Circle research

Weekly Crypto Recap 10/19-10/25

Know & go

  • Three things to know: (1) Multiple regulators (FATF and Japan’s FSA) commented on crypto regulation this week, (2) More news about traditional equity funding (Algorand & dYdX), (3) Coinbase and Circle launched a new JV (CENTRE Consortium). More below.
  • We attended Web3 Summit in Berlin this week. Key themes included governance, interoperability scalability, privacy, and more. Highlights below.
  • The total crypto market is fairly flat w/w. 40 of the top 100 by market cap are trading up in the last 24 hours.
  • BTC volatility pushes lower. The spread between the 10-day volatility of the NYSE FANG+ Index vs. BTC rose to a record high of 46%. BTC’s 10-day volatility hasn’t been this low since October 2016 (Bloomberg). Another measure of volatility, BVOL (the rolling 30-day annualized volatility as calculated by Bitmex) fell below 30% on 10/21 and was 26% as of 10/25. Prior, it was in the 32%-37% range since 10/5.

Weekly market snapshot

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Chart sources: coinmarketcap.com, sifrdata.com, Circle

Web3 Summit

We attended Web3 Summit, organized by Web3 Foundation, on October 22nd to 24th in Berlin, Germany. Key themes at the conference included interoperability, governance, scalability, privacy, and more.

Web3 Foundation is building Polkadot in partnership with Parity. Polkadot is an interoperability solution that connects chains with different consensus mechanisms and state machines and helps chains pool security. Polkadot uses Parity Substrate as its underlying foundation. Substrate is a customizable technology stack or set of libraries that makes it easy for developers to build blockchains. Substrate is architected on WASM (or WebAssembly). Here are additional highlights from the conference.

Title: WebAssembly for Web 3.0
Speaker(s): Alex Beregszaszi (Ethereum/Ewasm), Peter Czaban (Web3 Foundation), Sergei Shulepov (Parity Technologies), Lane Rettig (Ewasm)
Highlights: WebAssembly (Wasm) is a universal language that opens up the scope of programming languages to write smart contracts. Thus, the Ethereum community began working on the implementation of Wasm in Ethereum, aka Ewasm, because EVM has many flaws, does not provide ideal performance and is not extensible. WASM also has significantly more tooling around it and proponents believe it will result in a much bigger ecosystem than EVM would allow.

Title: The Why and How of Governance – Let’s Talk Risks and Rewards
Speaker(s): Vlad Zamfir (Ethereum), Gavin Wood (Parity), Arthur Breitman (Tezos), Adrian Brink (Cryptium Labs)
Highlights: The panel focused more on the challenges we face when discussing governance. Although there are many ideas, it’s still very early. The ideas need to be tested to determine what works and what doesn’t work. Additionally, it will be difficult to find a solution that works 100% of the time and we should consider accepting a solution that works most of the time.
Here are a few tidbits from the panelists on specific challenges in governance.

  • On voter apathy – The underlying assumption of this question is that governance is democratic and vote-based. Gavin Wood highlighted that he doesn’t think forcing stakeholders to vote (i.e. by making them pay) would yield the right decisions.
  • On delegation – Delegation allows stakeholders to give a proxy the right to vote on their behalf. The challenges with delegation are that (1) delegates could become apathetic and (2) delegators could become apathetic about choosing and updating their proxy.
  • On usage-based voting – An example of this is using gas used as a way to determine the weight of a vote. The risk is that richer stakeholders who have more *gas to blow* could sway results in their favor. The question that we don’t have an answer to is how much is a burned fee worth to one versus another.

Title: STARK – Zero-Knowledge Proof Protocol
Speaker(s): Eli Ben-Sasson, Avihu Levy (Starkware)
Highlights: Starkware has been working on developing zk-STARKs to improve upon zk-SNARKs (cryptography used by ZCash to enable privacy) and other privacy mechanisms. Here are a few takeaways from their presentation: (1) ZK SNARKS require a trusted setup and scale linearly with computation time. (2) Recursive ZK SNARKs need a trusted setup, but it can be made small. The challenge is that the proving time is long – if you have a long proving time, the quasi-linear quality of verification might not even yield scalability. (3) Monero just introduced bulletproofs to enhance privacy. While bulletproofs don’t require a trusted setup, verification time scales (super) linearly with compute time. (4) With ZK STARKS, the key advantages over ZK SNARKS and Bulletproofs are scalability (verification time goes up logarithmically aka more slowly) and quantum resistance.

Title: The Goals of Governance
Speaker(s): Matthew Di Ferrante (ZK Labs)
Highlights: Governance aims to create a robust process to recover from mistakes. Incentives are challenging in governance because what’s desirable to one side is often undesirable to the whole. Additionally, those who are most vocal are not necessarily the best informed to make governance decisions. For example, fund recovery affects layer 1 transaction finality and the benefit is the rescue of lost funds. However, the risk is that this action changes a fundamental property, which means the action can also be exploited for the negative. Matthew Di Ferrante believes it’s better to make a bad choice with good governance than to make a good choice with broken governance because it’s very difficult to recover from misplaced trust.

In other news

  • The Financial Action Task Force (FATF) stated that countries need to implement and enforce more concrete regulations on cryptocurrency exchanges, wallets, and other crypto firms to prevent crimes using crypto assets such as money laundering or terrorism financing. The FATF is a global AML/CFT standard setting body. (Elliptic)
  • Japan’s FSA delegated regulatory authority to the Japan Virtual Currency Exchange association (a self-regulatory organization) to police exchanges. (Reuters)
  • Square made the documentation, storage and tools for it’s cold storage solution (Subzero) open-source on Github. Square uses Subzero to hold bitcoin assets on its users' behalf in an offline environment based on a hardware security module (HSM). This is the same technology Square uses to store encrypted keys for its other payments services. (Coindesk)
  • Algorand announces a $62 million equity investment from a global group comprised of VC, crypto-first companies, and financial services companies. dYdX raised $10 million from a16z and Polychain. Traditional equity funding has gone up this year as funding via ICOs has declined.
  • 115 deals involving crypto or blockchain have been announced, on pace to hit 145 by the end of 2018, up from 47 total deals in 2017 (+209% y/y). (CNBC)
  • On 10/22 Binance announced that it will list Decred (DCR) on 10/24. The volume jumped from a daily average of ~$600k to as high as $6 million and DCR closed up 34.5% on 10/23. (CCN)
  • Monero implemented “bulletproofs” to improve Monero’s privacy features via a software upgrade last week (10/18). Since then, transaction fees on Monero have fallen from $0.54 on 10/18 to ~$0.02. (Coindesk)
  • Tether has redeemed a large amount of tokens in the past few weeks (i.e. they have been taken out of the circulating supply and placed in treasury). As a result, they destroyed 500 million USDT from the treasury. The current treasury balance is at around 467 million USDT. (CCN)
  • Coinbase received approval from NYDFS to serve as a custodian for cryptoassets in New York. (Coindesk)

What we’re listening to

Circle in the news

  • Circle and Coinbase co-founded CENTRE Consortium, a JV aimed at establishing a standard for fiat on the internet. CENTRE's first initiative was USD Coin (or USDC) and Circle became the first issues a few weeks ago. With this announcement, Coinbase is making USDC available to users of Coinbase Pro and Coinbase.com. Users can now redeem USDC for dollars and vice versa on both Coinbase and Circle. (CNBC)
  • Jeremy Allaire, Circle’s CEO, provided his thoughts on the FATF’s commentary on crypto regulation. He believes the rules should also cover the issuance of digital money by private companies (i.e. ICOs) and exchanges and how they deal with market manipulation and customer identification. (Reuters)

Where we’ll be in October

  • Crypto Challenge Forum - London, UK, 10/28-10/30
  • #DeFi Summit - Prague, Czech Republic, 10/29
  • Hong Kong FinTech Week - Hong Kong, 10/30-11/2
  • DevCon 4 - Prague, Czech Republic, 10/30-11/2

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

Disclosures

Reports, market insights, and other information (“Information”) provided by Circle Internet Financial Limited (“Circle”) or its affiliates have been prepared solely for informative purposes and should not be the basis for making investment decisions or be construed as a recommendation to engage in investment transactions or be taken to suggest an investment strategy in respect of any financial instruments or the issuers thereof. Information has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research under the Market Abuse Regulation (EU) No 596/2014. Information provided is not related to the provision of advisory services regarding investment, tax, legal, financial, accounting, consulting or any other related services and is not a recommendation to buy, sell, or hold any asset. Information is based on sources considered to be reliable, but not guaranteed, to be accurate or complete. Any opinions or estimates expressed herein reflect a judgment made as of the date of publication, and are subject to change without notice. Trading and investing in digital assets involves significant risks including price volatility and illiquidity and may not be suitable for all investors. Circle and its affiliates trade and hold positions in digital assets and may now or in the future trade or hold a position in an asset that is the subject of Information provided. As a result, Circle or its affiliates may be subject to certain conflicts of interest in connection with the provision of Information. Circle will not be liable whatsoever for any direct or consequential loss arising from the use of this Information.