August 10, 2018 . 12 min read
Crypto Chat #51
Store of National Security:
Cuy Sheffield has published a fascinating thesis for Ether (ETH), Ethereum’s native digital asset, as a Store of National Security.
In order to fully understand Sheffield’s thesis it is worth reviewing the various competing value capture narratives driving this market: Fat Monies; Protocol Wars; Tokenized Securities, and dApps. Nathaniel Whittemore does a phenomenal job summarizing these narratives here.
Sheffield’s argument accepts that ETH will have difficulty fulfilling the Fat Monies requisites, with its role as working capital (versus a Store of Value) subjecting it to a high velocity and therefore a necessarily low monetary base.
However, if Ethereum ultimately succeeds in developing into critical public infrastructure, those enterprises and governments with assets issued on top of Ethereum will be incentivized to secure the network in order to protect the immutability of their digital property.
With Ethereum transitioning to a Proof of Stake consensus protocol, whereby stakers lock up ETH in order to be eligible for proposing blocks, the security of the network is directly affected by the value of ETH: if ETH is too cheap then an attacker could easily acquire the necessary amount of ETH to reach a 51% threshold and start double spending, censoring transactions, and/or revising the ledger’s history.
As a result, it is within the interest of governments and enterprises to maintain a high price for ETH, presumably through buying and holding ETH themselves. This would be akin to traditional government and enterprise security expenditure, hence the idea of ETH as a National Store of Security.
I remain unconvinced that ETH will be unable to serve as a Store of Value in its own right — its programmability and utility give it superior currency properties to Bitcoin — but Sheffield’s argument presents another convincing path to ETH’s long-term value capture. Indeed, as discussed above, Ethereum future under Proof of Stake is in fact entirely dependent on ETH retaining a high valuation (Ethereum-founder Vitalik Buterin makes a similar argument in his proposal for a finite ETH supply here).
Intercontinental Exchange Inc (ICE), the owner of the New York Stock Exchange, announced its plans to form a company and trading platform for crypto assets, as well as a “physically delivered” Bitcoin (BTC) futures contract.
The exchange said the new platform, titled Baakt, will be built using Microsoft’s cloud technology and work with companies including Starbucks and Boston Consulting Group to facilitate consumer trading, storage, and expenditure of digital assets.
While the introduction of a physically-settled futures contract (vs. CBOE/CME’s cash-settled BTC futures) should help drive demand for BTC, industry analysts note that the announcement is more significant from a supply standpoint, providing mature infrastructure for both retail and institutional exposure to the crypto asset class.
Bitcoin (BTC) was unable to sustain bullish momentum this week, taking a heavy hit from the $8,100 range back down to support at $7,000.
However, the Bitcoin price content market remains as bullish as ever, with four particularly strong pieces emerging this week.
First, History Rhymes; It Rarely Repeats from CoinShares Chairman Danny Masters, in which Masters criticizes those investors/traders, including high profile Pantera Capital, who cherry pick market data to fit their narrative of Bitcoin’s exponential growth trend.
Second, Nobel Prize-winning economist, Paul Krugman, shares his concerns in Transaction Costs and Tethers: Why I’m a Crypto Skeptic. Krugman, who once predicted that the Internet would be less revolutionary than the fax machine, once again misses the point of this novel non-sovereign censorship resistant digital asset, arguing that:
a) “Governments have occasionally abused the privilege of creating fiat money, but for the most part governments and central banks exercise restraint, again because they care about their reputations.” (Editor’s note: is Krugman forgetting that the US has $21tn in national debt?)
b) “Using a bank account means trusting a bank, but by and large banks justify that trust, far more so than the firms that hold cryptocurrency tokens. So why change to a form of money that works far less well?” (Editor’s note: is Krugman forgetting the 2008 Financial Crisis, which was largely driven by bank-issued Collateralized Debt Obligations?)
c) “Instead of near-frictionless transactions, we have high costs of doing business, because transferring a Bitcoin or other cryptocurrency unit requires providing a complete history of past transactions.” (Editor’s note: is Krugman forgetting promising Layer 2 solutions like Lightning Network, Side Chains, State Channels, Plasma etc.?)
Third, noted Bitcoin enthusiast Tuur Demeester predicts further downside potential in Bitcoin price in his aptly titled piece, Bitcoin: we don’t expect new highs in 2018. Demeester suggests that sluggish retail demand, hesitation from institutions, and a lack of correlation between current prices and on-chain activity will all contribute to disappointing price activity over the coming months.
Finally, Anthony Xie simulated a prolonged bear market with the Monte Carlo method, with the median result predicting a $99bn Bitcoin network value by the end of 2018, which would be a ~19% decline from today’s values. The prediction is even more dire when using the Geometric Brownian Motion, with a median simulation arriving at a $69bn network value.
Ether (ETH) also had a bad week versus USD, falling from the $460 range back down to $400. However, as predicted last week (a broken clock is right twice a day!) the ETH/BTC ratio found strong support at 0.054 and has since recovered to 0.058.
For those looking for valuation models for productive crypto assets (work tokens, governance tokens, discount tokens, profit share tokens etc.) check out Phil Bonello’s latest piece here. Spoiler alert: the often touted equation of exchange, MV=PQ, is not suitable.
Meanwhile, Eric Conner looks at the correlation between BTC and ETH prices versus Google Trends, noting that for BTC the strongest correlation comes when there is no lag and trends and price are moving together, while for ETH the strongest correlation comes when trends lead price by 4 weeks.
Conner also notes that both ETH and BTC prices currently have the largest spread above trends that we’ve ever seen, suggesting that either trends need to perk up immediately or that prices are headed even lower.
Four pieces on bad behaviour in the crypto asset markets this week:
First, a report of insider trading in the Crypto Kitty (CK) markets. After an internal investigation it was revealed that an employee had been sharing information on CK’s secret breeding formula, allowing one innovative investor to scoop up a series of valuable digital kittens.
Second, a Forbes profile on the infamous Fintech Blockchain Group (FBG), a Chinese crypto asset fund known for its propensity to ‘pump and dump’ crypto assets.
Third, an in-depth report from the Wall Street Journal on the aforementioned ‘pump and dump’ strategy, which notes that market manipulators have generated at least $825m in trading activity over the past six months, resulting in hundreds of millions in losses for those caught on the wrong side.
And finally, leading Hong Kong-based crypto asset exchange, OkEX, has introduced a ‘socialized clawback’ policy, forcing futures traders with unrealized gains to give up ~18% of their profits, after an unidentified futures trader with a $416m position was unable to cover losses.
Steven McKie, Managing Partner at Amentum Ventures, published a 4,000+ word Crypto Governance Manifesto, aggregating his thoughts on how blockchain networks should be architected, governed, and secured while maintaining the ability to improve iteratively.
The piece also introduces the appropriately titled McKie’s Triangle, which I have attached below:
Crypto-skeptic Preston Byrne implores the United Kingdom to change their lax attitude towards crypto assets and Initial Coin Offerings.
Byrne’s missive was inspired by the recent revelation that Member of Parliament Grant Shapps had been paid as an advisor to blockchain company OpenBrix while acting as co-chairman of the All-Party Parliamentary Group on Blockchain. Shapps was due to receive tokens worth $3.7m, although he has since resigned from his advisory role.
Ethereum venture-studio ConsenSys has published an introduction to the Chinese blockchain landscape, in which they discuss misconceptions surrounding domestic regulation.
Financial services giant Northern Trust, which has close to $10.7tn worth of assets under management, plans to add a number of new blockchain features for managing its private equity workflow while simultaneously opening its fund administration services to a select group of hedge funds.
Many crypto asset analysts have heralded Northern Trust’s entrance into this industry as a seriously significant step, noting the asset management firm's conservative history and historically stable credit rating profile.
Leading crypto asset exchange Binance has successfully completed its first acquisition, buying crypto-wallet provider and decentralized application browser, Trust Wallet. The terms of the deal have not been disclosed.
Meanwhile, Binance CEO, CZ, sat down with Fortune to discuss the timeline for mainstream adoption of blockchain-based applications, the competitive smart contract platform landscape, and his firm’s relationship with Coinbase.
Coinbase announced that they are considering the addition of 37 new digital assets to their custody platform, including controversial privacy coin, Monero, the native digital asset of the highly anticipated smart contract platform, Dfinity, and CryptoChat favourite, FOAM.
Of particular note is XRP, the digital asset associated with the Ripple network, which previously tried and failed to pay Coinbase for a listing on their exchange, Coinbase Pro. However, Coinbase Custody’s announcement explicitly states that their custody support does not guarantee listing on their exchange product.
In other custody news, Goldman Sachs is considering a plan to offer custody to crypto asset funds, further paving the way for institutional investors to gain exposure to this burgeoning asset class. However, somewhat perversely, GS also publicly stated this week that they expect Bitcoin to continue to decline, stating that it fails to fulfill any definition of a currency.
The Commonwealth Bank of Australia has partnered with five Australian and international supply chain leaders to successfully ship and track 17 tonnes of almonds from Australia to Hamburg.
Handshake is a decentralized, permissionless naming protocol compatible with Domain Name System (DNS), the Internet’s system for converting alphabetic names into numeric IP addresses.
In the Handshake network, every peer is validating and in charge of managing the root zone with the goal of creating an alternative to existing Certificate Authorities. It is designed to replace the root zone file and the root servers with a public commons, rather than replace the DNS protocol itself.
Handshake’s team is stacked with industry titans, including Lightning Network and Plasma’s Joseph Poon and Purse CEO, Andrew Lee. As a result, the project was able to raise $10.2m from every big investor in the ecosystem at a $136m valuation. Rumour has it that some investors blindly committed to the project only knowing the founders’ names, which has Linda Xie of Scalar Capital questioning whether we are still very much in a ‘peak bubble’ territory.
The Handshake team plans to give away most of their tokens to open source developers, and plans to give away the full $10.2m raised to famous open source projects.
For a deep dive on the project, check out this deck from Jeremy Gardner’s Ausum Ventures.
SmartDrops is a new application that allows projects to seamlessly and efficiently airdrop tokens.
Projects can leverage SmartDrops to target particular demographics and token holders, and use the SmartDrops analytics dashboard to measure impact over time.
Abstracting Away Gas Fees:
Software engineer Austin Griffith has released an implementation that allows Ethereum dApp developers to abstract away gas fees from users.
Titled Meta Transactions, the implementation will undoubtedly drastically improve dApp User Experience and help Ethereum compete with fee-less smart contract platforms like EOS.
Status Nimbus Client:
Status, an Ethereum-based messaging application, has released Nimbus, an Ethereum 2.0 Client.
The Nimbus Client is specifically designed for Sharding, mobile-based light clients, and features like Plasma and ZkSTARKS. Very exciting!
John McAfee’s ostensibly ‘unhackable’ Bitcoin wallet, Bitfi, has been hacked by security reachers OverSoft just one week after release.
Of particular note is that OverSoft managed to breach the device, which is being sold for $120, without actually owning or possessing one.
For those looking for cold storage solutions, I highly recommend the Ledger products.
The ICO market continues to decline from February’s peak of $2.57bn, with just $417m raised in the month of July. This is the lowest monthly amount since May 2017.
1. There have not been any sales that have verifiably raised more than $100m in either June or July 2018.
2. Only a handful of teams in the U.S. are still raising funds through public ICOs. Most, if not all, U.S. activity has shifted to private sales and/or traditional equity rounds.
3. Token prices have dramatically underperformed in the past months. The median return of all ICO issued tokens is now -20%. For the 100 tokens issued in Q1 2018 the median return is -60%, compared to just -30% for a portfolio consisting of Bitcoin.