“History doesn’t repeat itself, but it often rhymes”
This quote is often attributed to Mark Twain. And while Bitfinex doesn’t exactly rhyme with Mt. Gox, there are several parallels in the stories of these two exchanges. People interested in understanding Bitfinex are well-served to understand what happened with Mt. Gox.
Bitfinex and Tether were investigated by the New York York Attorney General (NYAG). Here’s a synopsis for those unfamiliar with the story. Bitfinex is a cryptocurrency exchange, the owners of which also control Tether, issuer of the most popular stablecoin, known as tether or USDT. The NYAG accuses Bitfinex of losing over $800 million. It alleges the exchange tried to recoup those losses by dipping into the cash reserves of tether, the stablecoin its principals also control.
Problem is, taking money held by Tether would render the stablecoin more or less useless. This is because Tether is supposedly backed by cash reserves and there are people who still believe this. Yet if there are no cash reserves, or significantly less cash than believed, then the whole concept of Tether is essentially fraudulent.
This is laid out in the filing from late last week. At the end of the document, the NYAG issues an ultimatum. The office “does seek to enjoin Respondents from taking any further action to access, loan, extend credit, encumber, pledge, or make any other similar transfer or claim between Bitfinex and Tether.”
Where’s the money?
The cliff for BTC on Coinbase April 25 once the Bitfinex/Tether lawsuit dropped. Source:Tradingview
One may rightly wonder: how exactly did Bitfinex manage to lose more than $800 million? The answer is closely intertwined with the exchange’s banking relationships, or lack thereof. Crypto “OGs” and insiders may be feeling like they’ve seen this movie before.
Indeed, those feelings would be quite valid. In the early days of crypto, one of the largest bitcoin exchanges, known as Mt. Gox, also got into significant trouble due primarily to its banking relationships. It got so bad that in February of 2014, Mt. Gox stopped all trading and filed for bankruptcy protection. At the time, it claimed to have lost 624,408 BTC.
What unbanked, noncompliant cryptocurrency exchange holdings look like. Source: Wizsec
A Japanese bank that handled Mt. Gox’s cash transactions had been trying to close its account. In addition, no U.S. banks would work with Mt. Gox. This made it essentially impossible for Mt. Gox to send users’ cash back to them when they tried to withdraw their money. Users experienced delays of weeks or months until the exchange shut down unceremoniously.
In the case of Mt. Gox, the fallout lingered for a long time and still continues to this day. If history is any guide, we can expect any potential fallout from significant troubles experienced by Bitfinex to linger too. While this should give many participants in the crypto industry pause, it is an excellent opportunity to reflect on the state of crypto in general – and for the crypto space to do a little soul-searching.
At issue in 2019 is the presence of so many problematic cryptocurrency exchanges. Spectacular failures where hundreds of millions of dollars go missing, in the case of Bitfinex, are not good. The fact that this appears to be happening again in the span of five years speaks volumes.
From the Mt. Gox crisis docs. Could other failing exchanges try to follow this same playbook? Source:CoinDesk
This industry is still young, immature, and experiencing growing pains. These latest issues with Bitfinex are also a learning opportunity. It’s now clear that exchanges without normal banking relationships are the weakest link in this volatile market. Now prominent traders and funds have been pulling assets from exchanges in fairly large amounts.
Inflow/outflows on BItfinex by USD value. Activity has increased since the allegations were announced. Source: TokenAnalyst
One can understand why exchange outflow would increase in the current environment. Certain exchanges clearly cannot be trusted to safeguard cryptocurrency assets.
It is time for some of the best engineers and developers to turn their attention to the most basic of mandates: Compliance and custody for crypto. Until there is an improved layer of trust, it will be difficult for this industry to grow in ways many advocates want to see.
Lawyer Stephen Palley knows crypto folks want BTC to be worth a ton. Yet that will only happen with much stronger and more compliant exchange infrastructure. Source: Twitter
What does ‘custody’ really mean?
Cryptocurrency goes beyond just computer science at this point. Experts are needed – people who have experience in the various arts and sciences needed to safeguard large amounts of money.
This is what is meant when using the word “custody.” More security, legal, regulatory, and compliance experts are required to push this ecosystem to new frontiers. Auditors, accountants, and experienced financial operators with enough seasoning in the traditional world. These people should have a vision for the challenges and also the amazing promise of crypto. And innovations in bank-backed stablecoins such as USDC and PAX are a great start.
“History doesn’t repeat itself, but it often rhymes.” There’s certainly a familiar rhyme going around right now. It’s easy to look back at Mt. Gox and see similarities to Bitfinex and Tether. This time, though, it’s arguably even more complex given the Tether stablecoin inflows and outflows.
Yet all the same signals, like the large price spread between Bitfinex and regulated exchanges such as Coinbase, are there. And we can stop the repetitive, “Groundhog Day”-type scenarios. We can do better and not let this happen ever again.
Bill Murray is trapped in a mysterious time loop in the movie “Groundhog Day.” Crypto doesn’t always have to repeat the same mistakes over and over. Source: Moviefone
We may be trying to build a better world at the intersection of finance and technology with crypto. However, perhaps it is time to acknowledge that we can learn some things from the legacy financial systems on Wall Street we are working to upgrade.
It’s not about “teaching an old dog new tricks,” but rather about a young, promising puppy learning a few tricks from the old dogs who’ve been managing money for a couple of centuries.
A new proposal by Vitalik Buterin, the creator of ethereum, suggests he is considering increasing rewards for validators who would secure the operation of the next version of the world’s second-largest blockchain.
Ethereum 2.0 is by far the biggest upgrade on the horizon for the ethereum blockchain, today valued at $17.5 billion. Its broader goal is to erase ongoing bottlenecks to transaction throughput and significantly decrease costs on the network.
Rather than relying on a proof-of-work consensus protocol whereby miners compete to bundle together blocks of transactions and add them to the ever-growing chain, ethereum 2.0 will rely on a proof-of-stake consensus protocol whereby validators stake their own funds and attest to blocks and transactions being created on the network.
As such, the security of the ethereum 2.0 network is reliant not upon enormous amounts of computational energy but rather enormous amounts of staked wealth.
“In a proof-of-stake system, your cost of attack is just buying tokens. You basically want it to be unreasonable that anyone would be able to buy so much tokens that they’re able to attack the network,” Fredrik Harryson, CTO of ethereum software client Parity, explained.
As proposed by Ethereum Foundation researcher Justin Drake in recent days, the targeted amount of staked wealth on the network is around 32 million ETH (by today’s estimates, that would be valued at $5 billion.) And based on that amount of targeted staked wealth, roughly $160 million in ETH could be earned annually by the entities that would, as planned, replace the network’s current ecosystem of transaction miners.
Reward issuance rates
But how do you get that much value set aside in order to keep the network secure? In order to incentivize that kind of behavior, ethereum developers need to set a return rate – akin to an interest rate – that rewards validators who lock up their ETH and contribute to the security of the blockchain.
“They have to find a number that is appropriate. You don’t want to overpay to secure the chain and you don’t want to underpay,” Jonny Rhea, a protocol engineer at ConsenSys, explained to CoinDesk. “So, the idea was they did some back of the envelope kind of math to figure out what’s it going to be worth and what should we pay to secure the chain which we pay the validators.”
Originally, this “back of the envelope math” suggested the interest rate should be roughly 2.20 percent given an overall amount of 30 million ETH staked on the network.
Should staked ETH numbers drop, this rate of return would increase to incentivize more validators to come online. Should staked ETH numbers rise, this rate of return would decrease to ensure the network is not overpaying its validators for their work.
As Harrysson explained:
“There’s a sliding scale of rewards that depends on how much ETH is locked up in stake. In a system where you have very small amounts of stake locked up, you want to encourage more people to stake and lock up more ETH to increase the security of the chain.”
However, estimations presented by Collin Myers, a token strategist for ConsenSys, back in January suggested that the present rate of return for ethereum 2.0 validators was simply far too low.
Taking into account the minimum staking requirement of 32 ETH, computing costs, code risk, general uptime and maintenance costs, and more, Myers concluded the current ethereum 2.0 specifications resulted in net yields “that are highly unlikely to attract a small validator.” Rhea adds that the same conclusion was reiterated by “several different people” including miners and financial experts in the ethereum community.
The latest proposal, submitted this week by Vitalik Buterin, the founder of ethereum, suggests bumping up the rate of return to 3.30 percent given an overall amount of 30 million ETH staked on the network.
This would mean that ethereum 2.0 validators collectively would receive a maximum annual reward issuance of close to 100,000 ETH, which by today’s estimates would be worth around $160 million.
By comparison, mining on ethereum today is estimated to be a nearly $700 million annual industry.
‘It’s a subjective measure’
As such, compared to mining on ethereum, the targeted valuation of validating on ethereum is considerably lower. At the same time, so is the overall inflation rate of ETH.
“The base inflation would be ~1 percent and the base return [rate] ~3.2 percent,” estimated ethereum researcher Justin Drake in response to Buterin’s proposal. At present, the inflation rate on ethereum is just over 4 percent.
Counting into this dynamic additional gas costs which on the current ethereum network can be thought of similarly to the costs of writing transactions into a mined block, Drake adds:
“With half of the gas burnt, then inflation [on ethereum 2.0] would be ~0.5 percent and the validator return ~5 percent. Feels healthy!”
In Buterin’s proposal, the validator return rate can be as high as 18.10 percent if only 1 million ETH are staked in the network to as low as 1.56 percent if there’s over 100 million ETH staked in the network.
“It’s more like behavioral economics,” Harrysson told CoinDesk. “It’s a subjective measure of what you want your cost of attack to be. So, the question you always ask yourself in blockchain is how much would it cost to attack this chain?”
These estimations that Buterin has proposed are by no means set in stone. The work going into determining the reward issuance structure, Rhea tells CoinDesk, is like trying to “target the sweet spot” between validator profitability and network security.
“For now, [Buterin’s proposal] is what it’s going to be but it’s being put out as a proposal. People are going to go back to the drawing board. I know Collin Myers from Consensys this weekend is going to rerun his analysis based on [the new numbers] and he’ll probably have some interesting feedback.”
Kripto Aset Altcoin
Altcoin merupakan singkatan dari alternative coin yang merujuk kepada ratusan kripto aset atau koin lain selain Bitcoin. Di antara sekian banyak altcoin yang beredar di pasaran, ada beberapa nama yang mungkin pernah Anda dengar seperti Ethereum, Ripple, ZCash dan lain sebagainya.
Altcoin memiliki beragam perbedaan dari berbagai sisi dengan Bitcoin. Ada yang menggunakan model ekonomi yang berbeda, ada juga yang menggunakan cara distribusi koin yang berbeda termasuk salah satu jenis koin yang dibagikan secara gratis kepada seluruh warga negara di sebuah negara.
Beberapa di antara altcoin ini ada yang menggunakan metode penambangan yang berbeda. Beberapa altcoin menawarkan bahasa pemrograman yang lebih fleksibel untuk membangun aplikasi, sementara yang lain menawarkan privasi lebih tinggi dibandingkan dengan Bitcoin. Dan ada juga altcoin yang melayani kasus penggunaan non-moneter yang sangat spesifik, seperti registri nama domain atau petunjuk penyimpanan data.
Mengapa Altcoin Juga Menarik di Mata Trader?
Selain keberagaman yang ditawarkan, salah satu alasan kenapa altcoin kerap dijadikan pilihan investasi selain Bitcoin adalah karena harganya. Ada kalanya Bitcoin mengalami penurunan harga sementara Ethereum atau Ripple justru berhasil naik. Di saat-saat seperti inilah altcoin berperan sebagai penyelamat bagi para trader. Dengan menginvestasikan uangnya ke aset lain selain Bitcoin, para trader bisa mengurangi risiko kehilangan uang mereka seandainya harga aset yang mereka beli turun. Konsepnya persis dengan diferensiasi aset untuk menjaga Anda dari kehilangan harta karena hanya memiliki 1 jenis penyimpanan saja.
Meski ada altcoin yang sukses menyaingi nama besar Bitcoin, banyak juga di antara altcoin-altcoin ini yang sama sekali tidak menawarkan keuntungan apa-apa.
Kesimpulannya, meskipun Anda tertarik untuk memilih altcoin sebagai investasi sampingan selain Bitcoin, pilihlah altcoin dengan reputasi yang baik. Nama-nama besar dan populer di 2019 ini seperti Ethereum, EOS, Cardano, Litecoin, Binance Coin, Tron dan Ripple bisa menjadi salah satu opsinya. Yang terpenting adalah jangan sampai Anda terjebak membeli altcoin yang sama sekali tidak memiliki prospek.