Finance vs DEX and Transparency
We have been seeing a lot of price manipulation of LRC (Loopring Token) in the last few days, all too similar to what one sees with GME (Gamestop). I have NO EVIDENCE of a CEX doing what I describe below, but am simply explaining the possibility of what could happen in today’s world of corrupt finance. The only solution to these problems will be transparency to the people of the world. DeFi ;)
When the individual goes to their bank and withdraws as much cash as possible, this could cause an issue for a bank as they hold more cash on paper than they do physically. This can also be applicable to Crypto and a DEX (Decentralized Exchange).
Shares that exist only on paper. There are more synthetic shares that are available for purchase on the market. Thus Synthetic, meaning fake.
DRS (Direct Registration System)
This is how you can attribute an individual stock to your personally, and not through someone like a broker. For GME you would purchase and hold GME stocks through computershare.
There is so much research over the past year into what Gamestop has become for Hedge funds like Citadel and good ol’ Kenny Boi. If you want to read into this you can stop on over to r/superstonk on reddit.
If you want a great site for GME DD (Deep Dives) go here, the creator has (and continues) to add to the DD that are published.
What does this mean for LRC?
How can you have a synthetic crypto? How is that a possibility when at the end of the day there is a max total supply and it’s a hard coded number? CEX (Centralized Exchange), that’s how. They could hold 10Mil LRC in their wallet, but at anytime their users could own 15Mil LRC. The 15Mil LRC doesn’t mean anything until more than their liquid total of 10Mil was pulled out. It could then be said that 5Mil LRC is then synthetic as they only exist within the CEX books.
A CEX like Coinbase does all their trading internally within their system, it is completely closed off from the outside. This means that we cannot see what Coinbase actually holds. You can think of a CEX like Fidelity, ETrade, Vanguard, etc. When you purchase your shares through a broker the BROKER is the one accountable for that record of who owns what. The broker is technically the owner of the shares. This is why DRS has been a huge topic for GME the past year. This ties your assets directly to you, the individual.
So just like bank running a bank, 1000s of individuals going to the bank and pull out physical cash; the equivalent of this on a CEX like Coinbase would be to transfer your LRC to your own personal wallet. One can only hope that Coinbase isn’t allowing trades that would put them above their liquid asset for each crypto.
What happens when you transfer from CEX
The crypto asset must be moved from the CEX wallet and sent to your personal address. If the CEX does not have those physical assets they must purchase those assets at market value. This could mean one of two things, the price shoots up and/or the CEX could ultimately fail.
How can we fix this?
The solution to prevent synthetic anything from appearing in the market is to use DEX (Decentralized Exchange) technology. Loopring being a platform that can provide that functionality.
A DEX allows the individual to trade directly from peer to peer with even lower fees than a CEX (at least with Loopring DEX). A DEX has public transparency and because of this can be audited by anyone at anytime. There are also Liquidity Pools that then provide the “physical” crypto that is on the DEX.
How do I tie my LRC directly to me?
You move them to your own personal wallet! Ideally to Loopring’s Smart Wallet with L1 functionality and guardians setup so you can protect your assets from something like you dropping your phone into a lake. You of course can also back up your secret key from within the app.
Think of moving your LRC (or any crypto) to your personal wallet as the same as DRSing your shares to Computershare for GME. NOT YOUR KEYS, NOT YOUR CRYPTO.