2018 May 28 - Volume.2 Issue.21

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2018 May 28 - Volume.2 Issue.21

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Coinbase Banking on Paradex: Puts Faith in Øx Protocol, Dai Stablecoin

Coinbase has marked its fourth acquisition this year with the purchase of self-custodian exchange Paradex. The cryptocurrency exchange looks to gear Paradex as a Bulletin Board rather than an exchange, as non-custody of ERC20 tokens could potentially steer Coinbase away from regulatory scrutiny. And while the buy could be seen as a regulatory loophole effort, Paradex could bring opportunities the exchange has been gunning for as part of their Open Financial System.


In what could be construed as its first purchase of purpose, rather than an acquihire, Coinbase bought self-custodian Decentralized Exchange (DEX) Paradex last week. The decentralized exchange, which would effectively act as a bulletin board matchings buyers and sellers, has been built on top of the 0x protocol – a project that has been highly interconnected with Coinbase’s alumni, including the company’s co-founder Fred Ehrsam (Diar, 2 April).

The differentiation between an exchange and a Bulletin Board couldn’t be emphasized enough by Coinbase’s President Asiff Hirji in an interview with CNBC. With no custody of tokens – whether they are labelled as securities in the future or not, Paradex will act no more than an engine that matches buyers and sellers, with the company taking a fee for the service.

The 0x token ZRX surged on the back of the news. But unlike other decentralized exchanges built using 0x, Paradex doesn’t actually charge its fees in ZRX, but takes a cut from the token being traded. And the decision to avoid the use of the token was based on an already complicated user experience that has possibly hindered the growth potential of DEX as of date in comparison to centralized exchanges. Paradex CTO Kevin Day says “It's already hard as is - connect a wallet, unlock tokens, wrap ETH - each of these has to be explained and walked through. Requiring users to buy and unlock ZRX before they could begin trading was an additional hurdle.”

And ultimately, for the time being at least, it doesn’t actually make much of a difference for Coinbase to hold onto the governance token as all protocol upgrades will continue to be made by the core team.

Governance voting for holders of ZRX on the direction of upgrades of the protocol is slated to take place in staggered steps between 2019-20 – and the voting mechanisms are yet to be vetted. But regardless of ZRX finding new trading volume and earnings for DEXs, the Paradex purchase does indicate Coinbase’s faith in the 0x protocol - at least for now.

|| LONG WAY TO GO

Paradex, which went live a short three months ago was processing approximately 7% of the total decentralized exchanges volume at the time of purchase. And that’s not really much with total DEX volume reaching shy of $20Mn as a day trading peak. But 2Q18 trading volume to date has already seen a 220% increase versus 1Q18. Still, of the 429 tokens available for trading on 0x relayers, approximately 25% of the total crypto market tokens, less than 1% have trading volume over $100K. An eye-balling 92% of the tokens have zero trading volume. And in terms of fee earnings, Paradex has none. As do most 0x based exchanges in an effort to win over traders from centralized exchanges.

0X DEX Trading Volume Minuscule But Begins to Find Audience ($)


Source: 0xtracker.com Notes: *Up to 27 May 2018


|| DAI STABLECOIN BACKED BY EXTENSION

Most major Cryptocurrency exchanges have a listed US Dollar pegged cryptocurrency and the Paradex move brings Coinbase one step closer to support one also. The Dai stablecoin could be an important conduit to win traders over into the DEX, or Bulletin Board platform. It would be an unlikely scenario that Coinbase hold onto tokens that they earn from trades and take on any sort of risk, and as such, the Dai holds a good chance for adoption not only by the Paradex platform, but by Coinbase Pro, the revamped GDAX that is set to go live at June-End.

|| COINBASE CUSTODY TIE-IN?

What is starting to make a little more sense is the ticket price on Coinbase's Custody service that has a cool $100K setup fee and a $10Mn minimum in AuM. The service that is confirmed to support ERC20 tokens, along side the majors that the exchange offers, could indicate the institutional direction that Coinbase is eyeing.

The Coinbase Custody service tied into Paradex could potentially alleviate some of the hurdles for institutions also as regulations similar to those operating cryptocurrency hedge funds would become applicable.

|| BANKING BUILDING BLOCKS?

Part of Coinbase's long-term plans is to offer loans (Diar, 2 April). And the Wall Street Journal reported earlier this month that the cryptocurrency exchange has been in talks with US regulators in the hopes of obtaining a Federal Bank Charter.

With Paradex being built on top of 0x, the potential for such a business model becomes a little more clear. Tokenized debt protocol Dharma which was started by former Coinbase employee Nadav Hollander, launched live on the Mainnet is doing exactly what the popular exchange has listed as one of their goals.

And Coinbase has not been shy in the backing of their former employees – in fact, the company setup a venture fund to support those very businesses (Diar, 9 April).


51% Attacks Take Toll on Low Hash Power Coins

There have been been five 51% attacks on Proof of Work coins in the last two months alone. Hackers are targeting overvalued coins with low hashpower and weak development teams. The attacks are economically unviable for established coins with high hashpower.


Bitcoin Gold, a fork of the original Bitcoin blockchain that was created to “combat the mining centralization problem”, became the largest public blockchain to be hit by a 51% attack. The attacker was able to acquire more than 50% of the hashpower and therefore took a temporary control of the blockchain, which allowed him to double spend transactions. The attacker specifically targeted exchanges because they actively allow large deposits, which compounds the amount that can be stolen by a double spend attack. It is estimated that more than 388,000 BTG was stolen ($17.8Mn at the time). The Bitcoin Gold developers have advised all exchanges to increase the amount of confirmations and carefully review large deposits. Even though the attack is no longer ongoing, the attacker could theoretically target the same network again assuming that he still controls more than half of the hashpower.

Verge, a privacy-centric cryptocurrency, has been a victim of two 51% attacks in the last two months. In the latest one, the attacker leveraged a bug in the code, which allowed to maliciously mine with very low difficulty. The bug enabled the attacker to set false timestamps and mine more than 35Mn XVG ($1.7Mn at the time) in the matter of hours. A very similar attack was orchestrated less than two months ago when a hacker was able to maliciously mine 250,000 XVG ($14,000 at the time) by exploiting the timestamp. The vulnerability from the first attack was not fully removed, which resulted in a variation of it being used in the second attack. Following the first attack, the Verge developers decided not to revert the stolen coins but in an effort to fix the issue, they managed to accidentally initiate a hard fork, which caused the entire network to be unable to sync until the issue was fixed.

Verge was initially popularized by John McAfee who has since revealed that he charges $105,000 per promotional cryptocurrency tweet. While Verge is marketed as untraceable, it actually only routes transaction through Tor or I2P to obfuscate addresses and hide IP addresses. Most of the cryptocurrencies including Bitcoin can be used with Tor to achieve the same level of privacy that Verge provides. In March, Verge also publicly asked its users to donate 75Mn XVG ($3Mn at the time) so it could reveal a potential partnership, which turned out to be Adult Entertainment provider PornHub who eventually announced that it will accept Verge as a payment for its premium service.

51% Attacks in 2018

wdt_ID Name Market Cap Date Method Amount
1 Verge $600Mn Apr 4, 2018 Timestamp vulnerability $14k
2 Verge $600Mn May 22, 2018 Timestamp vulnerability $1.7Mn
3 Bitcoin Gold $750Mn May 24, 2018 Double spend attack $17.8Mn
4 Electroneum $150Mn Apr 2, 2018 - -
5 Monacoin $200Mn May 14, 2018 Mining attack $90k

Estimated Cost of 51% Attack

wdt_ID Crypto Cost of 51% attack
1 Bitcoin $2.3Bn
2 Ethereum $3.2Bn
3 Bitcoin Cash $293Mn
4 Litecoin $320Mn
5 Dash $33Mn
6 Monero $450Mn
7 Ethereum Classic $83Mn
8 Zcash $87Mn
9 Bitcoin Gold $200k


Source: Link


While Verge and Bitcoin Gold attacks are the most noteworthy, there have already been five 51% attacks in the past two months (see table). Low hashrate Proof of Work coins are the most vulnerable to the attacks. The established coins with large hashrates deter attackers by making the attack economically unviable (see table). The biggest honeypots for hackers are overvalued coins with low hashpower and weak development teams. In order to decrease the likelihood and feasibility of 51% attacks, exchanges such as Binance have increased the number of confirmations required to deposit PoW coins into the exchange. Another possibility to prevent 51% attacks for lower hashrate coins is to closely monitor the hashrate and if foul play is detected, quickly buy new hashpower.


Price Manipulation Investigations Launched by US Authorities

United States Department of Justice (DoJ) together with the Commodity and Futures Trading Commission (CFTC) is conducting a criminal investigation into illegal trading practices that manipulate the prices of cryptocurrencies. The DoJ is reportedly looking specifically at spoofing and wash trading on unregulated cryptocurrency markets.

Spoofing is an illegal method through which traders enter and quickly cancel large orders before they are filled, which gives an impression of artificial demand to other traders that might act on it. In 2013, for the first time the CFTC fined an algorithmic trader $2.8Mn for spoofing under the Dodd-Frank Act’s prohibition of spoofing.

Washtrading is an illegal method to artificially inflate the volume through which the trader simultaneously buys and sells the same position to create fake demand. In some cases, washtrading can also be used to purposely generate commission fees to the exchanges as a payment for something else. Washtrading has been illegal in the United States since the passage the Commodity Exchange Act (CEA) in 1936.

In January, the CFTC formed an internal cryptocurrency enforcement task force, which works cooperatively with counterparts at the U.S. Securities and Exchange Commission (SEC) to develop the necessary expertise to prosecute fraud in the cryptocurrency space. The CFTC commissioner Brian Quintenz said earlier this month that there is an effort at both the SEC and CFTC to coordinate and harmonize regulatory oversight with the emphasis on fraud, market manipulation and disruptive trading involving virtual currency.

Earlier in March, the SEC released a statement that encouraged exchanges that could be trading securities to register with the SEC as a national securities exchange or be exempt from registration. The SEC would then review the trading protocols that determine how orders interact and execute.

Even though the CFTC primarily regulates futures and option markets, it has the authority to impose sanctions if it were to find fraud on cryptocurrency exchanges. The price manipulation on exchanges, specifically on Bitfinex, was largely suspected by an anonymous blogger Bitfinex’ed who has covered the space heavily last year.


Cryptocurrency Processing Ban Nibbles at Mastercard Earnings

USAA becomes the seventh bank in the United States to block cryptocurrency purchases by credit cards. It follows Capital One, Discover, JPMorgan Chase, Bank of America and Citibank who have all enacted their bans in 2018. Bank of Montreal (BMO) has been blocking cryptocurrency purchases on both credit and debit cards since March (see table). In a memo, USAA said that after careful thought, the company has decided to proceed with the ban in order to prevent fraud and losses.

The move of major banks to limit customers from buying cryptocurrencies was cited as one of the the reasons of Mastercard’s decline in cross-border transaction volume during Q1 of 2018. The cross-border transaction volume decreased by 2% during Q1 when all the banks announced their bans. Martina Hund-Mejen, CFO of Mastercard, said on the earnings call that the decline was “due to the recent drop-off in crypto wallet funding".

wdt_ID Name Region Credit Card Block Debit Card Block
1 Capital One USA Yes No
2 Discover Worldwide Yes -
3 JPMorgan Chase USA Yes No
4 Bank of America USA Yes No
5 Citibank USA Yes No
6 Lloyds Banking Group UK Yes No
7 Virgin Money UK, Australia, South Africa Yes No
8 CommBank Australia Yes No
9 Citi India India Yes Yes
10 TD Bank Canada Yes No


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