September 5, 2018 . 12 min read
Crypto Chat #54
The Ethereum community has come to consensus regarding its inflation rate: Constantinople, the hard fork planned for October, will include a reduction of the block reward from 3 ETH to 2 ETH, with the Uncle reward falling by the same rate. As a result, ETH's approximate inflation rate will be 4.7% at the start of 2019, down from 7.2% at present. For comparison, BTC inflation currently sits at 4.11%.
It is expected that the issuance rate will be revisited 8 months after Constantinople, with the community analyzing the effects of reduced block rewards on network security and adjusting parameters accordingly.
Indeed, while I have publicly supported reduction to 2 ETH block reward, it nevertheless feels somewhat arbitrary – might it be that a 1.8 ETH or 2.1 ETH reward would produce a more optimal outcome? I look forward to further in-depth research exploring ETH monetary policy.
Disinflating to Death:
On the topic of monetary policy:
This week I published an article addressing the implications of Bitcoin’s monetary policy as it relates to network security. Things look especially dire for BTC in the context of the increasingly popular narrative celebrating ‘holding’ as ‘using’, which further deprives miners of necessary revenue to continue securing the ledger. The second part to the piece will explore the migration of the Bitcoin network to an Ethereum Plasma Cash chain.
In an industry generally dominated by Austrian economists/'Satoshi's Vision' zealots the idea of a flexible monetary policy is beyond heretic, and yet I see it as an enormous competitive advantage of ETH’s over BTC. We should not avoid innovation because reaching decisions in a decentralized fashion is difficult. Refusal to make adjustments might protect ideological purity, but what is the value in an ideologically pure product that is not functional? Ideology is a means to an end, not an end in itself.
Another fantastic explainer from the team at Mechanism Labs, this time addressing different forms of finality: probabilistic, absolute, and economic.
Required reading for any reader attempting to understand design decisions across various consensus protocols.
Most Read From CC#53:
Bitcoin (BTC) continues to build momentum, with a third consecutive week of growth taking the leading digital asset towards a battle with the the infamous 200 Exponential Moving Average.
Certain analysts suggest that this momentum is being driven by retail investors: indeed, popular South Korean exchange Bithumb re-opened subscriptions this week, leading to a significant increase in Korean Won/BTC buy volume.
This latest run up has not been driven by an April-like sudden short squeeze, although shorts have certainly been damaged, falling by close to 40% over the week. Of course, rising/falling shorts can be interpreted in two directly opposing ways, either as rising possibility of a short squeeze or rising negative sentiment and momentum (and vice versa).
Rather surprisingly, The Economist published a shortsighted piece on the value of Bitcoin, resorting to tired arguments around its failure to fulfill the three core properties of currency. The author's focus on ‘blockchain technology’ is worrying in that it glosses over the fact that truly decentralized blockchains cannot exist without an in-built incentive for resource contribution.
Lastly, if you have ever wondered why BTC hashrate has continued to move up and to the right despite a falling/stagnant price of the underlying I highly recommend reading Leo Zhang of Iterative Capital’s thoughts on the relationship between hash power and price.
Ether (ETH) vs. USD remains within the $280-$290 range, while the ETH/BTC continues to slip, today crashing through support at 0.04 down to 0.0387.
ETH’s disappointing price action has many analysts celebrating its demise: Jeremy Rubin, an advisor to competing smart-contract platform Stellar and notable Bitcoin supporter, published The collapse of ETH is inevitable on TechCrunch, taking a rather unusual attack line that suggests economic abstraction — i.e. removing the necessity of ETH from the ability to interact with the protocol — as the death of the Ethereum native digital asset.
That Rubin’s argument relies on an ‘open research question’ is probably the least egregious of his fallacies: for an in-depth explanation as to why Rubin’s arguments don’t add up, check out Vitalik’s response here. For more on Ethereum’s development roadmap, be sure to check out Vitalik’s piece on Layer 1 vs. Layer 2 trade-offs, as well as Ben Edgington’s State of Ethereum Protocol summary.
Talking of valuations, check out this convincing rebuttal of John Pfeffer’s ETH valuation, which dismisses the rather useless MV = PQ valuation model for a more classic Supply/Demand dynamic. For more on this paper, you can find comments from Ethereum developers here.
Genuinely worrying is the announcement that CBOE is gearing up towards the launch of ETH futures. While futures do provide avenues for institutional investor exposure, they also open up a new means to short: historically, the introduction of derivative markets have led to falling price of the underlying — indeed, BTC peaked on the day CME launched futures.
Nic Carter addresses the unfortunate alignment of incentives amongst exchanges, crypto asset issuers, and coin ranking sites, positing that all three come together to extract value from unsuspecting retail investors.
North Korea plans to host leading blockchain researchers from around the globe for a two-day conference on blockchain and crypto asset technology.
The North American Securities Administrators Association (NASAA) announced that more than 200 active investigations of ICOs and crypto asset-related investment products are underway by state and provincial securities regulators in the United States and Canada.
46 enforcement actions have taken place since ‘Operation Cryptosweep’ commenced in May.
State by State:
A friendly graphic illustrating the applicability of Money Transmission Laws (MTL) as they relate to crypto assets across each state.
The fractured and opaque landscape of MTL regulation stifles innovation within the crypto asset industry, requiring entrepreneurs to dedicate vast time and resources to achieve compliance across the nation.
Andreesen Horowitz and Polychain Capital have led a $102m funding round for DFINITY. Both groups were previous investors in a $61m round earlier this year. DFINITY has now raised just over $195m to date, reportedly at a $2bn valuation. The project is yet to launch to mainnet, but a $2bn valuation would immediately propel DFINITY to a #11 rank on the industry’s network value list.
a16z’s Ali Yaha and Chris Dixon published a lengthy blog post in the wake of the announcement, which largely rehashes their belief in Web 3.0 networks and, towards the end, attempts to justify their participation in the seed round.
You can spin it however you want, and yet the bottom line is that DFINITY’s latest raise is embarrassing for all parties involved.
No seed stage project is worth $2bn, let alone DFINITY. I understand that DFINITY has a world-class team and the random beacon technology is genuinely fascinating (I have been writing about DFINITY for several months now but:
a) This should not confer a $2bn valuation. DFINITY’s core innovation – random beacons – have now been around for long enough that they are being integrated into competing open source projects, like Ethereum (expected 2019 — will DFINITY even be live by then?). Likewise, there are multiple groups working to integrate WebAssembly. Where is the competitive advantage?
b) The speed at which they have hired leading researchers is rather mercenary, and not the kind of organic engagement you would expect from a project attempting to build a decentralized, open platform. Moreover, such a high seed stage valuation makes it difficult to build a foundational community of economically and socially incentivized developers.
c) The very dynamics around DFINITY fundraising to date make it close to impossible for the DFINITY platform native asset to develop into a value-accruing Store of Value: upside for retail investors, AKA ‘the community’, is severely limited at a $2bn seed valuation, and the fact that token supply is largely held by the DFINITY team and a16z/Polychain creates an uneasy ambience for grassroot believers trying to disrupt existing market oligopolies, let alone high risk of dumping.
The great irony of DFINITY is that they have clearly produced game-changing technology that will enable meaningful decentralization at the protocol level, while misguidedly shirking responsibility regarding the development of a decentralized digital asset.
In their defense, global regulatory development has severely impeded the extent to which DFINITY could include non-accredited investors in their fundraising rounds. However, at this point, it seems unlikely that retail investors will come flocking, eager to buy into a16z and Polychain’s generous sell walls.
Gemini, New York’s leading crypto asset exchange, is pushing ahead with the Virtual Commodity Association (VCA), a self-regulatory organization mandated with developing industry standards, promoting transparency, and working with regulators to prevent fraud and manipulation in markets for digital assets.
Exchange participants also include Bitstamp, BitFlyer USA, and Bittrex.
The VCA may help police markets to a point at which they are suitable for an ETF approval: indeed, in their recent rejection of the Winklevoss Bitcoin ETF proposal, the SEC cited concerns around market manipulation and lack of surveillance.
The Associated Press has partnered with blockchain journalism startup Civil to licenses articles.
Civil will licenses AP’s content to its various newsrooms and the two groups will collaborate to track Civil newsrooms’ original content.
Crypto asset exchange Huobi is seeking to become the largest shareholder of a firm that is publicly listed in Hong Kong.
If the move goes ahead, the deal could open the door for Huobi to go public via a reverse takeover.
Lloyd’s of London (LoL), one of the oldest insurance marketplaces in the world, has partnered with custodial firm Kingdom Trust to offer digital asset insurance underwriting for institutions. Under the partnership, LoL would provide insurance coverage for theft and/or destruction of underwritten crypto assets.
In other exciting custody news, Bank of America has applied for a patent that covers a crypto asset storage system for use by custodians.
Polychain Capital, FBG Capital, and Binance Labs have participated in a $32m seed round to build a stablecoin, titled Terra, headed up by the founder of a $1.4bn startup called TMON.
Terra, which employs a two-token model, will launch with a number of enterprise partners that already reach 40 million customers.
It should be noted that Polychain Capital is also a large backer of Basis, a competing stablecoin project. Should their participation in the Terra seed round be considered a conflict of interest, especially considering the winner-takes-all nature of the stablecoin market?
Two exciting updates on the scaling front.
First, OmiseGo provides a fantastic summary of Plasma and how they plan to leverage it for their World Exchange.
Second, the team at Connext have pushed the first non-custodial payment channel hub to the Ethereum mainnet, enabling dramatic confirmation time and cost savings over transactions while preserving the security and decentralization of the underlying Ethereum blockchain.
Public Choice/Channel Auctions:
Three researchers from RMIT University have published a paper titled Crypto Public Choice, exploring the economics of collective decision making in the functioning of blockchain protocols and among related communities of users.
Meanwhile, Glen Weyl of Radical Markets has published a paper with two other researchers proposing a hybrid English/Dutch auction structure, titled Channel Auctions. Weyl and his co-authors suggest that such a system could be suitable for the blockchain transaction fee market.
Changing Token Models:
An increasingly pertinent piece from Ambrož Homar on the implications of changing token models.
I personally believe that any project with a broken token model — whether that means an unnecessary token or simply flawed dynamics – should change their structures as soon as possible.
It will undoubtedly be embarrassing to own up to a rushed/defective/greedy initial model but ultimately, in the medium-long term, the market will discover those models that hide behind obscurity, destroying those that fail to adapt and evolve.
DAI Savings Rate:
The MakerDAO team has announced the launch of Dai Savings Rate (DSR), which will provide those who lock up DAI with an interest payment.
According to the Maker team, DSR will create a whole new dimension of incentives for balancing the supply and demand for Dai.
As community discussion suggests, DSR payments will presumably come out of MKR holders’ stability fees. However, if DSR proves attractive enough, the cut in margins may be subsidized by a surge in volume.
Moreover, the introduction of DSR may be interpreted as a strategy to gain adoption from exchanges, which would lock up the vast majority of their DAI holdings, allowing their users to trade DAI at face value while reaping the interest payment rewards.
Another Ethereum transaction privacy solution, this time in the form of LibSubmarine, which permits users to hide their entire transaction — sender, receiver, value, data – until it is revealed in a later block.
A very viable replacement to the cumbersome commit-reveal scheme.
Dagger provides a way for dApps and and backend systems to receive realtime Ethereum blockchain events, like transactions, receipts, and logs.
ICO raise figures are out for August.
According to TokenData, $502m was raised, up from $417m in July.
Once again, most of the raises were private sales, with Hashgraph and tZERO leading the way with $100m and $134m respectively.