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  • 💰 Tokenization: Crypto’s Ultimate Use Case, Yield on Crypto Cash, Lido: Crypto's Biggest App 💧

💰 Tokenization: Crypto’s Ultimate Use Case, Yield on Crypto Cash, Lido: Crypto's Biggest App 💧

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Internet Capital
July 14, 2024

gm friends —

Today’s newsletter is my first shot at the new structure (see here). Let me know in the comments how you liked it (or what else you want to see)!

Today’s topics:

  • ❓ Markets: A Mixed Bag

  • 💰 Tokenization: Crypto’s Ultimate Use Case

  • 💸 Generate Yield on Crypto Cash

  • 💧 Lido: Crypto’s Biggest App

Check out this week’s YouTube show for a deeper dive!

Want to be a better crypto investor? Subscribe, follow us on X and check out our YouTube Channel to never miss an update - thanks for reading!

Markets

My friend Pepe (below) epitomizes current market conditions. Everyone is just trying to hold on through the chop.

Last week, I went on a long spiel about understanding your risk tolerance & time horizon. So today I’m rewarding you with a break from my ramblings:

  • BTC is UP ~7.5% on the week to ~$60,000

  • ETH is UP ~9.2t% on the week to ~$3,200

  • Crypto Total Market Cap is UP ~8% on the week to ~$2.16 T

From my perspective, sentiment is still mixed among investors. Here are some notable takes:

*PS - the markets section will have a consistent structure moving forward. Like today, I will be providing an easy-to-digest breakdown of the prices/returns and some market analyses from top traders & investors. No more of my rambling (unless I’m really feeling it) 😆

Tokenization: Crypto’s Ultimate Use Case?

Tokenization is increasingly viewed as one of crypto’s most promising use cases. This week the spotlight is on BlackRock’s tokenized fund “BUIDL”, which has surpassed $500 million in assets under management.

Tokenization is the process of creating blockchain-based tokens that represent ownership of some underlying asset. Anything can be tokenized - stocks, bonds, data, loyalty points, etc.

Tokenizing assets offers several benefits including interoperability with blockchain-based financial applications, enhanced transparency and liquidity, and reduced fees due to lower overhead for issuers.

Launched in March 2024 in collaboration with Securitize, BlackRock’s BUIDL fund is leading the tokenization charge. Other firms including Fidelity and Goldman Sachs have also announced tokenization initiatives.

BlackRock’s involvement is particularly noteworthy though, given its influence on Wall Street. When BlackRock innovates, others tend to follow. Expect to see a flurry of new tokenization initatives on Wall Street in the wake of BUIDL’s success.

The fund’s growth is also significant for Ethereum, the blockchain where BUIDL was issued. Ethereum's utility as a platform for financial innovation is becoming more clear to traditional players.

With the Ethereum ETF set to launch next week, investors will have a simple way to bet on the tokenization trend. Definitely a narrative to keep your eye on.

Generate Yield on Crypto Cash

This crypto crash has me thinking about cash. Every good investor needs a strategy for their idle cash. Otherwise, they’re leaving money on the table.

In traditional finance, the answer is simple: keep excess cash in a money market fund. Money market funds (MMFs) invest in highly liquid, short-term debt instruments such as U.S. Treasuries, cash, and cash equivalents.

Since MMF investments are tightly linked to cash, they can be converted back to cash quickly with little risk of loss. In the meantime, investors earn interest on otherwise idle cash.

Today we’re exploring crypto equivalents of MMFs and how you can use them to maximize crypto returns.

Understanding Stablecoins: Crypto Cash

To understand crypto MMFs, we must understand Stablecoins.

Stablecoins are blockchain-based tokens designed to maintain a stable value (hence the name). The most common stable value targeted is $1.

I say “designed” and “targeted” because some stablecoins are better at this than others, based on how they maintain a stable value. See Terra USD for a stablecoin gone wrong…

Terra Luna’s Stablecoin Collapse

Some Stablecoins (such as USDC) are issued by regulated U.S. companies and hold at least $1 of assets for every stablecoin they distribute. Others are issued by crypto protocols/apps and use automated systems to create and manage decentralized crypto-backed stablecoins.

Since creation and management methods differ, each stablecoin has unique risks and advantages. A deep dive is for another time, but for our discussion just understand: Stablecoin = Crypto Cash.

Crypto Money Markets

Crypto money markets exist on apps called “Decentralized Money Markets”. These apps facilitate crypto lending and borrowing without a third party via blockchain-based smart contracts.

Users of these apps can borrow and lend stablecoins, which enables a dollar-based decentralized money market. In short, investors can get a cash yield directly on the Internet without a brokerage account 🤯

Alternatives to decentralized money markets for crypto investors include:

  • Hold stablecoins on centralized crypto exchanges such as Coinbase. These exchanges often pay interest on stablecoin holdings

  • Lend stablecoins using a FinTech company such as Nexo

  • Keep cash in a MMF in your traditional brokerage account and transfer funds to a crypto exchange when you want to buy

So what are the advantages of using a decentralized money market over these methods for generating yield on idle cash?

  1. Accessibility - by keeping your stablecoins in decentralized money markets, you can withdraw all of your funds and convert to any crypto asset at any time (because you’re on the blockchain). Crypto exchanges/fintechs limit the assets you can purchase and often have withdrawal limits. Converting funds from a traditional MMF to crypto takes days…

  2. Functionality - stablecoins deposited in decentralized money markets can be used for other purposes or in other crypto apps. For example, you can instantly use your stablecoin deposits as collateral to borrow another asset without anyone's approval. This isn’t possible or is very difficult to do using the other methods.

  3. Counterparty Risk - counterparty risk is mitigated for decentralized money markets because they are over-collateralized and have well-tested risk-management systems. It’s also not possible for them to gamble all your money away because you’re responsible for custodying your own funds on the blockchain (*cough cough FTX).

    An important caveat: decentralized money markets have other risks not present in the other methods (smart-contract risk). While these aren’t negligible, they’re generally small for battle-tested apps.

  4. Return - returns are often higher on decentralized money markets. While this might be explained by the potentially higher risks, it is still an opportunity to earn a better return on your cash in a crypto environment.

Bottom Line

Decentralized money markets are a key piece of crypto infrastructure. As an investor, you can use them to earn a cash yield while you’re waiting to make your next investment on the blockchain.

If you want to learn more about how to use decentralized money markets, check out Aave’s (one of the top decentralized money markets) website.

Lido: Crypto’s Biggest App

Overview

What is it?

Lido is a liquid staking protocol on Ethereum and crypto’s largest app with over $30 billion in total value locked (TVL).

How does it work?

💧Lido enables liquid staking. Crypto staking is the process of committing tokens as economic collateral to help secure a blockchain network (proof-of-stake). Stakers typically earn newly issued token rewards (interest) in return for committing tokens.

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Lido’s liquid staking protocol lets users keep control of their tokens while staking by issuing tokens that represent the staked assets. It works like this:

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🥩 Users deposit tokens on Lido. The Lido protocol facilitates the staking of deposited tokens and distributes stTOKENs to the user in return. stTOKENs represent the underlying staked tokens and can be redeemed for them at any time.

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💲stTOKENs are rebasing tokens, which means their balances automatically update to reflect staking rewards. As users’ staked tokens accrue rewards, Lido updates holders’ stTOKENs balances to match the new rewards. This ensures the supply of stTOKENs tracks the supply of the underlying staked tokens.

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🏦 stTOKENs can be used in other crypto applications, enabling users to receive staking rewards while conducting other transactions

How can you use it?

1. Deposit ETH on Lido and receive stETH.

2. Hold stETH to receive staking rewards

3. Deposit stETH to Aave to earn lending interest AND continue receiving staking rewards

4. Borrow stablecoins from Aave against your stETH collateral

5. Buy a lambo

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For additional information, see Lido’s official documentation

Other News

Thanks for reading!

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Nothing in this newsletter is meant to be taken as legal, tax, investing, or other advice. Internet Capital is for educational and entertainment purposes only. All views are our own, and not representative of any organizations with which we are affiliated. For any business partnerships please reach out via the email [email protected]

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