Past issues

Dec 10 2018

#66: Ether’s rough week

📌 An opinionated recap of the most interesting news in crypto
Token Economy
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Editor's note
With Stefano and Yannick in the Dolomites mountains for the 2018 Summer Unplug Retreat, this week’s edition of Token Economy features guest editor Spencer Noon (that’s me 🙋🏻‍♂), an investor at Doggie Tail Crypto Capital, a fundamentals-focused and diversified crypto fund with the best name in the business 🐕. Find me on Twitter and don’t hesitate to get in touch.   
Ether’s rough week
Unless you were living under a rock for the past week, you know that Ethereum’s network value tanked. The price of Ether dropped to $170 on Wednesday, marking a 90% fall from its all-time high, reminiscent of Bitcoin’s epic 87% drawdown which ended in January 2015.

So is Ethereum dead?

It wouldn’t be all that unreasonable to wonder. Narratives are so powerful in this industry, and we’ve recently seen one emerge which posits that decentralized applications are “capitulating” and mass-selling Ether from their ICOs on the open market.

If you dig into the numbers, you’ll realize this isn’t actually the case. Diar’s Larry Cermak published an insightful tweet storm on Monday that largely refutes the idea of an Ether death spiral: 
It’s worth noting that projects are still holding 38% of the Ether they raised, and without revenues, they’ll likely be selling on the open market to cover expenses in the future. But the rumors of a mass capitulation were greatly exaggerated.

As investors and operators navigate this market, we have to be comfortable with the fact that price movements are often a function of narrative and market structure (like BitMex offering ETH futures)—not fundamentals.

🎧 To hear more on this topic, check out this recent Venture Stories podcast I recorded on the bull case for Ethereum → Link 

Let’s dive into this week’s newsletter!
🔥Thoughts
Tony Sheng drops an instant classic with an exploration of environments in which narratives fuel speculative bubbles. He argues that historically these environments have the following three properties:

1. Lack of reliable or relevant historical data to form valuations
2. Conditions that attract retail investors, oftentimes poor regulation
3. Relative strength of narratives to grab attention in an opportunity rich investment environment
We have all observed these properties in the crypto bubble over the past year. 

Tony asks whether things will change with future bubbles in crypto. For me, this is unlikely because although we’re making progress with more reliable data and better regulation, valuation frameworks are still experimental and need to be proven out. This will take time. 
Tushar Jain of Multicoin Capital is back with another cryptoasset analysis - this time doing a deep dive on Litecoin.

The verdict: despite being down more than 85% from its all-time high, LTC is still overvalued.

Here was the most interesting part of the analysis for me. Tushar argues that Litecoin’s security model is broken because, as block rewards decrease over time, the network must be secured by transaction fees. However, since Litecoin’s key value proposition is cheap transactions, the number of transactions needed to maintain security of the network over time will likely surpass the network’s capacity to process those transactions! This is a problem that could apply to other disinflationary Proof-of-Work cryptocurrencies boasting cheap transactions too (e.g. BCH).
Dan Held with a take on why Proof-of-Work may actually be efficient.

This post is noteworthy because it synthesizes the views of many notable Bitcoiners into one narrative that pushes back on Proof of Work’s wastefulness. I’m a fan of PoW–it’s secure, battle-tested, and critiques of its wastefulness often miss the big picture. That said, this romanticized depiction of its energy consumption goes a bit too far for me, and it fails to recognize that other less-wasteful consensus mechanisms may provide better security guarantees in the future. 
A short but thought-provoking post on Mining 2.0 by Erik Torenberg. Erik ponders some of the most esoteric questions facing crypto VCs today like

- How do you capture the value of decentralized technologies directly?
- How do you participate as an investor when there’s no token or no equity…?

and argues that some firms will differentiate themselves by actively participating in decentralized networks (e.g. by running a staking node). I’ve spent some time with firms who are making Generalized Mining their bread and butter, like CoinFund, and I’m convinced that it’s a winning model and something projects in the space are deeply interested in
🔦Featured on Token Economy, by yours truly (Spencer)

At Doggie Tail Crypto Capital, I’ve helped a number of portfolio companies with their community building strategies. In this post, I break down some of the fundamentals of crypto community building and explain why strong communities are indispensable for the long-term health of decentralized networks. 
Regan Bozman of CoinList writes a helpful post on navigating the crypto investor landscape.

This is an absolute gem if you’re an early-stage company looking for funding or an aspiring VC looking to break into the industry. Bookmark this because you might need it someday. 
The King of Curation, Nathaniel Whittemore, drops a new term on us called Complexity Theater, which is when ideas are explained in an overly-complicated way to make them seem smarter.

Complexity Theater is pervasive in crypto, mostly because our industry is so interdisciplinary. It’s hard to be an expert in everything, so when we come across domain experts ourselves, we often hesitate to ask for things like clarification. 

Personally, I’ve been making a point to ask companies that pitch me to break down technical concepts more slowly. It’s proven to be extremely helpful when evaluating investments.
Remarkable that Dai has remained stable even though the price of Ether crashed from $1472 to $170 over the past 9 months. 

Multi-collateral Dai is quickly approaching and that will only make the system more robust.

Inspired by discussions with Cyrus Younessi, I’ve been thinking about whether there might be a future relationship between the valuations of a native cryptocurrency (ETH), a governance token built on top of it (MKR), and the stablecoin it protects (DAI). 
Ash Egan begins his quest to research all of the smart contract protocols. 

There are currently 60 ways to deploy a smart contract! 

I believe there will be numerous complementary smart contract protocols someday. For the protocols that don’t make the cut, I think they’ll become sidechains of a more secure smart contract platform (e.g. Ethereum) or just die out altogether. 
Yaniv Feldman argues that we’ve had three eras in crypto so far 

1. Bitcoin
2. Altcoins
3. Utility tokens

and a new era is upon us: crypto-institutionalization, which is led by traditional financial institutions, banks, and even central banks. 

We’ve seen numerous developments related to institutional adoption over the past few months. I believe the pace is only going to accelerate from here. 
💥Newsy stuff
- Tezos Launch. After several months in Betanet and largely flying under the radar, the Tezos Foundation made a surprise Twitter announcement on Friday that its Mainnet is set to arrive on Monday morning.

- Manipulation. TrustNodes lays out the case for how BitMex seemingly admitted to price manipulation and trading against its own customers.

- Citigroup. It’s starting to feel like there’s exciting news related to institutional adoption coming out daily. Bloomberg announced that Citigroup plans to develop a new mechanism for trading cryptocurrencies by proxy without direct ownership of the underlying coins.

- Morgan Stanley. More on the institutional front as Bloomberg also announced Morgan Stanley plans to offer non-custodial Bitcoin swap trading for clients.

- Custody. BitGo has received approval from South Dakota regulators to be a qualified custodian for digital assets. Although this approval is only for one state, it paves the way for other states to come on board in the future too.

- Constantinople. Ethereum’s upcoming hardfork, Constantinople, which notably decreases supply inflation by 33%, looks like it will be installed before the end of the year.

Interstellar. After months of speculation, Stellar finally announced their acquisition of Chain. They are forming a new company called Interstellar.

- Talent. Ripple’s general counsel has left the company. The timing isn’t exactly perfect as the company is in the midst of a class-action lawsuit regarding whether or not XRP is a security.

- ICO Funding. According to Bloomberg, ICO funding has dropped to levels not seen in 16 months. 
😎 Cool new projects
A new dapp and collectibles wallet hit the App Store this week.

I’ve spent a lot of time trying out wallets and Vault is really freaking good. The UI/UX is sleek and they’re even giving away free NFTs to early users. 
Carbon is the latest algorithmic stablecoin to launch.

I’m personally skeptical that algorithmic stablecoins are going to stand the test of time. Once they get big enough, people will start trying to break them. 

There is no shortage of competition either. We currently have algorithmic, fiat-backed, and crypto collateral-backed stablecoins, and I think it’s only a matter of time before government-issued stablecoins make their way onto the scene as well. 
Gemini continues to play the regulatory game masterfully, this time launching a dollar-pegged stablecoin with backing from the NYDFS.

Say what you want about centralized stablecoins, but the fact that Gemini opted to issue GUSD as an ERC20 token, instead of on Ripple and Stellar (who are supposed to be good at this type of thing), speaks volumes to how far ahead Ethereum is as a digital asset issuance platform. 
We’ve got another dollar-backed stablecoin with approval from the NYDFS! 
The Lightning Labs team has released a redesign of their desktop app that’s super simple to use. 
Loom Network is an absolute powerhouse when it comes to shipping.

They just released a new standard, ERC721x, which is an extension of ERC721 that adds support for multi-fungible tokens and batch transfers, while maintaining full backward compatibility.

Worth noting: one of Ethereum’s most powerful network effect is its token standards.
Hold Bitcoin in your brain. Seriously. 

There have been some high profile cases of cryptocurrency being seized at border crossings. 

With NOWALLET, users can securely hold Bitcoin by simply remembering an email address and a passphrase. 
I don’t know about you but I’m about to become an amateur cartographer! 
Curated on a Product Hunt collection!
💰 New funds
Eric Meltzer and Dovey Wan announced last week that they’re starting a new cryptoasset investment fund. Details are light at this time but looks like they’ll be long-term investors, market cycle agnostic, and global from day one. This is a very exciting development from two of the most dynamic investors in the space! 
💸 Funding rounds
Seed CX has closed its Series B funding round led by Bain Capital Ventures. It is the first licensed cryptocurrency exchange to offer institutional trading and settlement for both spot market and CFTC-regulated derivatives. 
In tandem with their product release in the App Store, Vault announced that they’ve also raised a seed round from ConsenSys Ventures, FirstMark Capital, Raptor Group, Unusual Ventures, Digital Currency Group, and CoinFund. 

It’s probably because nobody has quite nailed the UX yet, but wallets feel extremely undervalued to me in relation to the broader crypto investment landscape. 
👮 This week in regulation
In a tweet posted Wednesday, France’s Minister for the Economy announced that an article had been passed which allows companies to do ICO fundraising. He said that this will “attract investors from all over the world.” 

The global race for becoming the most crypto-friendly jurisdiction is on. 
In what appears to be the first action ever taken against a cryptocurrency hedge fund, the SEC issued a cease-and-desist and a $200,000 fine to a fund called Crypto Asset Management.

The fund apparently represented itself as the "first regulated crypto asset fund in the United States” even though it wasn’t. Yikes. 
ℹ️ About us
Token Economy is normally written and curated by Stefano Bernardi & Yannick Roux, but this week we handed over the pen to our friend Spencer Noon while we unplugged at the Unplug Summer Retreat '18.

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