August 14, 2018 . 12 min read
Crypto Chat #52
This is really interesting.
Leading mining hardware manufacturer and mining company, Bitmain, is back in the headlines for all the wrong reasons.
Bitmain recently secured pre-IPO investments from Tencent and Softbank at a valuation of $15bn, having been valued at $12bn in June following a $400m funding round. Bitmain is expected to list on the Hong Kong Stock Exchange in September at a valuation between $30bn-$40bn.
Investors may now opt to stay away after Samson Mow, CSO at Blockstream, revealed that Bitmain has been misleading investors by only showing Q1 results to pre-IPO investors. The reason? Q2 was a disaster, with Bitmain sitting on $1.24bn in mining inventory while prices have dropped by ~85%. Estimated Q2 losses from inventory alone range between $600m-700m.
To make matters even worse, the Bitmain investor deck reveals that the company sold its Bitcoin for Bitcoin Cash at $900/BCH. For some contenxt, Bitmain has a clear interest in supporting Bitcoin Cash (BCH), which has increased block sizes to 32mb, over Bitcoin (BTC), which has opted to keep block sizes small and instead rely on layer 2 scaling solutions: BCH’s larger block sizes provide more transaction fees to miners, whereas layer 2 solutions, where transactions take place off-chain, cut into Bitmain’s revenue.
BCH has since fallen to $535/BCH, resulting in a further $500m loss over the last 3 months. If BTC developers had not disclosed the BCH vulnerability (see below), it is likely that several billion dollars would have been wiped off their balance sheets.
Bitmain now finds itself in a position where it has cornered the BCH market, with the price supported solely through continued selling of Bitmain’s BTC reserves for BCH. Bitmain cannot exit its sizeable BCH position without crashing the price. Solution? Exit through IPO. This will not end well.
Bitcoin (BTC) suffered another disappointing week, falling 12% on news that the SEC has delayed the VanEck-SolidX Bitcoin ETF decision until September. As you might imagine, the correlation between BTC and the S&P 500 that we saw back in January-March has now disappeared.
Two comments here:
First, this feels pretty irrational. Most analysts had already stated weeks ago that the ETF decision was likely be delayed until February, and even then there was a distinct possibility that the application would be denied. Nevertheless, it seems almost inevitable that a BTC ETF will one day be approved, whether that is in 2019 or 2020.
Second, I think there is some irony in the idea that the SEC is delaying (and will likely reject) a decision on an ETF under the premise that they want to protect retail investors, when their statements regarding delays/rejections will inevitably, albeit irrationally, cause markets to tumble further, therefore damaging retail investors. That isn’t to say that I disapprove of the rationale behind their decisions, but it certainly seems somewhat paradoxical.
For those tracking the ETF narrative closely, here’s a timeline for all pending BTC ETF applications from DRW/Cumberland’s Bobby Cho.
If BTC had a disappointing week, then Ether (ETH) had an abysmal week. Price vs. USD fell 30%, while the ETH/BTC ratio slipped through historical support at 0.05 down to the 0.046-0.047 range.
Many ecosystem participants of the Bitcoin persuasion are taking the opportunity to call this the death of ETH, an indisputable sign that the market has chosen BTC to reign supreme. Of course, these participants simultaneously claim that their precious asset is falling simply because markets have natural cycles.
Another narrative regarding ETH’s death sentence relies on the notion that ICOs, which raised huge rounds denominated in ETH, are now panic selling their holdings in order to maintain project runway. There is a palpable sense of schadenfreude from those that forever denigrated this new capital raising method and argued (in some ways correctly) that demand for ICO participation was the leading reason behind ETH’s surge last year, now that ICO projects now seem to be the cause of ETH's demise.
While this narrative is convincing, it is ultimately lacking in evidence. As data from Santiment shows, ICOs have moved 110k ETH in the last 30 days, which is close to $30m at today’s values. Compare this $30m to the $150m in ETH issued every month through block rewards, and ETH’s $1.5bn of daily trading volume: it seems unlikely that this has severely impacted the markets.
Don’t want to take Santiment’s word? How about data from dappcapitulation.com, a project launched by Brendan Bernstein, managing partner at the infamous Tetras Capital, which published an ETH short thesis in July?
In other news:
Darren Langley, Senior Blockchain Developer at Rocket Pool, has published a roadmap/explainer for Ethereum 2.0, which looks at Proof of Stake, Beacon Chains, Aggregate Signatures, Sharding, and eWASM. Worth the read.
Vitalik Buterin has had it out again with Charles Hoskinson, founder of Cardano, regarding the differences between the two projects’ implementations of Proof of Stake.
Despite the market doom and gloom, Outlier Ventures argue that the state of blockchains is thriving, with rapid growth and maturation across core infrastructure.
Some serious drama out of the IOTA Foundation, as leaked transcripts of a team call show that founder Sergey Ivancheglo no longer trusts fellow co-founder Dominik Schiener and has demanded his resignation from the IOTA Foundation board.
Perhaps most interesting is that Schiener continually alludes to ‘some legally pending issues that impact the future of the ENTIRE foundation’ regarding advisor tokens and an impending tax audit.
So on top of a broken protocol it looks like Foundation members may have to start worrying about a knock on the door in the middle of the night.
Israeli Prime Minister Benjamin Netanyahu provided his thoughts on Bitcoin in an impromptu interview yesterday, stating that banks will likely disappear as their role as trusted intermediaries in the financial system will be rendered useless by blockchain technology.
According to Netanyahu, this disintermediation is what is pushing Bitcoin prices upwards, although he remains unconvinced that prices will continue along their parabolic growth path.
Trading volume on Turkey’s crypto asset exchanges surged over 100% Friday as the country’s Lira plunged to record lows.
Absolute volumes remain low, with the country’s leading exchange, Btcturk, handling just $11.6m in trades.
A couple interesting updates from Coinbase this week.
First, Facebook’s David Marcus, who is leading the social media giant’s blockchain division, has stepped down from the crypto asset exchange’s board, with analysts suggesting his departure was influenced by an impending conflict of interest as Facebook continues to explore a blockchain/crypto-asset product of its own.
TechCrunch duly published an article speculating on the different directions Facebook might take, including: its own crypto asset; a p2p and micropayments service, and an interoperable identity service. All we know right now is that Facebook will not be working with Stellar.
Second, Coinbase has updated their instant trading limits, allowing customers to trade crypto assets immediately after purchase, rather than waiting five days for the funds to settle. Moreover, most customers will see their trading limits increased to $25,000 per day. (Editor's note: I can't help but laugh at the fact that Coinbase's trading updates come at a time when retail demand has fallen off a cliff.)
CB Insights has published a detailed report on the 42 big industries that blockchain could transform, including: banking; messaging apps; voting; identity; ride sharing; internet advertising, and cloud storage & computing.
Microsoft has released a Proof-of-Authority implementation of Ethereum on Azure, with the announcement suggesting that the partnership will compete with services including JP Morgan’s Quorum, Hashgraph, and R3 Corda.
Check out xSeq22x’s comments for more info.
According to CoinDesk, blockchain technology startups raised $228m from venture capitalists in July.
1. Funding fell 64% versus June, and the total number of deals fell 21%.
2. July’s largest raise was BlockFi Lending, which brought in $52.5m from Galaxy Digital.
3. The latest haul brings the 2018 yearly total to $2.2bn, which accounts for 47% of all reported blockchain VC funding.
tZero, an Overstock subsidiary building an exchange for tokenized securities, is back in the news.
tZero closed an ICO raise of $134m in December 2017, having initially targeted $250m.
They then proceeded to raise $374.55m from Chinese PE firm GSR Capital at a $1.5bn post-money valuation, valuing Overstock’s 63% stake at just shy of $1bn.
Unsurprisingly, this caused Overstock, which had a $1.2bn market capitalization of its own, to jump 25% in after-hours trading. No sign of yet of a product…
Two updates from leading crypto asset exchange, Binance.
First, a brief demo of the firm’s upcoming decentralized exchange product.
Second, a ‘listing tips’ guide, detailing the process for getting tokens listed. This presumably comes as a reaction to rumours this week that projects are still paying somewhere in the range of $2m to have their tokens listed. Indeed, listing fees are addressed in the guide, with CEO CZ noting that fees depend according to the quality of the project.
Regarding evaluation, the exchange promises that they look for ‘good coins’, with strong signs of user adoption and a solid product.
Smart Contract Platform Competition:
An interesting piece from Decentraland’s Tony Sheng on smart contract platform competition framed in the context of traditional paid marketing and user acquisition.
Sheng posits that efforts from Ethereum competitors to attract a community of developers have disappointed to date, with the cost of acquisition (CAC) far higher than the proceeding lifetime value of customers (LTV).
However, despite these failed efforts to date, competing platforms are stuck in a prisoner's dilemma-type situation, where they must continue shelling out for ‘mercenary developers’ as long as their rival’s continue to pursue aggressive developer acquisition strategies.
An encyclopedia of 30 consensus algorithms. Essential reading.
A fantastic overview of privacy in the crypto asset/blockchain space from 1confirmation’s Richard Chen, including detailed analysis of privacy coins (ZCash, Grin, Monero), smart contract privacy (Enigma, Oasis Labs), privacy infrastructure (Orchid, STARKWare, NuCypher), and privacy-related research (Homomorphic Encryption, Zero-Knowledge Proofs).
The Economist has published a short review of Augur, the decentralized prediction market.
One detail that I take exception to is the use of Daily Active User (DAU) figures as a metric of success. DAU has fallen from a peak of 265 in early July to 37 on August 8th, but this only measures the number of people interacting with Augur smart contracts rather than those that simply browse markets. Moreover, users derive value from Augur beyond daily interaction, with some markets taking weeks, months, or even years to resolve.
A better metric would be value staked in contracts, which currently exceeds $1m.
Bitcoin Cash Vulnerabilities:
An embarrassing week for Bitcoin Cash (BCH) supporters as news broke that a Bitcoin (BTC) developer and MIT Media Lab researcher had revealed a catastrophic protocol vulnerability that would have been so disruptive that transacting BCH safely would no longer be possible.
Neha Narula, Director of the MIT Media Lab, published a follow-up report, addressing responsible disclosure policies.
Felix Lutsch, a research analyst at Chorus One, a staking-as-a-service project, has announced the launch of a new staking-related newsletter, Staking Economy.
SE, which will be published on a monthly basis, will provide readers with a unique perspective on the staking ecosystem, which includes exciting projects like Cosmos, Livepeer, and Ethereum’s Casper. Subscribe here.
USV’s Dani Grant has published an update to her distributed computing overview, addressing the benefits/drawbacks of siloed networks like Heroku vs. open protocols like SONM, and the role that tokens can play in these services.
And if that wasn’t enough work, Grant has also revealed her latest project, Middleman, a service which allows Ethereum developers to spin up wallets for users that aren’t using a web3 enabled browser. You can think of it as wallets in the cloud, or a hosted version of MetaMask.
Even more exciting is that, with a couple tweaks, developers can leverage Middleman to allow users to interact with dApps using US Dollars, which will then be transferred into the necessary token and directed into their hosted wallets behind the scenes.
Alex van de Sande proposes a model for Sponsored Burning, a new revenue stream for participants in Token Curated Registries that rely on Token Bonded Curves.
The idea is that sponsoring through burning can improve incentive alignment among token holders, and therefore lead to better content curation for subjective information, by adding an exogenous profit model that doesn’t require token holders to sell or rent their tokens.
Two updates from the MetaMask team this week.
First, an interface redesign, with some additional changes to the backend that will stop the application from automatically injecting an Ethereum provider and Web3 instance for webpages to use. This protects users from ‘fingerprinting’ attacks, whereby bad actors can use a user’s MetaMask information to launch targeted phishing attacks, as well as revealing user’s Ethereum address, balance, and transaction history.
Second, MetaMask has announced Trezor integration, allowing users to interact with decentralized applications straight from their hardwallets.
Yannick Roux and Stefano Bernardi have uncovered a gem in Digipulse, a Latvian start up that has decided to ‘equitize’ its tokens.
I strongly recommend reading the entire analysis here, but for those short on time:
Digipulse raised ~3500 ETH in an October ICO, having failed to secure traditional funding. The token model promised dividends from a revenue share, which pretty much guaranteed that the token would be deemed an unregistered security.
After initially being listed on several exchanges, the Digipulse token was then de-listed, as exchanges rightfully expressed concern that the dividend element would classify the token as an unregistered security.
After removing the dividend-share element, the sole utility, the tokens were then re-listed, but then the company stopped developing blockchain features.
The team then decided to offer large token holders the ability to convert their tokens into company shares, although presumably at a steep discount to the amount they invested in October, as the tokens are now trading at a 75% discount.
As Roux and Bernardi note, this will likely be the first of many projects to pursue an 'equitize' strategy, having initially sold largely redundant tokens to naive investors.