Circle research

Weekly Crypto Recap 1/4-1/10

Know & go

  • Top story of the week: Ethereum will undergo the scheduled Constantinople hard fork on January 16, 2019.
  • Three things to know: Three things to know: (1) Ethereum Classic experienced 51% attacks this week (2) Ethereum could undergo two "contentious" hard forks on Friday, January 11 and Saturday, January 12 (3) ETH could implement an algorithm that makes GPU mining more profitable.
  • Chart of the week: ETH transactions vs. ETH transaction fees (underlying data provided by Mosaic.io).
  • Market snapshot: Total crypto market capitalization is around $123 billion at press time, down 4.1% w/w. BTC is trading at $3662 (down 3.6% w/w), ETH is at $128 (down 15.8% w/w). BVOL (the rolling 30-day annualized Bitcoin volatility as calculated by BitMEX) is down slightly at 77% vs. 83% last week.
    (As of 1/11 at 10:15AM)

Weekly market snapshot

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This week, Mosaic provided us with data allowing us to compare ETH's average fee per transaction in USD relative to daily transactions on Ethereum. While average daily transactions in December were 49% lower relative to average daily transactions in January, the average fee per transaction in December was 96% lower than the average fee per transaction in December.

Chart sources: coinmarketcap.com, coinmetrics.io, mvis-indices.com/indices/digital-assets

Top Stories

ETH Constantinople hard fork

Ethereum's next major update (Constantinople) will occur via a hard fork at block 7,080,000, estimated to take place on Jan 16, 2019. Constantinople is step two of the Metropolis phase, with step one, Byzantium, taking place in 2017. Constantinople is an anticipated Ethereum upgrade and part of the regular maintenance of the network. Thus, it is not expected to result in two chains, though it is difficult to predict what will happen at the time of the upgrade.

Constantinople includes five updates (EIPs) that mainly aim to optimize performance. The hard fork was originally slated to take place at the end of Nov 2018, but was delayed due to technical problems in the testnet phase. The five EIPs to be implemented are as follows:

  • EIP-145: This proposal plans to make information processing (bitwise shifting) on Ethereum more efficient to optimize gas costs.
  • EIP-1014: This proposal was created by Vitalik Buterin to move one step closer to state channels (like Lightning Network on Bitcoin) and their off chain transactions. Technical terms: introduce CREATE2 opcode for state channels.
  • EIP-1052: This opcode (EXTCODEHASH) aims to optimize contract code verification.
  • EIP-1283: This introduces gas metering (to the SSTORE opcode) to improve the cost/complexity of contract storage.
  • EIP-1234: This delays the difficulty bomb by 12 months and reduces block reward from 3 to 2 ETH per block. This is likely the most contentious piece of the upgrade.
Digging into EIP-1234

The reward is being reduced in response to the delay of Proof-of-Stake (aka Casper) and Ethereum's high inflation rate (6.2%), which has pushed its supply over 100 million. The update, which reduces block rewards from 3 to 2 ETH, is expected to reduce inflation to 4.5% (and thus reduce dilution). The argument against reducing the block reward has been that miners could leave because their revenues will fall (unless the price of ETH rises to offset the decline in block rewards). If miners leave (hash rate falls), the network would be less secure.

The difficulty bomb is an update where the difficulty would become so high that it would be impossible (and unprofitable) to mine blocks. The intention of the difficulty bomb was to motivate the Ethereum community to transition to PoS more quickly. If the difficulty bomb was implemented too far in advance of the switch to PoS, Ethereum would enter an "ice age" where the difficulty would be too high, preventing transactions from being processed and making the blockchain unusable.

According to this thread, the reward reduction and difficulty bomb delay were likely bundled into a single EIP to increase the chances of its success as one component (reward reduction) is not in the interest of miners and the other component (difficulty bomb delay), is in the interest of miners. A key reason that the chain is unlikely to split in two is that there is no incentive for miners to stay on the current chain with a difficulty bomb programmed in.

Additional Ethereum hard forks

Ethereum Classic Vision or ETCV (Jan 11): ETCV claims that it maintains true decentralization like ETC, while implementing performance and scalability upgrades like PoS and sharding faster than ETH. ETCV also proposes no reduction in block rewards, intended to win over Ethereum miners. However, it is unclear how ETCV intends to realize these and other goals, and who the team behind ETCV is.

Ethereum Nowa (Jan 12): According to the Ethereum Nowa website, the changes vs Ethereum include faster transition to PoS and scaling to 20,000 transactions per second, though no timeline is given. Ethereum Nowa initially detailed the team behind the project, but it was later discovered that pictures of the individuals on the team were stock photos. Nowa has since taken down the Team section on its website.

The legitimacy of the claims made by these hard forks is vague and questionable, and thus far, most exchanges have not announced support for them. This could change if either of the chains get sufficient traction/turn out to be legitimate.

In other news

  • Bitwise filed an S-1 with the SEC to list a bitcoin ETF, with the underlying index tracking spot prices from multiple exchanges and physically settled futures contracts. Source.
  • In the 52nd Ethereum core developer meeting, developer Hudson Jameson said they would tentatively go forward with implementing ProgPoW. Lane Rettig said they are "leaning towards adding it unless something major goes wrong--but it will take a few months and things can change". ProgPoW would make it easier for GPU miners to secure the blockchain. Source.
  • Ethereum Classic experienced 51% attacks with multiple 100+ block reorganizations. According to Coinbase, $460,000 was double spent as a result of the attacks. According to Crypto51, it costs $4,300 per hour to 51% attack ETC (at the time of writing). Source.
  • ShapeShift laid off 37 employees (a third of its workforce), citing the crypto bear market. Source.
  • Ledger revealed new bluetooth enabled hardware wallet, Ledger Nano X, at CES. The wallet will be able to store apps for up to 100 crypto assets. Source.
  • Qtum introduced Qtum-to-BTC atomic swaps to its mainnet using hash time locked contracts (HTLC). Source.
  • Beam developers discovered a vulnerability in Beam wallets. Source.
  • An anonymous trader discovered a bug on DX.Exchange (a Nasdaq owned exchange that facilitates trading in tokenized versions of top stocks) that has been leaking sensitive user information. Source.
  • CoinFLEX, based in Hong Kong, plans to offer physically settled BTC, BCH, and ETH futures. Other exchanges including Bakkt/ErisX will also offer physically settled futures but will be regulated in the US. Source.

Crypto funding

  • Canaan is considering a U.S. IPO as soon as 1H19 after abandoning plans to IPO in Hong Kong. Source.
  • The Ethereum Foundation awarded a $5 million grant to be delivered in tranches to Parity Technologies to fund its work on Casper, sharding, light clients, developer tools, and more. Source.
  • Veil, a prediction markets and derivatives platform built on Augur, 0x, and Ethereum, announced it's seed round led by Paradigm and including Sequoia Capital and 1confirmation for an undisclosed amount, and mainnet launch on January 15, 2019. Source.

Global regulatory roundup

  • Switzerland's former finance minister, Ulrich "Ueli" Maurer is now the president of the country, which could make the country even more friendly towards crypto. Source.
  • The FSB, consisting of all G20 nations, said cryptocurrencies don't post a threat to global financial stability. Source.
  • Colorado introduced the Colorado Digital Token Act last week, that would provide cryptocurrencies with limited exemptions from securities registration and licensing requirements if passed. Source.
  • The Indian government could legalize cryptocurrencies under strict scrutiny and regulations. Source.

What we’re reading

What we’re listening to

Circle in the news

Where we’ll be in January

  • Asia Financial Forum, 1/14-1/15, Hong Kong
  • Crypto OTC Roundtable Asia, 1/19-1/20, Singapore
  • Binance Conference, 1/21-1/22, Singapore
  • World Economic Forum Annual Meeting, 1/22-1/25, Davos, Switzerland
  • Paris FinTech Forum, 1/29-2/1, Paris, France

If you have any thoughts or questions, please reach out at [email protected].

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