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Steve Miller

Co-Founder at MPower365
Is a CFA® Charterholder and co-founder of MPower365.com. A site devoted to helping people integrate cryptoassets into their investment portfolios. The CFA designation is globally recognized and attests to a charterholder’s success in a rigorous and comprehensive study program in the field of investment management and research analysis.

Visit the site to subscribe to the newsletter and stay up to date on his latest research into cryptoasset investing.

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
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World of Crypto Round Up 1 – The News That’s Fit to Peruse

Author’s note – These snippets are intended to provide a full grasp of the linked content without needing to read in its entirety. 

Edward Snowden provides info to news outlet The Intercept on classified NSA program to compromise privacy of Bitcoin users.

Program appears to have included warrantless data collection of American users.

Starting in 2013 Bitcoin usage become a top priority for the NSA due to perceived national security concerns. Bitcoin users worldwide were targeted as the NSA powers to combat terrorism were expanded and used to justify a variety of surveillance measures to identify users and their activities across the Bitcoin network.

ACLU responds with its concerns government prosecutions proceeded without properly identifying the source of data as these enhanced surveillance measures.

Snowden’s allegations confirm what many long term users have suspected. The NSA leveraged its ability to harvest and analyze raw, global internet traffic to identify Bitcoin using its Xkeyscore (XKS) software whose existence was revealed in prior Snowden revelations.

Additional data sources included OAKSTAR, used to collect data with covert corporate partnerships and MONKEYROCKET to snatch data from Asia, Europe, the Middle East, and South America.

The NSA was not focused exclusively on transactions gathering of variety of details on users including passwords, general internet activity, and MAC addresses. MAC addresses are effectively digital hardware social security numbers and once compromised allow the NSA to track users easily over time.

Revelations affirm need for privacy coins for users focused on making transactions anonymously.

https://news.bitcoin.com/snowden-releases-nsa-documents-showing-bitcoin-1-priority/

Tennessee Passes Bill Recognizing Smart Contracts and Blockchain Transactions along with ownership rights for information secured using distributed ledger technology. Declaring data on distributed ledgers is protected with cryptography, is immutable and auditable, and provides an uncensored truth. While formalizing that smart contracts may exist in commerce, as event-driven programs, that can take custody over and instruct transfer of assets via distributed ledgers.

The bill passed unanimously in both chambers of Tennessee’s legislature.

https://news.bitcoin.com/tennessee-passes-bill-recognizing-smart-contracts-blockchain-transactions/

The Clarifying Lawful Overseas Use of Data (CLOUD) Act Passes

Almost in secret – hidden inside a spending bill of over a trillion dollars without debate. Forcing lawmakers opposed to the measure to reject the entire bill and risk a government shutdown, CLOUD expands international law enforcement powers over online activity.

It’s the result of a combined effort of Apple, Facebook, Microsoft, Google, Yahoo! and Senator Orrin Hatch, 84.

A joint statement from all five companies reads, “The new Clarifying Lawful Overseas Use of Data (CLOUD) Act reflects a growing consensus in favor of protecting Internet users around the world and provides a logical solution for governing cross-border access to data. Introduction of this bipartisan legislation is an important step toward enhancing and protecting individual privacy rights, reducing international conflicts of law and keeping us all safer.”

The major tech companies want a uniform set of rules governing international compliance laws so they are no longer involved in piecemeal litigation around their data privacy policies. The CLOUD Act represents a compromise they can live with between protecting privacy and providing law enforcement access to data.

The Electronic Frontier Foundation (EFF), views the legislations as a backdoor around the Fourth Amendment, stressing “to require foreign law enforcement to seek individualized and prior judicial review. Grants real-time access and interception to foreign law enforcement without requiring the heightened warrant standards that U.S. police have to adhere to under the Wiretap Act. Fails to place adequate limits on the category and severity of crimes for this type of agreement. Fails to require notice on any level – to the person targeted, to the country where the person resides, and to the country where the data is stored.”

Andreas Antonopoulos commented, ““The CLOUD Act passed. It destroys privacy globally, so it had to be snuck into the $1.3 trillion omnibus without debate. Encrypt. Encrypt. Encrypt. Go Dark. When privacy is criminalized, only criminals have privacy. We got sold out, again.”

Bill reinforces the need for the urgent pursuit of better privacy coins and encryption methods.

https://news.bitcoin.com/crypto-community-fears-passage-of-the-cloud-act/

Zombies eating kitties

Union Square Ventures announces investment in Cryptokitties, Because as a first use case cryptokitties scratches the surface of the broader potential for non-fungible tokens based on the ERC-721 standard.

Non-fungible means each cryptokitty is unique.  So, when a kitty is “born”, it is a one-of-a-kind digital asset, as opposed to other types of currencies or tokens that are completely interchangeable.  Every non fungible token is a unique, scarce, public digital assets.

The public part is particularly interesting.  Because each kitty is a token on Ethereum, anyone can view it and integrate it into other systems, permissionessly.

Kittyhats, developed independently from CryptoKitties, is an example of how this works. Owners can buy a hats for their kitty.

Owners don’t directly own the hats, their kitty’s do. From KittyHats whitepaper:

“When you sell a kitty, the sticker remains applied to the kitty. The new owner can choose to remove the sticker or leave it attached.”

Or, put another way:

Liad Shababo
@L1AD
You own the cat. But the cat owns the hat.

This is the beginnings of a world where digital assets can created in one place but freely integrated into other places.

The internet brought us the first interoperability revolution. Creating a world where sites could freely link to each other and be accessed globally.  The next interoperability revolution will be crypto driven.  Leveraging cryptonetworks and cryptoassets innovative solutions will be developed to shift data outside of centralized platforms and put it into the hands of users.

https://www.nickgrossman.is/2018/zombies-eating-kitties/

Short Convexity – The big problem awaiting token teams

Every team that has fundraised through a token in the last 5 years has signed up for an experiment in fundraising, cash flow generation (or lack thereof), and treasury management. And there’s a big problem they would all be wise to consider.

There is a concept in bond markets called convexity. Similar to other loans, bonds have maturites and interest rates. Because bonds are traded in secondary markets, they also have prices. Prices reflect the markets opinion on whether a bond has become more or less risky since it was issued.

As a quick example:

The relationship between the yield and the price is captured by duration, the change in dollar value per unit move in the yield. Duration plots a linear relationship between the two.

Enter convexity, convexity is the relationship between yield and duration. If a bond has positive convexity, the bond will experience larger and larger price increases as the yield falls. Conversely, as yields rise, the bond will experience smaller and smaller price drops.

If you are long convexity, your risky exposure increases as the market moves in your direction and decreases as it move against you. If you are short convexity, you become less exposed as the market moves favorably and you become more exposed as it moves the wrong direction.

As currently constructed token projects business models are short convexity. They plan to use vast sums of their own token to fund the project over the long term. As tokens go up in value, they sell to fund ongoing expenses. Becoming less and less exposed as the market moves in their favor.

During downturns it may be in projects best interest to sit on their tokens rather than liquidate them in an unfavorable environment. Potentially even supporting the market with buybacks. Increasing exposure as the market moves against them.

The takeaway: teams need to start thinking about ways for their projects to get long convexity.

https://medium.com/@jillcarlson/short-convexity-8793f18629bb

Plutocracy invades Crypto

Vitalik Buterin views coin holder voting as plutocratic and against Ethereum’s best interests. Citing EOS DPOS governance system as an example of things gone awry.

The delegate rewards for EOS are high because of its 5% annual inflation rate. So delegate competition for nodes is high and is leading to economic warfare generally along the lines of current geo-political splits. With Chinese delegates in particular feeling slighted.

Because rewards are so high. Competitors are increasingly engaging in bribery to obtain participants for there delegation. Reaping the rewards of their votes and then spreading the proceeds around to members to keep their coalition’s intact. Leading to a centralized economic model increasingly vulnerable to rent-seeking cartels.

Exposing the flaw in DPOS governance. Which is the average voter has only a very small chance of impacting which delegates get selected. So they have only a small incentive to vote based on what is best for the community. A much larger incentive exists to vote for whoever offers the highest and most reliable bribe.

Attacking is also easy. If a cartel equilibrium does not form. Attackers can offer share percentages slightly higher than 100% to capture the majority of delegate positions, and then start an attack. Repeating as neccessary post hard forks with new identities.

Given these concerns on chain governance in Ethereum will continue to be something Vitalik opposes.

https://vitalik.ca/general/2018/03/28/plutocracy.html

This is my first round up so suggestions for future direction of this space welcome. Please reach out.

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Steve Miller

Co-Founder at MPower365
Is a CFA® Charterholder and co-founder of MPower365.com. A site devoted to helping people integrate cryptoassets into their investment portfolios. The CFA designation is globally recognized and attests to a charterholder’s success in a rigorous and comprehensive study program in the field of investment management and research analysis.

Visit the site to subscribe to the newsletter and stay up to date on his latest research into cryptoasset investing.

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

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