Andrew Lockley – Exponential Investor (United Kingdom) –
There was a fairly popular sitcom in the 1990s called Red Dwarf.
It’s set millions of years into the future, where only one, very incompetent, man is left alive.
He lives on a spaceship with a hologram who he hates and a human-like evolution of his pet cat, called Cat.
In one of the episodes, he discovers he is in fact his own father.
Growing up he believed he was an orphan. As a baby, he was left on someone’s doorstep in a box, with “ouroboros” written on the side.
He always thought that his real parents wanted to call him “our Rob, or Ross” but they couldn’t decide.
Anyway, in the episode, he finds out ouroboros is actually an ancient symbol for infinity. You know, because it turns out his life is an infinite loop.
The symbol of the ouroboros is a serpent eating its own tail. Here’s a 1478 drawing of it.
The reason I bring it up, is because the ouroboros is a great analogy for one of the biggest movements in crypto today.
As you’ll see, crypto has become its own self-fulfilling prophesy. And I believe this movement could mark the next wave of breakout cryptos.
The biggest problem in investing in crypto right now
Hacks on exchanges are the main problem facing investors and institutions wanting to get into crypto right now.
It seems almost every week, another exchange is hit.
Last week, it was BitGrail losing $195 million of Nano.
A few weeks before, CoinCheck was taken for $534 million of NEM.
A few weeks before that, EtherDelta was hit.
The list goes on.
And it’s a problem that’s plagued crypto since the very beginning.
The infamous Mt. Gox hack set bitcoin back years. In total, $473 million of bitcoin was stolen, which represented 7% of the total supply at the time.
People see these lines and they shy away.
We at Southbank Investment Research repeatedly tell people never to leave their cryptos on an exchange, and for good reason. When you leave your cryptos on an exchange, you are handing over total control to whoever is running the exchange.
If the exchange is dodgy – as in BitGrail’s case – it can run off with your cryptos.
If the exchange is just incompetent – as in CoinCheck – it can lose all your cryptos.
And if the exchange goes under while holding your cryptos – as in Mt. Gox – there’s little chance you’ll ever get them back.
So, what can be done?
Decentralised exchanges are the future of all crypto trading
One of the main use cases for crypto is that of decentralisation.
Decentralisation gives users more security, more control and more transparency.
And nowhere is that needed more than in crypto exchanges.
Decentralised exchanges (DEXs) are essentially impossible to hack because they never hold your funds in the first place.
The way current exchanges work is this:
- You deposit your cryptos into their wallet.
- You then exchange those cryptos for different ones and pay their fees for setting up the trade.
- You then withdraw your cryptos back into your own wallet and pay a withdrawal fee.
While your cryptos are stored on the exchange, you are extremely vulnerable. You are handing over complete control of your cryptos to that exchange. And you are paying it high fees for the privilege.
The difference with a DEX is it never holds any of your funds.
You simply make the trade and it matches you with the buyer or seller at the best price out there.
The trade is then done through a smart contract, so the other party can’t scam you.
At no point does the DEX hold any of your funds. It simply sets up the exchange, finds the best price and creates the smart contract that lets you execute the trade.
Why DEXs are going to takeover
With every new hack the use case for DEXs grows stronger.
As crypto grows and grows in popularity, it attracts more and more people. With more people, comes more money. And with more money, comes more people wanting to steal that money.
That’s why over the last few months hacks on exchanges and lost funds have become commonplace.
“Another day, another heist”, was how AirSwap’s co-founder Michael Oved reacted when asked about a recent exchange hack on Bloomberg TV.
But that will all end once DEXs become fully operational. When will that happen?
Well, two of the three major players launched their DEX this month.
We are right at the beginning of this movement.
As DEXs take over, we can expect to see a big shift, away from the current crop of exchange and towards the DEXs.
And because this is a development in crypto, of course, you can invest directly into the companies making it happen by buying their tokens.
The top three DEX cryptos
I find it quite funny that one of the first businesses crypto will end up revolutionising is the trading of crypto itself. Remember the ouroboros?
And the cryptos that come out on top of the movement towards DEXs are going to make an awful lot of money.
Over $18 billion of crypto was traded in the last 24 hours.
And let’s not forget, crypto doesn’t sleep. Markets don’t close. They keep going, 24 hours a day, seven days a week, every week of the year.
We’re talking about half a trillion dollars a month being exchanged.
So, who are the DEX contenders?
Right now there are three:
- Kyber Network
0x is a protocol crypto. It is designed to allow companies to build decentralised exchanges on top of it. Right now there are a number of big projects building their DEXs on top of the 0x protocol.
When exchanges use 0x as their protocol, the fees they charge are paid in 0x. So the theory goes, if you hold 0x, it will become valuable.
If you hold 0x, you also get to vote on protocol changes. So the theory goes that exchanges built on 0x will want to hold a lot of 0x so they get a say in its development and policies.
If you want to know more about 0x, here are some good resources:
Kyber Network is different to 0x in that it isn’t aiming to let companies use its crypto to build exchanges on. It will be its own exchange.
This means it can create a very big and liquid exchange, which will then attract more and more users. After all, the more liquid an exchange the better deal users get on their trades.
Here’s a video that explains how Kyber Network works pretty well.
Why are its tokens valuable?
Kyber tokens are used behind the scenes to facilitate trades. Each time an exchange takes place on Kyber Network, Kyber tokens are used and destroyed. As time goes on, they become scarcer and so increase in value.
If you want to know more about Kyber Network, here are some good resources:
AirSwap has some very big money behind it and its mission is to help institutions enter the word of crypto trading.
There’s a good article by its co-founder on how it works and why he set it up here.
In that article he compares AirSwap to Kyber Network and 0x in a good chart.
You can see it below, but we should remember this chart was made by AirSwap. So it’s no surprise AirSwap comes out on top.
Why are AirSwap tokens valuable?
To use AirSwap, market makers must buy and lock up AirSwap tokens. So the more market makers that are buying them and locking them up, the smaller the supply becomes and so the tokens increase in value.
It’s also worth noting that AirSwap is completely fee-free for users and market makers. This is really what sets it apart from the other two competitors.
Market makers have to lock away their tokens, but they get them back eventually. And users don’t have to pay or lock up anything to use it.
By being fee-free, AirSwap hopes it will get the edge with institutional investors who may make thousands of trades a day. They wouldn’t have to pay any fees on those trades, they would just have to make an initial outlay on AirSwap tokens.
If you want to know more about AirSwap, here are some good resources:
It’s also worth talking into account the market caps of these three cryptos.
- 0x $489 million
- Kyber Network $376 million
- AirSwap $84 million
A smaller market cap means it has much more potential to grow, but it also tends to be riskier.
A bigger market cap means it’s already more well-known and already getting attention from the masses.
In that regard, 0x is the most well-known and probably the safer bet. AirSwap is the least well-known, with the most profit potential, but it’s also the riskiest bet.
Do you think DEXs are the future? Let us know in the comments below.
Until next time,
Editor, Exponential Investor