Past issues

Jan 14 2018

#31: ☠️ Kraken & the death of centralized exchanges

📌 An opinionated recap of the most interesting news in crypto
Token Economy
📓 also published on Medium
☠️ Kraken and the death of centralized exchanges
I've made only two predictions for 2018, and both of them came out of frustration and disbelief.

We spoke about the first last week (only 2 of the TOP 10 coins keeping their status for 2018 and things are looking good for now on this one!). That one came after seeing TRON in the top-10, which is just unacceptable.

The other one was that 2018 would be the year centralized exchanges died. And it came after I had withdrawals stopped and limits imposed from multiple exchanges. The prediction wasn't so popular (nor was the first one to be honest, actually have a 10 ETH bet on that one) but I still stand by it.

This week, the second of the year, was a clear demonstration of my point (or at least I like to believe so).

Kraken, one of the major exchanges, gave a 7-hour notice before an upgrade that should have taken 2 hours.
The result was a 3-day period where the site was unavailable, and people were losing money in a bear market.

Now the site is back online, but all orders have been cancelled and withdrawals are paused.

We have several friends who had orders placed and withdrawals initiated, who actually came to understand on their skin why decentralized exchanges will take the lead in 2018.

Centralized and custodial exchanges are the exact antithesis of why Bitcoin was born and why (we like to think) people spend their time in the crypto world.

We are building trustless technology to remove middlemen, monopolies and risk.

And yet, we have people leaving all of their coins in a centralized database entry, just one backup-failure away from being deleted forever.

I think that incidents like the Kraken one, and all the other ones that are bound to happen this year, will make more and more people consider decentralized and non-custodial exchanges.

Radar Relay, which was just recently launched, is already at $1.5M/day in volume while Etherdelta is already at more than $10M. Paradex just launched too and other relayers are being built.
That's obviously nothing compared to the $40B vol of the centralized exchanges, but our hypothesis is that there will be a swarm of DEXs and other non-custodial exchanges and that they will take the lead, especially as regulations will start to appear more markedly this year. Hiding in Hong Kong with weird shell-companies and personal bank accounts won't be enough.
(BTW, Bitfinex is also back with account registrations now open. Trading becomes available when you deposit at least $10k worth of fiat or crypto).
📌 Token Economy
The ZK-STARK whitepaper is here (and is a very technical read).

ZK-STARK is the first implementation of a zero proof system that scales sublinearly to the data being proofed.

This is a major improvement on ZCash-like zero proofs which are very computationally expensive.

The use-case of the WP is the proof of non-inclusion of a DNA sample in a massive DNA catalogue.

Look, we're even getting to real-world use case examples in whitepapers!
A really, really must-read post from the Keep Network, explaining why miners are not your friends.

It turns out that miners can interfere with the EVM state more than you imagine.
And given their treadmill like race towards 0 profits, they are actually incentivized to take your monies and be hostile.

They have a few yeas to interact:
- Transaction Reordering
- Transaction Insertion
- Forced Errors
- Censorship


This is a super interesting topic that's not discussed enough (probably because no one's really using the EVM for important stuff yet), but will have to be.
Cryptobros alert.

The NYT explores the subcultures of 20-something multi-hundred-millionaires in SF's Crypto Castle and Crypto Crackhouse.

Scary shit.
Vitalik proposes a new way for ICOs to raise money, through a DAO-like contract which has a set budget and a mechanism to self-destruct.

This is an obviously sensible way to handle a token sale, but the main problem we see with this is the market: as long as people are willing to give money to shitty projects with zero product (and no intentions of building it), no-one is incentivized to come up and use better ICO structures that limit their ability to access funds.
Nick Tomaino of 1confirmation shares his framework to evaluate the fundamentals of token-based projects, at a time when valuations seem to be driven mostly by memes.

1/ Team, 2/ product, 3/ community, and 4/ token mechanics.

Disclaimer: we are LPs in 1confirmation.
Ryan is at it again, this time explaining which utility tokens he thinks won't naturally go to zero.

He divides them in 3 categories:
1) “securitized” computing resources
2) “proof-of-human-work” systems
3) and token-curated registries
(jump to page 43 if crypto is all you eat for breakfast)

ARK have a dozen slides on crypto in their annual publication on the most innovative trends. The most notable is the one below, where they outline they framework for classifying crypto assets. It's interesting to think of tokens as "claims on the utilization of assets". 
I think we've found where we're going to work out of when we're in Berlin.
Jameson Lopp from Bitgo outlines many of the challenges and frustrations encountered by Ethereum developers. 

It's easy to forget that, despite the hype and the market cap, it's still an incredibly nascent piece of technology and that much of the core infrastructure still needs to be built out.

This post is a gem in understanding quite a few of the things that are most painful for people and companies that want to create actual businesses on top of this.
🔊 Podcast of the week!

Laura Shin of Unchained has managed to line up no less than Vitalik in her first recording of 2018. We haven't listened to it yet, but it's the first thing we'll do on Monday.
😎 Cool new projects
The team behind LegalThings are launching an app to showcase their live contracts technology.

Their upcoming mobile app will allow recording of se xual consent in a legally binding agreement, anchored to a blockchain through a hash.

Unlike smart contracts that are not enforceable by the judicial system, the idea behind 'live contacts' is to digitize natural language contracts. It's implemented by breaking down any agreement into rules that can be executed by either machines or humans, allowing parties to directly interact with the contract and information to be stored in an immutable way on a public decentralized storage.

More on live contracts in this deck.
Crypto-gaming is booming as the first mass user application of the blockchain (other than ICOs that is).

This one is a decentralized browser-based game where you invest in creating an army (tanks, ships etc), battle with other players and get rewarded in other armies if you win.

Others crypto games based on the same logic that are getting some early traction:

🏎️  Ether Racing
👾  Ether Monsters
🐠  Fishbank (yet to launch, rare fishes available for early joiners!)
This is pretty awesome (only found out about it now, it was launched in Q4 last year).

A community-driven calendar for upcoming events related to crypto projects. 

Anyone can contribute by logging an event and providing the evidence, the community can then validate it by voting 'real' or 'fake' and tip the contributor.
Etherscan have released an alpha version of a search for the decentralized web, for now indexing links from Swarm and IPFS.
A handy Chrome extension displaying the current gas price sourced from EthGasStation. 

Particularly useful given recent volatility in gas prices.
Love this (again, a little dated but we just came across it).

It's a eclectic group of engineers, software developers, scientists, environmentalists, designers and more set up as a cooperative to organize up and fund a decentralized space program. It looks like a set up that Colony could power effectively.
 
Tomorrow's space agency may look like a DAO its first space mission may be crowdfunded. The idea of a decentralized DARPA may not be so far fetched after all.  

🚀, literally.
ZigZag is a crypto assets exchange platform based on the Lightning Network.
Basically a LN-powered ShapeShift.

Very cool.
Paradex launched their mainnet beta. You should try it out.
🤡 ICO madness
Details of the TON ICO and pre-sale had started circulating last week already, though nothing has been officially announced yet.

The level of excitement is palpable, we've been approached by a large number of investors large and small about it. Multiple committed $50-million sized cheque into the pre-sale. We've even heard that Sequoia could be taking a large chuck of the pre-sale.

The project is hugely ambitious, a 3rd generation hyper-scalable blockchain platform leveraging a 200 million captive market of potential day-1 adopters. Trying to raise $1.2 billion to execute the plan, implying several billions of network value from the get go, is next level insanity from a risk-reward perspective. 

We think the interest it is attracting is down to it being one of the very few opportunities for institutional investors to write meaningfully large cheques to back a credible team that has created a very popular product already. It's somehow perceived as a late stage investment.

We'll watch from the sidelines.
Somehow our usually well oiled madness radars missed out on AriseBank back in November last year, when it set out to raise $1 billion via an ICO for its decentralized crypto bank.

The whole thing is so weird that we don't even know where to start, from their supposed acquisitions of a 100-year old bank and a 25-year old investment bank in one go, or from their announcement of a nonsensical "crypto treaty", or perhaps from the fresh endorsement of non less than retired boxer Evander Holyfield.

For more weirdness don't miss out on our friend Mathias' thread and this other post.
If we believe token sales are lame for tech startups that lost their way, you can imagine how we feel about a 130 year old company going for one...
 
 But there is even more. Kodak announced not one, but two things this week:

1. An ICO for KodakCoin, the native token of the KODAKOne platform, a blockchain based image rights management platform for photograher
2. The Kodak KashMiner, a bitcoin cloud mining scheme On the back of the news, it's stock price tripled adding $250m to its market cap. It later 
emerged that several directors were granted RSUs literally the day before the announcement. You can't really make it up...

Are there any merits to any of this? Unlikely, though no whitepaper nor prospectus has yet been released.

The rights management platform doesn't seem to solve any problems for photographers that aren't already solved by the likes of Getty or Shutterstock, with their touted AI-powered crawlers that supposedly scour the web looking for image rights infringement cases sounding no more than a few buzz words put together.
All that with the added complexity of requiring a proprietary token as an internal currency (which is sold as a fully fledged security and therefore won't be broadly exchangeable). Go figure.

As for the bitcoin cloud mining service, which is actually operated by a Kodak licensee, similar offerings have been labelled as scams. They are renting out what looks like an Antminer S9 with a Kodak sticker on it for a minimum of 24 months, operating rigs out of spare capacity at Kodak’s in-house coal-fired power plant and, crucially, keeping half of the profits. They are then promising flat monthly earnings, without accounting for increasing hash rate and therefore decreasing output, which would clearly make the whole proposition heavily unprofitable for whoever makes the $3,400 investment.

For a detailed dissection of this nonsense you don't want to miss David Gerard's 3-part analysis.
Literally the only thing this project had was a whitepaper (other than an aggressive marketing campaign). It then turns out that it was put together mostly by plagiarising the Filecoin's whitepaper, literally a copy & paste and Google translate job.

A yet, somehow this garbage is still worth $7 billion??
👮 This week in regulation
The South-Korean government announced and then denied being in the process of drafting a bill to ban trading of crypto currencies on domestic exchanges.

The mess up happened as the Ministry of Justice independently announced plans of banning cryptocurrency trading, without the consent of the Ministry of Strategy and Justice. The more likely scenario now is that the government will heavily regulate the industry.

PS: Coinmarketcap removed Korean exchanges from their coin price averages this week, as those were typically 30% higher than elsewhere.
Another cease and desist order for Bitconnect for offering securities, this time from North Carolina Secretary of State.

Bitconnect is stubbornly going ahead with its ICO. Needless to say, stay the hell away.
The CVA issued a code of conduct for ICOs in the form of a set of guidelines to ensure compliance with the law, security and transparency.
💰 New funds
Full Tilt Capital is going full crypto with its new $25m fund II in the making.

General Partner Anthony Pompiliano shared the letter sent to his LPs to announce their new focus, predicting that in 5 years time the majority of startups will be raising capital via token sales rather than traditional fundraising mechanisms.
Comcast Ventures is doubling down on blockchain investments, though still evaluating tokens.
🏦 VC funding rounds
CryptoMove is an "old school" tokenless Silicon Valley security company building a decentralized datastore that protects clients data based on moving target defense i.e. it keeps moving data using cryptographic techniques such as dynamic movement, fragmentation and re-encryption, thus making attackers lives more difficult.

Social Capital led the Series A, existing investors include Draper Associate, Pathbreaker Ventured, Red Dog Capital and Oberndorf Ventures.
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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