CryptoAM: More Banks, Reliance on Blockchain, and a Chinese Crackdown

Wednesday, November 7th

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3 things you need to know:

One: 15 banks have entered the testing phase of the Depository Trust and Clearing Corporation’s main blockchain project

DTCC is building a cloud based distributed ledger for its credit derivatives trade and information warehouse; Barclays is the largest global bank involved in the trial - the other 14 institutions remain unnamed.

  • DTCC’s TIW distributed ledger will go live after 1Q2019, and an open testing phase will open by the end of the year if all goes according to schedule.

    “We are pleased to be working with DTCC, our partners and colleagues on this exciting project to bring distributed ledger technology to life in a demonstrable way that will enhance efficiencies and lower costs and risks for the industry”

    - Lee Braine of Barclays

TIW provides lifecycle event processing services for ~98% of credit based derivatives transactions globally ($11tn) - this may well be one of the most ambitious and consequential enterprise blockchain/distributed ledger projects to date!

  • The warehouse has a massive customer base of over 2,500 buy-side institutions in over 70 countries

  • This means that despite their view on crypto and blockchain, over 2,500 buy side clients will be utilizing distributed ledger technology in their derivatives transactions - all that should matter to them is the front end interface, anyways

Key buildout participants:

  • IBM for program management and integration services

  • Axoni for DLT and smart contract functionality

  • AxCore blockchain protocol

  • R3 is acting as a solutions advisor  

Two: India’s largest company is now trialing blockchain for trade finance

Reliance Industries, India’s largest private corporation and a key player in the country’s energy markets, has completed its first trade finance transaction using blockchain technology.

“This transaction validates the commercial and operational viability of blockchain as an alternative to conventional exchanges for paper-based documentation.”

India has taken a negative stance with regards to cryptocurrency, and the RBI (central bank) decided to implement a ban on crypto trading in the summer. This news, especially coming out of India, is quite encouraging, given the fact that it illustrates the general acceptance of blockchain as an emerging, revolutionary technology that can and will exist with or without the presence of cryptocurrencies.

Key details:

  • The counterparty to the blockchain powered transaction was Tricon, a US-based global chemicals distributor

  • HSBC and ING Bank Brussels facilitated the letter of credit for the shipment between the two energy giants in a fully digitized transfer of title. Using blockchain technology, the process takes up to one full day relative to 7-10 days through traditional channels

  • The use of blockchain is a significant step toward digitizing trade…The overall efficiency it brings to trade finance ensures cost effectiveness, quicker turnaround and potentially unlocks liquidity for business.” - Hitendra Dave, HSBC India Global Banking Head

Three: The People’s Bank of China is cracking down on crypto airdrops from blockchain projects.

The PBoC is going after what are essentially ICOs in the guise of airdrops. Last year, there were 65 ICOs executed within Chinese borders, and approximately 105,000 chinese residents were involved in them, contributing roughly ~$375mm (USD) to these projects. This year, projects are attempting to orchestrate pump and dump schemes through airdrop.

Malicious actors will exist in any and every market, and when safeguards are put into place, they are sure to find alternative means to conduct their desired activities. No more ICOs? Enter airdrops.

Key details:

  • The PBoC is reportedly planning to conduct an investigation into crypto firms distributing tokens through airdrops

  • In its most recent financial stability report, the bank stated that airdrops are essentially ‘disguised’ ICOs, and there are an increasing amount of these ‘opportunities’ being presented in the Chinese markets. Last year, China clamped down on ICOs; this year, the regulatory trend continues with airdrops

  • In August, the Chinese National Internet Finance Association (NIFA) included a token sale section in its website, and is encouraging residents to report potential crypto scams

Also in the news:

Market Outlook:

Quick Take

Direction: Bitcoin continues it’s slow climb upwards, and increasing volumes, alt appreciation and fundamental developments lead me to believe that a bullish test of 6800(+300) is significantly more likely than a drop down to 6200(-300).

We broke through the upper resistance painted yesterday. Next target is 6580. If broken, we would likely see more rapid appreciation as shorts begin to cover.

Key Support:  6460, 6410

Key Resistance: 6520, 6580

Actions: I will be moving out of the alts in my portfolio that have appreciated significantly, and redistributing gains to Bitcoin and other similar tokens that haven’t moved. I will be opening up small longs on BTC here, laddering them down due to an overly greedy F&G

Fear & Greed

We’re decidedly greedy today. Based on overall market structure, I’m still bullish — but I’ve laddered my longs along support levels to catch a pullback.

Here’s a reminder of what these criteria mean

CoinSavage: Truth in Crypto

There’s a big problem with crypto trading. Too many fraudulent actors. People actually take trade signals from random people in twitter— with no way to vet anything.

CoinSavage is the platform to change all of that. They have built a fantastic (and free) platform where all portfolios, trades, and ideas are open sourced and timestamped. No more hindsight TA, now you can actually see for yourself if people are performing, and prove to your audience you know what you’re talking about.

Around the corner:

What I’m thinking today:

A brief on Consensus Mechanisms

In this great post, Jordan Clifford from Scalar Capital breaks down consensus mechanisms. This is now the #1 article I send people when they ask me about consensus.

Jordan breaks down consensus mechanisms into two types:

  1. Mining algorithms

  2. Non-mining algorithms.

Mining Algorithms:

  1. Proof of work.

    PoW creates consensus in rounds known as blocks. Consensus participants are called miners or block producers. To create a new block requires solving a mathematical puzzle that is difficult to solve but easy to verify. This puzzle acts as an ongoing lottery for the right to append to the ledger. Proof of Work awards each valid block that is included a block reward, and for the first time, consensus is paid for.

    Pros: Very simple and secure. Novel approach to Sybil resistance allowing open participation

    Cons: So far economies of scale have resulted in centralization. Consumes large quantities of physical resources.

    Notable Examples: Bitcoin, Ethereum (current), Litecoin, Monero, ZCash

  2. Proof of Stake:

    Building on the concept of proof of work, Proof of Stake aims to be faster, more environmentally friendly, and more amenable to sharding — the division of labor within subgroups of a network. For the privilege of producing a block, rather than solve a mathematical puzzle, block producers vote with their stake on the blocks they produce. In PoS, it is possible to create a schedule in advance resulting in quite fast block generation times.

    Pros: Offers finality enabling sharding possibilities. Can offer fast block times.

    Cons: More complex than PoW. Nothing at stake is a theoretical problem.

    Notable Examples: Ethereum (future), Decred (hybrid PoW/PoS), Dfinity

  3. Delegated Proof of Stake (dPoS)

    Delegated Proof of Stake is a specialized form of PoS. The difference is that the majority of owners in dPoS are expected to delegate their responsibility. By limiting the number of participants, latency becomes less of a problem and consensus speeds up. If the delegates are severely limited in number, premium hardware system requirements may be expected. A limited number of block producers with top notch equipment would allow a network to run at higher throughput.

    Pros: Faster consensus since latency is less of an issue; more throughput

    Cons: Less decentralized

    Notable Examples: EOS, BitShares, Tron

  4. Proof of Space Time (PoST)

    A clever alternative to PoW, is PoST. In PoW, miners expend energy trying to solve a hard mathematical puzzle. PoST awards block rewards to consensus participants at a rate proportional to the storage they have allocated for participation.

    One of the most promising advantages of PoST is the possibility that it will remain more decentralized. A problem with PoW algorithms is that they require cutting edge specialized hardware to participate profitably. Application Specific Integrated Circuits (ASICs) are mandatory to mine Bitcoin.

    Pros: Potentially ASIC resistant. More environmentally friendly than PoW

    Cons: Unproven and complex. ASICs or HD farms could diminish benefit

    Notable Examples: Chia, SpaceMesh

Non-mining consensus mechanisms:

  1. Practical Byzantine Fault Tolerance (pBFT)

    When parties are familiar with each other and cooperative, it can make sense to abandon PoW or PoS models, and use traditional consensus algorithms. One such algorithm is an off-shoot of the original BFT family of algorithms known as pBFT. pBFT was proposed in 1999 by two MIT researchers. It requires a lot of communication overhead between participants, so it is only practical for small groups.

    Pros: Reliable consensus amongst known parties

    Cons: Only supports small number of participants; not a trustless system due to users having to trust validators

    Notable Examples: Hyperledger, Ripple, Stellar

  2. Directed Acyclic Graphs (DAGs)

    Requiring all participants to come to consensus within a certain period of time limits the throughput of a system. One novel approach is to not require a global consensus on regular intervals. Rather than batch transactions into blocks that are agreed on in a global manner, transactions are individually added to the history.

    As transactions are added, they reference prior transactions, and that gives some confidence that the prior transactions are accepted. If enough transactions are chained together on top of a given transaction, it’s increasingly probable that the network will accept the original transaction.

    Pros: Fast “confirmations” and high throughput

    Cons: Unproven in practice. Suspect immutability.

    Notable Examples: Iota, Byteball, Nano

Some food for thought: everything but Proof of Work is “unproven in practice”. Even proof of work has it’s major flaws such as centralization of mining power and energy usage. In the coming years, there will be many breakthroughs when it comes to efficient consensus mechanisms, and I believe that the cryptocurrency landscape will radically change as a result. Make it a point to document all new consensus algorithms and follow the projects that are attempting new, novel approaches. One of them may end up a winner….

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CryptoAM is a Ledger Group project. We offer consultancy, advisory and research services for established companies and start-ups interested in the blockchain & digital asset space.