June 12, 2018 . 12 min read
Crypto Chat #45
Several interesting developments on the EOS front this week as the smart-contract platform attempts to move towards a mainnet launch.
As Eric Wall writes, the initial 21 Block Producers (BPs) were supposed to be elected in a democratic fashion by EOS token holders. The question on everyone's mind was how to go about conducting an open, democratic voting process on a blockchain when no BPs have been elected by token holders yet.
The initial plan was to use a set of ‘unvoted ‘ BP candidates, called ‘Appointed Block Producers’ (ABPs), which would be selected from the informal pool of candidates in a provably random fashion. However, Dan Larimer, the mastermind behind EOS, has since recommended that the voting process be managed by a single ABP due to ease of coordination.
Of course, relying on just a single ABP does little to guarantee censorship resistance within the voting process. The ABP has full control as to which votes get counted and which votes get discarded. The stakes are clearly incredibly high, as BPs are expected to rake in ~$9m year. Of course, to make matters worse, the identity of the ABP is being kept secret, ostensibly to avoid security risks.
Relying on just one ABP opens up several attack vectors. A token holder could reasonably a) rightfully claim that their vote had been censored, therefore invalidating the election b) deceptively claim that their vote had been censored, therefore invalidating the election.
So far, just 3% of the required 15% of EOS token holders have submitted their BP votes so far. As this thread from the EOS subreddit suggests, Vitalik Buterin may indeed have been right after all when he suggested that the incentives for small token holders to vote are not high enough.
For more on the dangers of structuring a validation system around a select group of BPs, check out this detailed analysis of Lisk’s Delegated Proof of Stake consensus mechanism by Simon Gunther.
To make matters worse, notes from a call amongst prospective EOS BPs suggests that the platform’s monetary policy is already being revised before its inception. Creating a new account for each EOS holder will cost around 19,000 EOS, so Dan Larimer has suggested simply printing an additional 19,000 EOS. So much for algorithmically controlled money supply...
Block.One, the development team behind EOS, announced this week that the outgoing CFO at Commonwealth Bank, Rob Jesudason, will join as COO. Could it be that Jesudason’s wealth of experience with money laundering made him a particularly attractive candidate?
Reports also suggest that Guido Vranken, the ethical hacker who made $120,000 in a week from exposing critical bugs in the EOS protocol, has been offered a permanent job at Block.One.
The International Monetary Fund published a report titled ‘Monetary Policy In The Digital Age: Crypto assets may one day reduce demand for central bank money.’
Authored by Dong He, the deputy director of the IMF’s Monetary and Capital Markets Department, the report analyzes the impact of digital currencies on central bank policy and suggests several strategies for response. Some key highlights:
“As a medium of exchange, crypto assets have certain advantages. They offer much of the anonymity of cash while also allowing transactions at long distances, and the unit of transaction can potentially be more divisible. These properties make crypto assets especially attractive for micro payments in the new sharing and service-based digital economy.”
“We cannot rule out the possibility that some crypto assets will eventually be more widely adopted and fulfill more of the functions of money in some regions or private e-commerce networks.”
"Such a shift could also portend a change in the way money is created in the digital age: from credit money to commodity money, we may move full circle back to where we were in the Renaissance.”
“If central bank money no longer defines the unit of account for most economic activities—and if those units of account are instead provided by crypto assets—then the central bank’s monetary policy becomes irrelevant.”
“Government authorities should regulate the use of crypto assets to prevent regulatory arbitrage and any unfair competitive advantage crypto assets may derive from lighter regulation.”
“[Central banks] could make central bank money user-friendly in the digital world by issuing digital tokens of their own to supplement physical cash and bank reserves. Such central bank digital currency could be exchanged, peer to peer in a decentralized manner, much as crypto assets are.”
The US’ Commodities Futures Trading Commission (CFTC) also had some bullish remarks on the topic of crypto assets.
Commissioner Rostin Behnam told an audience at the United Nations that virtual currencies will “become part of the economic practices of any country, anywhere...These currencies are not going away and they will proliferate to every economy and every part of the planet. Some places, small economies, may become dependent on virtual assets for survival...We are witnessing a technological revolution. Perhaps we are witnessing a modern miracle.”
Coinbase, the leading US crypto asset exchange, announced their acquisition of Keystone Capital, which has licenses to operate as a registered investment advisor, as well as to run an alternative trading system (ATS).
The acquisition of these licenses provides Coinbase with the necessary regulatory infrastructure to expand its listings to both security-like crypto assets and traditional securities.
Two announcements from the world’s leading Bitcoin miner and producer of crypto asset mining equipment, Bitmain.
First, news that Ant Financial, the Bitmain holding company, has raised a $14bn private round at a valuation of $150bn. For context, British Petrolium is valued at just over $150bn.
Second, news that Bitmain CEO, Jihan Wu, is considering an IPO. Wu has stated that he is open to listing in Hong Kong, although he sees value in listing in an overseas market with U.S. dollar-denominated shares, which would allow early investors a chance to cash out.
In other mining news, Obelisk has announced the launch of their new product, Launchpad, which will see the hardware manufacturer work alongside blockchain projects to develop ASIC-friendly proof-of-work algorithms.
The algorithms will only be disclosed when the ASICs are completed, which gives the blockchain developers complete control over the launch of their coin. ASICs can be equitably distributed throughout the community, ensuring that no one party controls more than a certain percentage of hashrate.
State of ICOs:
Matt Dibb, founder of Astronaut Capital, has published a review of the state of the ICO ecosystem.
While there is nothing particularly novel about Dibb’s analysis, he does do a fantastic job at illustrating the development of various sale mechanics (pre-sale, private sale etc.).
Bitcoin (BTC) consolidated between the $7,400-$7,600 range before dropping $900, or 11%, on Sunday. It remains unclear as to what caused such a precipitous drop, although as far as I am aware there is no single fundamental event driving the decline. 1D Relative Strength Indicator is now sitting at 30 — anything below 30 suggests that BTC is oversold.
Blockchain analytics firm, Chainalysis, published a fascinating analysis of BTC’s money supply. According to their findings, long term investors sold $30bn of BTC to new speculators between December 2017 and April 2018, with half of this transfer occurring in December alone. Chainalysis also reports that ⅓ of BTC’s available supply is controlled by 1,000 long term investors and 600 new speculators. Worth the read.
For those readers who have yet to gain exposure to the crypto asset class, check out ExtremeCryptoFomo, which calculates your gains for various coins over different timelines.
Ether (ETH) consolidated in the $600-620 range before dropping $90, or 14.5%, on Sunday. The ETH/BTC ratio is largely unchanged, continuing to range between 0.076-0.080.
For detailed ETH fundamental and technical analysis, check out Josh Olszewicz’s latest report here.
Protocol development continues to impress.
First, Justin Drake from the Ethereum Sharding research group announced that the team is considering changing the Ethereum 2.0 roadmap to skip Casper FFG with 1500 ETH deposits: instead, Casper and Sharding validators would be unified from the get-go and minimum deposits would fall to just 32 ETH.
Second, the Plasma research team introduced Plasma Debit, an update to Plasma Cash that would turn each Plasma coin into a bidirectional payment channel between the current coin owner and operator. This would allow: new parties to join the payment network without doing an on-chain transaction, and atomocity features, so that each coin can be updated atomically with other coins on the same Plasma chain without the need for Hashed Timelock Contracts.
Third, the results from EIP0, a questionnaire on the shared values of Ethereum community members, has been published. The questionnaire asked respondents about their values, the values that Ethereum should strive to embody, and their concerns with the current state of development.
With all this progress in mind, Loom Network makes the case that Ethereum will be the backbone of the new Internet.
The U.S. Securities and Exchange Commission has appointed their inaugural Crypto Czar. Valerie Szczepanik will serve as associate director of the Division of Corporate Finance and senior advisor for digital assets and innovation.
According to the SEC, Szczepanik will coordinate efforts across all SEC Divisions and Offices regarding the application of U.S. securities laws to emerging digital asset technologies and innovations, including ICOs and crypto assets.
In other news, former SEC Chairwoman, Mary Jo White, will represent Ripple Labs in their ongoing lawsuit, which centers around the XRP's contentious status as a security.
Dean Eigenmann, founder of Harbour Project, has published a treatise arguing against the type of community governance models introduced by EOS.
Eigenmann instead advocates for a technocratic governance structure, especially during the early years of a blockchain’s life.
Forbes reports that the 10 largest companies in the world are now exploring blockchain technology.
The New York Times has published a feature on Susqeuhenna International Group’s (SIG) crypto-asset desk. The firm is opening trading to a small group of its 500 clients, with plans to expand in the near future.
SIG is one of the largest players in trading traditional investments like stocks, options, and ETFs.
Reports suggest that Fidelity Investments, which has $2.45tn worth of assets under management, is building its own crypto asset exchange.
Goldman Sachs-backed Circle is seeking to register as a federally licensed bank in the U.S.
Circle, which offers a crypto asset wallet and investment platform, as well as an OTC crypto asset trading service, will also seeks to register with the SEC as a brokerage and trading platform.
Like Coinbase, the moves would allow Circle to trade crypto assets that are considered as securities in the U.S. and would also help the firm circumvent the complexities of registering as a crypto asset firm with regulators in all 50 states.
Fortune reports that R3, a startup focused on enterprise blockchain services, may be floundering, despite having raised $107m in 2017.
Two former employees accused R3 of falling 10x short of internal financial targets set a year ago and criticized the firm’s corporate culture, in which executives and consultants flew across the world on flight class flights. The CEO’s salary was described as ‘outrageous’.
The Korean National Tax Services have completed their audit of leading exchange, Bithumb, announcing that they have found no illegal activities to have taken place. However, Bithumb will be charged ~$30m in taxes.
In more exchange-related news, this graphic shows that crypto asset exchange volume has fallen drastically in the last 2 months. Bittrex and Upbit are the two biggest casualties, with volumes declining by 85% and 89% respectively.
Joe Lubin Q&A:
An interview with Joe Lubin, co-founder of Ethereum and founder of leading Ethereum venture studio, ConsenSys.
Lubin comments on the structure, culture, and ethics of ConsenSys, the future of ICOs, and his company’s decision to open a new hub in Tel Aviv.
Myles Snider of MultiCoin Capital has released the Stablecoin Index, which tracks market cap and trading volume for various coins.
The site also includes a list of stablecoin projects, divided into the following 6 categories: fiat-collateralized; crypto-collateralized; algorithmic supply; hybrid; alternative; metal-backed.
The Graph is powerful new protocol that aims to get data out of dApps.
Leveraging Graph, dApp developers will be able to query their applications for the following kinds of information: ‘Who is looking for credit matching my desired risk profile’; ‘What are the token balances for this wallet address’, and ‘Who owns land in my VR district and how much did they pay.’
Cost of Mining:
Christopher Bendiksen, the Head of Research at CoinShares, has published an article addressing misconceptions regarding the cost of Bitcoin mining.
The six main takeaways:
- Bitcoin energy usage is a major component of its network security model
- Prior reports on Bitcoin’s energy footprint were greatly exaggerated
- Hydro power actually appears to be the primary electricity source of the Bitcoin mining network
- ‘Migratory Miners’ seasonally move to wherever conditions are most profitable
- Annually, network hashrate grows by ~300%, while chip efficiency grows by 80% and chip cost per hash falls by 50%.
- CoinShares has observed increasing geographical distribution among miners
The Ethereum blockchain will be used to facilitate the auction of Andy Warhol’s 1980 work 14 Small Electric Chairs. The auction will be carried out by Dadiani Fine Art in London’s Mayfair district in partnership with Maecenas Fine Art.
Bids for up to 49% ownership of Warhol’s work will be denominated in Bitcoin and Ether. Estimates put the price of the piece at $5.6m/732 BTC.
Josh Stark of L4 explains the Web 3.0 vision.
The piece is structured around three fundamental trends:
- Money as a native feature of the Internet
- Decentralized applications offering users new features
- The increased control for users over their digital identities and data.
The Tezos Foundation announced that they will implement KYC/AML checks for contributors to last summer’s ICO. As Matt Odell comments, this may be used to prevent US citizens from claiming their XTZ. At the time of the ICO there was no KYC.
Australian police are pursuing a criminal investigation into what may be one of the first instances of a company stealing crypto assets using a software backdoor.
Soar Labs reportedly acquired a 49% stake in Byte Power Party (BPP) for $5m, with the majority of funds paid in Soarcoins. However, Soar Labs then proceeded to withdraw the Soarcoins from the BPP wallet, claiming that the move was required in order to protect the market and integrity of SOAR.
It was later revealed that the Soarcoin smart contract was structured in a way that allowed Soar Labs to remove coins. When asked why Soar Labs didn’t inform BPP of the backdoor, Soar Labs CEO Seth Lim indicated that the company should have looked at the code.
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