Keeping track of new developments in the distributed ledger technology space.
Token Economy
#11: Liquidity, Community tools, Estonia's coin
(also published on Medium)
🙏 WANT: better crypto community tools
Another week, another clusterfuck.

This time it was Enigma's turn and it was embarrassing. The story goes that the CEO used the exact same email and password for Enigma' Slack channel and website back-end as the credentials that were once compromised in a previous hack (the Ashley Madison hack no less!). Hackers logged in, messaged the Slack community and altered the front page of the site asking for contributions. $500k was stolen from the Enigma's community that way. This unfolded as the pre-sale was taking place, but apparently it didn't compromise it and they still managed to close $20 million. The CEO has eventually issued an apology and promised to refund the amount stolen to the scammed.

Ok, this was highly irresponsible and a very poor show from the Enigma's CEO, and could have easily been avoided with the most basic online security measures; but it once again shows how inadequate the existing tools are to address the needs of crypto communities.

Every Slack group we're part of is infested by phishing attempts of all sorts. It's untenable. Metacert have grown their business trying to ease this pain point, but despite being a great solution it still feels like putting lipstick on a pig. Just this past week its CEO Paul Walsh was on the ICO Alert Podcast to talk about what they do. And beyond the bad actors, Slack just isn't fit for communities of a certain size, let alone Telegram. We need something else, and it needs to be re-thought from the ground up to address some of the needs of growing communities.

Luckily the crypto community is stepping up. Luis from Aragon has taken the initiative and gathered a group of projects (Decentraland, 0x, Cofound) around the table to collaborative work on an alternative.
We very much look forward to seeing where this and other attempts go and will support in any way we can.

Secure and scalable community tools are paramount to the growth of this industry.
💧 The liquidity conundrum
There has been been a thought provoking debate about token liquidity this week, between a finance professor and a tech lawyer.
Stephen McKeon original post on traditional asset tokenization (covered in previous issue) argued that
a) tokenizaition improves liquidity by eliminating frictions from trade and enabling deeper secondary markets and
b) liquidity increases the expected value from a trade (eliminating the so called “illiquidity discount”).

Preston then picked up on Stephen's post arguing it ignored the regulatory angle: 'tokenizing' is nothing short of 'securitising', citing how projects like the DAO have cut corners for the sake of liquidity, causing more harm than good down the line.

Stephen ultimately responded reiterating how, unlike traditional securitized assets, blockchain tokens (within a regulatory compliant context) will in his view lead to incremental market depth, thanks to the reduction in frictions to trade emanating from the “divisibility, low cost global transfers of ownership, and an immutable record of the ownership claim”.

Ultimately the two views are complementary rather than divergent. Stephen's perspective is very much theoretical as we are still years away from mass adoption of tokenized traditional assets (though it is encouraging to see the first examples in Real for real estate and Digix for gold), while Preston's views are very much relevant to today's regulatory uncertainty and increased scrutiny from the likes of the SEC.

More generally, liquidity is touted as the single most game changing feature of this asset class and the reason why so much Wall street type capital is starting to dip their toes in it, with a lot more waiting on the sidelines.

But how much 'liquidity' is really out there?

Liquidity is not just a function of the availability of buyers and sellers, but also of the depth of both sides of the book, which affects the spread between bid and ask and thus the price one can liquidate a position at. Outside of the top 5 cryptos, the markets are actually very dry. It's rare to find tokens that trade more than 5% of their network value on a 24hr period and, crucially, that's spread across multiple fiat or crypto pairs and different exchanges, rather than in a single pool. Playing around with the order book depth charts for various pairs, one can immediately notice how thin the books are.

On top of that, there is the looming regulatory risk, as Ari Paul highlights in a recent tweetstorm: what happens to liquidity when the regulator starts naming tokens as securities? Immediate de-listings form exchanges, zero liquidity. We noted last week how Shapeshift has acted pre-emptively by delisting certain tokens, we bet their liquidity dropped as a result.

The liquidity conundrum matters not so much to the amateur investors, nor to the hodlers who never sell, but to the institutional capital that builds significant positions in these assets and perhaps gets too comfortable with paying a liquidity premium. Getting out of these positions will be long and costly, meaning that current trading price as meaningless for those who hold large positions. We do wonder how crypto funds are accounting for that in the quarterly NAVs...

We believe current valuations may be mis-pricing liquidity risk.
🇪🇪 EstCoins
Estonia has always been a pretty forward looking country in terms of digital innovation.
They kinda have to, but not any less impressive.

I'm picking up my e-residency card finally next week, and must say it's an amazing experiment.

This week, on the E-residency blog, there was what I would call a "provocation" post about a so-called Estcoin currency.

People went wild on Twitter with all sorts of "mind blown" "this is amazing" "this is super important' comments.

And I was left absolutely dumbstruck.

I've re-read the post now probably 10 times, and I still have no idea what they are talking about.
It's full of "could" "maybe" "potentially" language, and seems more like a question to the community rather than an announcement of any sorts.

But I think this is a great example of people just going out on mind trips with little substance.

Most people that hear about the space for the first time through usually old-school media are drawn to only one single thing: ICOs. Companies / people / raising stupid amounts of money for projects they don't understand.

And guess what the first thing that comes to mind is: "dude, idea, we could do an ICO for X".

I've gotten countless of these comments, and every time I look for the closest bottle.

The attraction to large sums of capital is certainly understandable, but the lack of interest into what the instrument is and why some things are raising money is frankly appalling.

In this post, there are talks of people "investing" in Estonia and only gaining financially if Estonia gains from the scheme

"it is important that Estcoin investors gain only when all of Estonia gains."

So, unless Estonia is going to start developing decentralized applications, or it is going to be changing its revenue model from a tax based system to something else, it seems to me that the only two avenues for this mutually beneficial arrangement are:
1) people invest in the government and the government pays out a share of tax revenue
2) Estonia develops some sort of decentralized product that has a need for a cryptographic token, whose use would benefit Estonia and whose consequent appreciation would benefit the investors.

For 2) this could very well be the e-residency product. But I've had to submit my passport and I'm going to go to an embassy to pick up my card, so I'd say we're a far cry from a decentralized system at the moment.

And in fact it seems like the thinking of the author is more on the 1) case. There are for example ill-advised talks of DAO-like VC funds to invest in Estonian companies.

"As an investment opportunity, estcoins could benefit Estonia and be attractive to investors from the day it is launched." 🤷‍♂️

In any case, I guess I'm pretty mad just for one reason.

In my view, the wrong question is being asked.

The question being asked is basically:
"so ICOs are around. We could raise a bunch of money, but then what the fuck do we do with it?"

While the real question should be:
"We have finally figured out how to run decentralized censorship-resistant consensus systems. What amazing things can we do with this technology to fix all the fucked-up things that happen in our country?"
"Could we maybe incentivize people to pay their full share of taxes?"
"Could we maybe make it clear, public and cryptographically verifiable that we spend money on what we say we do?"
"Could we maybe build automated tax-collection systems?"
"Could we build a currency that only rewards this type of actor, whom we need more in our country?"

But instead the question is always: what can we raise money for and what can we give back in return. It's just a bit boring and I think we could use our mental cycles for much more interesting questions. Proof.

I'm one of the few fans of purpose-specific alternative (crypto and non) currencies, and I would just LOVE if a country would start experimenting with incentive systems through the tool of a cryptocurrency.

But I don't think we should continue to continue instigating the raising of insane amounts of money to sell dangerous semi-securities which are absolutely not trustable, or are as trustable as a country's bonds.

"If there is support for this proposal, then the next stage before the ICO would be to provide a white paper that outlines the value of estcoins and how the investment will be used to develop our digital nation." 🤦‍♂️

Some Saturday 2am ideas for Estonia:

- implement e-residency as a decentralized protocol that can be used by other countries and where users retain their data
- give the ability to tie ETH addresses to e-residency accounts
- give full legal recognition to any Aragon organization managed by e-resident ETH accounts and provide its court system as an optional centralized dispute resolution system
- provide a district0x district for the selling of government assets.
- implement a decentralized automated exchange to enable anyone to pay taxes in whatever cryptocurrency they want, without having to go back to EUR
- don't raise money without an aim.

Watch this space, because the question of Nation-states trying to fight with crypto is one of my favorite :) 
📌 Token Economy
Fred Ehrsam raises an alarm bell as contributors to the largest protocols are gradually moving on to smaller projects where individual incentives are more attractive.

He discusses three possible ways to address that, from the least likely to have an impact to the most powerful:

1. Private funding (ie the protocol funds that we covered last week)
2. Public crowdfunding
3. Inflation funding

Decentralised organisations can move much faster than centralised ones, as long as the protocols are designed to continuously evolve via incentives.
Our friend Alex kickstarted a crowdsourced diligence framework for crypto assets, and we've chipped in alongside a bunch of smart folks that have this topic at heart.

This framework will continue to evolve and improve, we welcome comments and new ideas.
Josh Hannah summarizes the usual reasons that skeptics use to dismiss SoV use cases for cryptos.

1) Given there are a lot of tokens, they aren't a scarce supply and thus can't be a good store of value.
2) Store of Value Use Case is Inconsistent with Volatility
3) It will get regulated.

I don't think there's a big point to the post, but it's an interesting read to go over the arguments in your mind and see what you think about them.

I do think they are very, very weak arguments. Josh doesn't seem convinced either.
These are the type of contrarian inputs we like to see!

Some that are smart, important and interesting to thing think about.

The same reasons for which Blockchain is awesome, are the same for which it could be pretty bad for society as a whole.
- Censorship resistance: hate speech etc.
- Financial privacy: less tax revenue
- New orgs: ransomware etc.
RIchard Burton's Balance almost had a few people at the launch of their Initial Crowd Offering ('ICO') this week. The post is a Q&A where Richard explains the thinking behind a traditional raise, and a rather modest one compared to the numbers are are used to in crypto land.

(Hint: there's another NO-ICO example later in the issue!)

It's a REFRESHING read.

Disclosure: we have participated in the Balance crowdfunding round.`

Mastodon is a decentralized federated Twitter and it's usability is at best so-so.
But in Japan it's exploded mostly because a specific type of content I can't write about here for spam triggers is banned on Twitter.

The piece of the article which is interesting is:
"We end up speculating that the main barriers to adoption of decentralized platforms aren’t technical, but around usability. Most distributed publishing tools are simply too complex for most users to adopt. Mastodon may have overcome that problem, borrowing design ideas from a successful commercial product. But the example of [] may challenge our theories in two directions. One, if you’re unable to share content on the sites you’re used to using – Twitter, in this case – you may be more willing to adopt a new tool, even if its interface is initially unfamiliar. Second, an additional barrier to adoption for decentralized publishing may be that its first large userbase is a population that cannot use centralized social networks. Any stigma associated with this community may make it harder for users with other interests to adopt these new tools."

This is written by the Digital Currency Initiative at MIT and they released a very interesting report about decentralized publishing ⚠️ 113-pages PDF!.
🚨 Growing pains
The Canadian Securities Administrator has issued some guidance on crypto currencies, ICOs and crypto funds. Nothing in there is substantially different from the SEC's position.
Well this is a mild title if I've ever seen one.

Two Chinese exchanges are said to have invested $150M of users funds in "wealth management products".

The CEO of one such exchange says that it's false and that they can't invest client funds for their own gain.

This, together with the looming axe of regulation, is the reason decentralized exchanges are getting developed so fast - and will ultimately eclipse (see what I did there?) entirely legacy centralized ones.
The IRS has been using software to track bitcoin movements. As this news broke, the anonymous crypto currencies rallied, obviously...
Proof of work is getting out of hand.
😤 First they ignore you, then they laugh at you, then...
Coming from a country who previously blocked its credit institutions to offer any sort of cryptocurrency services.
🤡 ICO madness
Kin opened up registration for its upcoming token sale, as well as released its Whitepaper and Technical paper. 

The registration was a pretty intrusive one, a proper KYC based on investment tiers and jurisdiction of the investor, requiring to provide a passport, SSN, a selfie, date of birth and physical and ETH address.
It was surprising they didn't actually require a Kik account to register, that seemed like an obvious growth hack (which worked well for Civic).

Terms TL;DR:
  • Sale: 10% for the public sale, 60% for the Kin Foundation locked in a reserve for rewards, 30% to Kik the company and its shareholders under a "long term vesting schedule" (10 quarters linearly actually, so not that long).
  • Amount to raise: capped at $75 million in the public sale (we understand $50m was already raised through a pre-sale priced at 30% discount to the public sale, with half of the tokens vesting after 12 months.) 
  • Use of KIN token: unit of account for all economic transactions within the Kin Ecosystem (initially Kik), basis of interoperability with other digital services. 

This will be a fascinating experiment and a seminal moment for crypto, potentially creating the largest dapp and the most widely adopted crypto currency out of an existing company. 

If this is successful, expect a massive wave of companies trying to replicate.
This is really well put in an ICO madness section.

As we reported, the ICO would only be available to whitelisted email addresses.

Well, that announcement made their Slack grow from 4k to 32k people making it the largest Slack in the world, in just 5 days.
Many of those accounts are fake so we'll see how that will be handled.

There will be an AMA session on their slack channel on Monday 3pm (GMT+8/UTC 7am).

Number of people registered is now at around 50k 😱 . Interestingly this project attracted significant attention from both Asia and the West.

Meanwhile the pre-sale got fully sold out, obviously.

Terms TL;DR:

  • Sale: 61.06% for the public sale; 19.47% for company; 19.47% for founders, advisors and early investors
  • Amount to raise: 200,000 ETH
  • Use of funds: 50% for the first reserve; 30% for development; 10% for the legal/ marketing; 10% for operation
  • Use of KNC tokens: As a platform currency, used predominantly by reserve managers to pay for platform fees, and for KyberNetwork to reward parties or partners that channel traffic and generate volume to KyberNetwork. The collected fees will be burned.
Oh yeah, he's back.
😎 Cool new projects
NO ICO and actually charging people for revenues? What is this madness?

Radar Relay is one of the first Relayers for 0x.

It seems incredibly well done, but I wasn't able to find anything about the team.

It looks like it's in close contact with 0x obviously, but is not the same team.

Anyways, the design is top-notch and they are hiring so my guess is that it is a SV startup and has been funded by VCs.

Mark Cuban everywhere!

One of the companies he backed in the past years (on AngelList he's even listed as a founder) has introduced the Mercury Protocol for messaging in their app called Dust, which was already focused on end-to-end encryption and serverless messaging.

The app already has tens of thousands of DAUs so this will be interesting.

Did you ask for a token? Of course there's a token.
Tim Berners Lee!

This is Tim's new project coming out of MIT. It's a way to structure social linked data, and provide tools for developers that want to build decentralized apps where users own the data. 
Consensys keeps on shipping.

This is a fascinating smart legal contract connected to the blockchain.

Skip the article and watch the video!
💰 New funds
This is Nick Tomaino's new venture fund.

I've known Nick for a while now, and saw him go down the rabbit hole of crypto by joining Coinbase.

Nick has been at Runa Capital for a while, but has also been one of the pioneering and most influential voices in the token space for a while.

Many people wondered why he was staying at Runa if they didn't focus on crypto, and here's the answer:
Nick is dropping out to start his own early-stage venture capital fund with a target of $20M. Runa is investing, as is Mark Cuban.

While there has been an explosion of crypto hedge funds, there hasn't been so much activity in the traditional venture space, so this is refreshing.

Disclosure: we're investors in this fund too.
🆘 Help us
We'd love some help on a couple of data projects.
If you are (or know anyone who's) good at handling data, interested in cryptos and willing to help out in some spare time, please get in touch!
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 🤙
Please 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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