Author: admin heyokha

Stablecoins: /ˈsteɪblkɔɪn/

As the name implies, stablecoins always aim for one goal: stability. They bridge the gap between fiat currencies and cryptocurrencies by letting crypto users to make transactions easily and quickly without needing to leave the digital asset ecosystem or rely on intermediaries whilst worrying about the value of their coins fluctuating.

There are four primary types of stablecoin, classified by their underlying collateral structure.

1. Fiat-backed

2. Crypto-backed

3. Commodity-backed

4. Algorithmic

#1 Fiat-backed stablecoins

Fiat-backed stablecoins are the most popular type among the four. They are fully backed by fiat currency such as US dollar and short-dated US government obligations which are always redeemable at 1:1. Fiat collateral remains in reserve with a central issuer or financial institution, and it must remain proportional to the number of stablecoin tokens in circulation. The most prominent fiat-backed stablecoins include Tether (USDT), USD Coin (USDC).

#2 Crypto-backed stablecoins

Crypto-backed stablecoins are backed by another cryptocurrency or a basket of cryptocurrencies as collateral. This process occurs on-chain and employs smart contracts instead of relying on a central issuer. When purchasing this kind of stablecoin, you lock your cryptocurrency into a smart contract and obtain tokens of equal representative value in return. To redeem, you can swap the stablecoin back into the same smart contract for the original collateral. An example of this type of stablecoin is DAI. What gives some crypto-back stablecoins a layer of robustness is that they don’t solely depend on one single cryptocurrency, for instance, Maker Protocol (the Dai stablecoin system) accepts any Ethereum-based asset that has been approved by MKR holders as collateral.

#3 Commodity-backed stablecoins

Commodity-backed stablecoins are collateralized using physical assets such as precious metals, oil, and real estate. Tether Gold (XAUT) and Paxos Gold (PAXG) are examples of gold-backed stablecoins. Different from the other three types of stablecoins, commodity-backed stablecoins also provide investors access to these assets which may otherwise be out of reach as well as a fractional ownership.

#4 Algorithmic stablecoins

Algorithmic stablecoins rely on specialized algorithms and smart contracts to manage the supply of tokens in circulation. An algorithmic stablecoin system will increase or reduce the number of tokens in circulation depending on the token price in relation to the price of fiat currency it is pegged to. A case in point would be the TerraUSD (UST).

The Terra protocol consists of two main tokens: UST and LUNA.

UST uses LUNA to maintain its 1:1 peg to the US dollar which could be swapped for UST and vice versa to keep the price of UST where it should be.

To make it easier to understand, imagine that the price of UST is currently above $1, let’s say $1.01. A LUNA holder can then swap 1 USD worth of LUNA for 1 UST. In this case, the market, using an algorithm, will burn 1 USD worth of LUNA and mint 1 UST. The holder can sell 1 UST for $1.01 – profiting $0.01 from the arbitrage mechanism. The logic works the same for the opposite – when 1 UST is trading at $0.99, a UST holder can swap 1 UST for 1 USD of LUNA. The swap will result in the burning of 1 UST and minting of 1 USD of LUNA, holder profit $0.01 from the swap.

Mayday! Mayday!

Terra Protocol and its ecosystem have been all over the headline of news for the past week. TerraUSD (UST) – the protocol’s algorithmic stablecoin has lost its peg twice in three days which ultimately led to a permanent de-pegging. At the time of writing, UST fell as low as $0.15. Meanwhile, LUNA – the protocol’s governance token is almost worthless, trading at almost $0 from a high of US$119.18 last month. This has led to the Terra Validators officially halted the blockchain on 13^th May.

Source: CoinGecko

The event has sent shockwaves throughout the crypto ecosystem, making one to wonder what caused the blowup. The root cause of the fatal crash has not been confirmed, but speculation laid out by the Onchain Wizard suggests that it could be caused by a coordinated attack which has led to the drop of UST deposits on Anchor protocol from $14 billion to $11.8 billion over the weekend. As the Wizard sees it, the problems for Luna began in March when the Luna Foundation Guard (LFG) began purchasing Bitcoin (BTC) for UST’s reserve pool. And at some point, the attacker began building a BTC short position and a $1 billion OTC UST position, knowing that LFG will be creating a new liquidity pool – the 4pool, and requires transferring liquidity between pools. On 8^th May, LFG removed $150 million in liquidity in anticipation of 4pool from Curve. At the same time, an attacker drained $350 million of UST, kick-started the de-pegging. Once LFG began selling its BTC from reserves to save the peg, it put downward pressure on BTC. The attacker also began to offload the remainder of the OTC UST position. With strong UST liquidations, LUNA price starts to collapse because of the Terra’s algorithmic mechanism. The token then went down a “death spiral.”

However, it seems as though fiat-backed stablecoins such as USDT and USDC have managed to kop their head above the water and investor sentiment remains relatively intact. Although USDT briefly dipped to $0.95 last Thursday amid the UST meltdown.

Snowball Effect to DeFi

A chain reaction started a crypto bloodbath, over $350 billion has been wiped off the value of the global crypto market since the UST collapse. And the total value locked (TVL) in decentralized finance (DeFi) protocols has dropped from US$142 billion to US$87 billion, losing over 39% over 7 days. Tokens like Avalanche and Solana that underpin some key DeFi protocols posted over 40 percentage loss at one point.
Source: CoinMarketCap

Source: DefiLlama

The Postmortem

UST was a darling of DeFi. The protocol that seeks to power a stable global payment system with affordable and fast settlement amassed a market cap of $18.7 billion and was the fourth largest stablecoin by market value within 20 months since its launch.

A key implication from this fiasco is the vulnerability of algorithmic stablecoins. This type of stablecoin is uncollateralized in nature. It requires a complex engineering to hold its value steady. In addition, its reliance on the Anchor protocol which offered a high yield (a whopping 19.57% APY!!) to UST depositors adds skepticism to the sustainability of the protocol. For instance, the success of UST relies entirely on the belief that LUNA, a token that is created out of thin air, has value. Once a portion of investors begin to lose faith in Terra, a sell-off could trigger FUD (Fear, Uncertainty, and Doubt) which thereafter cause a loop between further selling of UST, which exacerbates the de-pegging of the stablecoin, and thereafter leads to more FUD and more selling – the tokens go down a ‘death spiral’.

What we observe as the flaw that has led to the meltdown of LUNA and UST is that the stablecoin is still prone to bank runs that happen in the traditional world, except there is no reserve backing the UST which made the problem worse. So when everyone try to withdraw their money at the same time, draining liquidity of a token, the token price plummets.

Nonetheless, the search for fiat alternative will continue, stablecoin is just one of the experiments that take advantage of the blockchain technology. Better iterations and new experiments will be attempted. Indeed, during the same week, Economist Nouriel Roubini, who has been a long-term crypto skeptic known as “Dr. Doom,” revealed over the same week that he is developing a tokenized asset called the United Sovereign Governance Gold Optimized Dollar (USG) that will be backed by real assets including U.S. Treasuries, gold and real estate investment trusts. Whether this attempt to create a more resilient dollar will play out or become just another experiment, only time will tell.

Despite being an unfortunate loss to many, Terra was the biggest algorithmic stablecoin that tried to achieve the decentralized mission of crypto. Afterall, any asset-back stablecoin is fundamentally centralized around a financial institution that opened the bank account. The collapse of Terra reinforced the credibility of the underlying blockchain technology and drew the attention of lawmakers and officials. Their call for stablecoins to be regulated may be a positive news to crypto enthusiasts and investors.

Following the devastating fiasco, US Treasury Secretary Janet Yellen cited the incident during a Senate Banking Committee hearing on the Financial Stability Oversight Council’s (FSOC) annual report, reiterated the importance for robust regulation.

“There was a report this morning in the Wall Street Journal that a stablecoin known as terrausd [UST] experienced a run and had declined in value.” Yellen said.

“I think that simply illustrates that this is a rapidly growing product and there are risks to financial stability and we need a framework that’s appropriate.”

As blockchain and crypto are unprecedented technology and asset, policymakers have been careful trying to understand and develop rules for the sector while leaving the industry guessing. Although the outcome of any new regulation is unclear, the terra meltdown becomes a catalyst to speed things up and would ultimately more stability to the market. The elimination of uncertainty surrounding cryptocurrencies could potentially entice a wider range of investors, particularly cash-rich institutions, providing a boost to innovation.

Reference:

https://www.gemini.com/cryptopedia/what-are-stablecoins-how-do-they-work#section-algorithmic-stablecoins

https://cryptonews.net/news/security/6356357/

https://news.bitcoin.com/us-lawmakers-push-for-urgent-stablecoin-regulation-fed-warns-of-stablecoin-runs-janet-yellen-cites-ust-fiasco/

https://news.bitcoin.com/dr-doom-nouriel-roubini-to-launch-tokenized-dollar-replacement-with-payment-and-esg-features/

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Everyone has a plan ‘till they get punched in the mouth. This frequently cited quote by Mike Tyson gains more relevance today. Politicians may aspire with plans to increase their odds of being elected. Greening economy projects, waging war against inequality, exerting political dominance over other countries, and other populist policies are some of the examples. However, all these means nothing if their leadership fails to bring food on the table.

In our past blog (link), we pointed out how supply chain issues, tight agriculture market, energy crisis, and geopolitical tension crystallised in the great rally of ammonia and fertiliser prices. If we consider the factors at play, this might be the warning shot of an upcoming food crisis.

Skyrocketing food prices have been associated with social unrest and we are at all-time high

It is pretty straight forward why high and volatile food prices could destabilise a society.  Food is both essential and have a significant share of our daily spending. Based on 2018 Euromonitor data, food on average accounted for 28.7% of  consumer spending in 51 countries throughout the globe. For some countries like Bangladesh, Myanmar, Kenya and Ethiopia, this figure can be as high as 53% to 59% .

There are anecdotal evidence in the past whereby food problems led into social unrest. In 1789, the famine led French peasants to storm the Bastille prison and ended up overturning the French empire. In the modern era, the high food prices in 2008 and 2011 sparked numerous civil unrests in the Middle East.

Before the recent boom, commodities were the sucker’s bet of the last decade. At the start of its gracious fall in the 2010s, the substantial commodity investments in the 2000s left the world with abundant stocks of commodities. This time around, the prolonged relaxed financial conditions and minimum investments in this sector drift the world into the opposite setting. There is a lot of liquidity, yet so few goods.

If we consider commodity as a currency of its own, we are seeing where Gresham’s rule of bad money drives out good money in action. The rapid expansion of liquidity without a respective production expansion of commodities led to the appreciation of the latter.

Today, food prices already exceeded the highs of 2011 and are yet to lose their steam.

Countries are taking food protectionism measures to stabilise domestic food prices

We find the severity of the potential food crisis cannot be underestimated. Case in point would be the magnitude of Russia-Ukraine war in escalating this matter.

Both Russia and Ukraine play significant roles in the agriculture or fertiliser market. Russia is the biggest exporter of wheat (18% of global export) and a major exporter of sunflower oil (18% of global export) and fertilizers (20% of global ammonia export). On the other hand, Ukraine is also a major exporter of wheat (15% of global export) and the biggest sunflower oil exporter (37.5% of global export).

The prolonged Russia-Ukraine conflict adversely impacts both near and long-term supply. Near-term supply has been affected because of the logistical hurdles made by the war. The future supply is at risk because Ukraine might miss this spring planting season. The ramifications of sudden drop in food exports at a time of tight stock will be painful and costly to bear by the rest of the world.

For some countries, such as those in the African continent, food affordability and availability will become major issues. From the following graph, we could see how Russia and Ukraine war could jeopardise the procurement of wheat in Africa.

This concern over food insecurity gained the spotlight in the world’s most populated country, China. During the 13^th National Committee of the Chinese People’s Political Consultative Conference on 7 March 2022, China President Xi Jinping underscored the importance of food security and ordered greater self-reliance in its production. Below was his speech as quoted by South China Morning Post:

“Vigilance in food security must not slacken, we must not think that food ceases being an issue after industrialisation, and we cannot count on international supplies to solve the problem… We must plan ahead by adhering to the principles of domestic production and self-reliance while ensuring an appropriate level of imports and technology-backed development… the rice bowls of the Chinese people are filled with Chinese grain”

There is no smoke without fire. The mounting food security risk is even more visible with the spreading food protectionism measures. China, Russia, Ukraine, Algeria, Hungary, Moldova, Turkey, Egypt, Serbia, and Indonesia are growing list of countries that curbs food or fertiliser exports.

A resource-rich country like Indonesia may fare better in facing a food crisis

Indonesia has adequate resiliency in the mounting food insecurity globally. In terms of food production, the country is well-known to have a 59% share in global palm oil production. This vegetable oil is extremely efficient. Palm oil supplies 40% of the world’s vegetable oil demand with only 6% of land used for vegetable oils. These economics made the commodity simply irreplaceable.

Furthermore, the USDA ranked Indonesia as the fourth biggest producer of rice with a 7% global market share. This country is also ranked the twelfth largest producer of corn with 1% global market share.

Given this natural advantage, Indonesia is inherently a net exporter of foods. The skyrocketing price of global food prices would suggest that the country will see its surplus widen. As such, Indonesia should benefit from either relative resiliency in inflation or a widening trade surplus.

According to The Economist’s research on the food security index 2021, Indonesia ranked 37^th of 113 countries globally in terms of the availability of food supply. Ample land for production, low volatility of production, and strong food security policies and agency are reasons why Indonesia fared well on this subject.

Furthermore, Indonesia’s food security improvement between 2012 and 2021 ranks 24^th among world countries. Based on our past on-the-ground observation, infrastructures development and strengthening of food security policies and enforcement are the reasons for the improvement. We discussed more detail about Indonesia infrastructure development in our Q1 2019 report (link).

We think that Indonesia’s resiliency in food security is pretty much reflected in the marginal food cost increase relative to the global average from 2010-to 2021.

In the world of commodities shortage and abundant liquidity, those who own the former will stand to benefit. Besides food, Indonesia produces lots of commodities and has been regarded as resource-rich land for decades. How will the booming commodity market affect Indonesia? How it be different this time? Stay tuned to our blog!

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While China’s push in technology is hardly news, its rising tensions with the West have sped up their need to become less dependent on foreign technology. In its 14^th Five-Year Plan on Digital Economy, China’s leaders emphasise, once again, their ambitions for the country to seize the leading position in the global technology race. The plan highlights China’s intention to boosts its global competitiveness in advanced technologies such as semiconductors and artificial intelligence. And blockchain was listed as a “key digital technology” alongside AI and cloud computing, which we coined as the “ABC”.

China’s Ambition in Blockchain Begins with Digital Currency

Over the past decades, China’s technological advances have mixed performance. While leading in 5G deployment, it lags behind western countries in technologies with more strategic positions, such as artificial intelligence and semiconductors. The catch up race has been painful and costly.  However, China may have indeed established a strong head start when it comes to blockchain.

While the initial concept of blockchain technology is underpinned by its decentralised nature, China’s version is different. It is a centralised operation which guarantees complete state control over the development and application of the technology. China’s drive for blockchain technology goes beyond economic ambitions. The technology essentially allows for effective government surveillance capabilities at both micro and macro levels.

The Chinese government has been investing in the financial application of the blockchain technology. The development of the digital yuan is among the core strategic priorities. The large scale domestic rollout of the digital yuan would align with Beijing’s push for financial security. The use of its CBDC not only increases its ability to monitor financial activity and tackle illicit activities, it provides Beijing an independent source of valuable customer data, meaning they will no longer need to obtain customer information from payment companies to monitor citizens’ transaction.

Image credit: TechNode/Jiayi Shi

But the Ambition Goes Far Beyond Digital Currency

The digital yuan is positioned to serve as the infrastructure for the country’s international economic agenda which is underpinned by the expansion of a China-centric digital ecosystem that encompasses technologies such as 5G, IoT, AI and big data. And since blockchain run on the internet, it is imaginable that China will try to control the underlying  communication protocol, domestic national cloud infrastructure and AI at the same time. However, the government is having a difficult time censoring and controlling the exchange of information between computers due to the distributed nature underpinning TCP/IP (transmission control protocol/internet protocol), the communication protocol that governs how data moves around the Internet.

Noting this stumbling block, Huawei proposed the “New IP” to replace TCP/IP. The New IP proposal emerged at a 2019 meeting of the International Telecommunication Union, a UN agency responsible for all matters related to information and communication technologies. The New IP is designed to offer more efficient addressing and network management than the existing TCP/IP standard, but it is likely to come with hooks that allow authoritarian nations to censor and surveil their residents, including features such as a “shut up command”. The new model is said to replace current centralised parts of the internet, such as Domain Name system (DNS), with Distributed Ledger Technology (DLT) solutions. However, as aforementioned, the blockchain technology proposed by China is likely to differ from commonly known definition of the technology, decentralisation is out of the question in China, but advanced adoptions of the ABC can be expected in areas ranging from energy conservation to urban management and law enforcement.

Cities of the Future

The government sees blockchain as a key pillar of its smart city infrastructure initiative that is currently being built across China. A smart city is an ideological term that refers to the development of cities that utilises advanced digital technologies including the likes of blockchain and IoT, as well as robotics and AI to optimise urban management and services including road network management, public health, energy generation, communication and food safety.  Local tech giants including Alibaba and Tencent are also heavily involved in supporting the development.

At present, there are 11 regions in China using blockchain technology to build a smart city system. Among them, the Xiongan New Area (possible future capital) was the first to be transformed into an intelligent city prototype. In 2018, Ant Financial, serving as the core blockchain technology provider, launched the blockchain rental application platform in Xiongan. This means that individuals will have their own credit score based on their rental related record. Blockchain also became an integral part of Shanghai’s smart city program, where it helps to collect and store vast quantities of data to assess optimisation levels for garbage classification management. The blend of blockchain with other technologies within the smart city ecosystem is likely to expand as China’s ambitious aspirations to take the lead on blockchain meets its equally ambitious aspirations to accelerate itssmart city development.

 

Xiongan Railway Station of the Beijing-Xiongan intercity railway in Xiongan New Area, north China’s Hebei Province.

Image credit: Xinhua/Xing Guangli

Invest in the ABC Before They Change the World

The above are only a few examples among the many use cases of blockchain in China. The Chinese government’s approach towards blockchain and its integration with other cutting-edge technologies provides it a first-mover advantage over other countries that are yet to make a move in this field.

Having said that, it may be many years till the country reaches notable success in the advance technology sphere given it is still far from technological self-sufficiency and remains reliant on foreign technologies such as chips design and manufacturing. China will likely face stiffer challenges in acquiring foreign technologies such as on semiconductors due to growing western consensus to curb its access. Its roadmap to becoming a global leader in critical technologies of the future will require the integration of advanced technologies which will be crucial to the development of other advanced industrial sectors. As such, the ABC strategy may present profitable opportunities in years to come as countries increasingly dedicate resources in technology sector as part of their national strategic plans.

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One of the wake-up calls during the still on-going Russia’s invasion of Ukraine is how the market witnessed the US and EU utilising the powerful tool of economic warfare by barring Russia from accessing its billions of foreign reserves (except using the reserves for energy payments.) As a result of this sanction imposed against Russia, calls have been raised for the need for alternative holdings.

Being the top holder of foreign currency reserves with $3.22 trillion as of January 2022, with over two and a half times more than the second-largest reserve holder, as well as a friend of Russia, it will come as no surprise if China decides to unshackle itself from the dollar-dominated system in order to reduce their reliance on US dollar.

De-dollarisation is not only limited to China, it is reported by The Wall Street Journal that “Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan,” a move that could further erode US dollar reserve currency’s status. And one should also notice that the Middle East, led by Bahrain and the UAE, is setting up some of the world’s largest crypto exchanges spearheaded by FTX (who have decided to leave HK) and Binance.

No matter how the war of tragedy unfolds, it has signalled to some countries the need to reduce their reliance on SWIFT – the global messaging system between banks to ensure financial security. In fact, Russia’s central bank has developed its own alternative to Swift called the System for Transfer of Financial Messages since 2014, when the US government threatened to disconnect Russia from SWIFT. But it is nowhere near as big as the former.

Having said that, with cryptocurrencies becoming more mainstream, the long race to catch up may not be necessarily if blockchain technology is here to provide a powerful alternative to the legacy global messaging system in the coming years.

Blockchain as a backbone for global finance may still be remote, but we have witnessed how crypto has marked its place in the war.

With Ukraine’s central bank limiting its citizens from withdrawing foreign currency, some Ukrainians have turned to crypto as an alternative. Crypto trading volume on Ukraine’s Kuna Exchange had surged 200% in the last week of February, reaching its highest level since May 2021. The country has also raised over $50 million in crypto donation, as indicated on its official donation website.

Source: CoinGecko

On the other hand, crypto could also be used as an escape route for Russia.

The fact that cryptocurrencies cannot be frozen (let’s rule out centralised crypto wallets for now), has made these tokens an extremely important tool. The Bank of Russia has been developing the digital rubles and has already started the pilot stage of its CBDC before the war began. The call to ban selective Russian banks from the international payment system may have motivated the Russian government to speed up the progress.

Despite no clear evidence of Russians rushing to crypto for a safe haven as information is limited about the country lately, we are witnessing regulators around the world ramping up their efforts in the cryptocurrencies space. Perhaps one of the motives behind this could also be the attempt to close any potential loopholes in the sanctions. While we hope that the conflict can be quickly resolved, if sanctions have become a norm rather than exception, we should all think about what self-sovereignty means to our wealth.

The global CBDC race

On 9^th March 2022, US President Joe Biden signed an executive order on digital assets, including cryptocurrencies. While the order did not specifically launch any new policies, but only guidelines for the upcoming steps, it marked the first official strategy on digital assets set forth by the US government and has given the crypto industry the regulatory clarity that has been long sought after.

The executive order outlined a number of policy priorities and risks related to the implications brought by digital assets, first and foremost is customer and investor protection, followed by financial stability and systematic risk, national security, energy demand and climate change, etc. The executive order contains a well balance of discussion on both the opportunities and risks.

No commitments were made to a US Central Bank Digital Currency (CBDC), but the executive order specifically called for the “urgency” for the Fed to double down their research on CBDC. We see this as a pursuit to put the US on a level playing field with China who has launched its CBDC pilot last month.

Just days after the executive order was signed, the European Parliament voted to advance a draft of the Markets in Crypto Assets bill, or MiCA, which is a regulatory framework for crypto assets that has been in development since 2018. A lot of similarities could be found between the executive order and the MiCA.

The uniform framework for the EU’s 27 member states also covers rules on supervision, consumer protection and environmental sustainability of crypto assets. An earlier addition to the bill that aimed to limit the use of cryptocurrencies powered by the energy-intensive consensus mechanism known as proof-of-work, which essentially means banning crypto such as Bitcoin and Ethereum in the EU, was voted down by the committee.

Alternatively, the committee voted in favour of a proposal to include crypto-assets mining in EU taxonomy for sustainable activities by 2025 to reduce carbon footprint. The EU has begun its digital euro project since July 2021 and the current investigation phase is expected to take two years. One thing to note is that the MiCA will not be applied to CBDCs.

While the US and the EU have just started with the entrée, China is enjoying the dessert. After eight years in development, China has debuted the digital yuan, its version of CBDC, during the Beijing Winter Olympic Games last month, subsequent to its trial launched in late 2019. According to the data released by the Chinese government, the digital yuan was accepted by more than 8 million merchants and over RMB 87 billion in transaction value was reached as of the end of last year. The next step for China would be to follow its plan outlined in the 14^th Five-Year Plan, further expanding the development of the digital currency alongside its digital economy.

Image Source: Kyodo

Last but not least, the Hong Kong Secretary for Financial Services and the Treasury released a letter through his blog yesterday, announcing the government’s latest development in regulating the virtual asset industry. Although there is no explicit timeline for the next steps, the letter highlighted the government’s consideration to introduce a new licensing regime for virtual assets service providers in accordance with the requirement imposed by the Financial Action Task Force which requires all virtual assets exchanges to apply for a license from the Securities and Futures Commission.

If 2021 was marked as the year that made crypto and NFT broke out of their niche, 2022 would be the year of crypto regulation. And with over 80 countries currently exploring a CBDC, we think digital currencies are here to stay and disrupt the traditional financial system. These are still early days for CBDCs and we do not know how fast and far they will go.

But we are excited.

 

Reference:

https://data.imf.org/regular.aspx?key=61280813

https://www.wsj.com/articles/saudi-arabia-considers-accepting-yuan-instead-of-dollars-for-chinese-oil-sales-11647351541

https://donate.thedigital.gov.ua/

http://www.gov.cn/xinwen/2022-02/23/content_5675094.htm

https://www.atlanticcouncil.org/cbdctracker/

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Who would’ve thought that someone is willing to pay a hefty price for turds? Although some might find this to be stomach-churning, it is a reality. According to Bloomberg, manure is selling for USD 40 to 70 per ton, an all-time high level since 2012.

Major reasoning behind this phenomenon could be traced from the ongoing fertiliser crisis, especially from one of its key ingredients: ammonia.

Ammonia is a compound of nitrogen and hydrogen (NH3). The high nitrogen component, a key macronutrient for plants, makes ammonia an essential feedstock for all nitrogen-based fertilisers. Alternatively, it can be applied directly to the soil as well.

Based on our study, the dynamic of ammonia market is reflecting today’s problems on multiple fronts, namely: supply chain, agricultural, energy, and geopolitical tension. Its price performance is a perfect example of what could happen when an inelastic demand faces a serious setback in supply.

Perhaps, ammonia could be good long exposure for the ongoing problems in the world. Below is our learning on this matter:

The now deep-pocketed farmers could afford the unprecedented upswings of ammonia price

The soaring price of ammonia has a profound impact on the agriculture market as fertilisers typically contribute up to 20% of in-farm cash costs. The ammonia market, however, is also affected by the agriculture market as the chemical is their essential derivative demand – 80% of ammonia use case comes from fertiliser.

Given such a relationship, ammonia price can only elevate that much for a considerable time because there are people who are willing to pay for it. In this case, it is the farmers who account for most of the demand.

As of 23 February 2022, the Bloomberg agriculture commodity price index was indicated 67% higher than on the end of 2019 level. The favorable agricultural prices certainly have buoyed the fertiliser market as it deepens farmers’ pockets. Nutrien, the world’s largest plant nutrition producer, sees crops producers’ margin to expand by more than two hundred percent for 2021 and 2022 compared to the 2019 level.

We see the outlook for agricultural commodities to remain bright as the tight market is yet to see relief. Global grains stocks-to-use ratio that indicate the carryover availability to fulfill the full-year demand has been in a free-fall in the last couple of years. The weak prices of 2012-2020 might had disincentivized investments in this space and resulted in a weak production capacity to timely respond to demand.

The combination of economic reopening and stimulus packages during the pandemic is also providing strong support for the demand for agricultural commodities.

Provided by these circumstances, farmers should be well-incentivised to continue applying fertilizers for maintaining or boosting their production. Especially, when they know that in some parts of the world crop yield might be adversely impacted by La Nina.

It is amazing to see this rock-solid demand could afford multiple setbacks on the supply side.

The supply-side problems have dislocated ammonia market by at least 48%

Normally, ammonia plants are built altogether with the downstream fertiliser plants. The statistics of the International Fertilizers Associations (IFA) indicated only 18.4 mn tons of 185.3 mn tons global capacity production in ammonia was traded globally in 2020. Only 10% of global production was intended for trade, causing the merchant ammonia market prone to disruptions.

Based on our estimate, the current ammonia market’s equilibrium faced a dislocation of at least 48% from the 2020 locus due to the following supply-side issues:

• Energy-crisis sent one-third of European ammonia plants to shutdown

Ammonia production process requires hydrogen and involved an energy-intense process. Most of the ammonia plants today are using natural gas as their feedstock for their hydrogen rather than coal or water due to environmental and economical considerations. Natural gas as a feedstock could govern 70-90% of the cash production cost of ammonia, excluding energy cost.

According to Bloomberg Intelligence, currently, about one-third of Europe’s ammonia production plants are being shut down due to the pricey natural gas cost. Such supply gap translates into additional demand to the merchant ammonia market and pinched 30% of the merchant ammonia balance.

The reasoning behind the energy crisis was a combination between structural changes and geopolitical tension:

In Q4 2021, we saw the tight energy market take the spotlight and send costs sky-high. The sector underinvestment over the last five years driven by lackluster prices, ESG scrutiny, and global-wide consolidation jolted fossil fuel prices up when it faces a robust demand from economic reopening. We had written some of these matters in our previous blog post in June 2021 (link).

In the case of natural gas, we saw its energy cost per unit has exceeded brent oil in both Europe (Dutch TTF) and Asia (JKM). Indicating the two regions’ competition to secure supply. This was primarily due to the region’s structural shift of adopting natural gas in their path of decarbonization. This structural shift is expected to result in a shortage of LNG in the future according to McKinsey.

With over 20% gas share in their energy mix, gas demand was amplified because intermittent renewable energy did not work during winter. About 10% to 20% of energy sources had to be switched to ‘dirtier’ hydrocarbon and gas has been the top preference.

This condition is worsened as Russia’s gas flows which account for 40% of Europe’s gas supply are reduced significantly. Russia’s gas flow in December 2021 was 10.3 bcm, about 26% lower than the same period last year.

The recently escalated tension of Russia-Ukraine has resulted in the postponement of the Nordstream II pipeline operation, carving out a significant potential gas supply for the region.

The Dutch TTF’s futures are now trading above USD 20 per MMBTU until mid-2023. This price has priced in the delay of the potential gas supply and implies LNG in Europe won’t be adequate to fill in the gas stock-up in the region for the whole year which starts at a very low base as inventory level is lower than five-year lows.

Warmer winter from La Nina for Europe could help to ease the replenishment of gas production but at this rate, this effect would be rather blunt. With natural gas availability remaining uncertain, we believe that the shutdown of European ammonia producers would take some time and the country will be a dominant buyer in the market.

• Missing fertiliser exports from Russia and China

In attempts to control food prices and security domestically, Russia and China have imposed restrictions on fertilisers export to ensure the availability and affordability for local farmers until 1H22. We estimated this resulted in 18% of missing supply from the merchant ammonia market.

The uncertainty looms whether as the policy would be carried as the initial plan since the tight market in agriculture, potash, nitrogen (ammonia), and phosphate market persist. Not to mention the escalating tension between Ukraine and Russia lingering the uncertainty in the already tight agricultural and energy market.

• Supply chain constraints kept prices high

The supply chain problems constraint that was initiated from the COVID-19 pandemic still haunt the economy. The steep freight cost has reportedly caused some producers to switch their inventory policy from just-in-time to just-in-case, stretching up the freight capacity even more.

For Europe and Asia, the steep freight market capped the potential cost savings from importing through LNG freight. Based on the normal calculation, we estimated about half the price of the current LNG price in Europe and Asia is going to the freight.

In addition to supply chain issues, health protocols also delayed the recovery and development of plants. Those factors combined slows down the plant turnaround process from 20 days to 60 days, according to one of our sources in the industry. Another case in point is the development of the Ma’Aden Ammonia-3 plant’s commercialization has been stalled from December 2021 and is expected to be delayed until Q3 2022, a nine-month delay.

Ammonia could be a good long-exposures on today’s world problem

In short, tight agricultural market, energy crisis, geopolitical tension, and supply chain issues are factors that keep ammonia prices high. At the current goldilocks situation, we see European fertiliser companies purchase to set the support price for ammonia as they become the dominant buyer in the market. It still unclear on how long this confluence of problems could be untangled.

So far, the pockets of farmers have been deep enough to pay the high price of ammonia from the tailwind of their commodities. Given the tight relationship of ammonia in the multiple problematic verticals of today’s economy, perhaps ammonia exposure could be a prospective long-exposure towards todays’ world problems?

Admin heyokha

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As the saying goes, time is money, inventors of play-to-earn games and esports have certainly taken note of it. One may consider that these two sectors in the gaming industry are the same in the way which both provide an opportunity for gamers to monetize their time spent on playing video games. This has led our analyst to study how the rise of play-to-earn games may potentially change the esports scene. And how may their convergence fit into the gaming industry?

Pro Earners – P2E phenomenon

Play-to-earn – GameFi – is the combination of video games and blockchain where players can earn cryptocurrencies and NFT by spending time in the games. The additional feature of being able to transfer values created from online games to the real-world is the key component that makes play-to-earn games differ from conventional games.

Play-to-earn has come exploded in 2021 with the growth of Axie Infinity, a metaverse game developed by Vietnam-based Sky Mavis that, that comes with its in-game token called Smooth Love Potion (SLP). And the play-to-earn phenomenon took off in the Philippines when Covid-19 destroyed jobs and forced many to stay at home. According to several news platform, Axie infinity gamers in the Philippines could earn USD 5 to 20 on daily basis during summer 2021 – comparable or even better than the country’s minimum wage of USD 10.5 per day. Not only does the play-to-earn model presents a new and flexible income stream, it also represents the beginning of shift in the socioeconomic paradigm.

 

Source: Axie Infinity

Pro Gamers – E-Sports ecosystem

Esports, rose in popularity in the 21^st century, has turned games from a casual hobby to a professional sport. And it has been taking the world by storm in recent years with impressive audience numbers. Insider Intelligence forecasts that there will be 29.6 million monthly esports views in 2022. The 2021 League of Legends World Championship grand final accrued an audience of over 73 million peak viewers, an increase of 60 percent compared to the previous year’s tournament. So what exactly is esports?

According to NewZoo, a market intelligence specializing in esports industry, esports is defined as:

“Competitive gaming at a professional level and in an organized format (a tournament or league) with a specific goal (i.e., winning a champion title or prize money) and a clear distinction between players and teams that are competing against each other.”

One of its sound merits is no doubt the loyalty of its fanbase. Despite not necessarily for all esports games, but most games have their own audience, best esports players even amass their own legions of fanbase. The network effect of such a community is the winning formula in esports market. According to an analysis done by Newzoo in 2019, between League of Legends, CS:GO, and Overwatch, only 6% of consumers watched esports content from all three games within the previous 12 months. Overall, 71% of viewers watch only one of these franchises. League of Legends and CS:GO have the most loyal audiences, with 29% and 25% watching only that title, respectively.

Source: Newzoo

The loyalty of the hyper-social, millennial fanbase of the esports industry has attracted not only an explosion of investments from venture capitalists and private equity firms, global brands such as Mercedes-Benz, Coca-Cola and Intel also saw this powerful branding medium and have all poured funding into this market by carving out sponsorship and partnership deals as an attempt to reach this largely millennial fanbase. These investments are being woven into the fabric of the entire ecosystem, such a multiplier effect has led the esports scene to grow and mature.

Both esports and play-to-earn games have set the foundation of their positions in the playfield. Let us now explore how a convergence of the two may change the scene.

What can happen when they are combined

For play-to-earn games, attracting true gamers has always been the top challenge. There are two reasons to why true gamers are deterred from participating in these games. Firstly, the play-to-earn feature has become a double-edged sword as it allures players who are fundamentally drawn purely by the potential value of the tokens, as opposed to the game itself. This creates an unhealthy player-base where these players will switch as soon as other games offer higher rewards. And when a large portion of players decide to leave and exchange the tokens for other digital currencies, the value of the token collapses. The second reason being that the play-to-earn games lack the most fundamental aspect of game itself – fun. Reviewers say that the missions are repetitive as if doing chores to grind 100 SLP a day. And one may notice that most noises or articles surrounding these play-to-earn games are how one can make a living, rather than how one can have fun, through playing these games.

It is clear that play-to-earn games need to be more entertaining to sustain, the gameplay and graphics of play-to-earn games are still very basic. A merge of play-to-earn games and esports will imply an increasing adoption of token mechanics by AAA gaming studios, leading to a big leap up to the quality of play-to-earn gameplay. What esports can also bring to the play-to-earn game model is the huge social component inclusive of media, pop culture, and commerce. One of the reasons that contributed to Fortnite’s popularity is that: Fortnite is built to be social. Esports and gaming are a highly social activity which people share opinions, talk and engage. So essentially, the problem here is to make “play-to-earn” to become “play-and-earn”.

As for esports, not only very few become good enough to play professionally, a career of a pro gamer is usually rather short-lived compared to a conventional career. Esports is also a “game developers say it all” model, all the in-game skins, characters and items bought are maintained by these corporates. Once a career ends or once you stop playing, gamers walk away with nothing. Play-to-earn model provides an extra level of protection to the gamers, who will be rewarded based on their skills. Having said that, a robust economic model is required to ensure the value of their time spent it not wiped out due to token volatility driven by external manipulation. In addition, with the introduction of game assets and NFT into esports, these game publishers could expand their reach into a whole new market – the cryptocurrency investors. The tokens also provide an easier channel for investors who may have previously found it difficult to navigate within the esports industry.

The unique features of play-to-earn and esports model complement each other. Despite still a long way to go, the start is promising. There are around 3 billion gamers worldwide, and only a small fraction of them is playing blockchain games. With more people getting involved in play-to earn games, it is only a matter of time when play-to-earn becomes too big that gaming studios cannot afford to ignore. Ultimately, as development continues to grow, more investment will be attracted. So we say there is a big opportunity still untapped.

 

Reference:

The Esports Observer, https://archive.esportsobserver.com/newzoo-report-august/

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While having a getaway from a tumultuous year of a volatile market, one of our team members decided to share his bitter and sweet experience while enjoying delicacies in two different restaurants. The story reminds us of maintaining an underdog spirit to avoid being complacent and getting spoiled. The story in his own words is as follows:

The tale

I recently visited a gorgeous restaurant in Jakarta. The place was busy again after the Covid hiatus. I was so delighted to see the restaurant making a strong comeback, and I was also elated to recognize that we are supporting a local business that had fought Covid and won.

Almost everything about the place has gone back to normal. However, that, unfortunately, includes the poor-mannered and unhelpful staff. How did I forget about that?

Despite my colleague’s warmhearted gestures like making jokes and chatting friendly with the restaurant staff, they gave us a stiff face. We certainly felt that the staff acted like they were doing us a big favour by interacting with us. Others sought ways not to have to do much while pretending to be hardworking. When the wrong food was delivered to us, no apologies were offered, not even in the most basic form.

How could this happen? Is the restaurant staff not grateful for our support?

Maybe they are not aware of it because the restaurant is busy once again. Maybe because the restaurant staff did not have to do the heavy lifting to make their business successful. The location is superb and the design is first class. The hardware is great.

The problem is with the software. We understand that the restaurants under the same group are not nearly as bad. If anything, the service is known to be outstanding. In other places, however, the hardware, the place, and the design were not nearly as good as for this particular restaurant.

Sometimes the gorgeous hardware, or the ecosystem, works against you. Perhaps it’s too easy for complacency to set in when people would come anyway, thanks to the restaurant’s unique setup.

A few days later, during a holiday in Bali, my family went to dinner in the quiet Sanur area. The restaurant we picked looked gorgeous (now a negative word in my mind) from the outside. But this time around, I did not expect much after the previous experience described earlier. Maybe my defense mechanism kicked in, attempting to manage my expectations after a massive disappointment just days earlier.

To my pleasant surprise, the staff working there were adept, fully engaged, and movingly knowledgeable. No one was glued to their phone. Instead, they were super disciplined, yet very friendly. Their smiles were genuine, even when we did not attempt to make jokes.

The food was no disappointment either. The duck was juicy, and the sauce complemented it very well. It was not too fatty but it did not lack fat. The eggplants were also outstanding. It was soft, tender, and packed with amazing flavours. Even the dessert, cheesecake with mango toppings, did not fail to bring out joy to my table.

Later on, I learned that the restaurant was initially part of a big-name hotel. It is now completely separated and they needed to survive on their own with no more ecosystem support from the big-name hotel. The food was great and tasted even better with such a good service.

The name of this splendid place is Naga Eight. Considering that they just re-started, maybe it’s still too early to tell what will happen in the future. If they can maintain the “day-one” spirit, I think it could one day be a dining institution in Bali.

With the “day-one” mindset and full acceptance that one has no support from any big ecosystem, suddenly Team Naga Eight stops rehearsing their limitations: they have been granted the chance of a lifetime.

Companies’ value creation starts from the people

In Indonesia, many investors are eyeing technology companies as they started to populate the public equity market. We find it quite often that investors overweight their tech stocks investment consideration for the ecosystem and may slightly overlook other aspects of the business as a result.

While the tech ecosystem may provide a better chance of winning as it provides a captive market that may translate into faster and cheaper user acquisition, it is not a necessary nor a sufficient condition for success. As in the tale of the two restaurants, the ecosystem may provide a comfort zone that could be counterproductive for the company’s growth like a spoiled child knowing there will be a divine hand to lift them.

The only way to reduce such risk is by paying more attention to the management team’s execution capability and their attitude towards the game. Like a horse race, it takes both a good horse and jockey to win the race.

If we recall the blitzscaling stories of new-economy companies that are worth hundreds of billions or even trillions of dollars today, a major part of their success can be attributed to the management’s attitude and character instead of just where the company come from. After all, a company is run by the people.

In the industry where there are numerous cases of David and Goliath, the threat of the underdogs should not be taken lightly. Their hunger for victory is what we are looking for. Underdog companies are more likely to question the way they conduct business and more willing to reinvent themselves while ecosystem players tend to be more constrained by their patron.

In start-up companies whose profits are often still imaginary, management team spirit is indeed a reality.

Last words…

The story of Naga Eight reminds us of a scene from Dark Knight Rises (2012). The hero of the story Bruce Wayne (the Batman) successfully made an impossible jump to escape the Lazarus Pit Prison after numerous failed attempts only when he did it without the rope that keeps death away.

Only when he knows that failure is not an option, he can exceed his limitations and achieve the impossible.

Doctor                  : “You do not fear death. You think this makes you strong. It makes you weak.”
Bruce Wayne      : “Why?”
Doctor                  : “How can you move faster than possible, fight longer than possible,

                                without the most powerful impulse of the spirit? The fear of death.”

Bruce Wayne      :”I do fear death. I fear dying in here while my city burns.

                                And there’s no one there to save it.”

Doctor                  : “Then make the climb.”

Bruce Wayne      : “How?”

Doctor                  : “As the child did – without the rope. Then fear will find you again.”

Admin heyokha

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Resolutions are firm decisions to do or not to do something. While such determinations can be reached anytime, it is a common practice to say out loud in the beginning of each year what those things may be, followed by a reflection at the end of the year on how much have been accomplished during the year. Three topics we believe that may stimulate you to decide some resolutions for 2022 are about health, habit and mindset. More specifically:

Healthcare today is really sickcare, how can we change that? Tiny changes may have remarkable results, how do atomic habits work? Unlearning is a big part of learning itself, how a growth mindset can embrace the metaverse? We gather our thoughts and previous research on these subjects to remind ourselves as well as our readers the importance of staying healthy, nurturing good habits and having a growth mindset.

A siren call to the healthcare (or sickcare) system?

Starting an exercise routine, cutting back on alcohol, eating more nutritious food…

Which ones of these appear on your new year resolutions? As we kickstart another year with the pandemic around, staying healthy is one of our top priorities. The soaring covid cases in the Omicron wave got us to pay attention to the healthcare systems around the globe.

And we noticed a few issues with healthcare systems around the world:

1. Healthcare systems focus on treating illnesses than preventing disease and maintaining wellness.

2. Economic incentives for the industry participants have made treatment and medication extremely costly as well as discouraging better health education in communities.

3. Mental health has been one of the most neglected area of public health. According to the National Institute of Mental Health, nearly one in five U.S. adults had a mental illness in 2019 (51.5 million people).

The U.S. healthcare system over the past decades has been shaped to address the needs of patients instead of maintaining the wellness of the healthy population. Technology has been the greatest driver of improvement in many industries, but healthcare remains the exception. Dr Rafael Grossman, who is the first surgeon in the world to use Google Glass during an operation, believes that the advanced technology has become a tool to improve access to health. He thinks that the collection of data and analysis by AI have become more important in the field in healthcare. These tools enable better diagnosis and prediction of diseases, as well as the likely outcome of a specific intervention through treatment and medication.

However, for participants in the healthcare system, it is not lucrative to help healthcare consumers to prevent health problems. Economic incentives for patenting medical devices and drugs have remained strong barriers to effective disease prevention. More advanced technology may provide a cost-effective solution to correcting this systematic issue. This strategy is unfortunately undesirable to the system participants. The lack of potential for patenting advanced technology impedes one’s incentive to address the problem.

There is no simple solution in transforming the U.S. healthcare system. The best advice to each individual would be to take control and be in charge of maintaining his/her own health.

How do atomic habits work?

Often, we find it challenging to build a good habit or break a bad one. One week, two weeks, then we will likely revert to the old routine.

To be persistent is difficult. This time around, we have turned to the book “Atomic Habits” by James Clear for some guidance.

As stated in the book, atomic habits are defined as:

Atomic:
– An extremely small amount of a thing; the single irreducible unit of a larger system.
– The source of immense energy or power.

Habit:
– A routine or practice performed regularly; an automatic response to a specific situation

Clear introduces the importance of small changes. Little things add up to big things and time can create a multiplier effect. A small change may seem insignificant at first, but over time, the impact can be greater than you would have imagined. Sometimes we find it difficult to form good habits while bad habits linger. Clear explains that this is not uncommon. He elaborates using two reasons for why changing habits can be challenging, first is that we try to change the wrong thing, and second one being that we try to change our habits in the wrong way.

He further explains by using the three levels of change:

1. Outcome change
This level is concerned with changing your results.

2. Process change
This level is concerned with changing your habits and system.

3. Identity change
This level is concerned with changing your beliefs.

Most people managed to get to level 1 or 2 but failed to change their identity / beliefs. The true behavioural change is identity change, once a behaviour becomes part of your identity, you will become more motivated to maintain the habits associated with it.

“Progress requires unlearning. Becoming the best version of yourself requires you to continuously edit your beliefs, and to upgrade and expand your identity. ” – Atomic Habits by James Clear

The above is one of our favourite quotes from the book, it perfectly resonates with our strong belief of the importance of the ability to unlearn.

This also paths a great lead-in for us to introduce the next topic – a growth mindset to embrace the metaverse.

Entering the future with a growth mindset

Our readers would be familiar with the idea of the growth mindset that we introduced in one of our blog posts last year. For those who are new to our blog, you may read the post here.

As we all know, the future is uncertain. But one thing that we can be certain about is that technology will continue and play an even bigger role in driving our future. And metaverse will be one of the important representations of this technology driven future.

The word metaverse was the tech buzzword of 2021. With metaverse becoming a reality and hybrid culture are here to stay, how should individuals seek to familiarize themselves with it?

Having a growth mindset can create a significant impact. People with a fixed mindset may find it difficult to embrace the new concept of metaverse as it blurs the line between the physical world and virtual world. It is against the beliefs of “reality” fixated in our mind. Is the metaverse real? How do we define what is real? In the metaverse, we are represented by our avatars, we see and communicate with other avatars. Are they real? This all comes down to our beliefs. No difference to being in the physical world, we can experience feelings such as happiness, sadness and anger in the metaverse. Such sensations and emotions created by our brain influence how our brain construct reality.

A growth mindset encourages development. People with a growth mindset are not fixated on existing, stereotypical concepts, they are always seeking to find new ways to learn. In the era of digital disruption, this concept is more important than ever. Sometimes, people may struggle to make progress. The problem is that they have been focusing on the wrong thing. Learning is not the spigot to embrace new ideas, it is the unlearning. Unlearning is the ability to adapt and perceive differently. We cannot learn a new skill or concept without unlearning an older one.

Embracing the metaverse means unlearning what we understand today as the internet, what’s real and what’s virtual. Embracing the metaverse means embracing a future of unknown, unknowable and unique.

 

Reference:

Is Mental Illness on The Rise?, https://www.banyanmentalhealth.com/2021/07/01/rise-in-mental-illness/

Going from ‘Sickcare’ to ‘Healthcare’, https://healthmanagement.org/c/healthmanagement/issuearticle/going-from-sickcare-to-healthcare

Admin heyokha

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