June 26, 2018 . 12 min read
Crypto Chat #47
The recent crypto-asset market downturn has investors rightfully questioning grossly inflated valuations. Nathaniel Whittemore succinctly captures the sentiments of leading VCs in the this thread – highlights below:
Teemu Paivinen, CompoundVC: “Many companies are also raising more capital right after closing their previous round. This seems like they are preparing for a long winter and are trying to milk whatever remaining FOMO there is for all it's worth. This does not spell good things for investors.”
Eric Meltzer, INBlockchain: “If the cheapest anyone got involved with your project is at a $200m valuation, then you simply cannot have a community similar to that of Bitcoin, where there is a mass of HODLers who got in at a very low price and are almost completely unperturbed by subsequent price volatility.”
Fred Wilson, USV: “CEOs and their talent organizations frequently tell me that it is easier to recruit people to companies that have raised at eye popping values. This is particularly perverse because the higher the valuation, the less money the employee will make on their equity. But, it seems, the talent market is looking to the investment community to signal to them what companies are worth working for. It should work the other way around. Capital should follow talent, not talent following capital.”
Brandon Reeves, Lux Capital: “One largely unspoken perverse incentive (and dangerous feedback loop) in crypto world is projects are incentivized to raise at insane valuations otherwise they have trouble being listed on a reputable exchange. Listing is expensive and better exchanges can lead to higher prices.”
Another fascinating perspective comes from Bhaargav Kosuri from Beast Ventures, who frames the market in terms of Prospect Theory: the perceived losses from the market’s all-time-high reference point has investors looking for higher risk:reward opportunities. This persistent demand continues to fuel high valuations from otherwise low quality projects.
As Whittemore suggests, the inflated valuation landscape is at least partly a consequence of the difficulty of valuing this new crypto asset class and the lack of agreed upon valuation frameworks. Qiao Wang of Messari brilliantly captures the flaws of popular frameworks here.
I strongly agree with Wang's concluding statement – “It’s entirely possible that an asset is at the same time overvalued on the horizon of minutes, undervalued on the horizon of days, and overvalued on the horizon of years.”
Bitcoin (BTC) fell to $5,775 on Sunday, surpassing February’s lows of $5,967: the last time BTC was worth less than $5,800 was in November 2017. The leading crypto asset has since recovered to the $6,200-$6,300 range. Despite price depreciation, BTC network hash rate continues to increase week on week.
For those BTC bulls looking for some light amongst the darkness: reports this week state that the Mt. Gox trustee charged with compensating the collapsed-exchange’s creditors will be able to pay back users in BTC rather than fiat.
This means that a) creditors will likely receive a massive windfall, as the BTC that they lost in 2014 was worth just a fraction of today’s price b) hundreds of millions of dollars worth of BTC will not have to be liquidated in the coming months, therefore relieving future sell pressure from the BTC market.
For those BTC bears looking for more darkness: reports this week suggest that leading BTC miner, Bitmain, mined 42% of all BTC blocks last week. This means that Bitmain is just 9% of hash rate away from being in a position to execute a 51% attack on the BTC network. However, as many have argued before, it would probably not be in their economic interest to do so.
For those readers concerned about the accuracy of existing BTC transaction volume metrics, check out “ Bitcoin Days Destroyed”, which gives more weight to coins that haven’t been spent in a while.
For those readers who still believe in their day trading skills, check out your competition here.
Ether (ETH) also saw a new yearly low of $420 this weekend.
It has since recovered to the $450-$460 range, although its value vs. BTC is down 5% since last week.
In the wake of EOS’ disastrous launch (see previous CCs), the project’s founder, Dan Larimer, has published a treatise on decentralized blockchain governance, in which he argues that only the most universally competent dispute resolution systems and blockchains will survive.
Larimer further posits that networks that are considered to be operated by a corrupt dispute resolution system will see its currency sold as users seek safe haven in new communities. This much I can agree with – $EOS is down 46% since its official launch on June 2nd.
You can keep track of the number of accounts arbitrarily blacklisted by EOS’s arbitration authority (which, it appears, is run by a former garden landscaper) here. Read EOS Block Producer ChainRift’s concerns over the arbitration process here.
On the topic of scams, here’s a list of the most lucrative ETH scams.
The St. Louis branch of the US Federal Reserve (SLFRB) has added four crypto-asset price trackers to its extensive research database.
The Federal Reserve Economic Data (FRED) will now include pricing data for Bitcoin, Ether, Bitcoin Cash, and Litecoin. Data points are obtained from Coinbase and updated daily at 5pm PST.
This is not the first time that the SLFRB has shown support for this new asset class: earlier this year a researcher published an article highlighting the similarities between Bitcoin and fiat currencies, and as recently as last month the CEO of the SLFRB praised crypto-assets for their ability to drastically reduce cross-border transaction costs.
Bitcoin made its first appearance in a US Supreme Court ruling this week.
Justice Stephen Breyer’s dissenting opinion in the Gill v. Whitford case briefly discusses the origins of money and suggests that “perhaps one day employees will be paid in Bitcoin or some other type of cryptocurrency.”
Regan Bozman, Head of Business Operations at leading ICO platform CoinList, gives his skeptical take on the concept of ‘Crypto Hubs’.
According to Bozman, while a vast majority of projects incorporate in regulatory friendly jurisdictions like Switzerland, Malta, and Lithuania, much of the development progress actually continues to take place in existing tech hubs like Berlin, London, San Francisco, and New York.
This week a report in Forbes indicated that the US Secret Service has requested the consideration of additional legislative and regulatory action related to anonymity-enhanced cryptocurrencies, citing billions of dollars worth of digital assets that have been used for ‘suspicious activity’. Just wait until the Secret Service finds out about cash!
The team at Zcash, one of the more prominent privacy-focused coins and a recent recipient of support from New York’s Department of Financial Services, responded with the following statement:
“The Zcash company mission is to empower everyone with economic freedom and opportunity. To that end, the company has focused efforts to help build and support Zcash, a privacy-protecting, digital currency built on strong science. It was created precisely to protect the privacy rights of law-abiding citizens and guard them against harm by bad actors.
We believe it is in the best interest of the citizens of the United States, the US Secret Service, and other governmental organizations to also advocate for those rights and protect its citizens and businesses from harm.”
Members of Congress have been ordered to publicly reveal any digital token holdings worth more than $1,000.
The fund will be led by Chris Dixon and Katie Haun, a former prosecutor with the US Department of Justice and the first-ever female general partner at Andreesen Horowitz.
According to Chief Operating Officer, David Solomon, Goldman Sachs is exploring crypto asset trades beyond the publicly-traded derivatives that it already handles.
Apple may finally be preparing to enter the blockchain game, with a new job posting for Apple Pay requiring candidates to have: a deep understanding of Side Channel analysis; a deep understanding of payment ecosystems and emerging blockchain schemes, and expertise on cryptographic operations and key management.
Blockchain platform, Stellar, is in talks to acquire Chain, a San Francisco-based startup providing enterprise blockchain services for the financial industry. Fortune reports that the sale price will be $500m, to be paid in Stellar’s native digital currency, Lumens.
As reported last week, Ari Paul of BlockTower Capital shared his knowledge of the upcoming acquisition in a private conversation, which has since been publicized. If the SEC deems Stellar to be a security, which does not seem out of the realm of possibility, then Paul should expect to receive insider trading charges.
Leading Ethereum application venture studio, ConsenSys, has launched an Ethereum focused accelerator program in San Francisco, titled Tachyon.
Starting in September, the program will invest between $75,000-$100,000 in up to 15 projects, as well as providing mentorship and Silicon Valley connections.
Business Insider reports that the SEC has received nearly 200 pages worth of complaints about Coinbase.
Coinbase, the leading US crypto asset exchange, has long positioned itself as a trusted and compliant platform for retail investors: the complaints, which include accusations of stolen funds, suggests otherwise.
In other exchange-related news:
The Japanese Financial Services Agency has ordered six exchanges to improve business practices after a series of inspections over the past few months. The culprits include: QUOINE; BTC Box; Tech Bureau; BitPoint, and Japan’s largest exchange by volume, bitFlyer.
Circle, a Goldman-Sachs backed crypto asset wallet and investment platform, has published their digital asset framework, which is used when assessing and evaluating assets for listing on their exchange. The framework largely reflects the sentiment of the GDAX digital asset framework, published in 2017.
The core questions:
- Does this project align with the core tenets of the cryptocurrency community?
- Does this project employ robust underlying technology in the realization of its goals?
- Does this project have a strong, committed, and experienced team behind it?
- Does this project create real value for a meaningful number of end users? Is it set up to succeed?
- Are there indicators of sufficient liquidity and interest in the market?
Louis Aboud-Hogben, Head of Research at Wyre Capital, has published an article addressing the flaws of the 0x ZRX token model. Aboud-Hogben proceeds to make several suggestions for how the ZRX model can be revised to incentivize further value accrual and relayer liquidity. Well worth the read.
Will Warren, co-founder of 0x, responded immediately to Aboud-Hogben’s comments, arguing that value cannot be forced into a token through clever engineering and that protocols must ultimately be designed to maximize utility for users rather than speculators.
State of Blockchains:
A thorough overview of some of the most interesting projects in the industry by Duke student, Adam Taché.
Projects covered include: Chia, Decred, DFINITY, Comos, RChain, Algorand, Mobilecoin, and MakerDAO.
A must read.
Several professors from Stanford’s Computer Science department have launched the Center for Blockchain Research, an initiative dedicated to researching and understanding blockchain technology.
The center’s initial five-year research program is being underwritten by gifts from groups including the Ethereum Foundation, Protocol Labs, Polychain Capital, and DFINITY Stitfung, at an estimated cost of $30m.
Grid+, an Ethereum-based venture that gives consumers direct access to wholesale energy markets, is now officially licensed as a retail electricity provider in the state of Texas.
Slides from Vitalik Buterin’s presentation on mechanism design challenges, including the concept of ‘subjectivocracy’, in which stakers use a dedicated token instead of depositing ETH:
In any controversial decision between parties A and B, the token is split into two ‘mirror universes’, one where A voters are rewarded and B voters are penalized, and another where the rewarded/penalized parties are reversed. The market then separately values the tokens of each ‘universe’.
Celo aims to remove the barriers for large-scale adoption of crypto-assets as a means of payment.
Leveraging a novel address-based encryption algorithm that maps phone numbers to wallet addresses, Celo makes sending money as easy as sending a text. Celo uses a fiat collateralized stablecoin in order to minimize the volatility of payments.
Celo has raised a funding round of $6.5m from top investors including Andreesen Horowitz, General Catalyst, Polychain Capital, and Coinbase.
Doug Petkanics of Livepeer discusses inflation funding as a means of incentivizing development contributions for blockchain protocols.
Global Digital Finance:
Simon Taylor is heading up a new initiative called Global Digital Finance (GDF), which seeks to address the growing need for a global crypto asset rule set. The initiative is publicly supported by over 170 industry organizations and individuals, including ConsenSys, Circle, Hyperledger, and Messari.
As part of its launch, GDF has published its ‘GDF Code of Conduct’, which can be found here.
Jeff Garzik, a former Bitcoin core developer, launched the ICO for his latest project, Metronome, this weekend. Metronome is designed to be a cross-blockchain cryptocurrency, affording users the ability to ‘swap’ between different blockchains’ native assets using the same coin.
The sale was structured as an autonomous descending price auction, whereby the price per token declined linearly over the course of the day.
As expected, the vast majority of tokens were purchased in the last minutes of the sale. With two hours remaining, the market cap stood at $140m – by the end of the sale, it had dropped to $12m.
Blockchain data shows that almost half of the available tokens went to just 3 buyers, with one investor paying a 59 ETH (~$27,000) transaction fee for their contribution.
Overall, this is a brilliant lesson for how not to run a token sale.