May 25, 2018 . 15 min read
Crypto Chat #42
Economics of Casper FFG:
Brian Venturo, CTO of Atlantic Crypto, published an analysis of the economics of Casper FFG, Ethereum’s hybrid Proof of Work/Proof of Stake consensus mechanism.
Applying the Black-Scholes model, Venturo surmises that staking under Casper FFG, which has a 4 month withdrawal lock-up, would have to yield roughly 26% annual interest in order to be a suitably risk-adjusted investment — in its current instantiation, Casper FFG promises ~5%.
The Ethereum community continues to debate the validity of Venturo’s calculations. As someone lacking a strong grasp of options pricing, I deferred to Jon Knipper, formerly on the Macro Sales FICC desk at Goldman Sachs, who provided the following thoughts:
“If the master-node assumptions he makes are otherwise correct (a lot of assumptions there), then I agree it's not super juicy for investors who are maybe getting 5% of extra ETH upside in exchange for the lock-up risk.
However, given that most of the new investors into the space are betting that ETH will continue to rise in value, they might be willing to accept some lock-up in order to accrue "free" ETH.
Imagine you're running a portfolio of crypto assets... you're always going to have some amount of ETH, even if you are bearish and overweight cash, right? So why not earn some extra return on that ETH?
...once there is a liquid ETH future contract market, the “cost” or inconvenience of being locked up goes way down, as you can just hedge with the futures...Depending on where the futures are trading with regards to spot, this could cost or even earn you a few %.”
I look forward to further discussion on this topic.
Japanese bank Nomura announced a partnership with crypto asset custody group Ledger to explore building a secure digital asset custody solution.
The new venture, Komainu, will pave the way for secure and compliant institutional investment in digital assets.
A lack of institutional-grade custody solutions is often touted as a major obstacle for institutional participation in the crypto asset class.
Cornell University professor and blockchain researcher Emin Gun Sirer unveiled a family of new consensus protocols from a pseudonymous team called ‘Team Rocket’.
Referred to as Snowflake, Snowball, and Avalanche, the protocols, inspired by gossip algorithms, randomly sample network participants, and ultimately choose a single result.
Vlad Zamfir, an Ethereum researcher working on the Casper CBC consensus mechanism, was skeptical, suggesting that the probabilistic nature of the new mechanisms does not provide the necessary security of a fully deterministic mechanism like Casper.
On the topic of consensus mechanisms:
An embarrassing week for EOS as Vitalik Buterin revealeda crucial security vulnerability in their consensus mechanism just weeks before the mainnet is due to launch. The EOS mechanism suggested that consensus could be reached with ⅔ of malicious validators, which is impossible — see Byzantine Fault Tolerance.
Perhaps even more embarrassing, Buterin graciously suggested that EOS implement the Ethereum Casper FFG mechanism instead.
Circle, a mobile payments and crypto asset trading firm, closed a funding round led by Bitcoin mining giant Bitmain for $110m, raising its valuation to $3bn, up from $480m in 2016.
Circle also announced its intentions to build an Ethereum-based fiat-collateralized stable crypto asset. Circle’s USD coins, USDC, will be backed one-to-one to the dollar, with the bills stored in auditable bank deposits and redeemable by verified buyers.
The platform, which already has 7 million users, will incorporate USDC in its Circle Pay payment app and in Circle Trade, as well as offer the asset on its newly acquired crypto asset exchange, Poloniex.
With the much anticipated Consensus pump failing to materialize, Bitcoin (BTC) looked rather bearish this week, momentarily falling below $8,000 before recovering to the $8,400-8,500 range. BTC must surpass $9,100 resistance with vigor in order to return to bullish territory.
Volatility was exacerbated by the outage of BitMex, a crypto asset exchange that offers customers up to 100x leverage for BTC trading. When BitMex came back online the BTC spot market moved between 50-100 basis points.
For an in-depth fundamental and technical analysis of BTC, check out Josh Olszewicz’s latest report here.
Despite numerous bullish ecosystem announcements, including comparisons to Apple from Steve Wozniak, Ether (ETH) similarly failed to rally this week: ETH momentarily fell to $658 before rallying to the $690-700 range.
ETH/BTC has remained rather stable in the 0.083-0.084 range.
Meanwhile, the Ethereum fee market has surpassed that of Bitcoin, even as average transaction fee remains lower. In the last 24 hours, total ETH transaction fees amounted to $468,570 vs. $260,327 for BTC.
Brian Quintenz, a commissioner at the Commodity Futures Trading Commission (CFTC), has stated that federal agencies should move quickly to clarify the legal status of Ether (ETH) as industry players clamor to list derivatives tied to the second largest crypto asset.
In his statement, Quintenz suggested that announcement would come in the following weeks.
Last week, Chicago Mercantile Exchange (CME), the largest derivatives exchange in the world, added an ETH/USD reference rate, a move that many analysts presume to be in anticipation of the addition of ETH futures support.
The whole world waits on the edge of their seats for a statement from the Securities Exchange Commission (SEC) regarding ETH’s status regarding securities law, but it seems that the SEC has more important issues on their plate, namely launching a fake ICO website.
The SEC’s project, titled HoweyCoin, has all the hallmarks of the ICOs we know and love: promises of 1% daily returns, deep discounts, and celebrity endorsements.
The Brooklyn Project, an regulatory initiative spearheaded by ConsenSys, has published an updated framework for Consumer Tokens, often referred to as utility tokens.
The framework outlines 10 core principles regarding token issuances:
- Consumer Token Design — The token should be usable and have intrinsic characteristics of a consumer token.
- Project Governance and Operation — The project should have an appropriate and transparent governance structure.
- Responsible Token Distribution — Token distributions should be orderly, fair, and carried out in a transparent manner.
- Purpose of Token Distribution — The purpose of the token distribution and expected plans for any proceeds should be transparent.
- Token Supply — Projects should define token supply parameters and prudently manage retained inventory.
- Mitigation of Conflicts and Improper Trading — The project should strive to create a level playing field in any secondary markets.
- Token Safety and Security — Any tokens offered to consumers should be safe to use and own.
- Marketing Practices — Marketing should be fair and accurately reflect the project and product.
- Protecting and Empowering Consumers — The project should protect and empower its customers.
- Compliance with Applicable Laws — The project and related organizations should engage in reasonable best efforts (in a complex and currently evolving regulatory environment) to comply with applicable laws, including securities, data privacy, anti-money laundering, and tax laws.
Meanwhile, ConsenSys also announced a new unit titled TokenWork and its first project, the Token Utility Canvas, a framework for developing technically and functionally sound tokens and business models.
Parity is discontinuing the Parity ICO Passport Service (PICOPS) due to regulatory pressure from the imminent General Data Protection Framework (GDPR).
PICOPS, a service enabling individuals to associate a single Ethereum address with their unique identity for AML/KYC compliance purposes, has been deemed to be incompatible with GDPR’s private data requirements.
Mitsubishi UFJ Financial Group (MUFG), the eighth biggest bank in the world with $2.459tn in assets, is plannning to trial its own cryptocurrency as early as 2019.
The test phase could involve around 100,000 account holders, with one MUFG-coin equal to the value of one Japanese Yen.
According to Japanese media outlet NHK, users will be able to use the currency to make payments at a variety of outlets, including restaurants and convenience stores, as well as transfer the currency to the accounts of other participants.
ConsenSys announced the launch of a new Ethereum/Quorum enterprise blockchain called Kaleido in partnership with Amazon Web Services.
Clients can choose from a variety of consensus mechanisms and protocols and can leverage the security of the main Ethereum chain by storing block hashes on mainnet.
Several new announcements from leading crypto asset exchange, Coinbase.
First, a new suite of institutional products:
- Coinbase Custody (previously announced), which has partnered with an SEC-regulated broker-dealer to offer institutional grade custody solutions. Launch partners include MetaStable, Polychain Capital, and Multicoin Capital.
- Coinbase Markets, a centralized pool of liquidity.
- Coinbase Prime, a new platform designed to provide a suite of tools and services for institutional investors. Features include lending and margin products, OTC trading, and algorithmic orders.
- Coinbase Institutional Coverage Group, which will provide sales, sales trading, research market operations, and client services support.
Second, the Wall Street Journal reports that Coinbase has talked to U.S. regulators about the possibility of obtaining banking licenses, which would allow the start-up to broaden the types of products it could offer.
A federal banking charter would also let the firm swap a hodepodge of state regulators for one primary federal one. Moreover, Coinbase would gain the option of directly offering customers federally insured bank accounts and other services, rather that joining with existing banks.
Third, Coinbase Ventures led a $8.2m seed round in Compound, a centralized application that lets you borrow or lend crypto assets, providing holders with fixed income revenue. Participants in the seed raise also include Andreesen Horowitz, Bain Capital Ventures, and Polychain Capital.
Fourth, Coinbase was profiled by the Washington Post. Highlights:
- Coinbase manages more than 20 million accounts, almost as many as Fidelity Investments and twice as many as Charles Schwab.
- Coinbase stores $20bn worth of assets.
- Coinbase has 300 staff, with plans to add 450 in the next year.
- Coinbase stores 99% of its customers’ funds in cold storage — the remaining 1% comes from the company’s reserves and is privately insured by Lloyd’s of London.
Finally, here’s a picture of Brian Armstrong, CEO of Coinbase, manning a booth at a Bitcoin conference in 2013. How times have changed.
More exchange news:
Social trading platform eToro has announced it will be expanding its crypto asset operation to the US later this year, having just raised a $100m venture round.
In addition to its foray into the US market, the company revealed it will also be launching its own crypto asset exchange desk and a dedicated mobile wallet for crypto asset custody.
Robinhood is aiming to become either the largest or one of the largest crypto asset platforms in the United States by the end of the year after raising $363m in a new investment round, which values the company at $5.6bn. Robinhood offers customers fee-free trading.
ICE, the parent company of the New York Stock Exchange, is working on an online trading platform that would allow large investors to buy and hold Bitcoin.
Genesis Global Trading, a crypto asset broker specializing in large trades with institutional investors, gained approval to operate in New York under the state’s Department of Financial Services’ BitLicense program. The BitLicense allows Genesis to facilitate the trading of Bitcoin, Ether, Ethereum Classic, Bitcoin Cash, XRP, Litecoin, and Zcash.
The Australian Securities Exchange (ASX) will replace its Clearing House Electronic Sub-register System (CHESS) with technology from Blythe Masters’ Digital Asset Group, with roll-out targeted for late 2020 or early 2021.
Amber Baldet, the former head of J.P. Morgan’s blockchain arm, has announced her much-anticipated next move: a new blockchain project called Clovyr.
Clovyr brings the flexibility and ease of use of modern application development to the blockchain domain, offering a unified way to create, deploy, manage, and extend applications across a variety of networks.
Meanwhile, J.P. Morgan has appointed 29-year-old Oliver Harris as its new head of crypto-asset strategy. Harris will be tasked with identifying crypto projects for JP to develop in-house.
Blockchain Week is over, thankfully.
Patrick Mayr of Cherry Ventures provides a recap of two of the largest events, Consensus and Token Summit, here.
- Consensus had 8,500 attendees, up from 2,700 in 2017 and 400 in 2015.
- Consensus raked in $17m from ticket sales alone.
- Joe Lubin bet Jimmy Song any amount of Bitcoin that there will be blockchain projects beyond the store of value application that will gain meaningful traction.
- Token Summit had 1,200 attendees.
- Discussion of good governance as a key value driver.
- Expect an explosion of tokenized securities.
Meanwhile, Craig Burel, Partner at Reciprocal Ventures, provided an overview of the Community Ethereum Development Conference (EdCon).
Clearmatics and Axoni, two enterprise blockchain services, have demonstrated how a financial derivative can be issued via a smart contract, trigger a payment, and then instigate a cross-chain atomic transfer of value between two distinct Ethereum-based networks in a first-of-its-kind trial.
The milestone is significant due to the importance of interoperability in the context of the existing blockchain landscape, with new networks spawning every day.
Deloitte’s former global blockchain lead, Eric Piscini, has left the consulting firm to start a supply-chain focused project, Citizens Reserve.
The startup is raising $150m to move the world’s fragmented supply chain networks to a combination of permissionless and permissioned Ethereum chains.
Introducing 0x Protocol V2, a new smart contract architecture to be released late July 2018 that will:
- Seamlessly support new token standards, including non-fungible token standard ERC-721.
- Increase order matching efficiency and cross-relayer arbitrage.
- Support new signature types and custom verification logic.
- Include an open source framework for forwarding contracts, facilitating user onboarding and the abstraction of WETH.
- Include the ability to filter contracts for permissioned liquidity pools.
- Allow for bulk order cancellations with a fixed sized transaction.
Some highlights from the 0x system to date:
- 100k+ trades
- $183m volume across a variety of relayers
- $4m average volume
- 10% week-over-week growth
- 300+ unique ERC20 tokens traded
Meanwhile, new project Fetch aims to make it easy to find the best rates and execute a trade across a variety of decentralized exchanges.
A fascinating approach to stable coins from two seasoned economists, Dick Bryan and Akseli Virtanen.
Bryan and Virtanen posit that it is not desirable for crypto assets to be stable with respect to the US dollar because their roles and goal are totally different: crypto assets are about exploring and re-engineering the sociallness of fiat; building alternatives of how a different economy might be. Stability should thus be discussed in the context of the newly-conceived crypto economy, rather than the system that we seek to transcend.
Meanwhile, infamous stable coin project, Basis, has come under some heavy criticism this week.
Qiao Wang, engineer at Messari, criticizes Basis for its cyclicality — unlike governments, which promise to pay back bonds using tax revenue, Basis promises to pay back bonds by printing even more Basis.
Then Tushar Jain, Partner at Multicoin Capital, noted the asymmetric risk in shorting an asset that in essence is designed to prevent margin calls. The downside for shorting should just be the interest rate on borrowing.
However, Nathan Black, CIO at SHA Capital, rightly noted that lenders will likely react to large borrow requests by raising interest rates to a point where risk/reward falls dramatically.
Introducing Harmony, a proposed standard for crypto transaction CSV exports to help make the next tax season slightly less stressful than this past one.
A new platform-agnostic decentralized app store from the team at Blockstack.
Zcash (ZEC), a privacy coin leveraging zero-knowledge proof technology, saw more daily active addresses than Litecoin for the first time in 2018. The data only takes transparent ZEC addresses into account — shielded ZEC addresses are near-impossible to monitor, as designed.
Last week, leading crypto asset exchange Gemini announced the addition of Zcash pairs.
John Backus provides a in-depth overview of the various blockchain platform plays, including: wallets; dApp marketplaces; product development platforms; consumer platforms; key management, and identity systems.
A new Ethereum Request for Comment (ERC) from Ethereum researcher Alex van de Sande, proposing a standard for allowing users to sign messages to show intent of execution, but allowing a third party relayer to execute them.
This new standard would give dApps the ability to pay user transaction fees themselves, therefore eliminating friction from the application user experience.
Samarai Wallet has teamed up with GoTenna to develop the TxTenna app, which can broadcast offline Bitcoin transactions off-grid via goTenna Mesh devices, enabling an alternative physical communication layer for Bitcoin and removing reliance upon centralized Internet Sevice Providers, who could feasibly censor transactions.
Investors in GoTenna include Union Square Ventures.
The Wall Street Journal released findings from its analysis of almost 1500 ICOs, concluding that 18.6% of them raised red flags.
Of the 1450 offerings, 271 were using what the WSJ described as “deceptive or even fraudulent tactics”, ranging from hiding and/or providing fake information, secrecy surrounding finances, to outright plagiarized white papers (looking at you, Tron).
Decryptionary, an extensive crypto/blockchain glossary
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