Introducing Orchid, The Privacy Network

VeradiVerdict - Issue #62

  • Privacy is an incredibly important concern for tons of Internet users in the modern day. Data capture and analysis by major corporations, governments, and other organizations have demonstrated the need for a better way for users to engage with the Internet.

  • Virtual private networks (VPNs) are essentially private networks overlaid on public networks to prevent the provider of the public network from accessing the user’s transmitted data. VPNs are popular for a diversity of use cases, but users still hold concerns with how VPN providers build their systems and what data they can capture.

  • Orchid is the first incentivized, peer-to-peer privacy network that connects VPN users with VPN providers. Orchid offers an ERC-20 token called OXT. Providers stake OXT to gain share in the Orchid network; the number of customers they have grows proportionately with their stake. Users then purchase OXT tokens to access VPN bandwidth from a provider. 

  • The system incentivizes providers to uphold progressive standards on user privacy and ownership because they are in natural competition with other providers on the Orchid marketplace. 

  • The entire solution scales well with the use of nanopayments, or probabilistic payments that take advantage of the way data is shared across the Ethereum blockchain to improve operational speeds.

  • Orchid is looking at an early-December launch with 5-7 providers. Given demands for privacy and the various VPN use cases, it’s likely to see significant traction early on. It represents a huge step in (1) translating the technological innovations of cryptocurrency to other spheres and (2) advancing user privacy, helping the Internet realize the dream of Web 3.0.

On the Need for Real Privacy

Privacy is one of the most hotly discussed aspects of technology in the modern age. With the growth of custom ad-based business models like those of Google and Facebook and increasingly personalized electronic experiences, companies, organizations, and governments are becoming more and more aggressive about collecting users’ data and analyzing it to optimize for their goals –– whether it be profit, research, censorship, etc.

This broad concern around privacy specifically within the financial sector is much of what spurred the development of Bitcoin and the entire market of cryptocurrencies; users wanted a system where they maintained complete control over their assets and could not be tracked back to their transactions because of data-tracking on a centralized server or system. Still, much of the technological innovations with blockchain technology have been overtly focused on the financial sector –– despite a potential diversity of other applications.

So, what’s Orchid?

Orchid is the first incentivized, peer-to-peer privacy network that operates by securely and efficiently provisioning virtual private networks (VPNs). Orchid leverages the developments in blockchain technology for asset control and applies it to the sphere of internet security. It essentially provides a decentralized, secure, and completely private marketplace for users to obtain VPN bandwidth and for providers to offer that VPN bandwidth, utilizing smart contracts, token staking, and algorithmic provisioning.

What’s a VPN?

Generally, when a computer connects to a network (the Internet), the network is public. This means that the agency that provides the network often can see certain information about what information is sent and transmitted over the network. The degree of data collection depends on the specific network provider, but some servers even track all communications. Naturally, this raises a concern with privacy because users don’t want to share their data over networks where other parties might have access to their private data.

That’s where a VPN comes in. A VPN is essentially a private network overlaid over the public network built to preserve a user’s privacy. When a user accesses resources or transmits data over a VPN, the VPN often can shield the communications from the public network, ensuring that the user maintains total privacy. VPNs are often encrypted and are also often used to dub or move IP addresses to access resources in other parts of the world. A fairly traditional example of VPN usage is when some travels to China and has to use a VPN to access restricted resources like Facebook.

How do VPN providers stake on (participate in) Orchid?

The crux of the Orchid system is the ERC-20 OXT token and proof-of-stake. This token essentially equates to a certain amount of bandwidth from a given provider. To participate in the system, providers stake OXT tokens on the Ethereum blockchain representing VPN bandwidth that they can offer users. Proof-of-stake, as opposed to the more orthodox proof-of-work, guarantees more efficiency and fewer attack costs for providers and the network. Orchid utilizes a stake-weighting model, where the more stake a provider puts on the Orchid network, the more traffic (and revenue) they get through their VPNs. Thus, providers are incentivized to stake tokens as more tokens translates to a larger user base and more revenue. To implement this staking model, Orchid uses an on-chain binary weighted tree where each node in the tree is a stake from a provider. This allows the system to efficiently allocate nodes to customers, proportional to a provider’s stake in the network.

On the user side, users stake currency in the network to purchase OXT tokens. Users can then purchase these tokens (which equivalently purchases bandwidth access) and add it to their wallets to maintain VPN access. The genius of the OXT token is that its amount is directly proportional to the consumption of bandwidth by a user on a network and that it creates an easily exchangeable marketplace for providers and users alike. When users randomly select a node to provide them with bandwidth, the probability that they select a certain provider is the same as the provider’s stake in the network. The system uses a random selection model that incentivizes providers to offer more stake in the network, while maintaining user customizability across things like VPNs’ geolocations, latency, pricing, and more. The entire protocol is peer-to-peer and automated via smart contracts, validated by ConsenSys diligence and the open-source community.

What’s all this stuff about nanopayments?

Nanopayments are essentially Orchid’s way of speeding up transactions in the marketplace. One common problem with blockchain system is that the entire idea of consensus creates a huge problem of delayed and slow transactions –– layer 2 solutions solve this to some degree, but still scale pretty poorly in terms of latency.

Nanopayments are essentially a probabilistic way of counteracting that problem. The system’s specific mechanics aren’t super critical for the average user to understand, but essentially users send payments in miniscule amounts (fractions of the real cost they’ll pay for bandwidth) until a certain payment is “accepted” by the network. The rare “accepted payment” is the only payment to go on-chain –– which means only a fraction of the user payments have to be cross-validated across the entire blockchain, significantly improving efficiency. The heuristics for being accepted and such have been architected so that the expected value of the user’s collective payments matches the actual value of the bandwidth they receive. Selling smaller miniscule payments takes advantage of how the Ethereum blockchain (and a ton of other systems) send data over packets; the probabilistic nature of nanopayments makes this much faster.

Why is this better than a regular VPN model?

The idea here is again to eliminate the control that providers have over the network. Even with modern VPNs, providers still can access tons of user data that are transmitted over their networks. Orchid leverages the incentives and power of blockchain and staking to ensure that users have an open marketplace where they can choose from a plethora of VPN providers. VPN providers are incentivized to maintain user’s privacy, keep up fast service, and generally create a positive experience for users so that users continue to engage with them on the Orchid system. Orchid essentially aggregates VPN providers and provides a regulatory control to ensure that users’ and providers’ incentives are aligned.

What’s next for Orchid?

After raising nearly $48 million, Orchid is planning an early-December launch of its technology. The initial launch will be piloted with 5-7 VPN providers. Some critics are wary of Orchid’s capability to onboard users, specifically because of its native token which represents a higher barrier to entry than ideal. Still, given the general demand for better privacy and the diversity of use cases in the VPN world, it’s likely many customers will be excited to join the Orchid platform as users.

Final Thoughts

Ultimately, Orchid, as a privacy network, presents an incredible channel that connects users and VPN providers in way that upholds users’ concerns around privacy and centralization as well as providers’ profit-centric incentivizes. More broadly however, Orchid represents an important step towards Web 3.0, where users can maintain complete privacy and control over all of their electronic interactions. Cryptocurrency was an important first step in realizing this dream, and Orchid does a fantastic job of transferring some of the technology and thought leadership to the VPN space –– this has huge promise for future developments around privacy and ownership.


DIGESTS

Mapping out the 10 most active crypto funds' 2019 investments

This is a follow-up to the 2019 funding trends piece, done earlier this month.


NEWS

US Arrests Ethereum Developer for Training North Koreans to Evade Sanctions

Virgil Griffith, who has lately been working at the Ethereum Foundation, has been arrested for allegedly going to a conference in North Korea and sharing his expertise in using cryptocurrency.

Ex-CFTC Chair Giancarlo to Push for Digital Dollar in New Role at White-Shoe Law Firm

Former Commodity Futures Trading Commission (CFTC) Chairman J. Christopher Giancarlo is joining the Willkie Farr & Gallagher law firm as senior counsel, he announced Monday.


IN THE TWEETS


REGULATIONS

Bakkt CEO Will Be Asked to Fill Georgia Senate Seat in 2020: Report

Crypto custodian Bakkt’s chief executive Kelly Loeffler has reportedly been picked by Governor Brian Kemp to serve in the U.S. Senate until the special election in November 2020.

Huobi joins China telecom and finance giants to form state-backed blockchain alliance

The Chinese branch of cryptocurrency exchange Huobi is one of the first members of the Blockchain Services Network (BSN), an industry alliance initiated by the State Information Center (SIC), according to several Chinese news sites. 


NEW PRODUCTS AND HOT DEALS

Introducing Set Social Trading

Our next major product release goes live early 2020 on TokenSets.

SoftBank issues new debit card featuring built-in blockchain wallet

Tokyo-based telecommunications conglomerate SoftBank has released a new bank card that includes a built-in blockchain wallet, in addition to traditional debit card functions.


MEET WITH ME

Orange County, December 9

Las Vegas, December 20

New York City, January 7-10


ADDITIONAL INFO

Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. The firm invests in equity, pre-sales/IEO rounds, and cryptocurrencies on the secondary markets. I focus on early-stage investments and share my thoughts on 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 benefit from it

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Recap From SEA Travels

VeradiVerdict - Issue #61

For the last 10 days, I traveled through Singapore and Thailand for conferences and tried to better understand what is going on in each geography for blockchain.

I was able to spend a dinner and some time with the Binance team and their partners.

In Singapore, I noticed that there was quite a bit of chatter around enterprise blockchain and security tokens. One of the more high-profile announcements during the week was the announcement of Project Ubin, using blockchain and distributed ledger technology for clearing and settlement of payments and securities. The project is being collaborated on by JP Morgan, Temasek, and the Monetary Authority of Singapore. For security tokens, folks mentioned that tokenization of real estate is not likely to be the first killer use-case, as REITs already exist. I personally think that a company like Otis is on the right path where you can reduce the financial friction of owning/transferring a piece of a collectible, creating a new target demographic for alternative assets.

In Thailand, there has been some regulatory progress as four crypto exchanges have received licenses. Since then, only five crypto exchanges have received approval and only one ICO. There seems to be a push for more flexibility from the Thai SEC to promote innovation going forward. On enterprise blockchain, two projects have stood out recently, one is a blockchain-based renewables platform led by PTT (the large energy conglomerate) and the other is Velo, a blockchain-based credit and payments platform that has strong cash-in/out and enterprise partners involved.


DIGESTS

Hard Problems in Cryptocurrency: Five Years Later

In 2014, I made a post and a presentation with a list of hard problems in math, computer science and economics that I thought were important for the cryptocurrency space (as I then called it) to be able to reach maturity. In the last five years, much has changed.


NEWS

China central bank’s Shanghai unit officially announces to crack down on crypto exchanges

Shanghai headquarters of the People’s Bank of China (PBoC), the country’s central bank, has officially announced that it will crack down on cryptocurrency exchanges in the city.

Bakkt's volumes are soaring as bitcoin sinks, and it could signal impending 'hockey stick growth'

Bakkt’s growth could continue, one expert predicts.

Canada: Thieves Steal 4K from Bitcoin ATM, leave 50K untouched

"Our security camera caught at least one of their cars drive away, which was a grey Nissan Sentra. The police were also able to catch their license plate too."


IN THE TWEETS


REGULATIONS

Crypto Market’s Overreaction to Xi’s Blockchain Remark Prompts Tougher Crackdown

After rallying as much as 30 percent within hours of Xi’s speech, the price of bitcoin has fallen back to a level even lower than it was before his remarks and dipped to a six-month low below $7,000 on Monday.

French Central Banker Advocates For Blockchain-Based Settlements in Europe

The central bank of France wants the eurozone to build a blockchain-based settlement system that will move euros more quickly and at less cost than with existing technologies.


NEW PRODUCTS AND HOT DEALS

Orchid's decentralized VPN network set to go live

Orchid says its new VPN protocol and token will make privacy more private. Launch is slated for the first week of December.

BNY Mellon Aims to Go Live ‘ASAP’ on Trade Finance Blockchain Marco Polo

Bank of New York Mellon has joined the Marco Polo trade finance consortium running on R3’s Corda, becoming the 28th bank to do so. 


MEET WITH ME

Los Angeles, November 25-29

Orange County, December 9

Las Vegas, December 20

New York City, January 7-10


ADDITIONAL INFO

Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. The firm invests in equity, pre-sales/IEO rounds, and cryptocurrencies on the secondary markets. I focus on early-stage investments and share my thoughts on 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 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!

Multi-Collateral Dai & What It Means

VeradiVerdict - Issue #60

  • On November 18, MakerDAO is migrating its stablecoin Dai from a single-collateral model to a multi-collateral model. 

  • Prior to the migration, single-collateral Dai (now called Sai) required users to open a collateralized-debt position (CDP) with solely Ethereum to receive Dai. The migration enables users to open CDPs with Ethereum, BAT, and more tokens (as MKR holders vote on them) to receive Dai.

  • The migration also launches the Dai Savings Rate (DSR), which is an account where users can deposit Dai they hold in return for returns over time through appreciation of the account’s value. 

  • Given the interdependencies of DeFi platforms on each other and MakerDAO, migration is an incredibly important and complex problem. Migration broadly entails returning any outstanding Sai to a platform and exchanging it 1-to-1 for multi-collateral Dai. Three of the most important migratory processes occur in:

    • Coinbase, which will automatically convert users’ Sai to Dai on 12/9. 

    • dYdX, which will set up a global smart contract that can convert individual open accounts’ balance of Sai to Dai in early December.

    • InstaDapp, which will set up an InstaDapp migration bridge to convert Sai from Compound borrows and Whale CDPs to multi-collateral Dai in a fractional, one-click process.

  • The migration has major implications for the cryptocurrency ecosystem, mainly signaling confidence and resilience in the MakerDAO platform and diversifying DeFi applications with the future breadth of cryptocurrencies used to collateralize Dai.

What’s everyone talking about in the Dai ecosystem?

The MakerDAO governance community recently voted to transition Dai, MakerDAO’s stablecoin, from a single-collateral form (now called Sai, or Single-collateral Dai) to a multi-collateral from (now considered the norm, called Dai). Multi-collateral Dai launches on November 18, and represents an important step in hopefully improving the governance and flexibility of the MakerDAO ecosystem across a variety of decentralized finance (DeFi) protocols. 

What is MakerDAO and Sai?

MakerDAO is a cryptocurrency organization that works to enable businesses and individuals to capitalize off of the decentralized & digital finance ecosystem by providing a stablecoin, called Dai. Dai is pegged to the US dollar (1 Dai = 1 USD, at any given time) and is entirely backed by cryptocurrency assets on the blockchain. 

When a user wishes to obtain Dai, they must open up a collateralized debt position (CDP) on the MakerDAO platform. A CDP offers users Dai stablecoins in exchange for locking other electronic assets into a smart contract on the MakerDAO platform as collateral. This CDP is what critically differentiates Dai from other stablecoins; most stablecoins are backed by real-world, fiat currency but Dai’s overcollateralization by other electronic assets makes Dai usable like a digital, dollar-based loan, which can be used to buy goods or even pay off a mortgage. Dai’s use cases have evolved to a variety of functions––including lending (both in the real-world and in electronic markets), hedging (given the stability of Dai compared to other cryptocurrencies), prediction markets, online and retail payments, compensation for labor, etc. Currently, Dai has a market cap of $101.9 million and a gross circulating supply of 100.4 million Dai. This makes Dai the 52nd largest cryptocurrency by market cap. Other stablecoins like Tether, Gemini, and USDCoin pose larger market caps (on the scale of billions of USD), but Dai’s diverse use cases across real-world and decentralized finance applications makes it uniquely powerful and important for the crypto ecosystem.

This original form of Dai only enabled users to collateralize their borrowed Dai with a single type of cryptocurrency asset––Ethereum. With the new transition, this old form has been nicknamed Sai.

On top of the Dai token, MakerDAO also provides the MKR token. MKR enables holders to vote on the governance of the Dai ecosystem––essentially, MKR holders vote on various concepts within risk management and the business logic of the Maker system. One of the most critical votes made by the MKR governance community was to transition Dai from its single-collateral form (Sai) to a newer, multi-collateral form (now called Dai).

What is multi-collateral Dai?

Multi-collateral Dai, which launches November 18, is essentially the same Dai stablecoin that MakerDAO offered users earlier––except, instead of only being able to lock up one variant of a cryptocurrency asset as collateral in their CDP, users can now lock up multiple kinds of assets as collateral. 

At launch, MakerDAO will support Ethereum (as it did before) and Basic-Attention Token (BAT) as its main forms of collateral; once early versions of multi-collateral Dai gain traction and are industry-tested, the community intends to expands its collateral offerings to integrate with the variety of decentralized finance platforms out there. Other cryptocurrencies that MKR holders voted on (and thus, considered) include Augur, Golem, OmiseGo, and 0x. The ultimate goal of the multi-collateral stablecoin is to enable a variety of blockchain users with a diversity of cryptocurrency assets to take out Dai to fulfill any function they choose––democratizing decentralized financial access and enabling new functionality within the blockchain ecosystem.

The launch of multi-collateral Dai also opens a new feature in the MakerDAO ecosystem––the Dai Savings Rate (DSR). The DSR allows users to deposit Dai they hold into the DSR smart contract, where the value of the deposit appreciates over time and users can earn additional Dai. The DSR functions quite literally as a savings account for Dai tokens. The returns from the DSR are produced by adjustments to stability fees of Dai CDPs and from MKR token holders. MKR token holders will also be able to vote to determine various risk and business parameters that govern the appreciation of assets in the DSR. 

What does migration actually entail?

Migration is the process of converting an individual user’s assets from Sai to multi-collateral Dai. The idea is to transition the entire Dai ecosystem towards a multi-collateralized model to enable a diversity of decentralized finance applications and to ensure symmetry across the use and treatment of Dai in the blockchain space. Dai is very popularly used in a variety of DeFi protocols by a huge cohort of users––which naturally makes converting their Dai from Sai to multi-collateral Dai an ambitious problem.

Broadly speaking, the transition from Sai to multi-collateral Dai entails users returning any outstanding Sai to the MakerDAO platform and then exchanging that for an equivalent amount in multi-collateral Dai. Given the dependencies of a variety of DeFi platforms on MakerDAO, many of these platforms have announced their specific mechanisms to automatically manage this migration for their users. We discuss three of the largest DeFi platforms with Dai functionality here:

  1. Coinbase: On December 2nd at 9 AM PST, both Coinbase and Coinbase Pro will automatically convert any Sai held by users into multi-collateral Dai. The Coinbase Wallet app also will have functionality to enable users to upgrade from Sai to Dai on their own terms, even prior to the December 2nd date. Coinbase will also support migrating Dai on other DeFi platforms by having users send their Sai to Coinbase, which it will exchange for mutli-collateral Dai and then return to the user.

  2. dYdX: Within 2-3 weeks of the launch of multi-collateral Dai (early December), dYdX will kick off its migration of user assets from Sai to Dai. The process will be entirely automatic, and entails setting up a globally-approved smart contract that can convert Sai to Dai for each individual open account within dYdX through trustless, community-approved smart contracts. The same goes for open positions––Sai open positions will now become Dai open positions. During this migratory process, spot trading in the Sai and Dai markets will be disabled to ensure the free flow of these crypto assets for proper, full migration.

  3. InstaDapp: This platform is a bit more nuanced than the other two, because it acts as a meta- and managerial-platform for other DeFi tools. Two of the most important uses of InstaDapp and Dai are Compound and WhaleCDPs, both of which are discussed below.

    1. Compound: Compound is currently the biggest holder of Sai, which makes migration a really critical advancement in the platform. To facitilate this migration, InstaDapp is launching an InstaDapp migration bridge that sets up a series of smart contracts that allow users to migrate their Sai to Dai within just one-click. This changes all debt and lending positions from Sai to Dai, ensuring symmetry across the platform.

    2. Whale CDP: Whale CDP provides the greatest supply of Sai on the market currently. Because Whale CDP essentially involves migrating lenders, it’s critical to maintain sufficient liquidity throughout the migration process. To that end, the InstaDapp migration bridge will enable users to migrate a fraction of their Sai to Dai in mutli-collateral Dai vaults with just 1 click. This enables users to migrate at any time, unblocked by the supply of Sai in the market. 

What does this mean for the MakerDAO and broader DeFi ecosystem?

The migration from Sai to multi-collateral Dai is one of the most important transitions in the cryptocurrency space of 2019. As a result, it has a variety of implications for various DeFi applications, but broadly speaking, two key ones are:

First, a successful transition will be a huge vote of confidence for the cryptocurrency space. The transition reflects the nascent and ever-evolving nature of the blockchain ecosystem; a successful transition demonstrates that users and platforms are very adaptable to these changes, and that the community as a whole is committed to the ongoing resilience and success of these DeFi platforms. Migration is an incredibly challenging and complex task––and successful migration signals that the community is prepared for further challenges and shifts.

Second, it diversifies the applications of Dai. As Dai can now be collateralized in BAT and in the future, other cryptocurrencies, various DeFi platforms can now plug in and leverage the MakerDAO platform to execute their applications with currencies outside of strictly ETH and Dai. Given the importance of the Dai stablecoin to the current cryptocurrency ecosystem, this will enable a whole slew of new applications in DeFi.

The successful migration ultimately signals huge promise for the resilience and diversity of applications in DeFi.


DIGESTS

Intro to Smart Contracts

In order to understand what smart contracts are and how they can be useful, it is helpful to take a few steps back to examine some other concepts related to blockchains, otherwise known as distributed ledger technology.


NEWS

Crypto investment app Abra will soon allow users to trade over 200 cryptocurrencies

Investment app Abra announced on Tuesday that its global users will soon be able to trade over 200 new cryptocurrencies on its revamped platform over the next few weeks. 

Data Provider Messari Closes $4 Million Funding Round

Data provider Messari has closed a $4 million funding round led by Uncork Capital with new participation from Coinbase Ventures and former Coinbase CTO Balaji Srinivasan.

Winklevoss Capital, Coinbase Back $1.8 Million Round for Bitski Crypto Wallet

A startup making it easier for developers to put crypto wallets in their applications is announcing a seed round from the likes of Galaxy Digital, Winklevoss Capital and Coinbase Ventures.


IN THE TWEETS


REGULATIONS

Wyoming’s New Crypto Banking Law Could Defang New York’s BitLicense

There’s a way cryptocurrency businesses can get around New York’s notoriously hard-to-get BitLicense, and it runs through Wyoming.

Kik Suffers Setbacks With ‘Void for Vagueness’ Defense in SEC Case

Kik is struggling to mount a strong defense in a case brought by the U.S. Securities and Exchange Commission (SEC) over its $100 million initial coin offering.

CFTC Chairman: The United States Should Lead Blockchain Innovation

Heath Tarbert, the Chairman of the US Commodity Futures Trading Commission (CFTC), said at a conference yesterday that the country should increase its involvement in digital currencies and blockchain.


NEW PRODUCTS AND HOT DEALS

a16z, Paradigm back Compound's $25M Series A to integrate with crypto exchanges and brokers

The company said it doesn’t have a clear business model yet, although the staggering size of this Series A will sustain the company before it takes up significant market share.

Brave Launches Next-Generation Browser that Puts Users in Charge of Their Internet Experience with Unmatched Privacy and Rewards

The Industry’s Most Advanced Browser Offers 3-6x Faster Browsing and Ends Surveillance Capitalism with a Private Ads and Payment Platform that Benefits Users, Advertisers, and Publishers.


MEET WITH ME

Los Angeles, November 25-29

Orange County, December 9

Las Vegas, December 20


ADDITIONAL INFO

Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. The firm invests in equity, pre-sales/IEO rounds, and cryptocurrencies on the secondary markets. I focus on early-stage investments and share my thoughts on 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 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!

Bitfinex-Tether Lawsuit

VeradiVerdict - Issue #59

During several meetings last week, folks brought up the topic of the Bitfinex-Tether lawsuit so I wanted to shed some light on what’s out there:

  • Roche Freedman, a NY-based law firm, launched a lawsuit against cryptocurrency exchange Bitfinex and token Tether for driving the Bitcoin bubble of 2017-2018, contributing to over $1.4 trillion in aggregate damages and a $450 million loss to the market when the bubble burst.

  • The lawsuit claims that Tether did not follow its premise of only issuing its token (USDT) for every USD in one of its company’s bank accounts, but rather issued USDT to illicitly manipulate the market. Specifically, Tether would flood Bitfinex with USDT in response to falling BTC prices in order to enable users to buy BTC and drive demand and price increases for BTC.

  • Tether and Bitfinex have had prior allegations of collusion and malpractice (namely, the April 2019 incident where it is alleged that Bitfinex used Tether to cover $850 million in losses), but still deny the claims of the lawsuit. They argue that the lawsuit is a money grab attempt and its research relies on cherry-picked data. 

  • It’s unlikely by many accounts that this collusion drove the entirety of the Bitcoin bubble, and there were a lot of other confounding factors like Tether’s business incentives and Chinese use of Tether, that may account for the USDT issuances on Tether’s end. Still, Tether’s and Bitfinex’s controversial past indicates that they may have indeed been manipulating the market to some extent.

  • Ultimately, the lawsuit may confirm criticisms that cryptocurrency is artificially governed and managed, delegitimizing it as an asset. However, by exposing this malpractice, the suit also prompts better regulation and oversight over cryptocurrency tokens and exchanges –– contributing to a more sustainable, secure, democratic crypto ecosystem.

What’s the hubbub about Tether and Bitfinex and some lawsuit?

If you’ve been reading any of the news in the crypto sphere recently, you’ve probably heard of a massive lawsuit against the cryptocurrency exchange Bitfinex and the cryptocurrency Tether. The suit accuses Bitfinex and Tether of colluding to drive boom-and-bust cycles (and resulting, profit) in the cryptocurrency market; accusations go as far to say that the collusion and manipulation was the primary driver of the Bitcoin bubble of the past couple years that saw a spike in the price of BTC up to nearly $20,000 in late 2017. Bitfinex and Tether vehemently deny the claims of the suit and argue that its logic and research is based on biased, cherry-picked data. 

What even is Tether?

Tether (USDT) is a cryptocurrency operated by Tether Limited. Originally, Tether was designed to be a stablecoin with one token equaling the value of one US dollar. The premise of Tether, as a stablecoin, was to keep the value of cryptocurrencies stable, particularly with respect to the US dollar, whereas other currencies like BTC and ETH might experience higher degrees of volatility. 

Part of the value of Tether as a USD-backed cryptocurrency is that it’s often a pulse for the financial market for the US dollar, which affects the markets for other assets, including cryptocurrency. Tether bridges changes from the USD money market to the cryptocurrency market, and resulting, Tether plays a huge role in influencing the price of various cryptocurrencies.

What is Bitfinex?

Bitfinex is a popular cryptocurrency exchange based in Hong Kong and the British Virgin Islands. Bitfinex has a bit of a troubling history, with several incidents of customer assets being lost or stolen due to poor or corrupt management of the firm. Tether and Bitfinex share certain stakeholders and management, and resultingly, there’s a lot of high-level collaboration between the firms.

Prior to this specific lawsuit, Bitfinex faced another lawsuit in April 2019 from the NY Attorney General of using Tether to hide and cover $850 million in losses. The suit claimed that Bitfinex deposited $1 billion in a Panamanian corporation called Crypto Capital Corporation, without a formalized contract or business relationship in place. Crypto Capital Corp. eventually left with the money, covering Bitfinex’s losses. Tether’s and Bitfinex’s history of collusion and malpractice sets a suspicious precedent for the way the public perceives the most recent lawsuit.

What exactly is the claim of the lawsuit?

The suit, filed by NY-based law firm Roche Freedman, claims that several groups deeply affiliated with Tether and Bitfinex colluded to defraud investors and manipulate the broader cryptocurrency market. Tether claims to investors that the number of USDT in circulation is one-to-one proportional with the total quantity of US dollars in their company’s bank accounts. The suit argues that Tether broke this practice and issued more units of USDT to buy cryptocurrencies they were interested in, driving pricing spikes and falls in those markets.

Specifically, the suit argues that Tether issued $2.8 billion worth of USDT and injected it into the popular Bitfinex exchange, which gave them the unique power to spike prices and demand for certain cryptocurrencies. Research suggests that roughly half the shift in demand for cryptocurrencies between 2017-2018 resulted from this scandal. The malpractice supposedly created the largest financial bubble in human history, which caused the market to lose $450 billion of value when it burst in just a month. In aggregate, the damages from these claims sum to $1.4 trillion.

Is it really true?

Bitfinex and Tether both strongly deny that their business practices contributed at all to these boom-and-bust cycles, and certainly not to the extent posited by the lawsuit. A public statement dually issued by the firms claims “It is irresponsible to suggest that Tether or Bitfinex enable illicit activity due to the efficiency, liquidity and wide-scale applicability of Tether’s products within the cryptocurrency ecosystem.” They characterize the lawsuit as a money grab attempt, a way for the firm and associated companies to take a cut of Bitfinex’s and Tether’s recent profit.

The lawsuit cites a research paper that claims that most of this illegal manipulation stems from one deposit account on the Tether blockchain. The lawsuit also cites the timing of Tether issuance and transactions, arguing that the issuances were always preceded by a falling price in BTC; in theory, Tether issued more Tether to enable more users to purchase BTC, driving the price up. 

Still, many economists and blockchain enthusiasts note that Tether has incentives to issue more of its currency when it experiences high user demand. A falling BTC price means that more users want to buy BTC, increasing the demand for Tether and thus, preceding its issuance. These arguments would mean that Tether may be complicit in the boom-and-bust cycles, but rather because of its business model and response to market supply and demand as opposed to intentional manipulation of the Bitcoin market. Some also bring up how China banned cryptocurrency exchanges in 2017, and many Chinese cryptocurrency users purchased Tether to trade crypto back to the Yuan. This may have also contributed to the Tether issuance timings and the resulting effects on the market.

While it may be possible that Tether and Bitfinex’s illicit collusion led to some boom-and-bust cycles, it’s likely untrue per many reports that half of the Bitcoin bubble in 2017-2018 was solely driven by this malpractice. There are many other factors mentioned by blockchain enthusiasts and leaders that characterize Tether as a cog in the Bitcoin bubble, but not necessarily its driver.

What does this mean for the broader cryptocurrency ecosystem?

Superficially, the lawsuit signals a lot of doubt about cryptocurrency. The claims of the suit exemplify how easy it might be to manipulate the value of cryptocurrency via various arbitrary, unregulated mechanisms –– these confirm biases and thoughts of many crypto critics that cryptocurrency has no real value and oversight. 

That said, an incident like this also naturally prompts more oversight into the operations of cryptocurrencies. Financial bubbles of this extent represent real, tangible threats to the broader financial ecosystem; at minimum, this case will prompt more barriers against collusion between exchanges and tokens in order to preserve the free, unmanipulated cryptocurrency market. Though a temporary slip-up in the cryptocurrency world, this incident ultimately highlights a critical area for improvement within cryptocurrency technologies and management.


DIGESTS

Bakkt's monthly bitcoin futures hit all-time-high of $15M

Bitcoin derivatives provider Bakkt just logged the largest single-day trading volume of its physically-settled monthly bitcoin futures.

Weaponizing Blockchain-Vast Potential, but Projects Are Kept Secret

Data and data sharing will be critical for warfare in the future, particularly with the development of artificial intelligence.


NEWS

Coca-Cola brings blockchain to its multibillion-dollar network

Coke is finally taking a lead from rival Pepsi by putting its bottling services on the blockchain.

JPMorgan and Singapore’s central bank develop a blockchain system for cross-border payments

The Monetary Authority of Singapore (MAS), the country’s central bank, and investment banking giant JPMorgan have developed a blockchain prototype for cross-border payments.


IN THE TWEETS


REGULATIONS

Hong Kong Regulator to Treat Some Crypto Exchanges Like Brokers

Hong Kong’s securities watchdog is to treat cryptocurrency trading platforms like traditional brokers if they offer security tokens, according to its second round of regulatory guidance for the industry.


NEW PRODUCTS AND HOT DEALS

Welcoming a16z Crypto, Union Square Ventures, and Multicoin Capital to the Arweave Community

Today we have some big news to share. Over the past six months, world-leading venture firms Union Square Ventures, Multicoin Capital, and a16z crypto have joined the growing community of long-term Arweave token holders. 


MEET WITH ME

Singapore, Singapore Fintech Festival, November 11-14

Bangkok, November 15-20

Los Angeles, November 25-29


ADDITIONAL INFO

Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. The firm invests in equity, pre-sales/IEO rounds, and cryptocurrencies on the secondary markets. I focus on early-stage investments and share my thoughts on 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 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!

SF Blockchain Week Recap

VeradiVerdict - Issue #58

Last week was San Francisco Blockchain Week, and there were tons of investors and entrepreneurs visiting from out of town. The main conference events were organized by my friends at Dekrypt Capital, and they have been great at involving our alma mater, UC Berkeley, in both event hosting and recruiting.

The number of events during the day and into the evenings were tremendous, so folks were spread out everywhere. On Thursday at Epicenter, I moderated a panel titled “The How of Howey: Telegram, Blockstack, and the Future of Utility Tokens.” While discussing regulations was a challenging topic, I and the crowd found it pretty insightful to get perspectives from the amazing speakers: Josh Stein of Harbor, Natalia Karnayaneva of Propy, Preston Byrne of Byrne & Storm, and Paul Bao of BitCherry.

Some common views during the panel include:

  • Entrepreneurs whose projects launched before the DAO report are working with regulators to find an appropriate middle ground

  • Launching a token with a functioning product vs pre-product is an important distinction

  • SEC and CFTC are very open right now to engaging with projects so projects should reach out to have conversations

  • Utility tokens may be easier to launch outside of the US. For projects in the US, to be most viewed as largely compliant, either avoid US investors or do a combination of a Reg D offering for non-US investors and a Reg A+ for US investors

  • Entrepreneurs need to decide what is the function of their token and their risk appetite before deciding which type of offering to do for their token

  • Security tokens are still promising but liquidity is an issue


DIGESTS

A Look at InstaDapp's Numbers

I tried my hands on studying how Instadapp users behave and understanding the model behind it. Here’s my attempt at summarizing it.

Is Blockchain Slowly Becoming A Core Components Of Digital Payments?

Although Blockchain technology got its identity from the cryptocurrency king Bitcoin, it went to make a name solely for itself.


NEWS

Huobi Global Is Forcing US Customers to Use Its Local Partner

Huobi Global will kick all of its U.S. customers off its platform later this month.

DX.Exchange Halts Operations, Seeks Buyer 10 Months After Launch

DX. Exchange, which offered tokenized shares in companies listed on the Nasdaq stock exchange, announced the move following a vote by its board on Monday to discontinue operations as it pursues “a merger or outright sell of the company.”


IN THE TWEETS


REGULATIONS

US Federal Reserve Hiring Retail Payments Manager to Research Digital Currencies

The U.S. Federal Reserve is hiring a manager to oversee its traditional payments section, while adding new responsibilities to the role, including researching how to integrate digital currencies, stablecoins and distributed ledger technologies.

Knabu To Pilot Bank Regulatory Reporting With Factom Blockchain

Crypto startup Knabu is working towards piloting bank regulatory reporting with Factom. Factom is among the first enterprise blockchain companies

Chinese Regulator Investigates Firm’s Blockchain Efforts Amid Stock Surge

An obscure porcelain and education firm is under investigation by a top Chinese regulator after it became one of the most sought-after blockchain stocks last week.


NEW PRODUCTS AND HOT DEALS

Go Programming Language of QuarkChain will be Launched and Open-source with Performance Five Times Better

QuarkChain’s focus and solid technologies enable Go version go live and open-sourced on schedule.

Jack Dorsey Backs $10 Million Round for Token Offering Platform CoinList

Token offering platform CoinList has raised $10 million with backing from Twitter and Square CEO Jack Dorsey.


MEET WITH ME

Singapore, Singapore Fintech Festival, November 11-13

Kuala Lumpur, November 14

Bangkok, November 15-19

Los Angeles, November 25-29


ADDITIONAL INFO

Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. The firm invests in equity, pre-sales/IEO rounds, and cryptocurrencies on the secondary markets. I focus on early-stage investments and share my thoughts on 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 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!

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