Weekly Insights #21

Written by on March 4, 2019

March 1: The crypto market moved down by roughly 3% this week. Interesting news this week includes Japanese “megabank” Mizuho introducing their yen-backed fiatcoin in March, Facebook said to be diving into issuing their own fiatcoin, and Ethereum successfully upgrading to Constantinople. Since we’re all for fundamentals, read about how in just under a year, it is becoming clearer and clearer (at EOS’s expense) that scalability is not just about high transaction throughput.

 

NOTEWORTHY NEWS

Japanese Banking Giant Mizuho to Launch a Yen-Pegged Stablecoin in March —Feb 21, Cointelegraph

Japanese banking giant Mizuho Financial Group will launch its fiatcoin pegged to yen for payments and remittance services today, March 1, as reported by local financial newspaper Nikkei Asian Review. In a partnership with around 60 other financial institutions, together reportedly hosting 56 million user accounts, Mizuho’s new “J-Coin” digital currency platform will reportedly directly link existing bank accounts with digital wallets. The digital coin will be managed using a dedicated mobile app called J-Coin Pay, but the underlying infrastructure used is currently not known.

XRP Listed on Coinbase Despite Violating Listing Rules—Feb 26, CCN

For years, supporters of the Ripple blockchain network and its native cryptocurrency XRP have anticipated the listing of the asset on Coinbase, the largest digital asset exchange in the US. Many investors believed that the integration of XRP by Coinbase could be considered a confirmation of regulatory clearance on the nature of the digital asset as a non-security.

OUR OPINION: While the SEC will decide whether XRP is a security, the recent listing of XRP on Coinbase goes against the exchange’s own values and rules they put in place in 2018. The so-called Digital Asset Framework laid out a series of rules that a token must follow in order to be listed by the exchange. The rule being violated by Ripple reads: “The ownership stake retained by the team is a minority stake. There should be a lock-up period and reasonable vesting schedule to ensure the team is economically incentivized to improve the network into the future.” Ripple Labs and its founders hold a large amount of XRP emission. The XRP token is a security, as it plays no role in the economic incentives of securing the network but certainly has a role in Ripple Labs’ revenue.

Facebook Reportedly Talking to Crypto Exchanges About Listing its Coin —Feb 28, New York Times

Facebook is looking to launch its own fiatcoin in the first half of 2019. It is currently not known if they intend to use a public or a private blockchain, but there are reportedly 50 engineers working on the project. Their fiatcoin will differ from current ones in the reserve currency, as they intend to peg it to a basket of currencies rather than just to the US dollar. Facebook has 2.7B monthly active users across their platforms, and a blockchain-based tokenized fiatcoin could enable international, fast, and cheap transacting, though the service will almost certainly be permissioned.

OUR OPINION: The most interesting aspect of this fiatcoin is Facebook’s large user base, which means the fiatcoin could introduce a large number of people to the concept of digital currencies, even if it’s just a permissioned tokenized basket of fiat currencies. Secondly, their choice to peg it to a basket of currencies is interesting, as it would be a novelty in this space and might prove useful for some individuals and purposes.

 


DIGITAL ASSETS ON THE MOVE

Constantinople Upgrade Activated

The Ethereum network was successfully upgraded at block 7,280,000, after months of waiting—2018 was the first year since the birth of Ethereum that the network did not receive any upgrades—and being postponed in January due to the discovery of a critical bug. The Constantinople upgrade is considered successful for now, but it will take a few days for network difficulty to adjust to the appropriate levels and for all the nodes to upgrade to the latest version. At the time of this writing, 28% of the 11,029 total Ethereum nodes are running updated clients that are Constantinople ready.

Looking ahead, Constantinople is just the tip of the iceberg for what’s in store for the future of Ethereum. This upgrade gave more time for developers to work on Ethereum 2.0 (the proof of stake version of Ethereum) while delaying the ice age and reducing the block reward from 3 ETH to 2 ETH. This “thirdening” effectively lowers the annual issuance rate of ETH to 4.40%. For comparison, annual BTC issuance is 3.85%. The current ETH issuance rate will be in effect until Ethereum 1.0 (proof of work) fully transitions to Ethereum 2.0 (proof of stake), which should happen no sooner than 2021 by rough estimates.

THE WEEK AHEAD

EOS is Crumbling Beneath its Weight and Their Social Layer is Unsustainable

EOS is popular due to its scalability in terms of transaction throughput and safety for their users in cases of lost private keys and stolen funds. While blockchain scalability does not mean only transaction throughput, EOS traded strong decentralization for higher transactions per second by using delegated proof of stake (DPoS). This consensus algorithm is not truly proof of stake, as a native coin is not directly used to reach consensus; rather, to delegate block producers, EOS’s small number of validators (21) enables much higher transactions per second compared to Ethereum or Bitcoin.

With a 0.5-second block time, the EOS blockchain is growing rapidly and has reached above 4TB in just eight months of operation. For comparison, Bitcoin has reached 240GB in 10 years and Ethereum has reached 187GB in 3.5 years of operation. For EOS, this results in a smaller number of full history nodes, which store the complete history of the blockchain, because it is simply not economical to run these nodes. Currently, only two out of the 21 elected block producers are doing so. These nodes are essential for dapps running on the blockchain, as they receive the necessary data from them. In just under a year, it is becoming clearer that scalability is not just about high transactions per second, but also about the long-term sustainability of running the blockchain in a decentralized manner, among other things like the complexity of computation that dapps can perform.

The second reason EOS is popular among its users is because of its alternative approach to the security of users’ funds. In traditional public blockchains, if a user loses his private keys or they get hacked, the funds are lost, which is not the case for EOS. In addition to validators, EOS has introduced another body, the EOS Community Arbitration Forum (ECAF), which acts as a supreme court, resolving disputes in the community. ECAF is not elected like the top 21 block producers are but rather was defined in the EOS Constitution. After ECAF resolves a dispute, they add malicious accounts to a blacklist that is enforced by block producers. Block producers must configure the blacklist into their nodes correctly, and transactions from blacklisted addresses are frozen as they are attempted to be executed. Recently,  a newly elected top block producer, Games.eos, failed to correctly configure the blacklist, and 2.09M previously frozen EOS was transferred to many different addresses across the network.

Public blockchains are designed to remove intermediaries, while EOS decided to retain them. This is just not sustainable. If they already fail to enforce their own rules now, when the project is in its first year, how will they be able to resolve all the issues and enforce them later when the blockchain has potentially many millions of users. This would result in a much larger number of issues than ECAF could possibly resolve, as ECAF is limited by human mental capacity.

 


MARKET OVERVIEW & METRICS

 

Weekly Market Overview, 22 Feb to 1 Mar 2019. Source: Coin360

Weekly Crypto Stats

  • Global network value reached $130.86B, with -2.8% weekly delta.
  • Global crypto market turnover was $26.3B, 63.43% from ATH.
  • Bitcoin dominance is 51.9%, with 0% weekly delta, and beta of 0.81.
  • Ethereum dominance is 11.03% with -4.4% weekly delta, and beta of 1.32.
  • Bitcoin hashrate is 45.27B TH/s, with 26.2% weekly delta.
  • Ethereum hashrate is 156.7K GH/s, with 3.1% weekly delta.

 


CHART OF THE WEEK

When a high percentage of Bitcoin’s market cap consists of unrealized profits, we can infer that investors are being greedy. The ratio drops as prices decline and investors become more fearful. When the unrealized gains turn into unrealized losses, we enter the phase of capitulation and apathy.

 

Bitcoin’s yearly price lows from 2012 to 2018. Source: Twitter @rallyqt

This content has been put together by Marko Štemberger and Tilen Držan. Feel free to contact us for any feedback or if you have questions.

Information provided above is not to be considered as an investment advice.

ANNOUNCEMENT

Block Analitica, the company behind Squared Capital, has just launched its digital asset metrics dashboard to the public. Though still in beta, if you are interested in a more in-depth analysis of blockchain fundamentals — everything that’s happening with stablecoins, development activity, exchange balances, and much more — we invite you to register for a free account.


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