This Week's Headlines:
Coinbase Lists 0x, But Token Use Case Remains Unestablished
0x has become the favorite front running protocol amongst development teams building decentralized financial applications. But the token itself, ZRX, which was added to Coinbase last week, doesn't currently fulfil any need. Most evident and even contradictory to the listing is the fact that Coinbase's own purchase of 0x decentralized exchange Paradex opted against the use of the token for fee collection, one of the possible use cases. And the primary use case as a governance token also falls short as the framework has yet to be established by the team.
After more than 6 months following a statement made by Coinbase that they would be listing ERC20 tokens, the exchange made the announcement last week that it would add the 0x protocol token, ZRX. The addition came as little surprise to anyone considering the deep connections the project has to Coinbase (Diar, 2 April).
|| COINBASE CONTRADICTION
The irony is not lost on anyone that Coinbase's entrance into the Decentralized Exchange (DEX) space was through their purchase of 0x based relayer Paradex - the only DEX to have, by design, rejected the use of ZRX for fee collection on the back of a poor user experience (Diar, 28 May). The token architecture would allow exchanges collecting fees in ZRX to pool liquidity. Clearly, though, for an exchange who is developing its customer base, this would be akin to shooting itself in the foot.
Still, the fee collection wasn’t the main purpose for the token envisioned by 0x – governance was (see quote box). However, the governance model is yet to be established. 0x aims to deploy the voting mechanism in three phases – but the last two, and core phases of the governing model remain under exploration, as stated by Will Warren, Co-founder of the popular protocol.
|| DECENTRALIZED GOVERNANCE? NOT EXACTLY….
The few 0x relayers who have opted to earn fees in ZRX, should they find traction amongst each other sharing liquidity, could have made for interesting future governance of the protocol considering the competing powers. However, with the development team, founders and advisors holding half of the total tokens, it seems unlikely that anyone outside the tight knit group to have any influence over the future direction of the protocol.
COINBASE A16Z MAFIA”
Andreessen Horowitz, who led Coinbase's Series B funding round, seems to have taken full reigns over Coinbase, and the extended circle (Diar, 23 April). The exchange's President & COO Asiff Hirji, as well as its CTO Balaji Srinivasan are both A16z alumni. A16z Crypto General Partner Kathryn Haun sits on the board at Coinbase. And the projects now seem all very intertwined between investors (see chart).
|| NETWORK VALUE OR NETWORK FAITH?
ZRX, at this point in time at least, with nearly no relayer collecting fees in the token, no governing model, and current asset holdings by the team centralizing future governance voting, means the investment would be a little more than pure faith in 0x development team and its investors. Which begs the question whether or not all the current factors have the hallmarks of a security.
Cleaning House: Poloniex Amps Up Cryptocurrency Delistings
Delisting announcements from various major cryptocurrency exchanges have been garnering attention as of late. Binance announced the delisting of 4 cryptocurrencies last week sending their prices crashing. But despite the bear market from the start of the year, all exchanges, bar Poloniex, have added more tokens than removed overall.
Since the purchase of Poloniex by Circle, the exchange has delisted 29 cryptocurrencies, and another 3 in October brining the tally to 54 from 79 at the start of the year (see table). In January 2017, the exchange had 93 cryptocurrencies (see chart). Binance has added 54, removing 4. But it's HitBTC taking the "crown" of adding a net of 198 cryptocurrencies, highly indicating a low level of due diligence on projects.
Poloniex Nearly Halves Listed Cryptocurrencies From Jan-2017
2018 Listing/Delisting Activities of Major Token Exchanges
Bitfinex Banking Concerns Spark Stablecoin Unsettling
A flurry of news surrounding Bitfinex's banking relationships has caused Tether to lose its peg from the US Dollar. Tether's report attempting to prove solvency released only a few months ago has not helped to alleviate concerns (Diar, 25 June). And last week the exchange informed clients that it would not be able to accept customer deposits.
The event has morphed and spiralled into a stablecoin bonanza with various pegs trading at a premium to one another - despite being considered a dollar-for-dollar peg. Adding oil to the fire was Binance temporarily pausing Tether withdrawals, but was later confirmed as a technical upgrade. Meanwhile, OKEx, the third largest exchange announced that it would list another 4 stablecoins.
Kraken: USDT/USD (Reversed Value-Axis)
Coinbase Dumps Index on Lack of Institutional Demand
In just a little over 6 months, Coinbase has confirmed, that it is set to scrap their institutional investment product, the Coinbase Index Fund (CBI) (Diar, 12 March). Last week, The Block broke the news that the fund had failed to attract the necessary number of clients and raised less than expected.
|| BITCOIN, NOT BLOCKCHAIN?
While many cryptocurrency bundled index funds have popped up this year, the CBI was most comparable with Grayscale's Digital Large Cap Fund (DLC), and shared a similar composition of underlying assets.
But according to Grayscale's 1H18 report, the DLC, by Diar estimates, also seems to have failed to garner much attention despite inflows into their portfolio of products averaging nearly $10Mn a week despite the bear market. Bitcoin interest however, looks to be a different story.
Grayscale Bitcoin Investment Trust, DLC Cumulative Inflows ($Mn)
Source: Grayscale. Notes: Diar Calculation Approximates.
Blockstream Takes Liquid Bitcoin Sidechain Live
23 cryptocurrency exchanges including Bitfinex and BitMEX, have jumped onto Blockstreams sidechain dubbed the Liquid Network that went live, privately, a few weeks ago. The exchanges will act as functionaries within a "strong federation" and Blockstream promises to deliver near instant transactions between them increasing liquidity and allowing traders to circumvent the current confirmation times.
The Liquid Network would effectively convert Bitcoin (BTC) into Liquid Bitcoin (L-BTC) using a two-way peg and can be redeemed at any time with final settlement within 2 minutes.
|| TRUSTLESS TRADEOFFS
The sidechain has been met with some scrutiny over the increased requirement of trust it would require in order to facilitate higher Bitcoin liquidity across exchanges.
"The Bitcoin blockchain excels at offering the permissionless, trustless, and censorship resistant transfer of value. However, achieving those means comes at the expense of a deterministic transaction flow and expense of mining. A sidechain allows a different set of trade-offs that allow privacy and rapid finality of asset transfer at the expense of being a permissioned network and trust of the functionaries."
Samson Mow, Blockstream's Chief Strategy Officer, took the opportunity to clarify, however, that while there is the inherit requirement of trust, the aim of Liquid is not to replace the main chain, but compliment trader requirements.
"A lot of people are approaching Liquid with the mindset that they *must* use it and are not traders...the reality is that it’s opt in, and if you’re not a trader or trading, it really has little to do with you."
Still, the requirement of such sidechains does signal the current short comings of Proof-of-Work, and how blockchains could still require a certain level of trust in order to accommodate modern financial market infrastructure.
Last week we watched the United State Senate Banking Committee hearing “Exploring the Cryptocurrency and Blockchain Ecosystem”, where Peter Van Valkenburgh of Coin Center and Dr Nouriel Roubini of NYU were invited to give evidence on a range of topics from the suitability of Bitcoin for payments, to ICO based scams, to KYC at cryptocurrency exchanges. Regardless of whether you were a staunch supporter of cryptocurrencies before the hearing, or not, we doubt that the hearing did much to change anyone’s mind. While we deeply respect Dr Roubini’s contributions on economic and banking affairs, and recognise his foresight on the US housing crisis and 2008/2009 financial crisis, on this topic we were left with an unshakable feeling that his side was done a great disservice. To paraphrase the Economist’s 1957 remarks on von Mises: Professor Roubini has a splendid analytical mind and an admirable passion for economics; but as a student of cryptocurrency he is worse than null and as a debater he is of Hyde Park standard.
Irrespective of where you stand on cryptocurrencies and blockchain technology, it is to the benefit of society as a whole to engage in well reasoned, fact-based and constructive debate. In debate, the ability to competently and coherently argue the opposing point of view is referred to as a steelman. By truly understanding those with whom you disagree you are able to better defend your own position, and we believe, provide better solutions to complex problems. In the case of cryptocurrencies there is still very few hard facts, and a limited cannon of objective research, to put it in the most charitable of terms. While this is not unexpected, due to the relative youth and experimental nature of these technologies, it could be argued that underlying financial motivations of the staunchest supporters cause to overlook or downplay evidence which challenges the narrative of their personal portfolio, whilst overestimating their benefits to society. To these points we believe that Dr Roubini has been effective in articulating the irrationality and exuberance which took place in cryptocurrencies, culminating in a steep price increase in the latter half of 2017, and later a dramatic correction.
What was notable during last week’s hearing were several of the points made by Mr Van Valkenburgh, that would --had a more well-versed witness argued in Dr Roubini’s stead-- have been challenged. This includes the narrative that blockchain technologies could have somehow offered greater protection against and even prevention of personal data leakages by credit agencies, or somehow prevent exploits of cyber security. These points ignore the fact that, while the data inside public blockchains is generally pseudonymous (another point that both sides missed on multiple occasions), it is generally not encrypted nor is it private, though some new privacy-focussed cryptocurrencies are in various stages of implementation of these features. The assertion that hacking, such as that demonstrated by an exploit of Jeep’s software, could somehow have been avoided by removing a central database and using a blockchain, blatantly omits exploited vulnerabilities such as the DAO exploit, or the Verge time-warp attack. This is not to say that the open source nature of these cryptocurrency implementations have not resulted in greater security or faster response to such threats than they would have been were these technologies proprietary.
We also felt that there were too many contradictory statements made against cryptocurrencies, such as the assertion that they were not money --owing to their lack of adoption as unit of account, medium of exchange or store of value-- which were then shortly followed by statements on their GINI coefficient as compared to that of North Korea. While we don’t seek to take a stance either way, surely if we were to discuss cryptocurrencies in terms more inline with private financial instruments such as securities --which Dr Roubini asserts-- a GINI coefficient would be irrelevant. Furthermore, Dr Roubini also undermined his point when asserting that fiat money is not created out of thin air, due to the link between bond buying and short term treasury issuance, or through the creation of liabilities in the form of loans in the commercial banking system. Taken alone this may be understandable, whereas in the context of linking it to cryptocurrency, Dr Roubini failed to see the allegory between the creation of central bank and commercial bank money and the reflexive necessity of cryptocurrency issuance in securing the system through compensating miners.
There were also arguments that cryptocurrencies were inefficient, owing to their decentralisation, but at the same time the over centralisation of mining by a cartel of individuals in China, Belarus (a fact that we were unable to independently verify), Georgia and Russia results in higher fees and reduced security. Individually these points all have merit (though we question his facts on the location of mining, and specifically would highlight Iceland, Quebec and Washington State’s cryptocurrency mining contributions), they lack the appropriate nuance needed to articulate why and how these points should be considered.
Perhaps one of the greatest disappointments was the lack of mention or depth of argument on some of the greatest excesses in this space. We would specifically highlight the way that promoters of cryptocurrency products are marketed to retail clients, which would not be allowed for any other asset class under existing rules, or the potential fiduciary duties owed by developers of these technologies towards these schemes. The hearing also missed evidence on the undisclosed and close-handed dealings seen by some large investors in ICOs before they became available to the wider public, often at terms that left the retail investing public, many of them unsophisticated American investors, at a severe disadvantage.
We feel that a valuable subject of discourse would be analysis into the macro and micro implications of an alternative global economic system and the effects on monetary and fiscal policy. Current economic models have been built from the baseline assumption that an economy is comprised of rational, information-gathering agents. The economic models that underpin cryptocurrencies assume adversarial conditions and bake these in via mechanism design, a field of economics and game theory. The mechanisms, such as the proof-of-work leader selection, reintroduce scarcity into the creation of the native coin via a hash collision algorithm, reminiscent of what had been previously mandated in the 1944 Bretton Woods Agreement via the pegging to gold, a commodity with inherent value due to its conductive nature.
While much empirical analysis has been done via the community and academia combined to discover the centralisation profile of bitcoin creation, not much work has been done to analyse the corresponding centralisation of the creation and distribution of fiat money and bank money and a comparison of costs. This is only one suggestion of a way for academia to use available data to participate in the discussion, and many of us would welcome such research and debate. Many of us, after all, can see the benefits of a decentralised global e-commerce system, while respecting the stability mechanisms and legality of the functions of money that we are lucky to experience in countries in which both authors, and indeed Dr. Roubini, reside. A concern would be the inherent bias of Dr Roubini that may leave NYU at a notable disadvantage in the global debate.
For all of the bluster that was the cryptocurrency skeptic position as demonstrated by Dr Roubini at the Senate Banking Committee hearing last week, and thereafter on social media, we find his discourse utterly lacking in the necessary subject matter expertise, coherence, and nuance needed to properly inform regulators at this level. Going forward we would advocate for better witnesses who are not simply selected for their laurels in other subjects, but who have a demonstrably deep knowledge in aspects of these technologies, assets and markets, as well as expertise in innovation. We highlight to US regulators just some of the names of people who have done the hard yards to challenge aspects of cryptocurrencies, such as Professor Angela Walch, Dr G.C. Pieters, Tim Swanson, Jackson Palmer, Stephen Palley, and Preston Byrne. We also acknowledge the deep reflection and ability to challenge their own positions by notable people innovating in cryptocurrencies, including Vitalik Buterin, and Vlad Zamfir.
Even those of us who believe most strongly in the potential benefits and opportunities of cryptocurrencies and the underlying technology, blockchains, should acknowledge the value of a competent and knowledgeable opposing view, which can serve to provide valuable feedback that allows them to construct a better, more sustainable solution suited to benefit to society.
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