CryptoAM: Twas the Thursday before Consensus

Thursday, May 9th

Twas the Thursday before Consensus and all the crypto townsfolk were merry. The one time a year when the suits of crypto, the flip flop wearers of crypto and everyone in between gather to celebrate the industry…or so the tale goes…

CryptoAMers in NYC next week let us know on our forever
🔥 telegram group where we’ll be coordinating a catch up!

Three things you need to know:

One: Binance Gets Hacked

As many people know by now, Binance had a rough Tuesday. Hackers gained access to hundreds (or thousands) of user accounts and managed to extract passwords, API keys and 2FA secret keys. Hackers managed to withdraw 7000BTC (which is the entire size of the Binance hot wallet) and move into their accounts.

While not a traditional hack (Binance’s infrastructure was not compromised, user accounts were), it still displayed a shortcoming of Binance's ability to detect abnormal behavior, and is now a black spot on Binance's otherwise pristine record. CZ admitted that the hackers exploited weak points in Binance’s infrastructure. Binance is offering to cover all losses through their Secure Asset Fund for Users (SAFU), so no balances will be affected. Their API and Withdrawals/Deposits will be down for a week.

This is actually the second “hack” that Binance has experienced. The first “hack” also involved compromised user accounts, although the hackers were stopped by Binance’s algorithms. These two hacks took place in the following manner:

  • Hackers phish user accounts

  • Hackers identify a few accounts with high withdrawal limits (>100BTC)

  • Hackers move money from others accounts into the high withdrawal limit accounts via trading

  • Trading attack: have all high withdrawal accounts place really high asks on illiquid coins (like 100 BTC for Viacoin…)

  • Have all other accounts complete those asks, transferring BTC to the high withdrawal accounts

  • Withdraw the BTC collected!

The hackers this time clearly learned from previous mistakes. They executed this attack flawlessly.

While the markers reacted badly at first with Bitcoin trading down ~2% and BNB trading down 10%, both assets ended the 24 hours after better, with Bitcoin flat and BNB down only ~5%. In fact, Bitcoin over the last two days has not only shrugged off the news, but actively gained in the face of the hack.

Why this matters for you: This hack drives home the importance of risk management in cryptocurrency. Even the best exchanges cannot save you if you choose to engage in risky online behaviors. Use a password manager, use 2FA on an app (not tied to your phone), and make sure you’re following the rules of good operational security.

From a market perspective, this reinforces that the bottom is probably in.

Another controversial point: a blockchain re-org. This one created a lot of discussion of Twitter. The consensus here: possible with a larger theft of BTC, but not likely. Here’s the original tweet that started the discussion:

Two: Facebook expands Whatsapp team by 25%

Image result for whatsapp payments

Facebook continued its push down the payments rabbithole yesterday by announcing that it was increasing Whatsapp staff by nearly 100, with the intention of developing a new Whatsapp mobile payment feature for more widescale use.

Side note - for those unaware, Facebook owns Whatsapp and Instagram.

Close to 1 million people have already trialled the payments feature in India, with the beta being launched there last year. Zuckerberg’s rationale and vision behind this move is clear:

"I believe that it should be as easy to to send money to someone as it is to send a photo.”

This isn’t a striking revelation to the crypto community, who have been echoing this sentiment for years. However it does again show Facebook’s intent for the payments industry, a large part of which revolves around the introduction of its own stablecoin called Project Libra.

What I’m most interested to see is what sending the stablecoin between users in different countries looks like. Anyone who has sent a sizeable crypto transaction knows the anxiety associated with making sure each digit in the address is correct. Putting to one side the potential concentration of power, when it comes to designing easy to use products for widespread adoption, there aren’t many better than Facebook.

See the video of Whatsapp payments in India.

Three: tZERO falls well short of projected investment by fund

Image result for tzero

Nothing is ever set in stone until the contract is signed. That’s a key takeaway after GSR Capital closed a mere $5 million investment in tZERO, one of the most prominent security token trading platforms. tZERO is a subsidiary of whose billionaire CEO, Patrick Bryne, is a prominent blockchain evangelist.

The breakdown:

  • GSR was originally supposed to invest $404 million in the company at a $1.5 billion valuation back in August. Term sheets were signed.

  • That was downsized to $100 million in an MOU in March at the same $1.5 billion valuation. Another firm, Makara Capital, was brought in to co-invest with GSR.

  • That agreement also fell through. In April Bryne’s stated that GSR was still obliged to purchase $30 million worth of tZERO tokens on May 6, as per the original agreement in August 2018.

  • That also didn’t happen. The $5 million deal finalized this week was an equity investment, with tZERO letting GSR out of all their previous contracts.

Why this matters: Security token platforms were hot last year but there haven’t been many prominent success stories yet. The failure of the tZERO/GSR deal, and the subsequent reduction in the valuation of tZERO, raises interesting questions about whether investors share the same optimism for these platforms as they did last year.

One Fun Thing: The Aliens Among Us

As per Bloomberg:

For the last several years, the U.S. military has observed an increase in what it calls “unexplained aerial phenomena.” The rest of us may know them by their more common name — unidentified flying objects — and we should all strive, as the Navy is doing, to take these reports more seriously.

Sometimes, according to the Washington Post, well-trained military pilots “claimed to observe small spherical objects flying in formation. Others say they’ve seen white, Tic Tac-shaped vehicles. Aside from drones, all engines rely on burning fuel to generate power, but these vehicles all had no air intake, no wind and no exhaust.” They also appear to exceed all known aircraft in speed and have been described by a former deputy assistant secretary of defense as embodying a “truly radical technology.”


Also in the news:

Market Outlook:

Quick Take

Direction: We’re above 6000, this cannot be understated. We performed an extremely important S/R flip, bouncing off the 6000 level before continuing higher to 6050. It’s likely that we continue this run up to the 6500 level, where we will encounter strong volume resistance. I’m very bullish on continuation, and will be until the parabola drawn above is broken.

Key Support:  6000, 5800

Key Resistance: 6300, 6500

Overall Market: Altcoins are going to die for the next few months. Consider this your warning. I know I’ve been saying that scaling into alts is a good idea, and I do still think so.

There is a smart way and a reckless way to scale! The smart way is to set limits at key support levels and wait. The reckless way is to market buy.

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 major flaws such as centralization of mining power and energy usage. 

Delegated Proof of Stake has seen some mild success with EOS, and there are many different Proof-of-Stake protocols launching in the near future which I will be watching with interest. 

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. PoW is just the first step, and while it’s the best as of now I’d wager that 50 years from now it’s likely we have discovered a more efficient consensus mechanism.

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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