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16. 28/01/2019 10:51
Stranger Things: The Upside of Down Bitcoin Prices

While 2018’s falling bitcoin prices led many observers to write off digital assets altogether, the correction should actually help force the market as a whole to mature.

That maturation is exactly what the space needs to attract more institutional investors, whose arrival en masse will improve the market for everyone by increasing liquidity, both directly, via the funds they invest, and indirectly, via the fact of their adoption. Their entry will signal to other traders that the market is stable and trustworthy.

Taking risk seriously

Between 2015 and late 2017, when the price of bitcoin was steadily rising, there was bullish euphoria in the market. Traders were willing to rely on little-known or unregulated exchanges despite the risks – the potential upside made those risks worthwhile.

In the early days, digital assets presented a unique scenario by conventional trading standards: the operational risk (risk of loss from inadequate procedures, security, and policies used to conduct operations) of trading was greater than the market risk (risk of financial loss due to the prevailing conditions of a market an investor is invested in).

Loss of some money (or digital assets) here and there to hacking, for example, could be outweighed by the fact that returns were astronomical and investors were indifferent to the price of bitcoin and other digital assets as it was increasing, exponentially, in a very short period of time. For example, bitcoin experienced a price increase of 460+ percent over the six-month period from July 1, 2017 ($2,492.60) to January 1, 2018 ($14,112.20).

Trading on platforms with very high operational risks could be entirely logical using an “adjusted” Sharpe Ratio, a risk-weighted measure. The adjusted Sharpe Ratio would take into account the return of investing in bitcoin over a period of time and the risk-free rate of investing in a risk-free asset (such as a U.S. Ttreasury bond) and determine the risk of the portfolio (market and operational risks) to determine the risk-adjusted return.

Using the example above, taking a risk-free rate of approximately 1.5 percent, the portfolio’s return, which exceeds 460 percent, and the portfolio’s risk of, let’s say, 135 percent (35 percent for market risk and 100 percent for operational risk), would yield a Sharpe Ratio of approximately three. This Sharpe Ratio would represent an attractive risk-weighted return as the return exceeds the risk by a multiple of three.

Today, returns have normalized for arbitrage opportunities as liquidity has increased across exchanges. Those who employed a purely long strategy and enjoyed exponential returns would now be experiencing losses if employing the same strategy over the last six months.

Aside from a purely directional strategy, traders will tell you that “easy returns,” such as simple arbitrage opportunities (buying the same asset on one exchange and selling it at a much higher price on another) have disappeared. When the returns they’re seeing are closer to what they’d expect from more established asset classes, traders’ willingness to accept the op-risk, or potential of losses from hacking and other preventable causes, is greatly diminished.

In short, the change to the risk-reward ratio means that exchanges are no longer given a pass for poor operations, lax security, troubling conflicts of interest, and insufficient oversight.

For example, most exchanges use a single wallet to hold assets for all participants. Even with the bulk of assets held in cold storage, a single wallet creates a tempting target for hackers and other criminals. Now, we’re seeing more exchanges introduce segmented wallet infrastructure (as at Seed CX, where we create a dedicated wallet for each exchange participant).

This attitude shift means exchanges that offer dedicated wallets and other security-focused features – those that have the lowest operational risk – will attract more institutional investors, who must consider not only financial and operational risks but also risks to their reputation when trading digital assets.

It also means exchanges have to offer the surveillance and account infrastructures required to prevent inefficient or suspect trading: trade alerts, circuit breakers, order book audit trails, and so on.

Growing sophistication

As we mentioned above, changes in the market since 2017’s rally mean that “long-only” strategies are no longer workable and “easy return” opportunities are much harder to come by because more groups are chasing the same opportunities. For example, DeVere Capital recently announced the launch of an actively managed cryptocurrency fund that will be focused on arbitrage opportunities between exchanges.

This means exchanges that want to attract and keep traders must build the infrastructure to offer more sophisticated trading strategies, including swaps, derivatives, and options, not to mention combinations of those and spot markets.

Legacy of the bear

The transformation of the market infrastructure still has an overhang of its history. In the first three quarters of 2018, hackers stole $927 million of cryptocurrency from exchanges and other trading platforms.

And while many exchanges still fall short on security measures, others are making significant strides forward. In addition to segmented wallets, we’re seeing greater use of multi-signature security (at Seed CX we require two keys, generated by independent parties, to access wallets), more enforcement of whitelisted withdrawal IP addresses, and the increased pursuit of regulatory licenses.

Two years ago, the entrance of institutional investors to the digital asset space seemed distant and unlikely. Today, thanks to falling prices, institutional investors are not only entering the market but are increasingly dictating the terms of the marketplace – to the benefit of everyone trading in it.

17. 27/01/2019 21:02
State of Lightning: What’s the Path for Network Adoption in 2019?

This is a visualization of the lightning network taken at 22:29 (UTC) on Friday.

Created by blockchain analytics startup 1ML, the snapshot represents all of the nodes running lightning software and creating public payment channels atop the bitcoin blockchain.

Looks complex, right? And believe it or not, this network is getting progressively larger each day according to 1ML.

In the past 30 days alone, the number of lightning payment channels has increased by roughly 36 percent, bringing to total to roughly 22,000 channels. Active lightning nodes have similarly shot up – over 16 percent in recent days – and presently sit at around 5,690 distributed nodes.

Launched in beta last March, the layer-2 payments technology is actively maintained and developed by over six different development teams spread out across the globe.

These include Eclair by Acinq, Lightning Network Daemon (LND) by Lightning Labs, c-lightning by Blockstream, ptarmigan by Nayuta, Rust-Lightning by Matt Corallo and Lit by MIT’s Digital Currency Initiative (DCI).

And even outside of these six, Pierre-Marie Padiou, co-founder and CEO of Acinq, predicts there are half a dozen more out “in the wild.”

Highlighting that the codebase to build lightning clients is open-source and available to anyone “without asking permission,” Padiou added that a list of 30 some-odd improvements to the network were agreed upon by developers during a summit in Adelaide, Australia November of last year.

“Now, after the summit, the work will continue to formalize the decisions taken during the summit, and implement them in the clients so that they can be deployed,” explained Christian Decker – core tech engineer at Blockstream – in a former interview with CoinDesk. 

Since November, one feature has already been released by CTO of Lightning Labs Olaoluwa Osuntokun enabling “the ability to send a payment to a destination without first needing to have an invoice,” as detailed on GitHub.

Explaining that each client team “has their own favorite features,” Decker added that more changes to the network would be released in “incremental” steps emerging piecemeal over coming weeks and months.

As such, lightning developers are optimistic about the continued success of the lightning network, expecting growth trends seen in 2018 to continue to rise in 2019.

Speaking to CoinDesk, Padiou highlighted:

“We have been seeing tremendous activity during the past few months and are confident that this trend is going to amplify in 2019.”

Looking ahead

According to blockchain analytics site P2SH.info, the amount of bitcoin sent through lightning channels since last June has skyrocketed from less than 25 BTC to 578 BTC.

State of the lightning network on bitcoin mainnet. Source: www.p2sh.info 

Speaking to greater adoption figures in 2019, Decker told CoinDesk that the key behind developing “a very active and engaged community … building and improving lightning” would come down to its continued potential to “change how we do payments in the future.”

Indeed, the main use case of the lightning network as described on the official webpage is “lighting-fast blockchain payments without worrying about block confirmation times.”

Transactions using the lightning networks takes seconds to complete, compared to the 9 or so minutes – on average, at least, with fluctuations based on block variance and miner luck – for transactions directly on the bitcoin blockchain, according to data from bitinfocharts.com.

And while payments for goods and services using a debit or credit card is done with relative ease in most developed economies, restrictions to such traditional banking services is a common struggle for marginalized populations within (and outside) first world countries.

According to a world map of the public lightning channels spread out across the globe, most of the servers running on the lightning network are concentrated in North America and Europe.

World map of the lightning network. Source: https://explorer.acinq.co

Speaking to this user demographic, Padiou explained to CoinDesk that while bitcoin’s development community has “historically been stronger in North America and Europe,” the nodes being depicted on the map did not show the number of mobile users for lightning, who may be “a bit more evenly distributed.”

He added:

“I believe that the language barrier is often underestimated, and initiatives like [Reading Bitcoin] which provide translations to Chinese, Japanese and Korean [people] are very useful.”

From Decker’s point of view, the map of public lightning channels “matches pretty closely with the map of Internet users, or the map of deployed bitcoin nodes” which is “to be expected since those are the regions that are most likely to know about bitcoin, have some bitcoins, and [are] testing the software.”

Nevertheless, Decker affirmed that developers are dedicated in 2019 “to extend the reach of bitcoin and lightning globally.”

“I’m not aware of any specific plans to foster adoption in certain regions specifically [but] we’d definitely welcome any user from those regions, and do our best to support them,” said Decker.

Since March of last year, the lightning network has seen the number of new payment channels grow from roughly 1,500 channels to over 20,000.

Growth of lighting network channels over time. Source: https://bitcoinvisuals.com

New developments

For now, there aren’t specific numeric targets on the agenda for lightning developers to reach by the end of 2019, though as mentioned there is a long list of features aimed at expanding network capacity expected for roll-out in months to come.

Standing for “Basis of Lightning Technology,” BOLT 1.0 is a common, open-source repository of code that contains all the necessary technical requirements or specifications for users to participate in the lightning network.

Not to be confused with BOLT – a lightning-inspired zcash implementation of the network released August last year by Dr. Ayo Akinyele  – BOLT 1.1 is the envisioned upgrade to BOLT 1.0 that will encompass the new development work going into lightning.

Speaking to CoinDesk in a former interview, Osuntokun acknowledged that the exact roadmap for BOLT 1.1 was “difficult to put estimates on … as it largely comes down to the prioritization of the various development team for each implementation.”

“[Clients] will implement features in parallel, according to their own prioritization and to the extent that suits them best … some implementations may choose to omit some of the features,” added Decker.

The five features that Osuntokun highlighted with CoinDesk as possessing the “biggest impact to the end-user” includes:

1. Splicing: Currently, each payment channel possesses a fixed capacity only able to send the amount of bitcoin initially staked at the outset of channel creation. However, in the event that a user would like to increase or decrease channel capacity, they require opening an entirely new channel with the same participants. Requiring the same amount of fees and confirmation wait time as a regular bitcoin transaction, splicing ensures users are able to avoid the initial pain of creating a new channel by making adjustments to the capacity of existing ones.

2. AMP: Standing for “Atomic Multipath Payments,” AMP according to Osuntokun presents “a massive boost in usability” for the lightning network. Instead of payments being routed along a singular path on the network, AMP allows users to send through fragments of payments through multiple public channels in the network. Additionally, as pointed out by c-lightning developer Rusty Russell, AMP can also be leveraged by users as a “bill splitting” feature when making lightning payments to a single party from multiple different sources.


3. Wumbo Channels: Named after an episode in an American children’s cartoon show called Spongebob Squarepants where starfish character Patrick uses the term “wumbo” to denote increases in size, wumbo channels refer to an increase on the maximum number of bitcoin that can be sent within a lightning payment channel. Put in place by lightning developers for safety reasons, the maximum capacity of a channel at time of writing is 0.16 BTC or roughly $570.

4. Static Address for/to remote outputs: Aimed at improving “disaster-recovery scenarios” on the lightning network, Padiou explains that static addresses ensure easy fund recovery for users. “This feature – the static information address – means that with only the seed to your lightning wallet you would be able to recover the main balance in your channel,” said Padiou. The seed being a mnemonic recovery phrase attached to all lightning (and bitcoin) wallets, users currently require both this information and channel-specific information to recover lost funds.

5. 2p-ECDSA: Perhaps the coolest upgrade in the eyes of Osuntokun, 2p-ECDSA would camouflage the transactions carried out on the bitcoin blockchain to create lightning payment channels. At present, transactions opening and closing a payment channel are easily differentiable from transactions on-chain. This improvement once implemented would add an extra level of anonymity for users by making lightning channel activity more difficult to distinguish from traditional bitcoin payments activity.

Speaking to all the anticipated changes to the BOLT repository, Padiou highlighted:

“We didn’t have to change very important, very low-level design decisions … It’s very good news because we could have made big mistakes and could have had to start over but it’s not the case. Going to 1.1 is just building upon the already working first version.”

Through the lens of the development agenda set for 2019, the priority, then, in Padiou’s mind, is “reliability in all its aspects” to encourage continued adoption of the tech.

“A payment network needs to ‘just work.’ It only has value if it allows you to send and receive money when you need it,” Padiou contended, adding:

“The more reliable it gets, the more companies with large user base will be ready to support it.”

18. 26/01/2019 13:47
XRP Market Cap May Be Overstated by Billions, Messari Report Estimates

A new report from crypto data startup Messari estimates that the true market capitalization and circulating supply of the digital asset XRP is markedly less than what data sources currently present.

As depicted on data providers like CoinMarketCap as well as Ripple – the distributed ledger tech company closely linked to the digital asset – XRP’s circulating supply is pegged at roughly 41 billion tokens. But in its report, Messari posits that of that figure, 19.2 billion XRP “may be illiquid or subject to significant selling restrictions” tied to daily trading volume, including “at least 6.7 billion XRP” held by Ripple co-founder Jed McCaleb that are subject to an agreement between him and Ripple.

In addition, Messari said that it believes that the circulation figure includes 5.9 billion XRP pledged by Ripple co-founder to a nonprofit entity called RippleWorks, an amount that it contended hasn’t been delivered. As well, Messari identified 2.5 billion XRP held by RippleWorks that are also subject to daily selling restrictions.

Further, the report also estimates that as much as 4.1 billion XRP sold via XRP II, Ripple’s money-services business, is also subject to selling restrictions. But Messari notes that “it is impossible to track the magnitude of this illiquidity without direct disclosures from Ripple, so we use a reasonable estimate.”

All told, these factors have led to the market cap of XRP being “likely overstated” by more than $6 billion, according to Messari’s reasoning.

Following the publication of this report, a spokesperson for Ripple disputed Messari’s findings, telling CoinDesk:

“Not only does this report contain several inaccurate assumptions around lockups and selling restrictions, the entire report is based on an incorrect calculation of market cap. While decentralized digital assets like XRP are different from traditional equities, the term ‘market cap’ is always a very simple calculation: current price X total number of the asset = market capitalization. That puts XRP’s current market cap at approximately $31 billion. We believe that any other calculation of market capitalization for XRP is not a clear representation of the truth.”

In its report, Messari estimated that the figure could ultimately be higher, explaining:

“In reality, this estimate may prove to be conservative, as they belie XRP trading volumes which have consistently fallen well below that of EOS and Litecoin, two cryptoassets whose current referenced market caps are a mere 17% and 15% of XRP’s, respectively. In addition, we believe the actual amount of ‘restricted’ XRP in distributions to investors, banking partners, and team member may be significantly higher than our initial estimates reflect.”

The report notes that it sought input from Ripple and RippleWorks before the report’s publication but hadn’t heard from the company, which Messari contended results in questions about how the restrictions work in practice.

“Ripple has not shared the methodology or reference exchange data it uses to calculate trading volume for XRP, a critical data point that drives selling restrictions. More than 99% of XRP trading volume appears to come from overseas exchanges, many of which have been suspected of wash trading,” the report states.

On Thursday, Ripple released its Q4 report, noting that average daily XRP volume was $585.7 million. The firm sold $88.88 million programatically – an increase compared to its third-quarter figure of $65.27 million – and $40.15 million in “institutional direct sales,” representing a decrease from Q3’s $98.06 million.

Editor’s Note: A previous version of this report linked to a 2014 agreement between Jed McCaleb and Ripple regarding McCaleb’s XRP holdings. The link has been updated to reflect information about a superseding agreement. 

19. 25/01/2019 21:00
Overstock’s tZERO Token Platform Has Officially Opened for Trading

Overstock.com’s much-anticipated security token trading platform, tZERO, officially began trading Thursday afternoon.

The company announced in a press release that its secondary market for tZERO’s own security tokens had gone live, marking the first step toward trading other digital assets on the platform.

Accredited investors can sign up to trade tZERO tokens through Dinosaur Financial Group, LLC, which is acting as the “introducing,” or customer-facing, broker-dealer.

TZERO subsidiary Pro Securities LLC is providing the alternative trading system (ATS) to trade the tokens.

Investors in the tZERO token offering have long been waiting for the platform’s launch, after its initial unveiling in 2015. Overstock CEO Patrick Byrne announced that the exchange would launch this week during The North American Bitcoin Conference in Miami on January 18, later telling CoinDesk that the technology was ready, but the company needed to finish processing its initial sign-ups first.

The launch is within the timeframe given previously by Jonathan Johnson, president of Overstock subsidiary Medici Ventures, who told CoinDesk last December that the platform would begin trading tZERO tokens by the end of January.

Several days before the launch, some users on the company’s Telegram noted that the registration process with Dinosaur, which began earlier this month, had been taking several days to complete. Customers similarly complained that communications with the broker-dealer were prolonged, with even wire transfer confirmations taking days to arrive.

Late Thursday, some investors were still waiting to get started.

“I signed up last week, and tokens listed as pending transfer today. I expect them to be tradable tomorrow,” investor Mark Nelson told CoinDesk. “The account is open so it is approved, just waiting on the completion of the token transfer.”

Long time coming

Overstock has been gearing up to launch tZERO for years. A months-long token sale to raise $134 million, using a Simple Agreement for Future Tokens framework, concluded last August.

The company had previously demonstrated how its platform could operate with a prototype unveiled in April 2018. At the time, tZERO’s then-president Joe Cammarata anticipated launching the security token trading software in May 2018.

The company shuffled its leadership last week in anticipation of the launch, shifting Medici’s chief operating officer, Steve Hopkins, to head up tZERO. In the process, the company promoted Medici’s chief technology officer, Joel Weight, to COO of the venture fund.

The company has also been hired by private equity firm GSR Capital to develop a token for trading cobalt. The security token will aid in identifying, tracking and purchasing cobalt, and may ultimately lead to the development of a tZERO-like platform in Asia.

20. 24/01/2019 17:17
‘Decentralized Airbnb’ Starts Charging Fees as ICO Model Falters

Bee Token – a crypto startup seeking to create a decentralized home-sharing platform – has begun charging fees for some customers as part of a pivot meant to boost revenues.

It’s a significant development for the company, which raised millions in an ICO as an alternative to Airbnb that could cut costs for users by reducing fees and eliminating ads from online services.

But Bee found that users haven’t been moving to its site fast enough.

Now, the company, founded by Uber alumni, is moving to a more traditional path to sustainability, according to an interview with co-founder and CEO Jonathan Chou.

The company announced the closure of its ICO in early February 2018, raising 5,000 ETH (roughly $4.5 million as the sale closed). Of the total supply of 500 million BEE tokens, 213 million are in circulation. The coin had a market cap of around $11 million in April, but the total value currently sits at less than $500,000.

Chou told CoinDesk in interview:

“It’s definitely a pivot. The focus is to have a sustainable revenue model.”

The company has also shed staff in recent months. While Bee Token employed 20 people in the early part of last year, it’s currently a team of just 10.

Chou says most of the people who are now gone were employed making the token sale happen, though he added that three people have transitioned out due to the changing nature of the business.

What had to change

Bee Token set out to create a protocol for home-sharing, one in which the company’s work building the system would be repaid through the rising value of its token supply. But Airbnb, it turns out, has a very big advantage: instant brand recognition with consumers.

The thinking at the time went like this: as more and more users of the platform purchased BEE in order to pay for stays in people’s homes, the more valuable the team’s compensation package would be. This token model was typical of companies conducting ICOs in 2017 and early 2018.

Bee Token’s website promises zero commissions on bookings through the site.

According to the Bee Token white paper, centralized services charge anywhere from 3 to 15 percent commission, depending on various factors. The theory was that by eliminating these fees, Bee’s home-sharing approach would be competitive with industry leader Airbnb and similar sites.

This vision has not been realized as quickly as hoped, Chou said, though he doesn’t intend to go back on his commitment to users.

“We are currently 0 percent for the crypto consumer,” Chou explained. “We still have a lot of crypto and blockchain companies that use us for travel.”

That said, the company’s emphasis today is to win over traditional business travelers. These customers are less cost-conscious than consumers, so Bee will charge 8 percent commission on businesses that use the site. That’s still competitive with the company’s chief competitors, Chou said.

Web3 on hold?

Despite the setback in vision, Chou estimates the team currently has a one-year runway. That’s why Bee Token is currently working to raise a seed round.

“We are pivoting to be a more revenue-focused business,” Chou told CoinDesk. Investors want to see money coming in, he said, adding: “Cash is king.”

Chou situated his company’s pivot within the broader context of crypto’s ebbs and flows over the last two years. “Most ICOs in 2017, the more decentralized you were, the more perfect you were,” Chou said.

Then came 2018: a year of shock after shock. Many companies didn’t react because they didn’t know if the market would come back.

Now in 2019, Chou said, only the biggest tokens – the ones with market caps in the top 10 or so, can afford their burn on those grounds alone.

Either the smaller ICOs pivot, he said, or “basically, you are just waiting to die.”

 

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