Monday, March 12, 2018

Changelly Bringing A New Trading Platform Online, "Oxygen"

Today I received an email from the folks behind Changelly announcing that they are bringing the latest distributed ledger tech trading platform to the world, Oxygen.

There's three interesting things to be aware of from the get-go:
  1. Oxygen will be based in Gibraltar, which is the first jurisdiction in the world to establish a regulatory framework governing distributed ledger technology-based entities
  2. The creators of Oxygen are well aware of the U.S. regulatory situation in regard to crypto assets and trading and appear to be conscious of the mistakes others have made; they have retained counsel to help them navigate regulations and plan to be registered as an "Alternative Trading System"
  3. One of the things this platform is being created to do is allow crypto asset holders to leverage their holdings for income via repurchase agreements
  I highlighted #3 because I think this is the most important feature of this new platform.

A repurchase agreement, briefly explained, is a collateralized loan from Party A to Party B that occurs for a very short amount of time. The party wishing to borrow, in this case Party B, pledges an asset in exchange for cash from Party A. This makes B a seller and A a buyer. A receives the collateral item, and B receives the cash.

A short time later, B makes good on the loan by repurchasing the collateral from A, plus a little more. That little more is in effect the "interest" that A earned on the loan. A then returns the collateral to B. The assets have been repurchased, as agreed; hence, a "repurchase agreement."

If B fails to make good on the terms of the agreement, A can liquidate the collateral and be made whole (or as close to it as possible).

In the white paper that is available on the Oxygen site, they describe on page 16 how this would work. It is essentially the same, just with a few extra steps since it appears that a "Oxygen token" will be used for transactions on the platform, but that other crypto assets can be used as collateral. The entire transaction will be facilitated via smart contract, ensuring that all terms and appropriate actions will occur as the repo agreements execute between parties. Additionally, in step 5 of the process, there is a description of what happens should the borrower default, with a possible settlement option made available to the lender to be to convert the collateral into any other crypto asset they prefer via Changelly. So if your borrower pledges Litecoin but you would rather have Bitcoin, presto! Their collateral becomes Bitcoin.

So what would you do with this? Basically, it's going to enable you to play a crypto asset long or short, depending on what you think it's going to do over the term of the repo agreement.

An example is given in the white paper beginning on page 24 (apendix 1). You can read their explanation, which I think is perhaps needlessly complex, or try my attempt at briefly explaining it:

Party A owns Bitcoin Max Horsepower and thinks it's better than everything.

Party B has regular old BTC and thinks that Bitcoin Max Horsepower is dumb and will crash in price.

Party B approaches Party A and says, "hey... lend me your crapcoi... er... Bitcoin Max Horsepower for 60 days, and I'll return them to you plus 15%. You can hold my BTC in the meantime."

Party A says, "15%! I think that's what plants crave! You have a deal!"

Party B, now in possession of Party A's crapcoi... er... Bitcoin Max Horsepower, sells it for cash at $100 per coin. Let's just say it was 100 of the coins, giving Party B $10,000.

Sixty days later, Bitcoin Max Horsepower has achieved the amazing sum of .50 cents each, and Party B must return 115 of the coins to Party A. Party B takes the cash he got from selling the coins sixty days prior, purchases 115 Bitcoin Max Horsepower crapcoi... er... coins for $57.50, returns them to Party A (who may have already jumped off a building), pockets about $9,943, and gets his regular old Bitcoin back that he pledged as collateral.

Now, had things been different and Bitcoin Max Horsepower actually did something amazing, Party A would be profiting nicely from the 15% additional coins he would receive per the terms.

What you can already do with any crypto is bet "long" on it by purchasing and holding it. But the way it works out there now, you really can't get interest on your holdings, not in a smart-contract driven, trustless fashion. And you certainly can't go short as described here for the same basic reason. That's been one of my chief disappointments with the crypto sphere thus far, an inability to profit on the short side from the inevitable crash of many of the absolute garbage coins that are out there being pumped and dumped. All I can do to profit from them is go long and hope I can time my exit well, which I don't really care to do.

Will this be available to us here in the U.S.? That's the other thing. This may be another one of those shiny, awesome, profitable objects that Uncle Scam places just out of our reach here. What's included in the white paper to that effect is encouraging, but who knows what regulatory shenanigans will occur along the way. And of course, I live in Washington state, where the morons in Olympia will probably decide that this is one more tool for achieving prosperity that should be denied to me "for my own protection."

This will be something to keep an eye on, that's for sure.

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