Coinbase Approved to List Securities and IBM Launches a StableCoin

Dear Readers,

Happy Tuesday! Kodak's blockchain venture has collapsed. This is such a big surprise! (Sarcasm)


Coinbase Approved to List Securities


Coinbase's purchase of a broker-dealer, alternative trading system and a registered investment advisor was approved yesterday. This approval comes after Coinbase announced they were looking into adding other tokens. The move into listing securities on their platform is a significant one. Security tokens seem like a natural evolution in ICOs. At the moment, many ICOs skirt security laws by allowing non-accredited investors to invest.

Most ICOs have little to no protection for investors. Security tokens solve many of the problems currently associated with ICOs. It would allow a legal way for any investor, regardless of income, to own a piece of an early-stage startup, immediate liquidity and protect investors from scams. The most logical way to do this is through the Reg A+ process. For those who aren't familiar with the Reg A+ process, it's like a mini IPO. Here are the highlights:

  • Raise up to $50 million in a 12-month period using a “public solicitation” of its shares and have the offering be exempt from SEC and state securities law registration.
  • Confidentially submit its offering memorandum to the SEC
  • Immediate liquidity which isn't subject to accredited investor laws
  • Combine public funding (through Reg A+) with private funds from venture capitalists to create a larger round of fundraising

I've been a big fan of the Reg A+ process. I wrote about the process here for the Gab ICO. The one downside to a Reg A+ offering is that the company must have two years of audited financials. If you think about it though, this will help create more quality ICOs. A company will raise a private fundraising round in anticipation of an ICO. Once, the two-year threshold passes, they will raise a Reg A+. 

This process will also help accelerate investment in the space. Security tokens don't have a lot of the regulatory ambiguity that ICOs have. Institutions will be cleared to invest in them because they know they are regulated and will have access to third-party custody. I'll give an example of a potential security token offering that Coinbase might have. 

I own 100 residential homes in Arizona. I want to sell some of these so I can receive liquidity, but don't have enough homes to create a REIT. I'd launch a security token. I'd be able to sell a portion of my ownership to investors, the investors would have protection because SEC laws govern the sale, and I'd also be allowed to issue dividends from the rental income. It's a perfect compromise to the IPO and ICO process. 


IBM Launches a StableCoin


Coindesk reported that IBM is launching a stablecoin. Here are the details:

Announced Tuesday, a startup called Stronghold is launching USD Anchor, which will run on the rails of the Stellar blockchain and use its consensus mechanism to verify transactions. The token will be backed one-for-one with U.S. dollars held at a Nevada-charted trust company called Prime Trust, which in turn will deposit the cash at banks insured by the Federal Deposit Insurance Corp.

New York City-based Signature Bank was originally expected to be providing the federally insured backing of the stable coin, but it appears to have backed out of the partnership at the eleventh hour, according to IBM.

Let's digest this. This token sounds very much like Tether but being built on the Stellar blockchain. I don't have a problem with Stablecoins that are backed by collateral assets. It's a perfect solution for solving the Fiat-Crypto bridge. For example, Binance doesn't allow fiat deposits. Many users will then be subject to the daily fluctuations of the cryptocurrency markets. If Binance lists a trusted stablecoin, users won't need to transfer their tokens off the exchange to enter a fiat position. IBM is tokenizing fiat currency. 

Reddit explains the use case for IBM's stablecoin:

A huge upcoming feature in XLM is the atomic swaps so say you want YEN, the stellar network will find the cheapest way to get you YEN through multiple paths (pathfinding), it may end up being USD->XLM->EURO->BTC->ETH->YEN for an example, but it is all one transaction to you and if any part fails, the whole transaction fails.

Remember, the whole use case here is simply trading value from one entity to another, so cross borders payments where there is no USD in say Africa or Russia, you can quickly and cheaply (basically free) send value anywhere as long as there is a way to retrieve the value on the other end - such as an anchor in that country’s native currency.

Who knows if this will be a success. I am skeptical of IBM's effort in blockchains. Their focus on permissioned blockchain seems more like a marketing ploy than a true investment in innovation. I hope this stablecoin project proves me wrong. 


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Block.One Fundraising

Dear Readers,

Hope you had a good weekend. Blackrock is apparently exploring cryptocurrencies. On to the daily update. I will try to have a few columns tomorrow. It's been a busy day!


Block.One Fundraising


Block.One, the publisher behind the EOS blockchain protocol, has raised additional funding from Peter Thiel, BitMain, and other investors. I have been critical of EOS in the past. No company should raise $4B in a seed round. It creates perverse incentives for the team. Instead of trying to build a successful startup, the company can overspend on salaries and other perks. The founders get rich while the investors lose money. 20 years from now, the company can announce they ran out of money, but Dan Larimer (founder of EOS) and company will have already cashed out. As Notorious BIG said, "Mo Money Mo Problems." 

Many people might think, "why does a company need to raise money after raising $4B?" The $4B was raised in a token sale, and this current fundraising round is for the equity component of Block.One. This fundraising is interesting for a few reasons. One, the investors could be getting special rights that make the investment attractive. Secondly, the investors could be looking to hedge against other cryptocurrencies like Bitcoin. Thirdly, there is an ideological aspect at play. Block.One writes on their site, "Block.one designs free market systems to secure life, liberty, and property." This quote aligns perfectly with the Libertarian-leaning, Peter Thiel. 

Back from the conspiracy theories. Here is the likely reason behind the investment. Bitmain creates mining machines for cryptocurrencies. Bitmain also mines cryptocurrencies. This reasoning makes Bitmain the ideal candidate to be a block producer. The equity investors will earn a consistent income from being a block producer. Their equity stake in Block.One creates an incentive for Block.One to encourage holders to vote for Bitmain's block producer. I'm not saying this is happening, but it makes sense. Bitmain can milk the network for the next few years. If it succeeds, it's a new revenue source and the downside is minimal. 


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Short-Selling Cryptocurrency and Augur Post-Launch

Short-Selling Cryptocurrency


Forbes wrote an article titled, "How To Short Sell Bitcoin, And Why More People Aren't." For those who are new to trading cryptocurrency, you might log-on to Coinbase and wonder, why can't I go short? The simple answer is that the infrastructure for cryptocurrency trading is immature. 

I want to explain how shorting works. Pretend I am going to short Coca-Cola stock. I'd first need to enable margin trading on my account. Margin trading allows an investor to lend from the broker. Anyone who'd like to short a stock needs to obtain margin trading because they could lose more than 100% of their position (e.g., if the stock more than doubled you'd owe more than 100% of your principal). I'd then enter a trade on my account, and I'd be short Coca-Cola. Behind the scenes, the broker is lending you 10 Coca-Cola stocks, and you are immediately selling them. When you want to cover your position, you'd buy (also known as covering) the Coca-Cola back in the open market and exit out of the position. 

So why can't Coinbase or other exchanges faciliate lending cryptocurrency? Bitcoin and other cryptocurrencies are incredibly volatile. It's not unlikely to see moves of more than 10% in one day. This volatility rarely happens in other markets. As such, volatile assets are dangerous to short because the counter-party (the one lending the asset) takes on a lot of risks. Some companies will allow you to short cryptocurrencies, but you'll have to pay a high rate of interest. If I can't short Bitcoin or other cryptocurrencies through Coinbase and other brokers, how can I go short? Great question, here is the answer:

  1. Contracts for Difference - A contract for difference allows you to short Bitcoin without actually taking a loan. In essence, you are making a deal with a counter-party and hoping that they will honor the agreement when push comes to shove. 
  2. Future trading -  CBOE and CME offer futures on Bitcoin where you can short the futures. Technically, you aren't shorting Bitcoin, but Bitcoin Futures (which closely tracks the price of Bitcoin).
  3. Option Trading - Ledger X allows you to buy puts and calls on Bitcoin. 
  4. BitMex - Technically, BitMex's contracts are considered futures, but they operate differently than traditional futures because the contracts are in perpetuity and act more like swaps. 
  5. Short ETF/ETNs - Instruments like Greyscale's Bitcoin ETF which trades over the counter can be shorted. However, the ETF doesn't always correlated with the price of Bitcoin. 

As cryptocurrency markets mature, expect traditional exchanges to offer the ability to go short. For now, you are left with the options above.


Augur Post-Launch


A few days ago, I wrote about Augur's launch. Today, Coindesk published a story about how Augur surpassed Crypto Kitties in daily active users (DAU). I'm not a huge fan of using DAU as a metric for dApps. The way DAU is measured is by looking at on-chain transactions. If I log onto a dApp, but don't complete an on-chain transaction, I am not considered a user for that day. Augur has about a few hundred DAUs. Coindesk writes:

That makes Augur a big fish in a very small pond, though, with just 300 wallet addresses (a flawed proxy for users) interacting with its smart contracts. It does better – third place – in terms of the volume of ether those smart contracts have processed, as the figure is 910 ETH (or around $400,000). By comparison, CryptoKitties saw just 23 ETH (or $10,000) in volume.

Let's assume all the wallet addresses are unique users and let's assume that each account wagered an equal amount of money. This would mean that the average user wagered ~$1,333. This would be an impressive number if REP (Augur's token) wasn't valued at $330MM. Let's look at a wager placed a few days ago:

France played Belgium and about ~$17,000 has been wagered on the result. However, the resolution period hasn't ended. 

Screen Shot 2018-07-12 at 3.40.47 PM.png

These are bugs that should've been fixed months ago. This Reddit post summed it up, "put yourself in the shoe of the end user": 

I think you've done a terrible job aiding and guiding users through the installation and setup process. Unless you're an Ethereum developer, how on earth would you know what to connect to? "use infura.io" doesn't help anyone. What was the reasoning behind launching the app without any preconfigured settings for mainnet?

I'll bet you 9/10 users will never get past the first page on the app because they don't know how to connect and sync and your guide doesn't mention, and the people who do get past that hurdle will not get past the cert error. The barrier of entry for using Ethereum for regular folks is steep enough to begin with. You need to take the end user by the hand and explain step by step, field by field or people will never figure this out.

People talk about the wonders of cryptocurrency and blockchain, but if a person with "basic" computer skills can't use your product, it will not succeed!


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“Blockchain” Phone and Opera Expands into Cryptocurrency Tools

"Blockchain" Phone


Late last year, Sirin Labs announced, the Finney. The Finney would be the world's first blockchain phone. Sirin's ICO raised over $150MM. CNET wrote:

Sirin Labs, the company that two years ago launched the ultra-secure, ultra-expensive ($14,800) Solarin smartphone, has now finalised the design and specification of its next offering. FINNEY looks very similar to Solarin, but costs nearly 15 times less ($999) and features a secondary slide-out touch screen that provides a window on an embedded cold storage crypto wallet. It's this, plus extra functionality provided by Sirin OS -- a security-hardened fork of Android 8.1 -- that underlies Sirin Labs' claim that FINNEY is the "first-ever blockchain smartphone".

Why would I want to carry cryptocurrency on my phone? If a thief knew that I had a Finney, they could threaten me to give up my private key/password and steal my cryptocurrency. Are people going to shell out $1,000 so they can have "blockchain" on their phone? I would wager that the average phone user could care less if blockchain was a feature on their phone. It's unclear how the phone even uses blockchain. A blockchain, at its core, is just a list of records, but what records is the phone keeping? Is it recording my calls, my texts or what applications I use? Who has access to this blockchain? 

The CMO of Sirin Labs wrote this about Finney:

We were wondering what prevents crypto-currencies from hitting the mass market, and we identified two main problems," Nimrod May, chief marketing officer at Sirin Labs, told ZDNet. "One is around security: for the first time in history, users need to take care of their own assets, without the ability to approach a central organisation like a bank. The other main problem with blockchain is the user experience: we [crypto enthusiasts] manage to obtain our cryptos, we know where to trade them, we understand the technology behind it -- but it's still something that's considered complicated for the average user."

Cryptocurrencies aren't meant to be traded. They are intended to be used. When someone buys Bitcoin, in theory, it's meant to be used for payments or a store of value. Bitcoin or any other cryptocurrency will lose its value in the long run if its only use case is speculation. Secondly, are we suddenly going to trust Sirin Labs with our cryptocurrency? Sirin isn't solving the trust problem even if the CMO thinks it is. How do we know someone isn't putting in malware during the supply chain process? 

My favorite part of the CNET article:

To fund FINNEY, Sirin Labs held an ICO based on its SRN token, raising a total of $158 million by the end of the sale on 26 December 2017. What kinds of people invested? "It's a mixture between institutionals and big crypto investors -- about two-thirds in our case -- and crowdsale," said May. And who is the phone for? "When you deep-dive and try to understand who is the ideal customer, they are millennials," replied May.

If the sole way to purchase Finney is through the Sirin token then why would you be bragging about institutional and big cryptocurrency investors buying it? Does the company not want wide distribution? Institutional investors are buying it to speculate. The token's limited distribution doesn't help Sirin Labs sell the phone or grow the token. I love how he added Millennials in there. He needed to fill his buzzword quota.

This phone is nothing more than a gimmick for Sirin Labs. They took advantage of a hyped-up ICO market to raise a lot of money. At the moment, a blockchain phone makes no sense. Blockchains are used to create trust. I admit that I don't trust Apple, but I don't Sirin Labs either. Sirin Labs control the "blockchain" on the phone. There is no guarantee that they aren't using your data either. Maybe, Lionel Messi will convince me to buy the phone. 


Opera Expands Cryptocurrency Tools 


When I was younger, I used to use my mom's Macintosh computer. I was not too fond of the Safari browser. I discovered Opera and became a big fan. Once, Chrome came out, I started using that and haven't looked back. I'm glad to see Opera is now expanding into cryptocurrency and maybe it'll give me an excuse to switch back. Opera's crypto wallet will only exist on Android to start. This marks the first time a browser has ventured into web 3.0. As I wrote above, I still think mobile cryptocurrency wallets are a bad idea especially if you are holding a significant amount of cryptocurrency on it. It would be the same as carrying a lot of cash in your wallet. A person can physically threaten you and take your cryptocurrency. This attack is called the $5 wrench attack:

security.png

I should be clear; technically Opera is focusing on the Ethereum blockchain to start. If you want to hold Bitcoin or Litecoin in your Opera wallet, it's a no go. Opera recently received a significant round of funding from Bitmain and plans to go public shortly. Public market investors have minimal options for investing in a "blockchain play," and Opera could be using this momentum to make it a more attractive IPO. For cryptocurrency/blockchain to grow, we need non-blockchain companies to build in the space. 


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Augur Launches and ICO Graveyard

I've been writing the newsletter for over a year. The newsletter has been focused on curating content. As the cryptocurrency space has grown, I realized there is no newsletter that focuses on analyzing the daily news from that day (similar to Stratechery.) Moving forward, I plan to choose 2-3 topics and analyze the topic. I hope you enjoy and as always I am open to hearing feedback. By the way, I am looking for a new name for the newsletter. If you have a suggestion, let me know.


Augur Launches


Today, Augur, announced in a Medium post that it was finally launching. Augur's first version won't have a web version. If you want to run it, you'll need to access it through Github and then run it locally. Augur was one of the first teams to raise an ICO in the form of a "utility token." I think the underlying idea behind Augur is a smart one. Augur allows anyone to wager on a prediction. The use cases are endless. For example, derivative markets, are mostly available only for institutional investors (think Big Short). Augur would allow retail investors to access these markets. For example, a shrimper in Louisiana might be worried about a hurricane. The shrimper can wager that a hurricane would occur and it would help offset the losses from his shrimping business. According to one economist, the derivative markets are valued at $1.2 quadtrillion. You can see how Augur can be very useful even if it just focuses on the derivative markets (which is unlikely). 

Despite the multitude of potential use cases, Augur has a significant amount of barriers it needs to overcome to succeed. Brendan Bernstein .of Tetras. tweeted about many of the issues today (he is also one of my favorite people to follow on Twitter) which I summed up below:

  • Augur doesn't have a web-hosted version. You need to run your own node or rely on a centralized node to use Augur.
  • Augur is slow to sync and will most likely get slower over time as more users join the platforms (Blockchains aren't optimized for speed)
  • How do we know the resolution methods are honest? (For example, if I bet on the Lakers winning, how do we know the source where they obtain the score is accurate. This problem is known as the Oracle problem.) 
  • Are the gas fees too high? One wager takes up 75% of a block (using Augur's recommended gas fees)

As of 11:54 PM EST, there are ~$1,800 worth of predictions in 37 markets occurring on Augur. Most of the predictions are focused on either sports betting or cryptocurrency markets (which is to be expected). The launched version of Augur is disappointing. Peter McCormack summed it up well,

So an initial look turned into a very quick review of Augur, sorry but it is full of elementary UX mistakes. I am sure the Crypto elite will be congratulating them or making excuses about it being early, give it time etc...

This is not ready for release!

If this application didn't launch on a blockchain, would observers be celebrating its launch? Most startups have one chance to impress a user. If the UX is poor, they will stop using it and not return. Augur holders are incentivized to promote Augur no matter how bad the application is because they want their REP (Augur's cryptocurrency) to increase in value. This issue is one of the downsides of cryptocurrency investing. People will promote poor products for their own self-interest. It's hard to know if a product is useful if the person recommending it is biased. 


ICO Graveyard


Two researchers from Boston College released a report that states 56% of ICOs fail within four months. 4,003 ICOs since January 2017 have raised over $12B. The average return between buying an ICO and the day's opening market price is 179%. The study used Twitter to measure failure rates. If a company stopped tweeting after four months, it assumed the token failed. 

The report confirms what many expected, a lot of ICOs are raising money and then disappearing into obscurity. This problem is occurring for a couple of reasons:

  1. There is little downside in failing. If you raise $50MM, management can pay themselves the money and shut down the company. Investors have little ability to recover their investment.
  2. ICOs have immediate liquidity so founders can sell their tokens immediately with little incentive to increase price (some ICOs have restrictions around this though.)

On the other hand, one can understand why the ICO markets have raised a lot of money over the past 12 months. Pretend you are a farmer from Iowa who dabbles in the stock market. You want to invest in the next "Bitcoin." An ICO allows you to invest in an early stage "company" (some could argue protocol is the better word) and maybe find the next Bitcoin. While the logic might sound sensible, it's flawed. Many ICO valuations are raising at absurd valuations so achieving the exponential returns that BTC or ETH returned is next to impossible. Ari Paul wrote about this phenomenon here

Back to the study. There were three compelling graphs which I shared below:  

Screen Shot 2018-07-10 at 12.41.44 PM.png
Screen Shot 2018-07-10 at 12.43.22 PM.png
Screen Shot 2018-07-10 at 12.43.42 PM.png

t's no surprise that the United States and Russia have the most ICOs. I expect that if this data includes ICOs after April 30, 2018, that Southeast Asia would have a higher amount of ICOs. The United States was an excellent breeding ground for ICOs because it allowed companies to raise from retail investors. ICOs were popular in Russia because it gave startups access to international capital that they previously didn't have access to before. ICO returns for opening day-trading were scattered, but over the course of more than four months, ICOs significantly out returned Bitcoin. I expect that Bitcoin probably out-returned the cumulative returns of the ICO data set over 250 days. 

ICOs are still in the early stages. "Popular" dApps like CryptoKitties have less than 250 DAU (this # is based on on-chain transactions so it could be flawed). Users are investing in ICOs to make money, not for utility purposes. The failure rate will remain high until users adopt tokens for their intended use.


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