Category: Uncategorized

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July 2022. Reading Time: 10 Minutes. Author: Sidharth Sachdeva

Introduction to NFTs

From the ownership of physical assets and art work back in old times, today digitalization has opened new avenues for ownership of multiple assets. Digital ownership has brought with it tokenization, enabling brands and creators to offer exclusive & curated services to their communities. A decade ago, who would have thought of having weddings in Metaverse. The pace at which technology is impacting our lives is unprecedented and no one today can predict how our lives will evolve 10 years from now.

While the modern art world is naturally one of upheaval, the meteoric rise of Non-Fungible Tokens or NFTs in the past pandemic year has left many wondering how new digital art is shaping the artistic landscape. While the concept of NFTs has been around since 2014, they were mostly under the radar until last year, when they suddenly commanded headlines around the world. An NFT is a special type of digital asset or token that is unique and not interchangeable with another digital asset token (i.e., fungible, thus it is referred to as a “non-fungible token” (NFT).

NFT Market by Numbers

Though NFTs have been around for some time, the real impetus came in 2021.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/07/NFTs-volume.png” alt=”Cryptocurrencies: Number of Dead Coins and Tokens” title_text=”NFTs volume” force_fullwidth=”on” admin_label=”Image” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: Yearly NFT Market Report 2021 by NonFungible

The same is evident from the number of buyers and sellers in the NFT market. While there were tailwinds for cryptocurrency markets and NFTs on account of the Covid-19 pandemic. Many people believed that the NFT has value independently of market conditions as most successful projects have seen price appreciation with minimal correlation to cryptocurrency prices.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/07/NFT-Buyers-Sellers.png” alt=”Dead Coins and Tokens: Breakdown by Scam Types” title_text=”NFT Buyers & Sellers” force_fullwidth=”on” admin_label=”Image” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: Yearly NFT Market Report 2021 by NonFungible

NFT Sales by Category

While there are multiple categories within the NFT ecosystem, 2021 was dominated by collectibles followed by gaming. A collectible is an asset whose main function is to be owned and displayed as part of one’s collection. The two flagship Collectibles projects of the year were undoubtedly CryptoPunks and Bored Ape Yacht Club. Crypto-Gaming was a part of the NFT landscape initially, but in 2021 it really took off, with the explosion of the “Play to Earn” trend.

Art comes third in the list in terms of total volume for 2021. Art was the spark that ignited the NFT industry, following the sale of Beeple’s “Everydays: The 5,000 First Days” in March 2021 for over $69m. While the numbers on Metaverse as a category might not be very high, but it undoubtedly generated the most interest towards the end of the year, thanks to the sensational announcement by Facebook (which became Meta) that it was starting to work on setting up its own Metaverse.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/07/NFT-Sales-by-Categories.png” alt=”Reported Cryptocurrency Crimes Across Regions” title_text=”NFT Sales by Categories” force_fullwidth=”on” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: Yearly NFT Market Report 2021 by NonFungible

NFT Marketplaces

The surge & potential of the NFTs is made possible by the blockchain networks via NFT marketplaces. Founded in 2017, Opensea is a clear leader in the NFT marketplaces with 80m+ NFTs, 2m+ collections and 200+ employees. Second on the list is Looksrare, a decentralized, community-first NFT marketplace that actively rewards traders, token stakers, creators and collectors for participating on the platform. Clearly the market is dominated by the top 2 players which together have over 80% of the market share among top 10 players.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/07/NFT-Marketplaces.png” alt=”Cryptocurrencies: Current Price versus the First Trading Price” title_text=”NFT Marketplaces” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: DappRadar as on 24.06.2022

Most Expensive NFTs Sold

No rule books define how to assess the value of NFTs. Their value usually stems from the highest offer made by a bidder and is largely driven by perception. If a NFT is assumed to be rare, and the price would go up. But just as simply, if it is perceived to be common or ordinary, buyers will run away. Regardless, people all over the world have spent and continue to spend tens of millions of dollars on these digital assets today, let us dive into the top 10 biggest NFT sales to date.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/07/Most-Expensive-NFTs.png” alt=”Cryptocurrencies: Current Price versus the First Trading Price” title_text=”Most Expensive NFTs” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: https://explodingtopics.com/

NFT Users by Country

Many believe that US would top the chart of most NFTs user by country but Thailand has the highest number of NFT users, followed by Brazil and the US. Even if the data is to be analyzed as population ratio, Thailand would still be top as 8.08% of its population own digital property. Overall, Asia has emerged as the frontrunner in the global NFT craze, with Southeast Asians making up most NFT-based web traffic.

This belief is further strengthened by insights from Metamask, a soft wallet with 21m users, which claimed that the Philippines is its single biggest market and Vietnam takes the third place with 32% of adults admitting to owning at least one NFT.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/07/NFT-users-by-country.png” alt=”Cryptocurrencies: Current Price versus the First Trading Price” title_text=”NFT users by country” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: Forbes

NFT Market in 2022: Fad or Future?

As the world embraces the metaverse, NFTs will become the thing to own. Owning an NFT would give people access to certain exclusive things in the metaverse, collectors can access unique and credible artworks in the form of NFTs from around the globe. While the data shows that the NFT market is behind its peak and since the onset of 2022, the numbers are falling in terms of unique buyers and sellers who participate in the NFT Market. It is important to note that as with all ground-breaking technology, there comes a “plateau of productivity”, a phenomenon outlined in Gartner’s hype cycle, which indicates a period of lesser interest following a period of considerable hype.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/07/NFT-Monthly-Buyers-Sellers.png” alt=”Cryptocurrencies: Current Price versus the First Trading Price” title_text=”NFT Monthly Buyers & Sellers” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: https://nonfungible.com/ as on 24/06/2022

Further Thoughts

The recent crypto market crash has sparked a wave of fear, uncertainty and doubt throughout the industry. The future of many coins and crypto projects suddenly is now questioned and in no time, the tide has changed against the funding of new projects in this space. However, the technology behind all of this i.e., blockchain is here to stay and change the way many industries work.

The future of NFT depends on regulatory clarity which in turn would define their adoption among the masses. As per an article by Yahoo Finance, sources from inside the US Securities and Exchange Commission (SEC) told Bloomberg earlier in the year that US regulatory agency is keen to investigate illegal digital token offers and to see whether NFTs should be considered securities. NFT “1.0” was built on FOMO (fear of missing out), scarcity, and price appreciation. “NFT 2.0” is set to be about utility, value, innovation, and storytelling. As long as NFT providers and partners keep the customer experience at the center of their strategies, there seems to be a bright future ahead for the overall market.

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About the Author

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June 2022. Reading Time: 10 Minutes. Author: Sidharth Sachdeva

Crowdfunding: What is it?

In 2016, Zach Brown raised more than $50,000 on Kickstarter to make a bowl of potato salad. Starting with a goal of £10 to buy his ingredients for the potato salad, Zach went on to raise a whopping $50,000 and has since gone on to release a recipe book called ‘The Peace, Love and Potato Salad Cookbook’. Well, that is the power of crowdfunding campaigns in today’s internet age. Investopedia defines crowdfunding as the use of small amounts of capital from a large number of individuals to finance a specific business, cause or a project. Crowdfunding draws inspiration from the concept of microfinance and crowdsourcing.[/et_pb_text][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Crowdfunding Models

During the past few years, different forms of crowdfunding have emerged. The two key categories are the following:

1. Investment

   • • Lending-based: This involves a company receiving money from the crowd, with the intention that it is repaid with interest. Debt crowdfunding is similar to traditional borrowing however, an advantage is that the company typically pays lower interest rates than they would ordinarily, and investors get a better return than they would with a bank savings account.

     • Equity-based: It is a form of investment that allows investors to finance startups and SMEs set up as corporations through platforms and online portals. A financial contribution is made in exchange for equity stakes in the same companies with equity and administrative rights.

2. Non-Investment

   • • Reward-based: Rewards-based crowdfunding often uses a tier-based donation system, meaning the fundraiser will provide backers with a reward like a service or new product in exchange for a predetermined contribution amount. Rewards-based crowdfunding doesn’t require the fundraiser to pay funders back.

     • Donation-based: This type of crowdfunding involves amassing large amounts of donations without needing to provide the investors with anything in return. This particular form of crowdfunding is commonly used by charities and for social causes.

3. Analyzing crowdfunding by geographies shows the US dominates with a transaction value of $504m in 2021. Behind are UK, France & Germany, while Australia comes fifth on list, implying a correlation between robustness of financial markets and the crowdfunding transaction value in an economy.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/06/Global-CF-Chart.png” alt=”Cryptocurrencies: Number of Dead Coins and Tokens” title_text=”Global CF Chart” force_fullwidth=”on” admin_label=”Image” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: Financesonline

Leading Crowdfunding Platforms & Business Models

Next, we provide an overview of some of the largest crowdfunding platforms. The fees range between 1% to 12% of the transaction volume and are often combined with fixed fees for listing the projects on the platforms.[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/06/Cf-Platforms-Tabl-2.png” alt=”Dead Coins and Tokens: Breakdown by Scam Types” title_text=”Cf Platforms Tabl” force_fullwidth=”on” admin_label=”Image” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” hover_enabled=”0″ global_colors_info=”{}” sticky_enabled=”0″]As per a study done by Fundera in 2020, on average at takes 11 days to prepare for a successful crowdfunding campaign & a successful campaign runs for 114 days on average
.

Crowdfunding vs Venture Capital

While the inception of modern-day crowdfunding can be traced to 1997 when a British rock band funded their reunion tour through their fans but the real seeds of equity crowdfunding were sown in the during the 2008 global financial crisis when capital became scarce and entrepreneurs could not get money from the traditional sources of finance. While companies like AngelList were existing, but they were not essentially a true crowdfunding platform as they function as a syndicate pop-up venture capital fund with a limited number of people pooling money and also provided a bouquet of other services to startup founders including a recruitment platform to hire relevant folks.

With the large-scale arrival of internet and an ever-increasing adoption of crowdfunding as a source of finance, it reached the White House in Washington DC and in 2012 Jumpstart Our Business (JOBS) Act was signed into law which redefined the equity crowdfunding ecosystem in the US. Now a company could raise up to $5 million over a twelve-month period, crowdfunding websites will display business plans/funding requests on their site and anyone will be able to view them and decide whether to invest or not.

When this act was passed, one of the most prominent venture capitalists, Fred Wilson, suggested that venture capital could be swept away altogether by a flood of crowdfunding money that will be unleashed by the JOBS Act. According to his line of thought, if each family or individual invested 1% of their assets in crowdfunding, it will equate to around $300 billion, but this has not turned out to be the case.

The total amount of equity crowdfunding raised in the US through various platforms stands at meagre $209m for 2020. This number appears minuscule when compared to $156bn raised by 10,862 startups in 2020 (as per National Venture Capital Association) from various venture capital firms, which comes out as $428m daily on average.

Therefore, even though equity crowdfunding has been there in the US for quite some time, it has failed to appeal to startup founders as well as investors as large.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/06/Global-CF-by-Countries.png” alt=”Reported Cryptocurrency Crimes Across Regions” title_text=”Global CF by Countries” force_fullwidth=”on” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: CrowdWise

As per an article by Crunchbase News & Fundz.net, in 2020 the average valuation for a startup in US raising seed round was $6m, for series A was $15.6m & series B was $30m. The average valuation for startups raising equity via crowdfunding points to a conclusion that those were relatively small ones, mostly in seed stage. Often, in most cases these are the ones which are unable to raise capital from angel investors and venture capitalists and resort to crowdfunding as a last resort.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/06/CF-startup-Funding.png” alt=”Cryptocurrencies: Current Price versus the First Trading Price” title_text=”CF startup Funding” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: KingsCrowd’s Regulation Crowdfunding 2018-2020 Intelligence Report

Structural Issues in Equity Crowdfunding

Often it is argued that crowdfunding is an alternative to venture capital but from the company and investor perspectives, there are some issues which limit the success of crowdfunding platforms.

Company Perspective: The use of crowdfunding can result in a situation where VCs could be deterred from investing in future rounds of financing. Crowdfunding creates a capital structure that is unappealing to VCs. VCs have little interest in competing with masses of retail investors, because they do not want to deal with the inconveniences that may arise from having numerous shareholders.

Investor Perspective: Most of the investors lack experience to evaluate an investment opportunity, thus could end up making sub optimal decisions. Even if the investor makes a sound investment into a successful startup company through a crowdfunding opportunity, and the company conducts itself in a legitimate manner, the investor still may not realize an above-average financial return (high risk-high return concept) due to the absence of investor protections against horizontal risk. The concept of horizontal risks relates to the fact that promising investment opportunities in startups appeal to competing investors, who are often sophisticated VC’s. Without adequate protections similar to those available to VCs, an early-stage crowdfunding investment, even in a successful startup company, can result in significantly lower financial returns. Thus, it comes as a no surprise in one of the reports by SEC that 85% of the crowdfunding campaigns failed during 2019.

Further Thoughts

The success of an enterprise cannot be guaranteed only by financing. Even promising enterprises can fail without an adequate business plan and support structure. It is critical for entrepreneurs to recognize that raising capital is a means to an end, not a goal in itself. Additionally, for growth companies that plan to seek venture capital, using equity crowdfunding early on may signal weakness to a venture capitalist. As indicated by the above numbers, crowdfunding should not be considered as an alternative to venture capital and should be used after due diligence by founders i.e., if the company requires 1,000 retail investors that each put in $5,000 or raising $250,000 or $500,000 from venture capitalists?

For individuals wanting to get into the angel-investing game, and who don’t have assets of $1 million or more, buyer beware. Investigate the details of the crowdfunding platform and the startup you plan to invest in. The investors need to keep in mind that just because an investment is accessible or affordable, it doesn’t automatically qualify as a good one. Carefully research the company, its management team and the quality of the investment being offered before investing any dollar.

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About the Author

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The number of DeFi users increased from 90k in 2019 to over 1 million in 2020.

May 2022. Reading Time: 10 Minutes. Author: Kaushik Ganesan.

Introduction

In February 2022, the Prime Minister of Canada, Justin Trudeau, invoked the Emergencies Act for the first time in Canadian history to freeze the bank accounts of protesting truckers. This event has made people question the power of traditional banks and their strong link to the government. Other events like the 2008 Global Financial crisis has shown the world how broken the most sophisticated stock market in the world was and not to mention the 2020 Gamestop’s short squeeze in which retail investors were blocked by Robinhood because of liquidity issues. The adoption of decentralized finance is increasing more than ever before as people see the power of centralization being misused and inefficient.

Decentralized Finance (DeFi) is the intersection of blockchain, digital assets, and financial services. DeFi leverages blockchain technology to facilitate financial services like lending, borrowing, insurance and much more. The DeFi protocols are built using smart contracts on the layer one blockchains.

In this article, we will explore various DeFi services.

Rise of Decentralized Finance

2020 was the foundational year for DeFi. The number of users increased from 90k in 2019 to over 1 million in 2020. According to Coingecko, the market capitalization went up from $1.8 billion to $21 billion. The number of decentralized apps has also grown by 29x. But why is 2020, more than a decade after the launch of Bitcoin, a special year for decentralized finance?

MakerDAO, a protocol that issues the stable coin DAI in exchange for ETH, was launched in 2017 and it is one of the first DeFi projects that laid the foundation for the DeFi ecosystem. ICOs became prevalent on Ethereum in 2017. In 2017 alone, ICOs raised a collective of $4.6 billion (up from $200 million in 2016) and the number of ICOs also went up from two projects in 2013 to 438 projects, according to PwC. The idea of people interacting with a piece of code (also called a smart contract) to collect funds is one of the main breakthroughs in DeFi.

There were no major breakthroughs in DeFi until July 2020, when Synthetix figured out a way to incentivize users by issuing the protocol’s native token to provide liquidity. As a chain reaction, Compound released its liquidity mining program in May 2020 which led to the creation of a governance token called COMP in Compound protocol. This model became widespread and all the DeFi projects started using this model.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/05/image057.png” alt=”Total DeFi Users Over Time (m)” title_text=”Total DeFi Users Over Time (m)” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]Source: Jackdaw Capital, Dune Analytics

Cryptocurrency Lending

In DeFi, users can borrow and lend crypto assets for a fee or interest. The idea of lending is instead of keeping the crypto assets idle, one can deposit the crypto assets into platforms like Anchor, Aave, etc to earn interest rates much like fixed deposits. Anchor is one of the famous lending platforms that provide very high-interest rates for depositors and the total staked value of Anchor is more than $16 billion. The interest rate has hovered between 18%-23% for the last 1 year.

There are different revenue streams for investors in a DeFi protocol. In Compound, when funds are deposited, the protocol issues tokens called cToken which is like a receipt that shows the balance of the deposited amount. For e.g. if ETH is deposited, the Compound protocol will issue an equivalent cETH token. This cETH token can be used as collateral for a loan, meaning that the deposit can be used while the token is earning interest at the same time.

Unlike traditional banks, most lending platforms also reward users for borrowing money too. On top of this, users are also given governance tokens called COMP in Compound which can be used to vote on key decisions for the protocol, and these governance tokens can be sold for the market value.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/05/image059.png” alt=”Top 5 Total Value Staked Tokens: Lending ($bn)” title_text=”Top 5 Total Value Staked Tokens: Lending ($bn)” force_fullwidth=”on” admin_label=”Image” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” hover_enabled=”0″ global_colors_info=”{}” sticky_enabled=”0″]

Source: Jackdaw Capital, Defillama

Yield Aggregators

Yield Aggregators are like mutual funds whose primary job is to manage the basket of funds on behalf of the investors. Because yields vary between platforms, it has been difficult for the investor to find the opportunities at the right time. Yield Aggregators automate the crypto investments to earn the highest yield from various platforms to find the best deals to maximize profit for the user, thereby simplifying the user experience.

Yearn Finance is one of the pioneers in automated financial services and it leads the space by a large margin. It aggregates DeFi lending platforms such as Aave, Compound, and various other DeFi protocols. Unlike the traditional finance world where it’s difficult to aggregate all possible investments and maximize the result, it’s simpler to aggregate all possible investment opportunities in one place because DeFi protocols communicate in one language called programs.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/05/image061.png” alt=”Top 10 Total Value Staked Tokens: Yield Aggregators ($m)” title_text=”Top 10 Total Value Staked Tokens: Yield Aggregators ($m)” force_fullwidth=”on” admin_label=”Image” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” hover_enabled=”0″ global_colors_info=”{}” sticky_enabled=”0″]

Source: Jackdaw Capital, Defillama

Blockchain Bridges

Like how stable coins are pegged to a fiat currency, wrapped tokens are pegged to a cryptocurrency. Blockchain bridges help investors exchange a token from one blockchain to another blockchain. For e.g., Wrapped Bitcoin derives its value from bitcoin i.e. 1wBTC = 1BTC but can be used on other blockchains like Ethereum, Solana, etc.

High market capitalization and widespread adoption of Bitcoin and Ethereum by the crypto community is what makes Wrapped Bitcoin, the most used wrapped token. Like other Ethereum tokens, Wrapped Bitcoin is an ERC-20 token that is built on the Ethereum blockchain to facilitate Bitcoin holders to transfer money to the Ethereum blockchain quickly.

Interoperability and leveraging functionalities of other blockchains are some of the advantages of using wrapped tokens. For e.g. transaction speed in Bitcoin is slow compared to Solana or Ethereum. So, to move Bitcoin faster, convert Bitcoin to wBTC and do all transactions on the Ethereum blockchain. Also, wBTC can be used as collateral or to participate in other DeFi activities in the DeFi protocols such as Aave, Compound, etc which can be used only using ERC-20 tokens.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/05/image063-1.png” alt=”Top 10 Total Value Staked Tokens: Bridges ($bn)” title_text=”Top 10 Total Value Staked Tokens: Bridges ($bn)” force_fullwidth=”on” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” hover_enabled=”0″ global_colors_info=”{}” sticky_enabled=”0″]

Source: Jackdaw Capital, Defillama

DeFi Thefts (2021-2022 Q1)

A total of $2.6 billion worth of DeFi crypto assets have been stolen since 2021. A large number of hacks in DeFi are caused by faulty code and breaching the security of the network.

1. In the case of the Ronin network, it was a security hack. The attacker got access to five of the nine validator nodes. With the majority access, the attacker forged the transaction and claimed 173,600 WETH (Wrapped Ethereum) and 25.5 million USDC, totaling over $615 million.
2. In the case of Poly network, it was a faulty code in the Poly Network’s smart contract. The attacker found a vulnerability in the smart contract calls and made over $613 million with various crypto currencies.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/05/image065-1.png” alt=”Top 10 Cryptocurrency DeFi Theft Incidents Between 2021 & 2022 Q1 ($m)” title_text=”Top 10 Cryptocurrency DeFi Theft Incidents Between 2021 & 2022 Q1 ($m)” force_fullwidth=”on” admin_label=”Image” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]Source: Jackdaw Capital, Chainanalysis

Further Thoughts

Decentralized finance is slowly evolving in terms of security and cost standpoint. The goal to eliminate the middleman in finance is efficient until one realizes it comes with a huge security concern. Most of the security concern comes from faulty code which can be easily resolved by stress testing the code and vetting the code through various predefined security checks.

There are a lot of DeFi projects that promise high APY and various benefits to attract more investors to create liquidity. Evaluating the intrinsic value of a token and the tokenomics of the yield-providing platforms has become essential to avoiding short-term traps. For e.g, the famous anchor protocol isn’t generating enough income to pay an 18% rate. It’s been paying the investors by burning its reserves. Because there is more demand for an 18% yield than there is demand from borrowers for Terra coin in Anchor, there is an imbalance in the Achor protocol. If this continues, Anchor protocol might burn its reserves and eventually go out of business.

 
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About the Author

Kaushik Ramnath Ganesan is a Technology Investment Analyst at Jackdaw Capital. He comes from a computer science background and completed the CQF (Certificate in Quantitative Finance) program. At Jackdaw Capital he applies computer science, finance, and mathematics to bring blockchain technology mainstream.

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Making money in the crypto bear market

May 2022. Reading Time: 8 Minutes. Author: Dilsher Singh Dhingra

Introduction

In a recent research article, Risk of Cryptocurrency Investment in 5 Charts, we highlighted that more than 85% of tokens and coins are trading below their first listing price, which implies it is difficult to make money with cryptocurrencies on average.

As well-established coins like Bitcoin and Ethereum sold off recently and others like Luna collapses, the interest in shorting cryptocurrencies had increased. Although some cryptocurrencies investors are evangelists, most are there for the money, which can be made by going long or short.

We are going to provide a brief overview of how to short cryptocurrencies.

Futures Market

CBOE was the first regulated exchange to launch cryptocurrency futures based of Bitcoin in December 2017, but liquidated these shortly thereafter. The CME launched their futures in the same month and has continued offering these to institutional investors, and also added Ethereum futures.

Unregulated exchanges like Binance or ByBit also offer futures to their clients and with significantly more leverage. At CME a margin of 50% is required to trade Bitcoin futures, compared to less than 10% at Binance.

However, although cryptocurrencies continue to get more attention in the media on a daily basis, the amount of Bitcoin futures traded has decreased in volume. We observe that the volume increased by 5 times from March 2020 to April 2021, which coincides with Bitcoin peaking at $63,000. The volume decreased and only slightly recovered in October 2021, where Bitcoin hit its all-time high price of $68,000.

Although the volume will decrease as the price declines, the magnitude is somewhat perplexing as investing into Bitcoin has become so much easier with hundreds of crypto investing apps having launched in the last 12 months. It seems futures are not particular relevant for Bitcoin investors.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/05/image011.png” alt=”Top 10 Cryptocurrencies Market Capitalization ($ bn)” title_text=”image011″ align=”center” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}” src__hover_enabled=”on|desktop” src__hover=”https://jackdawcapital.com/wp-content/uploads/2022/05/image011.png”][/et_pb_image][et_pb_text _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]Source: TheBlockCrypto.com

Investors might assume that this is unique to Bitcoin futures, but the trend in Ethereum futures was almost identical.

Ethereum hit its all-time high price of approximately $3,900 in May 2021, post which the volume dropped by 50%. Though volume has been dropping ever since, but it has been at a much slower pace when compared with Bitcoin.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/05/image013.png” title_text=”image013″ align=”center” admin_label=”Image” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]Source: TheBlockCrypto.com

Binary Options Trading

In addition to shorting via futures, investors can also use options to implement a negative perspective on cryptos. The key advantage to using option is that the downside risk is limited to the premium paid for the put, but the upside is significant. Naturally cryptos can only fall to 0, so there is a limit to the upside as well, but options, as per their name, provide optionality.

However, it is worth highlighting that the volatility of the underlying security, i.e the cryptocurrency, is a major driver of the performance of the option. Cryptos exhibit high volatility and there might be the case the cryptos fall in value, but the put holder generates no return if volatility falls as well. Popular venues for trading options are Deribit, CME and OKEx.

Comparing the trading volume of Bitcoin and Ethereum options shows roughly the same trends as in the futures markets, i.e the volume follows the price.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/05/image016.png” alt=”Top 10 Cryptocurrencies Market Capitalization ($ bn)” title_text=”image016″ _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]Source: TheBlockCrypto.com

Prediction Markets

Prediction markets are another way to consider shorting cryptocurrencies. Prediction markets in crypto are similar to those in mainstream markets. Investors can create an event to make a wager based on the outcome, eg a decline of 50% in Bitcoin. Popular crypto prediction markets are Augur, Gnosis’ Omen, and Polymarket.

Shorting via Exchanges or Brokers

The simplest way to short cryptos is via large brokers and exchanges like Binance, Kraken, FTX, eToro and Phemex. They offer investors to go long and short cryptocurrencies. This requires a margin account where investors post collateral, typically cash. Some of the coins available to long and short are Bitcoin, Ethereum, Litecoin, Cardano, Solana, Polygon, Uniswap, Axie Infinity to name a few.

Crypto trading brokers like Exness, AvaTrade, BDSwiss, Eightcap, OctaFX also offer crypto CFDs (contract for differences) for a number of cryptocurrencies. Again, like margin trading, using CFDs to trade cryptocurrencies offers the flexibility of taking a position on whether Bitcoin rises or falls without having to actually own any Bitcoin. The main cost when trading a cryptocurrency CFD is the spread (difference between the price and the offer to purchase/sell).

Exchange Traded Funds

Finally, investors can also short cryptos by shorting ETFs that provide exposure to these, mostly via futures. The total AUM of the top 20 crypto ETFs is $5 billion and are only available for the largest cryptos like Bitcoin, Ethereum, Solana, XRP Ripple, or Cardano.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/05/image010.png” title_text=”image010″ _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: JustETF.com and Jackdaw Capital

In addition to shorting ETFs that provide exposure to cryptocurrencies, investors can also buy short ETFs, eg via the BetaPro Bitcoin Inverse ETF (BITI.TO) or 21Shares Short Bitcoin ETP

Shorting NFTs

The NFT market is likely in a worse position than cryptocurrencies as even fewer NFTs appreciate. The majority becomes worthless, which makes it an interesting space from a shorting perspective.

However, there are few established venues that offer to short NFTs. Some that are being developed are Mimicry, which creates a token that follows the market capitalization of an NFT collection. Investors can go long or short this token.

NFTures is similar to Mimicry in that it allows users to go long or short a token related to NFTs, although this may be a single item or collection

Further Thoughts

Cryptocurrencies experienced a severe market crash in 2018 and many declined by more than 80%. Post this crypto winter came the next boom that takes us to the present, where it is unclear whether we are experiencing a crash, or are entering another bear pro-longed market.

Either way, it is beneficial that investors have more instruments at their disposal to benefit from the up and downs of markets. In this way, cryptocurrencies are no different from traditional asset classes.

Related Research

Risk of Crypto Currencies in 5 Charts

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About the Author

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Dilsher Singh Dhingra, is a finance professional working in the investment team of Jackdaw Capital. He has previously worked in private equity with CX Partners focusing on the healthcare, technology, financial services and consumer sector. Prior to this, he worked with Deloitte (India) in the investment banking team across the fmcg, industrials and hospitality sector.

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Lido has an 89% market share in the liquid staking category

May 2022. Reading Time: 10 Minutes. Author: Kaushik Ganesan.

Introduction

Staking is a term that has historically been associated with providing upfront capital to a player in a game like poker. If the player wins, 50% of the profits go to the investor, and 50% to the player.

However, over the last couple of years, staking has been more frequently associated with the cryptocurrency space, where staking represents the act of locking crypto assets in a blockchain network to become a validator. The validator’s role is to validate the transactions and secure the network, i.e. they can be viewed as the auditors of the blockchain space. For their service, validators are paid with staking rewards.

In this article, we will explore different types of staking and its rewards.

Consensus Mechanism: Proof-of-Work and Proof-of-Stake

The proof-of-stake (PoS) mechanism is designed to ensure the security and integrity of the blockchain network by incentivizing the validators for validating transactions. All the rules are programmatically defined in the protocol. Validators who break these rules by behaving abnormally on the network would lose a predefined percentage of tokens staked in the network. This mechanism to discourage validator misbehavior is known as slashing.

Proof-of-work (PoW) allows anyone to become a validator by solving cryptographic puzzles, aka “mining”. Whoever solves the cryptographic puzzle first has the right to validate the transactions and collect the fees for securing the platform. The main criticism of PoW is that it consumes a lot of electricity as many people are trying to solve the same puzzle. Bitcoin, which is based on a proof-of-work mechanism, consumed as much energy as Austria in 2020.

The market capitalization of PoS blockchains has increased from approximately $9 billion in October 2019 to over $211 billion as of April 2022. Although the market capitalization of PoW is significantly higher at $1.2 trillion, most of this can be attributed to the two largest blockchains namely Bitcoin and Ethereum. Once Ethereum 2.0 is launched, where the blockchain will move from PoW to PoS, the total market capitalization of each will be more similar. From a number’s perspective, the distribution is almost the same with 280 cryptocurrencies using PoS and 354 using PoW as their consensus mechanism, according to CryptoSlate.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/05/image047.png” alt=”Top 3 Cryptocurrency Consensus Mechanisms by Total Market Capitalization ($bn)” title_text=”Top 3 Cryptocurrency Consensus Mechanisms by Total Market Capitalization ($bn)” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: Jackdaw Capital, CryptoSlate

Cryptocurrency Staking

There are multiple ways to pursue staking for someone interested in earning some money. The most direct approach is to do this directly at the blockchain layer, which is also called layer one, e.g. depositing money into the Solana blockchain. However, staking at layer one is only possible for PoS and not PoW blockchains like Bitcoin. Ethereum is somewhat unique in that it is a PoW currently in the main network, but the PoS mechanism is running on a separate chain called the “Beacon chain” where staking is possible. When the Beacon chain merges with the main chain, PoW will be removed entirely from the Ethereum main network.

The total staked value of all the PoS cryptocurrencies is $266 billion currently, where Solana and Ethereum dominate with a 28% market share. The staked value changes daily as people withdraw from or stake more money in the networks.

It is worth highlighting that some blockchains have minimum requirements to start staking and becoming a validator, e.g., one must deposit at least 32 ETH tokens in the Ethereum blockchain. In contrast, the are no minimum SOL tokens to run a validator node in the Solana blockchain.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/05/image049.png” alt=”Top 10 Cryptocurrencies by Staked Value ($bn)” title_text=”Top 10 Cryptocurrencies by Staked Value ($bn)” force_fullwidth=”on” admin_label=”Image” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: Jackdaw Capital, Staking Rewards

Liquid Staking

Liquid staking is an alternative to staking directly in the blockchain protocol that involves complex steps like setting up hardware for validating transactions and maintaining the validator node but is offered by third parties that make a business out of staking. Essentially, the startups make staking easier as they manage the process and also require lower minimum investment amounts. However, they also charge for their services and so the yield is lower than if done directly.

Lido is by far the largest liquid staking platform with approximately $18 billion of staked value, followed by Stader with a mere $789 million. According to Etherscan, Lido alone accounts for 30% of the depositors in the Ethereum protocol. Other custodial providers like Kraken and Whales account for about 8.5% and 8.3% of the depositors, respectively.

Lido issues stETH in return for staking any amount of Ethereum. stETH is pegged to ETH and it can be used to lend, borrow, and pool using other platforms. For e.g., Aave, a lending platform in the crypto space, allows users to borrow against their stETH. On Lido, the current APR for Ethereum is 3.6% and 5.3% for Solana.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/05/image051.png” alt=”Breakdown of Top 5 Staking Tokens by Staked Value: Liquid Staking” title_text=”Breakdown of Top 5 Staking Tokens by Staked Value: Liquid Staking” force_fullwidth=”on” admin_label=”Image” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]Source: Jackdaw Capital, Defillama

Centralized Exchanges Staking

Staking in centralized exchanges is like depositing money in a bank account and the banks take care of the account. With this option, one doesn’t need to create a wallet separately or hold private keys for the wallet. This is simpler compared to staking directly in the blockchain, but the staking rewards from the centralized exchanges are lower as these charge fees.

Kraken and Binance have the largest market share in this category and manage $7.4 billion worth of staked value. In contrast, the popular US crypto exchange only manages $1 billion. However, when combining both centralized and decentralized exchanges that offer staking as part of their services, eight out of the top ten were decentralized exchanges. The largest ones are Everstake ($4 billion), Allnodes ($3 billion), and InfStores ($3 billion).

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/05/image053.png” alt=”Top 10 Custodial Staking Providers by Staked Value ($m)” title_text=”Top 10 Custodial Staking Providers by Staked Value ($m)” force_fullwidth=”on” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: Jackdaw Capital, Staking Rewards

Staking Rewards

Staking reward is the incentive given to validators for spending computing power to validate a block of transactions in a blockchain. But this is different from staking in DeFi protocols like Olympus or Pancakeswap. The process of lending crypto assets and earning interest for providing liquidity on DeFi protocols is known as yield farming.

Staking rewards are almost irrelevant if the price of the token does not go up. For e.g., if the staking yield is 10% and the token supply is also 10% per annum, in real terms, there is no gain unless the price of the token is higher than the initial price. And therein lies the issue as most protocols calculate staking rewards using the supply inflation of the token.

One important thing to note about staking is that annual percentage yield (APY) decreases over time as the number of total staked values increases in the protocol. For example, at an early stage, the APY for staking in Ethereum was 23%, but as the total staked value increased to more than $30 billion, the APY decreased the APY to around 3%.

Some tokens offer exceptionally almost absurd yields compared to the meager ones from the traditional finance space. Olympus’s APY was 7,320% in October 2021, which implied investing 1 OHM (Olympus token) would have generated 73 OHM tokens per annum. Since then, the number of OHM holders has increased from 12k in October 2021 to 82k in May 2022, which decreased the APY to 476%.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/05/image055.png” alt=”Top 10 Cryptocurrencies by Staking Rewards (Annual Percentage Rate)” title_text=”Top 10 Cryptocurrencies by Staking Rewards (Annual Percentage Rate)” force_fullwidth=”on” admin_label=”Image” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]Source: Jackdaw Capital, Staking Rewards

Further Thoughts

The quantitative easing programs of the world’s central banks have generated a gigantic thirst for yield that can be seen across all asset classes. In 2022, the demand for yield has increased as inflation has spiked and most investors are incurring negative real returns. Anyone in the US with cash in their bank account is losing money in real terms currently.

It is easy to see how the attractive yields from staking have created interest for all investors, and not just crypto enthusiasts. However, high yield comes with high risk, which is often overlooked by yield-hungry investors. In the case of staking, this means getting a yield and holding tokens that have price risk. Getting a 10% yield is not attractive when the token exhibit high price volatility, as that can quickly turn into a loss from a total return perspective. As usual, there is no free lunch.

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About the Author

Kaushik Ramnath Ganesan is a Technology Investment Analyst at Jackdaw Capital. He comes from a computer science background and completed the CQF (Certificate in Quantitative Finance) program. At Jackdaw Capital he applies computer science, finance, and mathematics to bring blockchain technology mainstream.

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Short now, pay later?

May 2022. Reading Time: 10 Minutes. Author: Sidharth Sachdeva

Introduction

Buy Now Pay Later or BNPL, as it is popularly known, is a financing option which allows consumers to buy a product or avail a service without having to worry about paying for it immediately.

It’s simply a short-term loan product where the BNPL lender pays the merchant or service provider at the point-of-sale and allows consumers to repay the loan at a future date with little or no interest charges. The repayment can either be in lump sum or in the form of equated monthly instalments (EMIs). BNPL providers cover their costs by charging commission fees to shops or by applying late payment fees to consumers. BNPL is offered across the globe by many banks and Fintech firms and has gained significant traction in the past few years.

BNPL companies make money from two types of clients:

• Merchants usually pay a charge ranging from 2 to 8 percent of the purchase amount. Some providers also charge a flat fee of 30 cents per transaction
• Customers sometimes are charged interest on the instalments and late fees when payments are delayed

The onset of COVID-19 pandemic had provided a huge impetus to e-commerce industry and BNPL was a direct beneficiary of this trend. The BNPL industry has modernized layaway and instalment payments to offer consumers flexible payment options for their purchases. Compared to credit cards, intended to be used repeatedly, BNPL solutions are applied to individual transactions—appealing to consumers who want to make less of a financial commitment, even on lower ticket items.

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The BNPL Players

Here is a look at the leading BNPL companies as measured by the gross merchandise value (GMV) generated in 2020. The private Swedish company Klarna is the clear market leader and was valued at $45.6bn when it raised capital in February 2022.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/05/BNPL_Analysis_2022-05_29489_image002.png” alt=”Cryptocurrencies: Number of Dead Coins and Tokens” title_text=”BNPL_Analysis_2022 05_29489_image002″ force_fullwidth=”on” admin_label=”Image” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: https://www.statista.com

We can also observe the venture capital firms have allocated steadily increasing amounts of capital to the space.

[/et_pb_text][et_pb_image src=”https://jackdawcapital.com/wp-content/uploads/2022/05/BNPL_Analysis_2022-05_29489_image004.png” alt=”Dead Coins and Tokens: Breakdown by Scam Types” title_text=”BNPL_Analysis_2022 05_29489_image004″ force_fullwidth=”on” admin_label=”Image” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”][/et_pb_image][et_pb_text admin_label=”Text” _builder_version=”4.14.8″ _module_preset=”default” global_colors_info=”{}”]

Source: https://www.cbinsights.com/research/

Recent Challenges of the BNPL Industry

In 2020, BNPL became a hot topic in fintech and funding poured into the sector, but there was a sharp reversal of this investor enthusiasm in 2021. Although many of the large BNPL companies are private, there are ten listed in Australia and two in the US.

We create equal weighted BNPL indices for both regions and benchmark the performance of these to the regional stock markets as well as a global fintech index. We observe a boom and bust of listed BNPL companies in Australia and a highly volatile performance in the US.

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Source: Yahoo Finance (data range from 2019/01/01 to 2022/04/27 for Australia Index & 2019/02/01 to 2022/04/27 for US Index)

If we calculate the maximum drawdown from 2021 till 2022 YTD, then the BNPL companies fell by ~70% on average, which indicates a proper crash of these stocks.

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Source: Yahoo Finance

What is ailing BNPL?

The space which appeared so promising few years back has underperformed the stock market by a wide margin in 2022. Many investors are now concerned about the sustainability of the BNPL business industry for a variety of reasons:

1. Increased competition:

The significant influx of competition led to higher customer acquisition costs. In essence, the product became a commodity where existing players compete on interest rates offered to consumers. None of the large players offering BNPL are profitable due to high customer acquisition and marketing costs. One article by Finextra Research authored by Pablo López Gil-Albarellos flags the concern on the sustainability of BNPL business model by modelling this as follows:

• A $100 sale earns (on average) $4 in merchant revenue with 56 cents in late fees = $4.56.
• Expenses are $4.75 – of which $1.00 are credit losses, 16 cents funding, 34 cents share purchases and $3.25 in marketing, operations and salaries.
• As a result, unit economics are negative

Furthermore, as the market grew for BNPL companies, large companies like Paypal, Mastercard, Visa and Apple have entered the market. Due to their size and experience, these companies have better underwriting mechanisms and risk management practices.

2. Increased regulation:

The BNPL industry was considered lightly regulated as the inherent interest free payments ensured the players remained isolated from the traditional lending lens of the regulators. But off late, regulators have stepped up vigil on the activities of BNPL companies.

• UK: The U.K. government, meanwhile, is also planning to introduce BNPL regulations, putting the companies under the auspices of the Financial Conduct Authority, which regulates financial services firms.
• USA: The Consumer Financial Protection Bureau asked several high-profile BNPL firms – Affirm, Afterpay, Klarna, PayPal and Zip – for details on their product and practices, amid concerns that the financing products is putting consumers at risk in December 2021.
• European Union: The EU is tightening its rules on consumer credit to provide more protection for consumers. In June 2021, the European Commission presented a new proposal to regulate consumer credit, bringing BNPL products under the scope of the regulation.
• Australia: The central bank adopted a decision in October 2021 ordering BNPL firms to remove their no-surcharge rules. This meant that merchants are permitted to apply a surcharge to customers for using this method of payment if they wish to offset fees paid to the BNPL providers. On December 2021, Treasurer Josh Frydenberg delivered a speech proposing a major overhaul of the Australian payments system, including new regulation for BNPL products. The new proposals, which may include changes in the current legislation, are expected by mid-2022.

3. Changing Macro Environment:

Before pandemic the environment of low or negative central bank interest rates, controllable inflation and moderate level of consumer spending provided the ideal platform for BNPL companies to flourish. The Covid-19 pandemic provided the impetus to E-commerce and BNPL companies to leverage the opportunity. With global inflation rising and central banks across the globe putting brakes on Quantitative Easing, the macro environment is completely changed for BNPL companies. Traditional lenders will enjoy higher margins and higher product volumes. At the same time, they will leverage their core business capabilities – efficient risk management and effective collection processes. On the contrary BNPL will face the challenge of increasing cost of financing and a spike in delinquencies among customers is already visible in many cases.

Further Thoughts

Stock market investors have clearly lost their love for BNPL companies, which will eventually permeate to private markets as well. Given this, we can expect a consolidation amongst BNPL players as well as the acquisition of these by the larger financial services companies.

Although some of these companies have reached multi-billion valuations, they are still young companies that have not gone through a complete credit cycle. Lower economic growth will expose the flaws of providing credit to the unworthy, similar to the subprime crisis, and create further pain for investors. Given this, short now, pay later might be more appropriate.

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About the Author

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