July 31, 2018 . 12 min read
Crypto Chat #50
BlockFi, the leading crypto asset-to-USD lender, announced that it has raised $52.5m from Mike Novogratz’s Galaxy Digital Ventures to expand operations, marking the first institutional investment in the crypto asset backed loan industry. $50m will be reserved to lend capital on the platform, with the remaining $2.5m acting as an equity investment.
BlockFi currently operates in 42 US states — with plans to expand into the remaining 8 in the near future — and is backed by other leading investors including ConsenSys Ventures, Kenetic Capital, and SoFi.
Around The World:
My good friends at Abacus, a leading crypto asset advisory service for both blockchain entrepreneurs and traditional finance firms, have launched a new newsletter, Crypto Around the World, which highlights the stories and actions that are pushing the global landscape towards the interconnected crypto economy they foresee in our futures.
Their first issue looks: at adoption in Venezuala; the role of blockchain-based loans can play in the equitable geographic distribution of human populations, and regulatory development in South Korea and Japan.
Coinfund’s Jake Brukhman generously shares some of his industry insights gleaned over the last 3 years. My favourites are listed below but the whole thread is well worth a read.
1. Decentralized governance is a thing. (2014) Decentralized governance is an important thing. (2016) Decentralized governance is a valuable thing. (2018)
2. Cryptoeconomics where asset price is a KPI of the economy generally make for suboptimal user engagement dynamics. (2017)
3. It’s prospectively hard to extract value into equity from a network which accrues value to a token. It is equally hard to extract value into tokens or equity from a technology that doesn’t require tokens or equity. (2014-2018)
4. The Custodian’s Dilemma: You need custodians to get the mainstream’s money, but locking assets into custody prevents one from utilizing them for voting, staking, and validating. (2018)
5. Generalized mining, or providing services for decentralized networks in exchange for their digital assets, is going to be a big business three years from now. (2015)
6. You can completely solve off-chain micropayments and utterly minimize transaction fees to amortized 0 using generalized state channels. Layer 2 is inevitable and vital technology. (2018) (Editor’s note: check out Connext’s State Channels for Babies explainer)
Bloom’s John Backus looks at the historical approaches to decentralization in his long-read, Minimum Viable Decentralization.
Meanwhile, USV’s Nick Grossman addresses the necessary requirements for a successful medium of exchange token in his piece, Minimum Viable Economy.
Bitcoin (BTC) continued its ascent this week, finding a local top at $8,479 before falling back to the $8,100-$8,200 range. Volume continues to impress, with BitMex recording a historic $7bn trading volume on the 24th July. Mati Greenspan, Senior Market Analyst at eToro, notes that a clear sign of BTC liquidity can be found in the tight spreads across international exchanges.
Be sure to check out the latest piece from the venerable Nic Carter on the transformation of BTC’s narrative over time, which includes a detailed timeline of BTC’s major events.
Many analysts were surprised by the strength of BTC’s momentum, which was ostensibly driven by an upcoming BTC ETF decision by the SEC. The SEC’s rejection of the Winklevoss twins’ ETF proposal appeal certainly does not bode well for the remaining proposals (although one Commissioner did publicly dissent from the decision).
I spoke with Keegan Toci, Managing Partner at Vertical Ascent Capital Management and former Director at BlackRock, where he focused on ETFs, who provided the following insight:
Despite the recent headlines, the chances of a BTC ETF getting approved this year are zero (imho). The fact that the SEC actively reached out to issuers asking them to pull their filings late last year is unprecedented. And even if the market matures to address the issues explicitly cited for last year's rejection (which it hasn't), the SEC has a laundry list of new reasons they can point to in their August / September decision to reject again.
The SEC is currently in the comment period on a new ETF rule which will absolutely get passed and make the approval process for new ETFs much easier assuming certain criteria are met... Which means the approval of one BTC ETF could open the floodgates for every issuer to build their own version, which the SEC obviously wants to avoid. This staff letter from Dalia Blass tells it all. And remember she's the former legal counsel for the Winklevoss Twins.... I don't think she wants to be give the impression of conflicts of interest in her new role.
You can find further commentary from Toci here.
Ether (ETH) continues to trade in the $450-$475 range, while the ETH/BTC ratio slowly declines towards historical support at 0.055.
Crypto asset analyst Eric Conner makes the case for a block reward reduction in the next Ethereum hard fork, Constantinople, using detailed data analysis to argue that the network currently over-pays miners for security relative to Bitcoin.
The Iranian government is following in the footsteps of Venezuela, announcing their intention to create a state-issued cryptocurrency in order to circumvent incoming U.S. sanctions.
Technical details remain unknown.
Bitmain, the leading crypto asset miner and mining hardware manufacturer, announced Q1 2018 profits of $1.1bn. According to their report, they conservatively estimate $2bn-$3bn profit for the full year.
The announcement comes in the run up to the highly anticipated Bitmain IPO, which is expected to list on the Hong Kong Stock Exchange. Their most recent raise valued the company at close to $14bn, implying a 10-11x earnings multiple.
Following CEO Jihan Wu’s conversation with Zcash founder Zooko Wilcox, in which Wilcox implored Wu to increase the secretive company’s transparency, Bitmain has published a Transparency Policy, which includes the following terms:
1. Disclosure policy on self-mining: Every 30 days we will publish data to advise community members which algorithms Bitmain is currently mining for itself and the total hashrate of Bitmain-owned hardware on each of these algorithms.
2. Zero tolerance policy against ‘secret mining’: ‘Secret mining’ is a practice whereby an ASIC manufacturer may mine with newly developed equipment prior to selling or distributing such equipment to customers. We therefore remain opposed to this practice and maintain our long-held zero-tolerance policy regarding same.
3. Never seek to mine ‘empty blocks’
4. Provide shipping and volume information of new miners to the public.
However, some industry members remain unconvinced by this shift in behaviour: Salva Herrara, owner of SiaStats.info, published a report with evidence that Bitmain does indeed mine coins in secret.
Two updates from leading U.S crypto asset exchange, Coinbase.
First, Coinbase has partnered with WeGift to issue e-gift cards with cryptocurrency balances, allowing customers to seamlessly spend their digital assets at retailers including Nike, Uber, Tesco, and Ticketmaster. As with Coinbase’s acquisition of Earn.com, the WeGift partnership is likely to have been motivated by the desire to encourage mainstream adoption of crypto assets.
Second, Coinbase has concluded its internal investigation into claims of insider trading around the Bitcoin Cash listing in December, reporting, unsurprisingly, that there is no evidence that insider trading took place. A class action lawsuit filed by Coinbase customers is ongoing.
State of the Blockchain:
CoinDesk has published its latest State of Blockchain report.
Analysts were particularly fascinated by the “dominant political ideology by respondent’s favourite cryptocurrency” slide: Bitcoin and Ethereum supporters both trend towards Liberal, while DASH supporters are split evenly between Conservative and Libertarian, and Monero fans lean heavily towards Anarcho-capitalist.
Report highlights below:
1. CME & Cboe launch with high interest but low volume. Large traders shorted and small traders longed.
2. $3.23bn for ICOs and $200mn for VC. However, forks were the largest token generating event of the year with $44bn created.
3. Key metrics up across public blockchains.
High-profile blockchain-based lending platform, SALT, raised some eyebrows this week after their CEO, Shawn Owen, unexpectedly left the company with no explanation. SALT duly appointed an Interim CEO, Bill Sinclair, with the announcement giving suspiciously absent regarding Owen's decision to leave.
SALT competitor, Nexo, took the opportunity to offer a buy-out of SALT’s loans businesses, brand assets, and customer database.
Fomo3D, a self-proclaimed pyramid scheme game, turned heads this week after analysts noted that their contract contained over 23,000 ETH ($10m+).
Launched by an anonymous team, the decentralized application allows contributors to buy ‘keys’ in exchange for ETH. A curved bonding scheme is used for the key price: the price of keys increases linearly over time, although key holders always have the option to sell their keys back to the contract at the latest price.
A percentage of proceeds are directed into a jackpot, with the remaining funds paid out to existing key holders as a dividend and to the founding team as a platform commission. According to the website, over 74,000 ETH has been paid out in dividends so far.
Each new buyer adds time to a countdown, with a countdown hardcap set at 24 hours: when the timer runs out, the last key buyer is able to drain the jackpot, at which point a new round begins.
In theory, round #1 could go on forever, with game theory dictating that there will always be someone willing to buy the last key in the hope of being the last man standing. Of course, others have noted that the jackpot could reach a size that encourages miners to censor certain transactions, so that they can claim the pot for themselves. This is fascinating in itself, as it will test the limits of Ethereum censorship resistance (and perhaps encourage protocol developers to integrate the schemes discussed here).
I strongly recommend reading this blog post, in which JP Koning argues for the merits of such transparent pyramid scheme games and dismisses accusations of Ethereum critics that the platform is only good for scamst:
If Ethereum dApps are a symptom of crackdowns and prohibitions, maybe we should be happy the network doesn't seem to be getting much use, apart from a few games and ponzis—a lack of Dapps might indicate our society is (still) fairly free. Maybe Ethereum is sort of like a fire extinguisher. Just because a fire extinguisher spends most of its time in a closet unused doesn't mean that it is useless. There are certain moments when it could save our lives.
Multicoin Capital’s Myles Snider provides a thorough overview of Grin, a new privacy and scalability-focused cryptocurrency that leverages privacy technology, MimbleWimble.
Grin’s value proposition stems from its fungibility, anonymity, and scalability, with the latter achieved through MimbleWimble’s light on-chain storage.
Grin enthusiasts further highlight its novel monetary policy, which favours a linear supply schedule: as a result, inflation as a percentage of existing supply will be very high at the early stages of the currency’s life cycle, but will gradually decrease over time, eventually approaching — but never reaching — zero percent.
That Grin embraces inflation, moving away from Bitcoin’s model of finite supply, makes it more suitable as a digital form of cash.
Privacy on Ethereum:
Researchers Rebekah Mercer and Sarah Meiklejohn have published a whitepaper outlining an implementation of Monero-style ring signatures for Ethereum.
The technology, titled Mobius, uses mixing solutions to obscure the payment information of Ether transactions. Unlike costly Zero Proof technology, Mobius-enabled transactions fees are estimated to reach just $0.06 and take just milliseconds to execute.
A fantastic overview of the state of decentralized exchanges (DEXs) — spoiler alert: they aren’t living up to their name (yet).
On the topic of DEXs, be sure to check out Totle, a new dApp that aggregates DEX order books. The user interface is probably the best I have seen of any dApp to date.
Messari, an industry Self Regulatory Organization, announced the acquisition of OnChainFx (OCF), a ecosystem-favourite crypto asset data tracking site.
However, despite its popularity amongst crypto enthusiasts, OCF remains far behind leading data site CoinMarketCap (CMC): according to site tracker Alexa, CMC has a global traffic rank of 295, compared to OCF’s 78,671.
A Blockchain News and Data Terminal. I have added this to the Resources document.
Proof of Location:
Two Proof-of-Location announcements/thoughts below:
First, FOAM, the decentralized global positioning system protocol, has partnered with decentralized messaging application, Status: the two teams will explore the use of FOAM for integrating geospatial functionality to the Status mobile app.
Second, a fascinating proposal to leverage FOAM’s Proof of Location for account recovery: users could reset their passwords by going to three of their secret locations and 'proving their location'.
State of Hashing:
Another fantastic piece from the zkCapital team on the state of hashing algorithms.
Partner Raul Jordan defines 'hashing algorithms' before exploring their history, weaknesses, and implementations across Bitcoin and Ethereum.
Aaron Brown, former Managing Director at AQR Capital Management, discusses the ICO sector’s reputation, arguing that many critics are ultimately missing the point: token sales align investor, customer, and manager interests.
Brown also alludes to Hayek’s 1976 suggestion that promoters could implement token financing with centralized databases or physical tokens, noting however that such a system would likely not have the same liquidity benefits of a blockchain-based token standard.
The Verge presents a retrospective on celebrity-endorsed crypto assets. The common theme? SEC enforcement.