September 11, 2018 . 12 min read

Crypto Chat #55

Highlights

Stable Coins:

New York’s leading crypto asset exchange, Gemini, announced the launch of their own US Dollar-collateralized stable coin (SC) this morning.

GeminiUSD (GUSD) exists as an Ethereum-based token (ERC20 standard) and will be regulated by the New York State Department of Financial Services (NYDFS). You can check out the GUSD smart contract here.

In their announcement post, the Gemini team cited the incompatibility of USD, which is close to impossible to move around outside of traditional business hours, with the 24/7/365 nature of the crypto asset markets as their primary motivation for releasing GUSD. Indeed, as a fiat-based exchange, Gemini has been at a notable disadvantage to Tether-based exchanges like Binance, which allow users to deposit and withdraw at a whim.

Gemini’s announcement comes on the same day that blockchain startup Paxos released its own Ethereum-based SC, similarly regulated by NYDFS.

What does this all mean? My immediate, unstructured thoughts as follows:

1. One should remain hyper-conscious of the difference between fiat-collateralized SCs like GUSD, CircleUSD, TrueUSD etc. and crypto asset-collateralized SCs like DAI.

Although they fall under the same moniker (i.e. SC), fiat-collateralized SCs do not have the same censorship resistant properties as crypto asset-collateralized SCs: if a user were to breach Gemini’s AML procedures or interact with a grey-market contract, Gemini could cancel the fiat redemption process, leaving the user with an essentially worthless voucher, whereas DAI owners will always be able to convert their SC back into ETH (or their collateral of choice).

2. I am struggling to see the competitive advantage of one fiat-collateralized SC over another. I think the biggest differentiator amongst fiat-collateralized SCs will be the trust surrounding the maintenance of reserves, but once these SCs become regulated by the same institutions (e.g. NYDFS), as is the case between GUSD and the Paxos SC, it becomes unclear as to what the superior product is or should be.

3. With this lack of competitive advantage among fiat-collateralized SCs in mind, it is unclear as to whether this will be a winner-take-all market or not. These products don’t have to compete on liquidity as there will always be a central operator to redeem or issue the SC.

Perhaps the fate of these SCs really boils down to the extent to which they are adopted by exchanges as a trading pair and the brand that they are able to build among exchange users (I say exchanges, rather than applications, because I imagine that decentralized applications will continue to opt for crypto collateralized SCs due to their censorship resistant properties).

With that in mind, my prediction would be that GUSD will struggle in the months ahead, as competitors refrain from adding it as a trading pair in order to avoid building Gemini’s brand and contributing to its newfound position as a SC central bank. The flipside here is that users of competing products pressure exchanges to add GUSD as a trading pair, threatening to take their business elsewhere unless the asset is added. Indeed, GUSD is far more attractive as a SC than the eternally-controversial Tether.

4. What is the grand strategy here? For Gemini, the launch of GUSD should be accompanied by an uptick in exchange volume as users can now deposit and withdraw dollar-based value at any time. More volume means more fees means more revenue. The same goes for Paxos, which is the parent company behind itBit, the 50th-largest exchange in the world.

As far as medium-long term strategy, as mentioned above, I am skeptical of the notion that competing exchanges will adopt GUSD. In fact, after today’s news, I expect Coinbase to announce a SC of their own within the next month.

5. Adoption of SCs from major crypto exchanges has major implications for the price of both ETH and BTC, the two major trading pairs for the 5000+ crypto assets on the market.

To date, traders/speculators/investors have been largely limited to ETH and BTC as trading pairs: if they want to purchase/sell crypto asset X, they usually first have to buy/sell ETH or BTC. This leads to higher correlations between all crypto assets, rising tides in bull markets and crushing dreams in bear markets.

Both ETH and BTC have benefited and suffered from these correlations in the past and thus it remains unclear as to whether this is ‘bullish’ or ‘bearish’, but the bottom line is that we should see strength of correlations fall, with fundamentally stronger projects finally rising to the top and fundamentally weaker projects disappearing into oblivion.

6. Fiat-collateralized SCs, which settle in a matter of seconds and cost pennies to transact, could/should be the beginning of the end for costly wire and ACH transfers, which can take days to clear. SWIFT and its supposed disruptor, Ripple, should be worried.

7. Lastly, I think it’s important to step back and note that every stable coin to date (apart from Tether), whether fiat-collateralized, crypto-collateralized, or algorithmically bond-driven, has been built on Ethereum.

Perhaps I am underestimating the significance of interoperable chains, but this certainly seems like positive validation of Ethereum’s technology/token standards and the thesis of Ethereum as indispensable infrastructure for digital, open finance.

For a quick overview of the stable coin market, check out Larry Cermak’s comparison table here. For an in depth dive into the stable coin ecosystem, I recommend browsing Myles Snider’s Stablecoin Index.

'Decentralization':

Another must-read article from Decentraland’s Tony Sheng, who advocates for the replacement of the increasingly ambiguous and abused ‘decentralization’ adjective in favour of more specific, quantifiable terminology.

Most Read From CC#54:

1. Finality in Blockchain Consensus

2. The Miner Trader Disparity

3. Bitcoin: Disinflating to Death

4. Vitalik's Response to 'The Collapse of ETH is Inevitable'

5. A Discourse on Token Valuation

Market

prices provided by coinmarketcap.com as of 18:30 ET

BTC:

Bitcoin (BTC) briefly battled with the 200 Day Exponential Moving Average before conceding defeat, rapidly falling back down to the $6,100-$6,300 range. I like to think that my article on BTC’s unsustainable monetary policy may have played its part, but in reality these conversations will likely be overlooked until it is too late.

Nodar Janashia published an interesting analysis of BTC’s Q3 2018 velocity, noting that (hybrid) velocity has fallen by 50% since 2017. The major implication here is that BTC’s network value is being propped up by Discounted Expected Utility Value vs. Current Utility Value, which should theoretically lead to price collapse as the market reevaluates the fundamental value of the asset at hand.

ETH:

The Ether (ETH) onslaught continues, with price vs. both USD and BTC continuing to drop precipitously over the week. For a summary of the ETH bull case, check out this podcast with Spencer Noon, Cyrus Unesi, and CryptoChat favourite Tony Sheng. Or just check out this overview of Sharding progress from Justin Drake.

As Chris Burniske notes, this ETH downtrend vs. BTC is likely a phenomena of market cycles, rather than the end of Ethereum as we know it. I am personally keeping an eye out for the (admittedly imperfect) Adjusted Volume Kalichkin’s Network Value to Transaction (NVT) Ratio, which currently has ETH at August 2018 levels.

Government

SEC:

The SEC has temporarily paused trading of CoinShares’ crypto asset products due to misinformation regarding their labeling as exchange-traded funds (ETFs).

EU:

A report authored by EU finance ministers advocates for the adoption of common regulation for crypto assets in order to both avoid potential risks posed by unscrupulous actors and harness the potential of the underlying blockchain technology.

Enterprise

Goldman Sachs:

Goldman Sachs is exploring crypto asset custody solutions, while continuing to serve clients through the clearing of CME and CBOE Bitcoin futures contracts.

Kraken:

Long-standing crypto asset exchange Kraken is feeling the bear market pressure, laying off hundreds of employees in their Canada office.

According to one ex-employee, Kraken administrators noted reduced trading volume and the opening of a new Asian office as the primary drivers for the redundancies.

Coinbase/BlackRock ETF:

Coinbase has teamed up with BlackRock, the largest asset manager in the world, to explore a crypto asset ETF.

Unlike most proposals on the market, which are structured around Bitcoin, the Coinbase ETF will likely be linked to a basket of crypto assets.

It remains unclear, however, as to how Coinbase plans to overcome the SEC’s historic resistance to crypto-related ETFs, which continue to be hampered by a lack of liquidity and rampant manipulation in the underlying markets.

Citigroup:

Citigroup has announced the launch of the Digital Asset Receipt (DAR), which will provide clients exposure to crypto assets without the need to own the underlying.

The DAR is based off the American Depositary Receipt model, which allows US investors to invest in foreign stocks that aren’t traded on US exchanges. In this case, the crypto asset would be held by a custodian, with the DAR then issued and managed by Citi.

It remains unclear as to what stage Citi is at in the development process but Business Insider reports that the bank has already started reaching out to potential partners.

Use Cases

Liberal Radicalism:

Vitalik Buterin has teamed up with Glen Weyl, author of Radical Markets, and Zoe Hitzig, a PhD candidate at Harvard, to publish Liberal Radicalism: Formal Rules for a Society Neutral among Communities, where ‘liberalism’ is defined as an intellectual tradition that “opposes arbitrary or historically-derived centralized authority…[favouring] social systems that are neutral across reasonable competing conceptions of the good life held by individual citizens.”

The paper leverages mechanism design to propose solutions for the ‘public goods’ problem, whereby those who benefit from a service are not the ones who pay for it, thus creating an under-provision of that resource.

I’m still working my way through the paper but I get the sense that this is quite a significant breakthrough, not only as it relates to traditional public goods like news media and campaign financing, but also to more blockchain-centric resources like storage (more on that here).

Luke Duncan of Aragon has a good overview of the paper, as well as some follow-up questions regarding implementation.

ETHBerlin:

The Ethereum community congregated in Berlin this past week for the aptly titled ETHBerlin, a mix of hackathons, workshops, and panels.

You can find a full list of the hackathon submissions here (there may be some issues with the website).

From my brief perusal, some cool projects include:

Das bündler, a relayer for Set Protocol. The Set Protocol user experience is currently limited in that you have to own each individual asset before forming a set. Das bündler leverages the 0x protocol to market buy required assets before forming them into a set of assets in the form of a non-fungible token.

Ring Signature-based anonymous voting. Use cases include critical decisions (death sentence, euthanasia etc.) but can be extended to any kind of scenario that may benefit from voter anonymity.

All Aboard, a UX flow to on-board mainstream audiences, providing them with a wallet and ETH that they can use to interact with participating projects' dApps.

Artonomous, a self-owning, self-sustaining, self-improving autonomous artist (featured previously in CC).

Honorary shout-out goes to Vlad Zamfir, who implemented a sharding proof of concept.

Tachyon:

More project announcements as the ConsenSys incubator, Tachyon, welcomes its inaugural class.

Lots of interesting, if ambitious, projects in the accelerator. Two that really stand out are:

Elkrem, a Cairo-based company creating hardware for Internet of Things devices to interact with the Ethereum blockchain.

FastX, a Plasma-based decentralized exchange for NFTs.

And while we’re on the topic of accelerators, check out the latest Google Launchpad Studio cohort, which includes multiple blockchain-based startups.

ShapeShift:

ShapeShift, a leading crypto asset exchange portal, announced the introduction of Anti-Money Laundering (AML) procedures for customers. To date, ShapeShift had not required users to submit personal identity information, thereby opening up the possibility of money laundering by nefarious actors. Viable alternatives to ShapeShift include EasyTrade and Kyber Swap.

Messari’s Katherine Wu believes that ShapeShift’s transition away from anonymous trading is largely the result of the Bank Secrecy Act enforcement by FinCEN. For some context on the BSA and its implications for crypto-related businesses, check out Katherine’s tweet thread here.

CDx:

Credit Default Swaps on Ethereum, inspired by the lack of insurance products for the counterparty risk posed by crypto asset exchanges.

WASM:

Raul Jordan of zkCapital provides an overview of WebAssembly (WASM), a browser-native standard that allows developers to compile different programming languages into smart contract logic.

Coming to an Ethereum near you.

ICO

Treasury Management:

The Mosaic team takes a look at ICO treasury management, a particularly relevant topic considering the widespread (although notably lacking in evidence) narrative regarding ICOs as the source of considerable ETH sell pressure.

Highlights:

When factoring in a 50% discount, in the event the price of Ethereum was to experience another volatile move downwards from this price level, this would leave the average monthly runway for these projects at $762,009 USD. When factoring in the current estimated average monthly spending rate for operational costs of $332,909 USD, these projects are well equipped with a proverbial “margin of safety” as their current treasury balances mean they can weather much more pain — roughly another 75% decline from current price levels.

Certain projects¹ such as DigixDAO, Aragon, & Gnosis raised amounts of ETH (which have subsequently appreciated in value) which are worth more than the total value of their respective circulating tokens. (Of course, for the most part, owning a token does not confer the right to access assets on the project’s balance sheet.)

ROI since Jan 17:

Tetras Capital’s Alex Sunnarborg reviews the ICO sector's return on investment from January 2017 to June 2018.

The whole thread is worth a read (as is the rest of Alex’s research) but for those short on time:

Only 75/344 (21.8%) of ICOs outperformed BTC and 138/344 (40.1%) outperformed ETH. Of those that outperformed, none had liquidity close to that of ETH or BTC.

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