On the Groundfloor of Bitcoin 2022

JPMorgan CEO Jamie Dimon has long been critical of cryptocurrencies. In 2021, he didn’t leave much up to the imagination when he said that “I [he] personally think[s] that Bitcoin is worthless.”

But in 2022, he’s singing a slightly different tune.

In a recent letter to shareholders, Dimon praised blockchain technology, saying that it will have a positive impact on our financial system.

“Decentralized finance and blockchain are real, new technologies that can be deployed in both public and private fashion, permissioned or not.”

At face, this might be extremely surprising. However, people with eyes on headlines would know well that Dimon’s flip-flop on crypto has been a long-time coming – JPMorgan has been developing its own cryptocurrency, JPM Coin, a dollar-backed stablecoin, since February 2019.

The company also developed a blockchain platform called Liink, which enables seamless data exchange between more than 400 institutions. 

“We use a blockchain network called Liink to enable banks to share complex information, and we also use a blockchain to move tokenized US dollar deposits with JPM Coin,” he wrote. 

“We believe there are many uses where a blockchain can replace or improve contracts, data ownership and other enhancements; for some purposes, however, it is currently too expensive or too slow to be deployed.” he added.

Both efforts are substantial tests of confidence in crypto and Decentralized Finance (DeFi) by one of its most dramatic critics – a monolithic investment bank. However, crypto maxis have their reservations about how authentic Dimon’s hate for Bitcoin really was.

To his credit, Dimon speaks plainly about what neobanks and crypto are doing to traditional finance in his letter. He said that “the role of banks in the global financial system is diminishing” and that he believes that there are “many uses where a blockchain can replace or improve contracts, data ownership, and other enhancements.” 

Maybe the crypto maxis can declare another small victory in Dimon’s praise. It has a lot of overlap with billionaire investor Ray Dalio, who found himself pivot away from explicitly anti-crypto rhetoric to optimistically-skeptical crypto convert last year amid the U.S’s latest inflation episode.

However, one thing can be gleaned from Dimon’s evolution on crypto: he was firm in his ways, until he wasn’t. And JPMorgan didn’t cement its opinion – it stayed open to the emergent tech, and the money, and played the field. 

If you want to apply for a loan, you need to submit proof of your income and reserves. But what if no documents are required? Such an option is available in the DeFi world, known as flash loans.

Flash loans are a form of unsecured (uncollateralized) lending which are offered to investors on-chain. However, instead of doing credit checks or using traditional finance applications, these lending mediums use smart contracts to impose lending rules. These rules make it so if a borrower tries to run off with the money – or the intended action for taking out the flashloan doesn’t execute – then the entire contract is voided and the transaction is reversed.

These lending rules, in short, require borrowers to pay back money almost immediately after they take it out. There’s no real-world equivalent to a flash loan – it’s like taking out a loan from a bank and being unable to leave. However, you can use these monster-sized loans to do some pretty crazy things. Let’s explore further:

How long have they been around? : Flash loans were first introduced in 2018 by an open-source bank Marble. They began through Aave, a decentralized lending platform built on and enabled by Ethereum in 2020. Flash loans have been popular, but they are still in their infancy. They have been built upon by contemporaries such as dYdX and Uniswap. As of December 2021, almost $5 billion worth of flash loans had been issued on Aave.

What can flash loans be used for? : In the past, flash loans have been disproportionately used to exploit vulnerabilities in DeFi protocols and steal millions of dollars. And on the flip side, even flash loan platforms themselves have been taken for money. Even these coded agreements have loopholes to be exploited. For instance, the bZX lending protocol was targeted by two flash loan attacks in February 2020, which allowed a borrower to manipulate the price of the stablecoin used to repay the loan, causing the lender to think that the loan had been repaid.

The future: Flash loans can give us a glimpse of what novel mechanisms and products can arise from emergent technologies. In 2008, few knew about CDOs – or collateralized debt obligations. In the end, these lesser-known instruments brought about a financial cataclysm. That’s not to say that flash loans will bring about a crypto cataclysm, but it is to say that being well-versed in new crypto-specific functions and instruments could go a long way to mitigating their pitfalls.

Bitcoin’s layer-2 chain, Lightning Network, will begin supporting stablecoin transfers in $USDC.X and $USDT.X – enabling greater multi-asset functionality on the Bitcoin network.

Bitcoin Taproot, an upgrade released in November 2021 which improved Bitcoin’s privacy and security, made stablecoin transactions possible and introduced smart contracts to the Bitcoin network. In effect, Lightning will help enable stablecoin transfers using Taro Protocol, which ​​allows developers to move stablecoins from the Bitcoin network to the Lightning Network. They will not issue stablecoins, but will simply allow people to move money across the networks.

Lightning Labs, the team behind Bitcoin’s cheaper and scalable “fast lane”, plans to roll out the feature in the coming weeks.

The aim behind allowing stablecoin transactions on Lightning networks is to bring about additional functionality and innovation on Bitcoin. In an interview with The Block, Lightning Labs co-founder and CEO said, “When it comes to the Lightning component, you’re routing through bitcoin.” 

“You’re literally doing a conversion from dollars [stablecoins] to bitcoin, back to dollars.” 

Currently, Lightning Network is being used by several companies, including Bitcoin payment company Strike, the tipping feature on Twitter, and crypto exchange Kraken. As a result of the latest development, it will add an important feature to its network, which will broaden its horizons. 

The company’s increased importance (and growth trajectory) in the Bitcoin ecosystem helped it raise a Series B round from Valor Equity Partners. Baillie Gifford, Goldcrest Capital, and several other angel investors also participated in the $70 million fundraise.

A number of developments have taken place regarding Bitcoin and DeFi and technology. Last month, Bitcoin Odyssey was launched which is a grant program with $165 million in funding designed to introduce Web3 elements to Bitcoin. These developments underscore how the blockchain world is diversifying and that Ethereum is not the only transaction engine for cryptos.