📌 #25: +governance debate, systemic risk, cryptokitties, 0x Connect, Nov ICO #s, Fedcoins
Token Economy
📓 also published on Medium
🇫🇮 Crypto vibes from Slush
It's that time of the year when 20 thousand tech souls (minus us two, sigh) migrate up north to icy Helsinki to party like there is no tomorrow at Slush. In coincidence of the last few editions of the conference, Atomico has released the State of European Tech report, an absolutely stellar piece of data-driven work and analysis by Tom and his team that tracks the growth and development of the European tech ecosystem. A must-read for anyone and a testament of how far European tech has come in the last decade. 🇪🇺 🚀

What's special about this year's edition is that it covers the blockchain and crypto ecosystem for the very first time, a welcome addition to other deep tech disciplines in which Europe is building a solid foothold. We are honoured to have made a small contribution to the coverage of this topic.

The relevant section starts at 6.2 and then it gets really juicy from 6.4. Below we cherry picked some of the most interesting charts and data points. The key message is that, despite the distributed nature of teams working on crypto projects, Europe seems to be well positioned to lead the way globally.

Spoiler: Atomico predicts that a major established European VC fund will participate in an ICO for the first time in 2018. Does it count as a correct prediction if it's Atomico itself? 🤑

1️⃣  Booming developer engagement in blockchain related projects, closely rivalling the US, in every corner of the continent.
2️⃣ More ICO activity [for better or worse] emanating from European entities than any other region: 446 ICOs (40% of total) raising $1.8 billion (46% of total). European founders on par with North-Americans in terms of capital raised via ICO.
3️⃣ Within Europe, lots of ICO activity happening in central/eastern Europe.
4️⃣ Half of the top 10 most prolific cities where founders are launching ICOs are European.
5️⃣ Regulators are under strong pressure to come up with the right framework to enable this industry to flourish. 
💰 Notes from Consensus:Invest 2017
🎁 A guest post by Thibauld Favre

By pure coincidence the week of Thibauld's guest post ended up being a very special one for him, as he's just joined French startup platform The Family as CEO of Decusis and part-time director with a focus on blockchain and cryptocurrencies-related activities! 👏
The 1st edition of Consensus:Invest took place in New York on November 28th. Unlike the developer oriented Consensus conference, Consensus:Invest targeted investment professionals with the promise to talk about cryptocurrencies “using their terminology”. Funnily enough, the day of the conference coincided with the day Bitcoin crossed the $10,000 mark for the 1st time.
The conference was crowded (~1,300 attendees), but unlike other industry conferences not many people seemed to know each other yet. It was like witnessing an industry in the making, with spontaneous telegram groups popping-up, very accessible speakers, lots of chats with random people and tons of new connections. For sure, the excitement was palpable among attendees. 

Making sense of Bitcoin as an asset of its own

Spencer Bogart explained Bitcoin using a funny animalistic analogy: the Platypus. The oddest animal on the planet, an improbable mix of a duck, a beaver and an otter. Like the Platypus that is bad at being a duck, bad at being a beaver and bad at being an otter, but it is very good a being a platypus, Bitcoin is terrible currency, terrible platform, terrible commodity, but it is very good at being bitcoin. Rather than digital cash, or digital gold, Spencer argued that 5 years from now, we might be describing Bitcoin rather as a native digital programmable asset.
Chris Burniske defined crypto assets as an asset class native to information networks [the deck he presented is available here]. While equities have to suck profits out of information networks to justify their valuation, cryptoassets bundle the user, the shareholder, the management, the creators all into one asset. As the utility of the asset grows, so does the value. He also presented data to prove the uniqueness of the asset class by showing the non-correlation between bitcoin and the other capital markets.
Chris had also compiled very counter intuitive figures. He was notably arguing that Fiat was more speculative than Crypto by looking at their respective Trading-to-transacting ratio (~2% for bitcoin vs ~10% for global fiat). He also made the case that Bitcoin had the same risk-reward profile than oil and a daily volatility inferior than Twitter.

Cryptoassets were compared to equities in the 17th century. Tuur Demester and Spencer Bogart also brought an interesting analogy by comparing the value distribution of cryptoassets with the TLD (Top-level domain) market with Bitcoin being the “.com” and the altcoins being the others TLDs (.net, .org, .io…). 

Trading bitcoin

In the last 50 days, bitcoin has averaged well over a billion dollars of daily trades globally ($10 billion dollars for the entire asset class), not taking OTC trading into account.

B2C2 founder Max Boonen had insightful comments explaining that as the market was retail-driven (at least so far), there was an under-investment in tech (poor feature sets, unreliability…) because “retail doesn’t care”. This needs to change if professional investors are to enter the market.

He also made the case for separating the trade from the settlement. Because the trade needs to happen as fast as possible, which is incompatible with the settlement in cryptocurrencies which will always happen on-chain. He concluded that buying cryptocurrencies today can be safe but “to trade cryptocurrencies today you still have to trust third parties much more than you are used to in traditional finance”.

Arthur Hayes from BitMex and professional trader had very interesting (and funny) comments about trading cryptocurrencies. He started by pointing out the challenge of trading 24x7: you have to be organized to be watching 24x7 if you don’t want to be exposed to a big gap risk.

He went on to explain that today’s derivative markets are mostly retail based, hence mispriced, making them a candy store for experienced traders: it is "easy" to make money with only basic trading strategies. This is why a lot of them quit their job, or trade crypto on the side while at their job :)

Finally, when asked about decentralized exchanges, he sees developers focusing on the wrong things: “liquidity is key, traders will favor centralized exchanges over decentralized exchanges any single day if liquidity is better on centralized exchanges”.

Bitcoin futures

While credit is not well seen by the crypto community, Adam White from GDAX told the crowd that there was “a strong demand for credit in the space”. Not only for leverage, but also to let investors hedge their investments. To address this very topic, in a very PR-reading talk style, Tim McCourt from the CME Group announced the details of the very awaited Bitcoin Futures [NDLR: launching on Dec. 18th]. 

Also, the CME group unveiled the BRR (Bitcoin Reference Rate) and the BRTI (Bitcoin Real Time Index). An much needed initiative as Bitcoin has no official, agreed on, trading price as of today (the spread across exchanges can sometimes be huge) and it is absolutely needed if professional investors are to enter the space.

Even though cryptocurrency traders had criticism regarding the product announced (no weekends, the BRR/BRTI being based on exchanges that might suffer from price manipulation attacks…), they were all pleased to see this type of product coming to the crypto space.

Holding cryptoassets

Cryptoassets custody was a much discussed topic both on and off stage. Even though Coinbase recently launched its cryptoassets custody service, while other players like Ledger are developing solutions for professionals, most panelists argued that there is a need for more cryptoasset custodians on the market. Too much concentration in custodians is not good, the high valuation of crypto assets will be a stress test for custodians who might not all be able to handle the pressure of high valuation when it comes to security. 

Another problem noted when comparing the cryptocurrency space to traditional finance was the absence of insurance on custody. Finally, it was interesting to hear that the custody business might very well evolve with Proof-of-Stake, as they will now custody naturally yielding assets.

2018 predictions and bubble discussions

Obviously, most of the panelists did not like the bubble analogy, arguing that we were more witnessing the initial excitement around the adoption of a new disruptive technology.
There were a few interesting predictions made for 2018:

1. Hard forks will become the norm to launch a new coin because it enables you to start your coin with a massive air-drop of value. This will create a big challenge for Bitcoin because “Forks are like dilution : each fork takes a group of people with it, so you get fragmentation of the investor base and the ecosystem” said Raoul Pal. For the moment, the number of forks is limited so that dilution is getting absorbed by a stampede of money moving into bitcoin but it won’t stay that way.

2. Investment bankers will be stepping in to provide liquidity and capital in the market. On that aspect Ari Paul from BlockTower capital argued that if “anchors LPs” have been West coast VCs historically, followed by High Net Worth Individuals and now Family Offices. He sees endowments entering the market in the next 3/6 months but career risk is still prevalent.

3. 2018 will bring a different kind of investors than we’ve had in the past with the ability to short.

4. Regulation will kick-in.

We won’t relay all the prices prediction that were made, but if you need one, here’s the one from Joshua Brown: “How much did Mike [Novogratz] say? $40,000? I’d say $41,000 then!” :)

Notable quotes

If something refuses to die, it demands your attention” — Joshua Brown on why he started paying attention to Bitcoin.

Crypto is about relearning all the mistakes we’ve made in financial history” — Spencer Bogart

Saying I like blockchain not bitcoin is like saying I like email but the not the @ sign” — Brian Kelly

90 % of ICO slam dunk investments have tiny liquidity so couldn’t have made substantial money. Treat ICO returns with a pinch of salt.” — Alex Sunnaborg
📌 Token Economy
The debate around the optimal governance structure for blockchain projects continues to attract the best minds, and for good reasons: the ability to seamlessly evolve and adapt is the single most critical factor in the long term success of these open-source networks. And unfortunately one that often gets summarily dismissed by founders.

Fred Ehrsam kicked it off this week with a long post dissecting the pros and (mostly) cons of existing (Bitcoin, Ethereum) and new governance models being tested (Tezos, Dfinity), as well as new proposals (futarchy, liquid democracy, quadratic voting etc) aimed at fixing some of those cons.

Vlad Zamfir, the Ethereum developer leading the PoS efforts, rebutted Fred's views that governance is an abstract design problem in a later post titled Against on-chain governance. In it he highlights the risks associated to on-chain plutocratic forms of governance, while defending the case for the existing, more tacit, off-chain models.

The two ultimately found some common ground on Twitter.
Naval on a podcast is always unmissable, show notes in the link and podcast below.

🔊 Podcast

The most interesting bit is when he highlights his investment thesis for crypto:

Money or money like tokens, tokens that can serve as a means of exchange, unit of account, store of value, or ones that can power financial contracts.
Good framework for mapping out the stages of disruption of the legacy infrastructure brought by the crypto revolution:

1/ store of value
2/ financial markets
3/ information markets
4/ governance

What's even more exciting for us is the potential for new markets and economies that do not yet exist and we can't yet imagine, that will be enabled by crypto.
This is Preston Byrne, you have been warned.

In this guest post on Coindesk he highlights some of the systemic risks that in his opinion are building up as the masses enter the crypto space:

- marginal new buyers are fickle, more prone to do a 'bank run' in a shock scenario, as they are not sitting on much paper gains unlike the 'early adopters'
- withdrawals of credit / banking facilities to intermediaries
- aggressive margin lending practices
- Tether / Bitfinex situation

Preston colourfully closes by imploring banks to "keep this garbage, and anything connected to it, the hell off of [their] balance sheets" so that "the rest of the ship won’t go down with it" when the time comes.

While crypto bears have had a really hard time lately and may continue to be proven wrong for much longer, it's challenging not to worry about these underlying risks as every week we witness increased levels of speculative greed flooding the markets. 

For this reason our approach has always been to focus on the most 'winter-proof' pieces of the decentralised stack, those projects that can weather any crash because they *need* to exist, run by teams less focused on prices and more driven by the ultimate vision.
Speaking of the devil. After the CME and Cboe, the Nasdaq exchange is lining up to launch bitcoin futures as early as Q2 2018. 

This makes the NYSE the last major US exchange without a upcoming crypto derivative product release, though we are sure it won't be long.
Classic Google here. 😈

Next time someone questions the value of censorship resistant services, send them this link.
This is a hot decentralised exchange that could have raised any monies with a token sale. Yet, in their own words:

"Raising seed money instead of a wading into a complex and fraught ICO process lets us concentrate on building the long-term value of our company. Instead of dozens of calls with lawyers, we’re developing our products. Instead of promoting our ICO, we’re talking to our users. Instead of getting distracted, we’re totally focused."

We are seeing an increasing number of founders taking this much saner approach, and it's refreshing.
An ode to why we do what we do and the world we want to live in.

Must read. 
If you were waiting for the verdict, it isn't great. The company is trying to spin it as a major victory because the data requests have been substantially lowered from the original demands, but the IRS will still be obtaining personal balance and trade information for 14,000 Coinbase users who had more than $20,000 in trades before 2015.
Fascinating article that explores the crazy second key ceremony for ZCash.

This was needed for a planned hard-fork and there were hundreds of people participating in order to be sure that at least someone removed the "toxic waste" created by the fork.

For it to be successful, at least one person had to securely destroy this waste, and people went to crazy lengths to make sure they weren't compromised.
What it says 👆

Unsurprisingly, consultancy firms are more receptive to the idea of crypto currency than banks, as it's not a direct threat to their core business model. 
Bitcoin really is a force of nature. It can make anyone look dumb instantly if they don't understand, because someone saying "I have no idea, I don't understand it and don't care" is never a good answer.

But it teaches us something fundamental about the world: no-one is a god. No one is an expert on everything. You should trust no one's judgment.

You should gather all points of view and then make your own decisions, because everyone else is still figuring it out at the  same time as you.

Don't trust. Verify.
Without much fanfare, there has been a significant contraction in early stage VC funding globally since the 2014 peak (from 13.3k to 5.9k deals in 2017).

Some folks are wondering whether ICOs had anything to do with it and frankly it sounds a little far fetched as the ICO boom is really a thing of the past 12-18 months at best (the November numbers are below btw). 
Very technical article that details a new Scheme dialect called Pyramid (Pyramid Scheme, get it?) that compiles to the EVM.
If you're a Haskell or Lisp person, here you go.
Rusty Russell of Blockstream breaks down the past, present and future of Bitcoin into three economic eras.

First Era (2009-2014) - free money bootstrap phase, high-inflation, bitcoin as a payment network.

Second Era (2014-2028) - Satoshi’s Subsidy, network congestions, higher fees, scalability debate, bitcoin as store of value.

Third Era (2028 onwards) - minimal inflation, users bearing the cost of securing the network via transaction fees only. 

Rusty predicts the third era will open up with a civil war between miners and developers. What else is news?
We still don't understand what Lykke exactly does (from the deck, it looks like they do *everything*), but we think this is maybe the first example of innovation in the post-ICO funding mechanics.

They are selling a 2-Year Forward contract. It's, in their words, "an ERC20 based token standard that confers the right of the holder to receive the base value of the token, expressed in digitized Lykke shares, or Lykke coins (LKK).
This novel financial instrument operates like a forward contract with the benefit of being “at the run” for the entirety of the contract period. Delivery can be triggered at any time. Two years later, the holder of the token receives the equivalent amount of LKK."

In this case, investors are paying around 4-5x the price of the ICO and the price of the first 1-y contract.

Will be interesting to see if anyone else will adopt similar strategies. You must retain central bank capabilities obviously (or company shares issuance), which makes it a no-go for most serious decentralized projects.
A brief update on the Tether/Bitfinex situation.

As if it weren't grim enough, Bitfinex's PR firm issues a press release that stinks fishy from top to bottom, while acting totally unprofessionally on Twitter. Speechless. 
Out there. But not that much.
If you didn't watch the livestream and didn't attend, all Devcon 3 videos are here!

There are a lot of deep tech talks as well a project presentations. We'd need another life to look at all of them, but if you're interested in something specific, this is the state-of-the-art info on it.
😎 Cool new projects
0x Connect is an open-source library which makes it much easier for developers to integrate relayer’s services in their applications. It follows the standard relayer API, released barely a month ago, which set out a way for programs to access liquidity across a global network of relayers. Combined, these are potentially a much bigger deal than it might seem initially.

"Imagine if anything of value that can be tokenized can also be easily exchanged or traded through one global pool of liquidity, without the friction of having to register or even interact with multiple parties. We are getting closer to the day when it’s possible to trade anything for anything in a truly frictionless way, where 0x Connect is providing the tools enabling developers to easily integrate these capabilities into their applications as easily as say integrating online payments with Stripe. This could potentially unlock market of a scale we couldn’t even picture before." says our friend Alex Shelkovnikov.

The 0x team continues to ship amazing products at an incredible pace. No wonder the 0x ecosystem is one of the most vibrant.

Disclaimer: we own ZRX tokens, including Alex.
Crypto. Kitties. Had to happen.

This thing has become all the rage in crypto land in the last few days. What on the surface sounds like the crypto version of the internet cat memes, is in fact one of the very first live games built on the Ethereum blockchain, and a very well thought one.

The idea is basically a crypto tamagotchi. You can use ETH to buy and sell unique, non-replicable, digital collectibles in the form of cute crypto kitties, with the blockchain proving and tracking ownership (similar to the Rare Pepe). There is a finite issuance of gen0 kitties that can be purchased and exchanged via a marketplace, beyond which the only way to create new kitties is via breeding them. Yes. You can breed kitties together and 'mint' a unique offspring, either between your own mom and dad kitty or by getting your mom-kitty to breed with someone else's dad-kitty, but not before paying a siring fee. So clever!

Now hold on tight to your chair, one of these crypto kitties (the genesis kitty to be precise) traded for 247 ETH last night! All transactions are visible here

Mind blown by this use case of digital scarcity. From central banks to kitties and back, only in crypto land. 
This team is building a new token onboarding user experience for dapps that abstracts away the 'blockchain', aiming to foster mainstream adoption of utility tokens.

Think of it as a Stripe-like checkout interface that allows users to purchase tokens in-app via credit/debit card, with its own managed vault service. By requiring a user's pin to transact the tokens, and whitelisting the relevant contracts in the vault so that tokens can only be sent to the right app, they effectively building KYC/AML from the bottom up at the wallet level, which is cool. 

Look forward to testing this out.
Consensys are pausing internal token sales for a couple of months to focus on this project, so it's probably a big deal. 

There isn't much on the actual project though, other than that it is aimed at bringing further clarity around the boundaries between security and utility tokens. In fact they are just announcing that they will announce more in the future. 

Stay tuned, I guess!
We are glad to see Unchained Capital starting to unveil what they have been working on. 

The concept of crypto-secured loans isn't necessarily new (see Salt Lending), it's in fact one of the most obvious, tangible and possibly lucrative business opportunities in crypto.

For now they provide lending to bitcoin holders in beta, allowing them to borrow against the value of their bitcoins without needing to sell them, but more financial products are on the way.
Microraiden is live on mainnet!
We've already featured Cent as a decentralized Quora, but there's a big update here.

The application has evolved into more of a marketplace for digital services of all kinds and the developers are embracing it.

"The ultimate vision for Cent is to become an income source for anyone who wants to provide their value to society via a digital network. "
Vynos is a small step for Spankchain, but a giant step for the Ethereum community. We did touch on it in our recent Q&A with Ameen, but we thought it deserved expand ing on it further.

If you were to use a dapp today, the default way to do that was through MetaMask, which is amazing, but fairly painful to understand and use.

Vynos instead is an in-browser micropayments wallet developed in by SpankChain and Machinomy. It provides a smooth user experience through state channels and could completely change the way we interact with dapps.

It is still a bit slow, but it feels like magic.

In Metamask you have to sign and verify every single transaction, here instead you just click on a button and the transaction happens.

It opens up the question obviously about "how do I make sure the next click won't empty my wallet", but I'm sure they'll figure that out.

Disclaimer: one of us owns SPANK tokens.
Fascinating stuff, a vertically integrated crypto mining project.

A tyre recycling company partnered up with a mining infrastructure manufactured to build a crypto mine on top of a renewable energy source, completely independent from the utility grid.
Some folks have too much time at hand!
🤡 ICO madness
The draft November numbers are out thanks to our friends at Tokendata. We are well on track to close 2017 in the region of $5 billion raised via ICOs:
  • 51 reported ICOs* (down from 97 in October)
  • $682 million (down from $828 million)
  • $4.3 billion raised year to date
*100 small/questionable token sales have ended but not reported numbers.
👮 This week in regulation
More central banks are warming up to the concept of cryptofiat, or more aptly in this case 'fedcoin'.

We remain unexcited by this development as it's likely to result, if anything, into a centralized form digital fiat still subject to supply shenanigans; however it's still worth covering as it's pretty significant that crypto is now firmly under the lenses of central banks.
Here is an alternative approach to cryptofiat, which still misses the main point.
The allure of crypto currencies is as much their ownerless, censorship resistant nature as the actual speed of transactions. 
Mr Grundfest, SEC commissioner in the '80s and now professor of law at Stanford, would certainly have a heavy hand were he in charge, and he's actively pushing for the regulator to take that approach. His stance is interesting mainly because he sits right in the middle of a tech hub as his day job.

“I.C.O.s represent the most pervasive, open and notorious violation of federal securities laws since the Code of Hammurabi”
From being laughed at as toy to a currency for drug dealers and criminals, to being questioned as a potential destabilizing factor for the US economy. 

What a journey!
A few clarifications emerged from the UK authorities this week:
- HMRC will not not accept crypto payments
- crypto gains are subject to capital gain tax
- there are plans to regulate exchanges and wallet providers
- the government won't intervene in support of "digital currency firms" who are struggling to get banking services.
This is a little odd. 

The largest national bank in Malta has stopped accepting transfers to and from crypto currency exchanges. It's odd because it stands in stark contrast with the very favourable stance towards cryptocurrencies recently expressed by the Maltese government, which also happens to be a 25% shareholder in the bank...
It's awesome to see jurisdictional competition at play on a global scale, and 'unusual' countries like the Philippines potentially emerging as the most forward thinking. 

Regulatory sandboxes are probably the smartest thing regulators can do in this space, allowing crypto entrepreneurs to experiment in a controlled environment. 
💰 New funds
Arrington is going all in on the crypto frenzy, raising $100 million hedge fund to trade cryptocurrencies, invest in ICOs and occasionally in traditional VC deals in the blockchain space. 

The most unique thing about it is that it's crypto-denominated, so LPs will contribute and get redemptions in XRP, and fees will be paid in it too. This is supposedly meant to facilitate investments by LPs who already hold crypto, particularly the non-US ones who will benefit from the fast Ripple settlement rails for cross border transactions. Fund performance will also presumably be measured relative to XRP.
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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