16th September 2024 > > The maxis don't like it up 'em.

tl;dr

A recent development that will annoy the maxis, which almost certainly means it is a good development, though it does raise some fundamental questions I am yet to grapple with concerning one’s crypto portfolio allocation.

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A mildly disappointing start to the week, except for the very exciting news that I am now on level seven aka “Legendary” (at the very least, in my own lunchtime) on Hamster Kombat.

Curious Cryptos’ Commentary – The maxis will not like this

Coinbase is not popular amongst the maxis. It is a centralised, TradFi firm that is publicly listed and in full compliance with all rules and regulations, though Gensler and his cronies at the SEC wish it were not so.

Coinbase released its own blockchain called Base not so long ago, which has proved wildly successful, for obvious reasons. Again, those reasons annoy the maxis intensely.

Wrapped BTC in the form of cbBTC (Coinbase BTC) is now live on Base:

https://x.com/coinbase/status/1834208544247144949

The process of “wrapping” a coin allows a synthetic version of that coin to be used on a non-native blockchain. The theory is relatively simple, though the practical implementation is somewhat more technically difficult. In essence, you send your coin to a smart contract which then sends you the wrapped coin on the alternative blockchain. The contract holds the original coin as collateral against the new synthetic coin. This synthetic coin can then be used within the new ecosystem, and at any time can be swapped back for the original. In theory, the value of the wrapped coin should be the same as the original.

Quick note for UK taxpayers – if you want to bring forward CGT gains to be taxed at 20% rather than at 45% or more after Rachel Reeves’ budget on 30th October this year, swapping from an original coin to a synthetic one with almost the exact same economics allows you the luxury of paying “only” 20% tax on gains to date. Personally, I am furiously taking advantage of this very small window of opportunity across my entire crypto portfolio.

There are issues and problems with this simplistic take on wrapping coins. There is contract risk, which should never be underestimated, though it is exceedingly difficult to satisfactorily quantify. Associated with contract risk is the potential for hacks from scammers. Bridge hacks are very popular amongst Russian and North Korean feral scumbags who try to prey on us daily, merely to garner approval from their respective murderous dictators. Execution risk is ever-present in the form of a fat finger, and frankly the documentation risk of inaccurately recording your DeFi involvement has caused many people many problems. Including me, on one very disappointing occasion a long time ago.

However, there are many benefits too. For example, this wrapping concept has allowed the rise of liquid staking tokens which we have explored in the past. In the long-run it is encouraging the coalescence of different blockchains from a user’s perspective. It is likely that in the not-too-distant future, crypto users will become agnostic about the underlying blockchain technology. Well, all users save the maxis.

…

cbBTC allows for greater use of BTC. As Coinbase explains:

“cbBTC is onchain. 

cbBTC is an ERC20 token that is backed 1:1 by Bitcoin (BTC) held by Coinbase. This means millions of BTC holders can now securely access DeFi apps on @base and Ethereum ecosystem – with more chains coming soon.”

The key advantage that cbBTC has over all the other wrapping options for BTC is plain and simple.

Coinbase is the custodian for most, if not all, of the issuers of spot BTC ETFs, and other institutional users of cryptos. Milk Road claims that 10% or so of all BTC supply is now in custody at Coinbase, and I have little reason to doubt that claim. If Coinbase custody is not 100% secure, we all have a huge problem, regardless of whether one owns cbBTC or not.

This development will likely result in even faster adoption of Base, and it will also extend the utility of BTC, with potentially far-reaching ramifications for my long-held investment portfolio thesis of 70% BTC/25% ETH/5% alts.