements for a possible pen-
alty;
• Off-chain aggregation similar to the one in MCD Maker.
Let’s take a closer look at how the oracle works for the ETH/USD
pair in the terms defined in the previous article.
The price is stored in the medianizer, which receives prices from

21 feeds. A quorum of 14 feeds is required to update the current
price. The price is updated either every two hours (heartbeat) or
when the contract’s price deviates from the spot price by 0.5%
(threshold). After a request to update the price, each of the con-
nected feeds receives payment in Chainlink’s native cryptocurrency
LINK for future work, according to the Service Agreement, and the
requestId value, to which they need to respond.
Each feed, for a certain time, should send the requested data to
the medianizer contract. The data sources for each feed depend
on the external adapters used, e.g. CoinMarketCap or CryptoCom-
pare.
Source: Chainlink Reference Data, Ethereum Blockchain, The Block Research
The ecosystem itself now consists of 48 contract oracles: 31 or-

acles are available at Chainlink Reference Data. There are also
4 Pre-Coordinator contracts that are likely related to AMPL/USD.
Chainlink oracles are sponsored by various DeFi projects that use
their data. (fig.2) pg.45
By receiving a request for data from an oracle contract, each feed

needs to run the job. This job is the sequential execution of tasks,
which are performed using adapters. Chainlink has 15 core adapt-
ers that implement a comparison operation or HTTP request. Since
such simple operations may be insufficient, external adapters are
developed for more complex actions. Currently, there are about 65
such adapters, most of which are written by the Chainlink team
fig.2
Source: Chainlink Reference Data, The Block Research
Finally, let’s consider Chainlink nodes that control feeds. Each

node controls a contract – that is, a feed capable of supplying data
for several oracles at once. It is expected that the vast majority of
nodes sending price belongs to staking providers. Apart from them,
there are also data providers, community, and DeFi projects.
In total, 221 feeds have been created since Chainlink’s inception.

Only 39 feeds have been active in the last month (21 of them are
formally reviewed and approved by the Chainlink team).
Source: Ethereum Blockchain
Chainlink has yet to implement all that’s written in the white paper
and create a secure network of oracles. At the moment, the proj-
ect’s ecosystem would also not be hindered by a larger number of
adapters and decentralization of nodes among other participants in
the crypto community.
In turn, LINK token holders who have proclaimed themselves “LINK

Marines” appear to pay more attention to the speculative nature of
the token compared to factors that might give it real, tangible val-
ue.
Maximum oracle decentralization

As an alternative to a federated model – where the user has to
rely on a large number of third parties – prices from DEXs are also
used as an oracle. Yet exchanges operating as Automated Market
Makers (AMMs) are more relevant for the following reasons:
• They constantly have liquidity, as the price is calculated by a

formula; for example, constant product as k = x * y;
• Arbitrageurs profit by maintaining the price in AMM at a level of
the market price.
As previously reported by The Block, the use of Kyber Network as an

oracle in bZx led to a loss of $640k. The root of the problem was
the leverage provided by the flash loan to manipulate the Uniswap
and sUSD Automated Price Reserve (both included in Kyber).
The ability to use Uniswap as an oracle was mentioned in the pa-

per (v5) ‘An analysis of Uniswap markets’, two weeks before the
second bZx attack. The Gauntlet Network, in their Medium review
of the paper results, highlighted: “No protocol should rely on very
fine changes in price reported by these oracles, or prices reported
over very short periods of time.” The fact is that, currently, the price
from Uniswap used as an oracle is calculated from the ratio of the
one asset in the pool to another asset.
These drawbacks will be fixed in Uniswap v2, in which it will be

possible to create oracle contracts for any pair of assets. Uniswap
v2 went live on May 18.
First, the price from the previous block will be used (the price from
the current block is used in v1). This effectively increases the cost
of manipulation – as the attacker’s deal must be the last in the pre-
vious block – and also renders a flash loan attack pointless.
Source: Uniswap blog
Second, the price in the oracle is stored as a cumulative sum of

prices since the contract was created. This cumulative ‘price’ may
be used to calculate time-weighted average prices (TWAP) at any
time. Besides, the oracles will store two prices: 1) the value of as-
set A in asset B, and 2) the reversed price since they are not recip-
rocal in calculating TWAP.

Source: Uniswap blog
Time to vote
Another type of oracle design is one that uses voting to obtain
blockchain data. This approach draws heavily on game theory
mechanisms and is primarily used in prediction markets like Augur.
Augur assumes that the designated reporter selected by the market

creator will provide the correct market’s outcome. In case it does
not announce the result in 24 hours, any other reporter is free to
do so. Nevertheless, if someone disagrees with the initial result,
a dispute can begin within 24 hours. In this case, the outcome is
determined by the consensus of reporters — those who stake their
tokens on the true result. If someone provides false data, other
participants have an economic incentive to choose the right result.
When 2.5% of the total REP takes part in the dispute, a fork occurs
inside the protocol. Within 60 days, each REP holder must choose
what result they consider to be true. To that end, they ‘transfer’
their tokens into the new version of Augur where the market’s out-
come chosen is canonical. Both reporters and REP holders can
lose the value of their tokens, as the version of Augur with “their”
result is unlikely to be used by other participants.
Source: Augur whitepaper
UMA
The UMA Protocol’s creators have also arrived at the use of game
theory and decided to update DeFi’s approach to the oracle prob-
lem through Data Verification Mechanism (DVM).
DVM is responsible for obtaining asset prices and maintaining the

inequality CoC>PfC, where CoC is Cost of Corruption, and PfC is
Profit from Corruption.
CoC is determined by the cost of 51% of UMA tokens, whereas PfC

is the sum of the collateral of all contracts in UMA. DVM regulates
the fees paid by financial contracts so that inequality (CoC>PfC)
persists. The received fee will be spent on the buyback and burn of
the token in order to raise its price, and therefore increase CoC.
This system provides an opportunity for implementing a new design

of synthetic assets — priceless tokens. The idea is that the position
of a synthetic asset is collateralized if not liquidated. Anyone can
monitor positions based on their data and consider that a position
needs to be liquidated. The asset contract requests for a price from
the oracle only in the case that another participant — the disputer
— considers the liquidation to be unfair.
Source: UMA Protocol blog
Subsequently, DVM uses the consensus of the UMA token holders
to find out the price at the time of liquidation. For the majority of
those who gave the same answer, new tokens are minted after the
voting period (2-4 days).
What we have
The federated model for oracles is now ubiquitous in the most ma-
ture DeFi protocols. It is widely used mainly because of the ease
in its implementation (especially in the case of a single feed) and
because it has been used in centralized services for a long time.
Oracle providers are simply working on additional security mecha-
nisms while mainly relying on the same model.
The success of Uniswap v2 in creating oracles based on its mar-

kets is also worth noting, as this is the first step towards using
secure oracles based on on-chain data.
Oracles using concepts of game theory, such as Shelling Points,

possess more innovative designs. Having one of the first ICOs, Au-
gur has laid the foundation for prediction markets on the blockchain
and now is preparing for its v2 release.
Using the achievements of its predecessors, UMA has created a

mechanism for the existence of priceless tokens that mostly do not
need the price. The hype around DeFi gives UMA a chance to test
the new model with more participants than Augur previously did.
Projects
52 $22 million: dYdX’s perpetual bitcoin swap market
56 Uniswap: The state of the market
65 Atomic swaps and CoinSwaps: safe and private

asset exchange
70 A Ponzi scheme styled after MMM is driving

Ethereum network congestion
VIEW ONLINE
• Less than a week after its official launch, dYdX’s bitcoin perpet-
ual swap market has processed over $22.9m in volume and now
counts over 55 bitcoin in open interest
• The perpetual swap market contract now controls over $1.2m
USDC, roughly 0.17% of circulating supply
Founded in 2017 and backed by venture funds Andreessen Horowitz

and Polychain Capital, dYdX is a leading non-custodial exchange
with close to 17% of the total market share since the start of 2020.
As first reported by The Block, dYdX launched a private alpha for

its new Bitcoin perpetual swap product on April 20, before opening
up access to the wider public on May 14. Perpetual swaps continue
to be the most liquid cryptocurrency-related financial instrument, with
derivatives exchange BitMEX reporting over $2bn in 24-hour volume
and $604m in open interest for its pioneering perpetual swap product.
An overview of the existing non-custodial perpetual swap land-

scape can be found here.
dYdX’s perpetual swap market has had a remarkably successful

first official week, boasting over $22.9m in trading volume and
currently counting over 55 BTC in open interest. May 19 marked
an all-time high of $12.9m in daily volume. To give a sense of the
scale of the perpetual swap market, popular non-custodial ex-
change Kyber, which launched in 2018, processed $18.3m in cu-
mulative volume over the past seven days across all token pairs.
Source: The Block, Dune Analytics
There is now over $1.2m worth of USDC collateral in dYdX’s per-
petual swap contract, with the largest daily inflow of $328,000
arriving on May 13. Collateral for dYdX’s perpetual swap contract
market now represents over 0.17% of the circulating USDC supply.
While USDC continues to be used for cross-exchange flows pri-
marily, we should expect to see a considerable portion increasingly
used as derivative margin over the coming months.
The number of daily unique market traders has almost doubled

since the end of the Alpha program, although the daily unique user
count has yet to rise above 56.
That dYdX’s perpetual swap market has been able to achieve such
high volume with so few active users suggests participation from a
more professional class of traders. On May 19, the average volume
per trader exceeded $254,000.
For context, Uniswap, a more retail-focused non-custodial exchange,

has averaged a volume per user of $8,213 over the course of May.
At $7,285 on May 19, the average volume per trade similarly ex-
ceeded Uniswap by roughly an order of magnitude, although the
figures are roughly aligned with average volume per trade in dYdX’s
spot margin markets. We should not be surprised that volume per user
and volume per trade figures exceed non-margin exchanges; the
ability to leverage long up to 10x naturally elevates notional volumes.
The Bitcoin perpetual swap promises to generate significant rev-
enue for dYdX. With a taker fee of 7.5 basis points and a maker
rebate of 2.5 basis points, dYdX captures 5 basis points per trade.
However, due to a promotional 50% discount on taker fees between
May 14 and May 20, dYdX’s cumulative revenue from the perpetual
swap market has lagged, climbing just over $2.8k.
VIEW ONLINE
• Uniswap Q1 volumes were up 225% versus Q4 ’19

• March and April saw positive liquidity inflows after $10m in out-
flows in February
• Liquidity provider activity suggests continued appetite for single
asset exposure
Launched in late 2018, Uniswap is a non-custodial, automated

market-maker exchange protocol based on the constant product,
x*y=k. A departure from traditional centralized limit order book
models, Uniswap markets are structured as shared passive liquidity
pools; any trader can execute orders against pools along a deter-
ministic price curve in return for a fixed, 30 basis-point fee.
As Uniswap moves closer to its ‘version 2’ launch — which brings

ERC20/ERC20 markets, ‘flash swaps’, and a time-weighted oracle
mechanism alongside several architectural optimizations — we re-
view the protocol’s performance since its release in November 2018.
Trading
Uniswap’s volumes have seen significant growth since the start of
2020: Q1 ‘20 volumes are up over 225% versus Q4 ‘19.¹
In line with other industry exchanges, Uniswap saw a monthly vol-

ume all-time high of $191.4m in March, which coincided with the
coronavirus-induced ‘Black Thursday’. Volumes proceeded to fall
roughly 60% in April ($77.3m), while May is on course to support
around $100m.
DAI, USDC, and MKR markets continue to comprise a majority of
trading activity. In April, the three assets alone comprised roughly
72% of all volume.
However, the increasing fragmentation of asset volume market

share does indicate that Uniswap is leaning into its core value
proposition as a venue for trading the long tail of assets.
Uniswap pool volume appears to be correlated with asset liquidity,

with Synthetix’s syntheticETH (sETH) and Augur’s REP the ex-
ceptions. We observe a power-law distribution of liquidity, with the
top five assets — DAI, USDC, sETH, REP, and MKR — making up
roughly 70% of the protocol’s liquidity.
Uniswap’s monthly unique user chart shows steady positive growth.
Despite the 60% drop in volume versus March, April 2020 saw a
record 15,280 unique addresses interact with the Uniswap protocol,
a 47% increase versus January.
Meanwhile, average volume per user per month continues to trend

down from April ‘19’s ($13,347), with March ‘20 ($14,055) serving
as an outlier. At $8,733 per user in April ‘20, average volume per
user data suggests increasing adoption among a retail audience.
Uniswap’s number of trades per month similarly continues to see

unabated growth, with back-to-back all-time highs in February
(227,924) and March (267,990).
The average number of trades per user per month has remained
sternly within the 10-20 range since January ‘19.
With an average volume per trade of $651.79 across the first four
months of 2020, we again see evidence that Uniswap’s primary
audience is among an amateur retail audience. By contrast, limit
order book-based margin trading exchange, dYdX, sees an average
volume per trade of roughly $5,000.
A look at the all-time top 20 traders by volume indicates the in-

creasing importance of execution aggregators: the top two ‘traders’
— 0x31e0 and 0x1111 — are contracts associated with Kyber and
1inch. That such a significant portion of volume comes from ag-
gregators reflects the difficulty of sustaining network effects in the
exchange industry, where consumers ultimately value best execu-
tion over brand.
While Uniswap continues to retain significant non-custodial ex-

change market share, its future success will largely depend upon a
combination of its ability to carve out a niche in the market – likely
within the long tail asset domain – and its ability to attract material
liquidity to the point where passive pools can viably compete on
slippage with limit order exchanges.
Liquidity provision
The number of markets created per month continues to trend up-

wards, with an all-time high of 433 in February 2020. There are
now 3,197 unique Uniswap markets.
Again, this continued growth in pool creation speaks to the value of

Uniswap as a platform for the seamless creation of markets for the
long tail of digital assets, while also reflecting continued strength
with respect to demand for new token issuance. Recent additions
span products from income sharing agreement-like ‘personal to-
kens’, options, and tokenized real-world collectibles.
While centralized incumbents like Coinbase, Gemini and Binance

continue to add support for non-’blue chip’ cryptocurrencies, the
permissionless nature of Uniswap’s market creation process means
it will forever have an edge on asset listing.
The number of unique liquidity providers per month — defined as

those adding liquidity to existing markets (regardless as to wheth-
er they then proceed to remove said liquidity) — has plateaued
around 1,500 since an all-time high of 1,568 in January 2020.
Since Uniswap’s launch, 7,960 individual addresses have provided
liquidity.
The net inflow of liquidity per month picked up to over $6m in April
after two successive negative months in February and March. Jan-
uary’s $13.7m worth of inflows singlehandedly exceeded the com-
bined net inflows across 2019.² February’s $10m in outflows may
have been motivated by volatility in the cryptocurrency markets,
with Ether alone climbing over 60%.
An overview of the top-50 liquidity providers indicates that, at least

among larger players, there seems to be little appetite to provide
capital across multiple markets. Rather, data suggests that liquid-
ity providers are not diversifying their market-making exposure,
instead opting to concentrate their positions into particular liquidity
pools.
This departs from traditional market-making operations, where
firms typically participate across multiple markets simultaneous-
ly. The concentration of portfolios may have implications for the
growth of Balancer, an alternative constant-function AMM that of-
fers liquidity providers the ability to simultaneously provide multiple
forms of capital with arbitrary weightings.
Naturally, we see a power-law distribution of LP fees per mar-

ket over the past 30 days in line with market volumes. USDC and
DAI LPs have earned $98,496 and $93,439, respectively, while
the third-largest market by 30-day fees — imBTC — has earned
$33,947.
It is worth noting that imBTC’s 30-day fee figures are largely in-
flated by a recent exploit of Uniswap’s imBTC pool.
The DAI market currently commands the largest number of unique
LPs. Curiously, however, USDC – which has the second most liquid
pool ($5.9m) and the most volume over the past 30 days – has just
342 unique LPs. REP also stands out as an outlier with 109 unique
LPs despite supporting a liquidity pool of over $5.5m.
The distribution of LP liquidity per market provides better insight

into pool composition. DAI and USDC fall into the more distribut-
ed ends of the spectrum, although in both instances, the largest
single LP provides 24.81% and 19.61%, respectively. sETH’s LP
distribution is misleading as presented due to the use of a contract
— ‘Synthetix Unipool’ — which pools individual deposits before
forwarding them to the Uniswap protocol.
Of the top 10 liquidity pools, REP and SNX pools are the least
distributed, with the largest LP holding 94.09% and 67.64% of
liquidity, respectively. While large individual LPs can be useful in
bootstrapping initial market liquidity, it is important that liquidity
distributions normalize over time in order to mitigate single points
of liquidity failure.
Source: The Block,
Dune Analytics
¹For the sake of clarity, the volume

per asset chart has been limited
to the following cryptocurrencies:
SNX, DAI, USDC, MKR, sETH,
REP, BAT, LINK, KNC, NMR, LEND,
SAI, WBTC, WETH, TUSD, ZRX
²Calculated as value of liquidity

provisioned at the time of addition
minus the value of liquidity removed
at the time of removal. This does
not account for price movements in
the underlying tokens.
65 Atomic swaps and CoinSwaps: safe and
private asset exchange
VIEW ONLINE
• Atomic swaps allow cryptocurrency users to exchange assets

without risking the loss of funds
• CoinSwaps expand on the concept of atomic swaps, making
them more difficult to detect on-chain and are therefore suitable
for privacy applications
• CoinSwaps can be used for cross-chain trading, or for exchang-
ing two sets of outputs on a single chain in order to improve
their owners’ privacy
Fair trade
Exchanging goods can be tricky. Even once a counterparty has

been found, executing the actual transaction can carry risks – the
most problematic being that one side can renege on their side of
the trade and run away with the other party’s assets.
The risks incurred are fundamentally due to lack of transaction

atomicity: in a typical exchange, parts of a trade can succeed while
others fail. This lack of atomicity is problematic, and makes it dif-
ficult for entities to trade with untrusted counterparties. Ultimately,
this leads to a reliance on institutionalized trust and the prolifera-
tion of rent-seeking.
Atomic swaps allow cryptocurrency users to exchange digital as-

sets atomically, so the transaction either succeeds in its entirety
or fails, returning all funds to their original holders. With atomic
swaps, users can trade cryptoassets with untrusted counterparties
without risking funds. This enables peer-to-peer trading and fur-
thers the goal of a disintermediated financial system.
Atomic swaps aren’t steganographic, however, which is to say that

they are identifiable on-chain by outside observers. This allows
blockchain analysts to trace the flow of funds, which is undesirable
to those seeking to spend money without being monitored.
CoinSwaps expand on atomic swaps, improving their stegano-

graphic properties and making them more private and discreet.
Atomic swaps: a primer

On Bitcoin and chains whose scripting languages derive from Bit-
coin, atomic swaps are typically constructed using a hash time
locked contract (HTLC). This is a type of smart contract that sends
funds to one address if a secret is revealed within a certain window
of time, and otherwise sends the funds to another address. This
construction involves two parties, an initiator and a participant.
HTLC-based swaps are most frequently used to exchange assets
across blockchains.
The most basic HTLC-based atomic swap functions as follows.

First, the parties agree on the parameters of the trade, and the
initiator generates a secret value but does not broadcast it. The
initiator then sends funds to a contract containing an expiry block
height and the hash of a secret on the first blockchain, specifying
that the participant can redeem the funds if they reveal the secret,
and otherwise the money is returned to the initiator. Then, the par-
ticipant sends funds to a contract on the second blockchain speci-
fying the same secret hash and a slightly earlier expiry block height
that sends funds to the initiator if they reveal the secret, otherwise
returning the money to the participant.
In the optimistic case, then, the initiator simply redeems the funds
on the second blockchain using the secret. In doing so, they reveal
the secret to everyone including the participant. The participant
then uses the secret to redeem the funds on the first blockchain,
and the exchange is completed.
In the pessimistic case, the initiator does not reveal the secret.
Both parties are refunded when the timelocks expire. Critically,
even if one party reneges on their side of the exchange, there is no
way for them to take the others’ funds.
Because the initiator is not required to reveal the secret, atomic

swaps of this construction suffer from an issue known as the free
option problem. Rather than directly exchanging underlying assets,
the initiator is instead receiving the right, but not the obligation, to
exchange assets at the predetermined exchange rate, and receiv-
ing this right for free. This allows the initiator to abort transactions
when the exchange rate shifts in the participant’s favor at no cost.
Beyond cross-chain trading, atomic swaps have applications to privacy.

By performing an atomic swap between two sets of outputs, users
exchange their coins’ histories. An atomic swap performed for this
purpose could be executed on a single chain, allowing two parties
to exchange their bitcoins in order to hide the source of their funds.
Ideally, an atomic swap performed for the sake of privacy would
look like two independent transactions. However, because the
same secret is used in this basic construction, observers can asso-
ciate the two legs of the swap, rendering them linkable. This ulti-
mately allows observers to trace the flow of funds, rendering this
construction only minimally useful to privacy-conscious users.
CoinSwaps
CoinSwaps are a type of atomic swap in which the secret is not
revealed in the optimistic case. CoinSwaps are particularly useful
in privacy applications, where they allow participants to construct a
set of steganographic transactions to exchange their coins’ histories.
CoinSwaps are a useful tool for those seeking privacy on-chain. In

tandem with techniques like CoinJoins, which allow two or parties
to mix their coins – rather than swap them – they can be used to
limit the effectiveness of blockchain analysis and provide fungibility
to users’ funds.
In a CoinSwap, the initiator generates a secret as before. The initi-

ator then creates, but does not sign, a transaction depositing funds
into a two-of-two multisig contract with the participant. Both parties
then collaboratively create and sign a backout transaction spending
the coins from the multisig to the participant if a key is revealed, or
otherwise to the initiator after a certain amount of time has passed.
In parallel, the participant also creates, but does not sign, a trans-
action to move funds to a two-of-two multisig. Both parties create
and sign another backout transaction that spends the coins from
this multisig to the initiator on revealing a key, or to the participant
after a certain amount of time.
Proposed transaction graph for CoinSwap between

Alice and Carol. Source: Adam Gibson.
Both parties then sign and broadcast the transactions that move
funds into the multisigs
In the optimistic case, the parties then collaboratively sign a trans-

action sending the coins from the multisig that was funded with the
initiator’s address to the participant. They then sign another trans-
action spending the funds from the other multisig to the initiator.
Each party receives their funds, and if the parties have avoided
address reuse, there is no on-chain indication of any interaction
between them beyond two payments.
If either party refuses to sign the first of the cooperative transac-

tions, the backout transactions allow each party to redeem their
coins after the timelocks expire, aborting the swap. While the trans-
actions can be linked from looking at their scripts, the fact that no
exchange took place renders this linkage useless.
If the participant refuses to sign the second cooperative transac-

tion, the initiator simply reveals the secret to spend funds from the
corresponding multisig. Because the first multisig’s funds were
spent without revealing the backout transaction, the legs of the
swap are still unlinkable on-chain, except as transactions of equal
balances.
As a result, CoinSwaps preserve the atomicity of the exchange,

and users’ funds cannot be taken by their counterparty.
On the Bitcoin network today, two-of-three multisigs are more com-

mon than two-of-two multisigs. Therefore, while a basic CoinSwap
implementation could use two-of-two multisigs, in practice the use
of two-of-three multisig escrows would provide a larger anonymity
set to the participants. To construct a CoinSwap with these proper-
ties, the participants can collaboratively generate a third, unusable
key for each escrow.
Because CoinSwaps require pre-signing of transactions, they can-

not be performed on malleable transaction outputs. On Bitcoin,
transaction malleability was fixed with SegWit, and CoinSwaps
should only spend SegWit outputs. CoinSwaps can be used for
discreet cross-chain trading, but both chains involved must support
non-malleable transactions.
Other variants
In addition to CoinSwaps, there are several other extensions to the
atomic swap concept.
Atomic swaps, including CoinSwaps, can be performed on the

Lightning network, a layer-two network on top of Bitcoin that al-
lows for instant transactions. Users can also perform an atomic
swap between coins on Bitcoin’s base layer and coins on Lightning,
known as a submarine swap, in order to top up the balances of
their Lightning channels.
Atomic swaps can also be performed between different types of

assets on the same chain. On Bitcoin, this would entail the ex-
change of uncolored bitcoins for colored coins; on smart-contract-
ing platforms like Ethereum, this would take the form of exchanging
a native token like ether for another on-chain asset like an ERC20
or ERC721 token.
Performing atomic swaps between assets on a single smart-con-

tracting platform like Ethereum is significantly simpler than across
blockchains with less advanced scripting capabilities. These sin-
gle-chain atomic swaps form the basis for several decentralized
exchanges, including UniSwap and AirSwap. However, since most
smart-contracting platforms use the address-based model, which
encourages address reuse, rather than the UTXO model, maintain-
ing privacy on these platforms can be difficult.
With Schnorr signatures, threshold-signing schemes like MuSig can

be used to hide the use of multisigs in a CoinSwap, further increas-
ing the size of the anonymity set. Schnorr signatures have not yet
been implemented, but soft fork has been formally suggested and
has received little opposition. Schnorr signatures also allow for
more discrete atomic swaps through the use of scriptless scripts.
Schnorr signatures also enable more advanced ways to coordinate

atomic swaps and CoinSwaps with more desirable privacy proper-
ties. These techniques include partially blind atomic swaps, which
are atomic swaps coordinated by a server that cannot deanonymize
participants if behaving honestly, and Multiparty S6, which allows
multiple users to perform a series of CoinSwaps with one another
in a distributed manner.
VIEW ONLINE
• MMM, a Ponzi-like investment scheme on Ethereum, now ac-

counts for at least 8.7% of all gas usage
• The rapid rise in MMM-related activity has pushed gas prices
over 20 Gwei, up from 3 Gwei at the start of the year
Ethereum is currently undergoing a period of heightened network

congestion, in part due to the rising popularity of an MMM-branded
Ponzi scheme.
The activity can be traced to MMM BSC, styled after Sergei Mavro-
di’s MMM enterprise which raised hundreds of millions of dollars in
the 1990s in return for empty promises of high-yield returns. MMM
Ponzi schemes have persisted since Mavrodi’s death, including
BSC which utilizes Paxos’ PAX USD token (Paxos, for its part, has
strongly disavowed any affiliation with the scheme).
The scheme loosely works as follows: users navigate through the

MMM BSC website, choosing the number of PAX USD tokens they
would like to deposit. Once the deposit has taken place, an ad-
dress is created on behalf of the depositor. Half of the deposited
tokens are then sent to the main contract as a form of prepayment,
while the remainder is sent after a period of time. After an initial
‘freeze’ window, the user can initiate a withdrawal, receiving some
principal and interest in return.
Due to the use of multiple addresses per user, the data sets be-
low appear to be inflated: MMM’s API suggests there have been
just under 37,000 users, while the number of unique addresses
that have sent transactions to the main MMM contract totals over
280,000.
Nevertheless, the data at hand should provide some degree of in-

sight into MMM’s role in Ethereum’s recent network congestion and
above-average gas prices.
Data
The number of unique addresses interacting with the main MMM

contract continues to grow week-on-week: the week of May 4
marked an all-time high of 4,547 unique addresses.
Similarly, the number of inbound transactions to the main MMM

contract continues to grow week-on-week. The week of May 4
marked an all-time high of 194,039 transactions, up over 46% from
the preceding week.
Cumulative PAX USD inflows into the main MMM contract have
now exceeded $98m, with weekly inflows similarly growing week-
on-week.
As a caveat, more granular on-chain analysis from research ana-

lyst Marcus Brooks suggests that a significant proportion of these
inflows are wash transactions. As such, while the trend is likely
directionally correct, total inflow figures should not be taken at face
value.
According to Brooks, 3,254 participants currently have a net nega-

tive balance, while 15 accounts have a negative balance exceeding
100,000 PAX USD. Additionally, more than 970,000 PAX USD have
been sent to Binance, while a further 140,000 have been sold for
Ether through non-custodial exchange Tokenlon.
MMM-related activity^ now accounts for over 55% of all weekly

PAX USD transactions, and over 12% of all PAX USD weekly trans-
action volume.
Source:
The Block, Dune Analytics
Heightened demand for blockspace, largely due to MMM-related
activity, has pushed the average gas price per transaction up by
several multiples: below, we see the average gas price per transac-
tion for inbound transactions to the main MMM contract. Between
the start of January and the week beginning April 20, the average
gas price consistently remained below 5 Gwei: since then, average
gas prices have spiked up to 21.79 Gwei.
Indeed, inbound and outbound transactions to and from the main

MMM contract now account for roughly 8.78% of all gas usage
across the Ethereum network over the past week, up from 1.37% at
the start of the year. In reality, MMM-related activity likely accounts
for a significantly higher percentage of total network gas usage.
^MMM-related activity defined as

inbound and outbound transactions
to and from the main MMM contract
in addition to inbound transactions
to the addresses that ultimately
send PAX to the main MMM con- Source:
tract. The Block, Dune Analytics
Company
75 Bitfinex made $21M in Q1, LEO exchange
token burns suggest
80 A close look at the activity of Argent’s 20,000

wallets
87 Square offers the most profitable bitcoin

business among publicly traded U.S. companies
92 Mapping the Institutional Digital Asset

101 Examining the blockchain gaming industry
token burns suggest
VIEW ONLINE
• Bitfinex generated $21.43 million in revenue in Q1, $10.91 mil-

lion in 4Q19 and $26.15 million in 3Q19
• Since starting the burns in June 2019, $19.85 million in LEO
(~17.34 million LEO) has been burnt in 2,435 on-chain burning
events
• Bitfinex’s revenue is declining significantly compared to previ-
ous years, which is caused by Bitfinex’s fall in market share
Bitfinex generated $21.4 million in revenue in Q1, an analysis of

LEO token burns indicates. This is an increase of 96% from 4Q19
but a slight decrease from 3Q19.
LEO, Bitfinex’s exchange token, was announced in May last year

after Bitfinex allegedly raised $1 billion in USDT and USD in a
private token sale. The firm issued LEO to cover the $850 million
frozen in several accounts controlled by the payment processing
company Crypto Capital.
Similarly to other exchange tokens, LEO’s most important value

capture proposition is its quasi-claim to Bitfinex’s cash flow via the
burning mechanism. In contrast to Binance, which only burns its
exchange token BNB once a quarter and uses its treasury, Bitfinex
buys back and burns LEO every three hours. It purchases LEO at a
market value worth 27% of consolidated gross revenues and then
burns the tokens in perpetuity until no tokens are in commercial
circulation. The whitepaper notes, though, that LEO paid by users
for fees may also be used for burns.
Initially, Bitfinex only burned the revenue from trading fees, but it
eventually began adding other revenue streams — r evenue from
its IEO platform (started on July 8), revenue from margin funding
activities (started on July 14), and revenue from derivatives trading
(started on Sept. 2).
The size of the burn logically varies depending on Bitfinex’s reve-

nue and the price of LEO. Bitfinex started burning LEO on June 14,
which means that there have already been nearly 11 months (326
full days) of burns. Since then, $19.85 million in LEO (~17.34 mil-
lion LEO) has been burnt in 2,435 on-chain burning events.
token burns suggest
Source: Bitfinex, The Block Research
About 1.73% of the total 1 billion supply has been burnt so far. If
LEO kept getting burnt at the same pace (~53.16k a day), it would
take more than 50 years to burn the full supply.
However, in addition to the burns, at least 95% of the recovered

funds from the frozen Crypto Capital funds and 80% of recovered
net funds from the 2016 Bitfinex hack has to be used to repurchase
and burn outstanding LEO within 18 months from the date of recov-
ery. None of the frozen or stolen funds have been recovered yet,
though.
Bitfinex’s revenues
Knowing that the total burnt amount represents 27% of revenues,
we can deduce that Bitfinex generated about $73.52 million in rev-
enue since June. If that amount was annualized, it would be ap-
proximately $82.32 million per year.
In 3Q19, Bitfinex generated $26.15 million in revenue. In 4Q19, the

revenue dropped by more than 58% to $10.91 million as cryptocur-
rency volumes dropped across the board — n ot just on Bitfinex. And
finally, in Q1, as volumes returned, Bitfinex generated $21.43 mil-
lion in revenue.
token burns suggest
Context
In the LEO whitepaper, Bitfinex self-reported gross profits of
$333.5 million in 2017 and $418.2 million in 2018, with net profits
of $326 million in 2017 and $404 million in 2018. If the self-report-
ed financials were accurate, Bitfinex is currently generating much
less than it did in 2018.
Source: Bitfinex
The falling revenue is caused by Bitfinex’s fall in market share.

Since January 2019, Bitfinex’s share of total legitimate volume has
dropped from 13.7% to about 5% in April.
token burns suggest
Source: CryptoCompare, The Block Research
Relationship to volume
Bitfinex’s revenue roughly corresponds with volume traded on the
exchange, which is an expected outcome since Bitfinex derives
most of its revenues from trading fees.
token burns suggest
The ratio has historically trended from 0.11% to 0.15%, as seen
in the chart below. The decline in April can be explained by more
maker activity than in other months. The average fee paid by Bit-
finex’s users was likely noticeably lower in April than in March.
Another possibility is that larger-volume clients traded more on

Bitfinex in April. Similar to other exchanges, Bitfinex uses a tiered
system for trading fees based on the monthly number of execut-
ed orders, which means that the fees decrease as a participant’s
monthly trading size increases.
80 A close look at the activity of Argent’s
20,000 wallets
VIEW ONLINE
• Argent is a leading smart contract mobile wallet backed by ven-

ture funds, Index Ventures and Paradigm
• The Block reviews user activity data across Argent’s life to date
Founded in 2018, Argent is a smart contract mobile wallet with a

range of integrated Open Finance products. Abstracting away many
of the more technical elements of blockchains and their associated
cryptocurrencies — private keys, hexadecimal addresses, transac-
tion fees — Argent provides a distinctly ‘Web 2.0’ application user
experience and is well-positioned to serve as a primary on-ramp for
mainstream audiences.
Analysis of Argent user activity may serve as a loose proxy for

mainstream cryptocurrency adoption and activity. Separately, it is
also valuable to review user statistics for a highly anticipated start-
up backed by leading venture funds, Index Ventures and Paradigm:
access to such granular insight is typically reserved for public mar-
ket participants, and even then only on a quarterly basis.
Over 20,000 wallets have been set up since February 2019, with
February 2020 the most active month by wallet creations. Officially
out of beta stage since May 18th, 2020, we should expect Argent
wallet creation activity to pick up over the coming months.
20,000 wallets
Of the 20,000 wallets created, we see that roughly 6,000 are ac-
tive on a monthly basis. Argent’s active unique users — defined by
distinct addresses that have submitted at least one transaction per
month — is up roughly 100% year to date. For context, non-cus-
todial exchange, Uniswap, had over 15,000 unique users in the
month of April.
May is set to be a record month for the total number of transactions

(transfers and non-transfers included). Simple transfers of Ether
and ERC20 tokens as a percentage of total transactions have de-
clined since February (62%), with transfers in May accounting for
just 59.6% of total transactions. This declining (albeit slowly) share
of simple value transfers suggests an increasing appetite from Ar-
gent users for non-payment use cases.
20,000 wallets
As for basic transfers: since Argent’s launch in February 2019,
there have been 40% more ERC20-denominated transactions than
pure Ether transactions. This relationship is in line with the broad-
er trend of stablecoins emerging as the primary mediums of ex-
change: as previously reported, aggregate stablecoin transaction
volume surpassed ETH-denominated transaction volume for the
first time in late July 2019.
Indeed, we see below that DAI and USDC dominate Argent user
token transfer market share. While token transfer volume has de-
clined 65% since March 2020’s all-time highs, transfer volumes are
still up 19% year to date.
20,000 wallets
However, there also appears to be strong demand for Ether expo-
sure — likely as an investment vehicle — as illustrated by Argent
user cumulative Ether balances over time. Valued at close to $3m
and growing month on month, Argent user Ether holdings rival the
~$3.5m held across various tokens.
A snapshot of aggregate user token balances shows a power-law

distribution among asset ownership. USDC and Numerai’s NMR
closely compete for the top spot, with over $770,000 worth of each
token held across all accounts. Yield derivative, cUSDC, follows in
third place with $580,000 worth of balances, while Chainlink-as-
sociated LINK sits in fourth place with an aggregate balance of
roughly $340,000.
In total, stablecoin-associated assets comprise 52% of aggregate

user token balances. It is worth noting that while USDC balances
dominate versus DAI, DAI is consistently favoured as a medium
of exchange, averaging over 59% of all token transaction volume
since the turn of the year.
20,000 wallets
Lending continues to be a popular product among Argent users.

Across protocols, Compound leads on deposits, although asset
supply is down roughly 36% since February’s all-time highs, likely
due to the fall in stablecoin rates as speculators seek to delever-
age in an uncertain market.
MakerDAO Dai Savings Rate deposits are down 93% since Febru-
ary after system governors set interest rates to 0%.
20,000 wallets
Aave, an upstart money market protocol, has seen healthy inflows

since mid-May’s integration, with over $250,000 worth of assets
now being lent through the platform.
Argent also offers users the ability to swap assets directly through
their application via an integration with non-custodial exchange
protocol, Kyber. Exchange fees may serve as a lucrative source of
future income for Argent, with fees charged to both users and li-
quidity providers, somewhat akin to the existing Robinhood model.
We predict that Argent will soon integrate an aggregator like 0x API
or 1inch in order to provide users with the best possible execution.
20,000 wallets
While Kyber does source quotes from multiple venues and market
makers, 1inch and 0x extend their offerings to capture the best
possible price across the entire non-custodial market.
*For clarity’s sake, exchange vol-

ume data has been limited to the
Argent user exchange volumes* saw an all-time high during March
following assets: DAI, USDC, as volatility returned to the cryptocurrency markets. Volumes pro-
WBTC, USDT, TUSD, PAX, ZRX,
MKR, NMR, BAT, ANT, LINK, LEND, ceeded to fall 55% leading into April, although they remain up
KNC, SAI, REP, WETH
over 80% year to date. It is interesting to see that the majority of
purchases were for Wrapped Ether, with less than 25% of volume
flowing into DAI.
Source:
The Block,
Dune Analytics
Meanwhile, investment products, PoolTogether and Set, are begin-

ning to see initial signs of traction: the former has seen $11 worth
of net inflows since mid-May, the latter just under $30,000. Set’s
‘active passive management’ products seem particularly well suited
for Argent’s target audience: as such, we might expect to see it
slowly pick up a dominant portion of Open Finance product market share.
Source:
The Block,
Dune Analytics
VIEW ONLINE Another quarter, another record level of bitcoin sales volume from
Square’s Cash App: this time the p2p payment and mobile banking
app served more than $300 million worth of bitcoin sales in the first
quarter of 2020.
To be fair, we knew this was likely coming. In March the company

released a company update in lieu of its originally planned annual
investor day, which included CFO Amrita Ahuja stating that Cash
App had seen a recent uptick in bitcoin engagement amid the mar-
ket turmoil driven by the coronavirus crisis, and Jack Dorsey also
confirming “stronger engagement and volume for Bitcoin.”
What was a surprise, however, was the margin expansion on total

bitcoin sales -- with gross profit originating from bitcoin sales sur-
passing more than $7 million in the quarter or ~90% more than the
previous record set last quarter. While Square made an effort to
include “Bitcoin” as one of its core monetization and engagement
levers within its investor day update deck, I didn’t think we’d see an
uptick in bitcoin gross profit so soon.
It’s worth reminding that Square still doesn’t net out the cost to
acquire the bitcoin it sells to Cash App users in its reported bitcoin
revenue, instead opting to count the entire purchase value of bit-
coin as “bitcoin revenue.” Therefore, the most accurate representa-
tion of the impact of bitcoin sales on Square’s bottom-line is to look
at the gross profit, or the spread between bitcoin revenue and the
cost of bitcoin sales. As tempting as it is to say “bitcoin was 50%
of Square’s revenue!” please, I beg you, let’s not. If you’re curious,
bitcoin gross profit was ~1.25% of total company gross profit -- an
all-time high, but still practically a rounding error.
What I can get behind though is this: Square officially has the most
profitable bitcoin/digital asset business out of any publicly traded
U.S. company. Yes, the list is small, including just Silvergate and
Signature Bank’s Signet (I’m not counting Canaan’s ADR on Nas-
daq because you clearly can’t trust their numbers), but Square has
at least distanced itself from Silvergate this quarter (which makes
more money than Signet) with $6.7M in gross profit to Silvergate’s
$1.7M.
Yes ~$50m in annualized bitcoin gross profit is still relatively

“small,” but with more than 24 million monthly active users as of
year-end 2019 (now likely north of at least 30 million given the
latest updates on record net-new actives in both March and April),
and a 4x growth in direct deposit transacting customers in April, the
distribution of bitcoin into this customer base has legs to grow. And
if it does, it’ll further monetization.
On the Q4 earnings call Jack Dorsey stated that in December Cash
App users generated more than $30 in annualized revenue per
user, with “bitcoin actives generating 2-3x annual revenue com-
pared to other cash customers.”
As Cash App has evolved into a one-stop-shop to “Spend, Send,

and Invest,” with the latest offering now including free fraction-
al-based stock trading, many of these product offerings have led to
meaningful “cross-sell” type levels of engagement, and specifically
into bitcoin. Square noted in its 3Q Investor Letter that the redesign
of the Cash App to include shares trading had helped to drive ap-
proximately “double” the number of first-time bitcoin buyers in Cash
App within the 30 days following the redesign.
What makes Cash App unique, especially in the context of bitcoin,

is it seems to have obtained the best pole position in onboarding
new users to bitcoin. And it clearly already has the momentum:
Square noted in its latest investor letter that in April Cash App de-
livered its highest monthly totals for net-new transacting active cus-
tomers, p2p volumes, cash card spend, and bitcoin volumes.
Considering this growth, paired with the fact that Cash App is al-
ready the second largest peer-to-peer payment application and
digital wallet in the US, according to the latest research from ARK
Invest, the two largest outstanding questions that I keep falling
back to are: 1) could Cash App’s monthly active userbase one day
overtake Coinbase (is it already getting close?), and 2) when does
a large digital consumer banking offering consider opening up bit-
coin purchases (think Goldman Sachs’ Marcus, Chase Invest, Mor-
gan Stanley’s E*Trade -- if it happens, etc.).
On the first question, it really comes down to it being a numbers

game, and in the long-run it may just favor Cash App. Simple back
of the napkin math, but assume Cash App hits 50 million monthly
active users and 5-10% of that userbase engaged with its bitcoin.
The midpoint of that is ~3.75 million bitcoin customers. While it
was reported that Coinbase added an additional 8 million custom-
ers over the 12-month span from June 2018 - June 2019, with now
more than 30 million, they have yet to crack the top finance app
downloads according to Sensor Tower since the 2017 bubble. You
have to wonder how many of those reported users are actively en-
gaged in any given month. Moreover, Cash App consistently sits as
the number 1 or 2 top finance app downloaded in the U.S.
On the second point, I keep falling back on the fact that Jamie Di-
mon at last year’s JPM’s investor day lamented about how Square
was able to come up with an “adjacent” business line (dongle to
process payments) that offered an opportunity to customers that
JPM could have provided, but failed to. Dimon said:
“We’ve looked to certain companies out there with stuff that we

should have done. I’ll give an example, Square. So here we’re a
great merchant processing, best in the world e-commerce. Hey,
they come out this whole dongle, you know to process stuff.. it was
a great idea, but that isn’t how they won. They morphed into some-
thing different, which was I’m going to call the adjacencies. We
didn’t give them opportunity, Square did.”
To that end, if Square successfully finds a way to further monetize

bitcoin and drive deeper engagement within Cash App, you have to
wonder how much longer one of these large digital consumer banks
will wait to step into the game on the retail investment side.
As for the pure-play crypto exchanges, there isn’t much to worry
about from a bitcoin volume perspective -- while Cash App bit-
coin purchase volumes are now growing in line with Coinbase and
Kraken, they still are over an order of magnitude smaller than both
players. But I’m sure the full suite offering of p2p payments, stocks,
bitcoin, and a debit card make some a little envious -- for now at
least.
VIEW ONLINE
• There are at least 115 firms building out institutional infrastruc-

tures for digital assets
• To date, $2.1 billion in investments have been allocated to insti-
tution-serving firms, with $1.2 billion of that going toward com-
panies focused solely on institutions
• This ecosystem overview is an introduction to a series that will
cover the following verticals: exchanges, liquidity providers,
settlement solutions, lending providers, service providers, and
custody providers
Digital assets like bitcoin have come a long way since the early days.
What was once a niche ecosystem has evolved into an industry

with some of the largest financial institutions now entering the
scene. Fueling this evolution: $2.1 billion in investments allocated
to blockchain startups that are building out infrastructure catering
to this crowd.
The Block has mapped out a total of 115 companies across 9 dif-
ferent sub-categories. The following verticals include exchanges
(OTC desks and derivatives), liquidity providers, settlement solu-
tions, lending providers, custody providers, and other service pro-
viders (Trade Messengers, Clearing solutions, etc.).
Note that other segments, such as spot exchanges, play a signifi-

cant role in the ecosystem’s infrastructure. This initial infrastructure
series piece focuses on firms that specifically serve institutional
clients. In the case of spot exchanges, many firms serve a mix of both
retail and institutional clients. Binance, Bitfinex, bitFlyer, Bitstamp,
Coinbase Prime, Kraken, LMAX Digital, Poloniex have varying mix-
es of retail and institutional clients, with some, in the case of LMAX
Digital, solely focusing on institutional clients. The exchanges list-
ed are included under ‘Spot Liquidity Provider’ in the visualization
below if one of its services include operating an OTC desk.
Many of the following businesses provide an assortment of differ-

ent products and services that overlap across different categories.
We expect that as the industry continues to mature, this trend will
continue and the majority of these firms will expand beyond a sin-
gle service type.
For readers looking for a more in-depth view of each firm, we have
provided tables at the end of the piece that highlights each compa-
ny’s services.
Investments in firms building Institutional products & services
To date, approximately $2.1 billion has been allocated to block-
chain firms that offer products and services to institutional clients.
However, it’s not easy to properly analyze how much of that capital
was allocated specifically for institutional side products and ser-
vices. For example, Spot Liquidity Providers have received approx-
imately $155 million in investments, but the majority are retail ex-
changes that also operate OTC desks.
To obtain a better picture of how much capital has been provided to

firms specifically for institutional needs, we analyzed investments
in 36 firms that only offer institutional products and services.
Investment in firms that offer exclusively Institutional Products

& Services
Approximately 57% of the $2.1 billion – or $1.2 billion – has been

invested in companies focused specifically on institutional infra-
structure and clients. The $1.2 billion has been allocated across 77
different deals, with a median deal size of approximately $5.4 million.
Prior to 2018, 89% of all investment toward institutional solutions

was either for custody or derivative products. Since then, there has
been a slight increase and focus in other verticals, including lend-
ing, brokerages, and market makers providing liquidity.
The slight increase is reflected by custody and derivative products
declining to 79% of all investment since 2018. In 2018, custody and
derivatives made up 78% of the investment and then 65% in 2019.
The high level of investment in derivatives services has been large-

ly influenced by the two deals conducted by Bakkt. The options
platform and now rewards-points wallet has raised 482.5 million or
about 87% of the total investment for derivative products.
Investments in lending products didn’t manifest until 2018, when

both BlockFi and Babel Finance raised a combined $107 million.
Investors with exposure to Digital Asset Institutional Infrastructure
The Block mapped out a total of 112 investors who have made at
least one investment related to institutional products for digital assets.
ErisX, a crypto derivatives platform, attracted interest from both

blockchain-focused investors and well-known firms in traditional
finance. This list includes TD Ameritrade, CBOE, Fidelity, Nasdaq
Ventures, Pantera Capital, Digital Currency Group, Bitmain, and
Dragonfly Capital.
We have seen traditional financial firms gain exposure to the sec-
tor through their investment portfolios. Examples include Goldman
Sachs investing in BitGo, Visa investing in Anchorage, and Boston
Consulting Group investing in Bakkt.
Most Active Investors
Digital Currency Group (DCG) has been the most active in invest-
ing in institutional products and services. The firm has invested in
two brokerages (SFOX and Tagomi), two derivative offerings (Bit-
nomial and ErisX), two custody products (Curv and BitGo), and
Paxos, a firm that provides different services including custody and
an OTC desk.
After DCG, CMT Digital and Dragonfly Capital have both made
five investments toward institutional products and services. Two
of Dragonfly Capital’s investments have been in large institutional
players in the Asian market: lender Babel Finance and liquidity pro-
vider Amber Group.
Asset management giant Fidelity has been very active in its in-
volvement around the institutionalization of digital assets. Aside
from operating Fidelity Digital Assets, the firm has made invest-
ments in Knox Custody, BlockFi, and ErisX. Both of its investment
arms – Avon Ventures and Devonshire Investors – have also in-
vested in the lending firm BlockFi.
The most common investment among the top ten most-active inves-
tors was Erisx, which drew in six out of the ten members of the list.
Company Overview: Institutional Products & Services
VIEW ONLINE
• There are a total of 73 blockchain gaming firms that are either

developing games, producing platforms, or providing infrastruc-
ture
• The blockchain gaming segment has received $313 million in
venture funding and $237 million in funding from ICOs, or a total
of $550 million
• While the industry average for blockchain investment declined
by 57% from 2018 to 2019, the blockchain gaming segment only
suffered a decline of 18%
Incorporating blockchain technology into gaming has been a topic of

discussion since the birth of Bitcoin. Before Bitcoin went live, its origi-
nal code hosted the framework needed to create a virtual poker game.
By 2012, gambling games like SatoshiDice were providing a clear

use case and laying down the foundation for blockchain-enabled
gaming. The game SatoshiDice, founded by Erik Voorhees, was
so popular that in 2013 he sold the company for 126,315 Bitcoin or
$11.5 million at the time.
Fast forward to 2020, there are now at least 73 blockchain gaming

firms that are either developing games, producing platforms, or
providing infrastructure for them. The Block Research has mapped
out these firms in the visualization below, as well as 23 popular
blockchain games.
Total Investment in Blockchain Gaming
Since 2013, $313 million has been invested in blockchain gaming

firms across 57 venture deals. Gaming-related ICOs attracted a to-
tal of $237 million worth of various cryptocurrencies. In aggregate,
the gaming industry has received $550 million in funding.
The 18% decline between 2018 and 2019 makes the gaming indus-
try unique compared to the broader blockchain space. While gam-
ing saw a decline in 2019, the decrease was less severe than the
industry average at 57%.
Approximately 47% of investment deals were early-stage ventures,

though there have been limited later-stage deals. An exception be-
ing High Fidelity, which raised two later-stage deals, one bringing
in $35 million to build out a blockchain VR platform. However, the
firm was already an established company prior to exploring block-
chain and has all but shut down its blockchain-related initiatives
since.
A lack of later-stage deals could suggest that firms within the in-
dustry have yet to find consistent revenue streams to make them
attractive investments or the size of the initial investments were
large enough to serve the companies’ long-term time horizon.
Investment by Category
The Block has analyzed the 57 deals to determine which particular

categories have been the most popular amongst investors. Gaming
Studios have been the preferred choice in both aggregate value
($133.5m) and number of deals (21). Fantasy/Esports platforms are
fourth in total investment at about $24 million, but represent 21% of
the investments. Notably, the average check size for a Fantasty/Es-
ports investment is $2m, versus the $6.3m for Gaming Studios.
Investments in specific games are rare with just one deal. It should
be noted, however, that some gaming studios have raised funds to
develop specific games. For example, Horizon Blockchain Games
raised $5 million in March to fund continued development for its
‘SkyWeaver’ trading card game.
Blockchain Gaming firms with the most funding (VC + ICO)
A trend among companies with the greatest amount of funding is

that they had an ICO. Six of the ten firms with the most funding
conducted an ICO. High Fidelity has brought in the highest amount
of funding at approximately $73 million, but as noted earlier, its
blockchain activities and VR platform have been halted.
The two most popular gaming studios amongst investors has been
Mythical Games ($44.5 million) and Dapper Labs ($38.3 million).
Mythical Games has brought on investors that include Avon Ven-
tures (Fidelity), Fenbushi Capital, Hashed, and Galaxy Digital.
While Dapper Labs, the firm behind the viral Cryptokitties game,
has a long list of notable investors including Union Square Ven-
tures and Andreessen Horowitz.
Notable Investors in Blockchain Gaming
The Block has mapped out a total of 71 investors across sub-cate-
gories that include companies, accelerators, hedge funds, compa-
nies, and both traditional and crypto VCs.
Square Enix, the firm behind the intellectual properties of popular

games including Final Fantasy, Dragon Quest, and Tomb Raider,
led a $2 million round in The Sandbox, a VR platform that uses
NFTs.
Ubisoft, the game publisher behind Assassin’s Creed, Far Cry, and
Tom Clancy’s Rainbow Six, has become part of a Blockchain Game
Alliance. Ubisoft’s accelerator program has provided assistance to
blockchain gaming companies including Azarus, CareGame, Plane-
tarium, and Sorare.
The financial services firm Wells Fargo has entered the blockchain
gaming space with an investment in Matcherino, a platform for Es-
ports tournaments.
Xpring, the venture arm of Ripple, and the gaming firm Forte have
partnered together to create a $100 million fund that invests exclu-
sively in the blockchain gaming ecosystem.
Most active Investors
The most active investors in blockchain gaming have been Ani-
moca Brands, the gaming company, and Galaxy Digital, mostly
through its EOS VC fund.
Animoca Brands has positioned itself as the most active investor

in the sector with 12 investments, 4 of which were acquisitions.
These acquisitions include a startup that rewards gaming credits
to gamers with idle computing power (Gammanow), a digital col-
lectible site to set them to expand to NFTs (Quidd), a monetization
platform for free games (Stryking Entertainment), and nWay to pri-
oritize in-game prizing using blockchain technology.
Animoca Brands is also the mobile distributor of Cryptokitties in

China and receives a share of revenue generated in the region.
Trends
108 Charting blockchain investments during the
COVID-19 pandemic
114 The race to become the first digital asset full

prime broker is on
117 How much longer before payment giants move in

on the stablecoin market?
120 The year of options and the clear winner
108 Charting blockchain investments during
the COVID-19 pandemic
VIEW ONLINE
• $1.47 billion has been raised across 265 blockchain deals

during the coronavirus pandemic era
• An 868% increase in later-stage deals in May, coinciding with a
46% decline in early-stage, suggests that investors pulled back
on early-stage deals with a preferred preference for more estab-
lished later-stage firms instead
• The economic environment has been ripe for M&A activity, with
M&A making up 18% of all investment deals in May
Much of the world has been in lockdown and in many cases, still
on economic pause due to the coronavirus pandemic. The virus
continues to leave an economic and social impact on many of our
lives. We will examine the effects the virus has had on the block-
chain investment landscape and which investors, if any, have re-
mained active.
For this analysis, we have counted any funding raise from January
1st on as a raise during “COVID conditions.”
Total Investment
Source: Pitchbook, The Block Research
In total, $1.47 billion has been raised across 265 blockchain deals
during the COVID-19 period. These figures are slightly miscued,
however, by two mega-deals in March involving Bakkt ($300m Se-
ries B) and Binance’s acquisition of Coinmarketcap ($400 million).
These two deals alone accounted for approximately 48% of all ven-
ture funding and spending year-to-date.
For this reason, we have also provided a visual of total investments

that excludes these deals to provide a more granular view of in-
vestment trends.
When excluding the major deals involving Bakkt and CoinMarket-

Cap, the remaining investments saw a 61% decline from February
to March. Investment in dollar terms did rebound after the decline,
where the past two months have had consecutive increases of 43%
from March to April, and 79% from April to May.
Investment in later-stage deals grew 868%, from just $6.5 million

in April to $62.9 million in May. Early-stage deals had the opposite
effect, declining by 46%. An explanation for these two trends is in-
vestors may have pulled back on their early-stage investments and
instead focused on “safer” investments, which could include more
established later-stage firms.
Mergers & Acquisitions
The current economic environment has been ripe for M&A activity.
M&A made up approximately 18% of all investment deals in May.
February also was relatively high in this regard, accounting for
about 12% of all blockchain deals. These two months saw the high-
est percentage for M&A deals for 2020.
Two of the notable M&As in May revolve around the race for a
crypto prime brokerage. Coinbase acquired the brokerage Tagomi
for an amount estimated between $70 million to $100 million. Gen-
esis Trading acquired Vo1t, an institutional custodian, signaling its
push toward becoming a full-service prime brokerage.
Blockchain Investment Deals
The overall trend for investment deals has moved downward, with
consecutive declines over the past seven months. By comparison,
May 2019 saw 104 deals, whereas May 2020 saw only 44, a dif-
ference of 58%. With investments up in dollar terms over the past
month — but the number of deals still declining — this may suggest
that investors are making more concentrated bets rather than allo-
cating capital across multiple risky investments.
A concentration of venture could also explain the recent uptick in

the median investment deal size for early-stage deals. For May, the
median deal size for early-stage deals was $10 million.
Blockchain Investment Deals by Region
Asia went from 16 investment deals in January to just eight in Feb-

ruary, a 50% decline.
During the same period, investment in Europe slightly decreased,

and in North America, it actually increased. In March, Asia had
rebounded to 16 deals, whereas Europe and North America saw
declines of 38% and 22%, respectively. This may suggest that
Asian-based regions were beginning to return to “normalcy” while
the virus was beginning to spread more rapidly across the globe
and drying up the volume of investment deals throughout Europe
and North America.
Most Active Investors & Notable Investments
Digital Currency Group has been the most active during this out-
break, with five investments. These investments include Horizon
Blockchain, Zabo, Lolli, Skew, and Transparent Systems. The sec-
ond most-active investors are Coinbase Ventures, Collaborative
Fund, and Pantera Capital, each with four investments of their own.
The cryptocurrency exchange Binance was involved in M&A, ac-

quiring the cryptocurrency data site, CoinMarketCap and BXB, a
firm behind the development of a KRW-backed stablecoin.
Citibank has been active in the blockchain space. The firm invest-
ed in Contour Network through its investment arm Citi Ventures.
Contour Network is a blockchain platform for digitizing the process
of letters of credit. The firm also invested in Komgo, a blockchain
platform for the trade and commodities finance sector.
Mastercard made a blockchain investment in a Latin American firm

Minka. The firm is a banking cloud platform that offers services in-
cluding mobile wallet support, tax collection, and the facilitation of
digital currency transfers.
114 The race to become the first digital
asset full prime broker is on
VIEW ONLINE You may have noticed, but lately, The Block has been spending a
lot of time thinking about the state of digital asset infrastructure.
Whether that’s the overall landscape of players across the infra-

structure stack, the burgeoning institutional market for digital asset
derivatives, or the ever-growing market of digital asset data provid-
ers, the components that weave together to form the market struc-
ture for digital assets has never been more robust.
On the other hand, the state of digital asset infrastructure has also
never been more fragmented.
Liquidity and services are split unevenly across various offerings

around the globe, akin to the market structure for equities in the
late 1990s and early 2000s – leaving many to wonder when the
inevitable consolidation begins to occur.
This week we got an early taste of what the end game of this con-
solidation may look like, with Genesis Global Trading moving to
acquire Vo1t, a provider of institutional custody services in the U.K.
With the acquisition, Genesis is making a bid to move one step
closer to becoming a full prime broker within the digital asset in-
dustry.
As part of The Block’s push to better understand the state of the

digital asset infrastructure, the research team has interviewed over
40 different firms across the landscape to get a sense of what par-
ticipants view as the biggest risks and structural pieces still miss-
ing within servicing this market. One of the most common themes
that emerged from these conversations is the clear need for a “full
prime services” offering, a player that sits in the middle of the mar-
ket and offers a one-stop-shop for spot and derivatives trading
aggregation, margin extension, custody services, capital introduc-
tion, and even trade ideation (similar to a role equity and trading
research plays for traditional banking prime services).
Micheal Moro, CEO of Genesis Trading, suggested the move to

grab Vo1t was the latest step in the firm’s journey to becoming this
“preeminent prime brokerage within the digital currency ecosys-
tem”:
“The digital currency marketplace is maturing at a rapid pace. Fi-
nancial institutions — large and small — are entering the industry
every day and they want a prime broker that can be a trusted, reg-
ulated partner to help them navigate an industry that is unfamiliar
and volatile. Integrity, experience, and an unwavering commitment
to top-notch client service and operational excellence have been
trademarks of Genesis since day one.”
As The Block’s Frank Chaparro pointed out in his coverage of the

move, Genesis Prime joins a fast-growing crowd of aspiring prime
brokers, which includes companies like BitGo, Tagomi, and Fal-
conX — and in many respects, these firms are heading in the same
direction from different starting points, Moro noted.
We’ve also seen the digital asset industry’s first U.S. public compa-
ny, Silvergate Capital, suggest that its own end game is to become
a full-service prime for the digital currency ecosystem. In March,
the CEO of Silvergate, Alan Lane, said on The Scoop that the firm
recently reapplied for a trust charter from the state of New York
with the idea that they would be able to be their own custodian.
Such a move would allow the firm to hold digital assets as collater-
al, and offer not only custody but escrow and settlement services
for the digital asset industry.
It’s clear the race to become this industry’s first true prime broker
is only going to get hotter as the months continue. Over time, the
expectation is that several of these players will find their own path
to achieving this end state as vertical consolidation across the in-
frastructure stack plays out.
The net effect of this is an overall improved market structure that

caters to a more traditional institutional crowd, and a current miss-
ing component that many players in the space view would help
enable more institutional money into the industry if a true prime
existed.
To that end, the challenge of fragmentation among the digital as-

set market structure may soon be coming to a close. If it wasn’t
already in motion, the move by Genesis this week all but forces
the hand of a number of competing infrastructure companies in the
industry. Expect to see a handful of firms look to cobble together
their own full suite of services, likely through acquisition, to shoot
their own shot at becoming a full prime.
At the end of the day, everyone will inevitably offer these same
services. The challenge for contenders will be figuring out how to
do every service really well, while also navigating an uneasy regu-
latory environment that differs across jurisdictions and states (there
really isn’t a one legal entity structure ala a broker-dealer license
in equities that allows you to pull this offering bilaterally across the
U.S.).
But with it comes stronger industry market operational efficien-

cies, a consolidation of risk (welcomed), and the maturation of this
young asset class — something for which we all are rooting.
117 How much longer before payment giants
move in on the Stablecoin market?
VIEW ONLINE Gradually, then suddenly.
In a week where all eyes came in obsessively fixated on the bitcoin

halving, one could argue that the actions and comments from large
corporates have been the more significant developments to tran-
spire this week.
It was a week of notable firsts, including: reports that J.P. Morgan

is now providing cash management solutions for both Coinbase
and Gemini (according to the Wall Street Journal), Visa CEO Al
Kelly acknowledging fiat-backed digital currencies as an emerging
payment technology on the day the U.S. Patent and Trademark
Office published a Visa patent filing for the creation of a digital fiat
currency, and news that Reddit is now beta testing two Ethere-
um-based tokens for users to earn rewards for contributing content.
Focusing in on the news out of JPMorgan and Visa for the purpose
of this column, each represents an important shift in how these
firms are publicly thinking about this space, and underscores a
broader theme of validation for the industry that we’ve continued to
see materialize so far in 2020.
In regards to JPMorgan, the move is the first time the bank has
been comfortable enough to service clients within the crypto space
-- and most likely required some form of buy-in from the highest
levels of the cash management business line. And since the initial
services provided reportedly include only handling dollar-based
transactions for U.S. based customers and processing ACH depos-
its, a relatively low fee service, you have to imagine the bank views
other potential associated benefits from the relationship to surpass
the perceived risk of moving and handling cash for these “higher
risk” clients.
Whether this service leads to further collaboration or a deeper

relationship remains to be seen, but it fits directionally with what I
suggested in this column last week: the initial success from Silver-
gate and Cash App in finding value in banking, servicing, or offer-
ing the ability to purchase bitcoin has likely started to raise some
eyebrows among broader legacy financial institutions.
To that end, it’s also fitting that the CEO of Visa acknowledged fi-
at-backed digital currencies as an “emerging payments technology”
that “could be additive to the payments ecosystem, as opposed
to being any kind of replacement or negative,” in the same week
that the total value of stablecoins crossed the $10 billion threshold
for the first time ever. Coincidentally, the U.S. Patent and Trade-
mark Office yesterday published Visa’s application for a digital fiat
currency (submitted Nov 2019) that proposes a way to bridge the
advantages of digital currencies with those provided by traditional,
government-issued ones.
Arguably, even more impressive than the growth in the value of

issued stablecoins, is the pace of growth within transactional vol-
umes of stablecoins this year. Through 1Q20, the cumulative trans-
action volume across stablecoins crossed $90 billion in the quarter
for the first time ever -- up 8% from 4Q and more than 280% since
1Q19. While many are quick to point out that the vast majority of
this volume comes from trading flow, it’s important to emphasize
that these volumes do still occur on-chain and represent a flow of
value from one address to another. In 2019, the cumulative value
of stablecoin transaction volumes crossed more than $250 billion.
While not a true apples to apples comparison, total transactional
volume for PayPal in 4Q19 was just under $200 billion, and $712
billion for 2019.
These are numbers that already matter, and it’s still very early
days. And we don’t even have Libra or DCEP up and running just
yet -- although both are indeed inching closer to the finish line.
On Libra, the association announced yesterday that it has added

3 new additional members, including the $300 billion dollar Singa-
pore sovereign wealth fund, Temasek. And while Visa, Mastercard,
and PayPal are among the payment providers who left Libra last
year, the association has recently picked up Shopify and Checkout.
com to help fill some of those capabilities -- and the former Chief
Legal Officer of HSBC, Stuart Levy, as its new CEO to boot.
The later also caught the attention of Alfred Kelly, with the CEO
noting at a JPMorgan conference that Visa remains engaged with
Libra and very interested in what they continue to do and how
they can be added to the payment ecosystem. Kelly also said he
thought the project is continuing to advance and is making prog-
ress by hiring Levy.
In my mind, the underrated trend so far in 2020 is the fact that the
payment and banking components of this market continue to pro-
fessionalize and validate itself among a broader set of legacy par-
ticipants, with this week’s news only further evidence of this trend.
Whether it’s JPMorgan now banking crypto clients, Visa acknowl-
edging the “additive” value in fiat-backed stablecoins, or Libra
bringing in a former global bank Chief Legal Officer and Under
Secretary, these headlines grab attention, and people certainly talk
-- even if it is largely confined to Zoom in a post-COVID world.
Considering how vital robust global fiat on and off-ramps are for
the adoption of bitcoin and digital assets, I’d argue this validation
was the more significant development this week, rather than a pre-
determined reduction in the supply issuance of bitcoin.
VIEW ONLINE Quick Take
• As market structure continues to mature, options are seeing ex-

plosive growth in 2020
• Liquidity for options platforms is difficult to obtain as there can
be countless different options contracts available for any one
asset
• Liquidity attracts more liquidity and the most complete and trad-
er-friendly platform is Deribit
• Deribit’s domination is unlikely to go away
Market structure continues to mature as the demand for options

continues to rise. The aggregated open interest of Bitcoin options
is currently at an all-time high of $1.16 billion after being at less
than $310 million at the beginning of January. And there are no
signs of the growth slowing down.
Source: skew, The Block Research
Uses
Options are most frequently used by market participants to specu-

late and hedge. Call and put options can be used to speculate on
the price direction in the short term. The further away the strike
price is from the current price, the lower the premium is, which also
means higher leverage. Buying an equal number of call and put
options (straddles and strangles) lets investors benefit from price
moves in either direction. Selling straddles/strangles gives inves-
tors exposure to the stagnation of the underlying price.
Investors can use various options strategies to hedge the risk ex-
posure of their futures/spot positions. The so-called protective
calls/puts can be used to minimize losses or to protect unrealized
profits if the market goes in the opposite direction.
Liquidity
The liquidity of options is much different than the liquidity of spot or

futures because there can be countless different options contracts
available whereas there is only one for spot and only a few for
futures. The further the option is from an expiration day, the least
liquid it tends to be, which is reflected in large bid-ask spreads.
Moreover, since Bitcoin (or ETH) is extremely volatile, it is hard to
accurately price the options, which is why the spreads also tend to
be high. This combination of these factors means that the liquidity
is still hard to come by but it is improving.
Platforms
Building a reliable options platform is not a quick process and at-

tracting liquidity is even harder. BitMEX launched their options con-
tracts in 2018 when it was, by far, the most liquid futures platform
but failed gain traction because it only allowed investors to buy but
not write the options. That meant that there was only one market
maker and investors were ultimately trading against BitMEX who
also controlled the spreads.
Binance’s options platform is designed similarly since only Binance

itself can write the options. This results in premiums being twice (or
more) as high as the same options on platforms that allow to both
buy and sell the same option. Since Binance is the only market
maker, it won’t ever have the incentive to offer the most competi-
tive prices. On top of that, Binance is mobile-only, doesn’t have an
API and only offers maturity ranging from 10 mins to 1 day.
Deribit is currently the largest options platform by far. It currently

has nearly $900 million in open interest, which equates to 77% of
aggregated interest across all platforms. Deribit was the first real
options trading platform and liquidity in options is extremely sticky.
It supports a two-sided order book, which means that anyone can
sell options, and it also has support for portfolio margin, which
allows traders to have a lower margin requirement and therefore
higher capital efficiency.
Bitcoin options on CME have seen explosive growth in the last

couple of weeks. On May 5, there was less than $15 million in open
interest. Fast forward two weeks and there is now more than $170
million. CME, however, has high capital requirements in USD while
other platforms like Deribit allow even small traders with BTC to
participate.
Deribit’s closest competitor in terms of its offering is OKEx, which

launched its options platform early this year. OKEx now has a lit-
tle bit less than $50 million in open interest but has yet to support
portfolio margin. FTX has an electronic Request-for-Quote (RFQ),
which lets anyone request and respond to quotes. FTX currently
has about $146.5 million in open interest.
The winner
When it comes to options, the winning platform will be the one with
the most liquidity. And liquidity attracts more liquidity — e specially
as options see 2020’s jump in interest. Traders are naturally at-
tracted to a proven platform with the most favorable buyer/seller
features, which gives them the best chance to be successful or
most profitable. In this case, the leading platform (at least for now)
is Deribit and I’m not counting on any other exchange to overtake
them anytime soon. Just look at the volumes.
Source: skew
As the growth of options continues in 2020, Deribit’s positioning

will pay dividends.
123
This content was created by The Block Crypto, Inc., a Delaware

corporation.
The Block Crypto, Inc. does not provide tax, legal, investment, or
accounting advice. This material is not intended to provide, and
should not be relied on for tax, legal, investment or accounting ad-
vice. Tax laws and regulations are complex and subject to change.
You should consult your own tax, legal, investment, or accounting
advisors before engaging in any transaction.
124

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1 Institutional Digital Asset Derivatives Market

Research Latest Research

THEBLOCKCRYPTO.COM Research May 2020 THEBLOCKCRYPTO.COM

Content 3 Research Team

Larry Cermak Matteo Leibowitz Ryan Todd

Steven Zheng John D’Antoni Mike Rogers

Mika Honkasalo Omkar Shanbhag

• Numerous macro indicators, such as on-chain volume, spot and

In terms of value settled purely in the chain’s native asset (BTC or

Since early February, the total issued supply has grown by

The adjusted transaction volume hit an all-time high in May and

Dai saw, by far, the highest velocity in May — t he supply changed

Source: Coin Metrics,The Block

Transaction fees, however, increased significantly and reached

Source: Coin Metrics,The Block

After last month’s decline, the cryptocurrency traded volumes saw

Binance continues to have the largest market share — t he exchange

Similarly to volume, Web traffic on cryptocurrency exchanges also

Binance had the largest number of estimated visitors in April, with

OKEx, Indodax, and Bittrex saw the largest month-over-month traf-

Source: Factset, The Block

Source: Skew, The Block

Source: Factset, The Block

Source: Skew, The Block

On the regulated exchange front, CME’s open interest reached an

Source: Skew, The Block

Similarly to open interest, the volume for options reached an all-

Source: Skew, The Block

25 An analysis of the value transferred in Tether

31 Unpopular pedantic opinions, and don’t sleep on

35 Oracles: a key element of DeFi

43 Can DeFi oracles be better?

While early crypto exchanges offered various types of margin and

Pioneered by BitMEX in 2016, the perpetual market has seen a

Such markets also dwarf spot exchange volumes on a daily basis,

These pure-play crypto derivative markets offer the unique charac-

More recently, several non-custodial futures and options products –

Last month, three separate non-custodial exchange platforms re-

The characteristics of both centralized and non-custodial digital

Fortunately, several CFTC-regulated exchanges now offer bitcoin

In a recent study titled The Institutional Adoption of Digital Asset

Among a number of common concerns ranging from counterpar-

Historically, regulated bitcoin futures open interest has made up ~5

Notably, open interest among CME bitcoin options has materially

CFTC Regulated Bitcoin Contracts

CBOE ultimately discontinued its bitcoin futures product in May

When considering the disparity in success in terms of volume and

In relation to Bakkt, the fact that CME’s contracts are cash-settled

Some of these intermediaries, liquidity providers, and clearing ser-

Contrast that with the physically-settled bitcoin futures space –

Outside of the early success of CME bitcoin futures, CME bitcoin

Interestingly, block trades and exchange for physical transactions

CME’s bitcoin futures market is coming up on its 30th month of

And in terms of measuring its initial success relative to the launch

This compares favorably to bitcoin futures volumes, which have

• The aggregate value of transactions conducted in Tether has

The aggregate supply of stablecoins recently crossed the $10 bil-

Source: Coin Metrics The Block Research

Tether, the dominant stablecoin by market capitalization, makes up

Source: Coin Metrics The Block Research

For our analysis, we used Coinmetric’s ‘Adjusted Transaction Vol-

The aggregate value of transactions conducted in Tether has in-

On the contrary, Tether transferred on Tron – which launched in