Scalable Blockchain Focused On The Developer Experience

VeradiVerdict — Issue #45

Pantera recently invested into Near Protocol, a blockchain that uses sharding for scalability and really focuses on the developer and user experience. We were impressed with the team which comes from top companies like Google and Facebook but more importantly had experience creating decentralized and distributed computing systems at MemSQL. After seeing a demo of the developer experience and hearing their vision, we knew we wanted to be part of the journey. Below you can read more in-depth about the scalability problem, how Near unique solves these problems, and what makes them compelling.

TL;DR

  • The most common blockchains today (namely Ethereum and Bitcoin) run into a huge problem regarding scalability; their consensus protocols and computational architectures aren’t designed to handle huge transaction volumes and frequency, which is becoming more and more common as dApps and arbitrage grow and become extremely more complex.

  • The NEAR Protocol is a new blockchain addressing many of these scalability concerns. NEAR uses sharding, or distributing transaction validation across multiple nodes, a customized proof-of-stake protocol that natively works with sharding, and smart contracts powered by WebAssembly (and TypeScript & Rust, and eventually the entire ecosystem of languages that compile to WASM) to create huge advances in speed and scalability for blockchain.

  • NEAR also presents huge incentives for users and developers to join, including an in-browser IDE, easy integration with Javascript, JSON, and APIs, a growing open-source community, and a NEAR token that rewards contributors and developers to its blockchain ecosystem––spurring more growth.

  • NEAR also makes usability a key priority––from onboarding users onto the platform to making transactions easy. Blockchain apps tend to have pretty steep drop-off rates (on the scale of 90%), so NEAR’s work in this field may very well power long-term usage of blockchain apps––and an explosion of the Dapp ecosystem.

  • NEAR’s team is incredibly stacked too––including multiple ex-Googlers, many of the early architects of sharding technology, a ton of ACM-ICPC (the most prestigious collegiate programming contest) winners, and way too many honors and accolades to list.

  • Ultimately, the NEAR protocol addresses many of the biggest concerns around scalability with the current blockchain ecosystem today, and might very well be the next step towards the next generation of blockchain.

The Next Generation of Blockchain

It’s been 10 years since Satoshi Nakamoto published the infamous Bitcoin whitepaper, inspiring an entirely new field of technology, finance, and the still-ambiguous potential to combine the two. It’s been 4 years since Ethereum launched their blockchain––powering the world’s first truly-decentralized applications and smart contracts, concepts that fuel much of the innovation in the cryptocurrency space today.

With new tokens, consensus protocols, and blockchain tech suites on the rise, the gaps in the initial iterations of blockchain are slowly being identified––poor scalability, high computational costs, low latency with consensus, etc. And with each of these newly-identified problems, new companies are scrapping together to produce the next generation of what blockchain might look like.

That’s where the NEAR Protocol comes in. NEAR is a team of developers and blockchain researchers that has come together to create a new open-source blockchain that promises to be faster, more scalable, and more user- and developer-friendly than ever before.

Why NEAR? What’s wrong with Ethereum or Bitcoin?

A ton of problems regarding the initial iterations of blockchain have been uncovered in recent years. The vast majority of these problems center around scalability––Ethereum and Bitcoin both fail to support high transaction volumes or frequencies, which throws immense barriers in the road when companies try to use the blockchain for high-speed arbitrage or decentralize applications with thousands of users.

NEAR differentiates itself in three key ways from the current blockchain market, again, namely around the ethos of scalability.

Sharding

Previous blockchains are fundamentally limited by how many blocks can be produced and how fast validators can actually validate transactions. This has created huge obstacles as blockchain applications scale in size, because at larger user-bases, they require a ton of blocks and validators at any given time. In 2017, an Ethereum dApp called Cryptokitties which had only 14k users (fairly small for a consumer-focused app) almost blocked up the entire Ethereum network, because of the blockchain’s inability to handle the volume of transactions.

The NEAR team identified this gap and began to introduce a computational concept called “sharding” into the blockchain space. At a high-level, sharding is breaking up computational work amongst a variety of nodes or computers. In a blockchain context, sharding breaks up the total work to validate a volume of transactions among a set of shards, each of which is validated by different nodes. The idea here is to further decentralize the computational expense and complexity of validating huge amounts of transactions, by parallelizing the work amongst many computers.

Sharding is an extremely complicated computer science problem––one that the brilliant NEAR team has been able to crack in a blockchain context, creating much of its competitive advantage. It should be noted that Ethereum 2.0 (the projected next version of the Ethereum blockchain) also plans to use sharding to address scalability concerns. There are differences between the two, though subtle; put simply, NEAR’s algorithms use smaller consensus committees in their node validation than Ethereum does because NEAR wants to capture the low-end device space. The trade-off here is that NEAR’s blockchain can have many forks, which tends to hurt sharding. It’s unclear which of the two algorithms will outperform the other––but Ethereum 2.0’s launch is well in the future, putting NEAR at somewhat of a first mover advantage here.

Ultimately, by introducing sharding, NEAR hopes to drastically improve the scalability of decentralized applications and blockchain usage.

Customized Proof-of-Stake (Nightshade)

Older blockchains like Ethereum and Bitcoin use the classic proof-of-work (PoW) mechanism to validate consensus on the chain. As a refresher, proof-of-work essentially presents a computational puzzle to all the nodes on a network; the nodes must “team up” and combine their collective knowledge of the blockchain to solve the puzzle. The “team” of nodes that solves the problem first effectively “wins” the challenge and their record of the blockchain is the new record of the blockchain for the entire network.

At its inception, proof-of-work was computationally brilliant––an unheard of way to determine whether computerized records of something agreed or not. But as the Ethereum and Bitcoin ecosystems scaled, the inherent problem in PoW became obvious; the protocol requires that every transaction be validated across the entire network, which exponentially racks up computational complexity. Put simply, older blockchains can’t scale as fast because it’s too much computational expense to validate a million transactions each across a million nodes (that’s on the order of 1012 validations). Some solutions to this issue have popped up––namely, second-layer solutions which create another layer to the blockchain that helps speed up consensus and distribute the validation work. Still, these mechanisms are fundamentally limited by the fact that all transactions must be ultimately validated across the entire network.

Proof-of-stake (PoS) is a newer consensus protocol that operates a little differently. The network chooses a node to create the new block for a transaction based on a weighted probability inferred from the node’s “stake” in the blockchain (essentially, how much financial or network value they hold in that ecosystem). This still guarantees that the only way to maliciously add a block to the network is by owning >50% of all of the cryptocurrency on the network. 

PoS itself doesn't provide much scalability benefits, but significantly reduces the cost of operating the network, and is more green since no electricity is wasted to maintain the network. On top of PoS, NEAR implements sharding, which splits the work among the nodes instead of having all nodes validate all the transactions. Since sharded systems do not rely on validating every transaction across the entire network, it is orders of magnitude faster than traditional blockchains––creating huge advances for scalability. Designing secure sharding for blockchains, however, is extremely complex, since not all the transactions are now validated by all the nodes, it must be ensured that the set of nodes that validate the transaction is not adaptively corrupted and doesn't let an invalid transaction become finalized.

NEAR uses a customized version of PoS to implement consensus for its network because of its unique sharding structure. There are three types of validator nodes that implement consensus. First, chunk producers aggregate all the transactions for a given shard and turn that into a computational unit called a “chunk”. Block producers then take individual chunks and turn them into a single “block,” which is analogous to the same block discussed in validating transactions on Ethereum 1.0 or Bitcoin. Lastly, validators actually validate the transactions using the PoS mechanism to ensure that the transaction history is accurate. This entire process is called “Nightshade.” 

The entire goal with the PoS transition is to create a faster consensus mechanism that natively integrates with NEAR’s sharding infrastructure to allow for stable, and efficient node validation.

Web-Assembly Powered Smart Contracts

Smart contracts are one of the largest use cases for blockchain today; NEAR’s taken apt note of that and designed their protocol to integrate well with smart contract design. Most notable about NEAR’s implementation of smart contracts is that it runs entirely on WebAssembly (WASM) virtual machines (VMs).

There’s a ton of computational reasons why this is huge for the scalability of smart contracts, namely that it’s incredibly fast, deterministic, compiles from many different programming languages, and has a rapidly growing community of developers improving and making tools for the space. NEAR’s WASM smart contracts use Rust VMs and Wasmer, both of which are top-of-the-line in terms of speed and scalability. Aligning with the thesis of better scalability and speed, NEAR’s transition to smart contracts on WASM creates huge strides for the second generation of blockchain.

Additionally, WASM is one of the fastest growing developer communities today; on top of the scalability value, it’s smart that NEAR is going after a growing space to further bolster their tools and libraries for creating VMs.

So, from a theoretical computer science angle, NEAR sounds great. But what’s the actual drive to use it?

Great question. With any blockchain, there’s too main users to capture.

First, developers. Again, in terms of scalability, NEAR pretty much outpaces every other solution out there; with sharding, its customized PoS, WASM smart contracts, etc., there’s no other blockchain that can support the volume and speed of transactions that NEAR can––creating a huge incentive for developers to use NEAR to build applications and financial systems.

From a purely development angle as well, NEAR has really done all its can to make the development experience as easy and well-supported as possible. NEAR uses WebAssembly, which is pretty similar to TypeScript, a popular language among developers today. They also have an in-browser IDE that can do everything from blockchain development to user testing that creates a fully-stacked developer ecosystem with sufficient tools to build a robust application. Moreover, it’s easy to interact with NEAR blockchains using JavaScript, JSON, APIs, etc. The entire project is open-source, meaning developers can identify bugs in the code as they work through the earliest iterations of NEAR, fork it to make customizable, and really understand the ins-and-outs of the NEAR codebase. And NEAR targets 1-click testing, deployment, codeshare, and running programs––creating a better developer experience than web2.

Second, conventional users who might download NEAR-powered dApps or use it as a trading platform. This is a smaller focus, since most users would interact with technologies built on-top of NEAR, not NEAR itself, but still NEAR makes itself easily accessible. They use decentralized web, much like the web2 used by a ton of Ethereum projects. It’s super simple to make an account and create a wallet on the web, which requires no plug-ins and is entirely self-contained. The idea is to make the experience as whole and supported as possible––and NEAR’s done a great job of supporting non-technical customers who still want to interact with its blockchain.

On top of its incredible developer and user support, NEAR is also launching a token of its own (unsurprisingly called the NEAR token). Block creation rewards, transaction fees, and storage fees are distributed through the NEAR token; pricing is fixed for transaction and storage fees and is correlated with inflation for block rewards. The ecosystem rewards its contributors well, which hopefully incentivizes even more to join, fueling natural, rapid growth.Take a look here.

What’s the team like?

One-word: brilliant. Pretty much the entire team, from its C-level executives to individual contributors, has held a stint at a major tech company like Google, Facebook, Microsoft, Niantic, etc. Tons have worked in the CS industry at a research angle, building machine learning models and frameworks, creating decentralized and distributed computing systems, etc; many used to be the chief architects of MemSQL, a hugely popular distributed relational database today (used by Goldman Sachs, Morgan Stanley, Uber, etc.). If that wasn’t enough, multiple team members have either championed or medaled at the ACM’s Intercollegiate Programming Competition (ICPC), the world’s most famous and prestigious computer science concept. If anyone can pull off a blockchain revolution on the scale of NEAR, it’s this team.

Final Thoughts

Blockchain has made incredible advances in the last decade, but there’s also been huge areas for improvement. The biggest of these thus far has been scalability, stemming from poor architectures that required cross-network validation and poor computational load distribution. The NEAR protocol makes huge advances in pretty much every aspect of the scalability problem––presenting a blockchain that might actually be able to support insane transaction volumes and huge computational loads.

With sharding, its customized PoS consensus protocol, and use of WASM VMs, NEAR’s scalability is unlike any other blockchain before it. That’s on top of its quickly-growing developer ecosystem and toolkits for users and developers that make it easier than ever to engage with the NEAR blockchain. The future of blockchain and cryptocurrency is incredibly ambiguous, but it’s clear that NEAR presents a huge advance towards the next generation of blockchain: easy-to-use, secure, and stable.


DIGESTS

Facebook answers how Libra taxes and anti-fraud will work

Libra claims it’s no bank like Trump accuses.


IN THE TWEETS


NEWS

Crypto Prediction Market and Derivatives Platform Veil Is Closing

Veil, the crypto-focused prediction market and derivatives platform, is closing its doors.

Investor Fortress Will Buy Mt Gox Creditor Claims for $900 Per Bitcoin

Creditors of Mt Gox waiting to get their bitcoin back from the long-defunct exchange can now get pennies on the dollar by selling their claims to Fortress Investment Group.

Fidelity, Deloitte, Amazon support new blockchain accelerator

The program is set up by IDEO CoLab Ventures, a venture arm from design firm IDEO.


REGULATIONS

US Senate Committee Approves the Blockchain Promotion Act

The United States Senate committee of commerce, science and transportation approved the Blockchain Promotion Act on Tuesday, tech news outlet CNET reports on July 11.

SINGAPORE TO EXEMPT BITCOIN FROM GOODS AND SERVICES TAX

The U.S. is increasingly running the risk of being left behind other nations unless its authorities soon address issues surrounding Bitcoin. One of the main problems facing the cryptocurrency is tax treatment. In this regard, Singapore is now taking the lead.


NEW PRODUCTS AND HOT DEALS

Set Protocol launches Trend Trading

Set Protocol launches Trend Trading, a new category of Sets that auto-rebalances based on technical indicators. ETH 20 Day Moving Average Crossover, the first Trend Trading Set, is now available on TokenSets. Set is reinventing asset management using DeFi infrastructure.

Liquidity provider for CME and Huobi raises $7M from Polychain Capital

Altonomy, a Singapore-based market maker, just raised a $7 million seed round led by Polychain Capital.

Multicoin, Coinbase Ventures Invest $1.5 Million in ‘Decentralized Flickr’

Multicoin, Coinbase Ventures, BlueYard Capital and Collaborative Fund are backing a new protocol to help developers more smoothly interact with decentralized file storage. The investment takes the form of a $1.5 million seed round in data startup Textile.

Visa, Blockchain Capital back $40 million round for crypto custodian Anchorage

The investment is led by Blockchain Capital, with participation from Visa and existing investors such as Andreessen Horowitz


MEET WITH ME

Los Angeles, July 19

London, August 15-16

Berlin, Web3 Summit, August 19-21

Los Angeles, August 23


ADDITIONAL INFO

Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing into blockchain companies and cryptocurrencies. The firm invests in equity, pre-sales/IEO rounds, and cryptocurrencies on the secondary markets. I focus on early investments and want to share my thoughts and what’s going on in the industry in this weekly newsletter.

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Regulatory Progress for US Crypto Derivative Platforms

VeradiVerdict - Issue #45

TL;DR

  • Futures contracts are legal agreements to trade commodities at a predetermined price at some set price in the future. Futures exchanges are where these contracts are organized and traded to parties that want to enter into the contracts.

  • Currently, the biggest (and only notable) player in the cryptocurrency futures space is the CME Group. CME offers Bitcoin futures, and has been getting huge interest, peaking at $400M total value in futures contracts on its platform in June. However, CME futures are settled in fiat currency, not cryptocurrency, and rely on price-calculations from CME itself instead of purely contractual data.

  • Two of three major cryptocurrency exchanges, Ledger X and Eris-X, have recently received licensing from the Commodity Futures Trading Commission (CFTC) to launch futures trading platforms that can be physically-settled, meaning they’re settled in actual cryptocurrency, not fiat. I’m sure Bakkt will not be too far behind.

  • Ledger X plans to launch a platform called Omni, which is primarily targeted towards retail (day-to-day) traders who want to trade. It’s the oldest of the three exchanges and has been seeing substantial but unimpressive growth in the options and spot space.

  • Eris-X received a license to clear fully collateralized futures from the CFTC and has been licensed by the CFTC as a futures exchange since 2011. It’s new futures platform is geared towards institutional investors. Eris-X is fully collateralized and has the licensing that signals huge confidence for institutional investors interested in the cryptocurrency futures space.

  • Bakkt, which operates under Intercontinental Exchange (ICE), also presents a new platform for Bitcoin futures. Bakkt will manage and clear all its futures through ICE, which gives the platform way more control over how its cryptocurrency futures are managed, and also signals more confidence to users since ICE is well-established.

  • The new licensing opens up a huge market for futures that are actually settled in cryptocurrency, a concept that’s been getting a lot of user interest recently. Additionally, the licensing represents huge advances in cryptocurrency’s credibility and legitimacy; futures present a new space for a financial asset that’s becoming more and more established.

What even is a futures contract or exchange?

Futures contracts are essentially legal agreements to trade a commodity for currency at a predetermined price at some set time in the future. An example would be party A wants to buy three BTC at $12,000 per BTC in January 2020. Party B is willing to sell three BTC at that price and time, and thus, parties A and B enter into a legal agreement to trade with the designated price and time. This differs from a spot contract, which is settled immediately after (generally, ~two business days) both parties agree to trade. Futures contracts are important financial vehicles to (1) speculate and profit from changing asset prices, or (2) hedge against risky investments made later.

There are two major kinds of futures contracts: cash-settled and physically-settled. In cash-settled contracts, parties pay or receive the difference between the current price of the commodity (spot price) and the price of the commodity at the predetermined date (futures price). In physically-settled contracts, parties use a price that’s set in the contract itself.

Futures exchanges are essentially marketplaces where the public can trade futures contracts and enter into them; with regards to the analogy above, a future exchange is where party A and party B would meet each other once they decided what they were looking for in terms of a futures contract. Some of the largest future exchanges domestically include the CME Group, NASDAQ Futures Exchange, and Intercontinental Exchange. Thus far, the cryptocurrency futures market has been very nascent and nebulous and not a ton of players have gotten involved in this space––that’s very recently changed.

What’s the history of the cryptocurrency futures market?

Honestly, there’s not been much. The CME Group and Cboe Global Markets were the two biggest players in cryptocurrency futures, offering cash-settled futures contracts that were generally settled in fiat currency, not cryptocurrency. This means that buyers and sellers didn’t exchange actual cryptocurrency, but rather the fiat value of whatever commodity they chose to trade. Additionally, the futures contracts were less reliable than ideal, because they were cash-settled; CME calculated the currency price of the commodity as a weighted average of four of the largest cryptocurrency exchanges’ prices for that commodity and used that to price their contracts. Physically-settled futures contracts would attract more confidence because it doesn’t rely on vague calculations.

Cboe recently left the futures market in March, citing insufficient interest in the platform. CME, on the other hand, has been seeing great success in the space––the open interest (essentially number of contracts outstanding for sale on a futures exchange) hit $400M in June 2019, indicating that more and more people are becoming interested in cryptocurrency futures.

Why the sudden change?

With more interest in cryptocurrency futures, more exchanges and financial institutions are becoming interested in being a platform for trading futures contracts. NASDAQ, the New York Stock Exchange, and several other players have expressed interest in launching a futures platform for cryptocurrencies––but also to improve on the success of CME’s future exchange. These new players have hopes of (1) having futures-settled contracts, as to not rely on arbitrary pricing calculations, and (2) allowing parties to settle in cryptocurrency entirely as opposed to the fiat value of the commodities.

So far, no exchange has been able to meet those criteria because it requires special approval from the US Commodity Futures Trading Commission (CFTC) to exchange physically-settled contracts and to settle through delivery. This is called a Designated Contract Market (DCM) license.  But recently, Ledger X has received CFTC licensing to host these kinds of futures contracts for trade on their platform, and Eris-X (backed by TD Ameritrade) received a CFTC license to clear futures contracts traded on their platform (which has been licensed for futures trading since 2011. Bakkt (backed by the NYSE’s Intercontinental Exchange) should not be far behind.

What are the differences among these three players?

LedgerX is a platform for trading spot, options, and futures for just Bitcoin­­, and no other cryptocurrency. It’s been operating since October 2017 and is the oldest of the three exchanges to trade cryptocurrency swaps (LedgerX does not yet offer futures). However, despite huge growth in the cryptocurrency derivatives market, Ledger X’s growth pales in comparison. In 2018, they grew 35% monthly and added 200 new institutional partners, but that represents less than 5% of the total growth in the Bitcoin options market. Competitors like BitMEX, CBE, and Deribit have been driving the growth in the options space. Despite its first-mover advantage, Ledger X has not been able to lead in Bitcoin spot or options. With its new DCM license, Ledger X plans to launch a new futures trading platform called Omni that exchanges futures-settled contracts that are settled in actual Bitcoin, but not fiat; the platform will only support Bitcoin trades as well, and no other cryptocurrencies. Given Ledger’s substantial but unprolific growth in the options space, it’s unclear where it stands in terms of the futures space, but it’s unlikely to be the leader of the pack.

Eris-X is another exchange for trading digital assets­­––but unlike Ledger X who only currently offers swaps, Eris-X supports four cryptocurrencies: Bitcoin (BTC), Bitcoin Cash (BCH), Ethereum (ETH), and Litecoin (LTC) on its spot market and hopes to launch futures on the same cryptocurrencies. Eris-X recently received a Derivatives Clearing Organization (DCO) license and has been approved by the CFTC to launch futures on digital assets. Eris-X’s trades are also fully collateralized and don’t offer margins, which exempts Eris X from certain parts of CFTC regulations that make things particularly tricky for institutional investors. In short, Eris-X’s licensing is geared towards individual and institutional investors looking to access spot and regulated futures contracts on digital assets on a unified platform. Eris-X launched their spot market in April 2019, which follows the same order book that their futures market will follow, and plans to launch futures on digital assets later this year. It’s likely that Eris X will pave the way for institutional futures trade and be a major player in the futures space moving forward.

Bakkt operates under the Intercontinental Exchange (ICE), which itself operates under the New York Stock Exchange. Bakkt lists the same four cryptocurrencies that Eris X does and is a comparable player in the digital assets trading space. Bakkt’s organizational structure, however, gives the platform huge confidence and power over the way that it handles futures trade. Bakkt will trade its futures through ICE Futures US, which is a broader marketplace for all kinds of futures that has tons of users. This is critical because Bakkt’s cryptocurrency futures contracts will be listed as another futures option for the already-substantial customer base of ICE Futures US. Additionally, its futures will be cleared through ICE Clear US, which gives Bakkt more control over how its futures are managed; it has total custody over all its assets, which makes futures trading on Bakkt apparently more secure than most other platforms.

What does licensing mean for the future (pun not-intended)?

In terms of the three players discussed, they’ll all be launching their platform relatively soon to have physically-settled futures that are settled in cryptocurrency, not Bitcoin. Ledger X seems to be targeting retail consumers who casually buy futures, Eris X seems to be gearing up for institutional investors, and Bakkt is capitalizing on its ties to the already-established ICE Futures Space. We can expect all three exchanges to grow substantially following the launch of their futures platforms; given how much interest cryptocurrency futures have been getting recently, it’s a fair bet that all three exchanges will see high usage, at least initially.

For the broader cryptocurrency market, these developments mean two things:

First, CME’s effective monopoly on the cryptocurrency futures will be on the decline; recall that the new futures exchanges are physically-settled, which means they are settled cryptocurrency and not fiat currency. This presents huge value for users that see cryptocurrency as means for trading, not just as commodities to trade for fiat; additionally, the newer contracts are settled with predetermined pricing rather than relying on calculations from CME.

Second, cryptocurrency is gaining more legitimacy as an asset class in domestic markets. CFTC approval for this kind of futures contract trading isn’t easy to get––the fact that two of the three exchanges have been able to secure, or on track to obtain, effective licensing and that there’s huge interest in something like this reflects cryptocurrency’s growing credibility in the US financial space. Futures present a huge new market for cryptocurrency, which has primarily been focused on options and spot trading in the past. It’s unclear who will be the front runner of the new futures space or what that looks like for institutional and retail consumers, but it’s definite that there’s huge interest and potential for the futures space to bloom.

-Paul


Digests

Blockchain Supply Chain Market Outlook:2025

The global blockchain supply chain market is expected to reach over $9 billion by 2025, according to a study published by market research and consulting firm Allied Market Research (AMR) on July 8.

Blockchain for Food, How the Industry Makes Use of the Technology

As blockchain continues to push for mass adoption, the food and beverage industry is shaping up to be one of the most inclusive destinations for the technology


In the Tweets


News

Fujitsu Unveils Blockchain-Based Identity and Credential Rating Service

Japanese tech research firm Fujitsu Laboratories has developed a blockchain-based solution for evaluating user credentials, identity and trustworthiness in online transactions, according to an announcement by Fujitsu on July 4.

New Study: US Dominates Crypto Twitter While Venezuela ‘Most Negative’

Accounting for almost 40% of bitcoin tweets worldwide, the United States looms large over crypto twitter. 


Regulations

Korean Watchdog Warns of Financial Stability Risk From Facebook’s Libra

Facebook’s recently unveiled Libra cryptocurrency project threatens the stability of financial systems, according to a South Korean financial regulator.

Gemini to Apply for Broker-Dealer License in Bid to Trade Crypto Securities

The Winklevoss-owned cryptocurrency exchange Gemini will apply for a broker-dealer license from the Financial Industry Regulatory Authority (FINRA), CoinDesk has learned.


New Products and Hot Deals

ShapeShift’s New Platform Aims to Make Crypto Self-Custody as Easy as Coinbase

ShapeShift’s new one-stop shop for non-custodial crypto management is launching out of private beta today.


Casa Launches Lightning Node Mobile App for Bitcoin Newbies

Casa’s new mobile app makes it easier to manage your lightning node on the go.


Meet with Me

Las Vegas, July 12

Los Angeles, July 19

Berlin, Web3 Summit, August 19-21

Los Angeles, August 23

New York City, September 3-6

Montreal, September 27-29


Additional Info

Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing into blockchain companies and cryptocurrencies. The firm invests in equity, pre-sales/IEO rounds, and cryptocurrencies on the secondary markets. I focus on early investments and want to share my thoughts and what’s going on in the industry in this weekly newsletter.

👋 Working on building new technologies? I’d love to hear about it, shoot me an email

🙏 I’d appreciate it if you forwarded this email to someone who would might benefit from it

💡If you have any content you want to share on this newsletter, please send it to me and we can make it happen

Please click here to help me improve this newsletter and your experience by filling out this NEW survey!

On the Chaos of Bitcoin

VeradiVerdict — Issue #44

TL;DR

  • Bitcoin was on fire this past week, and peaked at $14,000 on 6/26, the highest it has been since January 2018. That reflects a 200+% increase since the beginning of the year.

  • It’s hard to pinpoint the exact reasoning for BTC’s price increase, but some theories I have are:

    • Halving: The reward for miners is computationally set to halve in 2020, which artificially drives up the value of BTC. Anticipation for the halving event might be driving some of the recent price increases.

    • Tether: The sales of a stablecoin called Tether in bulk amounts might drive some punctuated, large-scale changes in the demand for and price of BTC.

    • Market Manipulation: Much of the recent BTC activity has been occurring in large quantities over small intervals of time, suggesting that consumers are teaming up to force the market in a specific direction.

    • Institutional Confidence: Large financial institutions like JP Morgan and DRW have been gaining renewed interest in cryptocurrency as an uncorrelated asset class, which leads to bulk changes in quantities of cryptocurrency bought/sold and also signals confidence to smaller investors.

    • Facebook and Libra: Facebook announced its own cryptocurrency, Libra, this past week, which undoubtedly increased confidence and interest in cryptocurrency as a valid financial vehicle.

    • US-China Trade War: The ongoing trade war has produced dismal results for stocks and more traditional commodities; investors might be turning to BTC and cryptocurrency to hedge some of the losses from the trade war. Public interest in BTC in the US and China are both also at highs, reflecting interest from both sides.

    • It’s unclear how long this bull run will continue or what the exact outcome will be, but if there’s one thing for sure, it’s that Bitcoin and cryptocurrency are receiving levels of public interest and confidence that it has never seen before.

What’s all the fuss about?

If you’ve been following cryptocurrency at all recently, you have probably noticed the community going crazy over insane fluctuations in the price of Bitcoin over the past week. BTC started the week at roughly $10,000, but peaked at an insane $14,000 on June 26th, the highest it has been since January 2018. Just six months ago, Bitcoin was at $3,600, a ridiculous comparison to its current levels.

Cryptocurrency is widely known for its crazy price variations, but it has rarely ever been at this scale; a $4,000 rise within a week is meteoric, even for Bitcoin, and even more confounded by the fact that BTC fell 19% the next day. Part of this is due to a temporary outage by prominent cryptocurrency exchange Coinbase, but that issue was resolved in minutes; even following the outage, BTC’s price continued to fluctuate quite a bit and currently hovers around $12,000.

Bitcoin, and cryptocurrency broadly, is gaining some serious national attention in recent months and price fluctuations like this largely threaten consumer and investor confidence in cryptocurrency and electronic commodities and assets. Spikes and falls like this are highly reminiscent of the crypto bubble burst at the end of 2017. Understanding why fluctuations like this happen are critical to making informed decisions in the cryptocurrency space.

So, why is Bitcoin going crazy?

Good question. The short answer is that it’s really unclear. As with any financial market, there’s a ton of speculation for why prices change so quickly but it’s hard to tie any quantitative change in the value of a commodity to any one change in the real world.

The longer answer is that the financial and cryptocurrency world have seen a lot of action in the past month, especially in the past few days. I’ve compiled a list of some things I think might be part of the vehicle for Bitcoin’s insanity and broke them down below.

Halving

Quick refresher on Bitcoin: when Satoshi Nakamoto proposed the system in early 2009, he architected the system to max out at 21 million BTC over the course of Bitcoin’s lifestyle. But if you look at the underlying code for Bitcoin, there’s no line that says “stop producing at 21 million BTC.” Rather, when miners create and validate a new block, they receive BTC in compensation. Miners initially received 50 BTC; this was later halved to 25 BTC, then 12.5 BTC, etc. Essentially, this is a way for the system to exponentially slow the production of BTC to ensure that it doesn’t exceed its 21 million cap.

In 2020, Bitcoin’s miner reward will halve to 6.25 BTC per new block. This drives up the value of BTC because (1) miners receive less rewards for creating new blocks, and thus, less new blocks will be created, slowing the production of BTC, and (2) the supply of BTC is artificially becoming smaller, raising the value of each coin.

The last time Bitcoin was halved in December 2017, BTC’s price shot up to $20,089. Halving events in general produce spikes in the price of BTC, and the next event (projected in May 2020), will undoubtedly do the same. Though we’re a ways off from the halving date, people are gearing up in anticipation and the price of BTC might be on the rise for that reason; speculation around the impact of the next halving, combined with the myriad of other factors listed below, might just be one factor behind the recent spikes and falls in the price of BTC.

Tether

Other cryptocurrencies are highly correlated with the price of BTC too, and have major effects on the perceived value of the cryptocurrency market broadly. Tether, a stablecoin pegged to the US Dollar, has been receiving a ton of attention recently; in the past month alone, $600 million worth of Tethers have been minted.

Tether’s architecture is what makes the possible ties between its own growth and BTC’s explosion particularly interesting. Tether’s growth isn’t gradual, but rather punctuated; institutional investors have to give at minimum $100,000 to purchase directly from Tethers, which leads to weekly growth on the scale of $100 million. Essentially, Tether grows in aggregated batches rather than dollar by dollar.

Once Tether mints its coins, it sells it on the public market in batches, which consumers purchase and then use to buy Bitcoin or other cryptocurrencies. Because Tether is available and sold in batches, it generally leads to huge spikes in consumption of cryptocurrency when it becomes available. For instance, some of the more recent batches of Tether sold coincided with BTC’s parabolic increase from $8,500 to 10,000 in late May/early June. Essentially, when Tether releases its batches for sale, consumers buy a ton of Tether and then use that to buy a ton of BTC, driving up its value.

Tether likely isn’t the only cryptocurrency playing a role in BTC’s bull run, but it’s definitely one of the larger factors given the scale at which it impacts the cryptocurrency market.

Market Manipulation

Many critics of Tether suggest that Tether highly colludes with its traders; rather, affiliates like Bitfinex issue Tether to traders who can then manipulate the cryptocurrency market with their new aggregation of assets, and then pay for the Tethers later when they profit from market moves.

Tether’s specific role in market manipulation is up for debate, but the existence of large coalitions that band together to force profitable market trends isn’t. Bitcoin and cryptocurrency are architected as a system that operates on the consensus of a mass of users; if a substantial mass of those users gets together, they can move the market in the ways they desire and generate significant profits.

Temporal analysis of market activity on June 26 (the day of BTC’s massive spike) shows some surprising trends that might correspond the manipulation hypothesis. $7 million worth of BTC was sold within 5 minutes on Bitstamp, and then liquidated within 1 ms on Binance. Seeing financial activity of that scale in such a short time delta is highly unusual, unless it was planned. Multiple anonymous messaging channels, on the scale of tens of thousands of users, asked users to band together to manipulate the market on Bitmex, hours before these transactions happened. It’s not certain that these events are tied and the idea might seem far-fetched, but the logic makes sense; people might be banding together to artificially force BTC’s insane bull run.

Institutional Confidence

Following the crash of Bitcoin in late 2017, a lot of financial institutions expressed doubts about the potential of cryptocurrency as a legitimate financial asset; many Goldman Sachs and JP Morgan executives were quoted delegitimizing Bitcoin as any matter of substance, but rather a financial fad.

Recently though, Bitcoin and cryptocurrency has been getting a lot of interest from the general public; on top of that, prices have been steadily rising. This has given institutions reason to think twice about their initial perceptions of cryptocurrency. Tons of companies, including Jump Trading, DRW, Galaxy Digital, Fidelity Investments, the NYSE, and Morgan Stanley, have given cryptocurrency renewed attention, even considering the possibility that it might constitute a legitimate, uncorrelated asset class.

Institutional investors are even using it to hedge risk; while the DOW Jones falls, BTC’s prices steadily increase––leading many investors (namely, Fidelity Investments) to announce plans to sell cryptocurrency on their platforms to manage some of the more traditional financial risks.

It’s hard to quantify the impact of large financial institutions on BTC’s price, but their effect cannot be understated. Institutional investors are important because (1) they consume cryptocurrency in bulk amounts [institutional activity is up 300%], which in and of itself has the potential to drive huge changes, and (2) a lot of smaller investors gain confidence and intuition from the movement and forecasting of larger institutions, so their attitudes towards cryptocurrency are reflected throughout the broader investing community.

Facebook and Libra

Anyone who has been following the cryptocurrency world knows that the price of Bitcoin is going crazy, but also that Facebook has launched its own cryptocurrency, Libra, regulated by a foundation that has massive partners like MasterCard, PayPal, and Andreesen Horowitz. You can read more about Libra here.

Though Libra hasn’t officially debuted for use on any cryptocurrency market, its symbolic impact is sweeping. Having an institution with the user base on the scale of Facebook announce a cryptocurrency creates huge confidence in cryptocurrency broadly; it legitimizes it the same way that positive forecasts from banks like Goldman Sachs or JP Morgan do. Moreover, Facebook’s integration with its own new wallet tool Calibra, means that cryptocurrency will be more natively accessible than ever before, fostering even more confidence in the growth and versatility of cryptocurrency.

Facebook’s announcement has been top-of-the-line for most news networks this past week, reflecting immense public interest and possible confidence in cryptocurrency. With higher confidence comes higher prices. People have more faith in the potential of cryptocurrencies and Bitcoin to constitute legitimate financial vehicles and tools. And it’s unlikely that BTC’s parabolic rise just coincidentally corresponded with Facebook’s announcement. The massive public interest creates tangible rises in the price of BTC.

China and US Tensions

The ongoing trade war between the US and China has massive implications for traditional financial assets. For instance, on Monday of last week, China announced that it would raise tariffs on $60 billion of US imports; the same day, the Dow Jones industrial average fell a shattering 696 points. Chinese stocks and commodities were down the same day too; the Chinese Yuan reached a four-month low this past week.

Despite these trade battles, the price of BTC has steadily risen. This means that cryptocurrency presents a mechanism for investors to diversify their portfolios and avoid the price crashes of stocks induced by an ongoing trade war with China with an indefinite end.

The decline in stocks happened the same week as the spike in the price of BTC; lower stock prices might result in renewed public interest in the better-performing class of cryptocurrencies, which drives up the price of BTC. Google search trends and Baidu search trends for cryptocurrency and bitcoin are also at relative highs; Baidu’s increases are even larger, which means that China’s perceived interest in cryptocurrency is increasing even more than the US’s. Search trends and public interest are highly correlated with the value of BTC, so it’s no surprise that the price of BTC has shot up so much this week.

Final Thoughts

There are a million other things that might contribute to Bitcoin’s insanity on top of the six mentioned here; unfortunately, there’s no concrete way to tie tangible price increases to any real-world events. But I have relative confidence that some combination of halving, other cryptocurrencies, market manipulation, institutional confidence, Facebook’s announcement, and the US-China trade war is driving the BTC bull run to some degree.

BTC’s increase is important because it reflects massive public interest in the cryptocurrency; even cryptocurrency non-enthusiasts are aware of the phenomenon, because any financial trend of this scale is sure to top the headlines of every major news organization. Whether the bull run reflects a sustainable increase in the value of BTC or is indicative of a crash is hard to determine. But given the hypothesized reasons for the bull run, I can say with confidence that public interest in Bitcoin is indubitably going up––and that has huge implications for the cryptocurrency community at large.

- Paul


DIGESTS

Bridging the Gap Between Bitcoin and Global Regulators

Since 2015, when bitcoin became an issue for regulators like the state of New York, the regulation of cryptocurrency (the G20 now calls it as a crypto asset) has been discussed in many places, mainly at bodies like the Financial Stability Board (FSB) and the Financial Action Task Force (FATF).

Bitcoin Charts Hint At Price Pullback to Below $10K

With the technical charts flashing signs of buyer exhaustion, bitcoin (BTC) risks falling to levels below $10,000 this week.


IN THE TWEETS


News

Goldman Sachs CEO Hints Bank Might Launch ‘JPM Coin’-Like Crypto

Goldman Sachs may ultimately take part in the crypto disruption of finance, according to its CEO, David Solomon.

Bitfinex Hack New Twist: Two Arrested in Israel After $1.5M Moved

One of the most prominent crypto cybercrimes in recent years took a dramatic turn on June 23, when two Israeli brothers were arrested in connection with the 2016 Bitfinex hack and other crypto-related phishing attacks.

Cryptocurrency Mobile App Downloads Stall Amid Price Surge: Report

Despite bitcoin’s (BTC) recent price surge, the download count of cryptocurrency-related mobile applications is not increasing, Bloomberg reports on June 28


Regulations

US Lawmakers Question Terrorist Use of Facebook Cryptocurrency

Members of the U.S. House of Representatives questioned Financial Crime Enforcement Network (FinCEN) director Kenneth Blanco about Facebook’s planned cryptocurrency Thursday.


Blockchain Association Takes Over Kik’s ‘Defend Crypto’ Crowdfunding Effort

Canada-based social media company Kik is relinquishing control of its legal defense crowdfunding campaign to the Blockchain Association in an effort to broaden the initiative’s reach.

ErisX Granted Derivatives Clearing Organization License For Physically Delivered Digital Asset Futures Contracts by U.S. Commodity Futures Trading Commission

ErisX today announced that the Commodity Futures Trading Commission (CFTC), the United States’ regulatory agency with jurisdiction over futures markets, has granted Eris Clearing a derivatives clearing organization (DCO) license under the Commodity Exchange Act (CEA). 


New Products and Hot Deals

Coinbase Releases Key Findings on Crypto Awareness and Adoption in US

Major American cryptocurrency exchange Coinbase released key findings about awareness and adoption trends related to digital currency in the United States in a blog post published on June 28.


Meet with Me

Las Vegas, July 12

Los Angeles, July 19

Berlin, Web3 Summit, August 19-21

Los Angeles, August 23


Additional Info

Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing into blockchain companies and cryptocurrencies. The firm invests in equity, pre-sales/IEO rounds, and cryptocurrencies on the secondary markets. I focus on early investments and want to share my thoughts and what’s going on in the industry in this weekly newsletter.

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VeradiVerdict - Facebook Launches Libra Token, What Does This Mean? - Issue #43

VeradiVerdict

Hi, I am Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing into blockchain companies and cryptocurrencies. The firm invests in equity, pre-sales/IEO rounds, and active trading of cryptocurrencies on the secondary markets. I focus on early investments and want to share my thoughts and what’s going on in the industry in this weekly newsletter. If you ever come across, or have an interesting project that you would like to share, please reply to this e-mail!

View this issue on my Medium blog here.

If you aren’t subscribed already, you can click here to subscribe.

Please fill out a NEW survey by clicking here


Editorials

Facebook, the world’s largest social network, announced the launch of their blockchain project Libra which sent ripples throughout our industry. I wrote in the past about my thoughts on what the company might launch but more details including a whitepaper was released last week. Below you can read more details on what was announced and thoughts on what this could mean.

TL;DR:

• Facebook recently announced the launch of Libra, a new decentralized cryptocurrency, and Calibra, a Libra wallet that integrates with Facebook’s core products (Facebook, Instagram, and WhatsApp), as part of their mission to connect the world through better financial accessibility.

• Libra uses a public, open-source blockchain that uses proof-of-stake and a modified version of Byzantine Fault Tolerance (called LibraBFT) that has leaders propose and validate blocks to advance consensus on the network. It also supports smart contracts through their new programming language called Move.

• The goal for Libra is to have low-volatility, which is why it’s backed by a Libra Reserve that currently consists of the US Dollar, British Pound, Japanese Yen, and Euro. The Reserve will diversify its currencies in the future by adding more uncorrelated currencies.

• Libra is governed by a Libra Association, a network of 100 organizations from a plethora of industries that have the power to control the Libra blockchain. Right now, there are almost 30 committed members including Visa, a16z, and MasterCard. More organizations will join over the next few months as long as they comply with Libra’s requirements of size and operations. Libra offers a Libra Investment Token (LIT), $10M worth of which is required to govern the Libra blockchain. This means Libra is starting as permissioned, but will transition to permission-less in the future.

• Calibra operates as a money-services business as a subsidiary of Facebook, but claims not to share any data with Facebook. Calibra is Facebook’s user-facing side of Libra.

• Facebook hopes to increase financial access through Libra and Calibra, particularly for the 1.7 billion individuals worldwide that aren’t banked. Facebook’s ubiquity and scale makes this a real possibility; its size dwarfs any other electronic banking system, which means easy Facebook integration is a promising path for deploying Libra to common users.

• Simultaneously, Facebook continues to receive flack for questionable practices regarding privacy and data sharing. The US Senate has even scheduled a hearing on Libra in mid-July to discuss its compliance with US and global regulations.

Last week, Facebook formally announced the launch of their new decentralized cryptocurrency Libra and their corresponding Facebook product, a wallet for Libra called Calibra. To say the least, Libra flooded the headlines of just about every tech circle (not just cryptocurrency) and has been at the top of everyone’s minds. Having a behemoth like Facebook commit to the decentralized financial future through their own cryptocurrency means a lot for the blockchain community.

How does it all work, technically?

Libra is built on an open-source, public blockchain called the Libra Blockchain that integrates some of the common developments we’ve seen in blockchain innovation over the past few years. The Libra Blockchain is completely new and native to Libra, unlike other corporate cryptocurrencies (e.g. JP Morgan’s) that run on forks of Ethereum or other, more established blockchains. Everything is pseudonymous (like Bitcoin) and governed on-chain.

Libra uses a proof-of-stake (PoS) protocol, like Ethereum, where the creator of the next block is chosen by an algorithm that optimizes for how long or how much value a user has in the network (formally known as their stake). PoS is becoming the new standard for cryptocurrency consensus protocols because of its high security, low latency, and inherent propagation of value in the network because it benefits those who have the most value and ownership of the network.

Within PoS, Libra uses a modified version of the Byzantine Fault Tolerance (BFT) consensus algorithm called LibraBFT. At a high level, BFT is essentially a cryptographic and probabilistic method for determining consensus even when it’s suspected that certain nodes of a network might be corrupted (technically called Byzantine nodes). Libra takes the vanilla BFT algorithm and adds their own customizations and modifications to natively integrate it with their blockchain architecture.

Essentially, the LibraBFT algorithm randomly chooses a leader out of all of the network validators to propose a new block; once the new block is proposed, the other validators must approve the block by majority before the block is sent to a new validator. If the block is not approved or if the leader cannot propose a block, a new validator is chosen as the leader. LibraBFT helps guarantee the safety of the blockchain, allows for asynchrony or disagreement between the nodes, and ensures finality of all transactions. It’s a fairly advanced, fast, and highly-trustable consensus algorithm reflecting a ton of the recent innovations in consensus protocols over the past few years.

Financially, Libra is not a stablecoin (meaning its value is not pegged to any one asset/fiat currency in particular), but it is backed by low-volatility assets in an account called the Libra Reserve. Currently, the reserve consists of the US Dollar, the British Pound, the Japanese Yen, and the Euro. The Reserve eventually hopes to expand beyond just those four currencies––their criteria for adding new currencies include quotability, a public decision-making process, and non-correlation from other currencies and assets. The idea here is to keep the value of Libra relatively stable by backing it with fiat, but not pegging the value of Libra to any one fiat currency in particular. This aims to assert Libra’s value as a stable, usable currency, but not totally lose its decentralization by completely tying it to a government-regulated asset.

On top of the core cryptocurrency side of things, Libra also supports smart contracts (including out-of-the-box contracts that developers can just deploy instead of writing it themselves). This allows for incredible degrees of abstraction for developers that aim to use Libra to support decentralized apps and other decentralized tools to help advance Facebook’s new notion of a global, decentralized financial ecosystem. The smart contracts must be written in Move, a newly-developed programming language optimized for Libra smart contracts and LibraBFT.

How is Libra regulated and governed?

Here’s where things get even more interesting. Facebook totally understands that they, a highly centralized company, and trying to launch a completely decentralized product. To get around that, they’ve helped set up a non-profit called the Libra Association.

The Association will initially consist of 100 members or validators of the Libra blockchain. There are currently around 30 committed founding members, like Visa, Andreesen Horowitz, and Coinbase; Facebook is inviting more from a diverse selection of industries (telecommunications, blockchain, venture capital, academia, etc.) to join the Association over the next few months before it formally launches the Libra blockchain.

Validators are required to host their own node and also meet a couple of criteria, including: (1) having $1 billion+ in market value, (2) reaching 20 million+ people a year, and (3) be recognized as a top-100 industry leader by a reputable third party (like the Fortune 500). There’s some flexibility on these requirements when it comes to social institutions, non-profits, and academic universities that may not have all these requirements down, but still provide immense value to Libra’s governance.

Libra also uses a two-token system to implement governance. Libra offers a token called the Libra Investment Token (LIT) which allows validators to govern the network. Validators must hold minimum $10M value in LIT to regulate the network; again, these requirements are more relaxed for social institutions, non-profits, and academia. This is similar to what MakerDao does with Maker (their governance token) and Dai (their stablecoin).

So, you’re saying Libra isn’t really open to the public yet?

Exactly. Libra is starting out as permissioned, which means the association regulates which organizations and parties have permission to regulate the network and the blockchain. Facebook understands that this fundamentally prevents Libra from being 100% decentralized, but it claims that the permissioned nature of Libra is only a temporary way to allow Libra to test itself and help identify kinks and bugs in the protocols for governance. Once this has all been worked out through repeated testing and usage of the testnet, Libra plans to transition to a permission-less system to make it openly accessible.

What is all this Calibra business?

Calibra was established as a subsidiary of Facebook to integrate Libra into Facebook’s products as a financial tool. Recall that Libra isn’t technically directly governed by Facebook, but rather by an association of 100 organizations (which include Facebook). To get around this, Facebook established Calibra as a technical business where they can create Libra wallets that easily integrate into Facebook’s key products (Facebook, Instagram, and WhatsApp) and allow for Libra payments to occur over these social media and messaging channels.

Calibra is also how Facebook purportedly complies with governmental regulations. Compliance is a mess for just about any cryptocurrency, and Libra is no different, because different governments have different requirements that allow for different degrees of collateralization, privacy, transaction volumes, taxing, etc. Calibra is set up as a money-services business, collaborating with FinCEN (Financial Crimes Enforcement Network) to ensure Facebook’s decentralized business complies with all US regulations. Facebook also claims that there will be absolutely no data-sharing between Calibra and Facebook’s core business aside from what’s federally required. Despite these measures towards compliance, there’s likely more regulatory road bumps that Facebook and Calibra will face, like GDPR.

Put simply, Calibra is the product side of Facebook’s decentralized developments. It’s how they make money from Libra.

Facebook’s never been in the blockchain business. Who on their team is running it?

The entire initiative for Libra and Calibra is run by David Marcus, the current VP of Blockchain at Facebook. Prior to that role, David headed Facebook Messenger, was on the Board of Directors at Coinbase, was the president of PayPal, and created a mobile payment company (Zong) that he sold to PayPal. The rest of the team comes from diverse backgrounds, including product, strategy, and investing roles at Messenger, Instagram, Yahoo, eBay, and McKinsey & Company. The team’s collective knowledge spans multiple domains of mobile payments, blockchain, communications, and consumer services.

Why does this all matter so much? Why can’t people stop talking about it?

Facebook’s entire mission as a company is to connect the world. There are currently 1.7 billion individuals globally that are unbanked and don’t have great access to even basic financial resources; financial transactions are one of the most fundamental ways that people connect with each other.

Libra and Calibra help advance Facebook’s mission to connect all these people. There’s no need for a full-fledged bank for the unbanked 1.7 billion if they can just run all their transactions and manage their funds through Libra and Calibra, tied to their Facebook account. The idea is to promote the global decentralized economic system and guarantee financial access to anyone who can access the Internet. Being a cryptocurrency, Libra also presents more opportunities for arbitrage and optimized trading strategies.

What’s even more critical is Facebook’s size and genuine potential to accomplish this mission. Facebook has 2.7 billion users worldwide; to give you an idea for scale, WeChat has 1.1 billion, PayPal has 0.3 billion, Venmo has 0.04 billion, and Bitcoin has 0.02 billion. If Calibra can easily integrate financial payments into Facebook’s product, the scale of Calibra would instantly dwarf any other electronic banking option. Facebook has already reached such a significant portion of the world that it genuinely has the potential to establish a banking system of scale and provide banking resources to those that need it most.

Facebook’s goal for Libra and Calibra is exceedingly noble, but that doesn’t mean it hasn’t met its fair (and deserved) share of criticism. Facebook isn’t exactly the most trustable company; it’s been in the headlines for a while now with scandals of user privacy leaks, undisclosed data collection, ethically questionable ad-based business models, etc. It’s hard to imagine a company with the reputation of Facebook establish a decentralized, “trustable” financial system. Facebook claims that they will keep Calibra and Facebook completely distinct, and Libra itself is governed by a non-profit, but that doesn’t stop the sentiments of hundreds on Twitter doubting Facebook’s true motives with Libra and their ability to implement a trustable system. Libra also plans to debut in 2020, but the US Senate has already scheduled a hearing for July 16 to discuss Libra and evaluate its compliance with US and global financial regulations and how it interacts with Facebook’s unsettled business with the US government and antitrust regulations.

Final Thoughts

Libra’s a technically strong cryptocurrency that provides a promising solution to the problem of billions of unbanked individuals globally; it’s one of the first steps towards a financial future of decentralization, trust, and most importantly, high accessibility. Its integration of the most advanced and sound blockchain technologies like BFT and two-token systems helps make Libra a decentralized, low-volatility option for financial transactions. And with Facebook’s scale, Libra truly has the potential to reach billions worldwide and become a highly used product through Calibra native integration with Facebook, Instagram, and WhatsApp accounts.

At the same time, Facebook’s history and reputation opens up a lot of questions for what the future of Libra holds. For starters, it’s launching as a permissioned ecosystem, fundamentally preventing it from achieving its mission of connecting the financial world. Additionally, Facebook’s faced immense flack for poor diligence on user privacy and data collection––to the extent that even the US government is worried about Facebook’s new cryptocurrency.

Altogether, Libra presents a promising, but questionable, foray into a decentralized financial future. The launch of the testnet in 2020 will inevitably create huge waves in the blockchain community and will help expose some of the critical flaws in Libra’s architecture and governance and better inform Libra’s potential as the global financial connector.


Nevertheless, the scale of Facebook enables the possibility of a more decentralized payments network that can enable low-cost remittances and payments over a global low-volatility currency for billions of people (especially for the emerging markets that have a much higher penetration of Facebook users than the United States). As an investor, there would be investment opportunities in companies and applications that build on top of the Libra infrastructure, while for consumers, imagine a global venmo and the ability to make payments without the friction of high fees and different currencies.

Digests

Libra's Dante Disparte on Why We Should Trust a Financial System Designed by Facebook - Ep.078 by Unconfirmed Podcast | Free Listening on SoundCloud

Stream Libra’s Dante Disparte on Why We Should Trust a Financial System Designed by Facebook - Ep.078 by Unconfirmed Podcast from desktop or your mobile device

Facebook releases plan for its Libra cryptocurrency to 'meet the daily financial needs of billions of people' - The Block

Facebook today unveiled its new low-volatility cryptocurrency Libra, powered by a smart contract platform that’s designed to be “secure, scalable, and reliable”

In the Tweets

Joe McCann

@joemccann

5 out of the top 5 global cities have "Blockchain Engineer" as one of the highest paying (and most sought-after) tech jobs our there.

(Source: @Hired_HQ) https://t.co/vhxGQtvCss

12:03 PM - 20 Jun 2019

Jerry Brito

@jerrybrito

THREAD: Here are my thoughts on Libra. It is a permissioned but public blockchain. It’s public because the Blockchain will be publicly verifiable and the application layer is open. So it’s like a backed stablecoin, but with key differences. https://t.co/UZ3fkczWGb

2:08 AM - 18 Jun 2019

News

Algorand Raises $60 Million in Token Sale - CoinDesk

Algorand raised over $60 million in a token sale of its native Algo token on Coinlist, using a Dutch Auction mechanism that ensures market participants set a uniform price per Algo. All 25 million tokens were sold at a market drive price of $2.40.

Crypto Mining Giant Bitmain Said to Be Planning US IPO: Bloomberg - CoinDesk

Crypto mining hardware giant Bitmain Technologies Ltd. is said to be relaunching its initial public offering (IPO) plans, but this time in the U.S. instead of Hong Kong.

Line Said to Near Approval for Japan Crypto Exchange License - Bloomberg

Line Corp., Japan’s largest messaging app, is close to getting a license to launch a cryptocurrency exchange in its home nation, according to people familiar with the matter.

Microsoft and Ethereum Foundation Swell the Hyperledger Ranks Amid Growing Cross-Industry Blockchain Collaboration

Microsoft, the Ethereum Foundation and Salesforce join Hyperledger as new members, seeking to create open-source enterprise blockchain solutions.

Regulations

Halt Libra? US Lawmakers Call for Hearings on Facebook's Crypto - CoinDesk

The head of the U.S. House of Representatives Financial Services Committee wants Facebook to stop developing its new Libra cryptocurrency network – at least temporarily.

Regulators Debate Cryptocurrency Legislation Ahead of G20 Summit - CoinDesk

Cryptocurrency regulation will take a step forward during the upcoming V20 Summit where country representatives will assess the new course of legal action proposed by the international Financial Action Task Force (FATF).

New Products and Hot Deals

Lightning Labs Mobile App Gets 2,000 Downloads in 24 Hours - CoinDesk

San Francisco-based Lightning Labs, focused on a layered scaling solution for bitcoin, released its first mobile app on Wednesday.

Firm Behind Zcash to Introduce New Version of Protocol With Sharding

The Electric Coin Company, the firm behind second-biggest anoncoin zcash, is building a new scalable zcash blockchain.

Meet with Me

Las Vegas, July 12

Los Angeles, July 19

Berlin, Web3 Summit, August 19-21

Los Angeles, August 23

Additional Info

👋 Working on building new technologies? I’d love to hear about it, shoot me an email

🙏 I’d appreciate it if you forwarded this email to someone who would might benefit from it

💡If you have any content you want to share on this newsletter, please send it to me and we can make it happen

Please click here to help me improve this newsletter and your experience by filling out this NEW survey!

VeradiVerdict - A New Synthetic Non-Correlated Commodity Money Launches - Issue #42

VeradiVerdict



Hi, I am Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing into blockchain companies and cryptocurrencies. The firm invests in equity, pre-sales/IEO rounds, and active trading of cryptocurrencies on the secondary markets. I focus on early investments and want to share my thoughts and what’s going on in the industry in this weekly newsletter. If you ever come across, or have an interesting project that you would like to share, please reply to this e-mail!

View this issue on my Medium blog here.

If you aren’t subscribed already, you can click here to subscribe.

Please fill out a NEW survey by clicking here


Editorials

Pantera Capital invested into Ampleforth with top investors such as True Ventures, Founder Collective, FBG Capital, and angel investors such as Brian Armstrong, Alok Vasudev, and Mike Karnjanaprakorn. Ampleforth is not a stablecoin but a new type of synthetic commodity money that is non-correlated with other crypto assets and warrants further explanation below:


TL;DR


• Synthetic commodity money is an economic classification for monies that are absolutely scarce (like natural commodity-monies) and have no non-monetary use (like fiat). This new classification was discovered by George Selgin at the Cato Institute while investigating the use of Bitcoin for monetary reform as a base-money alternative to gold and fiat. But the new asset class also lends itself to many important applications in trading and asset management. Bitcoin is considered a synthetic commodity money.


• Thus far synthetic commodity monies have had low exposure to traditional asset groups, making them attractive for portfolio construction. However, the problem with most synthetic commodities today is that they are highly correlated with one another and tend to follow the price action of Bitcoin. High correlations within the cryptocurrency markets prohibit diversification and pretty much guarantee that economic problems associated with Bitcoin will affect all cryptocurrencies.


• Ampleforth presents a new protocol that responds to market changes by changing the supply of their token based on real-time nominal exchange rate info instead of the price (which most other cryptocurrencies do). This fundamentally makes their economic model different from other cryptocurrencies.


• The supply-based trading strategy de-correlates the AMPL token from the performance of Bitcoin, creating optionality and opening up numerous applications in diversifying portfolios. Moreover, the nature of the economic model is counter cyclical and free from the deflationary problems of fixed supply assets like gold, Bitcoin, and the majority of current-generation cryptocurrencies, making it an even better replacement for central bank money.


• People are incredibly interested in Ampleforth; their IEO on Bitfinex on 6/13 sold out to $5 million in just 11 seconds. There’s huge demand for something like this.


• Ampleforth presents a very promising option for diversifying portfolios and getting away from the problems of traditional price-based trading strategies.

What are synthetic commodities, and what’s the current issue with them?


Synthetic commodity monies are exactly what the name suggests––monies that are commodities because they are scarce and synthetic because they are designed by human systems and aren’t raw materials like gold and silver, which have immediate non-monetary use. Synthetic commodities are incredibly valuable because (1) they are free from market distortions that arise from innovations in raw material extraction or non-monetary use, (2) their monetary qualities make them tradable the way that we trade fiat currency or traditional assets like stocks, both of which largely drive the US economy, and (3) they are free from politics and outside tampering like natural commodity-monies.


Cryptocurrencies are synthetic commodities because they are scarce (as defined by algorithmic protocols that regulate the trade and propagation of cryptocurrencies) and don’t have immediate non-monetary use (like fiat, they are a vehicle for trading but you wouldn’t use cryptocurrency as a raw input the way you would use gold).


Since the inception of Bitcoin in 2009, there have been dozens of other cryptocurrencies (and synthetic commodities) that have spun off, representing financial value on an electronic, data-driven ledger of some sort. Surprisingly, despite the myriad of apparent choices in synthetic commodities or cryptocurrencies available, the performance of these commodities has been highly correlated with one another––and they all largely follow Bitcoin’s demand pattern. Put simply, the price and value of most synthetic commodities highly depend on the price, value, and supply of Bitcoin, leading to somewhat of a homogenous system of synthetic commodities.


In essence, there exist a variety of synthetic commodities, but they tend towards the same overarching trend which limits the true potential of diversification.


So, how do you approach diversification and de-correlating from the performance of Bitcoin?


That’s where Ampleforth comes in. The entire ethos of Ampleforth is a paradigm shift from price-based trading strategies to supply-based trading strategies. Most cryptocurrencies operate singularly or mostly on the platform of determining and adjusting their value using their own price and the price of other cryptocurrencies on the market; this is a pretty traditional economic concept, where price adjusts in response to shifts in supply and demand (perceived value).


Ampleforth makes a critical change in their protocol, where instead of using price to respond to changes in the market, they adjust supply instead. Ampleforth polls a set of reliable oracles every 24 hours to get real-time information on nominal exchange rates between various cryptocurrencies and uses that to establish what they call a price-supply equilibrium. In essence, they ensure that the price of their cryptocurrency persists and is consistent by adjusting supply to reflect changes in value.


I’m still confused. An example, maybe?


Let’s walk through the example that Ampleforth gives in their whitepaper.


Say you start with 1 AMPL which is currently worth $1. All of a sudden, the demand for AMPL doubles and now your 1 AMPL token is in theory worth $2 if you adopt a price-based trading strategy. However, the AMPL protocol immediately recognizes this shift in demand and resets your account to have 2 AMPL, each worth $1.


Your total value has increased, preserving the effect of the shift in demand, but the market responds by adjusting price and not supply. This critically de-correlates Ampleforth from other cryptocurrencies, because the theoretical shift in price from $1 to $2 is correlated with the performance of Bitcoin. Ampleforth instead persists their price and adjusts supply, effectively de-correlating Ampleforth from Bitcoin.


Essentially, if the exchange rate of Ampleforth to other targets rises, the protocol expands supply. If the opposite is true, the protocol contracts supply. There’s a lot more to exactly how the protocol achieves supply (smoothing, market expansion coefficients, etc.) but most of the fundamental information is captured in that simple rule.


So, basically the price of Ampleforth is stable? So it’s a stablecoin?


Not quite. Stablecoins are designed to remove volatility from economic markets (that’s why they exist––to remove volatility for investors who think basic cryptocurrency is a bit too risky) and are generally used for base trading-pair tokens on exchanges.


Ampleforth’s protocol still allows for volatility, and as in the above example, we saw how though the price of Ampleforth persists, the total value of the account definitely changed. Ampleforth tokens can gain and lose value. Additionally, given the expected volatility of Ampleforth, it’s highly unlikely that exchanges will use it for base trading-pairs––they’ll still used dollar-backed stablecoins or regular fiat.


What are the biggest benefits behind Ampleforth then?


Again, the biggest differentiator between Ampleforth and virtually all other cryptocurrencies is that Ampleforth propagates market information through changes in supply, not price. This makes the currency inherently fair and independent; to be more specific:


1. Changes in value affect every party in the same way. Propagating market information through changes in price has the potential to disproportionately benefit certain groups––think of it as the same way that inflation disproportionately helps those who already have a pretty hefty supply of the currency. Supply-propagation means that everyone’s value increases equally––both nominally and truly.

2. Ampleforth is entirely governed by the supply-propagation protocol, and relies on no discretionary decisions from external regulators, balance sheets, etc. This makes it inherently fair.

3. Ampleforth moves differently from other price-based cryptocurrencies. The economics of this are a bit too complicated to deeply dive into (their white paper does a great job of explaining it thoroughly), but essentially, price-based strategies vary somewhat harmonically and are relatively symmetric across a certain time interval. Supply-based strategies increase with time asymptotically. The math behind this isn’t super key to understanding; what’s important is that price-based strategies and supply-based strategies have different economic models for how value propagates. This inherently makes Ampleforth different from other cryptocurrencies, creating important applications in diversification.

4. In a purely economic school of thought, AMPLs don’t suffer the same drawbacks of deflation and also scale pretty easily because it is an outside commodity that doesn’t rely on collateralized debt. This mean that Ampleforth functions pretty well as a commodity in an economy.


In terms of use cases, the three that Ampleforth suggests are:


1. Near-term diversification in cryptocurrency portfolios. Since Ampleforth is de-correlated from Bitcoin, it truly offers a different currency to include in a portfolio that doesn’t vary with the broader trend of the portfolio, but rather operates under an entirely different framework.

2. Medium-term use as reserve collateral in banks like Maker DAO. Because the price of Ampleforth is stable, it functions well as reserve collateral for stablecoin-oriented accounts.

3. Long-term replacement of central-bank money. AMPL functions very similarly to Bitcoin as a replacement currency, but it’s more macro-economically friendly for the reasons described above. This makes it strongly preferable––and even more different––from centralized holdings of currency.


Are people interested in it?


Ampleforth had their Initial Exchange Offering (IEO, basically where they launch the sale of their token on an exchange) on Tokinex on June 13. Within 11 seconds, the supply of tokens sold out and the protocol raised a ground-breaking $5 million. People are definitely extremely interested to see how Ampleforth functions in a real market––and how it can help them.


Final Thoughts


Ampleforth brings an incredible degree of disruption to the way that we conceive cryptocurrencies. It completely changes the model from a price-based trading strategy to a supply-based strategy that guarantees fairer and more independence from the performance of other cryptocurrencies like Bitcoin.


The independence of Ampleforth leads to a lot of important applications in diversifying portfolios and creating a replacement for centralized-bank currency that isn’t subject to the woes of deflation and truly benefits everyone fairly. It’s patently clear that there’s huge demand for something like this; the $5 million, 11-second IEO speaks for itself. Ampleforth presents an incredibly promising view for a future with supply-based cryptocurrencies, guaranteeing a more diverse, fair, and independent market.

Digests

The Discovery Testnet Developer Release is Live! – Enigma

We are extremely pleased to finally announce the Testnet Developer Release of our Discovery network!

A 330% Rally Puts Focus on Litecoin, Top 2019 Crypto Gainer - Bloomberg

This year’s top-performing cryptocurrency is up more than threefold and you’ve likely never heard of it.

The Monetary Experiment: Algorand

We explore the monetary experiment of Algorand, a new cryptocurrency invented by Turing Award winner Silvio Micali. Arrington XRP Capital will be participating in the Algorand economy by running a relay node and bidding in the Algorand Foundation’s dutch auctions.

In the Tweets

Alex Krüger

@krugermacro

There's been a lot of talk about how China has been the driver behind Bitcoin's move up since the first week of May. So I decided to look into bitcoin Baidu trends (China's Google). China's bitcoin popularity has definitively been on the rise. 👇 https://t.co/kQ38WJfGjp

4:49 PM - 3 Jun 2019

Joe McCann

@joemccann

Once again, #bitcoin futures forecast story for the spot price.

Check the timestamps of the contango spike (15:11 UTC)

And the spot price at the same time (15:11 UTC $8045.80)

Followed by a jump in price (15:12 UTC $8142.40)

And again a jump in price (15:13 UTC $8221.18) https://t.co/xoRaAqhJ9J

9:21 AM - 12 Jun 2019

Goomba

@remigoomba

Here is the breakdown of what coins will still be available (as things stand) to US customers through US compliant exchanges once @binance stop US based trading in September https://t.co/OSawHb9GX6

5:58 AM - 14 Jun 2019

News

Facebook’s cryptocurrency partners revealed—we obtained the entire list of inaugural backers - The Block

Dozens of companies are set to be a part of the governing association of Facebook’s cryptocurrency. Here’s a map of the members set to be made public on Tuesday.

Jack Dorsey says now is our chance to build a global currency for the internet

Quartz spoke with the Twitter and Square founder about bitcoin, the end of cash, and more.

BitTorrent Creator Bram Cohen Takes Over as CEO at Chia Network | CoinDesk

BitTorrent creator Bram Cohen has taken over as CEO of his current company, Chia Network, CoinDesk has learned. Co-founder Ryan Singer has stepped away from the company to focus on family priorities.

Regulations

U.S. customers to be blocked from trading on Binance.com - The Block

Binance has announced that it will stop serving US individual and corporate customers on Binance.com in September

SEC vs. Kik: The Lawyers Speak | CoinDesk

The SEC has filed a complaint against Kik, claiming the company’s initial coin offering was a breach of federal securities law.

FINRA Fines Ex-Merrill Lynch Investment Adviser Over Crypto Mining Sideline - CoinDesk

U.S. self-regulatory organization, the Financial Industry Regulatory Authority (FINRA), has fined and suspended an investment adviser over undeclared cryptocurrency mining activities.

New Products and Hot Deals

Ampleforth raises $5 million in IEO - The Block

Ampleforth, the first token to be offered on Ethfinex and Bitfinex’s IEO platform Tokinex, reached $5 million in 11 seconds during its initial exchange offering.

Facebook’s New Cryptocurrency, Libra, Gets Big Backers - WSJ

Facebook has signed up more than a dozen companies including Visa, Mastercard, PayPal and Uber to back the cryptocurrency it plans to unveil next week.

Napster Founder's IoT Startup to Go Crypto With $15 Million Series C - CoinDesk

An internet-of-things (IoT) startup founded in 2013 is adding tokens to its business model with the backing of two of crypto’s best-known funders.

Fidelity, Tenaya Capital Fund Crypto-Security Firm Fireblocks - CoinDesk

Fireblocks, a platform for securing digital assets in transit, announced today $16 million in Series A funding from investment heavyweights including Cyberstarts, Tenaya Capital, and Eight Roads — the proprietary investment arm of Fidelity International.

Decentralized video infrastructure platform Livepeer raises $8m series A – TechCrunch

The company announced today that it has raised an $8 million Series A venture capital round led by Northzone.

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