This Week's Headlines:
Bitcoin Miners Begin Feeling Profit Squeeze as Hash Rate Grows
Bitcoin's next difficulty adjustment is set to retarget on June 6. The estimated 8-12% increase in difficulty would result in up to a 15% decrease in miner profits at current prices. And while miners do switch between coins to mine for the most profitable cryptocurrency balancing out the difficulty rate every two weeks, the upward trend in hash power remains unabated hitting over a whopping 600% increase versus a year ago. Meanwhile, profits have been plummeting by over 20% on average month-on-month from the start of the year.
While several cryptocurrencies this year have experienced 51% attacks, Bitcoin's current hash rate would make such an effort a futile attempt. Bitcoin miners who have kept the network secure have been, in return, rewarded handsomely. Miner revenues for 2017 was a shattering $3.2Bn. And so far this year miner revenues have breached the $3Bn mark. But January versus May shows a whopping 80% drop in daily estimated profits (See chart 1).
|| WHAT HASN'T DROPPED?
Hash power has been hitting new highs week on week. From the start of the year, the hash rate more than doubled with an increase of 152%.
Transaction fees have taken a hit since January-end, partly due to major cryptocurrency exchanges adopting SegWit and implementing batch transactions (See chart 3). Miner fees now represent, on average, a negligible 1.8% of revenues. In December 2017, transaction fees earned miners a cool $290Mn, 25% of earnings. In May, this dropped to under $9Mn - and split by more than double the mining units.
Alongside the increase of hash power is the reality of a lower share of the mining fees and block reward. And making problems worse for the profitability ratio is the fall in the price of Bitcoin. What hasn't changed, however, is the cost of electricity that miners must pay. Mining units now earn less Bitcoin, valued at 50% less from the start of the year, but running the equipment that's incurring the same electricity costs.
|| SHOW ME THE MONEY
While month-on-month hash power growth has been fairly linear, the day-to-day fluctuations show an entirely different story. Miners, now officially suffering from a bi-polar disorder swing between mining Bitcoin and other cryptocurrencies. On May 17, the hash rate dropped 26% - in a single day. And then recovered to a new high just a short week later. Should the hash rate growth continue, the problem might become more exasperated should the price of Bitcoin not keep up.
Whilst the King of Coins has continued to find equilibrium in maintaining miner profitability, past results don't dictate future outcomes. The increasing energy and hardware costs, as well as the increase of disbursements of miner returns across units, could bring new economic realities to the fore on a larger scale much like the way of mining on CPUs.
Should profitability mining Bitcoin dwindle to low levels, the hash rate could possibly abate as deployment of mining rigs slows down. More efficient mining units would of course address such problems in the long-term.
|| SMALL MINERS FEEL THE PINCH
A mass exodus of hash power would only be a story of fiction considering the billions on the table. What is a possibility is small miners move their computing power elsewhere in search of greener pastures, leaving the Bitcoin mining in the hands of large powerhouses who can weather low-profitability due to economies of scale as well as the benefit of purchasing electricity at wholesale prices.
S9 AntMiner Daily Profit Returns Scenarios (BTC/USD)
Source: Diar Calculations, Whattomine.com, btc.com
Notes: $0.1/kWh, No Pool Fees or Hardware Costs
Bitcoin Miner Profits Tumble an Estimated 80% From Jan-18
Dates on Difficulty Adjustment
Notes: Profit Estimates Using S9 Miners & $0.1/kWh, No Pool Fees or Hardware Costs
Sources: Blockchain.info, Whattomine.com, Diar Calculations
Hash Rate Set to More Than Double From Jun-Dec End 2018?
Notes: Estimates - Average Difficulty Growth: 7.7% - Average Hash Rate Growth - 7%
Sources: Blockchain.info, Diar Calculations
SegWit & Batching Up, Miner Fees Plummet 95% From Dec-17 High
Notes: Excluding Coinbase Value of Block Reward
Sources: Blockchain.info, Diar Calculations
All About the Block Reward
Sources: Blockchain.info, Diar Calculations
Bitcoin Trading Volume Holds Steady, Ripple Love Affair Peters Out
Bitcoin trading volume has remained just shy of the $200Bn mark for the past 3 months. Meanwhile, Ethereum volume has increased over 50% from its March low. The biggest winner from the top 5 traded cryptocurrencies is Bitcoin Cash which saw a massive 140% increase versus March, albeit taking the hardest hit from January highs. While all the majors are now on the up, Ripple's token XRP is the only cryptocurrency whose trading volume has decreased in May and by a whopping 86% from the start of the year.
Bitcoin - BTC
Ripple - XRP
Litecoin - LTC
Ethereum - ETH
Bitcoin Cash - BCH
2018 Month-on-Month % Change
Bank of England Outlines CBDC Principles Steering Bank Sector Risks
It has become increasingly understood that digital currencies will be part of the future as people become more tech reliant, and cash goes the way of whale oil. And while cryptocurrencies like Bitcoin have come to prominence on the idea of self-ownership and controlled supply, Central Banks are defining their own rules for Digital Currencies that will continue to function as a monetary tool protecting economic outlook and institutions.
Whether or not a Central Bank Digital Currency (CBDC) would have any further benefit to cash for society and the financial system is yet to be established. But the Bank of England (BoE), who have been at the forefront of economic research around digital currencies, has assessed how a CBDC would affect the balance sheet of the Central Bank, commercial banks as well as the financial stability of the economy.
In its latest research paper published a fortnight ago, the BoE laid out several key principles that it believes should be well established should a CBDC be issued (See Box 2). The prospect of earning interest on CBDC, versus none on cash, makes for an interesting proposition for the public. However, there are issues that do arise is maintaining price stability and parity with bank reserves. As such the BoE proposes an adjustable interest rate to account for over/under estimations on demand.
The BoE has also made a clear distinction between bank reserves and CBDC stating that such digital assets would not be convertible into one another. Primarily, this allows the Central Bank “ to operate a second policy instrument, specifically the quantity of or the interest rate on CBDC.”
But the BoE has striped digital currencies of one of their most important traits – instant and on-demand. The BoE proposed that there be no guarantee on banks to convert deposits into CBDC on-demand. The fear of bank runs can’t seem to be overstated – “This commitment of course opens the door wide to runs from bank deposits into electronic central bank money, which could conceivably be near- instantaneous and of an unprecedented scale, given that it is a run from the banking system as a whole rather than a run from one bank to another.”
This effectively safe guards failing banks. And the BoE is of the camp that commercial banks role in the economy need not be diminished by the loss of deposits to CBDC, but facilitators of the process. And with the central bank having the capacity to also introduce negative interest rates on CBDC, bank reserves may prove to remain more beneficial. But this model is beginning to look less like a currency, and more like a publicly available central bank bond that it can adjust at will, rather than bank notes which represent a risk-free and direct liability against the central banks books.
However, nothing is yet to be set in stone, and the verdict on which model the BoE would pursue is still out. And while the prospect of an economy-wide CBDC is on the table, it would seem that the BoE has a leaning towards safeguarding the banking institutions.
Non-Fungible Token Games Fail to Sustain Allure
2018 was supposedly set to be a year of crypto games on Ethereum after seeing massive hype following CryptoKitties, and other Non-Fungible Token (NFT) games gain backing by major investment outfits. But a short 5 months into the year, NFT games are now but a distant use-case as users drop off by droves.
The first well received blockchain game CryptoKitties boomed in popularity towards the end of last year. At its peak in early December, the game consumed around 15% of the whole network traffic of Ethereum and drove the median transaction fees to upwards of $3 – 20x current fees.
The enthusiasm around blockchain based games and non-fungible tokens (crypto collectibles) was extremely high. So much so that in March, CryptoKitties raised whopping $12Mn from Andreessen Horowitz and Union Square Ventures amongst others.
And interest didn't stop there. Rare Bits, a marketplace for non-fungible tokens (NFT) that was started by the co-creator of Farmville along with two Zynga alumni, raised $6Mn led by Spark Capital, a game-oriented VC firm.
As expected, many new crypto collectible games started popping up. Baidu, China's tech giant that rivals Google, has launched their own version of NFT game dubbed Leci Gou where users can breed and trade puppies as opposed to kitties. Baidu’s game doesn’t run on Ethereum however but rather on a different blockchain called Achain.
Chinese tech giant Xiaomi that specializes in smartphone manufacturing, launched Jiami Tu where users can breed and trade bunnies. Game.com also launched a similar game Love Pet that uses TRON instead of Ethereum. Other games that appeared include CryptoCountries, CryptoCelebrities and countless of others.
None of them were able to live up to their short term success.
At one point, CryptoCountries traded more than $25Mn in 24 hours. Now, the game has had two transactions in the last week. While CryptoKitties still remains the most popular NFT game (see table), its popularity has greatly diminished. In December, the traded volume per day was roughly $2.3Mn, which has now fallen to about $21k daily. The median price of sold kitties peaked at $41 and now is constantly at about $5. Rare Bits lists roughly 700,000 CryptoKitties for sale while only 4,200 have been sold in the last week. CryptoKitties tried to market the game to the Asian market and also experimented with celebrity-branded kitties but to not much avail to drive up demand.
There are currently under 2000 daily active users of all Ethereum based games and the weekly traded volume is approximately $1Mn. It’s not exactly clear whether NFTs were even as popular as originally thought. Venture capital firm Greylock Partners found that even at its peak, CryptoKitties only had about 14,000 daily users.
It's not looking like 2018 is going to be the year of crypto games on Ethereum after all as the NFTs are still orders of magnitudes away from widespread consumer adoption.
CryptoKitties Price Drops 91% From December High
Weekly Statistics onNFT Games
Sources: DappRader.com. Nonfungible.com
One of the bottlenecks is that the games only allow the most basic functionality such as breeding and battling, which leads to speculation and not much else. When the users eventually find out that there is more demand to sell than to buy, the popularity starts to fade away as easy profits are no longer made.
If NFTs want to have a sustainable value and a much wider user base, they would have to become a significant part of the gameplay. With the current problems of blockchain scalability, action heavy game that involves NFTs would prove to be expensive for the users and also inconvenient because of the relatively long confirmation times for transactions.
It’s unlikely that a permissionless blockchain such as Ethereum would be able to handle the traffic of widespread adoption if it couldn’t even handle less than two thousand active users at its peak. And the largest video game publishers such as Activision Blizzard, Sony and Tencent aren’t financially motivated to integrate NFTs since it would decrease the revenues that they generate from their own in-game digital assets that they fully control.
EOS Moves onto Developer Charm Offensive Post Mega Raise
The EOS tokens is set to launch on mainnet after finishing a 355-day record breaking token sale. Block.one, the company behind EOS, raised 7.2Mn ether, which will be the revenue of the firm. The company pledged to use $1Bn to incentivize companies and developers to build on the platform. But there are several concerns about the security of EOS after the CTO offered a bug bounty just before the initial set date for mainnet launch.
EOS ERC-20 tokens were frozen on the Ethereum blockchain on Saturday while the mainnet launch was expected to take place on Sunday June 3. Just prior to the launch, Block.one, the company that developed EOS, raised more than 7.2Mn ether (more than $4.2Bn at today’s prices) in a 355-day token sale. Daniel Larimer, Chief Technology Officer at Block.one and also a founder of Bitshares and Steemit, publically said that the token sale was purposely never called an initial coin offering (ICO). He added “We have consistently called it a token distribution. We have always called it revenue.” Proceeds from the token distribution “will be the revenue of Block.one."
Whatever it might be, the EOS token distribution has raised more than twice as much as the second largest token offering and more than the sum of nine of the remaining token sales in the top 10 (see table).
Cayman Islands-based Block.one tried to steer clear from the regulators by banning investors located in the U.S. and China as well as stating that the ERC-20 tokens “do not have any rights, uses, purpose, attributes, functionalities or features, express or implied, including, without limitation, any uses, purpose, attributes, functionalities or features on the EOS Platform.” This is of course a different story for the swapped EOS tokens on mainnet.
What still remains unclear is how Block.one plans to spend the vast amount of funds it raised. Block.one said that it doesn’t plan to develop the EOS platform following its initial release but rather wants to serve as venture capital for outside developers. The company pledged to invest more than $1Bn to incentivize companies and developers to build on EOS. Block.one might also develop their own decentralized applications (DApps) on the network.
What happens to the remaining $3Bn of “revenue” remains to be seen. If the raised funds are used efficiently and not to individually profit, they could prove to be a significant advantage in encouraging more adoption and development.
The involvement of Brock Pierce who co-founded Block.one has raised some concerns as well. Mr Pierce is also one of the founders of Tether, the controversial cryptocurrency stablecoin, and has also a co-founded Blockchain Capital. Mr Pierce has stepped down from his role of Chief Strategy Officer at Block.one amid backlash but having co-founded the company, he still has a significant stake in it.
The more severe concerns are regarding the security of the platform itself. Last week, Block.one released a statement saying that several members of the community received a sophisticated phishing email that included a link to a scam website claiming to be able to register EOS Tokens ahead of the end of the EOS Token distribution. The biggest problem is that some of the phishing emails came from the Block.one Zendesk support system, which was temporarily breached when the message was sent.
Top 10 Initial Coin Offerings
ICO Raises Gaining Traction Again? (USD Mn)
While EOS has been open source, it never had a professional code audit. Just days before the release, Qihoo 360, a Chinese security outfit, found several critical security flaws that could let the attacker control all nodes of the EOS network and manipulate transactions. Daniel Larimer has since patched the issue on GitHub and announced $10,000 bounty for “every unique bug that can cause a crash, privilege escalation, or non-deterministic behavior in smart contracts.” It is unclear whether someone with access to a zero day exploit would have any motivation to disclose the bug for a $10,000 reward if they could profit significantly from exploiting EOS and its market capitalization of more than $12Bn after it launches.
Block.one has promised a public financial audit in October, which would prove that the company is not recycling the raised ether and contributing it back to the crowdsale. CEO Brendan Blumer said in October: "Our CFO and a President are in NYC now speaking with firms that will manage an internal inspection of books to provide public comfort that no recycling is going on; existing firms require a lot of understanding of the space before they can agree to an blockchain engagement, so this is a time consuming endeavour". Since then, no audit was delivered.
Dfinity To Start Airdrop
Polychain and Andreessen Horowitz backed Dfinity announced the commencement of their token distribution via the now popular method of Air Dropping. The cloud computing blockchain solution will bestow $35Mn worth of tokens to their early subscribers, bar US residents citing regulatory concerns that may construe the token as a security. While the aim of the token distribution to to kick start usage of platform amongst early adopters, not much more than speculative trading has resulted thus far as pretty much everything remains in development stage.
With DFinity, Top 10 Airdrops/Faucets Pass $5Bn Value Mark (USD Mn)
Bittrex Gets Banking
US Cryptocurrency exchange Bittrex announced that it has landed a banking agreement with New-York outfit Signature Bank. While state regulations still come into play limiting who will be able to deposit US Dollars into the cryptocurrency exchange, the move brings tokens one step closer in the realm of regulation. It remains to be seen if Bittrex will have to apply for an Alternative Trading System (ATS) under US Securities and Exchange Commission guidelines as the exchange claims extreme vetting to make sure, in their analysis, that they are not trading securities. But what is certain, now, is that Bittrex will be the largest cryptocurrency exchange outside of Korea to have 195 tokens with a fiat offering.
Bittrex Set To Be Largest Fiat/Crypto Exchange in Offering Tokens
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