2018 January 15 - Volume.2 Issue.2

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2018 January 15 - Volume.2 Issue.2

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Major Blockchain Investors Back Select Few Cryptocurrencies

The number of new cryptocurrencies being added into the market keeps growing in unabating fashion – over 1400 are being traded as of date. But major investors Digital Currency Group (DCG), Blockchain Capital and Pantera Capital have only backed a select few cryptocurrencies, and many times, have invested in the very same prospects. But the “Big3” have another trick up their sleeves with the investors backing major exchanges and wallet services.

Initial Coin Offerings (ICOs) in 2017 exploded relentlessly with total funding exceeding a whopping $5.5Bn. And the total market capitalization of the cryptocurrency industry soared from $17Bn at the start of 2017 to a shattering $700Bn within a year.

Yet within all the massive growth, major Blockchain technology investors seemingly remained to be extremely picky backing only 20 projects that have an underlying cryptocurrency (See Table).

DCG boasts the largest, and the most far reaching portfolio with a total of 82 active investments (Diar, 18 December 2017). And while DCG has invested in the most companies of all major Blockchain backers, the number of firms that have a traded (or soon to be traded) cryptocurrency are a mere 10. Three of these cryptocurrencies – OpenANX, Unikoin Gold and Decentraland were invested most likely during the ICO phase as they are not listed within DCGs active portfolio of investments, but the company has stated that they hold tokens.

DCG has also disclosed that they hold Bitcoin, Bitcoin Cash, Bitcoin Gold, Ethereum Classic and ZCash. While Bitcoin Cash and Bitcoin Gold are forks of Bitcoin which inevitably landed in DCGs wallets, the other three digital currencies are most certainly by choice as they are part of the DCGs Over-The-Counter Bitcoin investment vehicle Grayscale (Ticker: GBTC) which have investment funds in those three cryptocurrencies.

Blockchain Capital, which started in 2013 and has a table of advisors from the Fed Reserve, Visa, Royal Bank of Scotland, as well as directors from major Blockchain companies, has a total of 45 active investments, only 8 of which are have a traded cryptocurrency. Half of these cryptocurrencies investments overlap with DCG. Two more cryptocurrencies, 0x and Kin, overlap with Pantera Capital, who has invested in the most cryptocurrencies accounting for 13 of its 43 total active investments. But even that amounts to only 30% of their portfolio.

The Big 3 have all backed Ripple Labs, whose software xRapid promises to deliver seamless cross-border payments without the requirement of Nostro and Vostro accounts using their cryptocurrency XRP. Money transfer services Moneygram announced they’ll be testing XRP for their operations earning Ripple Labs a step forward to possible wider scale adoption (See story below). And with Ripple labs holding over 61Bn coins, the company now has an eye-watering $120Bn in today’s prices in assets on their balance sheet (Diar, 8 January).

Half the overlapping non-cryptocurrency investments by the Big 3 are in exchanges and wallet services (see table). Popular trading exchanges Coinbase/GDAX, Kraken and Shapeshift have all found backing from the big Blockchain investors as well as other exchange services that have various jurisdictions around the world. Other similar investments fall in Blockchain technology platforms.

Digital Currency Group Investments

Blockchain Investors Back Few Cryptocurrencies

Blockchain Investments With Cryptocurrency [wpdatatable id=34] Overlapping Non-Cryptocurrency Blockchain Investments [wpdatatable id=35] Source: Diar, Company Websites 

Ripple, Moneygram Announce xRapid Pilot Testing XRP

Blockchain payments focused company Ripple Labs announced last week that the international money transfer firm Moneygram will be pilot testing xRapid that uses XRP to facilitate quick and low cost cross-border transfers. The news resulted an a quick stock price surge for Moneygram, as well as XRP. Seemingly, the possible adoption of the technology is positive for both companies, however, the benefits ultimately might be quite small.

Ripple Labs, and its cryptocurrency, XRP, have had a good start to 2018. The cryptocurrency was crowned king for 2017 after a whopping 35000% increase in value. And news of a partnership with Moneygram piloting xRapid, the software that facilitates cross-border payments using XRP supported its price - now hovering just under $2.

And while the news could be portrayed as another step for cryptocurrencies entering mainstream use, the benefits, seemingly might be quite small.

The benefits provided by using XRP are mainly to free up liquidity that has been tied up in foreign exchange accounts. According to SaveOnSend, an analytical blog that tracks Money Transfer Operators (MTO), Moneygram financials show that the total cash held is a humble $33.5Mn (see table).

And while the freeing of the nostro accounts might not amount to grand sum, what could potentially be a game changer for Moneygram are the incurred fees and Forex margins. According to Knomad, a World Bank backed Think Tank, the cost of remittance for 2017 was approximately 7.5%. Should Moneygram find opportunity to develop its business with XRP reducing its costs resulting in a lower price for consumers, the potential for new business growth could make an impact on the $600Bn market.

Moneygram: Cash Held at Institutions 1.2% of Portfolio [wpdatatable id=37] 

Kodak Snaps Moment With Blockchain, Announces ICO

Kodak announced the launch of a rights management platform for photographers that will run on a blockchain along with an underlying cryptocurrency KODAKCoin. Kodak is the latest publicly traded company to jump on the blockchain craze which has riddled the stock markets with soaring prices by simply announcing its entrance into the new technological space.

On January 9, Kodak announced a partnership with WENN Digital to launch a platform where photographers can register both new and archived photos that they can then license within the platform. The platform will also monitor the internet for copyright infringement or non-legitimate use of the photos that are on the platform and manage the post-licensing process in order to reward photographers. KODAKCoin will serve as an underlying cryptocurrency that will be used to receive payment for licensing the work.

Kodak CEO Jeff Clarke said that he believes that blockchain and cryptocurrency is the key for photographers who are struggling to assert control over their work and how it’s used. The ICO will open to accredited investors at the end of the month and is compliant with SEC under Rule 506(c), which allows raising money from accredited investors after providing proper legal paperwork to SEC. Canadian company Global Blockchain Technologies Corp announced that it purchased all 8Mn of KODAKCoin available for $2Mn in the first stage of Kodak’s pre-ICO.

Kodak’s stock price had hit an all time low falling from $15.5 to $3.1 in 2017 alone following its struggle to adapt to the trend of digital photography. Shortly after the announcement, the stock price bounced back to $13 and has since stabilized at about $8.8.

In addition, Kodak also revealed Kodak KashMiner at the Internation Consumer Electronics Show (CES), which is a mining rig that will be leased over the period of two years for $3,400. Kodak estimates that the rig will be able to generate $375 worth of new bitcoins every month over the two-year lease but all the users will be have to return half of the income to Kodak. It’s also possible that profitability of Bitcoin will decrease during the two year period and the users might not even make their money back.

Granted, Kodak isn't the only company whose stock has been struggling that found opportunity in entering the blockchain bonanza (see table).

Struggling Stocks Find Salvation in Blockchain Naming Opportunity [wpdatatable id=36] Source: Quartz 

Private Cryptocurrencies Challenge Bitcoin Fungibility

Bitcoin and most cryptocurrencies are pseudo-anonymous – all transactions are publicaly available online including the addresses and amount being sent. As a result, the coins can sometimes be traced back to a person through blockchain analysis. Privacy cryptocurrencies the likes of Monero and Zcash are attempting to solve the problem by masking all the information about the transactions to provide full anonymity. The movements of the privacy cryptocurrencies are near impossible to track, giving governments another technical obstacle to overcome.

When Bitcoin was introduced in 2009, it launched from a premise of shifting the power from governments, central banks and corporations to individual people. As with other decentralized cryptocurrencies, the ownership is guaranteed with the possession of private keys, which makes it impossible to be seized or manipulated by a central authority.

However, most of the cryptocurrencies including Bitcoin are pseudo-anonymous. Even though the transactions are not tied directly to an identity, every transaction is recorded publicly on the blockchain, which includes the sender’s address, the receiver’s address and the amount. By analyzing the blockchain, the coins can sometimes be traced back to the identity of users by looking at the patterns of transaction history. The issue of financial privacy is not only a matter for criminals but rather for anyone who wants the ecosystem of cryptocurrencies to remain decentralized.

Blockchain forensics companies such as Elliptic and Chainalysis are already providing actionable intelligence to law enforcement and other entities to help them identify illicit activities and assist with Anti-Money Laundering (AML) compliance. These companies obtain Know-Your-Client (KYC) information that is required to be provided for all the cryptocurrency exchanges and thus have access to identifiable information.

The current solution to enhance Bitcoin’s fungibility is to use a tumbling software such as the open source JoinMarket, which automatically mixes coins of different people to obfuscate the trail back to the fund's original source. Most of the wallets generate a new address each time a transaction is received to obscure the identity which helps, but is far from perfect.

Bitcoin’s inability to provide a fully private and fungible solution has ignited the creation of other cryptocurrencies that focus mainly on privacy features.

Monero, which launched in 2014 after forking from Bytecoin, is often considered the most prominent privacy-based cryptocurrency. Monero uses stealth addresses, which means that after every transaction is made, a random single-use address is generated, and the transactions are routed through that address. Stealth addresses therefore mask a receiver, which in turn assures that there is no linkability on Monero. However, in order to be truly private, Monero also solves the issue of traceability by utilizing ring signatures. The untraceability means that the original sender of the transaction is not able to trace when or where the recipient of the transaction moves the coins. Ring signatures essentially mix the real transaction with a few other already existing transactions on the blockchain, which guarantees plausible deniability. In January 2017, Monero implemented an improved version of ring signatures called RingCT, which also obscures the amount being transacted. RingCT became mandatory for every transaction after September 2017.

Because of Monero’s privacy enhanced functionality, the coins are fungible. Coinfirm, a company that specializes in analyzing the blockchain to determine which coins are suspected of being involved in illicit activity, currently treats all the of Monero transactions as high risk because its privacy techniques are so established that it’s impossible to figure out its history. It only treats about 10% of Bitcoin transactions as high risk.

According to Riccardo Spagni, one of the seven members of the Monero Core Team (all but two are anonymous), most of the users use Monero legitimately. Of course he should have no way of knowing if that statement is true. Speaking to Bloomberg, Mr Spagni said that he wants people to have access to a fully private coin where no one knows whether they are buying a car or a coffee. He added that since Monero is decentralized, it’s impossible to prevent illicit actors from using it.

The closest competitor to Monero is Zcash, which was launched in October 2016. As opposed to Monero, 10% of all the supply will be distributed to the stakeholders in the Zcash Company - founders, investors, employees, and advisors (see story above). Zcash uses an advanced zero-knowledge proof cryptography called zk-SNARKs. All the transaction data is fully private including metadata, which is encrypted. Zero-knowledge proof means that the validity of data can be proved without revealing the actual data because it is secret. Therefore, there is a real concern that the total supply cannot be verified because the system is too private. If the trusted parties that are controlling Zcash were to collude and secretly create more coins, it would be impossible to tell.

Another difference from Monero is that the transactions are transparent by default and optionally private. Currently, most of the transactions on Zcash are not private, which makes it easier to identify the private ones through traffic analysis. The private transactions are quite resource intensive for users as sending a private transaction takes about 3GB of RAM and an average of 40 seconds to perform the encryption, which is one of the major reasons that it's rarely used in practice. Zcash's next major upgrade, codenamed Sapling, should significantly decrease both the resource requirements and the time needed to send a private transaction. Zooko Wilcox, CEO of the Zcash Company, stated that the intent is to upgrade to all private all the time eventually. Even though the technology of Zcash is more advanced than Monero, it has yet stand out and there are still some unresolved issues.

Zcash and Monero are the main privacy coins but there are also a few lesser known ones. Zclassic for example forked from Zcash over the concerns of 10% of the supply going to the stakeholders. DASH also has an opt-in privacy feature that integrates tumbling of the coins in the same block to enhance anonymity.

There is also Verge, which automatically hides the IP address of the sender by routing the transaction through Tor or I2P. Most of the cryptocurrencies including Bitcoin can be used with Tor to achieve the same level of privacy that Verge provides, which indicates that Verge currently doesn’t add much value.

Zcash has the most advanced cryptography of the private transactions, which technically makes it more anonymous than Monero. However, since the transactions are not private by default, it is possible to narrow down the private transactions through traffic analysis. Monero is currently the most private coin that uses technology that has been thoroughly tested with time and all of the privacy features are turned on by default. Other privacy-based coins are either not known enough or their privacy features are far from the features that Monero and Zcash provide.

Since the most private coins are impossible to track by the government and their awareness is growing, it is possible that regulators could put pressure on fiat off-ramps. In October 2017, Europol stated that “Monero, Ethereum and Zcash are gaining popularity within the digital underground” and that Monero transactions cannot currently be attributed to any particular user or address. With coins that are truly private, AML/KYC regulations at compliant exchanges can therefore only be used to determine who bought and sold how much for tax purposes but they cannot determine what is being done with the coins that were bought.

Bitcoin Market Dominance Wanes (%)...

...But Overall USD Market Cap Close To High ($Bn)

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