September 18, 2018 . 12 min read
Crypto Chat #56
Leading crypto asset fund Polychain Capital was the subject of an unflattering Wall Street Journal profile this week.
Having realized over 2,000% returns in 2017, Polychain’s assets under management (AUM) have now shrunk by 40%, the result of a combination of investment losses and investor redemptions.
Olaf Carlson-Wee, Polychain’s founder and Managing Partner, has been criticized for his decisions to take fees every year on paper gains and move LP funds into a side-pocket, which removes the possibility of full investor redemption moving forward.
To be fair to Olaf, the article's author does seem to be tipsy, if not drunk, on schadenfreude: as Joshua Hannah of Matrix Partners notes, its rather unlikely that LPs with 23x return in 2017 are too disappointed with Polychain's strategy.
My unstructured thoughts:
1. Achieving irregularly high returns in the 2017 bull market was not difficult. 2,000% doesn’t even seem particularly impressive considering a) long-only exposure to Ether would have netted somewhere close to 20,000% over the course of the year b) risk adjusted returns. I encourage industry participants to tone down the unadulterated veneration for Olaf and his colleagues.
Conversely, Polychain's future should not be dismissed for shedding 40% of AUM in 2018 – its venture-type structure means that its performance can only be meaningfully judged on a 5-10 year time horizon.
2. The WSJ piece cites Polychain’s strategy as ‘long-term, thesis-driven investing’, which does little to shed light on Olaf’s and co.’s approach.
What we do know is that Polychain participates in a deal on an almost weekly basis, and has hedged its bets across various protocols and applications. This approach reminds me of a line from Warren Buffett: “diversification is protection against ignorance. It makes little sense if you know what you’re doing.”
As participants in a rapidly emerging industry, we are all ignorant, and thus merely recognizing that ignorance and protecting against it may be the optimal strategy. But considering the nature of these protocol level projects —which are all ultimately competing to be money —I cannot help but feel that Polychain is pursuing a misguided approach, .
Yes, Polychain has to justify its generous fee structure and cannot simply pile funds into Bitcoin and Ether, but it seems erroneous to ignore the network effects that these two pre-existing crypto assets have built and the almost insurmountable first mover advantages that they have established.
3. The Shakespearean irony of Polychain and the 100 copycat funds that have emerged in the shadows of their success is that they are likely to be the cause of their own demise.
I wrote about Dfinity’s latest raise several weeks ago, arguing that a $2bn pre-mainnet valuation will act as a formidable barrier to the kind of community building that is necessary to achieve the memetic qualities that any successful money candidate will have.
The same applies to every other VC-led deal: restricting early round access to the Polychains, a16z’s, and Pantera’s will ultimately isolate a project from retail investors, who are eventually offered significantly reduced risk-reward opportunities and will be highly conscious of the fact that their buy orders are directly enriching insiders.
I think entrepreneur Alexander Liegl put it best: “Nothing builds a community like making money together.”
A fascinating long-read on Malta, the tiny European island on a mission to position itself as a global crypto hub while simultaneously fighting off accusations of corruption and money laundering.
Malta’s initiatives have undoubtedly been forward thinking. We must recognize that some of these policy decisions have attracted unscrupulous characters but they should nevertheless be celebrated for their contrarian embrace of markets — gambling, crypto etc. — that have historically been shunned, often for ideologically puritanical reasons.
Indeed, the recent ruling from the Supreme Court regarding sports betting illustrates how forward-thinking the Maltese government has been in welcoming gambling outfits for years.
The passport initiative, whereby Maltese passports are sold to foreign nationals, is justifiably controversial and evidence from the article suggests that thus far it has been abused by nefarious actors. However, I am nevertheless fascinated by the concept of nationality as a marketplace, which should catalyze global competition at the regulatory and legislative level.
Thanks to Abacus’ David Beiner for additional insight.
Most Read From CC#55:
Bitcoin (BTC) remained range-bound this week, continuing to trade between $6,200-$6,500.
Active traders/investors may be interested in CryptocurrencyNewsfeed, which provides real-time updates on over 3,000 coins.
Dan Held, co-founder of PicksCo, published an article refuting claims from critics that Bitcoin’s Proof of Work is ‘wasteful’.
Meanwhile, Maximilian Fiege provides a fresh perspective to the cannon of Proof of Work criticism, positing that PoW’s reliance on energy introduces political risk due to the highly centralized nature of energy infrastructure and markets.
By contrast, alternative systems like Proof of Stake mitigate this political risk by relying solely on endogenous factors for consensus. Well worth the read.
Ether (ETH) found a local bottom at $175 before finding a local top at $229 — it is currently trading between $195-$200. ETH/BTC similarly bottomed out at 0.0263 before climbing back above 0.031.
For those readers looking for an articulate and compelling ETH bull thesis, I highly recommend checking out this podcast from Spencer Noon, Cyrus Younessi, and Tony Sheng. Also worth reviewing ScalingToday, a new website exploring the state of Ethereum research and development.
For those readers looking for someone to blame for ETH’s disappointing price action, check out this BitMex-related conspiracy.
Kobre & Kim’s Jake Chervinsky provides a concise summary of various enforcement actions from the past week, including:
1. Department of Justice charging an individual on three counts of securities fraud.
2. SEC charging TokenLot with operating an unregistered broker-dealer.
3. FINRA charging a broker with fraud and unlawful distribution of unregistered securities, the first enforcement action to come from FINRA involving crypto assets.
4. SEC charging Tim Enneking’s Crypto Asset Management for operating an unregistered investment company. CAM was brazenly marketed as the ‘first regulated crypto asset fund in the United States.’
As Chervinsky notes, the Crypto Asset Management case is particularly interesting as CAM clearly violated federal securities laws and yet, a meager $200k fine later, were permitted to continue operating as a business.
This regulatory slap on the wrist has major implications for other potential securities law violators, the most high profile being Ripple. Now we have precedent in the CAM case, it seems possible that the SEC could charge Ripple with the sale of unregistered securities while permitting the company to continue operating.
A quick update on GeminiUSD, a fiat-collateralized stable coin issued by New York’s leading crypto asset exchange, Gemini.
A quick review of the GeminiUSD smart contract shows that Gemini can make GUSD non-transferrable at any moment and can change the implementation of the token after a 48 hour grace period.
Of course, this should hardly be surprising — as a fiat-collateralized stable coin, GUSD inherently does not afford any of the censorship resistant properties that truly decentralized currencies like DAI and BTC offer. Indeed, I suggested as much in CC#55 without having reviewed the contract.
In other news, Gemini has added support for Litecoin (LTC), taking the asset tally to 4: LTC, BTC, ETH, and Zcash.
This is both surprising and unsurprising: somewhat remarkably, Litecoin still has a $3bn+ network value and sees $248m in daily volume.
And yet, as Multicoin suggest in their latest report, the conditions that facilitated Litecoin’s rally in 2017 have now largely disappeared, leaving its future in a precarious state.
Morgan Stanley joins Citigroup and Goldman Sachs with plans to offer trading in Bitcoin-based derivatives.
Leading crypto asset custody group, BitGo, has received approval in the U.S. to act as a qualified custodian for digital assets.
First Block Capital, a Canadian cryptocurrency and blockchain investment company, has achieved mutual fund status in Canada for its Bitcoin trust, FBC Bitcoin Trust, providing accredited investors with a seamless path to crypto asset exposure.
Competition in the crypto wallet/browser market is heating up, with ConsenSys Ventures-backed Vault the latest addition to the impressive roster of applications vying to become the WeChat-esque one-stop shop for the crypto/blockchain experience.
Argent is another wallet-to-watch: their pioneering Guardian feature provides an easy path to account recovery, mitigating the risk posed by easily-misplaced seed phrases.
Other wallet/browsers on my watch-list include:
Coinbase Wallet (formerly Toshi and led by the founder of Cipher)
TrustWallet (acquired by Binance)
The question I keep asking is how these wallet/browsers build viable, long-term business models, avoiding a Twitter-esque predicament whereby they serve as powerful, valuable infrastructure but fail to capture value themselves.
Some possibilities, as I see them, are as follows:
1. Transition to a Distributed Autonomous Bank-type model, as outlined by Balance’s Ric Burton.
2. In-app exchanges interfaces, with revenue from trading fees and market-making activity
3. Freemium model, offering advanced features to paying subscribers
4. Affiliate/referral relationships with dApps
5. One-click staking services, with pool fee based off existing mining pool fee structure
6. Data harvesting
7. Wallet-to-dApp services, like featured listings and user gas subsidies.
In the run up to the launch of multi-collateral Dai, Mike McDonald presents a review of single collateral Dai and its journey over the last 9 months.
I recommend actually opening the article as it contains some clever visuals, but for those short of time, I have listed highlights below:
Dai has successfully maintained its peg to USD despite the underlying collateral, ETH, falling from $1,432 to $183 in just 9 months.
Continued demand for CDPs throughout different market conditions and timeframes.
A total of 114,512,112 Dai has been drawn against collateral over the last 9 months
Dai’s daily token velocity min/max/avg/median are respectively 0.07/5.62/0.54/0.39.
There are currently only 4,610 MKR holders, which Mr. McDonald attributes to accessibility and psychology of a high price since the supply is only 1 million (a clever mechanic in token design to prevent uneducated speculators)
0.48% of the entire ETH supply is locked as MakerDAO collateral
Average age of a CDP is 134 days
There were 20 CDPs that had over 1000 pETH liquidated
Using some extremely rough calculations, keepers have made between $400,000 and $600,000 in profits these last 2 months by buying liquidated ETH at a 3% discount and turning around and selling it on the market.
Another excellent piece from Mechanism Labs’ Aparna Krishnan, this time on the role that randomness plays in consensus.
Cross-chain Atomic Swaps are approaching.
Well over a year after raising $232m in an ICO, Tezos is finally launching to mainnet.
XTZ, the Tezos-native digital asset, is currently trading at $1.44, down 89% since December 2017’s all time high.
I have never been particularly enamoured by Tezos, so take the following with a grain of salt: I honestly don’t think anyone really cares (which is ironic, considering that I am writing about it in my newsletter).
Tezos is more likely to be remembered for its greedy, uncapped ICO and its Foundation-related turmoil than the backbone of on-chain governance-driven decentralized computation.
If the protocol wasn’t already doomed from the very beginning then its chances of success have been significantly hampered by the technical and community . development progress of competing smart contract platforms, namely Ethereum and Dfinity.
Internet security provider Cloudflare has announced the launch of a new product that will help users access IPFS, the decentralized storage protocol developed by Protocol Labs.
As Péter Szilágyi notes, Cloudflare’s IPFS Gateway does little to advance the core tenets of decentralization, with its product acting as a trusted operator of sorts between users and IPFS-based content.
On the other hand, Cloudflare Gateway does take pressure off Infura, which has thus far been the dominant IPFS node and the subject of criticism from those concerned about its disproportionate role in dApp hosting.
Fantastic content from the team at The Block, who have broken down ROI on 300+ ICOs.
Best performer? Ethereum, up over 59,000% since September 2014.
Worst performer? Bolenum, down 99.72% since August 2017. Ouch.
Daniel Zakrisson, CEO of Cofound.it, a platform for ICO investing, is winding down his operation, citing the death of the ICO market and the shift from retail to institutional participation as primary reasons for his decision.
For what it’s worth, I think the ICO model is severely overrated in the short term and severely underrated in the medium-long term. In particular, I remain incredibly bullish on concepts like milestone-based ICOs, DAICOs, and Interactive Coin Offerings.