July 17, 2018 . 12 min read

Crypto Chat #48

Highlights

Zcash Founders Reward:

Plenty of controversy in the last two weeks around the Zcash (ZEC) Founders Reward (FR).

The FR is hard-coded into the ZEC protocol, providing the ZEC team 2.1m ZEC, or 10% of total supply, over the first four years of the network’s life cycle.

The FR saga started after Arjun Balaji published a piece discussing the ‘founder incentive trilemma’, which refers to the difficulty of satisfying the following three properties: a) decentralized governance & development b) continuous team/founder incentive alignment c) fairness.

Things then became slightly messy after INBlockchain’s Eric Meltzer proposed that the FR be modified, with a certain % being directed into an ecosystem fund. A ZCash Co. employee, Daira, proceeded to shut down the thread, claiming that the proposal was an act of violence due to its insinuations of effectively stealing from ZCash employees.

The thread was later re-opened following approval from ZEC founder, Zooko Wilcox, who, despite not agreeing with the proposal, suggested that the discussion was a worthy one.

I have given this topic a lot of thought and still cannot come to a definitive conclusion as to whether I think the FR should be modified.

There is a strong argument that the FR should remain untouched: it was transparent from the conception stage of the network and it seems right that the founders should be rewarded for the value they have created.

At the same time, I think that there is value in the network community having a say in the network’s monetary policy: after all, ZEC is ostensibly a decentralized community, which should bring with it a governance process where multiple parties (investors, users, developers) have a say.

Augur:

Augur, the much anticipated decentralized prediction market, has finally launched on the Ethereum mainnet.

Augur was initially conceived in 2015 and was one of the first projects to pursue an ICO.

The mainnet launch was met with a mixed response.

Enthusiasts were excited by the release of by far the most technically complicated decentralized application (dApp) to date and continue to proclaim the many use cases ( decentralized derivatives, leverage of wisdom of crowds) that the platform will provide. So far over $320,000 has been staked across a variety of markets, with the largest market being the $150,000 staked on whether Ethereum will exceed $500 by the end of 2018 (right now Augur predicts 70% yes!).

Critics, including myself, were disappointed by the dApps User Interface and User Experience, in particular the rather complicated order book interface and the lack of a native web app – in order to use Augur you have to download it and sync with an Ethereum node.

For a project that took 3 years to ship to mainnet and is currently valued at over $330m, one might expect less user friction! Ari Lewis of Grasshopper Capital wrote very well on what he expects from a good dApp, while Nathaniel Whittemore writes more generally about how we have moved into the Age of Execution Maximalism – well worth the read.

You can check out all the Augur markets here.

Consensus Protocols/The ‘Stack’:

Plenty of progress on the analysis of various consensus protocols and the Web3 stack over the last couple of weeks.

The team at Mechanism Labs published this invaluable document comparing consensus protocols (Tendermint, Thunderlla, Algorand, Casper FFG, Dfinity etc.) and this fantastic short-read on the various elements of the blockchain stack. Essential reading!

Multicoin Capital’s Kyle Samani published his own breakdown of the Web3 Stack, although William Mougayar, a prominent blockchain evangelist, was critical of his depiction, suggesting that his version was more accurate. The Enterprise Ethereum Alliance has their own understanding of the Web3 stack, which can be found here.

Mohammed ElSeidy, Partner at zkCapital, published an explainer on the new family of consensus protocols previewed by Professor Emin Gün Sirer.

Not to be left out, Cosmos compares its Byzantine Fault Tolerant (BFT) protocol to EOS’ Delegated Proof of Stake. For more on BFT, check out Loom Network’s explainer here.

Coinbase:

Big news from Coinbase, which announced that they are exploring the addition of 6 new assets to their platform – Cardano, 0x, Stellar, Brave Attention Token, and Zcash.

As explained in their blog post, the announcement was made internally at Coinbase and to the public at the same time, largely in order to avoid the kind of insider trading activity that many presume occurred when Coinbase listed Bitcoin Cash in December.

The post also notes that these assets will require additional exploratory work and that the exchange cannot guarantee they will be listed for trading. Nevertheless, each asset spiked somewhere between 10-30% on the announcement, with speculators presuming that increased liquidity and the Coinbase stamp of approval will drive prices up over the short-medium term.

It must be noted that Coinbase will only be accepting deposits of transparent Zcash (ZEC) – ZEC that has not used the protocol’s shielded transaction feature. Most industry analysts agree that transparent transactions far exceed shielded transaction volume.

Coinbase’s refusal to definitively confirm the listings brought some ridicule from their peers — Kraken, another popular exchange, announced that they were likewise considering various additions, linking their audience to coinmarketcap, a site listing over 1,600 assets.

EOS:

A quick update on EOS.

1. Accusations from some Ethereum community members that a member of the EOS/Block.One community is purposefully spamming the Ethereum network with redundant transactions in order to increase gas fees to unsustainable levels. I’m not entirely sure to what extent I believe the accusation, but it is nevertheless an interesting theory.

2. Block.One (B1), the company behind the development of EOS, has announced that they have closed a strategic investment round led by Peter Thiel and Bitmain. Other notable investors include Brevan Howard’s Alan Howard.

I was generally under the impression that the $4bn raised in the year-long ICO would be enough to sustain the project for the foreseeable future but what do I know about anything? Clearly nothing!

3. The EOS constitution has come under heavy criticism from all sides of the EOS community after the director of the EOS Core Arbitration Forum (ECAF) ordered Block Producers (BP) to suspend several accounts.

Since then, Dan Larimer, the CTO of B1, has advocated that the entire constitution be scrapped in favour of a new-and-improved version. Fortunately for those who derive great pleasure from watching EOS collapse in real time, the improved constitution is equally flawed. You can find a critical response from an EOS BP here.

4. Throughout the ICO process, B1 had assured investors and users that they would step away from EOS post-launch in order to avoid welding undue influence in the governance process.

Of course, this act of stepping away was presumably also at the advice of B1’s lawyers, who knew that B1’s active involvement in EOS would likely add further weight to the argument that $EOS should fall under the unregistered securities category.

Nevertheless, just weeks after the launch it has been revealed that B1, which holds 10% of all $EOS tokens, will be participating in the EOS BP voting process. The announcement, which starts with a self-congratulation for the swift and successful launch of the platform, notes that B1 will participate as an “active minority voting member.”

Of course, as analyst @econoar notes, considering current voter turnout, B1’s 10% stake is more than sufficient to single handedly select BPs. Who could have ever seen this coming?

Market

prices provided by coinmarketcap.com as of 18:40 ET

BTC:

Bitcoin (BTC) has found some bullish momentum this week, rising from a local low of $6,070 up to the $6,600-$6,700 range. For those interested in Technical Analysis, the 1D Bollinger Bands are now very tight, suggesting a strong move (in either direction) in the near future.

I reported on the ‘Bitcoin Days Destroyed (BDD)’ metric in the last issue of CryptoChat. In this tweet, @MrJozza suggests that the BDD downtrend indicates that large investors are currently unfazed by the market downturn.

Meanwhile, Professor Eric Budish of UChicago has published a paper on the Economic Limits of Bitcoin and the Blockchain, which (as far as I can tell — have not read it fully yet!) suggests that BTC will be subject to attacks if it becomes sufficiently economically important. At a $114bn market cap, I personally feel that BTC is currently sufficiently economically important, but I am not a tenured professor at UChicago’s School of Business.

Finally, take a look at a comparison table of Bitcoin’s predecessors.

ETH:

Ether (ETH) has similarly built some momentum over the course of the week, recovering from a local low of $417 before rising up to the $470-$480 range.

The ETH/BTC ratio has also seen a short-term recovery, appreciating to 0.071 after a low of 0.067 on the 10th July.

Crypto-Assets:

Some interesting crypto-asset related resources below:

Kitty Sales gives live updates on the sale of CryptoKitties.

DappCapitulation shows the treasuries of high profile dApps and their 30 Day ETH moves. Brendan Bernstein makes a good point that these dApps are essentially playing a game of prisoner’s dilemma.

DoIOwnAShitcoin — speaks for itself.

TokenAnalyst — providing data on Token Transfer Count across a variety of networks.

SifrData — a phenomenal site all round but their volatility index is especially captivating right now.

Correlation — an incredibly comprehensive overview of the correlation of crypto-assets: 75% of the top 200 coins currently have a correlation of 0.67 or higher.

Government

FBI:

The FBI has 130 crypto-asset-related investigations open.

It is unclear as to whether this includes their investigation into Russian intelligence agent’s use of Bitcoin to pay for services during the election meddling process.

Malta:

The Maltese government has passed three bills relating to crypto assets, blockchain, and distributed ledger technology, making it one of the first jurisdictions in the world to pass specific legislation around this burgeoning technology.

Korea:

The Korean Blockchain Association has announced that they found all exchanges under review met at least the minimum requirements of the self-imposed regulations.

The reviewed exchanges included Bithumb, Huobi Korea, and UPbit.

On-chain Vote Buying:

A fascinating piece from several members of Cornell’s Initiative for Cryptocurrencies & Contracts (IC3) on vote-buying and Dark DAO’s, decentralized cartels that buy on-chain votes opaquely.

Europe:

A comprehensive survey from ING on crypto-asset ownership across various jurisdictions.

According to the survey results, 9% of Europeans own some crypto assets, compared to 8% in the U.S. This far exceeds my expectations: be weary of the limited sample size.

Enterprise

Storytelling:

Melissa Lafsky, author, content strategist, and digital storyteller with previous experience at New York Times and Facebook, is hosting a workshop tomorrow evening in which she will explore the use of storytelling as a map to communicate the oft-misunderstood decentralized landscape.

Sign up here!

Trade-Driven Mining:

An exploration of ‘trade-driven mining’, a phenomenon popularized by Asian exchanges like FCoin.

In this approach, the exchange token is distributed to users based on their trading volume. Exchanges calculate the daily trading fees for each coin, convert the fees to the exchange token at market price and deposit the tokens to traders according to their trading volume.

Trade-driven mining allows traders to effectively have zero-fee trades and exchanges benefit from keeping their tokens on their balance sheet and profiting from the price appreciation that are driving themselves!

Facebook:

Facebook has reversed its blanket ban on crypto-asset advertisements. While ICO advertisements continue to be blocked, crypto-based businesses and services will be allowed to apply for advertising space.

The ban comes in the wake of the Great Facebook Blockchain Reshuffle, which saw a former senior engineer, Evan Cheng, become the first Director of Engineering, Blockchain.

Circle:

The CEO of crypto-asset investment platform and OTC broker, Circle, reports that his firm’s institutional trading desk experienced a 30% increase in new institutional clients in May, even as Bitcoin’s price fell to yearly lows.

Polychain Capital:

Fortune interviewed Polychain Capital founder, Olaf Carlson-Wee.

Worth the read but ignore the headline – as far as I am aware there are several funds that have already reached the $1bn+ AUM mark.

Binance:

Leading crypto-asset exchange Binance will launch its first crypto-fiat exchange in Uganda.

DCG:

A fantastic long-read on Barry Silbert and his company Digital Currency Group.

Despite a relatively low profile, DCG is one of the most important venture firms in the industry, with sizable stakes in every facet of the ecosystem.

Opera:

Opera is launching new browser software that has a built-in Ethereum wallet.

The announcement comes just days after Opera revealed that it had raised $50m from mining giant Bitmain.

Litecoin Foundation:

If you can’t beat them, acquire them!

The Litecoin Foundation has partnered with TokenPay to acquire a 10% stake in Germany’s WEG Bank AG.

MLB:

Major League Baseball is launching an Ethereum-based digital collectibles game.

Use Cases

Custody:

The definitive list of crypto asset custody solutions for consumers and institutions.

Meanwhile, the New York Times’ Nathaniel Popper notes that Coinbase’s custody partner, Electronic Transaction Clearing, has been charged by the SEC with “repeatedly putting customer assets at risk.”

Sidechains vs. State Channels:

A complete comparison of the two popular scaling methods. A must read.

Meanwhile, Diar provides a fantastic analysis of the Lightning Network’s various faults.

Radar Relay:

Popular 0x relayer, Radar Relay, has published some statistics from their beta phase:

The future of exchanges is decentralized!

Artonomous:

A new project from one of my favourite Ethereum community members, Simon de la Rouviere.

Artonomous is a self-owning, self-improving, autonomous artist. Artonomous sells daily art, with funds accessed through a curved bond (another of Simon’s innovations). The stakes are then put towards renting hashing power to generate new art.

Michael Zargham, founder of BlockScience, has modeled out the system here.

Find out more about the Artonomous project here.

Decentraland:

The team at Decentraland, a decentralized virtual reality world, discusses their plans to scale using a Plasma chain with Delegated Proof of Stake.

I expect to see more projects leveraging Plasma chains in the near future.

ZK Signaling:

The developer behind Miximus has started working on an anonymous identity and signaling protocol that similarly leverages zkSNARKs.

Oasis Labs:

Andreesen Horowitz’s new dedicated crypto-asset fund is off to a quick start, leading a $45m private token pre-sale in Oasis Labs, a blockchain platform aiming to rival Amazon Web Services.

Schnorr:

An explainer on Schnorr Signatures, which the Bitcoin community hopes can help with both scalability and fungibility.

DIRT Protocol:

General Catalyst, Greylock Partners, Pantera Capital, and a host of other prominent investors have participated in the $3m seed round for DIRT Protocol, a platform for Token Curated Registries development.

Bancor:

A hacker was able to exploit a security backdoor in decentralized exchange Bancor’s smart contracts, making off with $12m in ETH.

Parts of the blockchain community were infuriated at the revelation that Bancor was able to hit a ‘kill switch’ to freeze and recover the stolen Bancor tokens.

Of course, the existence of a ‘kill switch’ feature does do some damage to claims of decentralization, yet at the same time it is rather common security practice at this point in the smart contract development life cycle and is employed by multiple high-profile projects.

Read the Bancor team’s response here.

Nic Carter:

A Q&A with Nic Carter, founder of CoinMetrics and Managing Partner at Castle Island Ventures.

I often disagree with Nic but he is undoubtedly one of the smartest minds in the industry.

IOTA:

Renowned researcher Sarah Jamie Lewis asks some tough questions of IOTA, which has essentially stopped working for the last several weeks.

Founder of the multi-billion dollar network, David Sonstebo, took a leaf out of Elon Musk's playbook, promptly responding by asking whether Sarah was on crack.

FOAM:

FOAM, a decentralized GPS protocol, has launched its highly anticipated ICO.

You do not need to be an accredited investor to participate, but in order to buy tokens you will need to: a) prove that you actually intend to use a portion of the tokens b) pass a protocol literacy test.

I imagine many projects will use a similar ‘proof of use’ ICO model moving forward.

June:

Tokendata reports that just $585m was raised through ICOs in June, down from over $2bn in May.

The biggest deal was Hybridblock, which raised $47m for its crypto exchange, closely followed by GoNetwork, which raised $46.7m for its mobile infrastructure.

ICCO:

A new crypto trading platform, Palladium, has launched the world’s first Initial Convertible Coin Offering.

The issuance of a tokenized convertible warrant — which is regulated by a prospectus approved by the Malta Financial Services Authority and subject to stringent EU rules — will give investors the right to convert tokens into shares of Palladium three years after the issue date.

I find this model interesting and expect that some other projects will follow suit. However, Palladium’s €150 million ICO target raises several red flags. For context, leading crypto-asset exchange Binance raised just $15m in their ICO last summer.

Failures:

Bloomberg reports that half of ICOs die within 4 months after the token sales have finalized.

Their methodology is slightly suspect but the overall sentiment does not surprise me.

Resources

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