CryptoAM: Ethereum's Plan, Dharma's Interest, and CZ Sues

Happy Thursday CryptoAM!

Three things you need to know:

One: Ethereum Foundation announces yearly plan

Image: Ethereum Foundation

There is still a significant amount of capital
in the Ethereum Foundation (EF) piggybank, according to an announcement made yesterday outlining the Foundation’s yearly plan. It holds 0.6% of all circulating ETH, coming to a cool $164 million. This excludes cash reserves, suggesting that the amount could potentially be meaningfully larger.

Other highlights:

EF plans to spend $30 million USD
over the next 12 months on key projects. This is broken down into three categories:

  1. $19M for projects involved in next generation Ethereum improvements (scaling solutions, zero-knowledge R&D, working with academic institutions to attract top researchers).

  2. $8M for projects involved in supporting Ethereum’s current capabilities (Solidity, other developer tools like Web3.js).

  3. $3M to attract more developers, especially in Asia where the EF sees significant room for further growth.

Let’s highlight that last point. One of Ethereum’s killer differences right now is they already have far more developers than any other protocol, including Bitcoin. Having the largest number of devs doesn’t guarantee success of course, but it doesn’t hurt. I’d also be looking to see whether the push into Asia attracts new dev talent that is currently outside of crypto or draws it away from other protocols based in that region, namely Tron, where CEO Justin Sun has repeatedly talked of ‘rescuing’ Ethereum developers.

The importance of funding cannot be understated. Most protocols (such as EOS, ADA, HOT and XTZ) actively fund projects as a way to incentivize them to develop on their platforms. EOS has even set up special joint funds with players like Galaxy Digital in order to do this.

Context: As for Ethereum, it’s unclear how much of an increase the $30M in funding is from what was spent on grants during the last year. By August last year for example $11M had been committed to Ethereum projects in 2018 alone.

Go deeper: read the official announcement.

Two: CZ is suing Sequoia for reputational damages

Image: Bitcoin Magazine

The CEO of Binance flexed some muscles
and filed a lawsuit against Sequoia earlier this week, claiming that they hampered his ability to raise capital at favorable valuations.

Context, courtesy of Coindesk:

The case began when Sequoia Capital obtained the December 2017 injunction order in an ex parte or unilateral procedure without notifying Zhao and subsequently filed a notice for arbitration in January 2018 as a claimant against him.

Sequoia accused Zhao of breaching exclusivity by talking to IDG Capital when still in discussions with Sequoia for the Series A round.

Three months later, following an April 11 hearing, a Deputy High Court Judge ruled in a judgment on April 24 that Sequoia “was wrong to pursue the ex parte application without notice to Zhao,” since there was no explanation or evidence as to why no efforts were made to involve both parties.

Why this matters: Binance has proven itself to be a major player, not just in the cryptocurrency markets but also in the traditional VC world. This move should not be overlooked, as it cements the power of cryptocurrency companies and sends a message that this market is one to be respected and not played with. Generally in emerging markets companies tend to be pushed around by larger incumbents and “traditional” players. This action shows the world that the cryptocurrency ecosystem is a formidable one.

Three: Dharma + USDC = 8% interest

Image: The Block

The decentralized lending platform Dharma
announced on Wednesday that it was adding USD Coin (USDC) to its platform, joining DAI and ETH as the currencies able to be lended. Lenders who commit USDC on Dharma will receive 8% interest - not a bad return when you consider the top savings rate at a traditional bank is 2.50%.

What is Dharma? Launched in early April 2019, the company offers peer-to-peer lending of assets in a non-custodial manner. In the plainest english possible basically what this means is:

  • There are two groups, borrowers and lenders.

  • Dharma is the protocol that helps connect these two groups to facilitate a loan in ETH, DAI, or USDC.

  • Dharma doesn’t actually take control over the assets - users remain in control of their private keys that grant access to the assets.

This contrasts with traditional custodial services, where lenders trust a central party to take control over their assets and then lend them out to a borrower. The central party is responsible for making sure the lender is compensated and ultimately has their loan paid back.

Decentralized lending services get around this by having pre-set loan conditions coded into the protocol via smart contracts, meaning that there is no active involvement by a central party. To make sure the borrower doesn’t run off with the assets they have to put down collateral, which is usually around 1.5 times the value of the asset they take out.

Why USDC? It’s a play to increase Dharma’s user base beyond traditional crypto users and increase liquidity on the platform. The company argues it will attract more mainstream investors who are more comfortable with using a cryptocurrency backed by US dollars, in contrast with DAI which is backed by ETH.

The big question: Who would pay >8% interest to borrow USDC? According to Dharma Business Development Manager Max Bronstein on The Block:

"“People who need to get in and out of cryptocurrency easily without getting a lot of price slippage is where we see a lot of USDC demand.”

What I’m watching: How sustainable the high interest rate offerings are on Dharma. Dharma has historically subsidized lending rates in order to capture marketshare, an unsustainable practice. As the markets mature and competition stiffens it will be interesting to see how far the rates fall.

Context: Other lending platforms like Celsius currently offer lenders 6.1% on USDC, while BlockFi recently halved savings rates for ETH deposits due to a lack of interest from the markets.

Also in the news:

Market Outlook:

Quick Take

Direction: As referenced in the last market report, once we broke the 7720 level we broke down relatively quickly to 74xx.

As a trader, it’s important to know when a thesis is invalidated, and you should be able to flip from long to short in a heartbeat. For example, the bullish thesis noted yesterday was invalidated when the triangle broke down, and it was important to note that and move positions accordingly.

There was a slight rebound in price, but on low volume and over a period of time. The market structure has turned short term bearish in an overall bull trend. I would generally consider this a no trade zone, as there’s no solid indication of future movement. If we break above 7980, I think it’s highly likely we revisit 8400. The longer we stay at these price levels, the most likely it becomes to break down based on the structure.

Key Support:  7720

Key Resistance: 7980

Overall Market: 

  • Huobi Token outperforming + on the announcement of Reserve token IEO. Stablecoins seem to be having a slight renaissance now. Ampleforth, another algorithmic stablecoin, was announced as the first IEO on the Bitfinex platform.

  • A lie can travel around the world before the truth gets its pants on: BSV is still trading up 80%+ after the announcement that Craig Wright filed a copyright on the Bitcoin whitepaper. The U.S copyright office later clarified that it does not make calls on the veracity of claims…

  • Augur down 20% since Poloniex announced token delisting last week due to regulatory reasons.

  • Holochain continues to outperform the market, up 18% against BTC today on no news and up 329% YTD.

  • Binance Launchpad coins up ~12% in aggregate today after retracing significantly from their initial rise. They are performing in a highly correlated manner, something interesting to note. It seems to be that after launching on Binance, each coin generates strong community interest from highly overlapping bases.

  • Bitcoin dominance is back on the rise, but I believe it is likely to be a short lived rise. BTC dominance increases during times of chop and high volatility, and tends to decrease during periods of low volatility. I’d expect continued decreasing of BTC volatility and therefore also continued decrease in BTC dominance.

Chart: CryptoAM

What I’m thinking today:

Does Bitcoin have a Security Problem?

Here’s a longwinded article about Bitcoin security that you might want to read. It’s very ok and uses a lot of “cop-outs” but it’s at least interesting and thoughtful and there was work put into it.

To summarize, it talks about the potential security problem that will crop up when Bitcoin block rewards go away.

For those unaware, Bitcoin generates fees for miners & secures its network in two ways:

  1. Block rewards

  2. Transaction fees

Block rewards will disappear by 2140, leaving transaction fees the only way to secure the network. The question is: will the transaction fees be enough?

Right now, the security of the Bitcoin network is mostly a function of price. If I were to write a fake formula with illustrative weights (please do not write to me saying these specific weights make no sense) for the security of the network, it would look like this:

Price = P

Transaction Volume= TX

S(x) = .9P + .1TX

Because price has a much bigger impact on security than transaction volume does. This is because the majority of rewards that go to miners are currently from block rewards. As block rewards decrease, the weight on TX goes up, and the weight on P goes down, until they settle at some equilibrium.

The article above tries to make all sorts of cases for why this doesn’t matter but the crux of the issue is this:

Will people use the Bitcoin network for transactions?

Transactions are the lifeblood of the Bitcoin network, and are absolutely needed if we want Bitcoin to succeed. This is actually the main issue with the Gold vs BTC debate. Gold can accrue value just by sitting around. Bitcoin needs to be actively used in order to keep it’s value. So where does that leave us?

Well, in a few places. As the block subsidy reduces, we will need modest increases in price or a large increase in transactions. When the block subsidy goes away, we will need large transaction volumes. This makes the purely SoV thesis a challenging argument. It however makes the digital cash thesis stronger. The end result in my opinion will likely be somewhere in between, with only large amounts of capital that pay large fees moving through the underlying protocol.

Something talked about in the article that I found interesting was the potential for a more volatile hash rate. As rewards become less standard and more unpredictable (transactions are not regular!) there will be miners that turn on their machines for some blocks and not others.

From the article:

“The volatility of fees, which seem to behave nonlinearly as blocks become full. Might lead to corresponding big swings in hashrate.” — Nick Szabo

Scarce block space is a good thing since we will see a backlog of transactions, which demonstrates future intent to reward miners, which in turn stabilizes the system. Congestion in 2017 demonstrated that the system can create and sustain a backlog.

A legitimate concern is that in a pure transaction fee security model, there will be volatility in cash flows. Transaction fees are market-centered, meaning that they go up and down adjusting to supply and demand. The base assumption is that cash flows from transaction fees will be unstable which makes the network less secure. Dan Mcardle sums it up nicely:

“As mining becomes highly commoditized with mature corporations, miners are unlikely to play short-run games, but will rather choose to mine continuously. Taking this further, as miners will likely vertically integrate with other services (ex: OTC) that become additional profit centers (meaning they’re not as concerned about the possible games to play on a block-by-block basis)” — Dan Mcardle

Miners like stable cash flows, hence why they join mining pools. They don’t play short term games trying to win a block, they socialize the winnings.

Given the worst case scenario where mining fees are unstable, it doesn’t actually undermine the system, it just makes settlement time longer until fees grow large enough for mining to turn back on. Entities, by necessity of time preference, would increase fees in response, countering.

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Nothing written in CryptoAM is legal or investment advice and should not be taken as such. CryptoAM does not make any guarantee or other promise as to any results that may be obtained from using our content. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence.

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