Chicago’s Trading Firms Look to DeFi With New ‘Alliance’

Some of the most experienced trading firms in Chicago are joining forces to promote decentralized finance (DeFi) during the coronavirus recession.

TD Ameritrade, Cumberland, CMT Digital, DV Trading and Jump Capital, plus venture capital firm Volt Capital and the DeFi startup Compound, all joined forces in the Chicago DeFi Alliance (CDA). Announced Wednesday, the new group will focus on providing advisory services to select crypto startups.

CMT Digital Holdings CEO Colleen Sullivan said she sees a significant benefit in “bringing together the Chicago trading community that’s been active in the digital asset space for some time.” 

Plus, mentors stand to benefit, too, by identifying talent. For example, CMT Digital runs both a legacy trading desk and an investment arm interested in equity opportunities.

Funds that invest in early-stage startups may have more responsibility in the DeFi consortium. For example, Volt Capital co-founder Soona Amhaz said the CDA will help entrepreneurs get their startups “up and running during the crisis,” then stay “as insulated from macro conditions” as possible. She said she hopes the CDA will offer a pool of talent that crypto startups like dYdX and Yield can draw from so they can focus on their long-term visions.

“There’s a real opportunity here to leverage financial and trading expertise from Chicago to support DeFi products around the world,” Amhaz said.

Especially during a broader economic crisis, there are ample arbitrage opportunities for companies looking to ensure liquidity for products or services that need Ethereum-based stablecoins. Uniswap founder Hayden Adams said March 2020 was actually his decentralized exchange’s peak month, seeing $220 million worth of activity. That’s $70 million more than February, or nearly a 47 percent increase.

“Stablecoins were the most traded,” Adams said. “There were some active arbitrageurs that were able to keep the prices in the right place and make sure there was always crypto available for purchase.”

Volt Capital co-founder Imran Khan said the CDA will “provide startups with real-world trading feedback.” Volt Capital already invested in one such DeFi startup, Dharma, and Khan said his firm is eager to find the next early stage investment opportunity in the DeFi space.

“We’re very early in DeFi. I think there’s going to be a lot of hand holding with some of these companies before they [DeFi contracts] become decentralized,” Khan said. “Right now everyone is just dogfooding their own products. The goal for us, as the CDA, is to help us get out of that cycle.”

With the help of experienced traders, Khan said the DeFi ecosystem can become more robust.

“All of the DeFi products being built are going to be catering to these large trading firms,” Khan said. “Obviously, we want users. But these products are so complex [today], it only fits well for professional traders.”

That’s why some of the most experienced trading firms in the industry joined forces through the CDA, to help entrepreneurs understand and access liquidity. According to DeFi Pulse, there’s still roughly $744 million worth of crypto locked in DeFi contracts, usually as loan collateral or smart-contract deposits earning interest. The current economic crisis may stimulate even more activity among stablecoin users.

Ledn co-founder Mauricio Di Bartolomeo said demand for his company’s bitcoin-collateralized dai loans doubled between December 2019 and March 2020. These are often average bitcoiners seeking stablecoins so they can use DeFi platforms. 

“As market volatility increases, we are seeing the need for more tools that allow our clients to switch between the amount of dollar loans versus bitcoin (BTC) they are holding,” he said of stablecoins. 

Crisis management

So far the DeFi ecosystem appears to be maturing in times of hardship.

When the coronavirus crisis hit exchanges in March and crypto prices plummeted, people using the leading DeFi protocol, MakerDAO, had to act fast to fend off widespread liquidation of the system’s collateralized debt positions (CDPs). New dai stablecoins are issued when someone creates a loan backed by ETH collateral. So, although many exchanges offer dai trading regardless of MakerDAO, no one knows how supply and demand for dai might be impacted if the underlying CDP system faltered.

Holders of the system’s MKR voting tokens promptly added a new collateral type for dai, the Coinbase-affiliated stablecoin USDC, which the exchange also distributed to DeFi platforms like Uniswap and PoolTogether. In the most recent community vote on emergency measures, which ended on March 30, MakerDAO Foundation head of communications Mike Porcaro said more than 55 percent of the governance tokens came from a single account and just four voters made up more than 94 percent of the votes.

According to Anchorage co-founder Diogo Monica, a custody startup that works with prominent MKR holders like Polychain Capital and Andreessen Horowitz, investors were actively moving MKR tokens out of storage to participate in those urgent votes.

“There was a very significant increase in interest from people using Anchorage for voting and governance decisions for Maker because they had to make some pretty hard decisions to maintain dai, keep it healthy,” Monica said. “Almost all of the clients that had MKR positions wanted to actively participate in this.”

Quantstamp CEO Richard Ma, spearheading a startup that audits smart contracts, said he was impressed with how quickly the Maker Foundation rallied to resolve issues by using public polls for broader feedback. Plus, MKR holders are now voting on whether to compensate accounts that had liquidated loans. 

“They had proactive communication,” Ma said. “We’ve had a lot of requests from companies wanting us to review their systems to prepare for these volatile situations.”

Diversification

Volt Capital’s Khan acknowledged the community still has a long way to go before the DeFi system can work without its creators keeping a proverbial hand on the wheel.

Ma added he’s concerned the DeFi aspect of these systems might not inspire enough accountability for people to continue auditing public contracts. This can lead to hackable vulnerabilities. Startups like those involved with CDA are more likely to audit, Ma said, because they are responsible for a product or service and profit from it. He said he expects startups that work with bitcoin as well, like Ledn and Thesis, will see an uptick in demand.

The latter, which is scheduled to debut tBTC in April, will allow tech-savvy bitcoiners to wrap the godfather cryptocurrency in an Ethereum-friendly shell and use it in DeFi loans or interest-bearing positions. Consumers have a variety of choices at every income level. 

“One area I think is going to take off is using bitcoin as collateral for DeFi,” Ma said. “Generally speaking, lending and borrowing are here to stay.”

These DeFi startups already serve some retail users, beyond professional traders and investors, like Argentinian ex-pat María Paula Fernandez in Germany. She had cross-border accounting issues in 2019 and now uses Compound to manage a significant chunk of her income.

“I trust dai more than banks. If I take small [freelancing] contracts, I’ll take dai and save it,” Fernandez said.

But her trust in products that rely on smart contracts has changed since March’s drastic market fluctuations.

“After Black Thursday,” Fernandez added, “I’m no longer using DeFi [products] for a while.”

She’ll continue using stablecoins and wait for a less volatile time to use interest-bearing products or loans.

According to Sebastian Serrano, CEO of Latin American crypto exchange Ripio, dai is the most popular stablecoin among Argentinians and demand for it among his clientele increased six-fold in March compared to January. 

Khan said he expects the economic crisis will bring in more users by winter, especially if local fiat currencies suffer. That makes this spring the perfect time for professional traders and technologists time to iron out the kinks in ecosystem liquidity. 

“People are scared and they need something that will get them through this phase of life,” Khan said in reference to crypto newcomers. “It’s not going to be bitcoin, it’s going to be stablecoins.”