September 25, 2018 . 12 min read

Crypto Chat #57



A major bug was discovered in the Bitcoin Core client this week: had it been exploited, an attacker would have been permitted to:

a) print unlimited coins, thereby decimating the sacrosanct 21 million supply cap

b) mount a denial of service attack, forcing honest nodes to go offline

The vulnerability was discovered and reported by Bitcoin Cash developer, Awemany, who wrote about his disclosure experience here.

While Bitcoin developers have urged nodes to upgrade, it seems that 87% of the network is still vulnerable to the exploit.

This incident raises two interesting questions/discussions:

The first is the notion of responsibility in the world of open source software.

Does Matt Corallo, the (volunteer) Bitcoin Core developer that unknowingly introduced the fateful bug, bear full responsibility for this error? Or is the burden on the ever-nebulous ‘community’, who failed to thoroughly parse through the consensus change?

I am very much still grappling with this conundrum but suspect the answer is non-binary. What I do know is that events like these expose terms like ‘decentralized’ for what they really are: trust minimization rather than a pure elimination of trust.

The second major consequence of this affair is that it serves as a sharp wake up call for those pushing the ‘Bitcoin as Sound Money’ narrative.

Bitcoin has certain properties that theoretically might position itself as a good store of value, but we must remain ever-cognizant that we are still dealing with highly experimental software built by ever-fallible humans. It may be that Satoshi’s pseudonymity has led many to subconsciously conflate his invention with the supernatural: such hubris, whether intentional or not, will not serve the ultimate mission of hyperbitconization well.

Indeed, just last week Ben DiFrancesco posed an attack scenario whereby a malicious core developer could intentionally include a “devious, arcane, consensus bug”. DiFrancesco was duly ridiculed, with Bitcoin acolytes noting the heavy code review process that takes place before new code is merged.

Novel Economic Institution:

Nic Cater, founder of CoinMetrics and Managing Partner at Castle Island Ventures, has generously shared his presentation slides from the Baltic Honeybadger conference this past weekend.

The presentation is largely concerned with re-evaluating the way in which we approach Bitcoin, although the same lessons apply to competing crypto assets: as a novel asset class, we must step away from traditional metrics and heuristics in order to accurately measure the state of development and adoption.


1. The notion of ‘containerships, not parcels’, which advocates for a shift of emphasis from transaction throughput to transaction value: average Bitcoin transaction value is orders of magnitude larger than transaction value through systems like Visa.

2. Two proposed alternatives to market capitalization as core network metrics: Thermocap, which measures accumulated security spend, and Realized Cap, which aggregates the value of transactions priced by their value when they last moved.

The latter metric is particularly interesting as it provides accurate insight into illiquid markets: for example, Bitcoin’s current RealCap is ~$88bn, versus a $110bn market cap, a multiple of 1.25x, whereas Bitcoin Private’s market cap peaked at $2bn with RealCap at $65m, a multiple of 30x.

3. Another interesting proposed Key Performance Indicator (KPI) is ‘fee ratio’: the percentage of economic volume that would have to be paid in fees in order to sustain the network without block rewards.

This metric is particularly relevant to me considering my previously-expressed concern around Bitcoin’s security model as it relates to a disinflationary monetary policy.

Carter asserts that at today’s transaction volumes about 0.6% of economic volume would have to be paid in fees in order to support an equivalent level of security. If annual aggregate transaction volume is somewhere close to $750bn then 0.6% equates to $4.5bn.

The problem here is that annual transaction fee revenue currently sits at just ~$60m (average of $157k in transaction fee revenue/day). Reaching 0.6% of economic volume would require somewhere close to 75x increase in transaction fee revenue. There is no obvious path as to how such an enormous appreciation could take place. The disparity between existing and required levels of transaction fee volume should concern anyone interested in maintaining Bitcoin’s security levels.

Perhaps this discussion will produce an alternative KPI: the ‘Fee Ratio Ratio’ (FRR), which measures the ratio between existing transaction fee revenue and the revenue required to sustain the network at existing levels without block rewards. For next week’s edition I hope to have some analysis relating to the FRR for alternative crypto assets.

Most Read From CC#56:

1. WSJ Polychain Capital Profile

2. Why The EU Is Furious With Malta

3. Scaling Today

4. Crypto Fund List

5. Is BitMex Trading Against Its Own Customers?


prices provided by as of 19:30 ET


Bitcoin (BTC) bounced up this week, finding local highs at $6,800 before settling back into the $6,600-$6,700 range. The Technical Analysis community remains divided as to whether BTC is currently sitting in a bear pennant, which would be bearish, or a descending wedge, which is typically bullish. Place your bets accordingly.

Messari’s Qiao Wang explores the Lindy Effect, which states that future life expectancy is proportional to current age, finding it to be little more than a trivial statistical heuristic. The Lindy Effect is often cited by proponents of Bitcoin as a reason for its inevitable success.

Meanwhile Jordan McKinney has published an ingenious chart illustrating Bitcoin’s declining ‘Security Factor’ (SF), which measures the relationship between attack cost (which is equal to miner revenue) and network value. Bitcoin’s current SF is ~4% and is expected to decline to 1% by 2030.

SF is a significant metric as it illustrates the upside for network attackers: a low SF suggests high risk reward for anyone willing to strike. As several commentators have noted, one might infer from the chart that the chain that commands the largest pool of transaction fees will win the Store of Value use case due to its concurrent properties of high security and low inflation.


Ether (ETH) continued its recovery this week, finding a local top at $253 before falling back into the $230-$240 range. ETH outperformed BTC for a second week in a row, with the ratio once again moving above 0.035.

Several updates on the scaling front:

1. Alexey Akhunov has revealed Turbo Geth, a new Ethereum client that cuts down storage to one-fifth of its current size, allowing Ethereum nodes to run on cheaper hardware and thus further facilitating decentralization of the network (as measured by the number of full nodes).

2. Vitalik published a proposal that leverages ZK-SNARKS to mass-validate transactions, which would potentially scale network throughput to 500 transactions/second. O(1) Labs is taking a similar approach with their chain, Coda.

3. Kevin Zhang of ConsenSys published a primer on the state of Plasma, a promising Layer 2 scaling solution.

4. Ethereum core developer Danny Ryan appeared on the HashingItOut podcast to discuss the joint implementation of Sharding and Casper. Based on the specs outlined by Danny, Eric Connor estimates that Layer 1 throughput under ‘Shasper’ will rise from 7 tx/s to 13,410 tx/s.

Bonus: NFTmarketcap, which lists the top non-fungible tokens by market capitalization. Decentraland currently dominates at $60m, followed by CryptoKitties at $22m.



The New York Attorney General, Barbara Underwood, published her Virtual Markets Integrity Initiative Report this week. Aaron Wright, Professor at Cardozo Law School and co-founder of OpenLaw, provided the following comments:

1. Many exchanges have potential conflicts of interests.

2. Trading platforms have yet to implement serious efforts to impede abusive trading activity.

3. Protection for customer funds are often limited or illusory.

4. Many platforms seem to suffer from insider trading issues.

You can also review a tweetstorm from Underwood herself here.

The report concludes with recommendations to the New York State Department of Financial Services that three exchanges – Binance,, and Kraken – be reviewed for potentially operating unlawfully in New York. True to form, Kraken responded to the report in an incendiary, public, and (in my opinion) unprofessional fashion.

Unsurprisingly, leading exchanges Gemini and Coinbase emerged from the report largely unscathed. Coinbase was briefly criticized as it emerged that almost 20% of executed volume on its platform was attributable to its own trading, although a clarification from Mike Lempres, Coinbase’s Chief Policy Officer, soon corrected the record, noting that the 20% was Coinbase executing trades on behalf of Coinbase Consumer customers.

While this does counter allegations around Coinbase trading against its own customers, we must nevertheless question how this execution process takes place – namely, is Coinbase careful to avoid slippage?


The co-chair of the Congressional Blockchain Caucus, Representative Emmer, will introduce two crypto-friendly bills and a resolution this week.

The resolution supports a light-touch approach to regulation, and the two bills create safe harbors, one for non-custodial use of crypto assets and the other for taxpayers who report income from hard forks.

Of the bills, the Blockchain Regulatory Certainty Act seems more significant, as it would create a safe harbor from state licensing requirements for non-custodial entities in the blockchain space.

As the CoinCenter team notes, “there is no reason for these laws to ever apply to persons who facilitate cryptocurrency use but who do not hold other people’s coins.” At present, any failure to comply with state money transmission licensing laws can carry harsh penalties.

Consumer Tokens:

Latham & Watkins, a global law firm that has worked closely with ConsenSys on the Brooklyn Project, has published a paper detailing the path to SEC and CFTC compliance for ‘consumer tokens’, commonly referred to as ‘utility tokens’.

VanEck/SolidX ETP:

The SEC Has released a document asking for input on the SolidX Bitcoin exchange traded product (ETP) proposal.

Specifically, the document lists 18 questions relating to the ease of market manipulation and the role of OTC desks in the wider market. While the document does ask for input from the crypto community, it is hard not to read them as rhetorical questions.

A particularly interesting line from the report suggests that approximately 50% of global BTC/USD trading volume takes place on OTC desks.



Andreesen Horowitz has purchased 6% of the total MKR token supply for $15m. At a current market capitalization of just over $450m (based on total supply), this equates to a ~45% discount from market value.

According to the Maker press release, a16z will participate in governance and the Dai Credit System. MakerDAO will also receive operating capital through the next growth stage and full operational support from the 80+ person a16z crypto arm. You can find the a16z press release here.

As Spencer Noon notes, this establishes early precedents in regards to teams selling to strategic investors in secondary transactions and the cost of operational support from a top-tier VC firm.

As per usual, my personal reaction is somewhat contradictory:

On the one hand – I have the utmost respect for the Maker developer team and trust that they have done what is right for the future success of Dai.

On the other hand – I feel extraordinarily uncomfortable by the emerging trend of a16z (alongside several other major funds, *cough* Polychain *cough*) owning significant shares of these emerging networks and fail to realize how this OTC deal can be reconciled with Maker’s purported emphasis on transparency and decentralized governance.

On a different note, what does this 45% discount mean for current MKR valuation? Comments welcomed!


Another week, another exchange breach.

Japan-based Zaif is the victim, with close to $60m worth of crypto assets transferred out of the exchange by hackers.

With just $20m in asset reserves, Zaif was forced to reach an agreement with Japan-listed firm, Fisco, which will invest $44.5m in exchange for a major share of ownership.

A stark reminder to the CryptoChat community: do not leave assets on exchanges.

Grupo XP:

Grupo XP, Brazil’s largest independent brokerage, is launching an exchange for Bitcoin and Ether trading.

Grupo’s CEO notes that ~3 million Brazilians have exposure to Bitcoin, compared to just 600,000 that invest in stocks.


Fifteen of the world’s largest institutions including banks, trading companies, and a major energy player, have formed a new venture known as Komgo SA, which will seek to digitalize the trade and commodities finance sector through a blockchain based open platform.

The platform will be based on Ethereum and developed in partnership with ConsenSys.

Use Cases


Alex Evans of Placeholder Ventures has published a Brief Study of Cryptonetwork Forks.

The summary is as follows:

1. The vast majority of child networks resulting from chain forks are in disuse and have lost significant value relative to their parent networks.

2. Despite lower use metrics, child networks trade at higher user and transaction value multiples (e.g., NVT ratio) than their parent networks.

3. Users and developers tend to remain loyal to the original network, while most miners are loyal to economics only, directing hashpower to the most profitable network of the moment.

For what it’s worth, I have been promoting a similar thesis for a while. The crypto industry often overestimates the triviality of forks, especially as it relates to community building.

Public Goods:

Matthew Di Ferrante, a core Ethereum developer, has published Blockchains as a Public Good, which cuts through the noise to present the real use cases for this emerging technology.

Key insight:

“Until there is a public, agreed upon utility chain that ties all the different uses cases, players and systems together, all the ‘enterprise, private blockchains’ are a waste of time at best, with the only exception being maybe finance, but SWIFT is so bad that more or less anything else would be massively better.”

Bonus: another good thread from Noah Ruderman on a similar topic.


Another dApp ‘store’ to sit alongside, Dappradar, and StateoftheDapps.


An Ethereum-based sports betting platform.

Peer2Peer betting, sleek interface, provably fair, no signups or deposits, no fees, and no token – the real deal!

Decentralized Credit:

Andrew Young of CDx writes on the decentralized credit problem: the challenge of figuring out how to get the benefits of credit without the instability caused by the misaligned incentives, opaqueness, and closed nature of our existing systems.


The dYdX Protocol team has introduced expo, a relayer for their decentralized margin protocol, which will go live on October 2nd.

Expo will initially support Short Ethereum ‘sETH’, an ERC-20 token pegged to a short ETH position: support for additional short and leverage assets will be added in the future.

According to the announcement, expo automatically:

1. Sources lending liquidity in the underlying asset from various dYdX lending partners

2. Sources spot liquidity from decentralized exchanges

3. Locks collateral into the position

4. Mints new short or leveraged tokens to give the user margin exposure

All users need to do is decide how much to buy.


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