2019 March 04 - Volume.3 Issue.8

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2019 March 04 - Volume.3 Issue.8

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Binance Gains Market Share in Global Trading Tussle

With prices down and volatility taking a back seat in recent months, Bitcoin trading volumes across exchanges have hit new lows. Still, traded volume in terms of Bitcoins remains higher than that seen in 2017. But as market share across major exchanges continues to drop, Binance is one seeing growth.


Bitcoin traded volume witnessed a massive 55% drop in January and February of this year versus 2018 for the same period. Still, total Bitcoins traded already stands at more in the first two months of this year than that seen in all of 1Q17.

Overall, 2018 saw demand rise 45% versus 2017, with the last three quarters of 2018 finding an even footing (see chart).

|| HOW LOW CAN YOU GO?

Major exchanges though have hit new trading volume lows in Dollar terms. For the first time in almost 2-years, Coinbase, in part due to a short month, saw its Bitcoin traded volume fall below $1Bn last month (see chart).

Adding alcohol to the wound, Coinbase's market share against major exchanges has also dropped from an average of 24% in 2017 to half that in 2018.

|| BUCKING THE TREND

Binance hasn't fared much better either seeing its total BTC/USDT volume drop to levels seen just before the exchange became the goto cryptocurrency trading hotspot (see chart).

Binance though has been able to capture valuable share against major exchanges now cornering over 50% of the market (see chart). This marks the third straight month in a row that Binance has seen its market share grow as Coinbase, Kraken and Gemini plateau.

Bitfinex market share also continues to slide after Tether-related controversy put a question mark around one of the oldest cryptocurrency operations (Diar, 22 October 2018). And while it still maintains over 20% of traded volume on the majors, it has been a steep drop from the 60% it once controlled.

|| NEW TRADING NORM?

With Bitcoin's volatility down 82% versus the start of 2018, it's unlikely that trading activity will gain much speed bringing back the sunshine exchanges basked in last year.

The "Crypto Winter" has now pushed Circle to seek an additional round of funding to the tune of $250Mn, The Information reports, having already raised as much to date (Diar, 5 November 2018).


SOCIAL MEDIA HARNESSES POWER

Bitfinex is no longer alone in community-driven backlash. Coinbase is now the latest to face upheaval following the announcement that the US-based exchange had acquired Neutrino to spearhead their in-house blockchain analytics. The crypto community unveiled that the executives in the company had serviced contracts to authoritarian regimes through "Hacking Team," a firm that had been branded as the "Enemy of the Internet" by Reporters without Borders.

The "DeleteCoinbase" movement though will unlikely affect Coinbase's professional trading platform but could very well hamper future recommendations by the crypto community to on-board through its retail product with several US-based alternatives now on the market.

Binance Back Over 50% of Traded Volume vs. Major Exchanges (%)


45% Increase in BTC Volume 2018 vs 2017 (BTC)


Binance BTC-USDT Volume Hits Low Since Coming to Fame ($)


Coinbase: BTC-USD/USDC Falls to 22-Month Low ($)


Bitcoin Hash Rate, Miner Margins Shift Back into Growth

Bitcoin miner revenues last month fell to the lowest intake since August 2017. To make matters slightly more difficult, miners running optimal equipment and who have secured wholesale electricity prices have seen their gross margins squeezed requiring a massive deployment of hash power in order to stay afloat. But this month did see a small uptake, the first time since Bitcoin's price boom.


Bitcoin miner revenues plummeted to a 19-month low in February bringing home just under $195Mn, a 10% decline from the start of this year (see chart).

In December 2017 fees alone earned miners over $295Mn. But along with the price drop and the adoption of SegWit rising from an average of 12% in January 2018 to over 43% in February this year, revenues from fees have become an afterthought.

|| MARGIN GAINS

With smaller miners put out to pasture, the majority of the Bitcoin network is likely to be running on the most recent equipment or else be running at a loss (Diar, 8 October 2018).

But the increase in competition has also minimized gross margins from 94% at the start of 2018, down to 32% a year later (see chart). The silver lining, perhaps, is that gross margins grew to 39% in February.

Meanwhile, the hash rate has been able to maintain growth after a reversal in December last year (see chart). But current equipment might no longer be enough to sustain long-term outlook with a looming coinbase reward halving a little over a year away.

|| ONE STEP FORWARD, ONE STEP BACK?

Miners are now raking in a great deal less per unit deployed while trying to keep up with a growing hash rate that has seen a massive increase of over 1700% since the start of 2017.

Mining operations who have been able to overcome any cash flow hiccups due to the price decline are now faced to lay down further capital expenditure in order to maintain their share of the coinbase reward or find themselves trailing to those who have more efficient equipment.

|| BITCOIN BACK INTO BITCOIN

With gross margins now having a little more breathing room, it is likely that mining operations will increase capital expenditure on the latest mining equipment in order to stay ahead. Bitmain's latest flagship miner that began shipping at the start of the year, the s15, has already sold out twice-over with the next batch set for shipment in April.

It is likely then that hash power continues to increase in the coming months bar a massive price drop. But at current Bitcoin prices, the capital requirements would still be to miners benefit with the S15 averaging 84% more return than it's predecessor, the S9 (see chart).

Miner Revenues Fall to 19-Month Low...


...But Gross Margins Shift Back Up (S9 - $0.05Kw/h)


Bitmain Antminer S15 Gross Margin Avg. 84% More Than S9 (% Difference)


Sources: Diar Calc., Coinmetrics, Blockchain.com, BTC.com


Stablecoins Peter-Out

A recent report published by data services platform TradeBlock has poured some cold water on the adoption thus far of stablecoins after seeing a strong push early on (Diar, 14 January). Dai leads the way in on-chain transfers as well as the number of holders. Maker, however, estimates that over 50% is used primarily for trading on decentralized exchanges. Then again, TradeBlock also asserts that no stablecoin has found a use case for much else as of yet.

"While stable coins initially saw traction as a digital currency trading pair on exchanges, this appears to have lost some momentum as trading volumes fall and as the US dollar maintains its dominance as the top trading pair in bitcoin and altcoin transactions" the report said.


Stablecoin Holders / On-Chain Transactions

Source: Etherscan

Argent Wallet Soft Launch

Ethereum-based cryptocurrency wallet provider Argent is set to go live with their offering later this week after the startup secured a $4Mn investment a few months ago aiming to streamline the recovery process of a lost wallet without the 12-word phrase requirement.

"We’ve been telling people for years to stop writing their passwords on post-it notes and spreadsheets. Crypto shouldn’t be any different" says Argent.

The solution might not be to everyone's flavor, however. The Argent wallet would give limited powers to people one trusts dubbed as "Guardians" who would be able to assist should someone lose access to their wallet.

It is, however, one of the more elegant solutions to come of age. A different solution came from Coinbase last month who deployed the ability for users to back up their seed phrase on popular platforms such as Google Drive and iCloud. That too was met with scrutiny. But they are efforts to address a roadblock that could make new adopters hesitant - especially for larger sums.

Ultimately, however, some level of trust along the pipeline is going to required unless users are willing to face the potential consequences of a complete loss. And few people are hiding cash under the mattress.

|| MORE THAN MEETS THE EYE

Non-custodial wallet providers from Coinbase to Argent have set their eyes on addressing a much larger ecosystem with easy onboarding into Dapps though they have yet to gain any significant traction outside of trading and gambling (Diar, 28 January). But Decentralized Finance (DeFi) has been making some headway opening up the potential for easier access to financial products (Diar, 4 February).

Op-Ed: Blockchain Boon for Watchdog Transparency Activities

- Omid Malekan

As the blockchain industry grows, vendors are pitching different implementations to legacy companies. One feature some will offer is to have the regulator of that particular application run their own node to monitor every transaction in real time. It’s a simple idea, but one with profound implications.

The crypto industry has a bad reputation with regulators. Some of it is understandable after events like the ICO craze, but most of it stems from a lack of education and a tendency for outsiders to confuse features of the technology for bugs. The Mt. Gox collapse, for example, simply proved that the Bitcoin blockchain works as intended: immutable, uncensorable, and preserving provenance. The rest of that story— the collapse of a poorly run trading house after shady behavior by insiders— is a story as old as finance (or as recent as Enron and Lehman).

This lack of understanding is blinding most regulators to the fact that blockchain has the potential to become one of the most important developments happen to their profession since the government subpoena. Once the technology goes mainstream, inspectors will no longer have to rely on the companies they are meant to regulate to furnish the data needed to do their job. Unlike most industries, transparency is a core value of this one.

Running their own node to monitor every transaction is just the tip of the iceberg. With securities issuance slowly migrating to token riding blockchain rails, much of the manual labor of enforcing compliance will be automated.

Today, making sure that restricted securities don’t end up in the wrong hands is a herculean task handled by armies of internal compliance officers and external government agents. Tomorrow, however, the tokens themselves will simply refuse to be owned by someone who isn’t supposed to. The recent demonstration of this concept by Polymath, on a decentralized exchange no less, was one small step for some programmer, but a giant leap for the compliance department.

|| DISCLOSURE ACCOUNTABILITY

One of the core tenets of regulations all over the world is that of full disclosure. Not only does transparency improve markets, but it also keeps corporate executives accountable to their shareholders and customers. This is why public companies the world over are required to make massive public disclosures on a regular basis.

Full disclosure is especially important in banking, where clients and counterparties have a vested interest in the financial health of the companies they deal with. But the complicated nature of that business, along with the sheer size of the biggest banks, creates an opacity problem. You can only know so much about a large financial conglomerate with subsidiaries all over the world. In the legacy banking system, every bank requires an army of controllers, auditors and regulators to stay on top of important numbers. In the blockchain banking system, all you have to do is visit a website. 

MakerDao, and it’s smart-contract based system of users putting up collateral and borrowing against it, is every banking regulator’s dream come true. Important metrics of stability, like its collateral ratio, are calculated and broadcast continuously. You can even watch in real time as new loans are generated, old ones are paid off, and under-collateralized loans are liquidated.

To appreciate just how much of a leap forward this really is, recall that one of the contributors to the 2008 financial crisis was uncertainty about who owned what, and which collateral backed which loan. You, a casual reader who just clicked on a random link, probably know more about the financial health of Maker today than Dick Fuld knew about Lehman back then. As if that wasn’t special enough, Maker’s smart contracts can’t ever commit the kind of fraud that took down Madoff, and wouldn’t be able to commit the kind of discrimination against underrepresented communities that some banks have historically been caught doing.

Potential Decentralized Applications Addressing Compliance 

wdt_ID Comliance Activity Blockchain Platforms
1 AML/KYC in Correspondent Banking JPMorgan IIN, Ripple, Blockchain Worldwire
2 Soverign Identity Hyperledger Indy, uPort, Evernym
3 Securities Compliance Polymath, Securitize, Harbor, Templum
4 Trade Legality (Customs, Sanctions, etc.) Tradelens
5 Banking MakerDao, Compound
6 Fiat Payments USDC, TrueUSD, Paxos, Dai, Gemini Dollars
7 Trading DEX
8 Conflict Diamonds Everledger
9 Food / Pharma Source Tracking Food Trust, Mediledger


|| PERSPECTIVES DELTA

This counterintuitive idea that decentralization is actually good for regulators can also be extrapolated to exchanges. While the SEC’s crackdown on EtherDelta, a decentralized exchange that some had allegedly used to trade unregistered securities shed light on a negative implication of the technology, there’s plenty of positive.

Right now, agencies all over the world, working together with self-regulatory bodies like FINRA, commit tremendous resources to make sure that legacy exchanges, brokers and clearinghouses operate properly. With a DEX, that work gets outsourced to the community. Does the exchange maintain a proper order book? Is there wash trading? Can trades be front run? The answer lies in the code. Even centralized exchanges become easier to monitor on a blockchain. The most remarkable thing about the QuadrigaCX scandal isn’t that it failed due to the questionable behavior of its leader (remember MF Global?), but that the community was able to dismiss the official narrative almost immediately after some basic sleuthing. If it were a traditional exchange, it would have taken an infantry of (highly paid) investigators months to come to the same conclusion.

In the future, as more and more services get ported over unto decentralized platforms, their values of fairness and transparency will go mainstream. When a decentralized ride-sharing service goes into surge pricing, you’ll be able to see exactly why. When a company does a share buyback by purchasing and burning its own tokens, you’ll see the numbers trickle down on chain. When a supermarket tells you that its produce is local and organic, you’ll scan a QR code to see for yourself. When Central Banks introduce their own blockchains for tracking fiat transactions, they’ll get a level of visibility that today they can only dream of. When that day comes, every regulator who has ever worked to bring transparency and fairness to their respective market will rejoice. The next day they’ll be out of a job.

Years ago, it was reasonable to assume that the very negative attitude of regulatory authorities toward blockchain technology was due to a combination of immaturity on the part of the industry and lack of education on the part of the regulators.

But as significant progress is made on both fronts, their attitude should change. If it doesn’t, it might just mean that they understand too much. Of all the industries that blockchain technology threatens to disintermediate, regulation might be one of the biggest.


Omid Malekan is the author of the book The Story of the Blockchain: A Beginner's Guide to the Technology That Nobody Understands - Link. You may read his previous op-ed in Diar on the potential of Stablecoins here.

Ethereum Fork Completed Without a Hitch
After an initial set back earlier this year that delayed an important upgrade to the Ethereum blockchain, the 'super computer' last week forked successfully implementing four new proposals. The upgrade addresses how code is processed allowing for better scaling, reducing gas costs, introduces state channels for better resources management and decreases the block reward from 3 to 2 ETH. The upgrade immediately showed its power with blocks being processed much faster, akin to the early days of the network.
Polymath Security Token Trading Success
Security token platform Polymath has successfully completed the testing of its own token protocol, the ST-20, on the Loopring Decentralized Exchange (DEX) showcasing that their trades would be able to comply with regulatory requirements. Revealed to Coindesk, trades would only be executed should certain criteria be met that have already been whitelisted by the token issuer. Security token platforms have garnered much attention as of late, but it remains to be seen how many companies will opt to go down the crypto-route.
Thai SEC Trims Down Eligible Cryptocurrencies
The Thai Securities and Exchange Commission has taken a peculiar precautionary step likely due to liquidity baring Initial Coin Offerings launching in the country to have a base trading pair with Bitcoin Cash, Ethereum Classic and Litecoin. "The list update has no impact on investors or digital asset businesses because so far no ICO has been launched and the operating digital asset exchanges have never used BCH, ETC or LTC as base trading pairs"  Bangkok said. Bitcoin, Ether, Ripple and Stellar are safe, for now.

Deconomy 2019
Seoul, South Korea


Diar is pleased to be the principal media partner for the upcoming Deconomy conference in Seoul, South Korea on April 4-5.

With a speaker line-up from Andreas Antonopoulos, Vitalik Buterin and Nouriel Roubini, to name a few,  the conference is set to be filled with important discussions and a good debate about the future direction of the cryptocurrency industry.


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