October 2, 2018 . 12 min read

Crypto Chat #58



In last week’s CryptoChat I briefly discussed the Fee Ratio, a new Key Performance Indicator proposed by Nic Carter, founder of CoinMetrics and Managing Partner at Castle Island Ventures.

The Fee Ratio measures total miner revenue as a percentage of transaction volume, providing a sense as to what percentage of transaction volume will have to be paid in fees in order to maintain existing security levels once block rewards eventually trend to zero.

For example:

Bitcoin miner revenue over the past year was equal to $6.11bn and adjusted transaction volume over the same period was $1.49tn. As a result, the fee ratio is approximately 0.41%.

Thus, in order to sustain existing security levels once block rewards have disappeared, ceteris paribus, transaction fee revenue will have to rise to 0.41% of transaction volume.

The problem with the Fee Ratio is that it does not provide insight into the growth in transaction fee revenue required to sustain security levels without block rewards. 0.41% is ostensibly an insignificant fraction, and yet its true significance emerges once you come to realize that transaction fee revenue currently makes up just 0.0082% of total miner revenue.

And so I present the Fee Ratio Multiple (FRM), which provides insight into the distance protocols with disinflationary monetary policies are required to cover in order to sustain existing levels of security solely through transaction fees. FRM is calculated as Total Miner Revenue [Block Rewards + Transaction Fees] / Transaction Fees.

Of further interest (in my opinion) is that FRM implicitly measures the strength of an assets properties as a Store of Value. A low FRM suggests that an asset can maintain existing security levels without having to rely on a significant inflation-based subsidy. Conversely, a high FRM suggests that an asset will require heavy inflation through block reward subsidies in order to maintain existing security levels.

Please bear in mind that this piece is still a work in progress: there is undoubtedly great room for improvement regarding methodology, analysis, and description. Indeed, I decided to publish the piece prematurely so that I could feature it in this week's newsletter.

Nevertheless, I hope that sharing the FRM will encourage further conversation around security as it relates to monetary policy, as well as providing further insight into the current health of various chains and their suitability as stores of value.

A couple highlights for those short of time:

1. ZEC, DCR, and BCH all have FRMs above 1000x:

Remember: this means that in order to reach current security budget levels without block reward subsidies, transaction fee revenue for each chain has to 1000x+.

2. BTC FRM is on the rise:

Just two years ago BTC FRM was 26. By November 2017 it was as low as 2. Since then, FRM has risen 40-fold to the 80–90 range.

3. ETH FRM is declining:

ETH FRM in September 2016 was 891x. Today it has the lowest FRM among the assets measured at 43x. ETH’s FRM is also the only FRM to be lower today than it was in July 2017.

If you have any thoughts/comments around how FRM can be improved/applied please contact me at [email protected]

Bonus: Part III from Jordan McKinney’s exploration of Bitcoin’s security, which seeks to formally prove that the security budget (AKA miner revenue) dominates attack cost in ASIC-based networks.


The team at Coda, a Zk-SNARK-based protocol, has released their fully-verifying in-browser testnet state explorer.

This means that your browser is essentially acting as a full node, an absolutely astonishing feat considering that resource requirements for running full nodes for Bitcoin and Ethereum include hundreds of gigabytes worth of solid state drive space. The ultra-lightweight nature of Coda means that one could even run a full node on a mobile phone.

This release has enormous implications for the future decentralization of blockchain networks: by collapsing resource requirements for full nodes, Coda has paved the way for anyone in the world with a mobile phone and internet connection to participate in the ledger validation and maintenance process.

I imagine it will not be too long until we see the proliferation of default in-browser native nodes, in the same way that Opera now comes with a built-in Ethereum-wallet.

Many congratulations due to the Coda team: the importance of this release is not to be understated.

Bitmain IPO:

Bitmain, the world’s leading mining hardware manufacturer, has published a prospectus in the run up to its IPO on the Hong Kong Stock Exchange.

Various analysts have reported on the prospectus details: I recommend reading those from Katherine Wu and BitMex Research.

Highlights as follows:

Around the Block:

Had enough of reading?

Check out this extremely high production-value docuseries from Paratii Lab on the story of the cryptosphere, featuring exclusive interviews from your favourite industry titans: Zooko Wilcox, Simon de la Rouviere, Alex van de Sande, and Alexey Akhunov.

Most Read From CC#57:

1. Bitcoin Cash Developer Reveals Catastrophic Bitcoin Bug

2. Nic Carter Riga Presentation

3. P2P Sports Betting Site

4. Kraken Response to NYAG Report

5. Marketplace for dApps


prices provided by coinmarketcap.com as of 18:20 ET


Bitcoin (BTC) continued to trend sideways this week.

Many market analysts expect this period of subdued volatility to be followed by a sharp and momentous price movement, although it remains unclear as to whether this will be upwards or downwards.

Elaine Ou, blockchain engineer at Global Financial Access, published an article examining the role of paranoia in BTC. While the piece does not yield any particularly novel insight, I was struck by the anecdote concerning the American population’s shaky relationship with the Federal Government.

Meanwhile, it seems that the seemingly unexploitable exploit discovered in the Bitcoin Core client last week has indeed been exploited in the Bitcoin-fork, Pigeoncoin, with the attacker printing themselves an estimated 235 million coins.


Ether (ETH) similarly remained range-bound this week, flitting between $230-$240. Meanwhile Ethereum continues to lead the market on the development front according to various metrics set by CryptoCodeWatch.

In honour of Elon Musk (not really) Constantinople, the next Ethereum hard fork, will hit the Ropsten testnet at block 4,200,000, expected to be on October 9th.

Ben Edgington provided a brief overview of the Ethereum 2.0 roadmap, while Eric Conner announced the launch of EthHub, a one-stop shop for essential Ethereum-related information.

Meanwhile, Vitalik has teamed up with two researchers from University College London to propose a method for leveraging fraud proofs in order to maximise light client security.

This is an exciting development and yet, in the context of Coda rolling out an in-browser full node, I think that there is plenty of further progress to be made.



The SEC worked overtime this week, filing charges against 1Broker for their role in soliciting US investors to buy and sell security-based swaps (without KYC/AML procedures, no less) and subpoenaing Michael Arrington for the second time due to his fund’s role as an investor in a U.S.-based company.

Further, some fascinating insight from the Co-Director of the SEC’s Enforcement Division, Stephanie Avakian, regarding their first year tackling ICOs.

“...The Enforcement Division has tried to be thoughtful about how to handle ICO registration cases that do not involve fraud...the Division has approached ICO and digital asset matters with a focus on bringing cases that deliver broad messages and have an impact beyond the individual cases.

In other words, each SEC enforcement action should be viewed as setting a precedent: even if not mentioned directly in charges, any organizations operating in a similar fashion to those named should be conscious that they will likely be punished in the months and years to come.


Raphael Auer, Principal Economist at the Bank for International Settlements, addresses the extent to which the crypto asset market reacts to global regulatory actions.

Key takeaways:

1. While cryptocurrencies are often thought to operate out of the reach of national regulation, in fact their valuations, transaction volumes and user bases react substantially to news about regulatory actions.

2. Because they rely on regulated financial institutions to operate and markets are (still) segmented across jurisdictions, cryptocurrencies are within the reach of national regulation.



Two announcements from Coinbase:

First, the release of a new asset listing process, which allows coin/token issuers to submit assets for review themselves. This departs from Coinbase’s historic process of reviewing coins based off of their proprietary digital asset framework.

The process takes the shape of a Google Form, with detailed questions regarding: the candidate asset's classification as a security; distribution, and team member vesting schedules.

Several analysts noted that this is just a means for Coinbase to measure listing demand across various assets: this seems unlikely as you must be either a lead developer/founder, major investor, or executive/employee of a project in order to participate in the application process. As a result, I expect applications to be limited to 1/project.

I have yet to comprehend why Coinbase have decided to take this approach to asset listings.

There do not exist more than 10 assets (that may be actually be too many) in the crypto markets that are worthy of being listed and one would assume/hope that Coinbase has a strong enough understanding of the ecosystem to be able to determine which assets fit among this top 10 by themselves.

It is difficult to view this new process as anything but a condescending attempt to extend a figurative olive branch to Coinbase’s customer base, an absurd effort to suggest that Coinbase cares and that its decision making process is 'decentralized'.

Surely Coinbase's resources could be better deployed elsewhere rather than investing time and effort to create this unnecessary illusion that their organization is anything but an organization?

Second, the release of Coinbase Bundle, which allows users to buy five crypto assets weighted by market capitalization with just one purchase. Circle, a competing investment platform, released a similar feature back in May.

As with the asset listing process, the Bundle launch is yet another misstep from America’s leading crypto asset exchange.

The theory behind a one-click-purchase feature is promising: indeed, I have long applauded Set for their efforts to build index-type baskets of digital assets.

The problem is the method of execution.

First, three of the five assets listed in the Coinbase Bundle – Bitcoin Cash, Litecoin, Ethereum Classic – are unlikely to be promising long term investments (this is not investment advice). Their presence on Coinbase will certainly act as a signal of legitimacy to unsuspecting retail investors, who will be unaware as to the various conflicts of interests that led to their listings in the first place. Compare this to the products offered by TokenSets, which provide exposure to specific verticals like DEXs and stable coins.

Second, the decision to weight the Bundle by market capitalization is nonsensical given a) the illiquidity of crypto asset markets b) the irrationality of existing crypto asset valuations.

In regards to point A, a telling example is that Bitcoin Cash has just over 3x market cap of Litecoin yet the 24hr volume of both assets is basically identical.

In regards to point B, market cap fails to take into account the fundamental health of chains – their security levels, their usage, their community size etc. That EOS and XRP both command $5bn and $22bn market capitalizations respectively illustrates the absurdity of taking network value as an accurate indicator of quality: the efficient market hypothesis clearly does not apply to the crypto asset markets.

Perhaps Coinbase should weigh by FRM instead?


Google’s blanket ban on crypto asset-related advertisements has come to an end.


Several ex-UBS bankers have raised CHF 100 million to build a FNMA regulated bank to bridge the gap between the crypto and traditional financial economies.

Use Cases


An internal document from Chinese exchange Huobi leaked this weekend chronicling rampant collusion, mutual voting, and pay-offs among the EOS block producer (BP) community.

The report reveals that Huobi and many other BPs mutually vote for each other to cement their BP position and Huobi openly votes for a several BP candidates in exchange for pay-offs.

Who could possibly have predicted that the dynamics of Delegated Proof of Stake would lead to cartel-like behaviour?

“Voters therefore become receptive to bribes from BPs, who can buy votes in return for some share of their annual rewards. BPs are encouraged to collude amongst each other so that they can fix the rate at which they will share rewards with voters. If they don’t collude then there will be a race to the bottom, whereby BP profitability will eventually be driven to the equilibrium cost of running the hardware required to be a BP.” Matteo Leibowitz, April 30th 2018

To make matters worse for EOS, CoinDesk reports that the second, third, fourth, and fifth hires by Block.one, the corporate parent that created EOS, left the organization this week to start a stealth project of their own, tentatively titled StrongBlock.

My favourite part of the announcement is the unironic description of Branden Espinoza and Thomas Cox as 'EOS governance specialists'.

Did someone say exit scam?

Blockchain Governance:

Presumably in reaction to the Huobi leak, Vlad Zamfir has published a primer on blockchain governance in which he addresses: coordination problems; the inextricable relationship between governance processes and politics, and the importance of establishing legitimate coordination mechanisms.

Zamfir outlines five possible, non-mutually exclusive forms of blockchain governance, concluding that the nascent state of the ecosystem permits early participants, including readers of this newsletter (!), to help shape its future.

Of course, it remains very unclear as to what extent individuals wish to get involved in governance processes versus the more comfortable, apathetic alternative of leaving decisions in the hands of a select committee.

As one insightful reader has noted in the comment section, it seems pretty clear that most blockchains are firmly governed by their core developers, whether publicly cognizant of the fact or not, and there is no obvious path as to how this power might eventually come to be diluted.

For all of Bitcoin’s desire to fit into the ‘Autonomous Blockchain’ category of governance, the process around last week’s catastrophic bug mitigation clearly illustrates that power continues to reside in the hands of a few.



The September numbers are in!

According to TokenData:

1. $180m raised in September, the lowest level in more than a year. This is down from $2.57bn in just 7 months ago.

2. No single ICO raised more than $50m.

3. 16 ICOs took place, down from 100+ in February.


An interesting development from ICONOMI, a high-profile decentralized asset management platform that raised via an ICO in August 2016.

COO Matej Tomazin announced in a blog post that the project has taken the decision to move towards a traditional legal structure, tokenizing its shares and issuing security tokens.

Existing ICONOMI token (ICN) holders will be given the right to convert their ICN into shares of the Liechtenstein holding company. If ICN holders do not wish to convert their tokens into shares, they will be able to sell them back to ICONOMI at an exchange rate set at 0.0019 ETH/ICN. Considering ICN currently trades at 0.00167 ETH/ICN, this presents a rather profitable arbitrage opportunity for anyone willing to put in the time and effort.

The utility functions of the ICN token will be discontinued on December 31, after which ICONOMI platform users will be able to pay for services using ETH or fiat currencies.

I admire the ICONOMI team’s decision to discontinue their token. Although the announcement comes under the guise of regulatory pressure, it seems likely that the acknowledgement of ICN as a friction-inducing mechanism played a part. I hope, and expect, more projects to pursue a similar path.


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