bookmark_borderXRP purchasers back Ripple, arguing that it is not a security

Breaking down the ongoing SEC v. Ripple case clarifies the crucial meaning of it for the whole crypto industry.

On Dec. 22, 2020, the United States Securities and Exchange Commission filed a complaint against Ripple Labs. The complaint essentially alleged that Ripple had engaged in a multi-year, sustained practice of illegally selling unregistered, non-exempt securities in the form of its XRP tokens. 

This complaint, having been filed on the last day of former SEC Chairman Jay Clayton’s tenure at the commission, led to a considerable volume of public commentary, as is not unusual for SEC litigation against major players in the crypto space. What is unusual about SEC versus Ripple is the reaction from a sizable segment of XRP purchasers.

Related: SEC vs. Ripple: A predictable but undesirable development

On Jan. 1, 2021, a group of XRP purchasers led by attorney John Deaton filed a petition seeking a writ of mandamus in the District of Rhode Island, asking the court to force the SEC to exclude their XRP tokens from the pending litigation against Ripple on the grounds that the plaintiffs had not purchased investment contracts. The petition argues that the SEC, under the leadership of then-chairman Clayton, abused its authority on a politically-motivated vendetta against Ripple. Regardless of Clayton’s motivations, the petition deserves closer analysis.

Public response to the petition

The public reaction to the SEC’s lawsuit was swift and powerful. Within days after the action was announced, the market capitalization for XRP had fallen an astounding 63%, losing about $15 billion in value. While a review of pricing data maintained by CoinMarketCap indicates that much of that value has recovered as the crypto market has exploded, as of this writing, XRP has not reached the price it was trading at before the litigation was initiated — as has been the case for the other top cryptocurrencies, such as Bitcoin (BTC) or Ether (ETH), which were up from $19,500 on Dec. 15, 2020, to more than $60,000 on March 14; and from $589 on Dec. 15, 2020, to more than $1,924 on March 13, 2021, respectively.

A large part of the problem, from the XRP purchasers’ perspective, is the completely understandable decision of a large number of crypto exchanges and platforms to delist XRP or to halt sales to U.S.-based customers. Binance.US, Bittrex, Blockchain.com, Coinbase, Crypto.com, eToro, OKCoin and Wirex (a crypto payments enterprise) are among more than 50 businesses that have suspended trading in XRP. Since regulated exchanges are not allowed to trade in unregistered securities, this is a rational decision for these businesses, but the consequence of these changes is likely to be devastating to Ripple and persons holding XRP tokens.

Unfortunately, the bad news just keeps coming. The drop in price and delisting of XRP has also been accompanied by the liquidation of XRP holdings by U.S.-based investment firms such as Grayscale and Bitwise Asset Management. Regardless of what happens, this is likely to make major investors cautious about XRP for the foreseeable future.

Deaton’s claims, and is XRP a security?

As mentioned above, on Jan. 1, 2021, a petition was filed in Rhode Island seeking to halt the SEC’s claims as to XRP owned by a group of purchases. John Deaton, an attorney with class action experience, claims in the petition that he and others like him did not buy XRP as an investment or consider it to be a security. Paragraph 45 of the complaint suggests that XRP is a currency, virtual currency or commodity, or utility token, and, therefore, not a security. In support of this conclusion, Deaton argues that XRP has a number of uses that essentially preclude it from being classified as a security.

The memorandum in support of the petition suggests that XRP has a range of legitimate functions, such as increasing the speed of international payments, acting as an alternative payment or a currency substitute, and serving as a medium for foreign exchanges. The petition claims that these use cases prove that XRP is not a security. Unfortunately, the SEC has never accepted the notion that utility by itself means that an asset is not a security. According to the SEC, the question is how the asset is marketed and the reasonable expectations of purchasers.

The SEC’s position in this regard is not unique to digital assets. For example, the SEC issued a release in 1969 explaining that while whiskey has utility as an alcoholic drink, a share of whiskey receipts can still be an investment contract:

“The purchaser of the whisky warehouse receipt is not being offered or sold such receipts with a view to acquiring and taking possession of the whisky. Rather, the purchaser in these cases is making an investment under an arrangement which contemplates that others will perform services which will increase the value of the whisky and will also eventually sell the whisky under circumstances which are expected to result in a profit to the purchaser-investor.”

This analysis applies even if the warehouse receipt gives the purchaser the right to acquire the whiskey. Similarly, rare coins have all kinds of utility. They can be a collector’s item, as well as a store of value or even a medium of exchange. However, the sale of coins, especially when combined with services such as assistance in selecting and reselling when desired, can also be an investment contract, again without regard to whether the purchaser actually takes possession of the asset and could display or otherwise use it.

In the case of the XRP token, the utility that is available is not, in and of itself, sufficient to ensure that the token falls outside the definition of an investment contract. Instead, if you parse through the annoyingly complicated Howey Test, there is an argument to be made that these assets are indeed securities notwithstanding Deaton’s allegations.

Does XRP fall within the Howey investment contract test?

The Howey Test requires that there be a payment of money or something of value, in a common enterprise, where the purchaser is expecting a profit, based on the essential managerial or entrepreneurial efforts of others. Most of those elements are indisputably present in the case of XRP, and the last is at least arguably present.

Purchasers buy XRP for fiat or other convertible digital assets or sometimes acquire them by providing services. All of these are things of value that satisfy the first element of the test. Moreover, the fortunes of the company and all of the purchasers rise and fall together, as the success of the XRP token itself rises and falls.

Paragraph 56 of Deaton’s complaint, in fact, bemoans the fact the drop in price caused by the SEC’s action resulted in “multi-billion-dollar losses of innocent third parties.” This is only possible because the fortunes of everyone are tied together along with the successful development of XRP. Finally, the profitability and success of XRP are clearly due to Ripple’s efforts. Even an examination of the use cases suggested by Deaton points to this.

XRP’s numerous use cases

In the memorandum in support of the petition, there are numerous allegations about use cases for XRP that explicitly depend on the efforts of Ripple and individuals associated with the company:

  • Paragraph 78 explains how Ripple’s “partner XAGO” will use XRP to move money across Africa.
  • Paragraph 84 touts the efforts of SBI/Ripple Asia’s CEO to have the next World’s Fair in Japan accept only XRP as payment.
  • Paragraph 95 recites Ripple’s investment in MoneyTap, a subsidiary of SBI, and SBI Asia’s decision to use XRP.
  • Paragraph 105 discusses Ripple’s partnership with Novatti to enable real-time transfers between Australia and Asia.
  • In paragraph 115, the memorandum explains how Ripple’s decision to hire a Goldman Sachs former executive has improved the prospects for XRP’s role in FX markets.
  • Efforts of Ripple CEO Brad Garlinghouse to improve Ripple’s role in central bank digital currencies are referenced in paragraphs 135 and 136.

The common thread running through all of these allegations is Ripple’s involvement in the process of promoting and developing XRP and its functionality.

Deaton’s petition suggests that none of this matters because many of the named petitioners and thousands of other purchasers had never heard of the Ripple (the company), or its executives, until after the SEC’s suit. However, the Howey Test does not require that purchasers know the identity of those managing the asset; if the purchasers are waiting for others to provide the entrepreneurial efforts and experience, the element is satisfied.

In addition, paragraph 163 of the memorandum supporting the petition explains that some of those who had heard of the company were aware that:

“Ripple executives and former executives have publicly stated that XRP was not designed for retail investors. These Ripple executives have stated that XRP was not designed to pay for a cup of coffee. Instead, it was designed for the banks and money service providers.”

Unfortunately for the petitioners, this does not support the conclusion that the petitioners hope for. Certainly, for those retail purchasers who knew that XRP’s functionality was not designed for them, the only motive that makes sense for a decision to buy the tokens anyway would be the hope that the tokens would appreciate in value. That reality is acknowledged in paragraph 164, which tacitly admits that “some investors may acquire XRP with the hope that it will increase in value.” That satisfies the most debatable element of the Howey Test.

Despite the presence of a number of potential use cases, the reason most retail investors acquired XRP is likely the belief that it was going to go up in value. If they had purchased it for any of the uses listed in Deaton’s complaint, they could have used it. If they bought thousands of tokens with no such use in mind, the only realistic explanation is that it was being purchased as an investment, in the hopes of appreciation. That conclusion is bolstered by the petition’s repeated allegations about the loss of billions of dollars in value, which would not have been needed if the only XRP purchases had been those that were needed in order to access its functionality.

Does this justify the SEC’s action?

While the foregoing analysis indicates substantial flaws with the arguments in Deaton’s petition and also supports the conclusion that XRP really is an investment contract, this should not be taken as justification for the SEC’s decision to bring an enforcement action against Ripple at this point in time. The entire thrust of the SEC’s complaint is that Ripple has repeatedly violated the U.S. Securities Act of 1933 by selling unregistered securities in a continuous distribution that has been ongoing since 2013.

Ripple’s answer to the SEC’s complaint accurately points out:

“The SEC filed this Complaint 8 years after XRP was created, 5 years after the DOJ and FinCEN characterized XRP as a virtual currency, and after more than 2½ years of investigation during which the SEC allowed Defendants to continue to distribute XRP, allowed the XRP open market to grow, and allowed millions of market participants to rely on the free and efficient functioning of that market.”

The reality is that the choice by the SEC to bring an enforcement action at this late date could cripple the United State’s ability to participate in a growing industry or influence the direction of its growth. In addition, it seems profoundly ironic that in an effort that is ostensibly designed to protect investors, the commission is taking an action that does indeed cause them billions of dollars in losses. Treating XRP as a security sets a precedent potentially subjecting thousands of exchanges, market-makers and others in the crypto markets to oppressively burdensome regulatory requirements not just with regard to XRP but potentially other widely-held cryptos as well.

Deaton’s petition ascribes a wide range of improper motives to Clayton, which this comment does not address. Regardless of why the lawsuit was initiated, it is clearly one of the most, if not the most, important crypto case filed to date, and it clearly poses the possibility of undesirable outcomes. Perhaps Gary Gensler, in his probable role as SEC Chairman, can weigh in on this, and if nothing else, influence settlement discussions to minimize negative consequences from the suit.

In the meantime, it is critical that entrepreneurs do not fall into the trap that seems to have convinced Deaton and the other named plaintiffs. The existence of some functionality for a crypto token, whether as a currency, commodity or “utility token,” is simply not enough to prevent a digital asset from being treated as a security under the Howey Test.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Carol Goforth is a university professor and a Clayton N. Little professor of law at the University of Arkansas (Fayetteville) School of Law.

The opinions expressed are the author’s alone and do not necessarily reflect the views of the University or its affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

bookmark_borderEthereum network in a fee spin: Can the Berlin upgrade save the day?

The upcoming Berlin update contains EIPs aimed at reducing transaction costs, but it may not provide a long-term solution.

Though Ether’s (ETH) value has continued to showcase increasing signs of stability around the $1,800 range over the past fortnight or so, users of the premier altcoin’s network have been faced with rising gas fees as well as increasing network congestion issues. To put things into perspective, since summer last year, a time when the DeFi boom was starting to peak, Ethereum’s network fees have more than doubled.

While this fee increase quite directly relates to ETH’s increasing value, there is no denying that it also clearly shows growing demand for ERC-20 tokens, stablecoins, as well as various decentralized finance-based offerings in general.

As is evident from the chart below, costs of facilitating transactions on the Ethereum network have increased significantly over the last few months, with the average transaction fee touching an all-time high of $39.49 on Feb. 23.

Not only that, on March 20, the average transaction fee is at $16, a price point that is quite high, especially for developers and those looking to facilitate small value transactions.

Also, as nonfungible tokens continue to gain mainstream traction, it stands to reason that transaction costs on the Ethereum network will continue to rise in the near future. Thus, until a viable scaling solution is implemented in the near term, network congestion and high transaction costs are likely to continue, especially as the NFT sector continues to thrive.

Is the network broken beyond repair?

Providing his thoughts on Etherum’s existing state of affairs, Jay Hao, CEO of cryptocurrency exchange OKEx, told Cointelegraph that Ethereum is definitely at a point of inflection along with other layer-one solutions, adding: “They are being forced to address their issues of rising fees and network congestion fast — or risk losing out to competitors who can offer lower fees and higher throughput.” He also added:

“Ethereum still has by far the largest developer community, as well as the number of DApps, built on it, but still, complacency is a killer.”

And while Hao does believe that Ethereum will eventually be able to cope with its issues at some point in the future, the crypto community no longer wants to wait until the transition to proof-of-stake and Eth2 has been complete, especially since an increasing number of developers and other network users are starting to expand their operations and switch to alternative ecosystems.

For example, many platforms have undertaken the integration of different versions of Tether (USDT) and USD Coin (USDC) — a la Algorand, Tron — allowing stablecoin traders to transact quickly and at a fraction of the cost currently being levied by the Ethereum network.

Moreover, an increasing number of EVM-compatible blockchains — OKExChain, Binance Smart Chain, etc. — have sprung up and are challenging Ethereum’s dominance. “Competition is healthy, and it forces the incumbents to do better and focus on providing users with the experience they deserve,” Hao opined.

However, Jack O’Holleran, CEO of Skale Labs — a decentralized Ethereum compatible layer-two PoS network — believes that the network’s rising gas fee issues will be alleviated as scaling efforts continue to be worked on, adding:

“The Ethereum mainnet will evolve into a base layer of security and settlement. Scalability layers will sit on top of Ethereum, providing functionality for smart contract execution and low gas fees. We will also see the rise of application-specific blockchains, which provide more price efficiencies with greater predictability.“

What is the Berlin upgrade?

After months of planning, the Ethereum community recently laid out its implementation timeline for “Berlin,” with the upgrade slated to go live on the Ethereum mainnet at block 12,244,000, or on April 14. In this regard, it bears mentioning that a total of four Ethereum Improvement Protocols will be deployed as part of Berlin.

These include EIP-2565, which seeks to reduce the cost of the ModExp precompile, which will help with calculating the gas cost; EIP-2929, a proposal that will “increase” certain gas costs; EIP-2718, which introduces a new transaction module; and lastly, EIP-2930, which includes a transaction type with optional access lists.

To help make the upcoming transition smoother, Ethereum node operators have been advised to upgrade their operations to nodes that are Berlin-compatible before April 7. That being said, exchanges, wallet service providers and Ether token holders are not required to make any modifications on their end.

Will “Berlin” really help ease Ether’s growing pains?

To gain a better perspective of whether the Berlin upgrade will really shake the Ethereum ecosystem up and help mitigate many of its existing issues, Cointelegraph spoke with Maxim Blagov, CEO of Enjin — a blockchain-based gaming and DApp ecosystem. In his view, the Berlin update is an important step toward creating a better user experience on Ethereum, especially in terms of estimating gas costs, adding:

“We can’t assume that it will have a significant impact on cost per transaction. Deep structural changes will need to be made in order to bring Ethereum in-line with user expectations. Newcomers to the NFT market often expect free, instant transactions, and unfortunately, nothing like this will be achievable on the current state of Ethereum.”

Additionally, “Winston,” a moderator for yield farming aggregator Harvest Finance, told Cointelegraph that he does not see any major fee reduction happening as a result of the upcoming Berling upgrade, adding: “There are few EIPs included that can help users save gas, but there is also EIP-2929, which actually increases fees in some transactions.”

Hao believes that while the upcoming update may help in reducing gas fees, by and large, the community will only start to see more satisfactory solutions to Ethereum’s problems in the mid-term. Furthermore, he added that while Berlin may be able to ease out gas fee problems temporarily, it will not be able to address the network’s long-term scalability issues.

In his view, Ethereum will need to work on incorporating rollups and other layer-two scaling solutions, such as Polygon, in order to provide meaningful and sustainable midterm solutions to its problems while Ethereum 2.0 is rolled out in its entirety.

However, providing a contrarian take on the matter, O’Holleran stated that the upcoming upgrade is quite robust and holistic in its outlook, and when combined with EIP-1559, it is an effort to make fees lower and more predictable:

“Miners will gradually be paid less over time, but in doing so, it will make Ethereum more usable and increase the value of the network, which, in turn, ends up being a win for both miners and developers if managed appropriately.“

EIP-1559 and more

The most anticipated upgrade to the Ethereum network — EIP-1559 — is slated to go live sometime in July. The proposal will be packaged along with the “London” hard fork and will seek to fix numerous issues with Ethereum’s user experience. For starters, it will look to redirect Ethereum’s native gas fee to the network itself instead of miners. This fee will then be burned, allowing for a gradual reduction in the total supply pool of ETH.

Related: Ethereum at a crossroads: Ether community turmoil over miner reward fees

On paper, the upgrade seems like a welcome change, however, it’s expected to reduce reward ratios by a whopping 50%, something that has irked Ethereum’s mining community so much that many have even advocated for a demonstrative network takeover — potentially threatening the security of the network.

Thus, with all of these moves aimed at fixing the fees issue laid out on the table, it remains to be seen how the Ethereum network will handle the increasing demand and if it can deliver a solution that is welcomed by all in a speedy manner.

bookmark_borderBitcoin price slides 5% after failing to break $60K — Here’s why

BTC dropped below $56,000 on Sunday as several bearish signs emerged.

The price of Bitcoin (BTC) dipped below $56,000 on March 21 after repeated rejections by the $60,000 resistance level throughout the past four days.

BTC/USD 1-hour candle chart. Source: Tradingview

Despite getting closer to cleanly breaching past the key technical level, Bitcoin has been showing weakness in the $59,000 to $60,500 range.

There are three major reasons behind the stagnation: the rise in Treasury yields, bearish movements on Bitfinex, and the struggle of the risk-on market.

High U.S. Treasury yields cause risk-on markets to slump

When the 10-year U.S. Treasury yield rises, the appetite for risk-on assets tends to drop because investors can seek safer yield-generating alternative in Treasury bonds.

Although Bitcoin has not seen tight correlation with the Dow Jones, it has seen close correlation with tech-heavy indices, like the S&P 500.

This suggests that the strong momentum of the U.S. Treasury bonds is leading risk-on assets to stagnate, bringing down Bitcoin’s momentum in tandem, as Cointelegraph previously reported.

The U.S. Treasury yields began to break out above key levels starting March 19. Since then, Bitcoin has been consolidating, struggling to rise above $60,000.

Holger Zschaepitz, a market analyst at Welt, said:

“Treasury yields breached more key levels as bond traders boosted bets that the Fed will allow inflation to overshoot as US economy recovers. 10y yields top 1.75% w/ING sees ‘no real barrier’ for move higher.”

The 10-year Treasury yield rises above 1.7%. Source: Bloomberg, Holger Zschaepitz

For Bitcoin to see a sustainable rally, it needs to see a favorable macro landscape, which would only be possible through the stabilization of U.S.Treasury yields.

Selling pressure on Bitfinex at $60K resistance

According to a pseudonymous Bitcoin trader and technical analyst known as “Byzantine General,” there has been serious selling pressure on Bitfinex.

Other derivatives trading platforms, like Deribit, FTX, and BitMEX also saw decent short interest, the trader said.

He wrote:

“Yeah… Fuckery still not over. Bitfinex still unloading. There was serious short interest on Deribit, Mex & FTX. OI is finally unwinding though.”

Bitcoin price with short interest. Source: Tradingview.com, Byzantine General

The combination of an unfavorable macro landscape and the selling pressure from both whales and derivatives traders likely caused Bitcoin to consolidate under $60,000.

However, in the foreseeable future, the likelihood of a relief rally could increase if the open interest of the futures market continues to unwind.

The term open interest refers to the total sum of active positions in the futures market. When this declines, it means that there is generally lower trading activity concerning derivatives.

There is one positive catalyst

Willy Woo, the prominent on-chain analyst, explained that Bitcoin has a decent chance of not going under $1 trillion market capitalization again.

Woo noted that the UTXO Realized Price Distribution (URPD) indicator, which shows the realized price of all UTXOs on any given day, indicates that the $1 trillion market cap is acting as a price floor. He said:

“URPD: ‘7.3% of bitcoins last moved at prices above $1T.’ This is pretty solid price validation; $1T is already strongly supported by investors. I’d say there’s a fair chance we’ll never see Bitcoin below $1T again. It’s only been 3 months since Bitcoin broke the $19.7k all-time-high of the last macro cycle. But already 28.7% of bitcoins moved at prices above $19.7k.”

UTXO Realized Price Distribution. Source: Glassnode

The on-chain data also indicates that while there has been short-term selling pressure, these moves are not large enough to suggest that the market is anticipating a prolonged correction.

bookmark_borderBitcoin network’s computing power: Is it an accurate predictor of BTC price?

Drops in Bitcoin’s hash rate coincided with some big BTC price corrections in the past.

Hash rate refers to the overall computing power involved in validating transactions on the Bitcoin (BTC) blockchain. As reported by Cointelegraph, more power suggests greater network security and interest in the profitability potential of mining Bitcoin.

Hash rate a function of Bitcoin’s value

A hash rate increase is often associated with the expectation of BTC price appreciation. Analysts found evidence that both the 2013 and 2016 bull cycles were marked by a rise in mining difficulty following the hash rate increase.

For instance, the 70% gains in 2021 coincided with multiple investments and large orders for mining equipment. But singling out cause and consequence is almost impossible.

A few examples include Argo Blockchain buying a 320-acre land pilot in Texas to expand operations, Bitfury’s U.S. mining subsidiary going public, and the BTC.com mining pool acquisition by a Chinese lottery service.

However, there have been periods of absolute dissonance, so maybe there is no direct relation between Bitcoin price and miners’ installed capacity.

Despite being impossible to measure precisely, the seven-day average hash rate yields better results to spot trend changes.

Bitcoin hashrate, TH/s (left) vs. BTC price, USD (right). Source: Coinmetrics

Most likely, 2017 was an outlier when it comes to BTC price as Bitcoin entered a phase of parabolic price growth. By August, the hash rate had also tripled to 6.8 TH/s. But the theory that the hash rate can predict price was undermined when the computing power then suddenly dropped by 25% with no apparent effect on the price.

On the other hand, Bitcoin’s 132% surge over the last two months of 2017 seems to have been reflected only a few months later by the hash rate as it more than doubled between December 2017 and March 2018.

Bitcoin hashrate, TH/s (left) vs. BTC price, USD (right). Source: Coinmetrics

The second half of 2018 and 2019 provide a more interesting dataset as BTC price faced more vigorous movements and periods of stagnation. Meanwhile, the hash rate doubled from April 2018 to November 2018, peaking at 54 TH/s. Curiously, this peak preceded BTC’s sharp correction to $4,000.

On the other hand, both indicators bottomed in mid-December 2018, while the first half of 2019 presented a synchronized movement between BTC price and hash rate.

Bitcoin hashrate, TH/s (left) vs. BTC price, USD (right). Source: Coinmetrics

The second half of 2019 saw completely opposite trends as the hash rate went up by 66% while BTC price plunged 38%. This time around, BTC price peaked at $10,200 in mid-February 2020, while this happened only three weeks later for the hash rate.

Bitcoin hash rate and price all-time highs today

The most recent data also presents a strong correlation between the two metrics. Moreover, the hash rate of 166 TH per the second peak on Feb. 8 seems to have been mimicked two weeks later as BTC topped near $55,000.

Bitcoin hashrate, TH/s (left) vs. BTC price, USD (right). Source: Coinmetrics

Therefore, without a doubt, there is a strong correlation between hash rate and price, although there have been periods of six months or longer when the mining capacity continued to expand despite BTC price stagnating. 

The same can be said for the abrupt hash rate drops, such as the recent one in October 2020, which had no impact on BTC price. Therefore, such a metric to predict short-term price movements appears to be unreliable.  In other words, hash rate and price trends, albeit correlated, provide a slew of mixed signals that are sure to confuse any trader.

But despite the apparent long-term correlation, there are other factors that should also be taken into consideration since they can have a more immediate impact on price. These include new mining hardware, regulation, seasonality, geography, and variations in energy prices across the globe. 

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

bookmark_borderDefault auditing for DeFi projects is a must for growing the industry

There has been a shift that has taken auditing from being seen as an unnecessary burden to an absolute essential for any serious project.

The radical opportunity presented by decentralized finance has garnered significant attention from investors and speculators alike. The total value locked in DeFi protocols grew over 2,500% in 2020, from around $700 million in January 2020 to over $20 billion in December 2020. TVL is a more useful metric than market capitalization when it comes to DeFi, as it accurately represents the equity that investors are willing to commit to these protocols. And their commitment didn’t end in 2020; this year alone, DeFi’s TVL more than doubled, reaching $40 billion in February.

Related: Was 2020 a ‘DeFi year,’ and what is expected from the sector in 2021? Experts answer

While DeFi’s growth over the last year can be largely attributed to retail investment, 2021 is shaping up to be the year institutions start getting in on the action. As yields from fixed-income assets continue to drop to historically low levels and unprecedented stimulus packages ratchet up inflation expectations, a massive amount of money is now seeking higher returns.

Forward-thinking asset managers are turning to DeFi. Circle — the issuer of popular stablecoin USD Coin (USDC) — is set to launch the first high-yield digital dollar account to be aimed at institutions. By lending out to the capital-hungry crypto markets rather than oversaturated traditional markets, the account can offer up to 10.75% annual percentage yield. While it will initially serve only businesses, there are plenty of options that cater to individual investors.

How to bring institutional investors into DeFi

During DeFi’s explosive growth in 2020, dozens of separate attacks drained investor funds, with half of all crypto attacks in crypto were of DeFi protocols. Many of these exploits made use of tactics as new and creative as the protocols themselves. Others were repeats of previous exploits that remain frustratingly easy to prevent. While any loss of funds is unfortunate, the security of DeFi has improved greatly over the last few years.

Getting listed on any major exchange now requires a project to have passed auditing, as it’s simply too risky for exchanges to compromise on the safety of their customers’ money. But meaningful security doesn’t end there.

Related: The code is key: Solutions for overcoming DeFi security breaches

Worryingly, in 2020, there were attacks that resulted in money stolen from protocols that had passed a security audit. While auditing focuses on a snapshot of code prior to its deployment, the process cannot take into consideration the interactions of a contract once it’s released into the wild. The dynamic rate of change in DeFi means that new tools and programs can pose new risks.

Related: As faith in audits falter, the DeFi community ponders security alternatives

The possible solution

Automatic security tools can continuously monitor smart contracts against a wide range of known vulnerabilities, even after they’re deployed onto a public blockchain. Users can protect individual transactions, too, by requiring the contract with which they’re interacting to meet a certain security threshold before the transaction can be confirmed and funds are committed.

It’s important to be protected while your contract is running, even if everything seems to be going smoothly.

In addition to real-time security tools, there are a few options for decentralized insurance alternatives on the market today. There are solutions that can provide protection for user funds locked in many DeFi protocols, which give DeFi users peace of mind, knowing that their capital is secure in the face of unforeseen events.

We envision a world of decentralized finance where protecting your assets is as simple as checking a box before placing a transaction, where on-chain technology protects transactions before they happen, and where security is a foundational pillar of every platform.

In combination with its unparalleled yields, a reputation for this kind of comprehensive security will help take DeFi from its current share of around 8% of cryptocurrency’s total market capitalization to a level rivaling the legacy financial system.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Daryl Hok is the chief operating officer of CertiK. Previously, he spearheaded corporate development at FiscalNote, a global machine-learning GovTech unicorn. He obtained a dual B.A. in economics and psychology from Yale University, concentrating in behavioral economics.

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