Rating ICOs


The explosive growth of ICOs has led to some of the fascinating innovations in the internet space in recent times. There are more than 5000 ICOs listed here, and, as per a research report from NUS-Singapore, more than a million smart contracts running on the Ethereum blockchain. The report studies the bytecode from the Ethereum blockchain, and, categorizes smart contracts into various functions. What is interesting to note is that not all of them are ICO’s but some of them are behind smart apps such as Ethereum and Golem.

This space has seen many innovations in smart contracts where firms have tried to create new mechanisms for contracting such as those that relay back dividends on profits earned, or, those that promise continuous buy-backs or such. However, along with explosive unregulated growth, arrives problems of speculation, spam, and invalid ICOs.

During the initial stages of the dot-com boom, we saw a lot of firms raising money with no valid business model, or, revenue/profit generation plan. Eventually, this led to a massive crash in the stock market. To prevent such things from recurring in the crypto-space where startups or businesses that intend to go the ICO route for capital infusion, rating mechanisms are often used to judge the ICO. Almost all of these rating schemes use factors such as : a) the offering Whitepaper, b) Team’s reputation¬† c) LinkedIn Profiles d) Telegram engagement¬† e) Blog postings f) Prototype’s traction g) Prior seed or angel investors h) token sale conditions (hard cap/soft cap/flexible cap/burn rate), etc… as methods to decide a ranking.

Several of these ICO rating mechanisms now provide private (pay-walled) services to individuals and institutions willing to invest in this space.  This marketplace for ratings is slowly becoming similar to that independent credit rating agencies.

A few interesting ones that provide ratings are as follows:

Proof of Work Alternatives (and irrelevance to the future of cryptocurrencies)


Proof of work

Most cryptocurrencies today employ proof-of-work mechanisms; that evolved from Bitcoin’s original mechanism, solving complex hashing problems and consuming a lot of energy.¬† The current Bitcoin implementation uses SHA-256 .¬†This approach to confirming transactions, after validation (on the nodes) is extremely wasteful for many reasons. Crypto-currency designers and blockchain designers¬†such as Dash have created¬†incentive mechanisms, wherein¬†“node” maintainers¬†who validate transactions also¬†get rewarded, in addition to the miners.¬† Some¬†economists and a few bitcoin champions have argued that¬†this¬†conversion of energy to “bits and bytes” through hashing is what provides the fungible value to Bitcoin as an asset.

The Bitcoin core-dev team led by luke-jr (one of the highest contributors) to the Bitcoin core code, have proposed algorithms to update the current Proof of work system. This system hasn’t as yet gained approval of the core – team, miners, etc. however, at some time in the critical future, this might take shape.

Issues with Hashing

a) Firstly, solving the hashing problem consumes significant energy, and this consumption increases as the difficulty of the solution¬†increase at regular intervals. By some estimates, the¬†largest miners combinedly surpass¬†power consumption in some of the world’s nation states.

b) Despite spending the energy there is a possibility that all transactions included in the newly mined block can be abandoned for many reasons, one of which includes the race to include only the longest block with the most number of transactions for reward. In Bitcoin this leads to orphaned blocks. In Ethereum, this leads to blocks called uncle-blocks that are not entirely abandoned but are connected with the main blockchain.

c) Thirdly, the rewards for mining reduces over a period of time, and halves every few months. The next day for halving rewards for the bitcoin blockchain. The assumption of most miners is that this reduction in rewards will be offset by the positive growth in USD valuation of the cryptocurrency.

d) Lastly, as the difficulty levels increase, and the rewards from mining reduce,  equipment used for mining would become obsolete.  This creates a marketplace for mining wherein a few specialists with the ability to keep up with the technology changes needed to mine would dominate.

e) To top it all, there are incentive alignment challenges in these markets, wherein the few miners who dominate the mining market would wield enough controlling power (as in network hash rate) to block any new development initiatives by the core development team. These handfuls of miners can pretty much block or allow any change to the protocol layer.

Lastly, this process of earning disproportionate rewards has led to significant investment in the ASIC technology, and the over-demand for GPUs that are used for mining. Almost the entire of GPU inventory sometimes get bought out by miners, leaving very few of them for the gamers.

To solve this problem of extreme wastefulness, and making crypto-currencies more efficient, there is this massive initiative of the ethereum network towards proof of stake. More on this approach later.


Dilineating the Blockchain from Cryptocurrencies


Congressional Hearing

Anyone working in the blockchain sector has to listen to the congressional hearing about cryptocurrencies, that conclude a couple of weeks back.  In addition to the debate about the legalities of Cryptocurrencies, and, ICOs, there were presented; many interesting industry applications were presented too.  The interesting piece about the benefits of the blockchain starts at 1 hr: 25 minutes about here.. and ends 2 minutes later.

Walmart-IBM-Blockchain application

Recently, Walmart and IBM demonstrated how the blockchain reduces shipment tracking time to about 2.2 seconds from 2 weeks. In providing traceability of transactions through a chain of records, and, almost instantaneous validations, the blockchain reduces the query times across data stores.  Industries that traditionally have relied on record keeping and verification benefit the most from the Blockchain.

Improvements in tracking transactions

An article here cites that the blockchain can tremendously improve efficiencies in the food chain; right from the farmer till the end consumer. In addition, due to the persistence of identity and records on the Blockchain, the data can be queried, validated and fetched almost instantaneously. This creates immense possibilities, for firms, moving large commodities across geographic boundaries and locations.  Such tracking capabilities that are dependent on multiple players integrating and updating their logistic management systems are now vastly simplified through the implementation of smart contracts.


One of the important takeaways from any regulatory hearing (including this one) was the proposal to legally dileneate Cryptocurrency and the Blockchain. What this means is that regulation (when it arrives) will treat blockchain applications differently than cryptocurrency. Many blockchain applications do not need tradeable tokens. Though creating a token of value is beneficial for many things such as
a)  setting up contracts between different economic actors,
b) making network effects fungible for all users by tangibly rewarding stakeholders,
c) providing a viable funding mechanism for the business,
d) Locking-in customers by increasing switching costs.
Overall, the blockchain applications can influence the entire supply chain industry. This delineation when regulation hits this nascent sector will hopefully allow innovation to continue un-hindered.

Open Source Development and behaviors – It pays to be nice!

Behavioral game theorists have long studied, how behaviors of open source developers, lead to either the success or failure of software projects, that are open source.  While amicable, courteous and teamwork have their benefits, these could also lead to groupthink and cause the team to overlook major flaws in design such as security flaws. Another school of thought has led to the belief that Рa strong emergent leader from within the open source development community e.g. Linus Torvalds, or, Alan C Cox has helped shape the thinking and bring divergent views to a concur. Such concurrence Рan equilibrium state of the system, has propelled many long-term projects to significantly leapfrog the competition and accrue immense value to society.

The birth of Bitcoin and its handing over to a group of diverse developers, by Satoshi Nakamoto,  has recently shown how decentralized decision making can potentially fail. For most of 2017 Рwhat has played out on all major developer forums for Bitcoin, was an intense battle of minds. Groups of developers pushing their own versions of development systems to solve the scaling problem. Some of these agendas even led to a fork in the main network Рcreating a new coin altogether. Observers can argue that this fight has led to a sudden increase in value to the system.

The ecosystem and its core development team – despite having put in significant thought into each performance upgrade, has not been able to push forth its scaling agenda in the form of Segwit2X (or something similar). This despite the overarching commitment from the Consensus New York Agreement to roll out the performance upgrade.

I wish that 2018 will bring about a new structure to the development of open source crypto ecosystems, and,  some working mechanism by which sparring developers will not try to dominate each other. Eventually, being nice to each other and reaching an agreement will potentially propel software forward. There is an example in Linux, that has survived large challenges from many quarters and has survived for over 30 years now to become the world leading server operating system. Similarly, there is Apache and the group of developers led by the Apache foundation who have written and maintained world-beating software Рyear after year.

Ripple Effect and Price irrationality of Bitcoin

Irrationality in prices

Behavioral economists have tried to correlate and predict price movements in markets with behaviors of traders. Since most such analyzed markets were in stable economies that were efficient and usually upheld the rule of law, irrationality was quickly absorbed by markets. Irrational exuberance, as in the times of the dot-com boom quickly devolved and disappeared. All this was good, as long as the markets were local (geographically) and as long as traders were local firms that were under the purview of the law of the land.

With Bitcoin, things have changed.

With a 24X7 market and a globally available(distributable) asset, these behavioral inconsistencies can potentially last for a long long time. Off late, this irrationality and exuberance have meant arbitrage opportunities for other asset classes in nations where political and economic instability have taken place.

Such instability has had a tremendous spillover effect on the price of Bitcoin. Over the past 3 days, since the regime was toppled in Zimbabwe, citizens have Рattempted to move their assets into Bitcoin. Exchanges for the local currency saw brisk trades giving it a rise of over 200%.

Ripple Effect

However, these prices are mostly local and do not spiral out to global markets, on account of low demand for such expensive assets. For example, the markets in Zimbabwe have had less than monthly transaction volume of USD 1 Million. Compare this with an average daily transaction volume of greater than 1.4 Billion USD for Bitcoin globally.

This clearly shows that though local markets can, at times, in the face of sudden economic uncertainty exhibit irrationality in prices; global markets will not be affected unless volumes are large.

You can consider this as similar to a ripple effect on a large pond of water. Unless and until the stone thrown into the pond is large enough the ripples will not reach the edge of the pond. In Physics and Economics, this is modeled as a Ripple Effect.

Question: How much of a volume is needed to move the price up irrationally for Bitcoin in a global market?

Technology Maturity and the Blockchain’s stability


Markets are rife with price speculations about Bitcoin and Ethereum. The last few days saw a unique phenomenon in this market – one where all miners, exchanges, and developers came together to accomplish Segwit2X roll out¬†onto the Bitcoin Blockchain. Unlike Ethereum, which has a loveable and mature leader, Bitcoin’s development team has changed over the years. As the value has increased, more and more power has gone onto the miners of Bitcoin. In fact, this parody website Bitcoin Obituary¬†that has recorded the death of Bitcoin¬†140 times – as reported by mainstream media i.e. Forbes, Yahoo! news, CNBC, NYtimes, WEF, etc.. ¬†Here’s the most recent obituary.

Complex Technology Maturity

Any new (complex) technology that depends on its network adoption, should have two concurrent mathematical time series functions expressing their adoptions.

The first time and most prominent one is the diffusion curve. This curve represents the value the technology provides to its users. There has been enough debate and literature around diffusion of innovation and this curve.

The second – and – most often ignored time series function is that of technology maturity. It takes many years for a technology to mature to operate behind the scenes, and, to become so ubiquitous that problems with the technology (or bugs in code) do not affect its users.

For example, consider your desktop computer or mobile phone. The TCP/IP network layer works mostly seamlessly without the need for any restarts. nearly flawless (or mature) TCP/IP is what makes it possible for anyone to depend on the email or browser or even stream videos or play games. The complex piece of software splits each packet of data into chunks and sends it over a network. On the receiving side, the same complex piece of code reassembles these packets and surfaces it to the application reading it.

Linux TCP/IP

Linux has been around for about 27 years, and the TCP/IP protocol that formed the backbone of the internet has been around for more than 40 years. One would expect that technology which powers 80% of all internet traffic (mobile and desktop based), and millions of apps should have zero bugs in it. The fact that TCP/IP itself is older does not help. Despite, its age, and the number of developers, apps, and installations TCP/IP on linux still has several bugs. The list of all TCP/IP bugs can be seen from Bugzilla. As recent as 2016, there have been bug fixes for TCP/IP code that could potentially cause a system to function.

Perspective for the Blockchain

To put this in perspective with the Blockchain’s technological maturity – society is at the very early stages of Bitcoin (about 7 years old) and Ethereum(just over 3 years old). The adoption curve is still at the very early stages (less than 0.1% of the world’s population own it), and, so is the technology maturity curve (the scale of transactions and the possibility of applications on the Blockchain is less than 0.1% of all monetary transactions therein). This volatility is expected for the next several years atleast.

The only difference this time is that this technology is fungible and both the adoption curve and technological maturity curve affect its value at any given point in time.

The Blockchain solves Byzantine general’s problem – part 2

Trust and the Blockchain

In my previous post here, I had written about the two key problems the Blockchain solves. In this post, I’ll talk briefly about the Byzantine General’s problem – an intricate Distributed Computing problem facing all distributed systems. ¬†On the Blockchain, “trust” shifts from a DBA (or a database administrator or a trusted third party) to a set of computers that concur about the true state of a data residing in a database.

Byzantine General’s problem

The Byzantine general’s problem described in detail¬†here¬†gives us a two-part¬†problem statement.

Firstly, consider the context: There are ‘n’ generals attacking a castle. Unless and until all of them act on the same plan, the¬†castle will not fall. The generals communicate amongst themselves using messengers. It is known that a few of the ‘n’ generals are traitors, and will never follow the plan. In such a scenario here is¬†two things a solution to this problem should accomplish.

a) all generals decide upon the same plan of action.


b) a small number of traitors should not be able to cause the loyal generals to adopt a bad plan.

Byzantine general’s problem in the context of the Blockchain

In the context of the Blockchain – an openly accessible ledger stored on multiple hosts all interconnected, and, claiming to have a copy of the exact same ledger (or the state of truth), the Byzantine General’s problem is a potent factor. A few nodes could have wrong (or incomplete data) and could attempt to send false transaction data to other good nodes on the network.


Bitcoin scaling agreements – Consensus 2017

Consensus 2017 concluded this past week in New York. Off the many excellent talks like the one here from Dr. Arvind Krishna at IBM¬†or the one from ¬†Stefan Thomas, Ripple’s CTO here¬†Consensus 2017 marked a watershed moment in the history of computing per se – in terms of participation from the industry, from the research community and the overall crypto ecosystem. Many agreements were reached – and development paths for many altcoins such as LiteCoin, Ripple, etc.. have been put forth in front of the public.

Off the many trade agreements that were reached, there was one that was notable. The Bitcoin scaling agreement amongst the miners, developers and hosting partners of Bitcoin. The Segregated Witness¬†proposal rollout agreement was reached – as stated here in this Medium post¬†.¬† This is going to be the first consensus based¬†hard fork for Bitcoin. The debate around BTU (Bitcoin Unlimited) versus SegWit2MB has with this (hopefully!) been settled. As of now 83.5% of the world’s hashing power – has agreed to this hard fork.

What we’re seeing now is really very large delays in transaction confirmation. For example, most exchanges or places that accept Bitcoin such as miners are forced to alter policies on payment using BTC because of transaction delays. The transaction delays increase costs for all parties involved in a bitcoin based transaction – thus NOT living upto¬†Satoshi’s original vision for¬†Bitcoin. The following is an excerpt from his seminal paper…

“Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model. Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for nonreversible services. With the possibility of reversal, the need for trust spreads. Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party.”

With SegWit2Mb, once the hard fork is rolled out we will see Bitcoin scale to¬†unlimited number of transactions at a much larger pace than ever before. This was one of the major problems with Bitcoin – documented in one of my research papers which I will share – a presentation off shortly…

This was one of the major barriers for adoption of Bitcoin that we documented in one of our research papers, that I presented recently at POMS 2017.


Cloud Mining

Cloud mining is a unique business.

HashFlare demo

Firms such as Genesis mining and Hashflare, have arrived at very unique business models never seen earlier in the internet infrastructure industry.

These firms raise capital from the public based on mining capacity measured in Tera Hashes (for Bitcoin) and Mega Hashes (for Ether, SCrypt, Dash, etc.). Then these companies return – pretty much on a daily basis – a share of the revenues( coins earned) by the pool back to the investor. The return on investment is issued in coins (E.g. ether, dash, BTC).

Investors can either withdraw daily returns on investment or reinvest back into their mining pool – at a transaction cost. The amount returned to the investor is in the range of 40% – 60% of the mined capacity.

This slows down as the network becomes larger, and, at some point where the cost of mining overtakes the transaction cost of the deposit to be made – mining stops and the returns on investment stops.

These models can scale significantly because there is neither a lower limit nor an upper limit on how many pools or Tera Hashes an investor can invest in.

ICO list

What started off as a Bitcoin/Blockchain experiment of creating Cryptocoins has now started to affect new venture funding.

After the success of the largest ICO in history – that of the DAO, what we see here is this:

  1. Tens of companies and projects are choosing the ICO route to raise capital instead of seed capital, venture capital or debt.
  2. Here is a primer about modern methods of raising seed capital, including SAFE 
  3. Essentially all of these are contracts between the funder and the funded entity, that is legally enforceable.
  4. With ICO’s these rules get rewritten, since geography or jurisdiction usually no longer holds ¬†true.
  5. Most times as in the case of DAO, investors were global and invested even small amounts of money (as little as 10$) into the funding round.
  6. Enforcement organisations such as the SEC, ESMA, SEBI, etc.. that track funding and capital raising are still ambiguous about what happens to the ICOs and capital raised.

( How do they regulate a capital raising round that is global in nature and where people issue colored coins or tokens  in return for money, using contracts that are automatically enforced on a network. )