🌅 Welcome!
Vitalik delivers an updated roadmap for Ethereum and OpenSea weighs in on the creator royalty debate by launching a new tool to help enforce royalties.
Today, we took a look at the price performance of tokens associated with FTX/Alameda. Plus, our Research team talks about the Inelastic Market Hypothesis, introduced in a 2021 paper on modern market theory.
This is the Delphi Daily. Let’s dive in.
🚨 In Case You Missed It
- OpenSea launches a new on-chain tool to help creators enforce NFT royalties.
- Google Cloud partners with Solana and becomes a node validator for the network.
- Vitalik delivers an updated roadmap for Ethereum.
- The European Commission will propose legislation on a digital Euro soon.
- Hong Kong looks set to launch ETFs tracking crypto futures for retail investors.
📊 Tokens Associated With FTX/Alameda Sell Off Amid Concerns
- On Nov. 2, 2022, CoinDesk published an article that reviewed the balance sheet of Alameda Research. The article acknowledged that the document may only paint a partial picture of the market maker.
- Although FTX and Alameda Research are separate businesses, they are closely linked as FTT accounts for a large portion of Alameda’s balance sheet. The firm holds at least $5.7B of FTT tokens.
- While there is nothing wrong with this, concerns that Alameda’s balance sheet rests on a token issued by a sister company instead of an independent asset have prompted growing concern in the market.
- Alameda’s balance sheet amounts to $14.6B in assets and $8B in liabilities. Concerns that they may be forced to sell other illiquid assets in a bear market to repay loans collateralized by FTT have led to a decline in tokens associated with FTX/Alameda.
- Over the last two days, SOL (-17%), FTT (-11%), FIDA (-12%), SRM (-13%), and RAY (-17%) have underperformed BTC (-3%) and ETH (-4%).
- Alameda’s CEO, Caroline Ellison has come forward to assure that the firm remains solvent and has repaid most of its loans already. Regardless, Binance is looking to sell over $500M of FTT tokens held by the exchange as an investment.
⚡Volatility, Order Flow, & the Inelastic Market Hypothesis
- With the rise of electronic market-making and high-frequency trading dominating the liquidity landscape over the last 20 years, order flow analysis and its impact on markets has become a topic of growing intrigue.
- More specifically, many have wondered if analysis based on this new order flow data could provide insight into a topic that has stumped market professionals for decades.
- Why does the stock market exhibit so much volatility, what is the origin of these seemingly random price fluctuations, and how does the market deal with these price movements?
- The prevailing theory, known as the efficient market view, contends that the price of an asset is the net present value of all future cashflows. If this is true, the value of the market should not change much at all. In practice, we know this is not the case.
- Enter Xavier Gabaix and Ralph Koijen, authors of a pivotal 2021 paper on modern market theory, “In Search of The Origins Of Financial Fluctuations: The Inelastic Market Hypothesis.” Their analysis found equity markets to be surprisingly inelastic.
- The origins of the Inelastic Market Hypothesis started with a surprisingly simple question: when an investor sells $1 worth of bonds and buys $1 worth of stocks, what happens to the aggregate value of the stock market?
- Prevailing efficient market theory suggests, in the absence of fundamental news driving changes in the net present value of future cashflows, the sole action of buying/selling $1 of stock should theoretically have a minimal effect on the stock market. Through empirical analysis, the 2021 paper has found this not to be the case.
- Given this new, order flow-driven theory of price impact, how do asset prices move? Why does the act of trading actually move prices if every buy trade is matched with a sell trade, and vice versa, even for uninformed traders with no edge?
- It is important to distinguish between the two types of trades: active and passive trades. Active trades consume liquidity and are known as liquidity takers. These trades are market orders hitting the bid or ask.
- Passive orders are the opposite and are known as liquidity providers. These are limit orders, which appear in the order book, at a specified reserve/reference price.
- Active buy orders push prices up (i.e. market orders hitting the ask), while active sell trades tend to push prices down (i.e. market orders hitting the bid). This is known as the price impact of order flow. The larger the position size, the larger the price impact.
- This dichotomy gives rise to supply and demand imbalances. These imbalances can be thought of as the difference between active buyers and active sellers, thus reflecting the market’s appetite or aggressiveness in one direction.
- For more on the role of liquidity in markets, Delphi members can read our Delphi Pro report here.
🐣 Notable Tweets
SBF Says FTX Is Solvent
1) A competitor is trying to go after us with false rumors.
FTX is fine. Assets are fine.
Details:
Are Uniswap LPs Losing Money?
1/
Great thread on how Uniswap LPs are on net losing money.
Do DEXs on Solana fare any better?
Unfortunately, we don’t know for most DEXs because they only show the trading fees + liquidity mining rewards.
Impermanent loss is hidden.
🧵👇
– Durden ∞ (@durdenwannabe)
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