(Kitco News) – The digital asset ecosystem entered a new era of legitimacy with the launch of spot Bitcoin (BTC) exchange-traded funds (ETFs) on the U.S. market, exciting many long-time hodlers who had been waiting more than a decade for such a development.
But not everyone sees the ETFs as a major triumph, as they really just rebrand a popular investment vehicle from traditional finance (TradFi) without doing much to improve the overall crypto market structure.
Some have even warned that continued inflows into the spot BTC ETFs, which currently hold more than 838,000 Bitcoin – approximately 4.26% of the circulating supply – could lead to Wall Street controlling a large or majority share of all Bitcoin, which could destroy organic price discovery.
Q: Will you buy the Bitcoin ETF?
A: No. Just as I own gold and silver coin and mines and own apartment houses I do not own gold or silver ETFs or REITS, real estate ETFS. ETFs are best for most people and institutions. Personally I am an entrepreneur and prefer to stay as far…— Robert Kiyosaki (@theRealKiyosaki) April 12, 2024
Rather than focus so much attention on the ETFs launched by TradFi fixtures, Sebastian Higgs, co-founder and COO of Cordial Systems, a provider of institutional-grade self-custody software using a Zero Trust security model, would like to see changes made that improve the overall operating conditions of the crypto market.
Referring back to the collapse of FTX, which played a major role in the onset of the most recent crypto winter, Higgs said “there are numerous levers that can contribute to its improvement.”
“While many individuals may emphasize the importance of increased regulation, transparency, and audit processes, this approach can be somewhat derivative,” he said. “Today, there are emerging solutions that utilize blockchain technology to enable multiple distributed entities involved in a business process to independently verify adherence to the rules of trade or commerce.”
He noted that as the crypto market matures, different subsectors are becoming more apparent, with the two most prevalent being exchange services and custody providers.
“There’s a noticeable shift in market structure, with a growing distinction between execution venues and asset safekeeping,” he said. “While this observation is accurate, there has been some complacency in envisioning what improvement truly entails.”
“Typically, the approach is to merely replicate the traditional finance system, overlooking the potential for substantial enhancement,” said Higgs. “The greatest improvement over time will be driven by technology that ensures asset movement can only occur in the ‘correct way’ based on specified initial conditions and parameters.”
He noted that “Traditional financial markets operate as trust networks, where participants often have their preferred operating partners.”
“However, utilizing a shared ledger and avoiding reconciliation between disparate in-house databases, while also codifying ground rules of engagement within contracts, processes, or relationships, significantly reduces the potential for operational errors and failures in risk management,” Higgs said.
“A market participant and its operating partners, such as exchanges, will each run software in parallel and independently check processes in a trustless manner,” he added. “This approach eliminates the need to rely on one entity to host a database while the other performs API calls, as this setup represents the maximally trusted setup and isn’t fit for purpose in a distributed ledger world.”
Higgs, like many other analysts, also warned that the recent rise of restaking platforms for tokens like Ethereum (ETH) has introduced one of the worst aspects of TradFi to the crypto market – rehypothecation – and he thinks it will have a negative impact over time.
Restaking allows previously staked assets to be staked again on a different platform or program, enhancing the asset's utility and potential for rewards. This process enables staked assets to be leveraged by other decentralized protocols, offering additional reward opportunities to both validators and nominator stakers.
Popular restaking platforms include Eigenlayer, Ether.fi and Renzo.
"My view on liquid restaking, which is shared by many other institutions, is that it presents a real compounding of risk - both financial and technical,” Higgs said. “Rehypothecating a chain’s security budget are not words I thought I’d ever be saying when I entered the blockchain world in 2017 and shows how unhinged this market can be in its pursuit of innovation.”
“On the finance side, it’s reminiscent of securitization in traditional finance,” he added. “On the technical side, leveraging up your security budget does not create more of it; in fact, it makes all chains in the equation weaker. The value of helping to bootstrap security for a new chain is well understood, however, shared security is a false god."
According to Binance, the main benefits of restaking include asset flexibility, mitigating the shortcomings of traditional staking, scalable security, and enhanced security for new protocols. The main risks include asset centralization and compounded slashing.
While many crypto degens have been more than happy to restake their tokens in exchange for higher yields, many experienced traders and analysts see it as a holdover from TradFi that only increases the risk in a highly volatile and risky market.
Restaking is a financial product not a technological one.
Restaking provides:
> No new capital
> No new tech innovation
> No new users
> New systemic risk$ETH— Zedzies (@Zedzies) April 8, 2024
