The Crypto Market is Nervous: Options for Investors to Protect their Capital

The crypto market has always been considered a decentralised and independent alternative when compared to traditional financial structures. However, recent events have shown that even digital assets are not always immune to geopolitical changes. A number of crypto giants have already chosen to support newly announced sanctions against Russian users, and there is no way of telling what will happen next. Let's examine the main ways investors can protect their capital in this nervous market. 

• Tether (USDT) promised to support the sanctions.
• Circle (USDC) has disabled fiat payments for Russia-based accounts.
• Coinbase blocked 25,000 Russian addresses.
• Metamask wallet has banned Russian users based on geolocation.

This is only the tip of the iceberg, and this list is likely to keep growing. 

• Stablecoins now pose a risk. 
• CEX exchanges pose a risk.
• KYC data pose a risk.

How to protect your capital.

We have identified three main ways users can protect their crypto investments: 

• Switch to Layer-1 solutions and algorithmic stablecoins.
• Turn to DEXs.
• Use crypto barter for businesses.
• Let's elaborate. Here are the main blocking scenarios:

While matters on wallets and exchanges are clear enough, recent statements by issuers are a concern. After all, it is not just Metamask attempting to block users by IP.

Let's examine Tether as an example:

The USDT issuer never promised anonymity. The company already has experience of blocking Ethereum addresses at the authorities' request. How will things unfold if geo-based sanctions are on the table?

There is a possibility that Tether may have a centralised API setup for wallets and exchanges, meaning that transactions are recorded in chains after centralised processing. If that's the case, blocking by geolocation will only take a couple of days. To identify holders from the Russian Federation, companies may undertake a collective analysis based on KYC data, IP, transaction volume and directions. 

There is also a risk of Tether cancelling USDT wallets via the ‘Clean Dirty Money’ method. Russian holders will be identified using tracing tools such as Chainalysis in this case. They provide data, software, services and research services to government agencies while offering power investigation and compliance tools to solve cybercriminal cases.

The banning will begin based on wallets and exchange data. First, a data leak from wallets and exchanges will be followed by user blocking. Considering that identifying holders from the Russian Federation is challenging, the process will not be accurate. If a user wants to unblock your account, they will have to provide proof of not being a Russian citizen, as well as the source of income.

There is also an alternative scenario: the blocking is useless and does not pose a threat. Many wallets do not require KYC, are not tied to the Russian zone, and the token can always be "wrapped." Similar to stablecoins, wrapped tokens are blockchain-specific assets that have the same value as the basic coin, Bitcoin or Ethereum, for instance. Such tokens provide a simple, fast, and easy way to move assets between chains without having to spend a lot of money on conversion fees and transactions. In this case, Tether understands that it can only block amateurs.

Switching to Layer-1 cryptocurrencies

Switch to Layer-1 solutions: both the oldest, bitcoin and ether, and promising assets such as Polkadot that allows transactions with other blockchains. Layer-1 cryptocurrencies refer to projects that only have the base blockchain network that requires updates and changes in code for the network's scalability. Layer-2 solutions, on the other hand, use a different tactic: they create an additional layer for the base blockchain to increase the number of nodes and, consequently, the throughput of the system.

Once again, MetaHash is both Layer-1 (a significant advantage) and decentralised, while the transaction speed is 3 seconds. It is the only blockchain that supports mass transactions and provides instant payments. There is a caveat, though: when the chain breaks up due to connection failure of the nodes, transactions are not processed until it is automatically reassembled. Nevertheless, this also ensures network decentralisation and reliability. For instance, Tron is entirely centralised since there is a switch.

Almost all L1s are worth considering. Consider Cosmos, which utilises the Inter-Blockchain Communication protocol and enables a free asset exchange across sovereign and decentralised blockchains. Algorand, a permissionless blockchain network that allows users to become a validator without requiring much computational power while maintaining security, scalability, and decentralisation, is also worth considering. Nevertheless, diversification is the key. There is no way of being 100% sure which networks will operate in the future.

When choosing a project, the most important criteria are hacking protection of the Layer-1 network and its transaction speed. In a world where trading on CEX exchanges is impossible, the benchmarks mentioned above will be much sought after.

Choosing algorithmic stablecoins

Refrain, at least partially, from the classic stablecoins (USDT, USDC, etc.), and consider algorithmic stables instead. DAI, for instance, is a useful stablecoin pegged to the U.S. dollar. It reduces volatility risks and offers several DeFi features such as lending, borrowing or trading. Frax is another option, serving as a Defi market that uses several distinct mechanisms such as minting and redeeming the FRAX stablecoin and staking. 

You should be careful though. For example, plenty of coins are Ponzi schemes, not stablecoins, although they disguise themselves to be one!

Considering DEX exchanges

Switch from CEX exchanges to direct local exchanges between wallets and DEX exchanges. The main advantages of DEXs are that there are no middlemen and the user solely owns and controls their tokens. Here are a few options you can choose, based on your goals: 

• UniSwap

Automated liquidity protocol powered by a constant product formula and implemented in a system of non-upgradeable smart contracts on the Ethereum blockchain. It obviates the need for trusted intermediaries, prioritising decentralisation, censorship resistance and security. 

• Serum Dex

The permissionless protocol for decentralised exchanges built on the Solana blockchain that provides high speed and low transaction costs for Defi users. 

• ShibaSwap

The trading platform where users can exchange Ethereum-based tokens such as ETH, DAI, USDC, USDT, AXS, MATIC, along with dozens more. The platform also allows the staking of three Shiba Inu coins: LEASH, SHIB and BONE. 

• 1inch 

The exchange aggregator that evaluates decentralised exchanges and helps users find the lowest cryptocurrency prices. The platform is powered by 1INCH utility and governance token, allowing participants to earn on staking by facilitating liquidity.

Using crypto barter for business

Crypto barter with counterparties is a viable option for businesses. Here is what can be done:

• Help counterparties with the opening of legal entities in Hong Kong, Wyoming, and Delaware.
• Get yourself a crypto wallet and switch to that same DAI.
• Make a contribution to the company's balance sheet using an agreement.
• Draw up a series of service agreements between counterparties using crypto wallets instead of bank details.

Summing up

Although the crypto market is becoming increasingly nervous, and there is no way of telling what the new sanctions will result in, there are still efficient ways to protect your capital. Consider switching to Layer-1 cryptocurrencies, refrain from classic stables and CEX exchanges, while crypto barter remains a viable option for businesses.