If we ask about discrepancies between centralised (CEX) and decentralised (DEX) exchanges, what appears first in the crypto discussion? Odds are high it would be intermediation and custody of assets.

Yet there is another critical aspect to be covered. Namely, the way trades on exchanges are registered, since they could be either off-chain or on-chain transactions.

In regard to CEXs, most of the trades are made off-chain — in the name of transaction cost (fee) savings. As to blockchain ledger, off-chain multiple transactions could be later batched and executed as a single on-chain transaction (e.g. simultaneously addressing numerous recipients).

What’s more, such aggregations make the tracing of transactions less trivial, so as to complicate efforts to reveal the entire path of the crypto-assets origin.

Besides, off-chain transactions on CEX are stored in its order books, which represents purely private bedside book for CEX staff only. And serve as data shared with price aggregators to which market participants appeal as a source of reliable information.

Whereas distortions become tougher when market manipulations on CEX platforms took place. In terms of regulation, it relates to the compliance between CEX order books and on-chain transactions recorded in the ledger.

To sum up, not every crypto transaction goes on-chain and, thus, not all of them are completely traceable. So it’s probably the very crypto originators who rewrite the entire idea of blockchain with “the invisible ink”. And the existence of peer-to-peer (p2p) trustless technology built on a real-time public ledger remains a big question…

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 47) by Dr. Olga D. Khon

Staking on Ethereum is known as a crypto investment within APR up to 8% after the Merge. Still, one vital detail remains less transparent.

In general, stakers (investors who staked their ETH) run virtual entities called validators (created for a minimum of every 32 ETH staked) and receive staking rewards in return.

Meanwhile, most parts of these staking rewards are locked along with the initial stake under the ban on withdrawals. This restriction would last til the Shanghai update took place on Ethereum (not earlier than March 2023). Meaning that these rewards accumulating on so-called staking accounts are also seized for several consecutive months. Besides, the exact terms remain uncertain.

Indeed, there are fewer ETH amounts the validator could immediately achieve. It comes from the transaction fee tips (the increment paid on the base fee) and gains on maximum extractable value (MEV). The latter is obtained through the choosing and tossing transactions to be finally appended to the block.

Investors should be cautious while relying on APR calculated for Ethereum staking -not to be locked in time…

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 46) by Dr. Olga D. Khon

The crypto industry is a playground for enormous market manipulations.

Here is another trick requiring special attention. And it is based on the very origin of blockchain-produced cryptocurrencies — the anonymity or pseudonymity of holdings.

This is especially noticeable on the Ethereum blockchain. The option of anonymity creates a tool to imitate excess demand for any peculiar token and the native Ether (ETH) in particular. So, the same person or institutional entity could amplify a pseudo-trading activity.

Imagine an owner of two visibly-independent accounts: one possesses ETH coins, and the other — some derivative tokens, like stablecoins built on the Ethereum ERC-20 standard.

To produce fake interest to boost ETH price, the manipulator could apply to peer-to-peer (p2p) services available both on centralised (CEX) and decentralised (DEX) exchanges. Besides, DEX shares the easiest way to mimic additional demand on ETH and hide the essence of p2p-trades.

Then, such a bad actor could place the offer to sell ETH at a price much higher than the current market levels — from the account storing ETH tokens. Despite the lack of general demand, the same manipulator would accept that deal from the mirror stablecoins’ account. As a result, the ETH market price artificially would increase.

Indeed, to achieve the manipulator’s goals, these attempts should involve significant amounts of cryptocurrencies. As well as the less liquid market (e.g. outside major trading sessions on US markets).

So, when applied, manipulations with ETH price serve the interest of Ethereum whales and advocates among founders, early adopters, and developers.

All this illegal activity is constructed at the expense of regular investors, turning these manipulators thicker by the hour…

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 45) by Dr. Olga D. Khon

Should pay attention that one urgent detail about Ethereum has walked away from crypto news. It relates to the terms when withdrawals of Ether (ETH) staked would be approved.

To recall, Ethereum developers promised to deliver withdrawals under the Shanghai update, as they said, in 6 to 12 months after the Merge. The info was published on Ethereum’s official website for a long, as well. Besides, these terms played a crucial role while attracting new investors to become fresh Ethereum stakers.

Indeed, the many-times-postponed Merge was finally anchored on September 15, 2022. And?

Well, Ethereum developers continue to claim (under a new agreement made on November 24, 2022) that withdrawals are to be provided within the Shanghai update. Still, with the mention of 6 to 12 months removed from the informational agenda completely. And this is the most disturbing call!

Investors (stakers) staked their ETH to receive so-called staking rewards (around 4% and 8 % before and after the Merge, respectively). Meanwhile, stakers are believed to receive their initial investments in these 6–12 estimated months. Guess, particularly, those being invited to Ethereum this summer — in the close anticipation of the Merge.

As to staking pools operating on Ethereum, they are stuck in a deep trap, setting up their investors. Simply put, nobody knows when stakers could receive their investment even if they are willing to.

Imagine, a bank depositor who came to redeem a deposit from a commercial bank and received the answer to wait for an uncertain period of time. Impossible in mainstream finance, isn’t it? Right. Meantime, it’s the very case for the crypto industry, at least, on the Ethereum blockchain.

“Catch me, if you can”, withdrawals from Ethereum say…

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 44) by Dr. Olga D. Khon

These days, the Ether (ETH) price gained a short-term recovery. Any objective reasons? Or was it simply an attempt of blockchain proponents to artificially lift the crypto asset’s price?

All the crypto-way, investors should be cautious while witnessing the next coincidence of unexpected Ether (ETH) growth and its accumulation came from so-called sharks and whales (holders of more than 100 ETH and 100 000 ETH, respectively).

And here is not the same explanation we used to appeal to the mainstream financial system. Simply because the Ethereum ecosystem provides enormous opportunities for market manipulations.

In addition to the crypto bridges (see Note 28. «Crypto Bridges to Market Manipulation») and crypto mixers (Note 31. «Crypto Mixers Or Minefield for Blockchain») we’ve mentioned before, it’s time to highlight wide-known services called crypto lenders.

How do such services work for price manipulations? Apparently, there are plenty of ways. So, let’s depict one of them: the manipulator possesses some amount of ETH. These initial ETH tokens are sent to a crypto lender to serve as collateral to receive other crypto assets in return. These newly achieved digital coins could be exchanged for extra ETH, and simultaneously boost demand for ETH and push the price up. And it could be a multi-pass of trivial manipulations aimed to misguide regular investors.

Indeed, these manipulations require substantial amounts of ETH in possession. Thus, being implemented, it would inevitably involve some Ethereum advocates (either blockchain founders, early adopters, or developers).

The Ethereum ecosystem is a spot for infinite regeneration of derivative tokens on underlying tokens, so far. It also reproduces inflationary pressure beyond true intrinsic value creation.

Therefore, the essence of the secret is the chain of market manipulations…

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 43) by Dr. Olga D. Khon

Imagine a person writing short articles on crypto and blockchain, with an emphasis on Ethereum.

And the most amazing thing: these notes have a downward effect on Ether (ETH) token prices.

That seems to be an incredible, illusory phenomenon.

But what if it is repeated several times? Actually, 14 times (for the last 24 notes) on a daily basis watch (see dots with green labels pointing to the date and number of notes posted)… Then what is your thought to be?

Is it a pattern or a coincidence?

Or perhaps it’s just those hidden and subtle connections occurring from the energy-information field?..

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 42) by Dr. Olga D. Khon

The crypto world is buzzing that so-called rollups are the future of Ethereum and would solve the scalability issue every blockchain faces. On this, I beg to differ. Both optimistic and zero-knowledge (zk) rollups are known, but somehow Ethereum developers prefer the latter.

Meanwhile, in very essence, the implementation of rollups distorts the entire idea of blockchain promoted by crypto proponents when the technology came to finance.

First of all, it questions the state of blockchain as a completely trustless entity. In brief, rollups batch multiple transactions off-chain to submit them as singular transactions into Ethereum (the layer-1 blockchain). Meaning rollups make the transaction’s tracing less trivial for regular users and wide-range observers. Herein, users inevitably should trust rollup services (the layer-2 networks) and their protocols outside public reporting.

Next, this solution argues the notion of full decentralisation since such rollup services do actually represent intermediaries, and solely work for blockchain centralisation.

Finally, rollups challenge security while being designed through Ethereum smart contracts. It threatens users and amplifies the risks of the service being hacked or compromised.

To sum up, should the development of Ethereum contradict the idea of blockchain, it simply fails…

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 41) by Dr. Olga D. Khon

Have you met the statement that Ethereum staking is analogous to a bank deposit? In fact, Ethereum staking bears much more risks of losses — up to the total amount of investments made.

No way? So, let’s clear it up.

Everybody knows, when users stake (or deposit) Ether (ETH) tokens, they become stakers who create virtual entities titled validators to produce blocks and receive staking rewards.

The financial trap hides further. Ex-ante stakers (or depositors) are unable to withdraw the amount staked (initial investment). Formally, they would receive redemption rights after the next Shanghai upgrade (announced to be in 6–12 months following the Merge). Meanwhile, the exact term of execution is unclear (besides, we all witnessed how many times the Merge was postponed).

In reality, even the Shanghai upgrade would provide a rather narrow exit hallway for stakers. Once allowed, withdrawals could get stuck in the bottleneck and set a long queue of stakers willing to leave for months (see Note 29. «Ethereum Digest With Counterpoint» to read more on Ethereum pitfalls).

After all, the Merge has made the case of Ethereum stakers tougher. Since mid-September 2022, the transition from Proof-of-work (PoW) to Proof-of-stake (PoS) consensus mechanism has been accomplished. Thus, stakers within their validators become the crucial infrastructural entities for this blockchain. In other words, In PoS Ethereum era, validators and, hence, stakers are solely responsible for the existence of the blockchain — the very block production process.

So, if stakers were able to unstake their ETH tokens by demand, they would diminish the number of validators in the network. Such permanent volatility could trigger infrastructural breaks. Apparently, Ethereum developers, without worrying, decided to abandon the democratic redemption rights for stakers — its blockchain essential investors, by the way. This solution helped to hide the insufficiency of the PoS consensus proposed by Ethereum. Perhaps, it was the easiest way that simultaneously unfolded the best for developers but the worst for investors in a broader sense.

Therefore, the Ethereum blockchain holds its stakers, both individual and institutional ones (e.g. variety of staking pools), — in a financial trap. The long-term restriction on withdrawals, deployed into Ethereum per se, forces stakers to validate blocks and permanently support the network even if they wish to quit. Otherwise, its validators would face slashing penalties and lose all the initial investments.

The simple truth for modern Ethereum is that this blockchain could not survive without validators created by stakers, providing the area of special monitoring or stakeout. Summing up we have to admit: the destiny of stakers is at the mercy of Ethereum developers…

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 40) by Dr. Olga D. Khon

Seems obvious that blockchain proponents should be acknowledged with economic sciences before pretending to be the invention of disruptive financial innovation.

And if crypto advocates reveal the research awarded this year’s Nobel Prize in Economics, they would recognize that the entire idea of blockchain to disintermediate finance is insufficient.

But do not rush to conclusions. The advertising of disintermediation in the crypto sphere was done not for lack of information.

Frankly speaking, DLT (distributed ledger technology) ideologists and blockchain originators, promoting looked-like-disintermediated finance, were assured they use intermediation from the very beginning.

Remember the bunch of intermediaries deployed on various blockchain domains? Meanwhile, such entities are functioning under the PR idea of democratisation and disintermediation of finance.

Indeed, crypto originators purely oversimplify finance by the means of complicating the visibility of technological design and informational balancing.

As it turned out, blockchain did not bring anything super innovative to finance. It’s just the next attempt to make a sham — an oversimplified replica of the global financial system operating without the watchful eye of the regulator…

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 39) by Dr. Olga D. Khon

The paradoxical situation is developing under crypto sanctions on dictatorships worldwide. And we are talking about the ban of users according to their national affiliation.

On the one hand, they aimed to prevent dictators’ aggression and war. But on the other, these measures do not target the spot directly.

Simply put, such attempts primarily refer to the activity on so-called centralised exchanges (CEX), where somehow know-your-customer (KYC) policies are implemented. Thus, here we mainly deal with sanctions on regular users whose citizenship could be easily identified.

While a bunch of money laundering and other deals covering criminal agendas occur on decentralised exchanges (DEX) and through other over-the-counter (OTC) manipulations, it’s the very place where the national residence is blurring.

Therefore, for crypto sanctions to become more efficient, above all, regulators better to focus on the criminal institutional entities (among multiple DAO foundations and blockchain originators), which are hiding under the label of international ones so far.

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 38) by Dr. Olga D. Khon

Gratefully, the modern discourse on blockchain and crypto is passing under the aegis of financial regulation. And that’s for the good of the common public and the health of the global financial system, indeed.

So, to keep abreast of recent developments, I took part in the Banque de France Conference on “Opportunities and Challenges of the Tokenization of Finance: Which Role for Central Banks” on September 27, 2022.

Although discussion was multidimensional, it pointed to central bank digital currencies (CBDC) and stablecoins, in particular.

Well, I’d like to share some of my thoughts on stablecoins here. Since it’s the bottleneck where crypto usually meets and harms traditional financial markets.

Beyond conventional wisdom for distinguishing crypto-assets as purely speculative and stablecoins as more value-secured (for being backed by reserve assets), we should consider one key aspect.

That’s stablecoins, even if they are backed by fiat currencies, do not exist independently of crypto-assets and their pricing.

Namely, stablecoins are simply tokens built upon existing layer-1 blockchain, like Ethereum. And thus, they are fully dependent on drawbacks such a network possesses through its consensus design. Since these underlying blockchain platforms would fail, every stablecoin would inevitably be shaken.

For instance, almost a half of total market capitalisation is represented by three well-known stablecoins: USDC of Coinbase and Circle, DAI of MakerDAO, and BUSD of Binance.

All are built as ERC-20 tokens on Ethereum, which, I argue, has more problems than opportunities. Obviously, the realisation the Ethereum has brought to Web 3 is vastly destroying the entire concept of blockchain (distributed ledger technology) to be the democratisation of finance (see Note 29. «Ethereum Digest With Counterpoint» to read more on Ethereum).

Thus, risks of stablecoins came both from the sufficiency of reserves and infrastructural point of view, as well. And remembering that an empirical design to express the pure idea of blockchain is yet to be created, stablecoins could easily become triggers for collapse of financial markets.

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 37) by Dr. Olga D. Khon

The world is watching. The next package of anti-Russia sanctions is en route!

At the same time, the crypto “whales” activity arose again, according to major whale-trackers.

Seems, such crypto-assets moves are mainly attempting to escape from the radar of observers and regulators. Likewise the most popular shift is running away from centralised to decentralised exchanges or fiat currencies at all.

Well, this mobility deserves to be analysed in time while the big fish is flooding. The crypto whales movement has much to say towards global finance, and foremost regarding the sanctions imposed on Russia.

For sure, the reliable knowledge should be obtained before these shadow whales go deep into the crypto ocean.

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 36) by Dr. Olga D. Khon

I’m not mistaken if I say the landmark event happened last week: the crypto-industry would never be the same anymore.

On Friday, September 16, 2022, the US Department of the Treasury published three reports on “Ensuring Responsible Development of Digital Assets”. Undoubtedly, these reports are remarkable. So, I would emphasise the report on crypto-assets within consumer and investor protection, in particular.

The document presents a comprehensive source of knowledge on crypto-assets highlighting the core pillars of technology, perspectives of proper use, drawbacks and risks blockchain-based products provide to the global financial system.

This report, like hotcake, was delivered right on time to the public awaiting high-quality analytics.

I admire the report for the diligence and consistency of expertise brought to the crypto ecosystem teeming with informational disparities and fragmentation.

Whether you are with blockchain or not, foremost should you be a crypto- investor or a customer, the Report on Crypto-Assets is the essential handbook to appeal to for professional guidance and benchmark of expertise!

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 35) by Dr. Olga D. Khon

Amid the Merge ongoing on Ethereum, its surrounding supporters remain overlooked. Meanwhile, I think, these interested parties are kept in shadow for a purpose.

Under the Merge, the biggest crypto exchanges decided to suspend deposits and withdrawals of native Ethereum token ETH — to wait until the update would be accomplished. In general, such seizures took place for ten consecutive days — till the final timing of September 15, 2022, as planned.

Thus, major institutional players simply halted the entire trading activity for ETH — to protect the token’s market price and Ethereum’s future. And they did this during the most turbulent time for the Ethereum blockchain.

Some exchanges even locked more other tokens that are sensitive to the Ethereum ecosystem (like ERC-20, Polygon MATIC, Optimism OP, PWETH, PUSDC, PMATIC, etc.).

Do pure altruism and sincere belief in blockchain lead to these prominent supportive actions?

Nope, indeed. The truth is that institutional players have their business interests in Ethereum.

For instance, crypto exchange Coinbase and Circle jointly launched their stablecoin USDC on Ethereum. USDC is the second largest stablecoin with over 51 bln US dollars in market capitalization. Obviously, if Ethereum fails, the whole Empire of USDC would inevitably collapse too.

And there are many more examples that could be mentioned from DeFi services and NFT…

The enormous advertising and inspiration that come from crypto institutions to support Ethereum have one simple reason. Despite multiple pitfalls and risks for their clients (see Note 33 to read more about Ethereum), these institutional Ethereum enthusiasts rely on “vested interest”. Since when Ethereum would crash, businesses of such Devil’s advocates would simultaneously go down.

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 34) by Dr. Olga D. Khon

I was surprised while reading fresh analytical reports declaring that Post-Merge Ethereum become more attractive for institutional investors. As usual, arguments rely on well-promoted postulate beyond crucial details withheld. Such crypto enthusiasts are repeatedly assuring us that rather sustainable proof-of-stake (PoS) instead of energy-starving proof-of-work (PoW) would open doors for institutional investors.

Moreover, they inaccurately call Ethereum staking a “higher-quality yield (lower credit and liquidity risk)” for any validators applied.

But wait a minute, is it the same Ethereum staking that allows investors only to deposit their assets within restriction on withdrawals under demand — until the Shanghai update took place? To remind, the Shanghai is expected not earlier than March 2023 should the Merge be accomplished this September (see Note 29 «Ethereum Digest With Counterpoint» to discover more details on Ethereum).

Besides, even if investors could finally possess the right to redeem their staked assets, they would face another inevitable limitation. That’s a maximum of six validators per epoch to unstake. In other words, not more than 43,200 ETH (of around a total 13,607,340 ETH staked as of September 12, 2022) could be returned from the network within 24 hours. So, simply put, it will make a queue of more than 314 days for all current validators to quit the network.

To sum up, Ethereum staking brings investors: 1) uncertainty on the time when withdrawals would be granted; 2) permanent limitation on withdrawals to be executed. Thus, admittedly, significantly high credit and liquidity risks are pursuing Ethereum staking by default, for sure.

Need to note, institutional investors are making decisions for their clients — all of us — regular investors within entire life savings!

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 33) by Dr. Olga D. Khon

From the very beginning, supporters of Tornado Cash do strongly appeal to its decentralisation, allegedly out of any peculiar team management. The argument was based on the operation scheme of the so-called decentralised autonomous organisation or DAO (see Note 19 to read more on DAOs).

Yet Tornado Cash’s governance tokens (the analogue of common shares in TradFi) were distributed to provide developers with an enormous concentration of voting power.

Besides, blockchain basics of pseudonymity allow fragmenting votes to imitate a multiplicity of participants, to hide interconnectedness between accounts. Quite a tricky path for assuring the common public of possessing the power in Tornado Cash’s decision-making.

To remind, developers of Tornado Cash announced the following allocation of governance tokens (10 mln TORN in total):

1. 30% (3 mln TORN) — for developers and “early supporters” (probably, being close to the inner circles);

2. 55% (5,5 mln TORN) — for the treasury of Tornado Cash’s DAO;

3. 15% (1,5 mln TORN) — for the outside users: 5% (0,5 mln TORN) as an airdrop to early users and 10% (1 mln TORN) spread through anonymity mining.

In dry residue: the maximum voting power distributed to users beyond the team of Tornado Cash and its inner circle was limited to 15%.

Taking into account the chances that “early supporters” and “early users” were likely to coincide, the signs of proclaimed “democratisation” were seen to melt significantly. Thus, DAO there was nothing but the cover for centralised management.

Once again, they say it’s users who control Tornado Cash. As a matter of fact, it’s developers (the very team of originators), indeed. Only they are the main keepers of cash, not the investors’ community.

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 32) by Dr. Olga D. Khon

I feel pretty anxious while reading of opponents advocating for lifting sanctions imposed on one of the popular crypto mixers on Ethereum -Tornado Cash. The regulator did the right thing — banned the tool of money laundering (see Note 25 to find more on these sanctions).

Well, ok, let’s dig into this case once more. But this time we’ll point to a peculiar paradox that challenges the entire idea of the crypto mixers.

To be short: if frankly recall the essence of blockchain, and being persistent, crypto mixers could not ever be created.

Blockchain permanently claims to be a peer-to-peer trustless network in the form of a public database where each transaction is immutable and, thus, traceable. Trustless is also meant to make an independent risk assessment on the users’ side, who distinguish criminal and non-criminal activity on their own. And that is what accountable transactions are served for. Meanwhile, herein crypto mixers do overturn the logic of blockchain.

By the way, blockchain does not provide any mechanism to protest transactions users could receive without knowledge. Likewise when criminals were trying to compromise multiple uninformed users in the aftermath of Tornado Cash’s ban. Besides, such actions reveal nothing but the immaturity and insolvency of the Ethereum blockchain, and, indeed, the whole blockchain technology.

How do supporters manage to fight for Tornado Cash? The answer is the existing system of concepts’ substitution enables them to do that. These permit avoiding responsibility and sheltering by false notions. Since blockchain would follow the same path, it remains a dangerous minefield for the common public.

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 31) by Dr. Olga D. Khon

I’ve always been sceptical about crypto exaggeration made in a broader positive context. Besides, it’s the easiest way to pay tribute to blockchain solutions by getting over the underpinned details.

The same is done frequently while covering scalability issues and the layer-2 solutions proposed on Ethereum.

Well, limitations on scaling are common for any blockchain. It reflects the growth of the network being a burden for its mass adoption and fast-and-convenient public use. Namely, the wider the blockchain is applied, the more transactions are being processed. So, the slower and more costly such transfers are involved. And therefore the greater the network size becomes. Thus, the more powerful and expensive computers blockchain participants are required to adopt to turn into its nodes operating.

Herein layer-2 relates to off-chain scaling built upon Ethereum Mainnet, being the layer-1 blockchain. Beyond the multiplicity of layer-2 solutions, the majority of them have a central entity — a server or cluster of servers — to be constructed around. As I see, layer-2 is just an intermediary, let’s say, a node to whom users send their transactions instead of executing them directly on the Ethereum blockchain. These layers-2 could either tentatively batch numerous transactions into groups or roll up them straight to a single transaction to be executed on layer-1.

Despite the visible economy of scale: lower transaction fees paid by users and higher execution speed, layer-2 possesses another feature, often undisclosed. That is an extra tool to hide money’s origin. Transactions sent through layer-2 solutions are harder to trace, complicating the job of following the complete path of assets circulating.

Moreover, malicious actors could influence injudicious users by the means of layer-2, when transactions are batched and grouped. So, layer-2 has its contribution prohibiting proper anti-money laundering policies from being implemented.

In fact, layer-2 solutions do not protect decentralisation. Instead, they boost intermediation activity and thus serve a quite straightforward centralisation. There is also an issue of security of layer-2 solutions from a long-term perspective.

In plain words, the entire layer-2 solutions are simply a bunch of intermediaries tied to end-users to cover Ethereum's failure as layer-1 blockchain to ensure a sustainable and truly decentralised network.

When someone says that layer-2 is Ethereum’s future, it means, the person deeply believes in intermediation and the crash of decentralization…

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 30) by Dr. Olga D. Khon

Thinking of the Merge as it seemingly approaches (on September 15, 2022), I wonder about the massive exaltation the event is bringing to crypto space. Acknowledging it as a final transition toward proof-of-stake (PoS), let’s take a look at several issues we’ve recently discussed:

1) Limits on withdrawals: The depositors (stakers) who entered Ethereum PoS are locked with their initial investments (stakes) for a long (at least six to twelve months) within perspective to stuck in the next bottleneck on the exit queue (see Note 27. «Secrets of Ethereum Staking: One Step Forward And Two Steps Back» and Note 21. Ethereum Staking: «Illusion is the first of all pleasures…» );

2) Arbitrage rally into block production: The essence of the Ethereum blockchain is built on arbitrage opportunities for block producers making its functionality a strong competition for maximum extractable value (see Note 22. «Blockchain: Democratization or “De-democratizing” of Finance»?);

3) Restrictions on scalability: Growing transactional costs and tapering the Ethereum network’s throughput (see Note 23. «In The Labyrinth of Cryptocurrencies: «The Devil is In the Details…»);

4) Market manipulation on the price of Ethereum’s native cryptocurrency — Ether (ETH) (see Note 28. «Crypto Bridges to Market Manipulation»);

5) The crash of disintermediation produced by Ethereum staking (see Note 24. «Ethereum Blockchain: Numbers Talk…»).

Apparently, there is much more to struggle with and modify on Ethereum. For instance, a question of whether the infrastructure (nodes the network operates) the Ethereum blockchain relies on could be genuinely decentralised. Based on Ethernodes.org data (as of August 29, 2022), more than half of Ethereum nodes hosting (55.5%) are run on Amazon.com, so as several popular cloud providers: Oracle Cloud (4,0%), Google Cloud (2,4%), and Alibaba (2,4%).

Thus, the empirical data questioned the decentralised independence of Ethereum’s nodes’ infrastructure, since its majority is based on centralised services. Simply put, the so-called Web3 still strongly depends on Web2 architecture claiming the absence of complete decentralisation.

Indeed, the Ethereum blockchain to enter our everyday lives should be significantly improved and regulated. The current product being advertised to the public is a half-worked solution with many drawbacks to financial markets. As our digest with counterpoint presents, the Ethereum blockchain, due to its imperfection, threatens the stability of the global financial system and the common well-being of people.

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 29) by Dr. Olga D. Khon

Crypto cross-chain (multichain) bridges are well-known for their ability to transfer tokens among blockchains without trades to be done (see Note 25 to read more on bridges).

Although, some could inaccurately state that bridges allow sending cryptocurrencies from one chain to the other. Actually, the operation is not the transfer of digital coins but the wrapping of cryptocurrency from one blockchain into the synthetic version of it, applicable to the different networks. I guess it’s clear that these wrapped tokens present an obligation of the bridge to re-wrap it into the original cryptocurrency under the demand of the holders.

Meanwhile, the foremost issue I see here is a direct path to market manipulation with token prices. Believe it or not, crypto bridges ex-ante serve to dispense information of actual demand and supply on crypto assets wrapped. De facto each shift towards the next cryptocurrency should imply the selling pressure on the token sold, so its price would go down. At the same time, the bridge shields these changes in prices by altering both jumps in supply and drops in demand. Thus, the market price on swapped-through-bridges tokens does not reflect a real supply-and-demand ratio as we used to be on financial markets.

Besides, things are even worse, I guess. Bridges give a wide room for bad actors to dump competitor cryptocurrencies by artificial transfer of selling pressure on them.

To depict the case, let’s imagine an institutional investor (aka whale) interested in the growth of the Ether (ETH) price. How bridges could be applied for market manipulation there?

First, this user sends ETH tokens, such as those gained through mining and staking, to the bridge and receives wrapped Ether (WETH) in return. So, ETH has shifted beyond the downward burden on its price. By the means of newly achieved WETH the same user buys stablecoins and sells them to fiat currency. Finally, push all the fiat to acquire more ETH to spur the market price up.

Or it could be more complex, redirecting selling pressure on third-party cryptocurrencies. For instance, ETH goes through the bridge to WETH (still beyond the impact on ETH price). Next, WETH is being swapped to a competitor token, let’s say, Bitcoin (BTC) or Cardano (ADA), which would be sold further to fiat currency, and later used to buy ETH. The outcome is the negative stress on the price of the competitor’s token and simulated demand for triggering the ETH price jump.

Such simple tricks could be a long-lasting loop. Either way, these are done by hiding initial downside pressure on ETH tokens while entering the bridge for wrapping.

Thus, I argue these bridges are designed for market manipulation of prices per se. The difference between intentional and unintentional exploitation depends on the final upshot requested by bridge users and reflects on the chain length of swaps and volume of tokens wrapped.

Indeed, tokens price on crypto exchanges could hardly be a market indicator used to be seen in the global financial system. While the intense bridge applications harm regular investors for most, who are misguided about the market state of the tokens wrapped and traded.

Herein crypto assets gone through bridges remind me of a forgery made on a masterpiece of the constantly rising price, but not for sale ever. Investors should think of it before relying on crypto bridges lined up for market manipulation.

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 28) by Dr. Olga D. Khon

These days news and social media are overwhelmed by the Merge anticipated in the middle of September. In a while, staking rewards are expected to double (up to 8% in APR) under the final transition from proof-of-work (PoW) to proof-of-stake (PoS) on Ethereum to be accomplished.

Long story short, investors (stakers) deposit (stake) their Ether (ETH) to earn rewards for block producing. The operation is done through virtual entities called validators. So, every time one validator is created for each 32 ETH staked. All new validators are required to wait in the activation queue while being activated and joining the reward-collecting process. It’s one validator to be randomly chosen to produce one block per slot (12 seconds) and receive ETH tokens in return.

Sounds rather attractive if not for the strict limit imposed on withdrawals (unstaking). Ethereum stakers have no chance to obtain their initial investments (stakes) back until the Shanghai upgrade on Ethereum took place (extended for at least 6–12 months after the Merge). And yet the Shanghai would be executed without delay, the path for stakers to unstake their assets is too narrow: a maximum of six validators per one epoch (32 slots = 6,4 minutes).

Besides, as of date, there are 416 379 validators on the Ethereum PoS Beacon chain. So, it would be a quite long pending tail for months since investors wish to leave (see Note 21 to read more on Ethereum staking).

Simply put, investors staking their assets on Ethereum are betting on a risky path. They play for the attractiveness of staking rewards under uncertainty and, simultaneously, lock their initial investments for seasons and, probably, years, as it was previously. Remember, the Merge has been already postponed several times, dooming earlier stakers to losses during crypto market downturns.

I’m also deeply concerned about the following. When the Merge evaporates mining activity on Ethereum, then additional validation power needs to be acquired — to provide the network throughput on the same level. Otherwise, the performance of Ethereum would be rather questionable, even if the Merge succeeds. Meanwhile, the current PoW Mainnet is processing around one million transactions per day, according to Etherscan. Thus, if Ethereum could not sustain the transaction throughput required by the end users, gas fees (transactional costs) would rapidly rise. Doesn’t it remind us of a popular catchphrase: One step forward and two steps back?

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 27) by Dr. Olga D. Khon

Sometimes people not involved in crypto-mania argue that the cryptocurrency market is relatively small to harm the global economy (around 1,126 tln. USD of market capitalisation on August 18, 2022). So, they can’t foresee the urgent need for the regulation of crypto. In fact, this space poses a tremendous threat to international finance and undermines its healthy fundamentals.

Among others, there is a particular hazard, frequently encouraged by crypto enthusiasts and provided through decentralised finance (DeFi) services. That is yield farming (yield mining). It presents a strategy, based on arbitrage opportunities when tokens are passed across numerous projects — to maximize profits. Target is achieved by higher rates and greater rewards while paying lower fees.

According to DefiLLama, more than half (58,89% on August 18, 2022) of DeFi total value locked is placed on Ethereum — the chain that pioneered the yield farming tools.

To remind, Ethereum’s block producers (still miners in proof-of-work Mainnet and stakers in proof-of-stake Beacon chain) receive their rewards in Ether (ETH) tokens. To apply these tokens in DeFi, ETH tokens should be wrapped into WETH (wrapped Ether — the ERC-20 fungible token standard created on Ethereum). The cause is that ETH as a native token to Ethereum was built before ERC-20 was applied and adopted in DeFi.

Besides, such rewards are always new tokens minted for every block produced in each modern blockchain that exists. Simply put, these chains are just printing new cryptocurrencies (e.g. for mining or staking) by hardly producing any substantial economic value, rather incomparable to top-tokens market price. Whilst being traded to fiat currency, these tokens amplify inflationary pressure on the global financial system.

To depict a simple “yield mining” strategy, imagine a “yield farmer”, let’s say Ethereum’s whale-staker, who’s accumulated several daily rewards in ETH tokens. Then, the farmer wrapped ETH to WETH, either through the ETH-WETH bridge or by means of decentralized exchanges (DEX). Next, this crypto enthusiast could do is to borrow another cryptocurrency from some DeFi lending protocol — under the use of these WETH tokens to be served as collateral. Further, the newly gained cryptocurrency could be sent to a liquidity mining pool — to become a liquidity provider and earn rewards greater than the borrowing rate requested by the previous lending protocol. Such iterations may continue for a long, while arbitrage persists (whether on the side of prices, fees, or interest rates).

That closely resembles making money out of thin air, indeed. One could be calm until such newly minted cryptocurrencies are thrown into the real economy, unbalancing global markets on rising inflationary trends. Thus, most probably, yield farming possesses the same context as a gambling phenomenon where the global financial system loses a lot.

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 26) by Dr. Olga D. Khon

On August 8, 2022, good news arrived from the US Treasury Department’s OFAC, which sanctioned Tornado Cash — a crypto mixer (blender) operated on Ethereum. Since its creation in 2019, Tornado Cash “has been used to launder more than $7 billion worth of virtual currency”.

To note, the primary goal of such mixers is to obscure money flow. Its users, willing to anonymize the origin of virtual assets, should send a necessary amount to the service and receive private keys (to prove the right to withdraw assets later). So, mixing broke the direct linkage between senders and receivers of money passed through it.

Although, the senders themselves decided on a time for the seizure. Tornado Cash is known for a piece of advice to withhold money for a longer time — to mess up chances for third parties for successful tracing. Unbelievable but true, many more recommendations were in circulation…

Besides, illegal practices of crypto mixers were often linked to so-called cross-chain (multichain) bridges. These entities exist to apply tokens native to the source blockchain for use in another one (target chain) without trades being conducted.

Basically, the functionality of cross-chain bridges presents a “lock-mint-burn-unlock” model. When initial tokens from the core chain are pushed to the bridge. They are locked and wrapped into a synthetic version of it, compatible with the target blockchain. Thus, the core blockchain tokens serve as collateral for the wrapped analogue minted. Under this obligation, the bridge promises to refund users on demand. If so, wrapped tokens would be burned within initial coins — unlocked in return.

There are different types of cross-chain bridges. It could be either custodian or non-custodian, one-way (unidirectional) or two-way (bidirectional), connecting two independent blockchains or linking a parent (core) chain to its child (sidechain).

Beyond any type of cross-chain bridge, there is always a high risk of failure and cyber attacks. Meanwhile, they are rather popular with an arbitrage opportunity (opened through the multi-level collateralization of tokens) upon its anonymization service. But to my mind, the main cause is that bridges work as a tool for cleaning up the payment history of virtual assets.

Moreover, cross-chain bridges in the recent state enhance systemic risks brought to the entire crypto space and the global financial system.

Indeed, when it comes to better use of blockchain technology and its future in finance: In regulators we trust!

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 25) by Dr. Olga D. Khon

Since crypto space is overwhelmed by the upcoming Merge event on Ethereum — the biggest altcoin by cryptocurrencies’ market cap. Let’s have a look at deposit data for its Beacon chain (one of Ethereum’s chains operating on proof-of-stake). According to the popular blockchain explorer Etherscan.io, there are four categories of total deposits staked at the Beacon chain belong to. Namely, staking pools (42,2%), exchanges (32,4%), whales (11,5%) and others (13,9%).

To recall, the Merge is supposed to accomplish Ethereum’s final transition from proof-of-work (consensus Ethereum’s Mainnet is based on) towards proof-of-stake (PoS) on its Beacon chain. After the Merge, Ethereum’s performance would utterly rely on block-producing executed by validators — virtual entities only the stakers (users depositing their assets to the Ethereum PoS chain) could create (see Note 21 to read more on Ethereum staking).

So, why does the category of depositors (stakers) matter to the public?

Foremost, it shows that 74,6% of all staking, and, thus, validation power in Ethereum PoS, have already been accumulated by crypto intermediaries (herein, staking pools and exchanges). And, for sure, these very services collect their additional commission from staking rewards. Seems, it’s the evidence makes arguments of pure peer-to-peer interaction and disintermediation for PoS-led blockchains rather questionable.

Even though a quarter (25,4 %) of block-producers is represented by individual players, both whales (11,5%) and retail stakers (13,9%). While extracting the share of whales (basically, users possessing more than 1 mln. USD), only 13,9 % remain for regular stakers. Then, the assurance of democratization brought by the PoS­-consensus becomes deeply controversial.

Still, believe in disintermediation and democratization of PoS-blockchain? Numbers talk of the opposite and the Ethereum blockchain is not an exception…

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 24) by Dr. Olga D. Khon

Each blockchain operates by a native token (literally, its currency) to serve for internal payments, both transactional cost (fee should be paid for every transaction to be executed) and rewards for block-producing (gains serve to incentivize the vitality of the network). Since these native tokens are fungible, they represent the notion we know as cryptocurrencies.

Thus, there are at least as many cryptocurrencies as blockchains exist within extra tokens come from decentralized finance (DeFi) services, built on smart contracts. Among these are governance tokens (type of utility tokens) for managing decentralized autonomous organizations (DAOs), stablecoins and numerous synthetic tokens.

So, as of today, Coingecko traces 13 072 cryptocurrencies of 1,132 tln. USD in total market cap. While Bitcoin (BTC) acquires 38,8% and rests 61,2% for overall altcoins (incl. 17,8% of Ether).

Amid the discussion, a lot has been said about the classification of various cryptocurrencies. Some crypto apologists presume governance tokens should hardly be identified as security. Meanwhile, several DAOs governance tokens are well-known for going public and have been added to crypto exchange listing. Transferring to the side of cryptocurrencies is tradable on exchanges, and neither remains a sole utility token though.

To remind you, the very field of DeFi, despite of title “decentralized”, in reality, tends to be based on highly centralized governing through DAOs (see Note 19) and represents the figure of a solid intermediary in crypto space (see Note 20). Indeed, DeFi is not that controversial to mainstream finance (TradFi), except for the pseudonymity of payments — the feature seems to attract dominantly the shadow participants….

Moreover, DeFi services have amplified the issue of scalability in blockchains like Ethereum. The burden comes from the boosting of the blockchain scale. The more blockchain grows the higher transaction cost (fee) for users becomes. Meaning, that under the greater demand for blockchain participation, fees could spike tremendously. That’s the point where regular (retail) user suffers the most. Quite expensive fees make the blockchain a luxury relatively affordable primarily for big players.

Well, same as usual, we should go through the informational shield and get on particulars, after all, in the crypto world «the devil is in the details»…

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 23) by Dr. Olga D. Khon

When blockchain comes to finance, it claims, the former democratizes the latter. Well, is this a thing it is supposed to be?

From the starting point, each blockchain evolves, such systems work on incentives (e.g. rewards) for users to participate and support the network’s existence. In general, there are two types of participants available to the public: 1) network users (senders and receivers of transactions), and 2) network transaction providers (block producers who include transactions to blocks to be finally added to the blockchain).

Each protocol has its additional specific features, but this part is common for the blockchain concept of any type of consensus mechanism (proof-of-work, proof-of-stake, etc.).

Block producers (like validators in proof-of-stake or miners in proof-of-work) select transactions on their own, based on fees proposed by users — senders of transactions. Basically, block producers do prefer the highest fee possible to improve the total rewards gained. To note, they not only decide on which transaction to include or exclude from the block, but the order in these transactions is appending. And here is where the shoe pinches.

This option has gone so far that an entire subfield under the block production process arose. Where block producers are competing to acquire the top of what is called the maximum extractable value (MEV). To do so, transactions are tossed to construct a block to maximize MEV (extra gains could be received in excess of the standard block reward and transaction fee).

I guess, this idea of blockchain runs on incentives for block-producing benefits for the big players (institutional ones and so-called “whales”) rather than regular retail users. The more capital the user entity possesses the higher fee it could arrange to make its transaction always first in the line for execution.

Besides, blockchain protocols could also allow a transaction with multiple recipients to be done. This case is most in demand by the biggest crypto players, saving cost per transaction, and again beating regular users.

So, looks like many blockchain protocols are constructed to push social inequality, deeper and tougher. And there are probably more ways to de-democratization finance instead of its democratization…

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 22) by Dr. Olga D. Khon

When blockchain comes to finance, it claims, the former democratizes the latter. Well, is this a thing it is supposed to be?

From the starting point, each blockchain evolves, such systems work on incentives (e.g. rewards) for users to participate and support the network’s existence. In general, there are two types of participants available to the public: 1) network users (senders and receivers of transactions), and 2) network transaction providers (block producers who include transactions to blocks to be finally added to the blockchain).

Each protocol has its additional specific features, but this part is common for the blockchain concept of any type of consensus mechanism (proof-of-work, proof-of-stake, etc.).

Block producers (like validators in proof-of-stake or miners in proof-of-work) select transactions on their own, based on fees proposed by users — senders of transactions. Basically, block producers do prefer the highest fee possible to improve the total rewards gained. To note, they not only decide on which transaction to include or exclude from the block, but the order in these transactions is appending. And here is where the shoe pinches.

This option has gone so far that an entire subfield under the block production process arose. Where block producers are competing to acquire the top of what is called the maximum extractable value (MEV). To do so, transactions are tossed to construct a block to maximize MEV (extra gains could be received in excess of the standard block reward and transaction fee).

I guess, this idea of blockchain runs on incentives for block-producing benefits for the big players (institutional ones and so-called “whales”) rather than regular retail users. The more capital the user entity possesses the higher fee it could arrange to make its transaction always first in the line for execution.

Besides, blockchain protocols could also allow a transaction with multiple recipients to be done. This case is most in demand by the biggest crypto players, saving cost per transaction, and again beating regular users.

So, looks like many blockchain protocols are constructed to push social inequality, deeper and tougher. And there are probably more ways to de-democratization finance instead of its democratization…

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 22) by Dr. Olga D. Khon

The temperature of the blockchain atmosphere is hitting! Everyone expects the event called “the Merge” of Ethereum under its renewed date of arrival, September 19, 2022.

So, when the Merge takes place, two Ethereum branches — Mainnet (operating on proof-of-work basis) and Beacon chain (built on proof-of-stake consensus) — would be incorporated together. It should eliminate the entire mining activity and keep solely staking for Ether (ETH) tokens. The case, according to developers, would improve both the network scalability and sustainability issues.

Apart from the timing of the Merge, I guess, Ethereum staking has a more peculiar topic to point. Namely, withdrawals of investor assets.

As we know, this option is unavailable for everyone who stakes (deposits) their Ether (ETH) tokens to Ethereum before the Merge and the following “Shanghai” update is implemented. Besides, the Shanghai requires at least an extra 6–12 months after the Merge to be delivered.

Anyway, let’s assume, Merge and Shanghai, finally, were released beyond additional rollovers and unstaking from Ethereum was approved (thus, to be expected not earlier than March 2023). Then, would it mean that Ethereum staking is becoming a full analogue to bank deposits in the blockchain area? Could we next title it as a passive income investment with fewer risks?

Apparently, it hardly ever. And the answer’s hidden at the bottleneck for exit Ethereum staking, underlies this entire proof-of-stake (PoS) solution.

To remind you, investors (stakers) are depositing (staking) their ETH to receive interest (rewards) in return. While staking, stakers create virtual entities called validators responsible for blocks approving (validation) proposed by users of the network. For validating a block, validators receive rewards in ETH tokens. It requires a minimum of 32 ETH to stake to create one validator. Given slashing (penalties for bad acting) risks, every validator’s balance rarely exceeds the limit of 32 ETH at large.

And here is the clue: only six validators could leave the Ethereum blockchain per each epoch which lasts 6,4 minutes (that’s a maximum of 1350 validators per day for 225 epochs). Nowadays, Ethereum’s Beacon chain consists of 411411 active validators. Imagine, the length of a queue for those willing to quit Ethereum staking and unlock their ETH at once?

Should we add crypto-assets volatility, global market turbulence, and uncertainty for the time the events on Ethereum development would actually take place, what investors should bear in mind first?

Above all, Ethereum staking is barely could be an analogue to bank deposits. It possesses higher risks of assets being frozen for substantial months, and neither such activity should be called a passive income tool.

Even if the «illusion is the first of all pleasures», how far it is from the reality of life!

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 21) by Dr. Olga D. Khon

Crypto-industry claims to have evolved to oppose financial intermediaries.

Well, let’s figure it out: to provide every peer-to-peer transaction in the blockchain, each user has to pay a fee to the block producer (either miner, validator or so). This fee should be covered by a transaction to be executed, meaning being included in a block and added to the blockchain.

Does it remind you of a basic commission in mainstream finance?

Perhaps, there is no one or several visible institutional intermediaries in blockchain but many less evident ones. Besides, neither all of them are individuals. There are validation services for proof-of-stake (PoS) protocols, for instance, that unite multiple nodes to participate in block producing to earn the following rewards (aka revenue in corporate business).

More to be said on decentralized finance (DeFi) since this entire field presents a bunch of middlemen gaining their fees and commissions but accusing intermediation is a tough bundle for the financial system.

Over and above behind all DeFi services and so-called decentralized applications (dApps) there are teams — real people, mostly hidden, pretending to be legally unknown, coming and operating from nowhere. What if they suddenly disappear the same way? Outside full responsibility to their investors? Whom should they sue if there is an anonymous (or pseudonymous) nobody?

Sounds like a myth for disintermediation when shadow intermediaries blame intermediation while overcoming regulation…

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 20) by Dr. Olga D. Khon

They say the notion of a so-called decentralized autonomous organization or DAO is completely the opposite of a well-known corporate structure. Is it true or just an illusion of decentralization?

As it states, DAO represents the idea of an entity being controlled by a community of users beyond any central authority. So, this self-management comes from voting on governance tokens issued for the project the DAO stands for. And, ideally, DAO commences voting every time the proposal for changes appears from any user involved. Thus, decisions are made on reaching a consensus on the majority of voting rights.

Sounds like decentralization works in theory, is it the same in practice?

To start, DAO evolves upon DeFi project or, namely, to lead a smart contract — the code-executed program that follows the straight logic of “if-and-then” events. Well, albeit such a computer program is automated, there is inevitably a group of creators who stand behind it. These participants, usually, come together and join in the unity titled the foundation of DAO.

Let’s assume now the case of voting on a proposal within around 300 votes (same as shareholders in the corporate world) where four or five of them belong to DAO’s foundation and its members, obtaining around 80–90% of voting rights (governance tokens).

Besides, generally, DAO’s foundation is the one that presents, promotes, and supports proposals for project changes and developments to the public. Given that, management power across such DAO is highly concentrated, so decision-making itself is overcentralized. Providing interest of very few dominated on the grounds of the less aware majority.

Herein, DAO’s foundation replicates an idea of the company’s top management, while owners of governance tokens remind us of nothing but shareholders of the corporation. The only difference is DAOs operate on no legal and regulatory boundaries, which liberates harmful insider trading and exposes investors’ interests beyond the protection of their needs.

It should be an innovative idea of project governance through DAOs. Yet multiple empirical executions revealed it’s being an informational shield for the substitution of concepts and elimination of urgent technological solutions.

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 19) by Dr. Olga D. Khon

Does a rapid growth of total value locked (TVL) always demonstrate an increase in investments made in decentralized finance (DeFi)? Or could serve to shield pseudo and illegal activity?

In general, TVL represents the value of assets deposited in DeFi. So, the rise of the TVL metric signals more digital coins added to the ecosystem. Meanwhile, there is also a tool that supports an artificial boosting of TVL.

When an investor provides assets (tokens) to the first project in DeFi, it improves this distinct service’s TVL within the total TVL in DeFi. Further, it could be relocated to the next project in DeFi amplifying the following entity’s TVL, while also causing another growth of total DeFi’s TVL, and so on.

Indeed, it’s the same assets possessing only one real value, so following reinvesting does not produce any additional economic utility. Yet, technically, every subsequent iteration is based on different synthetic tokens that are given in turn to the initially invested assets.

This unlimited opportunity for continuous relocation of the same asset value to numerous DeFi services provides ground for attractive advertising to gain double-digit returns, alerting of so-seen success through boosting overall TVL numbers.

In essence, that’s just an enormous climb of systemic risks, which could be fairly concealed by upward (or its closer anticipation) on the crypto market. The very behavior exists in the purely unregulated field of DeFi.

Believe it or not, DeFi has its vital life built on one precise feature — the inter-project arbitrage, bringing a little economic value inside the crypto ecosystem. And, simultaneously, infusing inflationary pressure on jurisdiction these minted digital coins are swapped to fiat and real-world assets.

The more to be done on regulation and purity of capital flows in the crypto sphere. Leading our thoughts on genuine reasons when oversimplicity hidden in overcomplexity serves for, being utilized by malicious actors in DeFi and crypto…

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 18) by Dr. Olga D. Khon

In recent days, we’ve been witnessing the discussion of the ruble and its historical maximum against major foreign currencies since 2015. The argument is strongly applied to falsely convince the world and Russian citizens that the economy is overcoming war expenditures and Western sanctions.

In fact, as I see it, such artificial resilience of national currency was precisely amplified by capital control measures.

Well, the ruble jumped up to 55,7 RUR per one USD. Still, I argue, so seemed-attractive exchange rate reflects nothing, but the pure result of the supply-and-demand law that existed under authoritarian regulation.

Let's cover the RUR/USD and share with you one of the regulatory tricks imposed.

Since the Russian invasion of Ukraine began, citizens were restricted to withdraw 10 000 USD in total. To cash out the rest, it should be swapped into rubles first. The prohibition was forced till September 9, 2022. To remind you, the first financial sanctions were imposed in March 2022. Russia was cut off from global payment systems such as Visa and Master Card, main state banks were sanctioned, and the USA also banned any supply of US dollars to the aggressor’s country.

The panic among ordinary citizens occurred, leading to USD withdrawals and the wiping out of RUR balances. The tremendous collapse began in national financial markets, as well. The demand for USD spiked enormously, and the ruble was balanced around 150 RUR/USD. Besides, the exchange spread jumped up to 30% after the Bank of Russia stopped to restrict its ceiling. Commercial banks tried to attract deposits in foreign currency by greater two-digits rates to stop bank runs but failed.

Thus, in a later war reality, to continue holding foreign currency, citizens in Russia had to pay additional commissions to commercial banks with almost zero deposit rates. Rare those who tried to buy USD and cash them out succeeded since the fresh law allowed them to redeem only the foreign currency acquired prior to March 9, 2022. Right before the massive financial sanctions were revealed on March 11, 2022. The very day the Russian ruble became completely worthless.

There is a tiny opportunity to transfer savings abroad but just to the bank accounts registered far beyond the war began. The financial tool the very few middle-and-beyond class of Russians possessed.

So, would the ordinary citizen be able to purchase USD in reality? It neither could be cashed out nor used for payments, both inside the country and abroad. Moreover, it required additional expenditures on holdings.

What does reflect such bought-in-aggressive-Russia USDs? Even not USD but the solely electronic registry of USD, unrecognized outside Russia. Look quite vain efforts to acquire. Evidently, the demand for USD diminished, that’s depicted in the strengthening RUR/USD exchange rate.

It also matters that the Bank of Russia has shifted from the free-market float to the established exchange rate. This move has already erased the true economic value of this indicator.

Similar conclusions should be made about the Bank of Russia’s key rate and inflation slump, stated in Russia nowadays. Apparently, the ruble is dead but artificially reanimated for the national public to calm down and to revive the state propaganda. That’s for sure! Nonetheless, for how long could it last?

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 17) by Dr. Olga D. Khon

Talking of proof-of-stake protocols and staking services, as an investor, what should be discovered first?

While investigating various solutions for staking opportunities, we could mention that projects used to compete through a few basic, rather intuitive, metrics. Such as measures of return (particularly, APR and APY) and market capitalization folds (like market cap and TVL). The same parameters play the role of indirect risk indicators.

But is it enough? Although these metrics are basic for any investment either in TradFi or DeFi, they’re just basics. By this means, there’s no way to compare reliably two competitive projects or estimate financial initiatives. Because such an approach is just too oversimplified.

First of all, the time value of money needs to be considered. Since one US dollar today and the same amount next month are not equal in the account of the opportunity cost of capital (OCC).

So, the present values of projects’ cash flows should be estimated before the comparison takes place. Thus, net present value (NPV) and internal rate of return (IRR) should be calculated. At least, these two metrics could be applied for a balanced investment decision start from. In addition, return on investment (ROI) possesses a fruitful insight.

The science of investment goes back to the 1950s and made a lot of progress in advanced analytics. Probably, more issues arose regarding the opportunity cost of capital and the choice of a particular rate. Here is a vast range of models proposed by economic scientists and financial scholars, starting from the Capital Asset Pricing Model (CAPM).

From a financial point of view, investment tools for staking services circulated nowadays are not unique. They migrated from traditional financial markets but represent only the first level of investment decision-making tools existing, indeed.

Since for highly dynamic and competitive markets, which staking does represent, diving deeper into the financial alchemy of investments is an essential key to success for modern companies and services.

Thus, welcome all to financial and economic science!

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 16) by Dr. Olga D. Khon

Yes, the modern world is on the edge of recession. While Russia is facing sovereign default.

Financial sanctions have already alarmed the bell! The consequences for the Russian economy are completely damaging!

But what the country beyond external sources of financing stands for?

Russia was implemented in the international financial system for a dozen years. Meaning vast opportunities for country-side borrowings, which left behind the national economy is inevitable, and couldn’t hold even three months — on the recent level.

In a more promising approach, fossil fuel revenues would hardly cover just half of the state budget. To find resources for the second one — under sanctions and the default condition — is purely infeasible.

The case has been exacerbated by the frozen reserves of the Bank of Russia. It’s more than 300 bln. USD — the amount equivalent to the annual state budget! There is no chance the money would ever be back to Russia.

All the efforts the Russian financial regulator took have a short-term effect — amid growing inflation and rising interest rates around the globe*. We’re going to be not observers but involuntary participants of these dramatic events…

Footnotes:

*This Friday, April 09, major stock markets closed in red under the Fed news. On Wednesday, April 07, the Fed March meeting minutes were published. Revealing the prospects to cut the Fed’s balance sheet — by 95 bln USD per month within the intense to raise the interest rate by 50 basis points in May 2022.

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 15) by Dr. Olga D. Khon

Definitely yes, when we remember the mythical Herсules and his Labours…

Yes, again, since the warrior defends the permanent firing point by his body, providing combating soldiers the victory…

And yes, while the pilot hits hostile targets performing a heroic act — to mortality…

But what if a person remains Alone in the space of the blockchain ecosystem? Is it possible to successfully move into a maze of complex constructs beyond the basis of professional partnership?

Let’s imagine an investor decided to allocate his capital to a particular blockchain area. To do this he’d conduct the so-called due diligence or preliminary research to assess risks and potential profits.

On the one hand, the investor could provide this study autonomously, relying on his own experience and knowledge by studying open sources, like documentation, forums, chats, etc. Occasionally, it is a path of «50-to-50» chance: any luck — no luck.

But on the other, the more optimal solution is teamwork! Here are DevOps and Data-engineers ready to reveal the content technical secrets. So as data analysts and data scientists committed to deep-diving through the investing mechanism along with predictive models. That’s how the multilevel survey of the entire complicated processes in blockchain and financial services is conducted.

Each team member should be more conscious about his own role and significance in the entire progress of work. To my opinion, rather little attention is given to the social aspects of such kind of research. As of today, the number of charity funds and organizations in the international blockchain space is growing. They were created to help people caught in difficult life situations.

Thus, to resume the above said: yes, No Man is an island but next to the support of co-thinkers and well-known professionals!

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 14) by Dr. Olga D. Khon

Let’s not dive into the existential sense of Shakespeare’s immortal saying: «To Be or Not to Be». Everybody has a different meaning. Someone sees himself as the favorite of fortune within a prize place. Haunted by intuition, the others cherish to push the very «golden ticket». And the third, even failing over and over, used to leave behind the comet towards the owner’s sacred dream.

Somehow a new phenomenon occurred today — the Homo Expectans. The Person Awaiting is the name. The meeting point is Web3. Here all continue to believe the time and space work for them. In strict compliance with what the great wisdom states: «Everything comes in time to him who knows how to wait».

Now it’s about time to shift from a chronicle of expectations to a coordinate system.

On Monday (Feb. 14) the anticipated Fed Closed Board Meeting was held. No rapid ad hoc regulatory actions occurred toward an inflationary spike in January 2022. This news supported markets with a trading session of growth. Two days later (Feb. 16) the minutes of the Fed January Meeting were published. It sent some confidence and increased opportunities for a while.

Yet everybody agreed geopolitical tensions were dominant. From a financial perspective, the geopolitical vulnerability primarily hit oil and gas pricing up. Besides, oil and gas inflation constituted the absolute 1.5 % of the entire 7.5% of the Jan.2022 Consumer Price Index (CPI) reported. Note, that the higher the inflationary risks, the greater the monetary response markets expect from the Fed.

Finally, on Friday (Feb.18) stock markets closed in red, summarizing the entire week of the slide. Foreseen, cryptocurrencies moved in tandem. The current state is quite alarming, amid diverse economic feeds revealed these days (such as the rise of weekly US jobless claims and corporate dividends growth).

Talking of the future of financial markets, monetary regulation would be the main trigger for sure. Fed would tighten the monetary policy in response to superior inflationary risks for the entire 2022. In my view, the highly sensitive receptivity of global markets would only increase throughout time. All this reminds me of a balancing act, quite nervous and uninsured «catcher in the rye».

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 12) by Dr. Olga D. Khon

The 14th of February! The St Valentine’s Day! But for the global financial world, it’s the date of the unscheduled Fed’s Closed Board Meeting.

Since Jan. 5, 2022, when the Fed’s minutes were published, financial markets have been betting on the number of hikes for the Fed’s Fund rate to be in 2022. And right before Thursday Feb. 10, the majority consensus was about 4–5 times of quarter-percentage growth per year.

But with the realities getting harder, today, many experts predict up to seven jumps in the rate. Besides, more voices are heard for 50 basis points, not a quarter-percentage, at the Fed’s March meeting.

This switch happened on Feb. 10, 2022, upon the Labor Department stated January consumer prices (CPI) spurred to 7.5%, compared with a year ago. It’s higher than the 7.3% economists foreseen before. To point out, this level presents a historical maximum for the last forty years.

Thus, the Federal Reserve urgently announced the Closed Board Meeting to be on Monday (Feb.14, 2022).

Given that, stock markets dropped, summarizing recent Thursday (Feb. 10, 2022). And guess what? Major cryptocurrencies mirrored the path almost simultaneously! Note, this co-movement phenomenon becomes more and more evident, particularly, on downward trends.

Events are seen tougher as far as the Fed comes close to shrinking the quantitative easing programs launched for preceding years of near-zero rates. Finally, the time for a «quantitative tightening» newborn has come.

Nowadays, the financial world focuses its sights on the Closed Doors of the Fed while awaiting the 14th of February 2022! «Do please open Ceasam!»

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 11) by Dr. Olga D. Khon

It is known, that “shorts” are deals for short selling on the financial exchange. This narrative became famous for a man named Isaac La Maire. He, being a humble and subtler shareholder of the powerful Dutch East India Company (VOC), turned into the nouveau riche on the Amsterdam exchange just for a couple of months.

What happened was this. In 1609 Amsterdam was the only one in the world, and trading relied upon complete trust to brokers of the VOC company. Reconciliation of shareholders’ balances, generally, took place once a year.

By then, Isaac La Maire owned almost a quarter of VOC shares. And the bright idea of how to increase the capital occurred to him. Accompanied by his partners, La Maire created a brokerage firm and started massively selling the VOC stocks they did not possess at all. They were hurried to catch the time! Since VOC stocks should be delivered at the end of the year. And by this moment, the price should be substantially low. Promising these gentlemen quite huge profits, albeit, the crash for the exchange.

However, despite everything, the ship of VOC survived the storms of adversities, overcame them, and was victorious in these troublesome days. After all, the States-General of the Netherlands prohibited short sales through free trade.

In 1610–1611, the VOC prices were back growing, and the company started to expand, again. These led several members of La Maire’s company to bankruptcy. Well, Isaac La Maire himself suffered enormous losses. His idea of unsecured shorts failed, and the fiasco pushed him to withdraw from Amsterdam soon.

Four centuries later, shorts are at the stock exchange service, nonetheless. But now it’s a deal when the seller borrows a speculative asset from a broker and executes the short. The asset is sold, and proceeds are deposited into the seller’s account. Hopefully, nowadays, brokers operate by existing assets. They come from the brokerage inventory — either another firm’s customer or partnership brokerage company.

Short deals need to be “closed” by buying back the same amount of asset (“covering”) — to be returned. Sure, the broker gains fees but requires the seller to meet margin requirements. Otherwise, the “bear” trader is fraught with a “margin call”. The case when money should be added to an account to meet minimum capital requirements (maintenance margin) — for the market price falls. Since no replenishment is performed, the broker forces a compulsory sale of trader assets to cover obligations and penalties.

Should we turn on cryptocurrencies? Here, analogies for the traditional financial market are straightforward. Shorts are foremost incorporated through marginal trading on centralized exchanges (CEX), while margin calls are transformed into “liquidations”.

But whether the psycho type of a trader changes? This archetype regardless of any space and time, for sure, remains the same. Deeply convincing the maxim that states: the actual indicator of people and their wealth is the entity they would be since all the money got lost.

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 10) by Dr. Olga D. Khon

While markets are in the midst of falls, what should we stare at for a better understanding of the entire asset movement?

For about three months, we’ve witnessed systematic drops in major exchanges, either centralized or decentralized ones. So, today everyone can easily find an extended answer from analysts worldwide. Actually, I’ve also plunged into underlying reasons and the influence they made, on the instance of Dec 3, 2021; Jan.5, 2022, Jan.17 — Jan.20, 2022 events.

Since then, if we tried to construct the entire picture, what appear before the eyes? Guess, being financiers, we shift to the concept of a speculative bubble at once.

Here is the spot: speculative bubbles are not the same as the soap ones in evidence. Why?

The former could inflate till and collapse gradually, being stretched out in time, not instantly, like the latter. And the time could take months and months. Thus, basically, the positive speculative bubble grows till the boom, so, it leads to a further burst, and the negative mate downstage.

Besides, the feedback theory teaches us of the consequent loops phenomenon. These provide an amplification mechanism for a speculative bubble to spur to a larger extent. But the way, there are numerous kinds of feedback*.

Have you heard, the first-ever known speculative bubble is called the «Tulip Mania»? The incident took place in Holland at the time of the Golden Dutch Age, in 1636–1637**.

The Tulip Mania is an encyclopedic example of a speculative bubble. Imagine, for just a year the price of one tulip bulb jumps to the value of entire houses. People mortgaged their homes and at the end of a year got nothing but a priceless tulip bulb.

Can you imagine that even afterward many people believed the tulip bulb would become highly expensive again? They continued to purchase so-cheap tulip bulbs in a dream of richness. Apparently, they lost…

How could this be? Wasn’t the bubble evident?

Well, it’s the hardest task on financial markets ever: To identify whether the time for a burst is to come. Simply put, when a speculative bubble is booming enough to burst and, finally, would behave like a soap twin.

Nowadays, many indicators serve to do this job. Among the most common of them are the CBOE VIX index*** and the price-to-earnings ratio within its various modifications. Their idea is clear: to measure the indicator periodically to compare to its historical levels, right at the moment of booms and bursts, in particular. And to pin whether markets are in a dangerous area or not yet.

Despite modern markets not possessing an exact recipe for precise numbers still, it steadily accumulates all the knowledge gained. Seems, the key to success is to apply interdisciplinary insights and archetypes of investor behavior to solve lifelong puzzles. And for financial markets — it’s as relevant as ever.

Notes:

* The most essential is price-to-price feedback of a positive (negative) bubble: when the price goes up (down) through investor optimism (pessimism), it feeds back directly to the next price rise (decline). The price-to-GDP-to-price feedback is the further one. Price increases (drops) of assets lead to the growth (tumble) of their value, which boosts (discourages) expenditures, both investments and consumption. Hence, GDP, gross domestic product, while accelerates (descends) signals of the economy to be stronger (weaker). And the last we cover is price-to-earnings-to-price feedback. When prices rise (discard), investors spend more (less) driving corporate profits (losses);

** Holland in the Golden Dutch Age is the place for many modern financial solutions to be created, though (like the first stock of VOC company and the first exchange still traded under NYSE Euronext brand);

*** The Volatility Index of the Chicago Board Options Exchange.

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 9) by Dr. Olga D. Khon

Have you ever wondered why technical analysis seemed to be widely used in trading? Does it have a strong scientific ground and proof? Are they helpful — those figures, patterns, lines of resistance or support, moving averages, oscillators, and the rest?

Well, both professional investors and academics would emphasize there is no science, either.

Long story short.

Technical analysis relies on the point that prices are everything you need to forecast its further movement. It argues price instantly contains all information about assets and markets themselves. Note, this refers exactly to the Efficient market hypothesis (or theory) * and is taught, nowadays, through financial courses worldwide. According to the theory, there could be weak, semi-strong, or strong efficient markets.

Could this be? Even the founder of the efficient market hypothesis claims technical analysis is inconsistent even with any form of market efficiency? Yeap. Namely, should markets be strongly efficient, no one could buy and sell any assets (stocks, bonds, derivatives, commodities, etc.) to make it profitable at all.

Moreover, the evolution of behavioral economics and finance plunged deeply into investment psychology roots. This strand of research proved markets are not efficient (prices do not update all the information correctly). And here should therefore proceed on the Prospect theory and the cardinal academic work of Professor Daniel Kahneman and Professor Amos Tversky**.

The renewed understanding helped to shift from maximizing utility framework to the value function within reference point and loss aversion puzzle.

To represent the idea, let’s imagine you’re walking on the street on a sunny day. And, suddenly, your friend gifts you a banknote of 100 USD, just because the day is nice. Would you be happy? Now, please, measure your happiness for yourself.

Next, imagine again the walk through the street on the other day same sunny as it was before but, accidentally, you lose a banknote of 100 USD. Would you be sad? Would your sadness of missing 100 USD be more than your happiness of gaining an equal 100 USD? These phenomena represent the reference point and S-shaped value function indicating losses outweigh gains.

Wait a minute… Modern research asserts technical analysis does have no scientific grounds, so do professional think tanks within hedge investors… Then, why do some experts recommend new entrants*** and the general public to learn technical analysis while joining the financial market?

Guess, the reason is technical analysis could be taught quickly sharing the starting point for trading, at the beginning. It gives a simple explanation of how to make decisions, then. Occasionally, it provides just a matter of chance for profitable trading. So, please, be careful!

Notes:

* Presented by Professor Eugene F. Fama, Professor at Chicago Booth School, Nobel laureate (2013 Prize in Economics)

** Amos N. Tversky was a Professor at Stanford, and Daniel Kahneman is a Professor at Princeton University. Six years after Tversky’s death, Kahneman received the 2002 Nobel Prize in Economics for the work made in collaboration with Amos Tversky

*** Retail investors, in particular.

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 4) by Dr. Olga D. Khon

Have you ever heard of financial theory contradicts practice, or goes far apart of it? You’d be surprised, that’s not entirely the point, at least, for lively science moving with the times. Now and then theories became obsolete but while in origin they caught a unique shot of the real world to make it learned and improved.

A tough job is to progress all the time, right? Seems true… So, it’s also quite exciting, cause science never blocks.

Work in practice? Try, prove it! Deal!

First of all, should anyone be fond of financial markets and modern exchanges, the research of Professor Robert B. Wilson* is a compiling prerequisite for professional expertise. Here is the discovery of the market design field. One is the theory of auctions serving as the ground for order execution and auctions on centralized exchanges (CEX). Next are matching markets that underlie recent trading on decentralized exchanges (DEX) and over-the-counter (OTC) services.

These approaches are based on the disclosure of orders placed within trading activity on the exchange. They worked efficiently except on the occasion of the so-called iceberg, a hidden order with no records in the order book since being allocated. So, no one knows such orders placed in the system, aside from the sender. While icebergs proposed by some trading platforms, severely increase the slippage of trades and harm the transparency of financial activity. Hidden orders illustrate an example of a few individuals trying to manipulate common rules for their own good.

Primarily, icebergs hurt centralized exchanges in TradFi. And, nowadays, there is no way for it in DeFi, it’s safe but for how long?

Moreover, such sleazy behavior (kind of icebergs and insider trading) hurts the market, sharpens its overall efficiency, and provides inconsistency anyway. And here is the question: what the science said of it?

Well, the answer underlies the concept of information asymmetry proposed by Professor George Akerlof** in his famous paper towards “markets for lemons” but the way, refused several times before being published in 1970. This framework transformed finance is two major problems: moral hazard and adverse selection. Hardly any financial research paper could overcome these issues.

For DeFi, information asymmetry is already reflected in vast arbitrages and algorithmic strategies, and for more — in the case of Maximal Extractable Value (MEV) trading for a few units not for the entire community.

Luckily, markets are evolving, and so is science. Besides, DeFi with its data transparency is the right place for those sharing insights and ideas!

Notes:

* Robert B. Wilson is a Professor at Stanford, a Nobel laureate (2020 Prize in Economics);

* George A. Akerlof is a Professor at Georgetown, a Nobel laureate (2001 Prize in Economics)

* Date of initial publication: December 31, 2021

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 3) by Dr. Olga D. Khon

The miracle of cryptocurrencies reflects the idea of inflation locked or, at least, being under control. Everybody knows inflation is a depreciation of value, and that’s an undesired phenomenon. Coming to a real-life, who’s happy when their portfolio or wallet weakens?

In fact, inflation bears benefits under economic growth conditions, but hardly anyone likes surging inflation at times of extended crisis as we observe nowadays throughout the world.

So, do cryptocurrencies provide an inflation hedge for sure? On the one hand, value depreciation primarily exists in every cryptocurrency domain. It’s the case even for those programmed to be inflationary protected by a fixed number of coins circulated (like Bitcoin) within a self-burning mechanism. Eventually, the problem could arise of negative inflation in digital coins, as well.

A bit puzzled?

Foremost, kindly point: out that the money supply could be boosted by the increasing velocity of money, even when the number of coins is fixed. A common example is an amplification mechanism of lending. The more times one piece of currency passes the cycle, the higher its inflation risks. Thus, there are several measures of money supply (titled money aggregates*), and coins volume (similar to “M0” or cash and demand accounts) is one of them.

The next vital thing is to note that “printing money” means not only the emission itself (physical printing of notes and coins). It also happens through the calibration of interest rates (like the Fed Funds rate) and quantitative easing programs (and the analogues) influence indirectly money demand.

Well, if cryptocurrencies expose inflation, then how to measure it practically?

One way is quite straightforward. I suggest following the Consumer Price Index (CPI). Remember, it serves to measure inflation in financial markets. While computing CPI, the number of essential products is selected to a basket. In the case of cryptocurrencies, these products could be substituted by tokens valued and traded in a particular digital coin.

Since the basket was constructed, prices of tokens should be extracted for the next index calculation, based on, let's say, weighted-average price. This price index (denoted as “Digital Coins Price Index” or DCPI) estimated on a starting date would indicate the 100% ground. Afterwards, to assess any recent inflation level for a specific cryptocurrency, DCPI could be re-calculated on request for various periods.

Finally, why do we need an inflation measure, like DCPI, for cryptocurrencies with its perspective of higher than elsewhere returns?

First, such unified metrics help to compare investments throughout various domains more objectively. It places cryptocurrencies to the point of conscious decision-making when investor compares both returns (APR and APY**) and asset value depreciation (DCPI). Moreover, the measure of inflation for cryptocurrencies would guide throughout recent developments, within explicit parallel between DeFi and TradFi markets.

Notes:

* There are labels attributed to standardized monetary aggregates: M0 (physical paper and coin currency in circulation, plus bank reserves held by the central bank also known as the monetary base); M1 (all of M0, plus traveller’s checks and demand deposits); M2 (all of M1, money market shares, and savings deposits); also, M3 and L could be calculated.

* APR and APY are basic metrics of returns in DeFi, where APR states for annual percentage rate, while APY denotes the annual percentage yield.

Date of initial publication: December 26, 2021

Published on Medium.com  "TradFi and DeFi: Broaden Horizons" (Note 2) by Dr. Olga D. Khon