Crypto could be contagious; ‘An account everywhere’ not a ‘wallet’; The natural question is: Is…


In this edition:

  1. Coinbase warns users could lose their crypto holdings if the company goes bankrupt
  2. The natural question is: Is this the end for algorithmic stablecoins?
  3. Alternative payments in Latin America
  4. Tiger Global Management is having a year and there is no free anymore
  5. A framework for navigating down markets: Reevaluating your valuation
  6. Why the Metaverse? Why Now?
  7. Binance CEO says Terra’s plan of forking the blockchain won’t work
  8. ‘An account everywhere’ not a ‘wallet’
  9. Understanding social commerce business
  10. Crypto could be contagious

Coinbase warns users could lose their crypto holdings if the company goes bankrupt

The disclosure was included for the first time as a risk factor in the company’s first-quarter earnings report, which also noted that Coinbase holds $256 billion in fiat currencies and virtual coins.

“Because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors,” the company said.

That means users would lose access to their balances since it would become Coinbase’s property.

It’s a different scenario from traditional investments. Many bank accounts, including checking and savings, are insured by the Federal Deposit Insurance Corporation for up to $250,000 per account if the bank goes under, while the Securities Investor Protection Corporation helps if a broker or dealer goes bankrupt.

Crypto enthusiasts have long heralded the decentralized movement as, in part, a way to give people complete control and ownership of their finances. That’s only the case for those who physically store their cryptocurrency on personal wallets, as opposed to a platform like Coinbase. (Coinbase does offer a self-custody wallet called Coinbase Wallet.)

Following the earnings report, which sent the company’s stock plummeting more than 23%, Coinbase CEO Brian Armstrong said there’s no risk of bankruptcy right now.

He took to Twitter Tuesday night to reassure users that their funds are safe and apologize for not being more forthright with communicating this risk when it was added, and noted the company included the disclosure because of new rules recently set by the Securities and Exchange Commission.

“This disclosure makes sense in that these legal protections have not been tested in court for crypto assets specifically, and it is possible, however unlikely, that a court would decide to consider customer assets as part of the company in bankruptcy proceedings even if it harmed consumers,” Armstrong said.


The natural question is: Is this the end for algorithmic stablecoins?

First-generation stablecoins from Tether and Circle maintain their value via assets in the bank. Every time someone purchases 1 USDT or USDC for a dollar, Tether or Circle takes that dollar and stores it so that holders can always redeem what they have. That’s the idea, anyway. In reality, a variety of other “cash equivalents” and/or debt instruments may be backing the coins in circulation.

UST, like other algorithmic stablecoins (or “algos”), works differently. It maintains a peg to the U.S. dollar via its relationship to another crypto asset. In Terra’s case, to mint 100 UST, you must burn (or take out of circulation) $100 worth of LUNA, which has a floating value. To mint $100 worth of LUNA, you must destroy 100 UST.

The intended mechanism here is clever. If the value of UST on the open market somehow starts to decline, you can still redeem it for the full value of LUNA. For example, if UST is trading at $0.95 each, you still get $1 worth of LUNA. The arbitrage opportunity theoretically keeps the price stable.

But that’s been broken as LUNA isn’t worth what it used to be either. By the time people could swap their UST for LUNA, the price had fallen further.

Centralized stablecoins have faced similar tests. Tether dealt with such a crisis in 2017, when its price moved to $0.91, according to CoinMarketCap. It survived but took over three weeks to get back to $1. It’s now the top stablecoin by market cap — and the third-ranked crypto-asset behind Bitcoin and Ethereum.

UST can do the same thing, but not on its own. “It is challenging to have algorithmic stablecoins keep their peg when things go sideways,” said Rice, “and you have to rely on outside intervention to set things right.”

Terraform Labs creator Do Kwon and the Luna Foundation Guard have come to realize that they’ll need outside intervention. In a Twitter thread Wednesday, Kwon said Terr is looking for “exogenous capital” in combination with implementing protocol changes to help it get back on track.

Terra was already well down that road, having purchased over $3 billion worth of Bitcoin, Avalanche, LUNA, and UST to use as reserves in case of market turbulence. But with UST worth more than six times that at its peak last week, it wasn’t enough collateral. The reserves have been all but emptied.

Terra users can see for themselves that the protocol isn’t solvent. Now all they need is some confidence.


Alternative payments in Latin America

In a region where about half the population still doesn’t have a bank account, new payment types are unlocking the potential of the Latin American market for online merchants as the Open Banking movement matures there.

According to a new Beyond Borders data analysis released by EBANX, methods such as Pix instant payments and digital wallets have paved the way to a major shift to digital commerce for Latin Americans with an increase of close to 50% more e-commerce users last year compared to pre-pandemic years (68% at the end of 2021 vs. 45% prior to the pandemic).

This means that more than 150 million people bought online for the first time during the last two years.

Latin America’s digital commerce market is projected to grow 31% per year until 2025, an acceleration comparable to only that of Asian markets.

Open Banking drives new online shopping experience

In addition to instant payments, regulators across Latin America and the world are promoting initiatives to support the development of Open Banking to encourage further innovation, competition, and efficiency in the financial sector — a movement that is increasing the accessibility of financial services to more significant swaths of the population.

In Latin America, Brazil is once again leading the charge in Open Banking regulation, while countries such Mexico and Colombia are preparing its implementation for late 2022.

At EBANX, Pix has been growing at about 40% per month during the last year, helping to increase its customers’ user base and gaining consumer preference in nearly half of their online purchases.

According to the latest Beyond Borders data analysis, a majority of Brazilian consumers using Pix are first-time digital shoppers.

The study found that 62% of EBANX’s customers who paid with Pix had not made any other online purchases on that website or app over the last year.

Their purchases represented 40% of all Pix volume for merchants using EBANX, and a 20% increase in sales overall.

Today, 98% of Pix transactions are carried out by mobile phones, which represents around 70% of the volume of the new payment method, according to data from the Central Bank of Brazil.

In this rapidly changing market, there is one niche with an even more intense acceleration: cross-border e-commerce.

International online purchases in Latin America will move around $45 billion in 2022, according to data from Beyond Borders.

That annual growth rate is expected to reach 35% by 2025, which is four percentage points above the 31% growth forecast for the overall e-commerce market in the region.

In Mexico, the second largest economy in Latin America and the number one trading partner with the US in the world, the jump in cross-border commerce was 59% in 2021 compared to a 28% increase for local e-commerce sales.


Tiger Global Management is having a year and there is no free anymore

According to a new report from Financial Times, the low-flying-yet-seemingly-ubiquitous 21-year-old outfit has seen losses of about $17 billion during this year’s tech stock sell-off. FT notes that’s one of the biggest dollar declines for a hedge fund in history.

As shocking, per FT, according to the calculations of a fund of hedge funds run by the Edmond de Rothschild Group, Tiger Global’s hedge fund assets have been so hard hit that the outfit has in four months erased about two-thirds of its gains since its launch in 2001. (Ouch.)

The question is whether that trouncing will impact the firm’s venture business, which — like that of many other venture businesses — has ballooned rapidly in recent years. In 2020, the firm closed its twelfth venture fund with $3.75 billion in capital commitments. Early last year, it closed its thirteenth venture fund (titled XIV for superstitious reasons) with $6.65 billion before closing its newest fund, fund XV, with a massive $12.7 billion in capital commitments in March of this year.

Yet even that new fund — which reportedly took less than six months to raise and includes $1.5 billion in commitments from Tiger Global’s own employees — is almost fully invested already, according to a source close to the firm.

In the first quarter this year, wrote the firm, “remaining value in the funds decreased by 9%, following an increase of 54% in 2021.” (Presumably, that value has sunk further in Q2, as valuations begin to drop broadly across the startup ecosystem.)

According to that same investor letter, Tiger Global boasts of stakes in 38 companies that went public last year — including Coinbase, Freshworks, SentinelOne and Toast — and says it distributed $3.7 billion to investors last year.

It certainly has a weaker case to make. According to FT, hedge fund investors who invested at Tiger Global’s 2001 launch have made more than 20 times their initial investment — despite its massive new losses. But that’s just twice the return they would have received by investing in the S&P 500 over the same 21-year period, and that’s not taking into account Tiger Global’s management fees.

Meanwhile, Tiger Global’s venture bets could go sideways — along with many other firms’ investments — if the market for exits doesn’t improve.

Venture capitalist Keith Rabois, whose firm, Founders Fund sometimes competes with hedge funds, told The Information at the time that some pullback from those giant rounds was inevitable given the plummeting share price of publicly traded tech companies. “If you have a high burn rate and have raised money at high prices, you’re going to run into a brick wall very fast,” he’d said of late-stage startups. “There’s no free money anymore.”


A framework for navigating down markets: Reevaluating your valuation

We start with quantifying how valuation multiples have changed (your valuation multiple is the ratio of your valuation to revenue). Here, public markets provide the best basis for recalibrating private growth valuations because public markets tend to see the effects of decreased valuations first. For instance, in the current market median public company software valuations have dropped from 12x forward revenue to 5x or less since highs in October 2021, representing an almost 60% decline. The same goes for fintech and consumer internet companies, which are also down over 70–80%.

However, the impact on venture markets will not be clear until data for the coming months and quarters filters in, and even then, many deals announced in Q2 were likely priced in Q1.

Downturns hit different sectors differently, making it important to look at relevant public companies to best gauge where you stand. For instance, a year ago, it was common to see funding valuations for late stage private companies that were 100x of ARR (equivalent to run rate revenue). If you did your last round at $20M ARR, growing 3x, you may have raised at a $2B valuation.

But things look very different now. You can get a rough estimate for the change in your valuation by looking at leading public companies in your sector. If they’re down 60%, there’s a good chance you’re in a similar position. When looking at high growth public software companies, you’ll want to compare your ARR valuation multiple to their revenue valuation multiples because of its availability as a GAAP accounting metric.

A helpful exercise is to figure out what ARR you need to reach to get back to your last round’s valuation and plan accordingly. To do this, use the estimated change in valuation multiples from leading public companies in your space and add a growth- and efficiency-adjusted premium for your faster growth. Then use this number to calculate the ARR you need to get to. Your goal should be to hit this revenue target with at least 12 months of runway. If you can do this, you’ll be in a strong position to raise your next round of funding. Raising capital with less than 12 months of runway sends a negative signal to the market and makes it harder to have a good fundraise.

Continuing our example, a $20M ARR business which last raised at $2B might observe the leading public companies in its space trading at 10x revenue, rather than 100x. Adjusting for the startup’s faster pace of growth, relative to public comps, let’s say that 15x ARR is a reasonable valuation for its next round of funding. (Note: 15x ARR represents a 50% premium to the leading companies in their sector and a 200% premium to the software average of 5x, but the appropriate multiple will vary across companies.) This means their goal should be to reach $133M of ARR, or $2 billion divided by 15x, with 12 months of runway.


Why the Metaverse? Why Now?

First, what exactly is the metaverse? For a word that’s thrown around a lot, precise definitions are hard to come by. As Eric Ravenscraft recently observed in Wired, if you replace “metaverse” with “cyberspace,” the meaning of the sentence will not change in 90% of cases.

Enthusiasts see the metaverse as the next generation of the internet, a virtual, interconnected reality seamlessly woven into our physical world. Thanks to AR and VR, the argument goes, real and virtual social, consumer, and business experiences will become intertwined. Gamers are already familiar with this notion — albeit usually in two dimensions — but games are only the beginning.

Millions of users now gather at virtual 3D concerts, shop in virtual malls with virtual currencies, and own fully customized virtual homes. They have innovative virtual experiences, such as Travis Scott’s concert on Fortnite. They also participate in a sizable and growing virtual-asset economy, buying, selling, and creating goods such as clothing, real estate, art, and currency.

In 2021, more than $40 billion was spent on nonfungible tokens (NFTs) — certificates of ownership of digital assets — according to the Financial Times. Goldman Sachs predicts “as much as an $8 trillion opportunity on the revenue and monetization side” of the metaverse. Morgan Stanley likewise sees an $8 trillion metaverse market — in China alone.

Others are more circumspect. While they don’t deny the attractions of decentralized finance and the internet iteration known as Web3 — or the activity each has spawned — they point to the long history of financial bubbles. They also cite, as a good reason to hedge one’s bets, the absence of easy to traverse bridges between the world of cryptocurrencies and the “real” economy where fiat currencies rule.

Companies tap into the metaverse in a rudimentary way when they hold meetings using virtual-conferencing apps such as Zoom or Microsoft Teams. Indeed, much of the value of the metaverse may ultimately lie not in consumer but in business applications, such as virtual meetings and training sessions, new-product design capabilities, or the ability to give customers the experience of a virtual home or vehicle before buying a real one.

Divergent views are hardly unusual when new technologies and models of business, finance, and commerce are rapidly taking shape and pushing against existing paradigms. But the metaverse is now starting to really come into focus.


Binance CEO says Terra’s plan of forking the blockchain won’t work

“This won’t work,” Zhao said in a tweet on Saturday. “Forking does not give the new fork any value. That’s wishful thinking.”

Zhao’s tweet came a day after Do Kwon, the founder and CEO of Terraform Labs, proposed a revival plan for Terra after its collapse last week. Kwon pitched forking the Terra blockchain — creating a new chain — and distributing 1 billion tokens to stakeholders.

“The Terra community must reconstitute the chain to preserve the community and the developer ecosystem,” Kwon said.

Still, according to Zhao, “minting coins (printing money) does not create value.” It just “dilutes the existing coin holders.”

Incentives are “just a bootstrap mechanism,” he added.

Zhao also questioned where the Luna Foundation Guard’s bitcoin reserves are. “Shouldn’t those BTC be ALL used to buy back UST first?” he asked.

As The Block reported on Friday, more than $1.2 billion in bitcoin reserves remain unaccounted for by the Luna Foundation Guard. It accumulated more than $2 billion in bitcoin reserves to support UST and provided a loan of $750 million in bitcoin. The rest remains unaccounted for. Additionally, 9,658 bitcoins (worth more than $288 million at current prices) also remain unaccounted for.

Overall, Zhao is “very disappointed” with how the Terra team handled the collapse of the stablecoin TerraUSD (UST) and its related token Luna (LUNA), he said last week.

The tokens collapsed when UST lost its peg to the US dollar, putting incredible pressure on LUNA to keep its price up. Because of the way the two tokens were designed to interact, this led to a huge supply increase in LUNA and a resultant price crash.

Binance Labs was an early backer of Terraform Labs, having co-led its $32 million seed round in 2018. Terraform’s other notable investors include Coinbase Ventures, Polychain Capital, Pantera Capital and Hashed.


‘An account everywhere’ not a ‘wallet’

You can see this in the design pattern.

✴ Web1 — Create an account for every service

✴ Web2 — Use a centralised account to access service


Like a physical wallet (which holds IDs, photos of your kids and pets, money, credit cards, loyalty cards, the grocery list, other random stuff) it can see more about you than any one centralised service can, because it’s yours.

Understanding web3 wallets and keys…

House example

- A house has a location, address, square footage, bedrooms, bathrooms, etc.

- A key lets you enter a house and use it. But it is not ‘control’ of the house.

- The deed recognises a legal owner, who can sell, extend or change the house as they choose.

Web3 example

- An NFT has an address and unique token reference number.

- A wallet lets the holder interact with the NFT (if it has functionality).

- The owner of the NFT is the only one who can sell (or borrow against) the NFT (which is considered property in UK law).

What do wallets mean for users?

An account everywhere

If you hit a paywall on The Economist, FT or The Wall Street Journal, you need to enter your personal information and sign up before you can access the content you wanted. In web3, you just connect your wallet and approve the contract.

Digital ownership

A physical DVD works regardless if the company that made it no longer exists. If a streaming service revokes access or closes, your film won’t play. Web3 wallets make assets behave more like they do in the physical world.

What do wallets mean for businesses and entrepreneurs?

Better data

In web2, the platforms that built the largest data moats won. But no single platform has more data about a user than they do themselves — not the government, Meta, Google, etc. Web3 means users can let algorithms run on all of their data, creating new competitive opportunities.

A CRM for assets

The wallet that owns an NFT (e.g. a Cryptopunk) is recorded publicly for all to see.

Imagine being able to directly interact with everyone who bought a product from your brand. Or better yet — a competitor’s brand. Imagine being able to engage with your NFT-holders simply by knowing which wallets hold the corresponding assets.


Understanding social commerce business

In just one day in October 2021, two of China’s top live-streamers, Li Jiaqi and Viya, sold $3 billion worth of goods1. That’s roughly three times Amazon’s average daily sales. This is the power of social commerce. And it’s set to sweep the world, growing into a $1.2 trillion wave of change by 20252.

Social commerce offers something radically different from traditional e-commerce by weaving buying and selling into the fabric of everyday life and through a real sense of community and connection. It’s set to revolutionize the way we shop: affording new opportunities for people to participate in the global economy as consumers, creators, influencers and sellers, resulting in a power shift from big to small. This will impact every brand, retailer and platform business. No one can afford to ignore it. This essay explores the scale of the change, what’s driving it, and the implications for companies across industries.

So what makes social commerce so different? Fundamentally, it represents a real shift in power from retailers and brands to people. And it’s being turbocharged by the rise of social media. In contrast to the relative anonymity of big-box retailers and transactional emphasis of e-commerce behemoths, it’s commerce available where people choose to spend their time and underpinned by the authenticity and trust that social connections provide.

It’s nothing short of a people-powered democratic retail revolution. And it’s incredibly effective. Why? Because it seamlessly blends social experiences and e-commerce transactions through a single path to purchase, all enabled by a single platform.

Social commerce engages in three principal ways, via brands, influencers or individuals themselves:

- Content-driven: Unique content created by brands, influencers or individuals drives authentic discovery, engagement, and action. For example, social media users are discovering new goods and experiences via shoppable posts and in-app stores on Pinterest, YouTube, TikTok, Facebook, and Instagram to name a few.

- Experience-driven: These experience driven channels enable shopping within an overall experience, most commonly livestreaming, but could also include AR / VR experiences or gaming. Look at Obsess’s “Shop with Friends” which enables groups to visit virtual shops with their friends9.

- Network-driven: People are harnessing their existing social networks to buy and/or sell. That could mean getting together to procure bulk discounts — a model used so successfully by Pinduoduo in China that it now has more active buyers than Alibaba Group. Or it could mean individuals using their influence and network to drive sales and earn commissions. India’s Meesho now has 13 million+ entrepreneurs who connect with their customers on social media platforms such as WhatsApp.


Crypto could be contagious

A great article by Matt Levine a Bloomberg LP opinion columnist.

If you asked a normal person, you know, two weeks ago: “How would it affect your life if the prices of some monkey JPEGs and algorithmic stablecoins crash,” I think most people would reasonably have said “I do not own a monkey JPEG and do not aspire to own one, so this will not affect me at all.”

Crypto has at least started to work its way into the real financial system. Some traditional investors also own crypto; if their crypto goes down they might have to sell regular stuff. Some public companies are exposed to crypto (because they are crypto exchanges, because they have levered crypto holdings, etc.), so your boring old index fund might go down when crypto goes down.

Ten years ago, if you had waved a magic wand and every cryptocurrency went to zero, not much would have happened. A few oddballs experimenting with a newfangled money called Bitcoin would have seen their experiment fail. “Oh well, that was cool for a while,” they would have said.

Five years ago, if every cryptocurrency went to zero, a lot of people would have lost a lot of money. But they would mostly be crypto people: Some individuals and some hedge funds that bought crypto would lose their money. The contagion to the real financial system would have been small. But most people would barely notice.

Five years from now, if every cryptocurrency goes to zero … well, I don’t know what the next five years will be like, but a plausible story (as of last week anyway!) is that there will be continuing integration of crypto into the real economy. More crypto companies will be big and important and intertwined with other companies; their stock will be in the indexes and they will borrow money from banks and use their own money to finance real businesses. More traditional investors will own crypto, and will make levered bets on crypto, and if those bets blow up they will naturally sell more liquid traditional assets, causing contagion from crypto markets to stock and bond markets.

This is a very bullish story for crypto; in this story, broad institutional adoption and growing utility will be good for the popularity, and prices, of crypto. And then if there’s a break in crypto — if there’s a run on a stablecoin, if there’s a rug-pull in a popular DeFi project, if all the apes gone — that break will naturally spread to the broader financial system, and that will be a sign of crypto’s success. Ideally there would not be a lot of breaks; that would also be a sign of success.

But a sign of failure would be if crypto projects keep blowing up and nobody outside of those projects notices. That would be a sign that crypto isn’t good for anything, that it cannot provide benefits to the real world. If crypto can be good for the real world, then crypto prices going down should be bad for the real world.

Right now we are probably in between?