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Dec 24 2017

#28: 👿 Is Coinbase going evil?

📌 An opinionated recap of the most interesting news in crypto
Token Economy
📓 also published on Medium
👿 Is Coinbase going evil?
We're obviously not new to continuous shitshows in this industry, but when we start seeing suspect behavior even from the people or institutions that we thought were on the good side, we get scared.

The big news this week was that Coinbase added Bitcoin Cash trading out of the blue.

This was after they announced the ability for their customers to withdraw BCH by Jan 1st, 2018, but that a determination on trading would be made "at a later point".

While Coinbase has always added coins with no forewarning, this one seemed very suspicious specifically because of their published product roadmap (which was published/updated just 4 days before):
BCH touched $8900 on GDAX and then was suspended. Not clear what they were expecting.

The main issue, other than that crazy spike, is that there was a substancial run-up in price before the announcement.

This could have been because of a leak of their APIs, or because of insider trading from privileged information.
Trading crypto is still basically entirely anonymous if you use services like Changelly and Shapeshift, so any Coinbase customer can easily get away by trading on their own info, even if it's against their policies.

Nonetheless, they are running an internal investigation to see if anyone leaked data or acted on it. Good luck.

An easy speculation would be that Coinbase just couldn't let go of the supply of Bitcoin Cash it had. If they let everyone withdraw, that would have been a non-negligible part of their AUM.

The riskier question is: do they really have all of the BTC/BCH? I don't think they'd ever risk it by running a fractional reserve system, but these situations can make the question just a tad more legitimate.

On this last point, one of the most interesting conversations of the week has been about  UTXOs (Unspent Transaction Outputs).

I'm sure you all know how BTC transactions work, but just to make sure, let's clarify:
when a transaction takes place, there are two UTXOs created: one that is the actual coins sent to the recipient, and one that is the change output, which goes back to the sender's wallet but does not get just added to the total coin amount.

In Ethereum this is different for example, you just add coins to your address.
In Bitcoin instead your wallet will have many different amounts (of different UTXOs) that all together sum to something. But you need to spend them one at a time.

Now that we cleared that up, we can see how this could be a serious problem for Coinbase and other wallet providers.

This twitter thread explains it fairly well, but in short, Coinbase has some wallets with a massive amount of UTXOs of very, very small value. This means that oftentimes the transaction fee needed to move the coins will be larger than the value of the coins themselves, so they're as good as worthless probably.

Now, there isn't a great solution to this (Lightning and Segwit can't help much with it), so it it indeed is the case that Coinbase or other wallets-as-a-service has a lot of cash tied up in small UTXOs, then they have a massive problem, and they can't blame anyone else.

It'll be fun to watch. Our advice is always the same. Get your money outta there.
📌 Token Economy
The debate on blockchain governance continues unabated.

A couple of weeks back Vlad Zamfir and Fred Ehrsam stirred it off with a back and forth on the merits (and lack of thereof) of on-chain governance. 

Now Vitalik picks it up form where Vlad left it, making a case for "informal governance" and "soft mushy human intuitions". More specifically he advocates for "multifactorial consensus" as the most balanced approach to blockchain governance (i.e. polling multiple groups via different mechanisms and coming up with a collective view).

Always worth reading what Vitalik writes.
A riveting read on Bryce “Zooko” Wilcox of Zcash, no summary would make it justice.
The media is going absolutely nuts on bitcoin headlines. There's a whole industry that exists to write about Trump tweets and bitcoin price moves. Sad!

Here Ouriel, VC from Isai, unpacks the most common bubble talks about bitcoin (and draws a beautiful chart).
The drama continues.

After one of the three board members of the Swiss Foundation resigned, frustrated by the in-fights, the community is stepping up with petitions and other initiatives ultimately aimed at ousting Gevers (who still has control of the Foundation's board).

If only half of what's being said on Gevers is true, one wonders how on earth he was given that role in the first place.

(Gever's own business Monetas coincidentally went bankrupt a couple of weeks back).
This was unexpected. The news that the founder of a +$15B network has sold out completely clearly made everyone raise their eyebrows, more so as that coincided with an all-time-high for LTC (after a +80x appreciation for the year) and anticipated a (seemingly short-lived) market 'crash' by a day or so.

Imagine if Elon Musk did the same for Tesla, the stock would crater. But we are in crypto and everything needs to be seen with a different pair of lenses.

The nature of the crypto networks is being decentralised, without single points of failures. One could argue that a public founder with significant skin in the game could represent such weakness and therefore it may be in fact beneficial for the long term health of the network that he removes himself from such a influential position, which could cloud his thinking  and lead to conflict of interests of all sorts (the main reason cited by Charlie for selling out).

The counter argument is that network participants should all have their incentives aligned towards its success and that the token itself is the tool to calibrate them. This certainly holds in the early days of an ecosystem, when financial incentives have to make up for the lack of utility, however it may become less meaningful once network effects and utility value have kicked in. Could that be the case for Litecoin? 

Regardless of the real reason and its merit, it's hard not to read into this an implicit statement by Charlie on valuations, of LTC specifically but of the whole market more broadly.

Disclaimer: Stefano instantly followed Charlie and dumped all his LTC, which were a small % of his portfolio.
My view is slowly becoming that Tether is what will bring down the house.

The latest update is that both Bitfinex and Tether are now closed to new accounts, yet $50M+ were just generated. We're at $1.2B+ this year, $500M for December and $800M in the past 2 months.

Tether promises a 1-to-1 backing so we're supposed to believe there are $1.2B sitting in bank accounts controlled by Tether in random banks in Panama or Poland.
A must read from the founder of Sound Forge, an audio company that rode the 2000 bubble and was worth $200M for a few months.

His recollection of the web bubble make him fairly sure that, this time, nothing has really changed at all.

I feel particularly sympathetic to this sentiment: we are at the beginning of a complete revolution, but the mania is getting out of hand.
Estonia is dead serious about estcoin. The overall vision seems to be about making e-Residency the best platform to conduct a regulated ICOs, while the thinking about the estcoin is, let's say, evolving...
A nice internal MIT discussion, with the Media Lab team responding to an article about IOTA that was published by the MIT Technology review.

While the tangle is surely a fascinating concept and IOTA continues to be blindly praised by their followers, it smells fishy from very far away for some reason.
Their fake-ish partnerships announcements are the most evident signal at least for us.
Youbit got hacked for 17% of its assets and had to subsequently declare bankruptcy. 

Tough times for centralised crypto exchanges around the world.
😎 Cool new projects
A more technical overview of the new ERC721 token that we introduced in the last edition.
The Grid+ developers are scared, and rightly so, about exploding gas costs on Ethereum. So they are exploring ideas about scaling that could compromise a bit more on the security side.

One such idea is a Trusted Relayer Network, which borrows concepts from Plasma, 0x, Token Curated Registries and more.
Very early, but interesting draft paper about another staking / punishment protocol called Delphi.

This one uses Token Curated Registries concepts, which are fascinating.

If you haven't read it yet, one of the most interesting ones that kickstarted a lot of thinking is this direction (for me at least) is Truebit.
🤡 ICO madness
Well I guess ICO fever is not over yet.

SingularityNet went for the "most money in less time" record thing, and apparently it still works (I mean, we're writing about it..)
So it continues.

After Kik, now it's apparently Telegram's turn.

I'm a bit disappointed because I've been using Telegram with great pleasure till today, and can't see a single reason why a token would improve my experience.

In any case, the leaked TON video has all of the buzzwords (secure, scalable, millions of users, etc.) that made some friends reach out to ask if there was some early access to it..
The heuristic of not touching with a barge-pole any investment promoted by a celebrity is infallible.
Speaking of which, this one is endorsed by no less than Leo Messi. If that wasn't enough, they have just sold $130M worth of tokens to develop and sell open-source consumer electronics "for the blockchain era".

You draw your own conclusions...
Included for the 'madness' part rather than the 'ICO' part.

There seems to be no end to this insanity of public companies adding "blockchain" to their name and their stock popping. This one makes ice tea! Anyone can draw the parallel with those adding ".com" a couple of decades ago...

We do hope the SEC picks this one up as it's blatantly evident by looking at the traded volumes that there was insider trading involved in the days leading up to the announcement.
📚 Book of the week
Paul Vigna's new book is out for a pre-order and it should be a good one!
ℹ️ About us
Token Economy is written and curated by Stefano Bernardi and Yannick Roux.

If you're building a new fundamental piece of technology for the future, please reach out 🤙
Feel free to send links to include in the next issue, or any comments you might have on this one!
Token Economy · The Dolomites · 38121 Trento TN · Italy
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