Crypto News

  • Binance becomes the first exchange to list Blockstack

    Binance listed Blockstack earlier today, with trading set to commence on Oct. 25. This marks the first time STX will be available on an exchange. Binance plans to offer Blockchain only on its flagship exchange, thereby barring U.S. investors from accessing the new listing. __Why it matters:__ - Price discovery: It will be interesting to see how the market values Blockstack tokens as it transitions private to public markets. Blockstack’s SEC-approved Reg A+ offering sold STX for $0.30 each, and an earlier private round priced tokens at $0.12. In recent months, public token listings have not been favorable to high-profile, investor-backed projects . - Blockstack, a U.S.-based company, selecting Binance, an exchange that geo-blocks U.S. investors, is another example of projects leaning towards international companies and markets to avoid U.S. regulatory scrutiny.
    Source: Binance — Published: 2019-10-23

  • Fire Before Growth: The Likely Fate of Ethereum Killers by Chris Burniske

    A slew of high-profile, venture-backed Ethereum competitors, labeled as “Ethereum Killers” by Chris Burniske, plans to launch in the near future. We eluded to this in one of our recent Pro Research reports on Incentivizing Testnet Participation. ! Burniske expects most EKs to face downward pressure from their private market valuations as they transition to public markets. The price action for Algorand’s $ALGO and Hedera Hashgraph’s $HBAR provide a snapshot into the coming reckoning new entrants may face. EKs raised “significant amounts of capital based on the premise” their technology is superior to Ethereum’s. Thus, investors readily invested at inflated valuations believing these more advanced platforms could exceed Ethereum’s multi-billion-dollar marketcap. Burniske argues that supplementary tools and forms of distribution outweigh better technology, and high-throughput networks create weak fee markets, which increases reliance on asset inflation and cripples long-term network security. On the flip side, Ethereum had time on its side to acquire a diverse set of stakeholders beyond a small group of profit-seeking investors, relieving downward price pressure. Burniske also said Proof-of-Work and associated miner costs help provide a price floor for ETH. Ethreum’s transition to Proof-of-Stake is a move into uncharted territory and its impact on price is less predictable.
    Source: Chris Burniske — Published: 2019-10-23

  • Compounding Utility Through Composability

    ! Smart contract platform utility is predicated on a robust open-source development environment and widely available shared infrastructure. Developer tools make it easier to create new applications by borrowing existing infrastructure and design elements, lowering the barriers to development and expanding the number of use cases that can be addressed via non-custodial, blockchain-based applications. Shared token standards drove most of the initial development on smart contract platforms. They made it “easier to create consistent experiences across multiple products and use cases,” and touted the concept of ”token economics” - the concept that exuberance for ICOs could be justified as these new platforms came with attached incentives. Of course, most applications failed to drive user adoption, some due to a poorly defined or unrealistic product strategy, others hampered by an inadequate surrounding development environment. Recent developments have introduced new standards and complementary protocols that facilitate the creation of non-custodial consumer applications. These primitives provide the necessary infrastructure, such as token liquidity or price stability, to create more intuitive crypto-enabled products. These foundational elements act as building blocks for the next generation of applications and mark a platform’s level of “composability.” Composability increases the rate of software innovation “because developers can use each others’ code like lego blocks” and tap into existing user bases. The rapid creation of new protocols and applications also has a compounding effect on a network’s utility. With any luck, these experiments will ultimately attract new users, who use new applications and drive a higher total level of volume through underlying services and the network as a whole. ### __Breaking down the composability stack__ To help visualize the process, composable tech stacks can be split into four layers, with each layer providing distinct value up or down the stack. ! The base represents the blockchain network, such as Ethereum or EOS. In blockchain ecosystems, this is the security and settlement engine, as well as the shared database that powers the remaining layers further up the stack. Middleware protocols such as MakerDAO and Compound connect the blockchain layer with the consumer applications built above them while providing essential services that facilitate application development . Applications and aggregators both serve as interfaces to the base and middleware layers. The difference we found is that applications select and assemble specific elements of the underlying layers to build new user-facing products. Examples include PoolTogether, a no-loss lottery that leverages MarkerDAO, Compound, and Aragon. On the other hand, aggregators act as portals to multiple middleware protocols, and in some cases applications, to offer a more friendly user experience when transferring assets between these services. These aggregators aren’t necessarily locked into developing upon their current tech stacks, but switching costs are still relatively high. Some aggregators may ultimately choose to create their own lower-level infrastructure if necessary , but generally speaking there are significant security benefits to maintaining low-level blockchains with composability, as they present the greatest chance at creating developer lock-in on a given protocol. The Ethereum ecosystem is the most prominent example of composability in action across live smart contract platforms, especially within the decentralized finance sector. Protocols such as MakerDAO and Compound can serve as consumer applications but are ideally designed to add functionality to applications higher up the stack. Application developers can select certain elements from multiple protocols, like MakerDAO’s price stable DAI or Compound’s lender-borrower matching engine, and assemble them “in various combinations to satisfy specific user requirements.” Aggregators such as InstaDApp enable users to migrate their MakerDAO or Compound deposits between the two lending protocols in a single step, rather than the complex, multi-step process required without the InstaDApp portal. A number of DeFi applications have since integrated the basic utilities provided by MakerDAO and Compound. Mapping these integrations shows the extent of support smart contract primitives offer various applications and aggregators. ! The Maker and Compound partner maps illustrate how the convenience of composability can turn competitors into partners. Dharma initially launched as a competing lending platform to Compound but later pivoted to building on top of Compound to share Comound’s liquidity pool and offer a more reliable end product. ! The DeFi tech stack has the potential to offer a much wider range of highly integrated products and services that focus on the lending, exchange, and management of cryptoassets. For all of the performance drawbacks to building applications on a decentralized technology stack, enhancements in composability are the differentiator that make smart contract development interesting. ! As we zoom out, you can get a more complete picture of the interconnectedness of the DeFi ecosystem by looking at the flows between popular protocols. ### __The evolution of composability__ Ethereum’s DeFi ecosystem has been evolving rapidly since the public launch of 0x in Aug. 2017, however, the majority of new products and services were released within the last calendar year. Two-thirds of the projects we evaluated were launched after Q2’18. Even the applications and aggregators with earlier release dates did not integrate middleware services until more recently. ! DeFi middleware projects needed time to launch, debug, and incorporate essential features before they could be considered suitable building blocks. This gradual development phase reached a tipping point around the start of 2019 when a flood of new consumer applications and interfaces composed of middleware primitives launched onto the market. These new applications quickly amassed a critical user base of early adopters, and the total value of ether locked in DeFi applications has nearly doubled year-to-date as a result. A similar , evolution can be seen among Ethereum-based projects in the gaming sector. ! The gaming and marketplace sectors are less robust at the middleware layer compared to DeFi, which explains the limited number of live Ethereum-based games that leverage these protocols. However, it may only be a matter of time before the pattern plays out, and gaming middleware projects mature to the point that game developers see advantages to using components of these protocols in their applications. One notable exception is CryptoKitties, which infamously brought the Ethereum to a near halt shortly after it launched in late 2017. The game was released prior to the existence of reliable gaming middleware. and its smart contracts plug directly into the Ethereum blockchain, while its data and non-fungible tokens have served as the genesis for other games, such as Kotowars. It may be more accurate to characterize CryptoKitties as *extensible* rather than *composable* since third-party developers derive value from the tokens and data versus CryptoKitties smart contacts themselves. In this context, contract extensibility refers to “the quality of being designed to allow the addition of new capabilities or functionality.” ### __Long live the king__ Ethereum features an abundance of developer tooling and composable infrastructure that makes it appealing for developers. But Ethereum’s ongoing transition to Ethereum 2.0 and its proposed sharding solution for scalability has led to questions around whether this new environment can preserve protocol composability. The team at Aragon, a popular DAO governance project, reported the planned Istanbul hard fork was expected to break nearly 680 of its smart contracts, which pushed the project to explore partially migrating from Ethereum to its own chain using the Cosmos SDK. The uncertainty around Ethereum 2.0 creates an opportunity for competing smart contract platforms to steal developer mindshare. In fact, the topic caused such concern that it prompted a mid-Devcon research post from Ethereum founder Vitalik Buterin himself. What remains to be seen is whether these alternative networks will offer a comparable development environment to Ethereum in order to successfully acquire new developers. ### __Heir apparent?__ At the moment, EOS has the most advanced composable ecosystem among Ethereum competitors, but our analysis shows its available infrastructure is limited. ! The EOS application stack is still in its early stages, hence the lack of more sophisticated consumer products and underlying services. Similar to Ethereum’s gradual development, most efforts have been concentrated in the middleware layer to lay the foundation for future applications as the ecosystem progresses. Among recently launched EOS middleware projects are the Equilibrium Framework and Pizza, which are MakerDAO clones for the EOS network. Each protocol issues its own dollar-pegged stablecoin in exchange for EOS tokens as collateral. It makes sense: MakerDAO served as one of the primary catalysts for DeFi application proliferation due to high user demand for a stable, yet decentralized cryptoasset. The hope is that a stable and censor-resistant DAI equivalent could help spark a similar growth trajectory for EOS applications as well. Another compelling project is the lending protocol EOSREX, which allows developers and users to rent the computing resources required to operate on the EOS blockchain. The protocol enables users to commit funds to a lending pool that receives interest from users who borrow network computing resources. As demonstrated by Mohamed Fouda, EOSREX is in high demand among EOS lenders but has yet to achieve meaningful attention from borrowers. It’s too early to tell whether EOS can match Ethereum’s significant lead in composability. The possibility remains distant due to the immaturity of current EOS developer tools, and the emergence of newer protocols with larger spring-loaded developer communities such as Polkadot. Synthetix founder Kain Warwick stated his project abandoned its EOS related efforts because the available tooling failed to deliver a level of functionality even remotely comparable to Ethereum. Still, EOS’s burgeoning middleware layer indicates ecosystem development is progressing in the right direction. A more sophisticated series of composable applications could be on the horizon should deep-pocketed affiliates such as EOS creator Block.One start to more aggressively fund new infrastructure projects. ### __Coming for the throne__ Cosmos takes a different approach by leveraging the infrastructure of multiple networks. Using the Inter-Blockchain Communication protocol projects can interact with a multitude of networks, creating a hub-and-spoke model that leverages the design elements of other chains. Mohamed Fouda imagines a future where a central hub allows users to leverage Ethereum based MakerDAO to accept Bitcoin collateral for creating DAI stablecoins. In his piece *Dare To DeFi Ethereum* Fouda shows how Zcash, Bitcoin, Monero, and other cryptocurrencies can be leveraged by MakerDAO’s system. On the flip side, Polkadot is building its own network focused on composability. Using Parit's Substrate developers can create “parachains” within the network. These chains operate to facilitate collaboration between blockchains on the network. Unlike Cosmos, Polkadot will initially focus on chains within its own network and does not have a native solution for integrating other blockchains. ### __Existing challenges and future opportunities__ Combining different protocols and applications can compound smart contract utility. They also compound associated risk. Composability enables developers to turn ideas into functioning prototypes in a short period of time , but a single critical smart contract bug or point-of-failure lower in the tech stack could cause a system-wide collapse. The reliance of DeFi protocols on centralized price oracles, for example, has led some to label it a “house of cards,” and there have already been some high-profile examples of catastrophic flaws in oracle services. In response, some teams have turned to decentralized oracle solutions such as Chainlink or Compound’s Open Oracle System. Protocols have also adopted bug bounty programs that reward developers for discovering and submitting vulnerabilities. MakerDAO was the beneficiary of a recent submission uncovering a bug in its Multi-Collateral DAI contract, which would likely have proven critical upon its launch next month. Smart contract security presents major challenges, but it need not be an existential issue in practice. Scalar Capital’s Linda Xie believes as the Ethereum ecosystem matures, “centralized insurance companies will offer products to insure smart contracts” and composable systems against potential exploits. Centralized options could even be supplanted by community-owned alternatives like Nexus Mutual, which uses member contributions to offer protection against financial loss caused by smart contract failures. Better standards and security measures will eventually emerge to help preserve efforts in composability as the stakes get progressively higher. ### __Who wins?__ Despite the current risks, composable tech stacks foster innovation and attract developer mindshare. Ethereum’s success in decentralized finance is a direct result of the ability to share design elements and liquidity between layers, enabling developers to experiment with novel applications at a minimum expense. Enhanced composability increases the utility of a crypto network and leads to a value that is greater than the sum of each individual component. Competing smart contract platforms should take note and dedicate a portion of their resources to fund the development of composable middleware infrastructure. A suitable development environment will serve as a gravitational pull on developers and projects should the transition to Ethereum 2.0 pose a serious threat to its composability.
    Source: Wilson Withiam — Published: 2019-10-23

  • Investment returns to date for ICOs held in 2017 vs. 2018

    The cryptocurrency market of 2017 was characterized by high-flying prices and irrational exuberance for an asset class still in its infancy. As prices cratered back to reality, investor interest in initial coin offerings began to fade, impacting the price performance of tokens sold in ICOs in 2018. Our analysis shows that a significant number of tokens sold in early-to-mid 2017 provided generous returns for investors to date despite the market downturn in 2018. One notable project is Chainlink , whose meteoric returns were driven by a series of announcements, such as its partnership with Google Cloud, earlier this year. ! A look at the returns of tokens sold in 2018 illustrates the juxtaposition between market sentiment in 2017 versus 2018. The lone exception is Theta Token , which has maintained a higher price than its token sale price tag since its mainnet launched on March 15, 2019. ! For more insights like this, create your own custom screener with Messari Pro. __Click here to start your free seven day trial__.
    Source: Messari — Published: 2019-10-22

  • UMA looks to disrupt crypto derivatives with its decentralized alternative BitDEX

    BitMEX is one of the largest crytpo exchanges in the world, transacting over a billion dollars per day. This is largely a result of the popularity of its perpetual swap product that enables traders to go long or short up with up to 100x leverage. However, the exchange has come under scrutiny for both geo-blocking and trading against its clients by triggering early liquidations. Universal Market Access protocol released a white paper for a new decentralized alternative that looks to alleviate these problems. The protocol works by creating a single smart contract for each market. Counterparties must be matched off-chain and must post 10% of the position they would like to take, creating up to a 10x leveraged position. As the price fluctuates, one side will be required to post additional collateral to prevent their position from being liquidated. UMA does not intend to actually create BitDEX but hopes the release of this paper will prompt another team to do so. The efficacy of such a decentralized exchange remains in question given the scaling limitations on Ethereum , however, the paper presents a compelling case for a system that removes the need for a centralized party to perform functions such hosting order books, holding custody of assets and settling trades.
    Source: UMAprotocol — Published: 2019-10-22

  • Structural US Bankruptcy

    Written by Ryan Selkis __Structural US Bankruptcy__ Crypto prices have recovered from their nadir twelve months ago, but we’re still looking at something we last saw in 2015: structural bankruptcy. I mean that both literally and figuratively. __Circle's is the Least Bad Outcome?__ In the literal sense, Circle seems to be seriously low on money, and looking for salvage value as it spins out its $400 million acquisition , winds down its formerly life-sustaining OTC trading operations , and admits defeat in the US markets with respect to its bona fide crypto products. If that sounds like a whopper of a fall from grace, it is. But it’s hard to look at the current state of regulatory affairs and think Circle did anything other than crash the plane Captain Phillips style, with a bit of embarrassment to the airline, but passengers ultimately...not dead? They’ve got the SeedInvest business, an equity-but-probably-soon-to-be-securities-tokens-and-other-crypto-ey-things crowdfunding platform. Plus they’ve got the $USDC business with currently half a billion under management - check out our Stablecoin Index, which looks like the most credible regulated price stable cryptocurrency that will be on the market any time soon. I’m also cautiously optimistic for the API infrastructure they build around that. Looking elsewhere around the non-Coinbase, non-Kraken American exchanges is bleaker. Like opening montage from *Saving Private Ryan* bleak. Circle is somehow the *best* positioned of the other second-tier US exchange operators post-Polo spinoff. Bittrex has struggled ever since it’s public spat with the NYDFS and chaotic exit from the New York markets. Their volumes are about even with Polo’s, but without the side hustles to bail them out. Same goes for Paxos’ itBit, whose volumes have shrunk to $4mm, about 25% of Polo & Bittrex’s. They have that Paxos Gold thing that just launched, but it seems small. Gemini is still way down from a volumes standpoint as well, but we all know the Winklevoss twins will live forever - if only to wait out the SEC’s ETF approval process - so they don’t count. __Insult to injury__ Unlike 2015, this structural US crypto recession isn’t due to apathy so much as it is to bloodletting that is primarily at the hands the US regulators and people still slowly coming to their senses about the “value” of most ICOs. ** It’s not entirely the exchange operators’ faults. Circle bought Polo with the pitch it would bring the company into the regulatory light of compliance, only to slowly decay in the face of years-long delays from the SEC. Bittrex was a great platform even if it ultimately got leapfrogged by Binance. The trading and regulatory markets moved against them both. But __to be fair__, there’s a bit of a sense that maybe some of these guys knew better? Not sure if it’s the low water mark or the first of several sales, but the Polo exit throws into sharp contrast just how mean this extended token hangover has been. I don’t know, it seems as if it were somewhat expected after the pathological normalization of pump and dump token deals that even the adults got too drunk off of in 2017. I’m not saying the SEC is functional, or that navigating the byzantine US environment is anything short of maddening, but when you peddle shit wholesale, and you’re an adult, you should know there’s a risk you’ll get messy and end up with weird results. Nothing could prepare you for the weirdness we’ve seen though. The insults keep coming with the injuries. And they cut DEEP. Watching Circle bleed out publicly after trying to bring better compliance to Polo and eventually sell to Justin Sun certainly seems like the adult equivalent of puking in an alley whilst trying to locate your pants after a bad bender. They certainly went out of their way to __not__ mention his involvement in the announcement. And if you told me that Brad Garlinghouse would own MoneyGram and sell a billion dollars in XRP and fund a bunch of startups with their dirty money with Ben Lawsky on his board , while the former global #1 alt-exchange Bittrex slowly faded to black from the U.S. I mean, AGHHH. The indignity. We do have to work harder keeping straight stoic faces, I suppose. When we talk about banksters, and the men at the nanny state bailing out Wall Street, and us saving the other six billion, we’ve got to grin that forced 2015 smile. Because we’re kinda sorta getting bailed out by the most ethically bankrupt of a rotten barrel of apples. “And no one went to jail.” Selling out to Justin Sun sure feels close enough, though. ``` Subscribe to our newsletter to receive articles like this in your inbox. ```
    Source: — Published: 2019-10-22

  • A proposed bill aims to classify stablecoins as securities

    Rep. Sylvia Garcia introduced a bill to the House Financial Services Committee stating stablecoins lack regulatory guidance and should be classified as securities. According to CoinDesk, the proposed legislation could be a response to Facebook’s Libra, a project certain U.S. regulators seem keen on shutting down before it launches. The bill still needs to pass through multiple voting rounds before it can become a law, but the growing disapproval of Libra among regulators may not bode well for other stablecoin issuers.
    Source: CoinDesk — Published: 2019-10-22

  • Tezos recent Babylon upgrade puts on-chain governance on the front stage

    Tezos’ on-chain governance system voted in favor of the Babylon 2.0.1 proposal, which was automatically activated when the voting period concluded on Oct. 18, 2019. The new upgrade introduced a more robust version of the blockchain’s consensus algorithm , simplified smart contract development, and refined the delegation process. The Babylon vote also marked a new all-time high in participation in votes submitted . __Why it matters:__ - Ethereum is drawing developer attention away from other smart contract platforms, including Tezos , because of its robust development environment. Babylon introduces a more friendly smart contract language that could sway developer mindshare towards Tezos. - One criticism of on-chain governance is that low-voter turnout could enable a minority of voters to dictate the future direction of the network. The Babylon vote saw participation from nearly 84% of eligible stakeholders, suggesting Tezos’ approach is working as intended and even exceeding expectations.
    Source: Tezos Agora — Published: 2019-10-22

  • Scaling DeFi: Decentralized exchange Uniswap is testing Optimistic Rollout

    Earlier this month, Uniswap launched a new, high-throughput version of its decentralized exchange on the Ropsten testnet. The testnet demo, called Unipig, is running on Optimistic Rollup, a layer 2 scaling solution that supports Solidity smart contracts. Uniswap claims its demo is capable of processing ~250 gas-free transactions per second , a steep improvement over the 12-15 tps supported by the Ethereum mainnet. __Why it matters:__ - Ethereum’s current inability to scale and non-trivial transaction fees are not conducive for most use cases. A scalable, Solidity-compatible environment like Optimistic Rollup creates the opportunity for projects to build a wide range of new applications while still leveraging Ethereum’s robust developer toolset. - Ethereum 2.0 is still in development and may not be production-ready by its proposed launch date. If network utility grows in the near term, projects will need to explore alternative scaling solutions, and the preferred choice would be compatible with existing smart contracts to minimize switching costs. - The caveat to this is second layer applications may find it more difficult to communicate between chains due to a lack of standards for executing cross-network transactions.
    Source: Uniswap Exchnage — Published: 2019-10-21

  • How Flexa plans to increase merchant adoption of cryptocurrency

    *Messari hosted a public AMA with Trevor Filter, co-Founder of Flexa in the __Messari community group__. Below is a transcript of the conversation.* *You can find all of Messari's historical AMA's here* __Messari: I'd like to welcome @tylerspalding and @trevf from Flexa! To get started could you guys give a quick intro on Flexa and yourselves?__ __Trevor:__ Hi everyone, excited to be here. I’m Trevor and lead our product and design teams here at Flexa. My background is in payments and user interface design, including for large companies like American Express, Bloomberg and several payments-related startups since. Flexa was created to make payments faster and more efficient for merchants all over the world. We believe that the current payment infrastructure is too expensive and fraud-prone, so we’re building new infrastructure from the ground up using digital currencies __Messari: Thanks! We can jump right into some of the questions about your current roadmap and where things stand now. One question that came up a few times was around partnerships. You announced 100 retailers by the end of the year at Consensus. What is the current status of this?__ __Trevor:__ We’re still on track with our merchant partnership launches and really proud of who we’ve released to date. We also want to make sure that crypto doesn’t feel like a “passing fad” to these partners, and a big part of that is making sure that we’re able to show significant demand for crypto-based payments to these retailers. As such, we’re currently very focused on enabling the Flexa Wallet SDK in apps other than those developed by Flexa , and we anticipate that that progress will unlock a lot of progress on the merchant side into the holidays and early next year __Messari: How do you pitch Flexa to partners? What do you see as the biggest selling point and I guess on the flip side what have you seen as the biggest blocker when talking to merchants?__ __Trevor:__ As a network, we have two major types of “partners” — both merchants and wallets. We’ve found that merchants are drawn to the extremely low cost and fraud-resistant nature of our payments , while wallets are focused on providing spending utility to their users and the earning potential of staking Flexacoin. It’s really about bringing buyers and sellers closer together and enabling them to each pay with and receive payment in the currencies of their choice. This often involves eliminating as many middlemen as possible While there isn’t much resistance to enabling this kind of spending utility on the wallet side, we do run into friction with merchants, and we’ve seen it all. Everything from “what is cryptocurrency?” to concerns about who uses it. Therefore, we spend a lot of our time and energy on educating these partners about the reality of our industry . __Messari: Why has some retailers disappeared from the app? Have any of them backed out?__ __What was the story behind Wholefoods being removed from SPEDN? Why was it not communicated? Will they come back? Did you learn some important lesson__ __Trevor:__ Great question. Frankly, we saw more demand than expected at launch and ran into a variety of technical, development, hardware, and process issues across a few partners. As a result, we had to take some merchants offline temporarily shortly after we launched—fortunately, we’ve been able to bring most of them back by now __Messari: Why do you continue to work like a stealth project even though you have some of the biggest names, brands and experienced team that you work with?__ __Flexa is still not well known if measuring in num trading wallets, google results, social followers etc. Will there be a marketing push to change this?__ __Trevor:__ I think it’s a pretty simple answer, actually… Above all, we’re focused on delivering real value and real products . This isn’t to say that we aren’t public about what we’re developing—just two weeks ago, for example, we announced a major initiative with McKinsey and the Mall of America Also, to be clear, Flexa is a B2B payments network . With more wallets and tokens on the network, it will make much more sense to increase our consumer marketing focus in order to encourage spending on the network, across all of our partners. __Messari: How do you pick the coins you list?__ __Trevor:__ Well, the dream of Flexa is to enable spending at any app using any coin in any store, but obviously we have to start somewhere! We look for a combination of: - Spendability - Liquidity - Community Today, we’re specifically looking at coins that are more spendable, such as stablecoins and loyalty/reward tokens. While Flexa can be interesting as an off-ramp for speculative coins, our real focus is on coins that people are looking to spend every day. So, for example, what projects think about how coins end up in someone’s hands? Are there coins that consumers would feel comfortable receiving in lieu of their paycheck? Are there coins that they want to earn? etc. There are great projects out there that have compelling systems to incentivize spending—three that come to mind are Dai, Eco, and Terra. __Messari: Are you currently working on an online payment option?__ __Trevor:__ Yes __Messari: and related to that - Will we see fiat onramp so consumers that only own fiat can use the fast and efficient flexa network? Or will you keep catering only to crypto consumers?__ __Trevor:__ I think this highlights a really important reason we think Flexa is better than the legacy payment infrastructure. Almost every transaction that takes place today is digital in some form or another, but the problem is that the accounts we use to pay were designed in a pre-internet era . So, the majority of payments today are trying to jam an analog payment instrument into the digital context. Crypto fixes that—for the first time, we can send digital transaction signatures securely through a digital rail. So, will Flexa offer a fiat on-ramp? No. But we’re definitely not preventing wallets from offering a fiat on-ramp and then enabling secure and fraud-free spending through our rails. The combination of fiat on-ramp and merchant off-ramp is where we think digital assets start to go mainstream. We’re focused on solving the latter side of that particular chicken-and-egg problem __Messari: That makes a lot of sense.__ __Switching gears lets get into some questions around staking. First up, we had some questions around the roadmap__ __Why is the staking delayed past the beginning of October that was previously communicated in Flexa Announcements?__ __Trevor:__ We’re on track with the staking roadmap. Our dApp is live on testnet and we’ve been getting great feedback from our testers over the past couple of weeks; we’ve completed a security assessment/audit for our contracts with the fine folks at Trail of Bits; and our mainnet launch is coming Soon As a quick sidenote, anyone who’s interested in helping us test the dApp and contracts can get some text FXC and join the staking testnet . We’ll be pushing some major UI updates live within the next few days, and our testers have been instrumental in helping us smooth out the rough edges of the dApp. __Messari: What yearly return could we expect from staking?__ __Trevor__: The network reward is obviously based on a variety of factors, but… assuming that one percent of each transaction goes to the stake pool, it will really depend on the amount of spending volume that flows through the network. We’ve run a bunch of models, and the results can get really interesting even with a small amount of FXC staked and a small set of wallets on Flexa. Honestly, we’ll have to see what happens! __Messari: Alright, I want to finish up with a couple of questions related to staking in that they are about token supply.__ __Will the team commit to staking their released vested Flexa tokens?__ __Why did the circulating supply increase with 320M on September 1 and October 1 and with 3-4B on August 1__ __Trevor__: First of all, the Flexa team is absolutely excited to stake FXC and use the network. As for the supply increases, all of the monthly increases are pretty thoroughly described in our “Introducing Flexacoin” post from April __Messari: Great! Everyone be sure to read the post.__ __Thank you @trevf for joining us and before we sign off tell everyone where they can find out more about Flexa.__ __Trevor:__ Yes—aside from our Messari registry profile of course, the best place to learn about Flexa is our website or our blog . We spend a lot of time and effort on our blog posts, and that’s probably the best place to start in terms of learning how we think about payments and why we’re building Flexa. Separately, we have a really active Telegram community over at @flexacoin, and we post official announcements in @flexa and on Twitter
    Source: — Published: 2019-10-21

  • Bitmain launches ‘world’s largest’ bitcoin mining facility in Texas

    Bitmain has launched a mining facility in Rockdale, Texas currently developed to a 25MW capacity, with 50MW remaining under construction. The 33,000-acre site, completed in tandem with Rockdale Municipal Development District and DMG Blockchain Solutions, can expand to 300MW in the future.
    Source: Coin Telegraph — Published: 2019-10-21

  • Binance.com to add fiat pairs; starting with Russian rubles ‘in about two weeks’

    Binance announced they will be allowing customers to purchase crypto directly with their fiat currency, starting with Russian rubles. This comes a week after the firm quietly added euro and British pound pairs to its application programming interface .
    Source: The Block — Published: 2019-10-21

  • SEC’s court hearing on Telegram token delayed till next year

    According to a recent SEC filing Telegram will have to wait until 2020 for a hearing that could decide the future of its GRAM token distribution. Telegram had informed investors the distribution could be delayed until April 2020 after the SEC called the sale an "unlwaful" offering of securities and obtained an emergency restraining order to prevent tokens from going to U.S. investors.
    Source: CoinDesk — Published: 2019-10-21

  • Crypto derivatives exchanges: liquidation pioneers

    Crypto exchanges have introduced a new derivative model that operates 24/7, practically removes minimum contract size and eliminates the need for brokers. For this system to work, there needs to be automatic liquidations, which each exchange tackles in a different manner. The varying methods come with their own costs and benefits for traders on the platforms that effect traders profits and liquidations. !
    Source: Deribit — Published: 2019-10-19

  • Relearning to DAO craft

    The original DAO garnered a lot of support because it heavily aligned with the early Ethereum community. However, this new wave of DAOs are taking a different approach. MolochDAO for example, looked to build a Minimum Viable DAO in order to purposefully limit the features and scope in order to focus on funding ETH 2.0 research. Not too long after, the simple code was forked to form MetaCartel to take a wider stance and fund application layer protocols. This was a vital development as it proved the model of DAO iteration, allowing new models to be quickly spun up, starting us down a path of rapid innovation in the distributed governance space.
    Source: AxiaLabs — Published: 2019-10-18

  • Poloniex to Spin Out of Circle

    After acquiring Poloniex early last year, Circle is now spinning the company out into Polo Digital Assets. The first changes implemented will be reducing trading fees to zero for the remainder of 2019 and excluding U.S. customers from participating. Circle also plans on spending $100 million on the exchange to build out its capabilities and hire aggressively to reach over 100 full-time employees.
    Source: Circle Blog — Published: 2019-10-18

  • Babylon upgrade activates on Tezos

    Tezos has upgraded via it's third on-chain governance proposal, originally submitted by Cryptium Labs and the research and development group Nomadic Labs after receiving 85% approval. This upgrade, dubbed Babylon, affects the protocols consensus algorithm, smart contract functionality, and governance mechanism.
    Source: The Block — Published: 2019-10-18

  • The most valuable currency is trust

    Written by Jeffrey Wernick __Part I__ I have no plans to either sell or spend my bitcoin. My intention is to accumulate more. When bitcoin first emerged. It was in the depths of a global financial and economic crisis where payment systems, national currencies and financial institutions were all extremely fragile. The interbank market, where banks borrow and lend to each other became dysfunctional. Banks did not trust each other’s balance sheet. Investors did not trust the banks balance sheets. Global trade contracted. Economies contracted. Unemployment grew. Hayek has asserted that busts are a consequence of bubbles. An assertion I agree with. And I believe it is a consequence of how Central Bank interventions pervert the time preference for money. In a free market, without any manipulation of monetary policy nor change in fiscal policy. Where both are constant and predictable. The interest rate adjusts to reflect our preferences for consumption today and saving to consume tomorrow or at some later date. ! Previously in the USA, as an example, before the Fed was created. The government did not spend much as a percentage of GDP. And the private saving rate was high. So people consumed what they valued for today. And they saved so they could spend more tomorrow. To create more wealth for themselves. They bought real estate. They bought stocks. They bought bonds. And they saved by making deposits in banks. For most, they accumulated wealth through the power of compound interest. Albert Einstein once described compound interest as “the eighth wonder of the world”. “He who understands it, earns it; he who doesn’t, pays it”. For the most part, real interest rates were positive. And there was no inflation. During the 19th Century, in the USA, prices actually deflated except during wartime. It is a myth that deflation is bad. Deflation should be the norm. If a society is productive and productivity is increasing through time. And we innovate. That means we keep making more for less. We allocate resources more efficiently. Or we produce better things. Deflation is natural. We have been tainted by the deflation which occurred during the Depression of the 1930s and lost a broader, deeper and more historical perspective. An economist forgotten today, Jean Baptist’s Say wrote: > It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus the mere circumstance of creation of one product immediately opens a vent for other products. And further stated that: > Money performs but a momentary function in this double exchange; and when the transaction is finally closed, it will always be found, that one kind of commodity has been exchanged for another. The interest rate, without manipulation of either the money supply or the interest rate itself, equilibrated saving and investment. Since 1971, we abandoned any sense of market discipline and substituted Central Bank discretion. And fiscal policy, no longer encumbered by honest money but dishonest discretionary money, became significantly more interventionist, activist and and expanded is presence with respect to how economic activity is organized. Governments borrowed more. Companies borrowed more. People borrowed more. John Exter, a NY Fed Vice President, wrote, as a consequence of our abandonment of gold and Bretton Woods in 1971: > Today no money in the world fully performs all three services. National currencies are being used as means-of-payment and standard-of-value money, but none in this inflationary age is an assured store-of-value money. > In fact, a foremost concern to voters and politicians everywhere is that so many currencies are so rapidly losing their value in terms of commodities and services. Commodities like gold and silver, which are being used as store-of-value money, are not being used as either means-of-payment or standard-of-value money. > Thus the world we have so long known, in which most currencies were redeemable at a fixed price in a store-of-value money like gold, is in disarray. People are confused and wondering what money they can trust. > So today all currencies in the world are saying, 'I do not owe anybody anything.' Each one says, in effect, 'IOU nothing' in the way of any commodity that is a store-of-value money. > Governments will always try to shore up IOU-nothing money with laws making it legal tender, or even laws prohibiting the holding of store-of-value money like gold, but such laws cannot for very long add value to something that is losing value in the marketplace. Gresham's Law, which is really a special form of the law of supply and demand, will override man-made laws. In fact, there would be no Gresham's Law if governments did not persistently try by man-made laws to over-value their IOU-nothing money in terms of store-of-value money. > So it is a 'Who owes you nothing?', and 'When?', and it does not even pay a market rate of interest, only l½%. If central banks ever monetize them in significant amounts, they will have moved from days when they issued their IOUs principally to buy enduring store-of-value money like gold, to these days when they issue their IOU-nothings principally to buy government IOU-nothings, to days when they would issue their IOU-nothings to buy who-owes-you-nothings. > In days to come, international monetary reformers will have to consider whether these new kinds of money will produce a stable monetary world. In the world's marketplaces will they hold their value against goods and services in general?” ! I quote John Exter at length. An article he published in 1972 to point out how prescient he was. You would think that someone who so accurately predicted the consequence of our abandonment of gold would be more prominent to those studying economics and finance. Unfortunately the academic curriculums have practically erased any history that questions the Central Bank monopoly control over money. Fiat paper money. What replaced Bretton Woods? The petrodollar and dollar hegemony. We substituted a system that required the USA to practice both monetary and fiscal discipline. So everyone would be indifferent to whether they had gold or dollars or where gold was as good as dollars and dollars as good as gold. The global economy was predicated upon that assumption. That the dollar would be trusted if its purchasing power with respect to gold was maintained and preserved. The USA breached that trust. And replaced it with dollar hegemony. The Petrodollar. The Petrodollar meant that all oil produced would be invoices exclusively in dollars. So all oil-importing nations would need to hold dollars to purchase oil. Wherever oil traveled, the US dollar was attached. John Connally, then Treasury Secretary under Nixon as we exited and abandoned Bretton Woods famously told the Europeans and Japanese that “The dollar is our currency, but it’s your problem”. Then fiscal policy got expansionary in the USA. Government debt grew. Money supply grew. Inflation emerged. And the world implicitly acknowledged what Exter said, fiat paper money is equivalent to IOU Nothings. The gold price went from the Bretton Woods fix of $35 in 1971 to $600 in 1980. Oil rose, during the same period of time, from about $4/barrel to $40/barrel. Oil rose less as a result of OPEC but more of a result to the USA debasement of the dollar versus gold due to inflationary policies now that the USA was no longer encumbered by a fix to gold. And as Connally correctly bragged, it became everyone else’s problem. ! The Japanese referred to him as “Typhoon” Connally. He was Governor of Texas when JFK was assassinated in Texas. He was Treasury Secretary when Nixon assassinated Bretton Woods. Inflation had many bad effects on the economy. I think the best way to illustrate that impact is a measurement called Tobin’s Q. It is the ratio of a physical asset’s market value and it’s replacement value. At the establishment of Bretton Woods, Tobin’s Q was approximately 0.40 and rose to about 1 during the 1960s. Once both monetary and fiscal policies threatened the credibility of the gold dollar fix, Tobin’s Q started going down. And by 1980, is was under 0.40. A huge drop in a short period of time. There are many flaws in the use of Tobin’s Q as a proxy for firm value. But the general point is still valid, the 1970s, when the world lost faith in the dollar. As Americans did as well. There was a significant decline in the marginal productivity of capital and a reduced incentive to invest. The 1970s also witnessed an aggressive use of Keynesian policies. Maybe, in some respects, a misapplication. As a side note, when many say the USA interferes in the Mideast because it is about oil. I believe it is not about oil but about the Petrodollar and the preservation of dollar hegemony. The decade of the 1980s ushered in a paradigm shift away from Keynesian and embracing economic freedom. The Reagan-Thatcher partnership. Reagan, advised by Milton Friedman. Thatcher, advised by Hayek. In less than 2 years, gold went from over $650 to under $350. Oil went during a similar period of time from about $40/barrel to about $10/barrel. And Tobin’s Q rose from approximately 0.30 to 1.00. The severe recession that occurred during the beginning of the Reagan Administration in the USA was deep but short. There was no Keynesian remedy applied but a return to the wisdom prevailing before Keynes and articulated by Jean Baptiste Say. Supply side economics. Not demand side economics. Anchored by a strong dollar. Real economic growth in 1983, 1984 and 1985 were, respectively 7.90%, 5.58% and 4.18%. To put that in perspective, since the end of the Reagan Administration the USA has never had annual growth of 5.00%. During the 8 years of the Reagan Administration, annual economic growth exceeded 4% four times. Since then, now 31 years later, real economic growth has exceeded 4% only seven times, five of which occurred during the Clinton Administration during his second term when gold prices went from about $400 to $250. Again, low tax rates, fiscal discipline, the government budget went from deficit to surplus and anchored by a strong dollar. Clinton acknowledged that the era of big government was over and scholars have argued that Clinton extended the economic policies of Reagan. With low inflation and a government surplus, Greenspan became concerned about the consequences of a dearth of risk-free assets and deflation. Greenspan added significant liquidity into the financial system. In 2000, gold averaged $280. In 2012, gold averaged $1669. ! During this period of time, the global economy has created a huge increase in debt on all levels; governments, corporations, consumers. Wage stagnation. Poor productivity growth. We are borrowing significantly more to stay even or progress incrementally. We have experienced government debt defaults, bank bailouts, bank bail-ins. Central Banks have expanded their balance sheets in a way without precedent. Not only in the size of its balance sheet, but the capital market instruments being bought. We are significantly more leveraged today than we were in 2007. ! Government institutions have failed us. Financial institutions have failed us. The enormous fines they have paid as a result of the various ways they have cheated. Rating agencies have failed us. Regulators have failed us. Accounting firms have failed us. Law firms have failed us. We had a system designed for checks and balances and empowered third parties as trusted intermediaries. All these institutions and centralized, third party intermediaries have violated our trust. Have lost our trust. Establishment candidates are being defeated everywhere. Nationalism grows. Populism grows. The pre-existing paradigm is no longer accepted. The most valuable currency is trust. It is the foundation of all exchange, however denominated. It is the foundation for all relationships. A system of third parties intermediating that trust was established and failed. It’s failure, in my opinion, is unequivocal! A white paper written by Satoshi Nakamoto in 2008 proposed a trust revolution. Money would now be issued without nationality and travel anywhere and everywhere. Its monetary policy well defined and immutable. Predictable. Not subject to discretion. It’s proof of work consensus mechanism works if enough believe in the value of bitcoin. Otherwise no one would make the required capital investment and put the effort into mining or being a node in the system. People contribute work. The work is performed to validate the ledger, a trustless ledger as trust is embedded in the protocol. What is required of the ledger. To confirm each transaction as real. That no counterfeit currency exists. The trust issue is solved through incentives. Analogous to the invisible hand described by Adam Smith. We fill our wants and needs only by fulfilling the needs and wants of others. When exchange is purely voluntary, it meets the test of coincident wants and needs. Otherwise, exchange would not occur. No force. No violence. No coercion. No asymmetry of power. No cronyism. No political influence. No border. No gender. No religion. No nationality. No ethnicity. Identity is irrelevant. Martin Luther King talked about a world where freedom and liberty only existed if we are judged not by the color of our skin but by the content of our character. To me, that means we are not judged by by any innate quality that is inherited or circumstantial but we are judged by our deeds, actions, attributes the derive from the choices we make. Individual choices. No other aspect of our identity is irrelevant. I think MLK might have been dreaming about bitcoin. __Part II__ Thomas Jefferson is my favorite Founding Father. The principle author of the Declaration of Independence. So as I expand, Part 2, I want to cite Jefferson. Why do I think the Founding Fathers are so interesting is because the USA first presented to the most powerful monarchy at the time a formal list of grievances. And asserted that since those grievances were deemed by them to be legitimate yet ignored, that the colonies had no other option but to declare its independence. The last sentence of the Declaration of Independence reads as follows: > And for the support of this Declaration, with a firm reliance on the protection of divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor. After defeating the British, the colonies started with a blank slate. There were 13 independent colonies All with a healthy distrust of centralized power and authority. The Articles of Confederation were ratified in 1781 conveying very little authority to the Federal government nor the ability to claim resources through taxation. Between the time of ratification of the Articles of Confederation in 1781 and the implementation of the Constitution in 1789, there were 10 Presidents of the Continental Congress during those 8 years. And the money printing produced a currency that was deemed so worthless, hence the expression “not worth a Continental.” The Constitutional Convention produces a discussion and a final document as a consequence to that discussion addressing the issue of governance, centralized and decentralized, checks and balances. A concern about the inefficiency of decentralization but the abuses that were prone in centralized systems. And how dishonest money would was such a dangerous corrupting force. Please consider the following from Jefferson. > I am convinced that those societies which live without government, enjoy in their general mass an infinitely greater degree of happiness than those who live under the European governments. Among the former, public opinion is in the place of law, and restrains morals as powerfully as laws ever did anywhere. Among the latter, under pretense of governing, they have divided their nations into two classes, wolves and sheep. I do not exaggerate... Experience declares that man is the only animal which devours his own kind; for I can apply no milder term to the governments of Europe, and to the general prey of the rich on the poor." --Thomas Jefferson to Edward Carrington, 1787. ME 6:58 Further. Again Jefferson. > Mankind soon learn to make interested uses of every right and power which they possess, or may assume. The public money and public liberty, intended to have been deposited with three branches of magistracy, but found inadvertently to be in the hands of one only, will soon be discovered to be sources of wealth and dominion to those who hold them… They the assembly should look forward to a time, and that not a distant one, when a corruption in this, as in the country from which we derive our origin, will have seized the heads of government, and be spread by them through the body of the people; when they will purchase the voices of the people, and make them pay the price. Human nature is the same on every side of the Atlantic, and will be alike influenced by the same causes. The time to guard against corruption and tyranny, is before they shall have gotten hold of us. It is better to keep the wolf out of the fold, than to trust to drawing his teeth and talons after he shall have entered. And, > The sheep are happier of themselves than under the care of the wolves. --Thomas Jefferson: Notes on Virginia Q.XI, 1782. ME 2:129 My preference is to avoid being under the care of the wolves. Economics and politics do not fall under natural science but social sciences. Natural science relies upon what we can physically observe and measure. Thinks that are naturally occurring. Social science study interactions among people, human action and behaviors. Adam Smith not only wrote The Wealth of Nations but Lectures on Jurisprudence and The Theory of Moral Sentiments. And Mises, On Human Action. Economics has perverted itself from its roots as a moral science regarding wealth creation through voluntary exchange and human interaction into a quantitative exercise in resource allocation, as if economics has transformed itself into an engineering problem or a natural science, not a social science. A Newtonian world, a clockwork universe. Where we pretend we can measure and observe everything, precisely define and measure cause and effect, perform experiments and have perfect predictability. That we have successfully modeled the consequences of all human interactions and can control just by passing some laws and having the enlightened few use their discretion and proprietary models to eliminate the business cycle, preserve price stability and remove risk from our lives. As a result, economists basically have become noise, incoherent and without insight. The hubris of presumed omniscience. Frederic Bastiat wrote: > I cry out against money, just because everybody confounds it, as you did just now, with riches, and that this confusion is the cause of errors and calamities without number. I cry out against it because its function in society is not understood, and very difficult to explain. I cry out against it because it jumbles all ideas, causes the means to be taken for the end, the obstacle for the cause, the alpha for the omega; because its presence in the world, though in itself beneficial, has nevertheless introduced a fatal notion, a perversion of principles, a contradictory theory which in a multitude of forms, has impoverished mankind and deluged the earth with blood. I cry out against it, because I feel that I am incapable of contending against the error to which it has given birth, otherwise than by a long and fastidious dissertation to which no one would listen. Oh! if I could only find a patient and right-thinking listener! The essential attributes money must have are divisibility, portability, durability, recognizability and scarcity. Money was not created by the State. A committee did not originate money. A committee was not and is not needed to maintain money. A monopoly over money is a dangerous grant of power by the State. An honest money emerges by consensus, not force. Otherwise is violates nature. It is unnatural. As early as the Book of Genesis in the Hebrew Bible, the first time money is mentioned is a purchase Abraham made with silver. Gold and silver have been the most common forms of money throughout history. At the origins of the USA, the dollar that circulated was the Spanish Milled Dollar. Defined in units of gold and silver. Fixed quantities of gold and silver. The dollar was divided into “pieces of eights”. For several centuries it was the most stable and least debased coin. It is also why the New York Stock Exchange traded in denominations of eighths. And Adam Smith said the “All money is a matter of belief.” And as Exter said regarding fiat paper money, IOU nothings. Recently the former CEO from Credit Suisse stated that “…money is not worth anything anymore. That “negative interest rates are crazy”. Further, a recent BIS Report concluded that the unprecedented growth in central banks’ balance sheets have had an adverse impact regarding the functioning of capital markets. To put it more simply, financial markets are dysfunctional, no longer price risk appropriately and pervert the allocation of capital. Exacerbating inequality while, as a whole, making us poorer on an economic basis after considering the accumulation of what I refer to as odious debt. In 1927, jurist Alexander Sack described odious debt as debt issued by the State strengthen its power and repress the population. Hostile debts and profligate debts have been included in the definition of odious debt. And that the debtor and creditors are aware of its odious purpose. The Central Bank is quite aware, as are banks and Wall Street, that the spending is profligate and much has been spent on endless wars, hostile acts. Few, if any believe we will grow our way of the debt. Some believe we can both increase it and roll it over into perpetuity. I think few would actually being willing to attest to that under oath and subject to perjury charges. There are some though who are in the eternal free lunch school of economic theory where there is no limit to debt issuance by sovereign nations and that the market can absorb an infinite supply without any use of the Central Bank balance sheet. I guess they would argue that independent of economic growth, there is no limit to debt that could be issued and that future taxes would never have to be raised in order to sustain the debt already outstanding plus the incurrence of additional debt. It seems evident to me that if we are issuing debt today that will require tax increases in the future. If that spending is not of an investment nature like infrastructure projects or others whose revenues would offset the spending, like a capital budget, but used for current operations like wars, surveillance, transfer payments, entitlements. That seems clear to be a case of taxation without representation. Hostile debts. Profligate debts. And that those who did not have the opportunity to vote for the debt incurred should have no liability for its amortization or repayment. Ben Franklin wrote: “The refusal of King George to allow the colonies to operate an honest money system, which freed the ordinary man from clutches of the money manipulators was probably the prime cause of the revolution.” Howard Buffet, father of Warren Buffet, when he was a Congressman argued that “paper money systems have always wound up with collapse and economic chaos”. James Madison warned us that “If Congress can employ money indefinitely, for the general welfare, and are the sole and supreme judges of the general welfare, they may take of religion into their own hands; they may appoint teachers in every state, county, and parish, and pay them out of the public treasury; they may take into their own hands the education of children, the establishing in like manner schools throughout the union; they may assume the provision of the poor.... Were the power of Congress to be established in the latitude contended for, it would subvert the very foundations, and transmute the very nature of the limited government established by the people of America." Alexis de Tocqueville described democratic socialism: “That power is absolute, minute, regular, provident, and mild. It would be like the authority of a parent, if, like that authority, its object was to prepare men for manhood; but it seeks on the contrary to keep them in perpetual childhood; it is well content that the people should rejoice, provided they think of nothing but rejoicing. "For their happiness such a government willingly labors, but it chooses to be the sole agent and the only arbiter of that happiness; it provides for their security, foresees and supplies their necessities, facilitates their pleasures, manages their principal concerns, directs their industry, regulates the descent of property, and subdivides their inheritances -- what remains, to spare them all the care of thinking and the trouble of living." "After having thus successively taken each member of the community in its powerful grasp, and fashioned them at will, the supreme power then extends its arm over the whole community. It covers the surface of society with a network of small complicated rules, minute and uniform, through which the most original minds and the most energetic characters cannot penetrate, to rise above the crowd. "The will of man is not shattered, but softened, bent, and guided -- men are seldom forced by it to act, but they are constantly restrained from acting. Such a power does not destroy, but it prevents existence; it does not tyrannize, but it compresses, enervates, extinguishes, and stupefies a people, till the nation is reduced to be nothing better than a flock of timid and industrious animals, of which the government is the shepherd." We are living in a low interest rate trap. Counterintuitively and perversely, this trap is not only exacerbating wealth inequality but adversely and negatively impacting economic growth. Reducing incentives to invest in productivity growth. Industries will become more monopolistic over time. As markets get less contestable and the dominant, monopolistic firms no longer face any intense competition they will evolve into lazy monopolists. An inflationary monetary policy regime suffers from the ramifications of the Cantillon Effect. A regressive tax. Those who can create the most leverage at the lowest cost and quickest, win. Everyone else loses. Economic growth is a result of human creativity, the freedom and liberty we have to organize ourselves, on a voluntary basis, to innovate, use our mind, our imagination, our skills and talents in serving ourselves through serving others. Liberty, not power. Exchange, not aggression. In my opinion, the current global regime is unsustainable. Fiat paper money will fail, as it always has. And for the same reason it always has. Unfortunately so many have a perception that anything that happened prior to their birth is ancient history and not worth knowing. They lack perspective. They lack wisdom. Money being debased is a consequence of debasement and abuse of trust. The intermediation of trust through supposed trusted third parties. It is only force, legal tender rules that keep fiat paper money in circulation. And most either have tunnel vision or believe this time will be different. That there is no limit to indebtedness. No limit to the growth of central banks’ balance sheets. That somehow increased market concentration, further concentration of economic and political power, little investment and low to non existent productivity growth will make us wealthy. Or maybe, we will get better socialists managing the allocation of resources than Maduro, Castro, Chavez. That we pursue the path to serfdom. I bet on the trust revolution. On bitcoin. Immutability. Decentralization. Trustless. Scarce. Easy to divide. Easy to transfer. No need for intermediary. The ledger does not lie. No one can debase it. No controlling authority. I believe we are in the beginning of forming a new social consensus. It will be a global one. Independent of geography. Independent of religion. Independent of nationality. Independent of culture. Independent of ethnicity. Independent of gender, however gender is defined. Denationalized money, tokens, circulate though social consensus and trust. Voluntary. Organic. Emergent. Market process. And as a consequence of economic activity. Fiat paper money exists only through the monopolistic force of the State. Legal tender laws. The subsidization of financialization where the production of money is delinked from economic activity and its production and transmission is non neutral and perversely transfers wealth even in the absence of wealth creation. Even during wealth destruction. Without social consensus. Without consent. Odious money. Odious debt. In violation of natural law. I will sell everything else before I sell my bitcoin. If you believe in freedom. Liberty. Personal sovereignty. And a society predicated upon trust. Where individuals are empowered. Where liars and cheaters no longer prevail. Where we value cooperation. Transparency. Then buy bitcoin. Mine bitcoin. Hold bitcoin. It is permissionless. And it is yours. And you retain some sense of privacy. Fiat paper money is dishonest, corrupt, deceitful and managed by a cartel. Distrust and power are its currency. The use of fiat requires permission. It is subject to confiscation. You surrender all privacy. It enslaves. Not liberates. So if you are a liar and a cheater. And corruption and malfeasance is your game. Fiat paper money is your currency. ``` Community posts are hand selected contributions from our network. To have your work featured here please contact us at research@messari.io. ```
    Source: — Published: 2019-10-17

  • Market signals indifference towards assets listed as likely securities by the Crypto Ratings Council

    A few weeks ago, the Crypto Ratings Council announced a new ratings system between 1-5, with 5 signalling strong likelihood of being a security. Since the ratings were released, it appears the market has demonstrated either an indifference towards the asset's regulatory classification or the ratings system itself. ! For more insights like this, create your own custom screener with Messari Pro. __Click here to start your free seven day trial__.
    Source: Messari — Published: 2019-10-17

  • Telegram will delay launch of TON blockchain in light of SEC pressure

    According to documents obtained by CoinDesk Telegram will delay the launch of its network to April 30, 2020. Originally planned to launch later this month, the Telegram Open Network mainnet would have distributed tokens to investors in earlier fundraising rounds, Earlier this week the SEC sued Telegram in order to prevent the distribution of tokens to U.S. investors in what the SEC called an "unlawful" sale of digital tokens. According to the documents Telegram told investors: > *“We had intended to launch the TON network in late October. However, the recent SEC lawsuit has made that timing unachievable. We disagree with the SEC’s legal position and intend to vigorously defend the lawsuit. We are proposing to extend the deadline date in order to provide additional time to resolve the SEC’s lawsuit and work with other governmental authorities in advance of the launch of the TON network.”*
    Source: CoinDesk — Published: 2019-10-17

  • Telegram may be under FinCEN investigation, Libra Association finalizes initial partners

    Is Telegram under a FinCEN investigation? Who will be part of Libra? Stay on top of crypto's hottest news and trends with Nathaniel Whittemore and the Crypto Daily 3@3. embed url=https://www.youtube.com/watch?v=HVnbQVojyvw
    Source: Nathaniel Whittemore — Published: 2019-10-16

  • Nasdaq lists an AI-powered index of crypto market’s top 100 performers

    Nasdaq has listed CIX100, an index from cryptoindex.com that gives traders a real time view of crypto market performance. The index uses an algorithm aimed that includes only tokens that have"no fake volume, have no manipulation, that come from scrupulous companies,” according to Kirill Marchenko, a product manager at the firm.
    Source: CoinDesk — Published: 2019-10-16

  • eToro launches crypto portfolio weighted by twitter mentions

    A new portfolio based on twitter sentiment went live on eToro earlier today. TheTIE-LongOnly CopyPortfolio, powered by crypto data provider The TIE uses twitter analytics to create a portfolio based on the sentiment of tweets. At launch, the portfolio had a $2,000 minimum investment and will rebalance monthly based on the underlying algorithm.
    Source: CoinDesk — Published: 2019-10-16

  • CoinShares jointly rolls out a gold token ‘DGLD’, built on the bitcoin network

    A new gold-backed token named DGLD has been launched by CoinShares, Blockchain, and swiss gold trading firm MKS. Tokens will initially trade on Blockchain's recently launched exchange The Pit and represent 1/10th of a troy ounce of gold. Underpinning the token is London based CommerceBlock's Mainstay protocol which records transactions on the Bitcoin blockchain.
    Source: The Block — Published: 2019-10-15

  • Layer1 is seeking $50 million to run wind-powered Bitcoin mining facilities in the US

    Bitcoin mining firm Layer1 announced it has raised $30 million of its $50 million Series A goal to run wind-powered Bitcoin mining facilities in the United States . Peter Thiel and Shasta Ventures, among other undisclosed cryptocurrency-focused investors, have contributed to the current round at a valuation of $200 million. In addition to taking advantage of an "under-utilized" renewable energy market, Layer1 CEO Alexander Liegl stated his firm aims to increase the US's contribution to Bitcoin's hashrate. > “The United States’ hash rate share is currently below 5 percent,” Liegl said. “Our goal is to bump that up to at least over 15 percent.”
    Source: CoinDesk — Published: 2019-10-15

  • Bitcoin ETF denial, crypto airdrop taxation, the future of Libra, and more

    In this week's Narrative Watch NLW looks at SEC guidance for airdrop taxation, the Bitcoin ETF denial, the Senate's pressure on Libra, and the SEC's emergency action to stop Telegram's token distribution. embed url=https://youtu.be/okdV2WrxnIo
    Source: Narrative Watch — Published: 2019-10-15

  • Grayscale wins approval for first public digital currency index fund

    Grayscale Investments has received approval from the Financial Institution Regulatory Authority to offer a publicly traded large cap cryptoasset fund. As of 9/30/2019, the fund was comprised of 80.3% bitcoin , 9.9% ethereum , 5.8% XRP , 2.2% bitcoin cash and 1.8% litecoin .
    Source: CoinDesk — Published: 2019-10-15

  • [Analysis] Cross-shard DeFi composability - Vitalik Buterin

    There was a growing concern among Devcon attendees last week that Ethereum 2.0’s proposed scaling solution, sharding, will break the ability for different Ethereum-based applications to easily interact with each other. In its current state, Ethereum protocols and smart contracts can act as composable building blocks to formulate more functional end-user applications. This property has led to the relative success of the decentralized finance sector and helped Ethereum establish a healthy lead in available infrastructure and developer tools compared to newer smart contract platforms. If sharding fails to preserve protocol composability, the function of certain popular DeFi applications would be completely disrupted. Vitalik Buterin penned multiple pieces mid-conference to address specific concerns circulating within the Ethereum community, including one on the fate of cross-shard composability. Vitalik states transactions between shards can be executed through the use of receipts, rather than in the typical “all-or-nothing” fashion . But most DeFi use cases would not be significantly interrupted and may only need trivial updates to survive in a receipt-based, cross-shard model. In particular, the ERC-20 standard would need to be modified, since tokens would need to be able to exist on all shards. High-volume DeFi applications, such as Compound, MarkerDAO, and Uniswap, could exist on their own shards. Vitalik argues users would have to transfer tokens over to the appropriate shard, but the general user experience would otherwise remain the same. Overlay tools, such as InstaDApp and PoolTogether, would need to create new contracts for each supported function so these tools could continue to interact with multiple dApps living on different shards.
    Source: ETH Research — Published: 2019-10-14

  • Booking Holdings becomes the latest Libra dropout

    Booking Holdings, the online travel company behind Booking.com, Priceline, and Kayak.com, becomes the latest firm to exit Facebook's Libra. Booking Holdings joins PayPal, Visa, Mastercard, Stripe, and eBay as former Libra members that have abandoned the project within the last two weeks. The departure now leaves the Libra Association with 21 of its original 28 members.
    Source: Bloomberg — Published: 2019-10-14

  • DeFi Week of Oct. 7 - The Defiant

    __Recap: DeFi Week of Oct. 7__ Hello defiers, hope everyone is having a great weekend! If you were at Devcon, hope you’re resting up after an intense few days . Also, many thanks to all the readers who approached me with nice things to say about The Defiant! Really made my week. This past week started off with a bang with the DeFi.WTF event I helped organize with the amazing ladies Tina Zheng, Shruti Appiah and Toya B. Four packed days of Devcon followed, full of company announcements, crypto experimentation, interesting talks and side events. Read below to get the highlights. Reminder: The Defiant is in beta! Subscribe now to get the early supporter discount. Subscribe now ### Monday: - __DeFi Users in Asia are Booming and Underestimated:__ If you take a look at the top projects and investors in decentralized finance, you’ll come out thinking it’s mainly a Western game. Look at the users, and that picture starts to change. ### Tuesday : - __Ethereum Roadmap Talk:__ Some key takeaways were that __state rent__ is being postponed and developers are considering eliminating the need for all nodes to hold complete __history of Ethereum transactions.__ - __Uniswap and Plasma Demo a More Scalable DEX:__ Uniswap and Plasma Group released a __Layer 2 exchange demo__ and it could be a peak into a more scalable decentralized finance. ### Wednesday : - __MakerDAO Announces Launch Date for Multi-Collateral Dai:__ MakerDAO founder Rune Christensen said multi-collateral Dai and Dai Savings Rate are launching on Nov. 18. - __Mariano Conti on How Crypto Helps Him Protect Against 50% Inflation:__ Mariano, who is based in Buenos Aires, is an example of how crypto, and more specifically Dai and decentralized finance, can meaningfully improve people’s everyday lives. - __Libra is Getting Forked:__ Facebook’s Libra is getting forked into OpenLibra, a permissionless version of the blockchain, Lucas Geiger of Wireline announced at Devcon. ### Friday : - __Eth2 Mostly Preserves DeFi Composability, Vitalik Says:__ The transition to Ethereum 2.0 should be smooth for users and developers, and decentralized finance applications will be able to keep “talking” to each other, Vitalik Buterin wrote. - __“Ethereum Scam:”__ It’s a common narrative, especially among Bitcoin advocates, to say that Ethereum is a scam. This is why there’s no basis to their claims. - __Metamask Launches Web3 Plugins:__ Digital wallet Metamask is launching __plugins to add crypto-based functionality to normal websites. __ - __A Glimpse into Private Identity:__ Self-sovereign identity project Iden3 and decentralized exchange DeversiFi partnered to create a game for Devcon attendees, with the purpose to __test technology that would enable people to be in control of their personal data.__ *Don’t be late to all these news. Subscribe to read the full posts and to get the latest and most interesting developments in the decentralized finance space.*
    Source: The Defiant — Published: 2019-10-14

  • Telegram said it has been in talks with the SEC about TON "for the past 18 months"

    Telegram has responded to a recent court order by the Securities Exchange Commission in a letter to investors in its token sale in which the messaging app said they are "surprised and disappointed that the SEC chose to file the lawsuit." The SEC claims the company sold unregistered securities, but Telegram says that it has tried to communicate with the regulator and solicit feedback over the past 18 months regarding its TON blockchain project.
    Source: The Block — Published: 2019-10-14

  • SEC, FinCEN and CFTC issue a 3-party joint statement on digital assets

    The SEC, FinCEN and the CFTC issued a rare 3-party joint statement on Friday regarding digital assets, which emphasized that people who engage in digital asset activities must abide by their anti-money laundering and countering terrorism financing obligations via the Bank Secrecy Act. The Agencies stated that digital assets for the purposes of the statement "include instruments that may qualify under applicable U.S. laws as securities, commodities, and security- or commodity-based instruments such as futures or swaps."
    Source: The Block — Published: 2019-10-14

  • Coinbase eyes further European expansion after winning an Irish e-money license

    Cryptocurrency exchange Coinbase has been granted an e-money license by the Central Bank of Ireland, CoinDesk reports. Coinbase UK CEO Zeeshan Feroz said the exchange is one of the very first firms to receive the license from the central bank, following a Dublin office opening a year ago. As CEO Mike Shanahan put it: > “Coinbase’s choice of Dublin for this operation reinforces the strength of Ireland as a destination for financial services companies, providing a consistent, certain, pro-enterprise policy environment for businesses to grow and thrive.”
    Source: CoinDesk — Published: 2019-10-14

  • Zcash to develop a wrapped token for Ethereum

    Over the next six months, the Zcash community will be developing a wrapped token to be used on Ethereum . Josh Swihard, VP of marketing and business development at the Electric Coin Company noted: > "If you want to do lending, if you want to do DAOs decentralized autonomous organizations, all of that stuff could be done with zcash as well. … Ultimately, we want zcash shielded addresses to be usable in ethereum smart contracts."
    Source: CoinDesk — Published: 2019-10-14

  • The Evolution of Crypto Capital Markets

    __A look into how crypto fundraising has progressed from Initial coin offerings to Initial exchange offerings ; including returns by exchanges as well as discounts given on private sales and more in this deep dive into the world of "investment banking 2.0". __ This post was originally published on October 14, 2019, and sent to Messari Pro subscribers. ! In January 2012, a software developer by the name J.R. Willet posted a whitepaper in the Bitcointalk forum outlining a mechanism to raise funds for new protocols. The proposal aimed to help emerging ecosystems solve the “tragedy of the commons” problem in open source protocols, and facilitate investments in new development, maintenance, and early community rewards. He later described it at a Bitcoin conference in San Jose: *“If you wanted to, today, start a new protocol layer on top of Bitcoin, a lot of people don’t realize, you could do it without going to a bunch of venture capitalists and instead of saying, hey, I’ve got this idea… We’re going to make a new protocol layer. It’s going to have new features X, Y, and Z on top of Bitcoin, and here’s who we are and here’s our plan, and here’s our bitcoin address, and anybody who sends coins to this address owns a piece of our new protocol. Anybody could do that.”* This idea reimagined the entire fundraising process in crypto. Entrepreneurs would be able to access a global pool of capital while anyone in the world could invest in high growth potential projects without Silicon Valley connections or even accredited investor status.  Willet put his idea to work and raised 5,000 BTC for a new project called Mastercoin, in what was later considered the first initial coin offering . Mastercoin was later rebranded to Omni, the protocol that eventually powered Tether. trading than its ERC-20 counterpart.) The Ethereum token sale opened the floodgates for ICOs. As ETH rallied in 2017, the fundraising mechanism soared in popularity, driven by investors and entrepreneurs that saw easy access to capital and the chance tomake astronomical, and liquid returns. __Evolution of the token sale __ As the crypto markets cooled off in 2018, so did the concept of directly selling a token to the public via an ICO. Many retail investors that purchased tokens during the run-up lost significant sums of money on their investments.  Regulators took note and have since started to pursue enforcement actions against projects that conducted token sales they allege amounted to unregistered securities offerings. While billions of dollars were raised over the first two years of the ICO boom, demand for tokens released by projects has dried up, and with it new ICOs. Most protocol funding has now moved to the private markets, with teams exploring new options for distributing their tokens upon mainnet launches. ! Source: Smith and Crown The primary evolution has been away from ICOs and towards “IEOs”, Initial Exchange Offerings. IEOs burst onto the scene in January of this year after Binance announced they would sell a new token every month through its new “Launchpad” service. Since then, we have seen more than 250 such sales across 20 different exchanges, as competitors rushed to capitalize on the new trend as well. ! After peaking at around 100 sales in April and May of this year, new IEOs have cooled somewhat. Still, this fundraising mechanism seems to have staying power as it comes with a) an implicit stamp of approval and vetting from a major exchange, b) a guaranteed exchange listing and liquid market from Day 1. Although IEO activity dropped significantly in Q3, a number of larger sales are anticipated in Q4. ! IEOs have raised less money on average and sold a smaller portion of overall token supply than their ICO counterparts. They also require buyers to set up accounts with the listing exchange, giving projects better control at the point-of-sale. Unlike during the ICO gold rush, projects have more control over how they implement know-your-customer rules, facilitate sales to non-accredited investors, and restrict the size of individual investments. ! Like their ICO brethren, many IEOs have “sold out” in a matter of minutes or even seconds, leading some exchanges to utilize a lottery system rather than the “first come, first served” model that pervaded ICOs. This is good business for the exchanges.  Prospective buyers must claim “tickets” based on the number of native exchange tokens they’ve held over a fixed amount of time pre-sale, driving demand for exchange tokens and lengthening holding periods. Once users commit tickets, they are randomly selected for eligibility. If chosen, the buyer is obligated to purchase the amount committed. Whether the ticket system is used or not, it is standard to have individual purchase limits preventing single entities from buying disproportionate amounts of the supply. Once a sale ends, tokens can be traded on the listing exchange immediately, and will often quickly find their way onto competing exchanges provided they have sufficient liquidity. It’s not uncommon for projects to hire market makers to provide much needed early liquidity in what traditionally had been illiquid assets. By creating two-sided markets and adding order-book depth out of the gates, market makers reduce spreads, and make the newly released assets easier and less costly to trade. __Investment banking 2.0__ IEOs look a lot more like initial public offerings of equity than earlier ICOs.  Exchanges act as underwriters for new IEOs and provide a minimal amount of due diligence on new tokens before they are sold to users. While exchanges don’t offer recommendations on the investment prospects of listed tokens, they do attempt to filter out low-quality projects and outright scams as they have reputational skin-in-the-game. An exchange that brings a low-quality token to market, could damage its brand and hurt its relationship with customers, even leading them to bring their assets to a competitor. Exchanges price IEOs and syndicate them to ensure proper demand upon launch, similar to the IPO process. And thus far, it appears they have priced the IEOs competitively. The 30-day returns of IEOs on Binance, Huobi, KuCoin and OKEx are mostly positive: ! ! ! ! Nearly every IEO listed on a major platform has traded up on its first day. Of the listings on the above exchanges, 60% reached their all-time high within the first week. Many dropped shortly thereafter, but the majority still traded at twice their IEO price during the first 30 days.  For exchanges, this business has been an unqualified success. Projects and their investors seem happy with the returns post-listing, which leads to more interest in future listings and investor confidence in the platforms . There is also a reflexive nature in these markets, as investors have seen what has occurred with the short-term returns in prior sales.  In the span of a couple of days, there is the potential, even a likelihood, for triple-digit returns when investing in IEOs. For many this is reminiscent of the prior ICO mania, which begs the question, is this actually an improvement over the prior model?  __Returns to Date__ Indeed, many IEOs have ultimately suffered a fate similar to their ICO counterparts, jumping in price early on, but failing to sustain their elevated valuations, especially given the significant token treasury overhangs that are common in these sales. ! Of the offerings studied, a large portion isn’t even trading on exchanges anymore. Many projects have high rates of liquid supply inflation through both programmatic inflation and vesting schedules of the team and investors, increasing selling pressure. __Reverse shitcoin waterfall__ A defining characteristic of the ICO boom was the “shitcoin waterfall.” The waterfall begins with a team raising money through a private token sale usually via venture capital firms, who are offered steep discounts on the token price in return for their public investment. Once the token team raises money, they can then boast about their blue-chip investors to retail buyers, giving projects much needed social proof that they then market to ICO buyers.  Once the tokens are publicly listed, early investors can dump tokens on eager retail investors, often at an enormous profit. While incentives have historically been poorly aligned in the token markets, information asymmetry is even worse. There is often little to no transparency when insiders and investors exit their positions, and many late investors have found they are left holding the bag on positions no one else wants to hold, including project founders. In this respect, IEOs offer at least a marginal improvement.  Many exchanges disclose pricing for previous rounds when conducting offerings allowing us to see whether a similar situation occurred in the IEO markets. ! Contrary to the ICO markets of 2017, exchanges have tended to price offerings well below the most recent private round prices. This helps generate interest in the offering, and creates an interesting dynamic where early investors are forced to hold upon listing given their higher break-even price and/or vesting schedules. Most funds may be unhappy to see public listings occur below their latest marks, but the dynamic helps remove the poor optics of a “shitcoin waterfall” in IEOs, better aligns communities, and , often results in tokens that trade at higher multiples during their first full week anyway. ! This is a healthy development for the market.  __A step in the right direction__ The advent of the token sale brought about a radical new means of fundraising.  No longer did entrepreneurs have to go through the painstaking process of raising money from venture capitalists. Unfortunately, many investors didn’t have a grasp of how these investments would accrue value and people took advantage of this ignorance. The ICO mania is over and lessons have been learned. Retail investors have become more skeptical of new offerings and large investors are no longer receiving deep discounts on early rounds. Exchanges have stepped in and started to provide valuable capital market functions. Going forward expect many of these traditional banking and capital markets services to be more professionalized with new entities entering the space to perform them. IEOs may not be the perfect solution for token sales but they are an important step in market maturation.
    Source: Jack Purdy — Published: 2019-10-14

  • Incentivizing testnet participation

    __A look into how projects use test networks for more than testing experimental technology. We cover projects like Cosmos and Polkadot , among others, that offer rewards for tesnet participation to help bootstrap a community of developers.__ This post was originally published on October 07, 2019, and sent to Messari Pro subscribers. ! Preparing for the mainnet release of a crypto protocol may be a major technical milestone, but the larger challenge facing new market entrants is whether their projects can ultimately win enough miner/validator and developer mindshare to spark network growth in its launch stages. Testnet rewards events present opportunities for teams to bootstrap critical early engagement. The testnet rewards framework originated with Ethereum’s Olympic testnet. Olympic was the final Ethereum proof-of-concept released prior to mainnet launch. Its stated purpose was to reward participants for testing the limits of the Ethereum design by “spamming the network with transactions and doing crazy things with the state.” Only then could the Ethereum core team understand how the network would actually hold up under high levels of load.  The Ethereum Foundation offered a pool of 25,000 ETH for the top miner and developer participants in the Olympic testnet launch, with smaller amounts allocated to general participants. Broad testnet engagement unearthed critical bugs and simple optimizations in the live system that the core team was able to identify and resolve pre-mainnet. At the same time, it helped a community of early participants become network stakeholders immediately. The Olympic testnet provided several design precedents for other teams looking to incorporate testnet reward programs in their pre-launch strategies. The stakes are higher than ever today, as the “smart contract wars” start to heat up. After years of private development, the first in a slew of high-profile, venture-backed Ethereum competitors launched last month with Hedera's Hashgraph coming live. Several other launches are anticipated this quarter, including Telegram’s $TON, and Web 3 Foundation’s Polkadot . ! Newer smart contract platforms will need to provide adequate incentives to attract community interest amidst a crowded field of new entrants--not to mention steal developer mindshare away from Ethereum. They must go beyond developing potential technical advancements in-state processing and storage, as the best technologies do not always win in a field dominated by network effects. The “If you build it, they will come” strategy may be foolish when competitors are optimizing their early community’s financial incentives. We believe testnet reward programs offer the best option to spark engagement within a project’s early community. We studied six soon-to-launch blockchain projects in order to identify themes in the experiments that have been run to date. Each has coordinated testnet events that financially rewarded miners/validators and developers for their pre-mainnet engagement. Testnet programs benefit platform development teams in four ways: increasing developer exposure ; stress testing the network in a more practical environment; incentivizing participant buy-in as the project transitions to mainnet; and widening the breadth of the initial token distribution.  Here are the major design characteristics featured in some of the recent testnet reward programs. ! At a high level, most testnet competition features can be categorized into four design focal points: how the reward is distributed; how the event is structured; how the testnet is managed; and how the compensation pool is sized. Combined, these variables shape the goal of the event and enable a project to distinguish itself from competing platforms. __Reward incentives__ How is the testnet prize pool distributed? This has a direct impact on the behavior of participants during the event. Projects can choose to reward the most dedicated participants , adversarial behavior , general participation, or some combination of the three. Each option stress tests the network design in a different manner, requiring project teams to determine their goal for the testnet event prior to landing on a token distribution model. For instance, the Interchain Foundation sought to test its Cosmos Hub in a “live adversarial environment” and introduced “real cryptoeconomic incentives for attackers.” Registrants were encouraged to exploit misconfigured validator setups, target nodes with false or deceptive traffic, and even collude to create a cartel that could censor other players from participating in consensus and accumulating inflation rewards. The adversarial gameplay revealed a few network bugs that would have proven critical during mainnet launch, in particular, a token printing bug, a flaw in the Cosmos SDK that limited transactions per block and resulted in excessive gas costs, and an error in the on-chain token vesting implementation. Elrond , a high-throughput, PoS smart contract platform expected to launch by the end of 2019, is running a similar adversarial testnet program slated to start within the next few weeks. On the other hand, the top prizes in Nervos Network’s mining competition are reserved for the miners that accumulate the most testnet block rewards. The financial incentive creates a mining race almost identical to that of a live PoW network, allowing the team to test in near real-world conditions. Nervos Network intends to collect feedback regarding the stability of its consensus mechanism as well as the "impact of hashrate fluctuation on the consensus." The Nervos Network team also notes that these stress tests are essential for blockchain networks in particular as “once it is built, it is very difficult to retroactively fix any structural problem.” General participation rewards tend to be the most commonly adopted method of incentivization within testnet events as they engage a wider range of prospective registrants, critical for proof-of-stake networks that may require active participation rates from their end-users. Almost all of the testnet events covered here dedicated a small portion of the prize total to users for simple actions, such as spinning up a node or remaining online for a certain amount of time. Increasing participation rates can help stress test a network’s capacity for handling higher node totals. For example, Solana’s Tour de SOL also added a community prize pool, intended to compensate participants for non-technical efforts like creating educational content. __Stages/phases__ Some projects have opted to break up its testnet events into multiple stages, allowing teams to stress test specific components of the protocol in isolation and address potential areas of concern individually. Solana structured its Tour de SOL event into three stages to measure its processing capacity , gauge its ability to support live decentralized applications , and create an environment that would mirror its eventualmainnet in functionality . Elrond opted to progress towards its adversarial event by featuring two earlier phases that helped participants configure their nodes and test the network before the Assault phase begins. The alternative option is to release the testnet in full without any planned stages or upgrades. Cosmos selected this route for its “Game of Stakes” as the team wanted to simulate a live network. Game of Stakes was updated five times over the course of the competition, and even suspended for a brief period, but major updates were only implemented in response to a bug fix or testnet failure to remove a cartel). __Testnet management__ While all of the testnets mentioned above are publicly accessible, most have been or will be managed in-house so the team can run tests in a controlled environment and flip the kill switch when necessary. This centralized approach enables projects to stress test certain network features in isolation and limit noisy, irrelevant feedback. Further, projects want to keep participants interested and involved as the testnet evolves and in-house management enables the team to implement changes or upgrades on the fly with minimal resistance. Of course, isolated and controlled tests fail to account for how a network may function when released, and features should eventually be tested in totality and preferably in a simulation that resembles a live environment. Alternatively, other testnets like Polkadot’s Kusama are designed to be maintained and governed by a community of independent developers and node operators. Kusama has mimicked a live, decentralized environment from the onset, and the feedback gathered by the Polkadot team may be more functional when developing its mainnet’s security model. Polkadot purposely built Kusama without a kill switch with the hope Kusama would be maintained by the community long enough to operate as a testnet companion to Polkadot’s mainnet. __Compensation pool relative to the initial supply__ The final design aspect is the size of the compensation pool, or how much of a token’s initial supply a project willing to dedicate as a reward to testnet participants. In theory, a large token reward encourages more validators/miners and developers to register and increases the breadth of token distribution, a key characteristic regarding the level decentralization within a given crypto network.  Finding the ideal token amount to fund testnet competitions can be a bit of a balancing act. Larger handouts may incentivize more testnet participants to actively participate in mainnet post-launch, as stakeholders would be more inclined to help grow a project in its early stages. On the other hand, project teams or foundations cannot over-allocate their token supplies to testnet rewards, and foundation and team treasuries are critical to funding ongoing protocol developments and related efforts.  ! It seems reasonable to assume newer blockchain projects should allocate a higher percentage of tokens relative to the initial supply when compared to Ethereum. What remains to be seen is whether other projects will ultimately target or even exceed Polkadot’s current high-water mark of rewards for testnet incentives.  Polkadot has dedicated more than twice as many tokens for its testnet rewards than the next highest project . One explanation could be that Kusama compensation is currently based on participation, although the precise mechanics have not yet been finalized.  __Closing remarks__ The testnet design introduced by Olympic and enhanced by its successors now needs a robust evaluation framework. Future projects may benefit from understanding where certain models succeeded and which areas offer possible opportunities for improvement.  Metrics to consider for future programs include testnet participation rates, conversion rates from testnet to mainnet for validators/miners, the distribution of addresses holding network tokens before and after the event, and the number of attacks or critical bugs discovered relative to the number of participants. Testnet reward programs offer an exceptional return on value for token projects in preparation for a mainnet launch. We will follow up on this study once we have been able to better gauge the relative effectiveness of these different experiments.
    Source: Wilson Withiam — Published: 2019-10-13

  • Stablecoins backed by national currencies

    This post was originally published on August 28, 2019, and sent to Messari Pro subscribers. ! Stablecoins backed by national currencies, i.e. “fiatcoins,” are the least interesting thing in this space. From the users’ perspective, digital representations of the dollar, euro, yuan, etc. aren’t much different than using Venmo or WeChat pay.  However, the more attention they receive, the more convinced I become of their impact. I’ve started viewing them through the lens of the international financial system rather than the individual end-user.   In the past few weeks, we’ve seen Binance announce Venus, a plan to create multi-currency stablecoin, Tether issuing CNHT pegged to the Yuan, and Bank of England Governor Mark Carney suggesting a “synthetic hegemonic currency”. With dominant crypto companies , multinational corporations , regulators, and central bankers from across the world all looking into these digital alternatives, there is a certain sense of inevitability to a world dominated by fiatcoins. What this will look like is unknown, and will differ depending on the breed of fiatcoin. This makes it important to delineate between single currency and mixed basket as well as private vs. public sector entities issuing the currency.  ! ### __Single Currency - Private__ In the mid 19th century, private currencies were common in what was known as the “Free Banking Era.” States, municipalities, banks and even large corporations printed money backed by government bonds. Over time, consolidation occurred to a single currency system as the Federal government-regulated private money out of existence. In the last decade, we have seen a resurgence of private money as Bitcoin eliminated the need of a central issuer by effectively solving the Byzantine Generals Problem. Since then, private companies have issued hybrid currencies that exist as digital bearer instruments but are backed by government-issued fiat.  There are currently around $5 billion outstanding, with Tether comprising around 80% of the market. Many of these tokens are backed 1:1 with their respective fiat currency making them very similar to the dollars in a bank account. The only substantial difference is their use in digital economies such as decentralized exchanges or lending platforms.  At their current size, these currencies don’t have the potential to make much of a difference but let’s say they grow as a result of being used for P2P payments or in online marketplaces. As we’ve seen with Tether, there is no obligation to maintain this 1:1 peg. If the issuer decides to make them backed by only 90% cash then 80% cash, they are effectively performing the duties of central banks expanding the money supply. If they are on the scale of hundreds of billions or trillions of dollars then you can see how these adjustments could start meaningfully impacting the economy of the country whose fiat is being inflated.  Now, this is not likely to happen since federal governments enjoy their monopoly on seigniorage. If the fiat-backed stablecoin market begins to take off, central banks would step-in and issue their own digital currency as we are seeing with People’s Bank of China.  ### __Single Currency - Public__ In the scenario described above, the privately issued currencies are just acting as a proof-of-concept before the government retakes control of money like they did after the Free Banking Era. This would not likely alter how monetary policy is conducted, but it has the potential to usher in an era of extreme surveillance capital.  When CB’s “print” money like they have through quantitative easing they release money into the economy by allowing banks to lend more. After that, there is little they can do to ensure the money trickles into the economy as desired. With a CBDC however, they have the ability to not only track the flow of money but control where it gets lent out or used as payments.  It’s not hard to imagine a Government mandating use of their digital currency. This type of system gives the Government complete control over our monetary system creating a terrifying financial panopticon. In this case, the need for a decentralized currency like Bitcoin will be painfully obvious. ### __Mixed Currency - Private__ Libra captured the attention of the world when they introduced the idea of private companies controlling a currency backed by a basket of fiat currencies and sovereign debt. We’ve written our thoughts about the impacts of Libra which I won’t regurgitate ad nauseum, but as you could judge by the reaction of U.S. regulators, it’s mere existence represents a direct threat to the dollars reserve status.  ### __Mixed Currency - Public__ Piggybacking off Libra and the idea of replacing the USD as the world reserve currency with a basket, Mark Carney floated the idea what he calls a “synthetic hegemonic currency ” essentially a public version of Libra because again - Central bankers don’t want to cede control over their power. While not well-known, this actually already exists. The Special Drawing Right is issued by the IMF and is comprised of the 5 largest fiat currencies. However, it’s not a currency per se, but rather a unit of account on the holdings of the IMF . Carney’s proposal seems to be suggesting an SDR-like instrument but to be used as the world reserve currency. He discusses in length the issues that arise from a unipolar system in his recent speech at the Jackson Hole economic symposium. The reliance on the dollar puts countries at the mercy of U.S. monetary policy which can make it difficult to achieve domestic growth and inflation goals. This SHC would alleviate these issues and help reduce the volatility of capital flows, particularly to emerging market economies.  While the idea of digital fiat money seems boring at face value, the larger zeitgeist it is a part of is actually a very big deal. Whether it’s transitioning to a surveillance state or upending the hegemony of the U.S. dollar we’re looking at a world much different than what we see today. These changes don’t happen over the course of a year or two but with all the developments that have transpired, they seem to be pointing to an impending shift in the international financial and monetary system. 
    Source: Jack Purdy — Published: 2019-10-13

  • How crypto could fit in your portfolio

    This post was originally published on August 13, 2019, and sent to Messari Pro subscribers. ! When talking Bitcoin to the uninitiated I try to avoid any talk about price and focus on the “why.” It helps people see the big picture and understand the brilliance behind it. Often times this involves delving into the origins of money, what makes for a good store of value, and the unique properties of bitcoin compared to other forms of money. However, at a certain point, you have to go beyond ideology and prove why it makes for a good investment. This type of thinking is becoming increasingly important as sophisticated investors start to consider allocating capital to cryptoassets. To make the case for bitcoin these investors need to see how bitcoin can provide positive returns for an overall portfolio. Even better, you want to show that an asset can provide positive risk-adjusted returns. Basically, if you are putting money into something highly volatile, like bitcoin , is the return high enough to compensate for the added risk? Or would you be better off with a lower return but less volatile investment like real estate. For this, you need cold hard data and one of the most commonly used measures is the Sharpe Ratio. To illustrate how various assets stack up on this measure we examined risk and return metrics for a hypothetical investment in major asset classes from Jan. 1, 2014, a period that gives us multiple market cycles for bitcoin. Note that our chart shows a five-year window to remove visual outliers. ! Comparing bitcoin to these asset classes, as represented by ETFs, we see that bitcoin had a superior Sharpe Ratio during the observed period, proving that investors were well rewarded for the extra volatility they endured. But looking at single assets doesn’t tell the whole story. Sophisticated investors are generally asset allocators, and in order to further reduce portfolio risk, they create diversified portfolios. A common reference portfolio is an allocation to 60% stocks and 40% bonds. Most managers will also rebalance these portfolios in order to maintain this ratio over a given period. Taking our previous analysis a step further we modeled the impact of adding a 10% allocation to a standard 60/40 portfolio taking into account the impact of rebalancing. ! The 10% allocation to bitcoin made a substantial difference to both the annualized and risk-adjusted return. It’s interesting to note that the quarterly rebalancing decreased the total return on investment, but measurably improved the Sharpe ratio. This intuitively makes sense because without rebalancing the portfolio can quickly become overweight bitcoin during a run-up. Not rebalancing heightens returns but it also opens an investor up to more risk as we see during bear markets. Starting at 10% bitcoin without rebalancing would result in a 55% allocation today, and 69% at the peak. This analysis demonstrates the benefits of making a small allocation to bitcoin. Expanding on this idea, we also looked at the impact of diversifying cryptoasset exposure; splitting our allocation to 5% bitcoin and 5% ethereum. For this study, we used quarterly rebalancing and an allocation of 50% equities, 30% bonds, and 10% crypto . Because ethereum has a shorter track record we started our hypothetical portfolio on Jan. 1, 2016. ! Here, an equal allocation of $ETH significantly outperforms just $BTC on both an annual and risk-adjusted basis. This makes sense as ethereum saw a rally from $0.93 to $206.84 today, a 22,041.23% return. As always, past results are not a predictor of future returns, so there’s no telling if any of these trends will hold in the future, and none of this should be considered investment advice. The goal of this analysis was to provide data-driven insights showing the value crypto can potentially provide to one’s portfolio. We could play around with these numbers all day, but the point remains the same - an allocation to crypto could make sense not just from an ideological standpoint but from a financial one too.
    Source: Jack Purdy — Published: 2019-10-13

  • Crypto Rates Markets

    This post was originally published on July 31, 2019, and sent to Messari Pro subscribers. ! If history is any guide, the rates market in crypto will ultimately be orders of magnitude larger than the spot market. These markets are still small, but they could surpass the $300 billion spot market before you know it. Just like the spot market, the rates market is becoming highly fragmented in crypto, with lots of platforms and assets. Fortunately, our friends at LoanScan built an awesome dashboard for people to monitor interest rates across all these platforms and assets. I spent some time playing around with it, and I’m reporting back with a few observations and insights to help you understand this ecosystem. ### __Observation 1: Borrowing/lending rates on stablecoins are high.__ Currently, the borrowing/lending rates of stablecoins are much higher than those of other assets. The former are mostly in the double-digit percentage, whereas the latter are in the low single-digit percentage. Moreover, the rates of Dai are even higher by a few percentage points than those of fiat-backed stablecoins like Tether. ! Why is this? My gut reaction is that the market sentiment is generally bullish and a lot of people are borrowing stablecoins to leverage-long other assets. On second thought, however, that doesn’t entirely make sense. Why would you borrow USDT at 16% to do margin trading when you can borrow USD at a much cheaper rate? You could argue that the dollar on blockchains is more frictionless than the dollar in the legacy financial system. For instance, sending USDT to Binance is more convenient than wiring USD to Coinbase. As such, the higher demand for USDT may increase the rates of USDT. But I’m not convinced that this fully explains the large spread between USDT rates and USD rates. I have another, potentially more controversial, explanation for this: __the rates on stablecoins reflect their risk of going to zero.__ When market participants price the rate on a stablecoin at 20%, they are implicitly saying that by borrowing that stablecoin they can generate a higher return than 20% in one way or another. For instance, they can choose to short that stablecoin relative to the dollar. When the rate is 20%, they are essentially saying that the EV of the stablecoin is less than $0.80. Because the fate of a stablecoin is pretty binary - either it goes to zero or it stays around $1.00 - the shorts are essentially saying that stablecoin has a greater than 20% probability of going to zero. Right now, the DAI rates are pretty damn high. They were raised by the MakerDAO holders precisely due to the lack of the demand for CDPs and thereby the risk of the DAI trading below $1.00. ### __Observation 2: Cross-platform arbitrage opportunities may exist.__ The mechanism of matching orders on rates markets isn’t fundamentally different from that of spot exchanges. The borrowing rates are like asks. The lending rates are like bids. The difference between the lowest borrowing rate and the highest lending rate is like the bid-ask spread. When you view lending markets this way, you will notice several potential mispricings across different lending platforms. For instance, you may be able to borrow ZRX on Compound at 4% and lend it on CoinList at 6%. ! But don’t get too excited too quickly. Two reasons: - First, in the grand scheme of things, the liquidity in the entire crypto lending space is still small. This is especially true for DeFi and for new OTC desks. I would be extremely surprised if you can make $100,000 by arbitraging between two platforms. - Second, and more importantly, the “mispricing” tend to exist between a borrowing rate on a DeFi platform and a lending rate on a centralized finance platform. Why is this relevant? Because the counterparty risk in DeFi is virtually zero, whereas the counterparty risk in CeFi is not nearly zero. DeFi loans are currently over-collateralized, partly due to the lack of credit system. In CeFi there is little transparency for lenders into what a platform is doing with the collateral. It is likely being loaned out to a variety of borrowers and there is no insight into terms or collateralization ratios. As such, when you borrow in DeFi and lend in CeFi, you take on a counterparty risk, and the spread between DeFi and CeFi is largely explained by this risk. ### __Observation 3: Some rates are fixed by the platform.__ Some platforms currently fix the rates rather than let them float with the rest of the market. This is partly responsible for some of the potential mispricings we discussed above. ! Theoretically, unless you are the Federal Reserve, fixing rates tend to be economically inefficient for you. If you are the Federal Reserve, you *are* the market. Otherwise, the market is usually the most efficient way to allocate buyers and sellers, or borrowers and lenders. But I’m sure these platforms probably have good practical reasons for doing this at the moment that outweigh the benefits of using floating rates. Furthermore, the rates market shouldn’t change too drastically on a day to day basis anyway. Over time, however, I expect them to let their rates follow the market rates in one way or another.
    Source: Qiao Wang — Published: 2019-10-13

  • Libra, the iTunes App Store for crypto devs

    This post was originally published on June 19, 2019, and sent to __Messari Pro__ subscribers. ! Here’s a great idea I had yesterday: > *“Everyone will be rushing to get out their Facebook / Libra hot takes as the press embargo lifts at 5am ET. We’re gonna take the day to absorb the chaos of research, analysis, crypto twitter snark, and MSM pieces around the announcement…then curate the top insights and reactions.”.* Well, holy sh*t. Turned out people had a lot to say on the subject. We sat on last night’s post as it came together a bit later than expected. It’s hard to know where to begin on the Libra news, but NLW curated many of the top gems and initial reactions from crypto twitter already. Check out his Messari board on the subject if you want to keep up with the weird rants and fall down Libra’s snark rabbit hole. On my end, I did a quick Q&A segment on *Bloomberg Markets* yesterday afternoon in which I barfed out my top takeaways on why I think this is the top development in the industry since the launch of Ethereum. It was a pretty good forcing function for me to cut the crap and focus on the meat of this announcement amidst the sea of noise: 1) At 2.4 billion users, the nation of Facebook is essentially creating a private central bank . 2) The entrance of the tech giant into crypto is *massive* for censor-resistant alternatives like bitcoin in the long-term as Facebook’s user base is 50-100x the current estimated crypto user base, and Libra will be a gateway drug to truly open alternatives. It’s a positive-sum announcement for some cryptos, killer for others. 3) The impact this will have on attracting new full-time crypto developers may be the greatest result and bear the most long-term fruit. Could Libra build an “App Store” for digital asset developer experimentation? The slightly longer synopsis... ### __First, what__ __*is*__ __Libra?__ Libra is Facebook's highly-anticipated blockchain protocol and stablecoin project, previously reported under names like “Project Libra” and “GlobalCoin.” Facebook has been working on its crypto initiative internally for over a year now. I remember speaking with some of the early team back when they were first getting assembled, and it’s been staggering to see the growth, and just how seriously the Libra initiative has been taken by Mark Zuckerberg. The first application of Libra will be a fiat-pegged currency backed by a basket of top national currencies . The Libra Network will allow users to make online purchases and money transfers using pseudonymous addresses and non-custodial wallets . The catch, of course, is that all of the entities that have backed the project - the top investors and corporates who have all ponied up $10 million each to serve as the network’s early validators in a delegated proof-of-stake system - are heavily regulated themselves. So the oversight of the network, including measures taken to prevent money laundering and terrorist financing could end up making this look more like a “WeChat for the West” than a bitcoin killer. Permissioned. Censor-enabling. Not as “Wild West” as existing cryptos. *The Block* first broke the initial list of 27 partners late last week . Facebook plans to move that number to 100 by the time the mainnet launches in 2020, but won’t plan to move to a fully “permissionless” blockchain for at least five years. As you can see, banks and other tech giants are conspicuously absent, leaving open the possibility that this is the first corporate coin of many. ! *Source: The Block* All the early investors have bought into the Libra Security Token, which confers network governance rights and allows them to reap rewards associated with the interest on Libra’s fiat deposits - in return for their work securing the Libra network and maintaining nodes. Facebook’s legal team seems to have figured out a structure that works, and that can succeed where a project like Basis had previously failed. Fundamentally novel and different? Or simply backed by a more powerful tech player. Of course, the meat of the announcement is about the Libra stablecoin itself, which could prove to be absolutely massive as a new global reserve currency as Facebook slowly rolls it out to its 2.4 billion users. It’s still got a low probability of success, but an insanely high expected value. And it’s the first credible non-sovereign reserve currency competitor we’ve ever seen. ### __Private central banking__ I called Facebook nation the “largest nation on earth” during the Bloomberg interview, and I meant it. What Facebook is doing is unprecedented in terms of scale, and more closely mirrors aspects of Keynes’ supranational bancor proposal from post-WWII, or the creation of SDRs in the late 60s at the IMF, more than it does any previous corporate payment experiment. Libra is a private central bank managed by a consortium of companies vs. a country. The most amazing thing about that statement is that *the powers that be don’t seem to think it’s hyperbole*. Within twelve hours of the Libra announcement, French, German, and US regulators and lawmakers all came out questioning Facebook’s ability to create its own currency, and calling out the systemic risks it could present to the global financial system. In the U.S. Rep. Patrick McHenry asked for a hearing on Project Libra, while Rep. Maxine Waters went a step further and called for a halt in Facebook's development of its cryptocurrency on the grounds it presented an “unchecked expansion” into people’s lives. . In Europe, German member of the European Parliament, Markus Ferber warned against Libra’s “shadow banking” services, while French Finance Minister Bruno Le Maire said explicitly that a sovereign Libra currency “can’t exist. It must not happen.” Even though Facebook has hyped up the decentralized element of the project , the subsidiary tasked with actually delivering the v1 launch is still managed by internal team members. They’ll be a regulatory punching bag for as long as Facebook appears to be controlling the project, which does offer some hope: it’s tough to envision Facebook failing to live up to its decentralization promises as that would make the project DOA from a user, bank, and government authority perspective. That’s why the team, led by former PayPal CEO David Marcus, is now spinning out a new subsidiary called Calibra, which will drive early development around the Libra protocol and stablecoin, and ostensibly build apps that allows Facebook users to leverage the currency/network within its family of apps, even if the new entity does NOT share this transaction data with the mothership. Calibra might power global remittances, bill pay, peer-to-peer transfers, credit, etc. , but it won’t own a new user’s financial graph and sell ads against it. ### __Lead blocker/gateway drug__ To me, Libra is amazing for bitcoin, especially in that it’s a “lead blocker” for the broader crypto market. Facebook/Libra will absorb most of the scrutiny on crypto assets in the years ahead given its scale and possible systemic importance, while truly decentralized and censor-resistant cryptos get built-in plain sight with more muted top-down criticism. Remember that things have started to look a bit more confrontational between authorities and crypto-assets recently. Libra is so ostentatious it might be a welcome diversion for the rest of the leaderless industry. In a similar sense, Libra is also a "gateway drug” in that once people realize how this tech works, a subset will opt for private, uninflatable, and unrestricted digital gold and programmable money. Many will gladly accept the volatility tradeoff in exchange if it means opting out of a global panopticon. Bitcoin is a big winner with Libra. Ethereum is a likely winner. On the other hand, centrally created, volatile, and smaller tokenized networks that haven’t reached critical developer adoption will be the ones most directly threatened by Libra. The trillion-dollar question remains, is anyone actually going to use this? To that end, it seems Libra would at the very least pose a substantial threat to “regulated” cryptos like XRP and stablecoins like USDC, Paxos, and Gemini. Ripple may continue to contractually enforce some companies to use XRP if it invests in them , and usage of the USD-backed stablecoins could present some tax benefits if they are simply pegged to the dollar and don’t fluctuate in value quite like a basket-based supranational currency would. ### __iTunes App Store for fintech devs__ My top takeaway - and one that I haven’t heard many people talking about - is that Libra could prove to be a sort of iTunes App Store for crypto application developers. Not all engineers want to go through the regulatory hassles that blockchain application development entails. Not all dev teams want to build full-stack solutions that cover the consensus algorithm, payment application, hedging mechanism, storage, and KYC/AML. Some devs just want to code without breaking one of the zillion laws our financial overlords have already implemented. Many will opt for a properly maintained walled garden vs. Ethereum’s wild west. Some will eventually cross over as the decentralized alternatives improve and if Eth 2.0, Cosmos, Polkadot, and other new Web3 networks can perform as advertised. ### __Miscellaneous__ Some other miscellaneous thoughts: - Facebook is playing up the whole "this could be a force for good” thing, and I want to believe. Really, I do. Based on some of the partners they’ve enlisted like Kiva, Mercy Corps, and Women’s World Banking. They are positioned to actually pull it off. Follow through could have a massive global social impact. - I liked this quote from Caitlin Long in Forbes: *"By providing citizens of developing nations with access to a store-of-value that is more reliable than their government-backed currencies, Facebook’s cryptocurrency will indirectly exert fiscal and monetary discipline on developing nations—which will improve the lives of many people globally."* - This is step one. Credit is the much larger opportunity, and on this front Calibra has the opportunity to build the world’s largest bank…quickly. They have more customer data for compliance, risk assessments , and product cross-selling than any company in history - orders of magnitude more than existing financial services giants. Libra could be decentralized…who gives a shit about the money market returns. But Calibra as a credit union/bank/payments giant is the real long-term opportunity for Facebook as a company.  - I liked this *CoinDesk* breakdown of the elements that Facebook borrowed from other crypto projects when creating Libra. It’s a grab bag of good ideas (to be determined if they are implemented, and there is certainly a vocal chorus who will remind me that “this is neither crypto nor blockchain” including Qiao, who’s probably ripping his hair out reading this post.
    Source: TBI — Published: 2019-10-13

  • Crypto Monetary Policies

    This post was originally published on June 12, 2019, and sent to __Messari Pro__ subscribers. ! We’ve been focused on cryptoasset supply curves since day one at Messari. For the past six months in particular, we’ve spent time building full liquid supply curves for the top ~100 assets. Our work has confirmed our initial intuitions: the variety of approaches taken across cryptoasset projects requires a more precise - if novel - way of defining and categorizing outstanding, liquid and circulating supply. Our current Cryptoasset Supply Method defines five tranches of supply: maximum, diluted, outstanding, liquid, and circulating. Liquid and diluted supplies are already included in our OnChainFX dashboard. We’ve been working feverishly behind the scenes to add maximum, outstanding, and circulating supply metrics for the rest of the top 100 assets. This framework is useful to understand the varied nature of cryptoasset supply management. But it doesn’t tell us how this observable supply, be it circulating, liquid or outstanding, has been or will be generated or destroyed over time. Indeed, we can go one step further and classify and measure other aspects of supply: - __Launch Style__ ** defines how the first coins were issued and distributed. - __Initial Supply__ defines how many coins were initially issued and how these coins were allocated among different stakeholders . - __Emission type__ defines the monetary policy ruling the issuance of new coins for a given cryptoasset. - __Supply cap__ defines whether a cryptoasset supply is capped or uncapped . Now that we have defined those categories, let’s take a look at the variety of monetary policies among the top 80 cryptoassets. ## __I) Launch Style and Initial Supply__ ### __Mining distribution__ __Fair Launch:__ There was no premine and the coin was mineable from the start of the blockchain. Examples include Bitcoin , Monero , and Dogecoin . __Instamines and stealth mine:__ Refers to a situation best defined by Nic Carter himself: *“founders used asymmetric advantages to mine large percentages of the coin at launch or failed to announce the inception of the coin, thus mining stealthily.”* Examples include Bytecoin and Steem . __Built-in centralized treasury:__ The founding team/foundation receives on-going mining rewards to fund the development of the project . This does not include decentralized treasury funding such as Decred or Bitshares. Examples include Zcash and Zcoin . ### __Premined distribution__ __Crowdsale:__ Part of the initial supply was sold through a public token sale to investors for another cryptoasset . Examples include Tezos , Basic Attention Token , and Augur . __Private Sale:__ Part of the initial supply was sold privately to investors . Examples include Cosmos , Neo , and Vechain . __Airdrop:__ Part of the initial supply was distributed to the community either for free or in exchange for small tasks. These coins are often airdropped to coin holders from large chains such as Bitcoin, allowing for a fair, distributed and transparent distribution. Examples include Decred , Nano and Ardor . __Centralized Distribution:__  Some of the coins may be airdropped, sold to private investors or distributed to partners through time but the entirety of the initial supply is managed centrally. Examples include $XRP and Ontology . ### __Fork distribution__ __Ledger Fork:__ The owners of the original cryptoasset receive proportional amounts of the new cryptocurrency created in the contentious hard fork. Examples include Bitcoin Cash and Ethereum Classic. Sometimes, the fork includes an additional premine or stealth mine to cover fork costs and future development expenses and reward the team. Examples include Bitcoin Gold____ and Bitcoin Diamond Below is the distribution of launch styles among top 80 assets by Liquid Market Cap: ! Of course, some assets might feature a mix of different launch styles such as Private Sale and Crowdsale, Crowdsale and Airdrop, Ledger Fork and Built-in treasury, etc. Yet, it’s worth noting that only 1 in 10 top 80 cryptoasset was “fairly launched.” More than half of them sold tokens to investors via a crowdsale. The built-in centralized treasury model a la Zcash isn’t widely used among the top 80 assets but other projects like Veil have also implemented a similar treasury model, with superblocks rewards instead of percent of block rewards. ### __Initial Supply__ Apart from pure Fair Launch assets and Ledger Forks without Premine nor built-in treasury models, almost all projects allocated parts of their initial supply or on-going mining rewards to the founding team and project operation treasuries. On average, those projects even allocated as much as 40% of the initial supply to Founders and Project Operation treasuries. The other distribution categories are investors and Airdrop and premined rewards. Premined rewards are mining or staking rewards that have been premined and are held in treasury to be distributed throughout the years. Waltonchain , GXChain , and AElf feature this kind of premined rewards. ! ## __II) Emission Type and supply cap__ ### __Inflationary Monetary Policy:__ The on-going emission structure of a cryptoasset can be defined based on issuance or inflation rate . __Increasing issuance:__ The amount of coins generated per period increases through time. This is the case for Waltonchain that features a progressive mining reward program. In Year Six, Waltonchain will transition from an increasing issuance policy to a decreasing issuance policy. ! __Fixed inflation rate:__ Also leads to an increase of coins generated per period through time, since the monetary base grows. Examples of fixed inflation rates include EOS and Aion which both feature a 1% yearly inflation rate. Below is *Aion Supply Curve.* ! __Fixed Issuance:__ The amount of coins generated per period stays constant. This leads to a decreasing inflation rate. Examples of Fixed Issuance policies include Tron and Dogecoin . Below is Dogecoin Supply Curve. ! __Decreasing inflation rate:__ Depending on the reduction rate of inflation, this can lead to an increasing, fixed or decreasing issuance per period. Examples include Steem whose inflation rate decreases by 0.5% per year until it reaches a perpetual 0.95% yearly inflation rate, and Decentraland continuous token model, although the inflation hasn’t yet been activated. __Decreasing Issuance:__ The amount of coins generated per period , decreases through time. This leads to an exponential decrease in the inflation rate. The issuance reduction is frequent for PoW coins with halvings and can also be implemented through a constantly decreasing block reward. Over 75% of the coins that feature a decreasing issuance policy are PoW coins and 80% of PoW coins feature a decreasing issuance policy. Examples include Bitcoin , with a 4-years halving interval, and Monero which features a constantly decreasing block reward until the reward reaches 0.6 XMR, in 2022, when Monero will eventually transition to a fixed perpetual issuance . Below is Monero Supply Curve. ! __Dynamic Issuance and Inflation rate:__ The amount of coins generated per period or the inflation rate, depend on specific network conditions such as the % of network staking. Examples include Cosmos whose monetary policy target a total network stake *,* Ethereum 2.0 with a sliding scale issuance based on total network stake ** and Komodo *.* ### __Fixed Supply__ Most of the coins that feature a fixed supply are non-native tokens that do not have to incentivize miners or validators with newly generated coins to provide security to the network. ! However, in some cases, even PoS and dPoS native tokens have a fixed supply. Indeed, there exist other ways to incentivize validators: transaction fees, premined rewards, and secondary token issuance. Waves ’ rewards are denominated in another asset, the Miners Reward Token and participants also receive transaction fees. Loom Network will reward PlasmaChain Validators by distributing premined tokens that had been allocated to a reserve fund. ### __Deflationary Monetary Policy:__ __Non-programmatic deflationary monetary policy:__  The outstanding supply shrinks through time due to non-programmatic mechanisms such as Binance quarterly burn policy: the equivalent supply of 20% of Binance profit is burned each quarter until the outstanding supply reaches 100 million BNB . The diluted supply of those coins is really hard to forecast. For BNB our model relies on a variety of assumptions . We estimated future coinburns to include 600,000 BNB, and we applied a similar relative deflation to each supply tranche until 2050. Below is BNB supply curve. ! __Programmatic deflationary monetary policy:__ The outstanding supply shrinks through time due to programmatic mechanism . The BOMB token is an interesting experiment of this kind: - There were originally 1,000,000 Bomb in existence. - Each time a Bomb is transferred, 1% of the transaction is destroyed. - There will never be newly minted Bomb. So far, over 27,000 BOMB tokens have been destroyed. ### __Burn and Mint__ __Burn and Mint equilibrium:__ Tokens are burned to access an underlying service of the network. Independently of the token burning process, the protocol mints new tokens per period and allocates these tokens to service providers. The percent of newly minted tokens allocated to a given service provider is equal to the percent of tokens burnt to access its services. If 10% of tokens burnt were in the name of a given service provider, this service provider will receive 10% of newly minted tokens. Factom was the first protocol to introduce a Burn and Mint equilibrium model. Kyle Samani from Multicoin Capital analyzed this model in its article “New Models for Utility Tokens”. __Other Burn and Mint models:__ There exist different burn and mint models. Maker supply, for example, is generally deflationary . So far, according to Maker Tools, 1,558 MKR has been burned and the annual burn rate, calculated as / MKR price, is over 20,000 MKR . However, in the case of Multi Collateral Dai, new MKR could be minted through the flop auction contract to cover bad debt. Moreover, it’s important to have in mind that some assets could well transition from an inflationary policy to a deflationary policy. For example, ETH 2.0 staking rewards could well be under transaction fees burnt due to EIP 1599 where the idea is to replace the first-price auction" fee model in Ethereum by a mechanism that adjusts a base network fee based on network demand. The BASEFEE would be burned and miners / stakers would only get to keep the tips, on top of the BASEFEE. This would lead to a deflationary situation where more supply is destroyed than generated. A given asset does not always feature the same emission type throughout its history. As written above, Monero will go from a decreasing issuance policy to a fixed issuance policy in 2022. Zcash was launched with a slow-start mining and an increasing issuance for the first 20,000 blocks , before transitioning to an halving-based decreasing issuance . Ethereum will transition from a fixed issuance policy to a dynamic issuance with a sliding scale based on total network stake. Eventually, it could even become a deflationary asset. The monetary policy changes may be determined by off-chain governance and in some cases on-chain governance. For example, EOS block producers voted to reduce the outstanding inflation rate from 5% to 1% last month. At Messari we are tracking closely these changes and are constantly updating our supply dilution forecasts. ! ### __Supply Cap__ Another important aspect of a cryptoasset monetary policy is whether the supply is capped or uncapped . 80% of the cryptoassets in our sample have a defined maximum supply. While Bitcoin supply cap will only be reached in 2140, other inflationary assets are already very close from reaching their supply cap. Bitcoin Diamond’s premine of 14 million BCD has for example drastically accelerated the transition to a fee-only reward structure for miners, which should happen around August 2024. The question remains if there will be enough incentives for miners to keep securing the chain from there. Below is Bitcoin Diamond supply curve. ! Being able to see cryptoasset supply across these metrics will provide investors with one of the most basic and important fundamental valuation components. The ability to precisely even talk about supply across assets, let alone calculate it, is sorely lacking in crypto today. At Messari, we’re building as quickly as we can towards implementing our supply frameworks across our products. In the coming months, we’ll be surfacing our data on launch style, initial supply, emission type, and supply cap on both OCFX and asset profiles.
    Source: Florent Moulin — Published: 2019-10-13

  • [Weekend Reads] Here's what the Messari team is reading this weekend - Issue #47

    List of Messari weekend reads: - A model for Bitcoin’s security and the declining block subsidy - Hasu - The eth1 -> eth2 transition - Vitalik Buterin - Privately buying a domain name with Zcash - Michael Harms - Eth2 shard chain simplification proposal - Vitalik Buterin - New START treaty data shows treaty keeping lid on strategic nukes - Hans M. Kristensen __See our newsletter for more news, analysis, and commentary.__
    Source: Messari's Unqualified Opinions — Published: 2019-10-13

  • The US, China, and Bitcoin

    This post was originally published on May 30, 2019, and sent to __Messari Pro__ subscribers. ! For many years, people have speculated about the fate of Bitcoin during the next financial crisis. Will Bitcoin behave like digital gold and emerge as a sought after safe haven? Or will it crash alongside other risky asset classes like equities? No one really knows the answer for sure. And anyone who claims otherwise probably doesn’t really know anything. But if you asked Ray Dalio, CEO of the largest macro fund in the world, “when is the next recession?”, he would say something like “55% probability that it will happen within the next two years”. In macroeconomics, there is a notion of “risk-on / risk-off” trades. Sometimes, investors will have a higher risk appetite than others. During the 2008 financial crisis, investors reduced risk by moving their stock and real estate exposure to less risky instruments such as US treasuries and gold. This was a so-called risk-off environment. From 2009 until the present, we have gotten to a state that is progressively more risk-on. A lot of folks in crypto showcase this behavior as well. Many seem to think that Bitcoin is a risk-on asset, meaning investors will reduce their exposure to Bitcoin during risky times, thereby crashing the price of Bitcoin. But the key realization here is that __risk-on / risk-off is not binary, it’s a spectrum__. For instance, both USD and long-term government bonds are generally considered risk-off, but dollar deposits are still less risky than long-term government bonds. Both equities and corporate bonds are generally considered risk-on, but equities are still more risky than corporate bonds. Where an asset is located on that spectrum can evolve over time. For instance, the USD became more risk-off as it became the de-facto global reserve currency. Where has Bitcoin evolved on the risk-on risk-off spectrum? I have a growing belief that right now, after nearly a decade of growing liquidity and supply immutability, __Bitcoin is somewhere between the USD and non-reserve currencies like the CNY on the risk-on risk-off spectrum__. ! Two things happened during the last half a year or so that I believe turned Bitcoin into more of a risk-off asset. First, in late 2018, we entered the deepest stage of the fourth crypto winter. This coincided with growing concerns that the Federal Reserve was hiking interest rates too fast and the stock market entered a 20% correction zone. During this particular period, money flowed from risky markets such as the stock market into the USD, partly because investors could earn more yield on the USD, and partly because rate hikes may have signaled we were entering the late economic cycle. Was it just a coincidence that Bitcoin also crashed from the 6000s to the 3000s? Hard to say with 100% certainty, but if I had to bet, I’d say the rate hike was probably a contributing factor. Bitcoin is more risk-on than the USD. The second event is the recent CNY depreciation against the USD. The exchange rate is now approaching 7:1, an important psychological level for many Chinese nationals. ! There is a decent likelihood that the recent Bitcoin rally was indeed led by Chinese buyers in the OTC markets looking to protect their wealth. In the grand scheme of things, Bitcoin’s liquidity is still tiny, and there doesn’t need to be a lot of buyers in China to push the market up by 200% in less than three months. *As an aside, it’s important to distinguish between “CNY depreciation” and the “US-China trade war”. Many speculate the latter is what contributed to the recent Bitcoin rally. But the link between a trade war and the Bitcoin market is weaker than that. The trade war, among other factors, contributed to the CNY depreciation, but it’s the CNY depreciation itself that is more likely to have a direct impact on the demand for Bitcoin.* In the events above, we see the difference in crypto market sentiment as investors shift risk-off or risk on. During the rate hike, investors felt that Bitcoin was too risky for them, so they moved from Bitcoin to the USD. When the CNY depreciated against the USD, investors felt CNY was riskier than Bitcoin, so they moved from the CNY to less risky assets like Bitcoin and the USD. So what will happen to Bitcoin during the next financial crisis? I suspect it will largely depend on the nature of the crisis. - If the crisis is contained mostly to developing economies with non-reserve currencies, it will likely drive Bitcoin higher. - If the crisis mostly happens in developed economies, especially the US, then there are two possible scenarios: - If people continue to believe in the US government and the Federal Reserve, like they did during pretty much all US recessions in the last century, then most likely money will flow from Bitcoin to the USD. - However, in the case of a rare, catastrophic crisis where people completely lose faith, there is a decent chance that people will go for the hardest assets on Earth such as gold and Bitcoin . The truth is, Bitcoin’s 10-year history has occurred during an epic and sustained bull market. We don’t yet know how it will perform in a deep recession, but we may have seen some clues this year. It’s impossible to tell from a sample size of two, but bitcoin feels more risk-off than it used to be.
    Source: Qiao Wang — Published: 2019-10-13

  • History of Tether

    This post was originally published on May 02, 2019, and sent to __Messari Pro__ subscribers. ! Depending on who you talk to in crypto, Tether either represents the most important liquid reserve in the ecosystem or its largest systemic threat. Very few debate that this digital dollar has played an integral role in the market’s evolution, and an even more important role in one of the world’s oldest and largest crypto exchanges, Bitfinex. Last week, it became clear that the Tether stablecoin had lost its full-reserve due to banking issues and the seizure of some $850 million of reserves. Tether is easy if you just put it into a nice, neat little diagram like this: ! Well, maybe not easy, but let’s walk you through the history ### __Realcoin__ Tether got its start in July 2014 as “Realcoin”, a new cryptographic token that aimed to maintain a peg against various fiat currencies by holding an equivalent amount of cash reserves. Realcoin was the brainchild of entrepreneurs and investors Brock Pierce, Reeve Collins, and Craig Sellars. Sellars, the CTO of Mastercoin at the time , was ultimately instrumental in building the system at Tether, too, as it was the Omni protocol’s top application. While the Realcoin site has been down for years now, an archived version shows that Realcoin promised many of the things Tether later fulfilled or promised to fulfill in the ensuing years, namely that its reserve would be audited and verified by third-parties. ! ### __The Birth of Tether__ By November 2014, Realcoin rebranded itself to Tether. According to Collins, the move was made “in an attempt to clarify that it was not an altcoin nor a new blockchain.” Along with the rebrand, Tether announced one of its first partners, Hong Kong-based crypto exchange Bitfinex. For years afterward, Tether and Bitfinex maintained they were completely separate entities. But we learned later, thanks to the Paradise Papers leak in 2017, that Tether Holdings Ltd. had been established one month prior to the Bitfinex announcement…by Bitfinex executives Phil Potter and Giancarlo Devasini. The “partnership” was, in reality, more of a secret acquisition than anything. ! Tether began trading on March 6, 2015, with a market cap of $251,600. During the rest of 2015 and through 2016 it remained a small part of the crypto ecosystem, with less than $10 million in Tether circulating at any point prior to the later ICO boom. ### __Bitfinex hacks__ Between its small size and basic early function, things were quiet for Tether in its first couple of years. The same can’t be said about its parent and primary source of trading, Bitfinex. On May 22, 2015, a Bitfinex hot wallet was hacked leading to the theft of ~1,400 bitcoin, worth around $400,000 at the time. Bitfinex absorbed the loss and trading continued with minimal interruption. A little more than a year later, though, Bitfinex was hit again. This time, hackers made off with 119,756 bitcoin, worth around $72 million at the time. The size of the loss meant Bitfinex was insolvent. Rather than call it a day, collapse Mt. Gox style, and unwind operations, the company socialized its losses across all users, even those that did not hold bitcoin. In return for a 36% account haircut, users received a proportional amount of new BFX tokens, which could be converted into shares of Bitfinex’s parent iFinex. Bitfinex promised to engage Ledger Labs to complete an audit of the 2016 hack. ### __Tether heats up__ Things started to heat up in Q1 2017, and by May Tether began to see massive deposit inflows. The company ended the month at more than $100 million in circulating tokens, and the rise coincided with the early stages of the crypto mega rally. This is also around the time that Bitfinex, and by extension Tether, started to face significant operational scaling issues. As new deposits ran up in early 2017, Bitfinex ran into major issues with banking relationships, as its deposits skyrocketed, and its banking relationships grew more tenuous. Tether is eventually hacked in November 2017 for ~$31 million, but is able to hard fork and freeze stolen funds. #decentralization. ### __Banking woes__ In April 2017 Bitfinex filed suit against Wells Fargo for allegedly restricting access to USD wire transfers through Bitfinex’s Taiwanese banking partners.This was the first major sign of banking trouble for Bitfinex but it, more importantly, gave us an early sign of the link between Tether and Bitfinex, as Tether was explicitly named a plaintiff in the lawsuit. Just days before the suit, Bitfinex announced all BFX token holders had been repaid. ! The lawsuit was voluntarily withdrawn only days after filing but it marked an unofficial start to the race of where to find a place to park the millions of dollars actually backing Tether. It was around this time, that Bitfinex engaged auditor Friedman LLP to conduct its long-awaited audit. The same audit that was supposed to have been completed by Ledger Labs but never actually happened. Friedman would later conduct an audit on Tether balances, but at this point, there has been no public disclosure of the relationship between Bitfinex and Tether, so it wasn’t on the radar. Following the suspension of its banking relationship through Wells Fargo, Bitfinex spent time hopping around various banks, trying to find a friendly jurisdiction to park crypto-related funds and process customer payments. ### __But where are the audits really?__ Realcoin promised third-party verification of funds from day one, and Tether continued to follow through on that claim into 2018 as well. ! For years Tether never actually released an audit. The first attempt was around three years after the rebranding in September 2017 in the form of a letter from Freidman LLP, the same firm that had audited Bitfinex. In the letter, Freidman referenced various accounts and balances that they reviewed for Tether, their client. ! While this didn’t disclose any specific banks or give a real feeling that Tether was truly backed 1:1 as disclosed, it was a step in the right direction. By January 2018 Tether, or Friedman, had dissolved their relationship claiming it would be too much of a burden to complete a full audit. ### __So where are the funds now?__ The old Friedman letter showed that Tether had funds *somewhere,* but the exact banking relationships were unclear. That became apparent in May 2018 as it became common investor knowledge that Bitfinex, and by extension Tether, had moved their banking to Noble Bank. Noble was an interesting choice. Not only was Noble based in Puerto Rico, its primary evangelists were also preaching the creation of a new “crypto utopia” there . This was also where Tether co-founder Brock Pierce, remember a Realcoin co-founder had connections. In 2014, Pierce had backed Sunlot Holdings, a group that attempted to take over defunct bitcoin exchange Mt. Gox. The Sunlot bid was backed by Pierce and John Betts, a serial wall street entrepreneur and the CEO of Noble Bank. The tie between Nobel and its client appeared to have been strong, but things went sidewise. By June 2018 Tether had released another pseudo-audit from Freeh, Sporkin & Sullivan LLP, where FSS provided a similar spot check that indicated Tether *had* the deposits to back their tokens, but it failed to disclose at which banks those deposits were held. ! For whatever reason, Tether parted ways with Noble Bank short after, in October 2018, leaving the bank with no sustainable clients and an attempt to sell itself for less than $10 million. At the same time, The Block reported that Bitfinex began working through a new partner firm, Global Trading Solutions, that would process its transactions through HSBC. This relationship was short lived, and it’s where all the recent trouble began. ! Tether released another letter attempting to confirm their holdings of $1.83 billion in cash held at new banking partner, Deltec Bank & Trust with the bank itself happily issued a letter confirming the reserves. ! ### __Funds secure?__ Up until this point, it had appeared that Tether was either a) a dangerous fractional-reserve fraud, or b) a misunderstood company operating in a global financial gray area, fully backed by cash reserves, despite its convoluted banking and auditor relationships. But by early in 2019 Tether finally started to hint that something was wrong when they updated their disclosures to expand the scope of acceptable “deposits” to include non-cash assets. A historical snapshot of tether.to from January 2019 still showed a promise of full 1:1 fiat backing: ! Yet the current site, updated in March 2019, paints a different picture: ! ### __So what changed?__ A recent action by the New York Attorney General’s office shows that Tether likely held the deposits they promised. Skeptics seem to have been wrong with their suspicions that Tether’s were “printed out of thin air.” According to the NYAG . filing, that all changed thanks to a Panamanian-based payment processing firm called Crypto Capital. Crypto Capital served an important but lesser-known role in the crypto space by processing payments for a variety of more loosely regulated exchanges, and in retrospect, also appears to have been a common thread between failed exchanges. For Bitfinex, the now known parent company to Tether, Crypto Capital was one of the only ways to process fiat payments. This is where things got interesting. ### __Crypto Capital__ In the latter half of 2018, there had been public questions around Bitfinex’s solvency, specifically related to issues with withdrawing funds. The public outcry got to the point that the exchange published a response, claiming that things were fine and that there was no cause for alarm. Armed with the April 2019 action from the NYAG office we now know that things were not fine and that Crypto Capital had apparently lost access to $850 million in Bitfinex deposits. According to the documents, Crypto Capital claimed that these funds were tied up because of government seizures in a variety of countries, a claim to which Bitfinex representatives seemed skeptical. Instead of socializing these new losses, as they had done in the past, Btifinex took a “loan” from Tether’s +$2 billion in reserves to cover the shortfall. It was becoming clear that Bitfinex and Tether were very much tied to the hip and a shared balance sheet, despite what the management team had previously told the public. ### __Where’s the money now?__ Following the NYAG’s suit and the subsequent media coverage, Tether released a statement claiming that the $850 million in funds were “seized and safeguarded” and effectively-acknowledged that government agencies had frozen funds from Crypto Capital’s operating accounts. In the intervening days after the suit, Stuart Hoegner, general counsel for Bitfinex and Tether, filed an affidavit confirming that Tether was backed by only 74% cash and equivalents. The rest being equity in iFinex. Around the same time, a separate suit was filed against Reginald “Reggie” Fowler and Ravid Yoesf. Remember the HSBC account that Bitfinex was using through Global Trading? This was later identified as one of many accounts allegedly used by Fowler to process payments for cryptoasset exchanges, including Bitfinex, through Global Trading’s relationship with Crypto Capital. The money may be there, but I doubt we are going to see it any time soon. In the meantime, keep up to date with our Tether board to stay up to speed on the saga or suggest an update to us via Twitter!
    Source: Eric Turner — Published: 2019-10-13

  • Real 10 crypto exchanges revenue

    This post was originally published on April 11, 2019, and sent to __Messari Pro__ subscribers. ! During the bull run in 2017, cryptoasset prices soared and irrational exuberance was rampant. The now infamous NYT article “Everyone is Getting Hilariously Rich and You’re Not” proved to mark a cyclical top. People were “investing” without regard for fundamentals or valuation frameworksinto projects with little to no development. And many speculators *did* strike it rich. Some 2017 tokens produced eye-popping, slot-machine-like returns. ! *TBI note: Verge is likely one of the best performing financial assets of all time with a 1,280,000% return in 2017.* Still, it was the exchanges who were *really* printing money as they morphed into bona fide casinos. The bottom started to fall out in Q2 2018, and many token projects began dealing with shrinking treasuries and crypto funds were left with angry LP’s. The exchanges though, kept on humming, thanks to a higher trading volume baseline than they had seen prior to the 2017 bubble. ### __Exactly how much did they make?__ We wanted to estimate trading revenue figures of the exchanges used in our “Real 10” methodology to give you a sense of how healthy most of these businesses still are. To compare apples to apples across exchanges, our estimates are based on the spot trading volume for the top five pairs on each exchange and the average fees from each exchange’s pricing tiers. For Binance, where the top 5 pairs represent only ~30% of volume, we used the 2018 daily average volume reported by the company. ! Overall, the ten exchanges in our sample brought in $1.74 billion in 2018 revenue, up 65% from $1.05 billion in 2017. These rough numbers are most likely too low, though. We only included trading estimates for the top five trading pairs per platform, and we excluded fees from ancillary businesses such as listings and advisory. You also might notice that Coinbase revenues seem much lower than expected. That’s because we only address Coinbase *Pro* in this particular exercise. The core Coinbase retail business likely generated revenues an order of magnitude greater, particularly in Q4 of 2017 when most new customers were paying 1.5% buy/sell fees vs. Coinbase Pro maker/taker fees. This explains the YoY estimated jump in Pro revenues despite the fact that Coinbase as a whole likely experienced a decline in 2018. ### __Wait, so you’re saying that the bear market didn’t impact trading volumes?__ Of course, it did. But the lion’s share of 2017 revenue was backloaded, while the majority of 2018 revenue was front-loaded. ! Q1 2018 was the trading peak, when Binance famously reported greater profits than 200-year old financial behemoth Deutsche Bank. The first quarter was strong enough for them and others to ensure that 2018 ended up a higher revenue year than the prior. Bittrex and Poloniex are notable exceptions as they lost significant share to Binance in 2018. That was likely the result of their geographic disadvantage competing from the U.S. with an exchange model that stood on shaky domestic regulatory footing. Indeed, the most striking takeaway from our analysis is how quickly Binance grew into the largest exchange by volume , and revenue. By capitalizing on regulatory arbitrage, Binance was able to gain a competitive advantage and list the long tail of cryptoassets where other exchanges had been hesitant for legal reasons. Binance has also been aggressive in diversifying income streams through other businesses such as Binance Research, Binance Labs, and Binance Launchpad. Even *CoinDesk* lauded the company’s impressive trajectory in an op-ed earlier today. Binance’s “full service” offering model has proven effective and is becoming increasingly popular as exchanges look to insulate themselves from future market dips like the back half of 2018. Binance’s “Launchpad” may have spawned the new “Initial Exchange Offering” trend, and their aggressiveness with new listings led other platforms like Coinbase to speed up their own listing processes. ### __Where’s the rest?__ We’ll have Q1 estimates updated soon, and we’ll be working overtime to get more legitimate exchanges like OKEx and Upbit added to our “Real 10.” Stay tuned. And please keep in mind this study is a starting point. The numbers are estimates, so they aren’t 100% correct. We will continue to invest time and effort into creating more precise exchange models that include all trading pairs and time periods in the coming months. Particularly for the Messari Pro launch later this quarter.
    Source: Jack Purdy — Published: 2019-10-13

  • Stellar's 2017 Inflation Exploit

    This post was originally published on March 27, 2019, and sent to __Messari Pro__ subscribers. ! Earlier this year Messari published an analysis regarding Ripple’s XRP supply, and the apparent overstatement of XRP market cap by some $6 billion. At the time, we received feedback that we should rigorously apply the same standards to other assets as well. During our subsequent research, we found a number of discrepancies with reported supplies of the top crypto assets. One of our most interesting findings came from an analysis of Stellar Lumens , which appears to have suffered from a serious inflation bug in 2017. The bug was exploited, significantly inflationary, and patched with little publicity in April 2017. It appears the bug may have led to the leak of over 2.2 billion Lumens worth nearly $10 million at the time. Other high-profile inflation bugs have been discovered in crypto over the years. - Bitcoin suffered from a serious one in its early days that was promptly rolled back, and a separate bug was discovered and patched without incident last year. - Zcash’s creator, the Electronic Coin Company, recently released a public analysis of a bug they found in their protocol that could have, in theory, allowed for infinite inflation. The company was thorough in its analysis and alerted other affected projects, Komodo and Horizen, well before they revealed the security vulnerability publicly. - In December 2018, Coinmetrics discovered a bug that allowed a bad actor to surreptitiously pre-mine inflation during the Bitcoin Private protocol’s hard fork. In BTP’s case, the core development team subsequently attempted to remedy the issue by burning coins. What’s interesting about the Stellar Lumens discovery, though, is the magnitude of the bug , and the relatively muted public disclosures at the Stellar Development Foundation regarding the event. In fact, no media or analysts seem to have previously reported on the bug and the SDF’s allocation/burn of community XLM to offset the inflation event. ### __History, in brief__ In early April, 2017, the SDF discovered an inflation bug that they believed had been successfully exploited during Q1 2017. They quickly and quietly patched the bug in early April before rolling out a full fix at the end of the month. In Stellar's developer channels, each new release includes version labels such as v0.5.0 with a specific date . Yet an oddity appears within three occurrences of the release notes with the phrase "not widely released." Versions v0.6.1b, v0.6.1c, and v0.6.1d contain this specific language. These versions were those that included patches that addressed the 2017 inflation bug ! Stellar founder Jed McCaleb personally committed a preliminary fix to the issue on April 6th, with a limited release patch rolled out under Stellar v0.6.1c two days later. The official release came weeks later, with v0.6.2 rolled out on April 30th. In the intervening weeks, the attack vector was still open, but that’s merely due to the fact the SDF team was testing the fix against a controlled set of nodes. In the April 30th announcement, SDF mentioned they had burned Lumens to balance out the inflation bug, but did not mention the magnitude of the exploit or that funds appeared to have been transferred to and sold on exchanges. ### __Stellar Token Distribution__ The token distribution of Lumens has historically been managed entirely by the Stellar Development Foundation. The initial mandate defines a clear distribution schedule: ! In addition to the initial distribution rules, the protocol also features a built-in, fixed, nominal inflation mechanism. New Lumens are added to the network at the rate of 1% each year. Each week, the protocol distributes these Lumens to any account that receives over 0.05% of the “votes” from other accounts in the network. The current stated supply of Stellar Lumens is: - 104.8 billion XLM total - 19.2 billion XLM available - 8.6 billion XLM distributed This so-called “distributed” XLM has been allocated as follows: ! The SDF has stated that Lumens not claimed during its Bitcoin airdrop program were reallocated to the Stellar Build Challenge and towards ongoing operations of SDF. ### __2017 Inflation Bug__ With that as context, we can share more specific details regarding the inflation bug. In early 2017, 2.2 billion XLM were created inappropriately between January and April due to what may have been a concurrency bug. Our hypothesis, which SDF representatives confirmed was generally correct, was that this could have been done by exploiting the protocol’s “MergeOpFrame::doApply” function which: 1. Retrieves the destination account, then checks the account exists 2. Retrieves the source account, then performs a validity check within the source account 3. Increases the destination account's balance with the amount in the source account's balance 4. Stores the updated destination account change 5. Deletes the source account The purpose of the MergeOpFrame:doApply function is to merge a source account into a destination account, thereby discarding the source account and transferring all the source account balance into the destination balance. Henceforth a source account __should__ __only be allowed to be merged once__. The above function would work perfectly fine if the call to MergeOpFrame::doApply happened in a sequential fashion where for a given interval of, say one minute, the merge function is called once. Henceforth, past that interval, any subsequent calls to MergeOpFrame::doApply with the same source account would fail at step 2, which is the desired behavior. However, if MergeOpFrame::doApply was called simultaneously multiple times at the same split millisecond, a window of attack potentially opens itself for the same source account to be merged into multiple destination accounts. Let’s run a hypothetical scenario where two function calls to MergeOpFrame::doApply happens simultaneously, denoted by function call “Alpha” and function call “Beta”. Let’s suppose “Alpha” gets executed first, followed immediately by “Beta” which executes while “Alpha” is in the midst of steps 1-5 as noted above. Suppose both “Alpha” and “Beta” operates the merge with the same source account, but with differing destination accounts. In call “Alpha”, steps 1-5 above get executed, successfully crediting the destination account and deletes the source account. At the same split time, call “Beta” executes, it has successfully loaded the source account through Step 2, but it oblivious that the account has been deleted by “Alpha”, hence “Beta” obliviously proceeds through steps 3-5, successfully crediting its destination account. The result of “Alpha” and “Beta” executions is that the same source account has been merged twice into the same destination account, thereby doubling the ending account balance. This results in the creation of new tokens equivalent to the source account’s original balance. This led to the April bug fix and subsequent token burn by the SDF to offset the illicit inflation. Over the first several months of 2017, the MergeOPFrame::doApply bug was exploited 110 times, leading to the creation of 2.2 billion XLM., All of the addresses that exploited the bug are no longer accessible today on Stellar Expert or any other explorer. However, we managed to keep track of the history using the Horizon Client transactions history. ! ### __Transaction Analysis__ Let’s dig into the blockchain and watch some inflationary sausage get made. Below you can see an example of an account executing the MergeOp inflation bug whereby it merges within another account and doubles the holdings into a new child account multiple times over. ! The address that received the newly created coins could merge into another address, which would then merge into yet another address and so on, in a daisy chain of duplicate transactions. The created coins were almost always transferred through executing a mergeOP function rather than a more traditional paymentOP function, thus removing the source account from the ledger, and making it difficult to track. ! Eventually, one address would receive the newly created coins and distribute them in almost equivalent chunks to a large number of addresses. ! These types of addresses would follow the same pattern of the original address that had received the XLM. Eventually, for each branch, one address would receive the newly created coins and send almost all of them to an exchange. ! The remainder was always transferred to *another* address through the MergeOP function, cloaking the illicit withdrawal. ! Over time, three addresses were used to receive the rest of the XLM that did not go directly to exchanges, each one of them eventually merging into the next. Thus, all the addresses that had been transferring the created coins from their creation to the exchanges were removed from the ledger. ! The repartition addresses would always send part of the XLM to a large number of addresses, as described above, and would then merge itself within a newly created address , transferring its balance  . ! The relay address would then merge into another chain of addresses and it would eventually lead to a point where an address would once again execute the MergeOp inflation bug. This example only displays the transfer of 179 million XLM, but this exact mechanism was leveraged 21 times, and all of these mechanisms are linked together, leading to the creation of 2.0 billion XLM, most of which went to exchanges. .) . A similar mechanism was used on April 08, 2017, creating 255 million XLM. Address 2; Address 3; Address 4.) ! This 255 million exploit is even more surprising, as it occurred during a massive rally in the price of XLM, and was executed *after* the first commits on GIthub   mentioning “multiple merges issues” and also *after* the first security & protocol release note was published to acknowledge the exploit. Moreover, 70% of those 255 million eventually ended up in addresses that are directly related to the SDF. ! In total, we’ve been able to trace 2.25 billion that was created through the MergeOp inflation bug, more than 20% of all Stellar Lumens that were circulating at the time. The whole process was well orchestrated and most of the coins appear to have been created and transferred by a single party, reusing the first created coins to create more of them from January to April, at a steady rate. ### __The Token Burn Remedy__ The SDF has different official addresses related to its distribution program. One of them is the SDF Direct Signup Program address that initially held over 47 billion when the Mainnet launched in 2015. This address is responsible for the distribution of 50% of the initial Lumens supply within 10 years. On April 07, 2017 and April 12, 2017, that addresstransferred over2.25 billion XLM to another address: GDIW…OLBJ that had been created on April 07, 2017 *. GDIW...OLBJ transferred 100 million XLM to a third address it created, GCAV…ONDJ on April 12, 2017 **. SDF Transaction 1: ! SDF Transaction 2: ! On April 12, 2017, the third address,  GCAV…ONDJ, executed two Path_Payments to itself which resulted in the destruction of 99,999,969 XLM. It then merged back into the second address, GDIW…OLBJ, transferring its remaining balance of 31 XLM. On April 27, 2017, GDIW…OLBJ executed a Path_Payment to itself which resulted in the destruction of over 2 billion XLM. It then merged back into the SDF Direct Signup Program address, transferring its remaining balance of 4 million XLM. ! The use of *pathPaymentOp* to destroy the equivalent number of coins that were created through the MergeOp inflation bug was confirmed by the SDF in the Security and Protocol release notes on April 30 2017. __The SDF has yet to publish how many Lumens were created through the MergeOp inflation bug.__ ! Officially, the SDF claims that those 2.25 billion were distributed to “the crowd,” part of the 5.3 billion reported in the Stellar Dashboard through the Direct Signup Program. ### __Statement from Stellar__ SDF’s Christian Rudder confirmed our report and offered the following statement: > *"In April 2017, Stellar was an emerging open-source project with a small but dedicated developer community. Announcing the bug in our release notes therefore made total sense—that’s how you reach those users. We mentioned it twice, in fact, in the notes, and we were very clear the bug had been exploited. From there, we took the additional step of burning Lumens to “true up" the supply, so that current XLM owners wouldn’t be diluted and our projected total supply would remain accurate."* > *"We recognize that Stellar has since become significant financial software, and our disclosure standards have grown to reflect that reality. There’s been no notable bug since, and if there were we would disclose it in full detail as soon as it was patched. As we announced last month in our* *2019 Roadmap* *we have already committed to a full accounting of all of SDF’s Lumens by the end of the year, and more details around this old bug were going to be part of that.”* ### __So how did Messari find this?__ We have been rigorously researching every top cryptoasset to better understand their supply curves and what “hidden inflation” might exist from out-of-norm quirks, hacks, lock-ups, or vesting schedules. While digging into the XLM data, we identified the issue and began a formal investigation. Transparency is crucial to this industry’s growth, which is why we’re working hard to onboard projects to work with us on basic, proactive disclosures. Crypto may be “trust minimizing” technology, but it’s critical that this ecosystem self-police, self-report, and set standards ourselves in order to foster trust between investors, builders, and regulators. We at Messari hope we can facilitate the progress of project transparency with our wide array of stakeholders, but it must start with clear disclosures about the health of the blockchain. While most basic protocol updates don’t need to be published, we believe that when a major flaw is found, it should be flagged for all parties to understand.
    Source: Florent Moulin — Published: 2019-10-13

  • DeFi vs. Web 3.0

    This post was originally published on February 12, 2019, and sent to __Messari Pro__ subscribers. ! There are two possible long-term, world-altering futures for crypto: Decentralized Finance, or “DeFi," and "Web 3.0.” Today these two often get conflated, but the end markets and maturity of the foundations of these markets are vastly different. The DeFi thesis may be 5-10 years closer to fruition than the Web 3 thesis . There are a few reasons for this. ### __Technical Foundations:__  Most obviously, the main ecosystems for DeFi today, Bitcoin and Ethereum, have a 5-10 year head start on pre-launch Web 3-focused protocols such as Filecoin, Dfinity, and Polkadot. Almost all of today’s useful crypto applications have centered around censorship-resistant financial services: payments, fundraising, escrow, settlement, etc. And the network effects around Bitcoin and Ethereum - community growth and developer lock-in - has only continued to accelerate.  ### __Scaling Issues:__ In addition to technical maturity challenges, the new Web 3 focused blockchain systems may also face more pressing scaling challenges than their DeFi counterparts. "Data sovereignty" at scale will require more advanced solutions in computing and data storage. In fact, there’s a good chance Web 3 may never prove as scalable as Web 2. A more likely intermediate step seems to be that Web 2 companies would adopt what Albert Wenger refers to as a "mandatory end-user API”, allowing users to port their data between centralized data companies.  ### __Vitamins vs. Pain-killers:__ Whether users will care enough about data sovereignty to accept the cost and security tradeoffs will remain an open question for some time. Yes, speech censorship is an issue in repressive regimes, and yes, social media giants do wield incredible power over public discourse and whether a person is de-platformed “unpersoned?" But there are other ways to circumvent speech restrictions, and even hard-core libertarians will use Google if it works better than alternatives. That’s in stark contrast to DeFi applications where there are more clear and pressing needs from those who have historically been underserved by financial services.  As a data company, this informs a lot of our thinking at Messari. Both DeFi and Web 3 will generate valuable data, of course. But *relatively speaking*, DeFi may generate a smaller amount of more valuable data , whereas Web 3 may generate a higher amount of less valuable data . The users who are interested in the two datasets are vastly different. DeFi data users will tend to be investors, while Web 3 data users will tend to be average consumers. It’s tough to see many interesting consumer data companies gaining traction in the near-term if they aren’t specifically focused on the investor crowd. That’s why we care so much about the fundamentals of these assets even if they're still under-appreciated in the market.
    Source: Qiao Wang — Published: 2019-10-13

  • XRP Market Cap may be $6.1 billion overstated

    This post was originally published on January 24, 2019, and sent to Messari Pro subscribers. ! If history is a guide, Ripple is due to disclose its Q4 2018 transparency report as early as today. In advance of that report, we conducted extensive research into the health and legitimacy of the currently quoted XRP "market cap” available on third party crypto data services and exchanges. We believe the figure is significantly overstated; potentially by as much as $6.1 billion. We have reached out multiple times to Ripple representatives for comment, but have not yet received a response to our inquiries. We acknowledge that some of the estimates in this report lack precision, but believe they are directionally correct, and presented in good faith. We look forward to Ripple’s response, and will update this report accordingly if and when they do reply. ### __Summary:__ - XRP’s liquid “circulating supply” and “market cap” could be overstated by 46%, which would put total XRP “market cap” at $6.9 billion vs. $13.0 billion widely reported at current USD-XRP exchange rate. - We recommend major indices, including Bloomberg-Galaxy, MVIS CryptoCompare, and the Bitwise 10 Large Cap Crypto Index, and others, as well as passive funds such as Grayscale’s Digital Large Cap, and Bitwise’s 10 Private Index Fund, review this report and reach out to us with questions regarding our methodology. .) Pursuant to this report's finding that the true liquid market cap of XRP is significantly lower than previously reported, index weightings of XRP should likely be reduced. We do not believe reliance on Ripple’s XRP data API can be expected to yield accurate circulating supply figures in light of these findings. However, a more precise estimate of XRP supply will likely require proactive disclosures from Ripple, given the contractual restrictions the company has placed on a large percentage of its XRP resales. - In addition to the 59 billion XRP owned by Ripple and held on the company’s balance sheet , there could be significant, persistent sell-side pressure in the XRP market depending on the length and structure of selling restrictions placed on Ripple’s market-making partners, a Ripple affiliated foundation, and Ripple’s co-founders, all of which appear to have negotiated rate limits for sales based on exchange trading volume of $XRP. - Ripple has not shared the methodology or reference exchange data it uses to calculate trading volume for XRP, a critical data point that drives selling restrictions. More than 99% of XRP trading volume appears to come from overseas exchanges, many of which have been suspected of wash trading. We urge Ripple to disclose its volume-based selling methodology, as well as the amount of XRP subject to contractual volume-based selling limitations over time. This is necessary in order to help investors better understand the inflation and selling pressure in one of the industry’s largest assets, and is necessary to protect consumers and promote fair and efficient crypto markets. - A snapshot comparison of our circulating supply estimates vs. Ripple’s highlight the drastic difference between our deep dive and the company’s proposed statistics: ! ### __Methodology:__ - Today, Ripple’s selling restrictions on co-founder Jed McCaleb have locked up at least 6.7 billion of current XRP supply that can only be sold at a theoretical rate of 1% of daily trading volume. Jed told us: *"What I can sell a day is significantly less than 1% of the total daily volume. I'm not sure I'm at liberty to say how reference trading volume is calculated.”* Ripple co-founders Arthur Britto and Chris Larsen could have similar selling restrictions on their multi-billion dollar XRP allocations. However, we do not include those unknown amounts in our analysis, with the following exception... - We believe current circulating supply estimates include an illiquid position of 5.9 billion XRP, which has been publicly committed, but not yet donated, by co-founder Chris Larsen to RippleWorks, an affiliated California foundation, and registered 5013 non-profit. Ripple previously communicated the existence of this donation on a post from the company’s CMO on the “RippleForum." This was in August 2014; the same time it announced the existence of Jed McCaleb’s original XRP liquidation agreement. - We reviewed public tax records for RippleWorks as well as XRP wallet addresses, which shows the foundation held at least 2.8 billion XRP as of April 30, 2017, and currently holds at least 2.5 billion XRP. These holdings contain daily selling restrictions "based on a percentage of the previous 24 hours total trading volume on designated exchanges.” We do not assume additional contributions from either Ripple or Chris Larsen to the Foundation in 2017 and 2018, as these could not be estimated from wallet address analysis, and has not yet been publicly reported in RippleWorks Form 990 for the year ended April 30, 2018. We have reached out multiple times to RippleWorks representatives as to its 2017-2018 activity, but have not received any comment. We will update our analysis if and when we do. - Finally, we estimate that 4.1 billion XRP sold via the company’s money services business, XRP II since 2016, may be subject to re-selling restrictions . It is impossible to track the magnitude of this illiquidity without direct disclosures from Ripple, so we use reasonable estimates. - Combined, this means 19.2 billion of the 41.0 billion XRP currently quoted by Ripple as “in circulation” may be illiquid or subject to significant reselling restrictions. In reality, our revised supply estimate may prove to be conservative, as XRP trading volumes are more similar to EOS’s and Litecoin’s, two cryptoassets whose current referenced market caps are a mere 17% and 15% of XRP’s, respectively. Finally, we believe the amount of “restricted” XRP in distributions to investors, banking partners, and team members may be significantly higher than our estimates reflect. ! *We reached out to Ripple and RippleWorks representatives for comment, and will update our research assumptions once we have received a response.* ### __Introduction__ In recent years, Ripple has repeatedly denied that it “controls” XRP in any way, shape or form, including in official testimony. It has claimed the XRP ledger is independent from Ripple Labs’ oversight, and that it is a mere contributor. The company asserts 41% of the XRP supply has been “distributed” to third parties. Yet a sizable chunk of this “distributed” supply remains encumbered, often through legal agreements the company has struck with XRP recipients in order to restrict the rate of asset sales and shore up the price of XRP. These private deals have helped Ripple carefully control its distribution of XRP and obfuscate the impact inflation may have on XRP investors while propping up the token price. Some of these wallet addresses even appear to be managed by Ripple on behalf of the address owners. As a result, it appears actual current “circulating supply” estimates for XRP could be overstated by as much as 48%, if not more. Indeed, we believe $6.3 billion in XRP’s quoted market cap could be illusory. __The questions we aimed to answer in this report are:__ 1. What exactly is the liquid circulating supply of XRP? 2. What is the rate at which illiquid, but distributed supply can be sold on the open market per Ripple’s contractually imposed selling restrictions on its partners? __Definitions:__ - Circulating Supply: liquid, tradeable supply that is unencumbered by contractual selling limits - Restricted Supply__:__ illiquid, but distributed supply encumbered by Ripple’s contractual volume-based selling agreements PLUS XRP balances Ripple holds on its balance sheet for sale in its direct and programmatic sales programs via XRP II, a money services business - Escrowed Supply__:__ supply escrowed programmatically by Ripple and held as a long-term asset __We break this report down into eight sections:__ 3. A history of XRP’s supply 4. An analysis of Ripple Founders’ agreements 5. RippleWorks Transactions, Balances, and Selling Restrictions 6. XRP II Sales 7. Ripple’s Escrow 8. Volume-based Selling Restrictions and Reference Data 9. Impact on Crypto Market Indices 10. Call for Additional Ripple disclosures ### __A short history of XRP’s supply:__ XRP's supply curve is unlike any other we’ve reviewed in crypto. page on Messari.) ! Let’s dig into the brief history that got us this unique shape... - September 2012 - Ripple is formed , and co-founders Arthur Britto, Jed McCaleb and Chris Larsen sign a founders’ agreement assigning Ripple software and future "Ripple Credits" to the founders and the company itself. .*) - January 2013 - Ripple launches. A fixed supply of roughly 100 billion tokens is created, with 20 billion allocated to “founders” and 80 billion to Ripple. - October 2013 - From Ripple’s website: "Ripple Labs created 100 billion XRP within the Ripple network, and that amount will never increase.” * * - May 2014 - Jed’s Agreement * *Co-founder Jed McCaleb has a falling out with the Ripple team, and later forks away to create Stellar. In order toensure Jed won’t tank the price of XRP , Ripple gets Jed to agree to lock ~9 billion tokens in a structured selling agreement. In the same announcement, Ripple CMO Monica Long claims CEO Chris Larson has also agreed to donate 7 billion XRP to the Ripple Foundation for Financial Innovation *“to be locked up and donated over time.”* The company also claims: *"Arthur Brito committed to a lock-up period for his XRP months ago. Ripple Labs is working on a broader XRP lock-up policy for team members, so his lock-up will be part of that plan.”* It is unclear how much total team member supply remains locked-up. - May 2014 - In a primer that was available on the site for some time, the company claims it “plans to gift 55 billion XRP to charitable organizations, users, and strategic partners in the ecosystem over time.” ** We do not know what selling restrictions, if any, have been placed on the company’s strategic partners, but we do know that they exist, and that these have predominantly not been “gifts”. - July 2014 - Chris Larsen makes his first pledge to RippleWorks , a 500 million XRP contribution. Through April 2017, an additional 2.5 billion XRP was donated to RippleWorks by Chris and Ripple Labs. A review of RippleWorks’ public form 990s reveals the Foundation has agreed to selling restrictions with its primary donors based on a percentage of daily XRP reference volume. There was 2.8 billion XRP remaining on the RippleWorks balance sheet as of April 30, 2017 . - September 2016 - Ripple enters into an agreement with bank blockchain consortium R3, which would give R3 the right to purchase up to 5 billion XRP for $0.0085 per unit until September 2019, in return for co-marketing XRP as a potential settlement currency for R3’s banking partners. We believe this type of bespoke options agreement may be pervasive with Ripple’s existing investors and financial services partners, such as SBI. - October 2016 - Ripple announces Brad Garlinghouse will take over as CEO from Chris Larsen. - November 2016 - Miguel Vias joins Ripple as head of XRP markets. *“In his new role, Vias will utilize his considerable expertise building liquidity for new financial products by working with marketmakers, traders, investors, and exchanges to strengthen the XRP markets and set the stage for large-scale institutional adoption. We’re planning to launch a quarterly XRP update that will focus on the state of the market, XRP deal structures, and sales targets. Most importantly, our intent is to make XRP more broadly accessible by listing it on additional exchanges.” * - Q4 2016-Q4 2017 - Reviews of Ripple’s first five quarterly XRP transparency reports from Q4 2016 to Q4 2017 include references to selling restrictions on XRP distributed throughRipple’s money services business XRP II. The disclosures all include some form of the following language, but no details as to the specific nature of the resale restrictions or the discounts provided to direct purchasers: *“These sales include sales restrictions that help mitigate the risk of market instability due to large subsequent sales.” *Subsequent* *2018 transparency reports omit this disclosure entirely. - May 2017 - Ripple commits to placing 55 billion XRP in Escrow. CEO Brad Garlinghouse tells CoinDesk the company spent "about 300m XRP per month for the past 18 months" to incentivize market makers to offer tighter spreads for payments. - June 2017 - R3 alleges in a lawsuit that Ripple CEO Brad Garlinghouse attempted to terminate the June 2016 options contract through an email to R3’s Chief Executive David Rutter. - December 2017 - Ripple officially places 55 billion XRP in Escrow. 1 billion XRP is unlocked every month and any amount that is unused goes back into escrow for another 55 months. - September 2018 - R3 and Ripple reach a settlement regarding the disputed options contract. No details are disclosed, further muddying potential outstanding illiquid or encumbered XRP that could account for up to 5% of the asset’s fully diluted supply. - Today__:__ Ripple’s XRP data API counts 41 billion XRP outstanding as of 12-30-2018. This figure currently serves as a reference rate for most third-party data services and indices. ### __Founders agreements:__ After leaving Ripple to found Stellar in early 2014, co-founder Jed McCaleb announced he would sell his entire stake in XRP. The sale would likely have crashed the XRP market, and indeed, the announcement itself led to a sharp 40% sell-off. Due to its inherently decentralized nature, there was nothing anyone could do about this dip in the XRP market, right? Not exactly. Ripple Labs panicked and ultimately moved to convince Jed to sign an agreement which would restrict his sales to according to the following schedule: - $10,000 per week during the first year - $20,000 per week during the second, third and fourth years - 750 million XRP per year for the fifth and sixth years - 1 billion XRP per year for the seventh year - 2 billion XRP per year after the seventh year In 2016, things got heated again, as Ripple accused Jed of breaking his agreement. They settled a $1 million lawsuit, and agreed to a new lock-up schedule: - 0.50% of average daily volume during the first year - 0.75% of average daily volume during the second and third years - 1.00% of average daily volume during the fourth year - 1.50% of average daily volume during the fifth year Despite high-profile media accounts of Jed’s accelerated 2018 XRP selling, he told us that his family and affiliated donor-advised fund still hold roughly 7 billion XRP. In addition, he said, *“what I can sell a day is significantly less than 1% of the total daily volume. I'm not sure I'm at liberty to say how it is calculated.” *In fact, it appears that as part of the August 2018 settlement, Ripple retook control of at least one of Jed’s primary XRP wallet addresses to manage his daily selling. . Jed wallet transfer. Ripple takes custody.) In addition to this 4.6 billion XRP address, we estimate 2 billion XRP remains committed and encumbered in a donor-advised fund per Jed’s and the company’s agreement. In projecting out Jed’s stake’s contribution to future liquid supply, we leaned on a more conservative daily selling schedule of 0.5% of reported daily volume per day. This may be overstate the theoretically possible pace of sales, as it's unclear which methodology Ripple uses to determine global trading volume. ### __RippleWorks + Chris Larsen Sales__ This one is a bit weirder. During the initial Jed market dumping saga, Ripple's then-CEO Chris Larsen committed to donating 7 billion XRP to the Ripple Foundation for Financial Innovation . This is how the message was delivered: *"As you know, Chris has agreed to gift 7 billion XRP to an independent foundation committed to the financially underserved. That XRP has been locked up and will be donated to the foundation over time. The foundation - the Ripple Foundation for Financial Innovation - has been established and its charter is to help the underbanked worldwide in a way that's supportive to the Ripple ecosystem and the value of XRP. An official announcement from the foundation is forthcoming."* Noble, but not very specific in terms of when exactly these funds would be committed. And indeed, Chris did *not* donate the full 7 billion XRP all at once. Instead, he appears to have contributed annually. We reached out to RippleWorks for comment, but have not received a reply. While we await a reply or the Foundation’s public filing for the 2017-2018 tax year , we assume that no additional contributions of XRP were made to RippleWorks in 2017-2019. ! In addition, Ripple appears to have made two contributions of 1 billion XRP each to RippleWorks in 2015 and 2016. It is unclear whether this was donated on Chris Larsen’s behalf or whether this was done at the company level to minimize tax liabilities. Based on our analysis of existing wallet addresses, we assume again that these donations to RippleWorks are distinct. ! __Summary information from RippleWorks 2015-2016 and 2016-2017 Form 990s:__ ! ! Reviewing RippleWorks historical sales of its XRP balance, we can further calculate that just 316 million XRP had been sold by the Foundation through April 30, 2017. A review of RippleWorks wallet addresses shows that an additional 195 million XRP may have been granted to third party charities in 2017-2018. We estimate the Foundation’s current balance is approximately 2.5 Billion XRP. ! Notably, we also reviewed Form 990s for *third-party* charities which were known to have received sizable donations from Ripple, and do __not__ believe they are subject to the same reselling restrictions as RippleWorks. DonorsChoose, for instance, was able to unwind its $29 million donation in three weeks. RippleWorks disclosed similar selling restrictions with Ripple as had been agreed to with co-founder Jed McCaleb in its 2015 and 2016 Form 990s, further supporting our position that this balance should be treated as illiquid and restricted vs. circulating: ! *, yet paid its chief executive $500k / year in salary. That’s a nice car on a teacher’s salary.* Let’s first break down how Ripple Labs makes money from its ongoing XRP sales, which account for well over 90% of the company’s revenue. There’s two types of XRP sales that the company discloses: - Programmatic sales__:__ These come from the company’s 6.5 billion XRP “available-for-sale” reserve, and can be sold at a rate of no more than 0.25% of average daily volume on defined exchanges. Since the company began its programmatic selling efforts in Q2 2017, they have made nearly $400 million selling on the open market. - Direct sales from XRP II: These come from direct bespoke deals with institutional clients, and include reselling restrictions to ensure its partners do not purchase XRP at a discount from the company and then immediately flood the market with sales. As the price of XRP tanked and programmatic selling declined in Q3 2018, Ripple had a record quarter from XRP II. The $98 million in XRP II sales nearly eclipsed the previous six quarters combined. ! The catch is that we have limited visibility into the actual amount of XRP that was sold via direct XRP II sales because we don’t know how heavily the company discounted its encumbered distributions. We *do* know the dollar volume of sales, though, so we can come up with a conservative estimate of encumbered XRP using an illiquidity discount of 60%. We estimate 5.1 billion XRP has been sold via direct selling deals since 2016, and we estimate that 20% of this restricted supply has been sold to date, with the remainder encumbered as part of contractual resale restrictions agreed to in return for such steep discounts offered to institutional partners. ! ** Selling private bank money is a helluva drug. ### __Ripple Escrow__ We’ve identified the potential issues with the company’s stated “distributed” supply. But we also know the company escrowed 55% of the XRP holdings into long-term contracts during December of 2017, and that they currently recognize these holdings as an illiquid balance sheet asset. Ripple Labs inorganically removed 55% of the total XRP supply from the market and locked it up into monthly 1 billion XRP contracts. To date, the company has "re-escrowed” most of the XRP it has unlocked, and released just 1 billion to its “available-for-sale” undistributed pool through Q3, which it taps for programmatic sales and XRP II direct sales. In calculating future liquid supply we assume Ripple takes 250 million out of escrow each month for the remaining period of initial escrow and liquidates the remaining balance at a similar pace in the years thereafter. ### __Problems with Ripple’s volume-based selling restrictions:__ Given the large XRP balance that appears subject to volume-based selling restrictions, we reviewed the exchanges with the highest reported XRP trading volumes. We defer to CoinMarketCap for figures, as we haven’t yet expanded our OnChainFx exchange coverage to some top XRP market makers like ZB.com, DigiFinex, BITBOX, Bitlish, BCEX, and Bitforex, which collectively make up 40% of XRP volumes. Aside from high volumes of XRP trading, those exchanges have one other thing in common: they’re all on the Trading Advisory List compiled by the Blockchain Transparency Institute, a research organization that has been studying suspected wash trading on major crypto exchanges. In fact, XRP’s largest market is currently ZB, which accounts for 15% of daily XRP trading volume. Here’s what the BTI had to say about ZB: *"The largest wash trading offenders in the top 10 exchanges include ZB exchange which appears to be wash trading their volume to over __390x.__” *There are three US-based exchanges that appear to offer XRP trading, despite XRP II’s status as one of the few BitLicensed companies in the state of NYS: Bittrex, Kraken , and Poloniex . Those exchanges account for less than 1% of total XRP volume. Make no mistake, Ripple has *significant* incentivizes to push the envelope in terms of which exchanges it uses for volume-based XRP trading data, particularly since its primary available options are all subject to non-U.S. regulators vs. the SEC or CFTC. By comparison, XRP trading volumes have consistently fallen below EOS and Litecoin, which trade at 17% and 15% of XRP’s currently stated market cap. ### __Impact on crypto market indices:__ One side effect of our analysis is that we now believe XRP’s importance as a component to most of the major crypto basket indices is vastly overstated. - Bloomberg-Galaxy__:__ Currently gives XRP its maximum weighting of 30% using its methodology. Pursuant to this report's finding that the true liquid market cap is likely less than half that, the XRP weighting should likely be reduced. - MVIS-CryptoCompare:____ Currently gives XRP a weighting of 24% using its methodology. Pursuant to this report's finding that the true liquid market cap is likely less than half that, the XRP weighting should likely be reduced. - Bitwise: Currently uses its own methodology to price the Bitwise 10 Large Cap Crypto Index for its Bitwise Private Index Fund, and for which it recently filed an ETF application with the SEC. Currently gives XRP a weighting of 13.4% vs. Ether’s 11.5%. Pursuant to this report's finding that the true liquid market cap is likely less than half that, the weighting should likely be reduced. - Grayscale: Currently uses its own methodology to price the index for its Digital Large Cap Fund, which currently holds $8.5 million in AUM. Currently gives XRP a weighting of 14.7% vs. Ether’s 13.9%. Pursuant to this report's finding that the true liquid market cap is likely less than half that, the weighting should likely be reduced. - Bitcoin Dominance:____ Given the downward revision of XRP’s market cap, we____are also recalculating the widely cited “Bitcoin Dominance” percentage on OnChainFx. Under our revised XRP assumptions, Bitcoin’s market dominance is above 60% vs. the generally cited rate of 55%. ### __Conclusion__ - XRP’s current circulating supply estimates are deceiving figures that are heavily skewed by the legal and strategic decisions of Ripple Labs. We estimate current liquid outstanding supply may be closer to 21.8 billion XRP -- half of what is currently reported. We anticipate significant future selling pressure as multiple entities conduct sustained and potentially simultaneous daily selling according to their trading volume-based restrictions. - We encourage Ripple Labs, the invisible hand of the XRP market, to provide additional disclosures regarding its liquid XRP supply and contractual encumbrances in order to protect investors, and ensure the markets are truly transparent, fair, and efficient. - Absent those disclosures, we recommend index providers, data services, and exchanges take the most conservative estimates available regarding the asset’s market cap so as to accurately reflect reality. ### Legal Disclaimers: - *Do your Own Research* *The information in this research report is intended to be used for informational purposes only. It is important to do your own research before making any investment based on your own personal circumstances. You should seek independent financial advice from a registered investment professional in connection with any information you find on our Website and wish to rely upon, whether for the purpose of making an investment decision or otherwise.* - *No Investment Advice* *Our site is a crypto financial data and research portal and content aggregator. We are not an investment advisor, we have no access to non-public information about publicly traded companies, and this is not a place for the giving or receiving financial advice, advice concerning investment decisions or tax or legal advice. We are not regulated by FINRA. No content on the site should be construed as a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in our analyses. We do not provide personalized recommendations or views as to whether a stock or investment approach is suited to the financial needs of a specific individual.* - *No Reliance* *Accordingly, we will not be liable, whether in contract, tort or otherwise, in respect of any damage, expense or other loss you may suffer arising out of such information or any reliance you may place upon such information. Any arrangements between you and any third party contacted via the site are at your sole risk. Messari has made every attempt to ensure the accuracy and reliability of the information provided on this website. However, the information is provided "as is" without warranty of any kind. We do not accept any responsibility or liability for the accuracy, content, completeness, legality, or reliability of the information contained on this website. No warranties, promises and/or representations of any kind, expressed or implied, are given as to the nature, standard, accuracy or otherwise of the information provided in this website nor to the suitability or otherwise of the information to your particular circumstances.*
    Source: Messari — Published: 2019-10-13

  • 51% attacks' impact on prices

    This post was originally published on September 05, 2019, and sent to Messari Pro subscribers. The value of decentralized networks comes from the ability for multiple parties to agree on a common “truth.” In a blockchain, this truth comes from an immutable history of transactions recorded to the ledger. If an attacker is able to alter this truth the value of the network, and any associated cryptoasset, would be damaged. The most well-known attack on a blockchain is a majority, or 51%, attack. In this scenario, an individual or group is able to gain a majority of hashrate and create double-spend transactions. As Bitcoin Wiki explains it the attacker* “submits to the merchant/network a transaction which pays the merchant, while privately mining a blockchain fork in which a double-spending transaction is included.*” Breaker magazine provides a more detailed breakdown and an example of what a double-spend looks like. While a 51% attack is possible on any network the costs to gain a majority of hashrate makes it prohibitively expensive. Attacking Bitcoin, for example, would cost ~$1 million per hour according to Crypto51.app. Smaller networks, on the other hand, are easier to gain control of. According to Messari Pro data, at least 13 networks have suffered a majority attack in the past. ! So with this data its time to ask the question: Do 51% attacks impact the value of cryptoassets? Looking at the seven-day performance following an attack the majority of assets showed negative returns with Horizen dropping the most at -30.1%. Interestingly, six of the 13 assets actually gained in value in the week after an attack, with Electroneum, Verge, and Waltoncoin all showing double-digit returns. ! Expanding our scope to the seven days before and after attack, it becomes clear that these events have little impact on price. Assets that had been trending up tended to continue rising while those that were falling tended to end with a negative return. ! Admittedly, a seven-day period could be too small to truly measure the impact of an attack and dissemination of this news could take longer to reach investors. Its more likely though that speculation continues to be the primary use case for most cryptoassets outside of a few, and fundamental events have little impact on price - especially for smaller networks.
    Source: Zack Voell — Published: 2019-10-13

  • The Economics of Proof-of-Stake rewards

    This post was originally published on May 22, 2019, and sent to Messari Pro subscribers. The war for attention is heating up as PoS blockchain communities attempt to entice new investors to join their ecosystems. A couple of weeks ago, Prysmatic Labs contributor) released its Public Testnet for ETH 2.0’s proof-of-stake “beacon” chain. This followed a proposal from Vitalik that argued for an increase in the issuance rate in ETH’s new PoS, something the Ethereum community had been clamoring for to remain competitive amidst a sea of new, and often more lucrative, staking options. With a variety of staking protocols now launched in the wild, we took a closer look at the ETH 2.0 proposals, and how they compare to other PoS and DPoS protocols. ### __ETH 2.0 issuance specs:__ As a reminder, the Ethereum blockchain is still secured via proof-of-work mining. Just like bitcoin. However, in ETH 2.0, the blockchain will be maintained via a new proof-of-stake system, where rewards will be distributed on a sliding scale based on the total amount staked on the network. The more total supply that’s staked, the higher the system-wide issuance rate . Although individual yields will decline as the percentage of network stakers increases. The most recent proposal more than doubles the staking reward rate: ! ! Justin Drake, a researcher at the Ethereum Foundation, has argued that targeting 30,000,000 ETH at stake, long-term, “*seems about right for strong security*.” That would represent about 30% of the network, and result in ~3% annual inflation. To illustrate how this new proposal would impact the ETH supply curve, we modeled out distributions considering only inflationary events while setting aside potential deflationary mechanisms which should be much lower. For this simulation, we’ve used a more conservative 10,000,000 ETH total stake and assumed a transition to Serenity in July 2021. ! The impact of the revised proposal on ETH’s long-term supply is not insignificant. After 10 years, over 3.6 million ETH *more* will have been issued than previously spec’d. By 2050, the outstanding supply would be 9% higher than with the first proposal. Still, it’s a negligible difference in contrast to fiat inflation rates, which are still higher. Of course, analyzing the issuance rate on its own does not provide the full picture of staking specifications under this new proposal, as Vitalik described on Reddit: ! *. The idea is to replace the “first-price auction" fee model in Ethereum with a mechanism that adjusts the average fee based on network demand. The base fee would be burned and miners / stakers would only get to keep the “tips” on top of the base fee.)* ### Here is a list of factors you need to consider when evaluating staking structures: - __Staking network issuance__: implied issuance rate to validators. - __Total network issuance:__ can be higher than staking network issuance in the case of hybrid PoS / PoW models. - __Transaction fees__: how fees are distributed/burned within the network. - __Other burn mechanisms__: slashing, offline penalties, etc. - __Hidden inflation __: supply managed centrally by teams, companies, foundations that enters circulation overtime via secondary sales. - __Validator set and rewards__: who can be rewarded for staking/voting. - __Yields competition__: opportunities to compound an investment in a given cryptoasset ecosystem ”). - __Governance rights__: how staking confers on-chain governance rights and how valuable those rights are. - __Access rights:__ how tokens provides product access or discounts in a network - __Work rights:__ how tokens offer rights to provide services in a network - __Minimum viable staking participation:__ the percent of the total supply needs to be staked in order to guarantee the security of the network. - __Staking costs and risks__: - Costs related to computing, maintenance, capital acquisition, capital lockup, etc. one needs to support to stake its asset. - Costs implied by staking your asset with a third-party service. - Risks associated with staking. - __Taxability:__ how rewards are taxed and how this impacts net staking yield. We won’t go into all the details on these points today, but for those of you that want to dig a little deeper in a PoS system, these are parameters you’ll need to consider. For now, let’s see how EOS , Cardano , Tron , Tezos , and Cosmos stack up to ETH 2.0 using the seven factors listed above: ! *Chart notes: ETH issuance rates are based on the assumption 10M ETH is staked and a transition to Serenity occurs July 2021. Cardano PoS specifications are based on the only reward distribution schedule communicated by Cardano to compute future inflation. The percentage of network staking is based on current participation or projected participation .* ### __Hidden Inflation:__ The Ethereum Foundation currently holds just over 640,000 ETH, or 0.61% of the current outstanding supply. Conversely, the Tron Foundation holds over 33.0 billion TRX. That’s 33% of the current outstanding supply, which will become liquid in January 2020. Why is this important? Issuance rates and staking yields are usually calculated based on outstanding supply. Tron’s current staking yield is a bit over 1.75%, but once the Foundation supply is free to enter circulation, it’s probable that the “real yield” will be negative - stakers won’t be able to keep up with the pace of dilution from new Tron Foundation secondary sales. Ethereum has the lowest “hidden inflation” among the 6 projects while Tron has the highest “hidden inflation” and the lowest issuance rate. In some cases, foundation tokens are also staked even though they have not fully vested. TheTezos Foundation is baking both its allocation and DLS allocation as stated on Reddit by the official foundation account:* “The Foundation has half of its tokens in a vesting smart contract and another half is reserved for DLS when certain milestones are met. When those milestones are met those tokens will be moved into a vesting smart contract for DLS. Until that time the Foundation will use some of these reserved tokens internally as part of the deposit needed for baking.” *According to TezosScan, the Tezos Foundation currently controls over 32% of the voting power. ! ### __Dynamic Issuance Rates__: Cosmos features the highest projected annual issuance rate at 7%, which is the minimum rate set by its protocol specifications. On the other hand, maximum annual inflation is capped at 20%. You can take a look at Cosmos supply curve on the asset page, computed with an assumed 8% annualized inflation. ! Cosmos devised this method to make it expensive for holders that failed to stake ATOMs. The team is targeting a participation rate of at least 66% rather than targeting a defined inflation rate. While this is one issuance structure, others exist including: - __Target total network stake__: if the total network stake is lower than the target, the inflation rate increases, if the total network stake is higher than the target, the inflation rate decreases or stays fixed - __Fixed inflation rate:__ total issuance increases each year and the stakers split - __Fixed issuance__: inflation rates decrease each year and stakers split - __Decreasing issuance__: inflation rate decreases exponentially each year) and the stakers split - __Sliding scale based on total network stake__: *as discussed above* - __Dual-token model__: staking rewards are denominated in a token different from the native token . The native token supply does not inflate. ### __“Real Inflation”__ Taking into account hidden inflation and projected staking incentives structures, we can calculate the real circulating supply inflation and show the dilutive impact of both hidden inflation and staking rewards. The table below features the real circulating supply inflation by January 1, 2022, which assumes project treasuries will be distributed linearly over a period of 20 years from today to May 2039. . ! ### __Transaction Fees and other Burn Mechanisms:__ Transaction fees that get redistributed , burnt , or slashed could have a significant impact on staking yields and the costs of holding in the medium-long term. Vitalik has written about fees distribution and their effect on incentives and protocol security in his article from 2016 “On Inflation, Transaction Fees and Cryptocurrency Monetary Policy”*.* Those potential deflationary mechanisms are nevertheless hard to project since they mostly depend on network conditions such as activity, validators behaviors, staking conditions etc. ### __Validator Sets and Minimum Costs:__ In EOS, only block producers and standby producers can earn a share of block rewards votes to be qualified as a standby producer). The EOS constitution does not allow block producers to buy votes from token holders. The result is that any token holder with less than 30 million votes currently gets diluted by new network issuance by default. In Tezos the requirement to be a validator is also relatively high , but users can delegate XTZ to a validator, and pay a commission rate . In ETH 2.0  the minimum collateral to run a validator is currently projected to be 32 ETH . ### __Yields Competition and Governance Rights__ Governance is a primary feature of Tezos. Staking XTZ not only provides network security but also confers network governance rights, which may have additional intrinsic value. Conversely, staking ETH does not provide the staker with any on-chain governance rights and ETH 2.0 monetary policy does not focus on maximizing staking participation the way Tezos monetary policy does. The rationale behind staking XTZ relies on: 1. Providing security to the underlying protocol 2. Accessing valuable governance rights 3. Compounding investment Whereas the rational behind staking ETH lies on: 4. Providing security to the underlying protocol 5. Compounding investment This difference has two consequences for ETH: 6. ETH staking specifications fit with the programmable money thesis. ETH issuance rate is lower. The net cost of not staking ETH is lower than the net cost of not Staking XTZ. This leaves more room for other higher-yield opportunities like locking ETH as collateral in an interest-bearing loan. For XTZ, any yield opportunity would have to provide a higher return than the net cost of not staking, which may prove to be a prohibitively high opportunity cost. 7. ETH staking rewards will be in direct competition with other yield opportunities. A rational investor will arbitrate between Net staking yields and other yield opportunities such as Lending ETH on Dharma, using ETH as collateral in Maker,  providing liquidity in Uniswap, locking ETH in a smart-contract to receive a given token . ### __Long-Term Equilibrium & Risk Scoring__ In the long-term, it will be interesting to see how staking returns and other returns will converge. It will likely take many years for on-chain financial product risks to get appropriately priced by the market. The variables that will impact staking and lending returns are numerous: ! Staking and lending yields are themselves correlated with costs, risks, and associated taxes. Staking yields are also correlated with transaction fees and the proportion of those distributed to Stakers. As the market evolves, we’ll track: - How investors price capital acquisition and lock-up costs. For example, the minimum withdraw queue wait will be initially set at 18 hours for staked ETH. - How lending and staking risks get priced and how third-party services will impact pricing. With a more mature staking-as-a-service market, we can imagine third-party risks associated with delegating will be brought down as the services compete on transparency, usability, and commissions. - How transaction fees grow. What will be the proportion between base fees and tips be? - How taxation will impact returns. - Protocol security is weighted as a return. Will there be people staking even though the short-term yields are lower but because they do believe in the long-term benefits of having a secure system? Issuance rates and staking yields alone are not sufficient to understand the economics of PoS and DPoS protocols. While we have covered many concepts at a high level here, the important takeaway is that each protocol has unique monetary policies and staking specifications. In Messari Pro , we’ll be adding more data on PoS and DPoS protocols to help you get a better sense of each protocol’s specifications. P.S. If you can’t get enough reading on PoS: - Three weeks ago we shared some thoughts on taxability and third-party staking services based on Ben Davenport’s article “A Stake to the Heart”. - Chorus also recently published an interesting article on staking costs and taxability and calculated an average weighted commission rate for Cosmos and Tezos. This was to *“show what percentage of the token rewards delegators in the network are collectively willing to forego in order to securely outsource the work of maintaining validation infrastructure to staking providers”. * - Additionally, Collin J. Myers from Consensys ran the calculation to find out how much it would cost to run a validators in a two-part article: Validator Economics of Ethereum 2.0 . - Anjan Vinod from Blockchain at Berkeley, covered current work token implementations, including Augur, Nucypher, and Livepeer in his article Stake to Play Token Economics: Exploring Work Tokens.
    Source: Florent Moulin — Published: 2019-10-13

  • DeFi vs. CeFI

    This post was originally published on September 11, 2019, and sent to Messari Pro subscribers. The crypto world has largely wrapped its head around “digital gold,” but the promise of a web 3.0 future with things like decentralized identity, autonomous agents, and p2p digital resource markets still feels far out. The DeFi narrative, on the other hand, has dominated the crypto conversation in 2019. It promises a future for banking that is open and permissionless. One where anyone can access various financial services, understand the transparent risks involved and have confidence their money won’t be stolen or frozen. There are killer apps that already work, too. Anyone can trade their cryptoassets on Uniswap or verify the amount of debt and related collateral in MakerDAO . However, encapsulating the true nature of the term “decentralized” is more difficult than it appears and a deeper look under the hood reveals many of the leading DeFi protocols aren’t as decentralized as they first appear. That’s not to say all projects working in what we refer to as DeFi have to be fully decentralized, so long as there is transparency regarding the degree of centralization. Take Compound. One of the fastest-growing DeFi protocols with over $40 million in loans outstanding. One major reason its been able to sustain this fantastic growth in its early going is that it offers a 5x improvement over centralized alternatives - 10% vs. 2% interest rates. This is a dApp that isn’t merely offering ideological benefits but easy to understand, tangible benefits to the average consumer looking to earn interest - more money is better than less money. At least for those interested in taking on the additional risk. ! Of course, there’s no such thing as a free lunch. Money doesn’t *actually* just go into a magic protocol and spit out continuous interest while funds remain completely safe. According to leading contract auditor, Open Zeppelin, this is not the case - their recent work with Compound shows the protocol has four administrative functions which - if compromised - would allow the attacker to prevent borrowing, steal cTokens, and even drain all of the underlying staked assets. Whoops. This is obviously problematic and compromises the key-value prop of “decentralized” finance where you can be your own bank and cease to rely on third parties for these types of administrative functions. Not only are you relying on this company to play by the rules, but you also exposing yourself to the chance this third party gets compromised by an attacker. I’d venture to say many people contributing to the $40 million on Compound are not aware of these vulnerabilities . It does highlight the danger in referring to some protocols as “DeFi” without more standardized definitions. This is by no means a Compound specific issue either, many of the other top projects have different centralized components. MakerDAO has been using a group of oracles to input price feeds that - if compromised - could cause mass liquidations on the platform. The Dharma team outright paused their entire platform in order to pivot their business model and actually build on top of Compound. The point here isn’t that these projects are doing a bad job and that centralization is to be avoided at all costs. In fact, it seems foolish to decentralize entire tech stacks indiscriminately. But more work can and should be done to ensure users better understand the centralized risks they are signing up for. That knowledge could lead to social pressure on teams that get pushed further towards decentralizing key components of their product stacks. Just like we’re seeing with MakerDAO V2 oracles or Compound’s plans to move their admin access to a DAO. It’s all about setting expectations and continuing to push the best teams forward.
    Source: Jack Purdy — Published: 2019-10-13

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