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otcable

Online Private Finance
Mentor Group Gold
I have dealt with cryptocurrencies for really long, as a currency converter and managing teams of developers.

The technology is here to stay so we better understand it. Don't be scared, jump in. Not only as investors, take the entrepreneur position.
It is still really early for mass adoption.

I will try to answer if you make questions, hoping I won't be the only one trying to help.

This won't be financial advice, I will try to throw my point of view if I have answers.
Also wanting to engage with more knowledgeable users =)

ASK!
 

Willblack

New member
What, in your opinion, is the most capital-efficient way to source liquidity for a cryptocurrency brokerage (think the standard Coinbase) and why?

1. Get a corporate account at another exchange with low fees (Kraken, Binance Jersey, etc.) and keep fiat there so you can source liquidity (up to the amount of available capital) from there.
2. Same as 1. but using multiple exchanges and developing an algorithm which sources X amount at best price possible using all available exchanges where capital is present.
3. Using own crypto reserves (basically exchanging counterparty risk for exchange rate risk).
4. A random combination of the above.
5. Something else entirely (P2P liquidity incentives etc.)

Also, what's your opinion on the best approach to integrating Ethereum wallets for such a business?
1. Generating a private wallet (with respective private key) for every user.
2. Outsourcing (Bitgo, Xapo, etc.)
3. Deploying a forwarder smart contract for each user directly to cold storage and having 1 hot wallet for withdrawals.

Looking forward to discussing the abovementioned questions with you!
 

otcable

Online Private Finance
Mentor Group Gold
only only question, will btc price keep going up? just wondering what's the price for the next five years?

I have no clue, and I doubt someone can answer this.
BTC price is highly manipulated, but that is my personal opinion.
 

otcable

Online Private Finance
Mentor Group Gold
What, in your opinion, is the most capital-efficient way to source liquidity for a cryptocurrency brokerage (think the standard Coinbase) and why?

1. Get a corporate account at another exchange with low fees (Kraken, Binance Jersey, etc.) and keep fiat there so you can source liquidity (up to the amount of available capital) from there.
2. Same as 1. but using multiple exchanges and developing an algorithm which sources X amount at best price possible using all available exchanges where capital is present.
3. Using own crypto reserves (basically exchanging counterparty risk for exchange rate risk).
4. A random combination of the above.
5. Something else entirely (P2P liquidity incentives etc.)

Also, what's your opinion on the best approach to integrating Ethereum wallets for such a business?
1. Generating a private wallet (with respective private key) for every user.
2. Outsourcing (Bitgo, Xapo, etc.)
3. Deploying a forwarder smart contract for each user directly to cold storage and having 1 hot wallet for withdrawals.

Looking forward to discussing the abovementioned questions with you!

My man! That is a tough question so I will try to throw you back something so we can both reach a reasonable conclusion.

1) First thing first, definition:
Enter capital efficiency.

Capital efficiency is the ratio between dollar expenses incurred by a company and dollars that are spent to make a product or service. This can also be explained as the ROCE (Return on Capital Employed) or the ratio between EBIT (Earnings Before Interest and Tax) over Capital Employed. If the acronyms made you doze off, this generally shows how efficiently a company is deploying it’s cash in its operation.

The absolutely best would be a combination of everything above, I think we are heading towards that point eventually. Something along the lines of ETH Flash loans were you would brokerage not using your reserve. You would, theoretically, use your clients money to perform and keep the profit. I mean theorically because I haven't seen this done, but I know it will happen. Even BTC is now tokenized on ETH so it is absolutely doable. That is the unicorn answer.

For something closer to reality:
I would recommend to check a cross exchange bot. Source liquidity from healthier exchanges. This would be point 1. Point 2 is an improved solution to step 1, modify the mentioned bot. Binance has an internal program that gives you 0% fee, get in contact with them. To avoid using your reserves I know some exchanges have pre-approval plans so you can avoid the exchange rate risk. They allow you to close prices even when money did not arrive yet to your account.



2) ETH fees are killing centralized exchanges. I am in doubt here. A clear winner on the outsourcing would be creating private addresses on Infura for deposits and doing offline transactions for withdrawals. Moving those individual funds to cold storage is the problem on fees. But that is how most are doing it.

Bitgo was chosen because of the insurance it had on funds, that provided the required extra security step big exchanges needed. For small brokerage it kills your business, takes a percentage of your withdrawals on the pay as you go plan. I have seen the automated contract solution on Lykke but have not research on that enough, I think it might be the best solution but I lack the certainty now.

I would like to know someone else/yours opinion on both questions.
 

Willblack

New member
My man! That is a tough question so I will try to throw you back something so we can both reach a reasonable conclusion.

1) First thing first, definition:


The absolutely best would be a combination of everything above, I think we are heading towards that point eventually. Something along the lines of ETH Flash loans were you would brokerage not using your reserve. You would, theoretically, use your clients money to perform and keep the profit. I mean theorically because I haven't seen this done, but I know it will happen. Even BTC is now tokenized on ETH so it is absolutely doable. That is the unicorn answer.

For something closer to reality:
I would recommend to check a cross exchange bot. Source liquidity from healthier exchanges. This would be point 1. Point 2 is an improved solution to step 1, modify the mentioned bot. Binance has an internal program that gives you 0% fee, get in contact with them. To avoid using your reserves I know some exchanges have pre-approval plans so you can avoid the exchange rate risk. They allow you to close prices even when money did not arrive yet to your account.



2) ETH fees are killing centralized exchanges. I am in doubt here. A clear winner on the outsourcing would be creating private addresses on Infura for deposits and doing offline transactions for withdrawals. Moving those individual funds to cold storage is the problem on fees. But that is how most are doing it.

Bitgo was chosen because of the insurance it had on funds, that provided the required extra security step big exchanges needed. For small brokerage it kills your business, takes a percentage of your withdrawals on the pay as you go plan. I have seen the automated contract solution on Lykke but have not research on that enough, I think it might be the best solution but I lack the certainty now.

I would like to know someone else/yours opinion on both questions.
Well, I can't get into too many details about how we did it, however, we developed a combination of 2. and 3.
I will highlight the problems each method has:

1. Finding a reliable exchange partner that you source all liquidity from is the most cost-efficient solution for a startup since:

a) Your entire fiat reserve is in two places (the bank and the exchange) which means you can provide higher order limits to end-users.

b) It requires very little development since you simply transmit client orders via API.

This is the approach Coinbase used in its early days and even all the way until they bought Gdax.
This is also the most common approach that T2-T3 forex and stockbrokers use.

However, this approach has 2 main problems:

a) A huge counterparty risk, which means that if the exchange that you use stops operating for any reason whatsoever or your account gets blocked or compromised - you cease all operations as well.

b) Still a form of counterparty risk, but this one has to do with fees and liquidity. If the exchange you use experiences price spikes or rases their fees - you are forced to carry over that to your end-users.




2. Using multiple exchanges and a custom (or modified open-source) arbitrage algorithm is a very good way to reduce both the counterparty risk and provide extremely good rates to your clients, however, this approach has the following drawbacks:

a) Your reserve capital is divided between exchanges, which means that you need A LOT more capital to provide the same order limits to end-users than you would if you used just one exchange for liquidity.

b) It requires a lot more development than the first method and that can get expensive quickly since we all know what a good full stack developer costs per month.

c) It compromises security a bit, since securing multiple accounts simply is a bigger risk, than securing just one, however, this can also be a positive, since all of your eggs are never in one basket.





3. Straight up maintaining an own reserve means that you become a full-fledged market maker and provide the best price to end users, however since cryptocurrency is extremely volatile, this changes the entire business model, because now you have to worry about the actual underlying asset price. This can be an extremely effective method since you can also profit from the actual asset price itself and you massively save on development costs, however its:

a) by far riskier than both 1. and 2.

b) Is the most capital-intensive of all approaches since it requires you to have spare capital on demand in order to benefit from big price crashes.

c) requires you to employ market analysts or even traders





4. As I said, this is the approach we use and the reason is very simple: this approach takes all benefits of each method and reduces the risks, involved in each method, however, this approach has the following problems of its own:

a) It's BY FAR the most troublesome and expensive in terms of development since it has the most moving parts. You have to integrate multiple providers, develop an arbitrage algorithm, secure those accounts, secure your own reserves as well as develop a trading algorithm, or employ analysts for maintaining your own reserves.

b) While it mitigates the risks of all approaches individually, at the same time it exposes you to BOTH multiple counterparty risk as well as currency exchange risk.

c) It can be the most capital-intensive or the second most capital-intensive approach, depending on the size of your reserve.







5. I firmly believe this is the future of cryptocurrency exchanges and I'm spending a lot of time and money on developing a P2P liquidity pool myself, however, I DO NOT believe that the future is completely decentralized and non-custodial.
Uniswap proved that this approach provides multiple benefits since it eliminates both the above-mentioned risks and transfers them to end-users, who in turn, are happy to accept those risks because it opens up the opportunity to make a return on their otherwise idle crypto assets and it leads to more balanced prices.
Now, with that said, there are many big question marks still since the technology is evolving as we speak and we've seen that the results of development errors can lead to catastrophic consequences for end-users.
The main problems still present with this approach are:

a) The only way to make it completely decentralized and non-custodial is to run it on Ethereum, which means you can never really integrate FIAT into the equation (yet) and you have counterparty risk with the Ethereum project itself. If it goes under, all DEFI projects we currently know instantly die.

b) It's impossible to make it newbie-friendly since users will have to use their own Ethereum wallets and that's the reason that these DEFI projects we know today will never be mass-adopted.

c) It's extremely development-intensive since it requires very skilled blockchain developers, as well as traditional developers and code-integrity, becomes paramount.







Regarding the Ethereum wallets, I believe the best thing for everybody would be if the Ethereum foundation focuses on developing more spending-oriented features which would eliminate this problem altogether. I know that it originally wasn't the idea of Ethereum and still isn't, however people are using Ether as currency and not just for using Dapps and this isn't going to change. If Vitalik and the foundation want true mass adoption, Ethereum has to become as user-friendly if not more so than Bitcoin and that means having the ability to generate multiple deposit addresses from the same private key at the very least.

Now, unfortunately, we live in a reality where things aren't like how I and every other brokerage and exchange owner want them to be.
Outsourcing via Bitgo, Coinbase Custody, or another provider is, as you said, detrimental to such a business since 0.05-0.1% fees are absolutely insane IMO.
The best approaches which I see are either:

a) generating a separate private-public key for each user and (somehow) securing those or letting users secure their own keys, both of which have their obvious drawbacks.

b) deploying forwarder smart-contracts to cold storage and executing withdrawals manually. This is the approach we use and the problems here are the network fees, which we are forced to absorb, as well as employing human capital.

c) developing the entire functionality via smart-contracts which platforms such as Nexo employ. This approach is good as well since you can basically automate the entire process and provide a better experience to end-users, but it's extremely development-intensive and you still have the (albeit negated) problem of absorbing network fees which you can't control.




I'd love to know which exchange allows you to fix prices for OTC-type trades since that could be useful. That's a service that's very popular in the precious metals business since many dealers depend on securing prices while they ship the metals to either industrial clients or other dealers.
 
Hi there
I've got a question about USD Coin, USD Tether and TrueUSD.
What do you think about holding millions in one of those and/or all of those coins storaged in an own cold wallet and spend 10-50k per motnh for monthly expenses ? Both personal and corporate accounts.
Thanks
 

otcable

Online Private Finance
Mentor Group Gold
Hi there
I've got a question about USD Coin, USD Tether and TrueUSD.
What do you think about holding millions in one of those and/or all of those coins storaged in an own cold wallet and spend 10-50k per motnh for monthly expenses ? Both personal and corporate accounts.
Thanks
Hi @tradingworldwide321, I am not sure if I would hold millions on them. It is crypto secured but they might still have points of failure.

USD Coin is backed by Coinbase with a 1:1 usd dollar ratio. Not much for decentralization, I give them a big plus for stability, but would fear not being completely free. Check their terms and conditions point 24. Prohibited Transactions. Tether has a big history of not being completely backed, I am lost now on how it is.
There is another stablecoin to mention, the princess of #defi DAI.

My answer would be, they are trusted for what they are for, stability on your crypto, avoiding volatility. For a long term holding I would kind of fear those millions turning into zero. My risk appetite is big, but not that big. I consider cryptocurrencies still on early stage, including the security of their code.
 

sinos

New member
Hi there
I've got a question about USD Coin, USD Tether and TrueUSD.
What do you think about holding millions in one of those and/or all of those coins storaged in an own cold wallet and spend 10-50k per motnh for monthly expenses ? Both personal and corporate accounts.
Thanks
USD Coin is backed by Coinbase with a 1:1 usd dollar ratio. Not much for decentralization, I give them a big plus for stability, but would fear not being completely free. Check their terms and conditions point 24. Prohibited Transactions. Tether has a big history of not being completely backed, I am lost now on how it is.
There is another stablecoin to mention, the princess of #defi DAI.
USD coin is actually backed by Centre a consortium comprising Coinbase and Circle that also has Goldman Sachs as a backer. Its just like Tether, but has a clean audit done by Grant Thornton on its Treasury reserves with 1:1 backing of US dollars. That means, every USDC is backed by a US dollar.

It can be traded on Binance and Poloniex. I would use USDC as a peg against Bitcoin volatility, by which I mean, I will convert my excess bitcoins to USDC as I won't loose my coin value as it is backed by 1:1 USD. When I want to cash out I will buy bitcoins or monero and cash out. I think USDC can be a store of value against volatility and price swings and is much more trustworthy considering the names and regulations behind it.
 

sinos

New member
DAI is also pretty good, have used Tether and DAI on Kraken. If you ask me between USDC, USDT (Tether) and DAI, I would prefer DAI more.
 
Hi @tradingworldwide321, I am not sure if I would hold millions on them. It is crypto secured but they might still have points of failure.

USD Coin is backed by Coinbase with a 1:1 usd dollar ratio. Not much for decentralization, I give them a big plus for stability, but would fear not being completely free. Check their terms and conditions point 24. Prohibited Transactions. Tether has a big history of not being completely backed, I am lost now on how it is.
There is another stablecoin to mention, the princess of #defi DAI.

My answer would be, they are trusted for what they are for, stability on your crypto, avoiding volatility. For a long term holding I would kind of fear those millions turning into zero. My risk appetite is big, but not that big. I consider cryptocurrencies still on early stage, including the security of their code.
USD coin is actually backed by Centre a consortium comprising Coinbase and Circle that also has Goldman Sachs as a backer. Its just like Tether, but has a clean audit done by Grant Thornton on its Treasury reserves with 1:1 backing of US dollars. That means, every USDC is backed by a US dollar.

It can be traded on Binance and Poloniex. I would use USDC as a peg against Bitcoin volatility, by which I mean, I will convert my excess bitcoins to USDC as I won't loose my coin value as it is backed by 1:1 USD. When I want to cash out I will buy bitcoins or monero and cash out. I think USDC can be a store of value against volatility and price swings and is much more trustworthy considering the names and regulations behind it.
@otcable @sinos
Thank you so much for your advices, I learn from you and will carefully consider your views in this important matter.
Thank you again, best regards.
 

otcable

Online Private Finance
Mentor Group Gold
DAI is also pretty good, have used Tether and DAI on Kraken. If you ask me between USDC, USDT (Tether) and DAI, I would prefer DAI more.

I like DAI A LOT.

But please remember DAI is only backed by code, the stability of the protocol depends on internal economics that are really cool, but still infant. They have been tested on a few really big downs and ups, but still only backed by code. The rest mentioned here are 1:1 USD.
 

otcable

Online Private Finance
Mentor Group Gold
How would you research a particular coin to find out if it is backed up by something serious or if it is just pure fiction?

Most simple answer would be to follow your normal parameters, crypto is not different than other investment proposals. Don't buy in a rush never and understand what you are buying in. If you understand and lose, then you won't feel as stupid as if you don't even understand it.

But it is not easy, many internet startups had no income, had no product, just ideas and still got big. Facebook, Twitter, etc.

I am not a good investor on crypto, to anxious, so after a few trials and errors I just focused on building. That gave me the opportunity to talk with a lot of project leaders/ceos of this blockchain projects. The cool think about crypto is that you can go and ask the main developer everything you don't understand.

This is not a strict rule, but usually, fiction projects won't answer you. As with dark setups they will avoid having a short talk on the phone. If the project is to big then you won't get answers from the main people, but you will still have a place to engage in a conversation with someone from the team. That is a must.
 
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