Crypto

The Salience of a Crypto-Bans

Road image with crypto coins symbol

The recent news-bites from a variety of outlets citing unnamed government sources introducing a bill in the Indian Parliament about banning cryptocurrencies in their entirety seemed to make news waves. So much so that it was assumed that Bitcoin price dropped a whole 10 percentage points because of this… however, one has to note that crypto-exchanges in India account for less than 1% of the global trade. Indian customers own only about 1.4 billion – 2 billion in domicile, which is a small fraction of the 1.2 trillion dollar market capitalization of all cryptocurrencies globally. Trading volumes are still in the millions of dollars for the entire country, whereas the top global exchanges single-handedly have several billion-dollar trades in a single day. Not to mention that custody businesses and such have not yet started in India overall.

While established stockbrokers and old economy veterans would vouch for a ban, citing lack of “value”, lack of “production functions” or “hugely speculative market behaviors among traders”, these criticisms have been tried and tested. So much so that there is an entire website dedicated to obituaries here: https://99bitcoins.com/bitcoin-obituaries.

By banning cryptocurrencies – Firstly, governments will move the entire sector into the black market. For example in Venezuela where a dictatorship deemed that cryptocurrencies were to be banned, people stored Bitcoin on mobile phones, traded for it in US dollars and escaped the country. Similarly, in Nigeria where mail scammers were banned from converting crypto into fiat by banning exchanges, peer-to-peer money transfer increased manyfold.

Secondly, banning will forfeit innovation in many sectors, such as decentralized finance, which provides individuals an opportunity to borrow against collateralized assets. Governments will miss out on capital gains, tax revenues, and other kinds of income taxes gained from people who are employed in this sector. This change in lending and consumer loan behaviors will prevent large-scale loan scams that have caused bank after bank from collapsing in India.

Thirdly, web3.0 which is about the decentralization of the internet where no single monopolized entity can control the gateways to the internet will completely exclude India. For example, today almost all data are controlled and owned by foreign and multinational companies possibly in foreign data centers. In the great west vs. east internet, wherein China runs its own internet behind the firewall, and collects and analyzes large troves of information about foreign citizens, whereas the US runs a similar operation to to control user data. web 3.0 apps can allow individuals to control their own data. With Web3.0 and decentralized search engines, blogging platforms, multimedia websites and apps, gaming platforms, and such these data will be encrypted and stored on decentralized nodes. Web-3.0 which connects to wallets requires that users pay small amounts of gas fees or transaction fees from their crypto-wallets using public cryptocurrencies. This prevents large issues such as spam and other malfeasance remnants from the past.

Fourthly, Financial inclusion by not involving private or public banks will remain a distant dream. With 200 Million people, un-banked, cryptocurrencies will provide a mechanism to enable the remotest person to access money without needing a bank account. Similarly signing up using complex procedures that governments require for accessing bank accounts will be entirely avoided. In addition, when banks and financial institutions collapse, people lose their money. Cryptocurrencies and their derivative software allow individuals to not only access their money but also have the ability to transact with it.


Fifthly, Last but not least is the concern about money laundering and cybercrime.Often mainstream media (possibly paid media) cites money laundering as the most common use case for cryptocurrencies. While a large amount of recent criminal activity such as cyber-attacks which blackmail users to pay in crypto-etc. have been detected. Such instances is still a small fraction of the money laundering that takes place through other means. . Many innovations in crypto-analytics such as chainalysis, etc. monitor public blockchains and provide law enforcement a quicker and faster route to capture money laundering instances to prosecute. In fact, the DEA and other authorities have seized millions of dollars worth of cryptocurrencies in the past few years using a combination of these techniques.

Sixth, Considering the percentage of money laundering happening with fiat currencies vs. cryptocurrencies, cryptocurrency-based money laundering is just a trickle. In addition, crypto-money laundering is tractable at entry points such as gateways which convert crypto tokens into fiat currencies. Specifically, when regulated exchanges exist, all of this information is accessible and disclosed by exchanges to tax authorities on a daily if not weekly basis. having access to this information combined with the public nature of the blockchain provides authorities operating in the income tax sector a once-in-a-lifetime mechanism to detect and prevent such instances. In addition to that, if the money laundering or crypto-malfeasance exceeds the tolerance levels of society, a technical change made on the blockchain can rollback such a change or exclude bad-actors entirely.

Seventh, With innovations happening in the design of next-generation cryptocurrency protocols where the crowd of developers, i.e., the protocol enforcers themselves penalize illegal behavior. As a result, incentives to cheat or extract illegal rents in this ecosystem drastically reduces. Comparing this with money laundering in terms of hiding physical assets such as land-records ( or cash or gold ) that individuals carry on their person, or hide under other pseudonyms or in the names of other people, cryptocurrency-based money laundering is a small fraction of the actual money laundering that happens.

Money laundering is a real problem but is more easily detectable with cryptocurrencies.

The PayPal effect on Cryptocurrencies

Pay pal crypto effect

As someone who studies cryptocurrencies, it is again a measure of maturity when a major peer to peer or business integrated financial application integrates cryptocurrencies. Paypal is the first of those businesses which are public that has decided to integrate cryptocurrencies. Such a move serves them multiple benefits. Firstly, currency markets have been slower to integrate i.e., transaction fees between EU banks and US banks continue to remain significantly high. Secondly, seamless inter-geographic trade is still not possible in most of the world ,since many currencies are not convertible to other currencies directly or indirectly even by Paypal.
As the internet and ecommerce grows – it is now possible through paypal to start paying for goods and services in cyrptocurrencies especially when these goods and services are offered in cryptofriendly regions such as south korea, japan or most of europe. Missing out on this market would have been a huge loss for any peer to peer financial business.

Nevertheless paypal has bought in more than 350 million global users who can potentially buy, sell and transfer cryptocurrencies through paypal’s network. This sudden addition of 350 million users onto the cryptocurrency network, has created additional demand for scarce assets such as bitcoin. It is only a matter of time before major global banks and banking networks and applications such as point of sale systems integrate with cryptowallets. Thats when the true mainstream adoption will happen.

Is there really a migration from Eth1 to Eth2?

ETH1.0 TO ETH2.0

Eth2 is A separate Chain

While everyone waits for a quick roll out onto Eth2, it is important to note that Eth2 is a separate chain by itself. Eth1 will continue to run, with its millions of dapps (and smart contracts) off a separate chain even after Eth2 is fully functional in the next few years. As of now the testnet is labeled Madella. The whole idea here is to have Eth1 and Eth2 run parallelly and application writers migrate their dapps over to Eth2. However, new dapp writers can start working with Eth2 as and when the entire main-net is live. As of now, i.e., phase 0 the development team is treading cautiously into migrating and getting the test infrastructure live, to check for any kinds of vulnerabilities or issues with this network.

Users who want to move from Eth1 to Eth2

Users who hold atleast 32 ETH’s can migrate ONE-WAY onto the ETH2 experimental beacon chain with validators, which will become live when a certain number of validators get on live.

https://ethereum.org/en/eth2/the-beacon-chain/

It is important to note that this is a one way migration i.e., those who chose to convert ETH1 to ETH2 will not be able to come back to ETH1. Additionally ETH2 is not yet offered for sale on exchanges. Over the next few weeks (possibly by Dec 1st) as the 16384 validators become live (or funded with approximately 16384 * 32 = 524288 ETH (or approximately in today’s valuation 250 Million USD), then the beacon chain becomes live,. with different shards (or subgroups of nodes) handling processing of transactions for smart contracts. Once rolled out the beacon chain and ETH2 will significantly increase the speed of processing and will enable a whole set of applications in the real world decentralized finance world and otherwise to operate seamlessly.

VALIDATORS

As of this week the seeding of ETH2 has started and as of the time of this writing approximately 9300 validators are live.
Here’s a list : https://beaconscan.com/validators

Additionally, if anyone wants to become a validator on the beacon testnet there are clear instructions on how to do it here: https://www.coincashew.com/coins/overview-eth/guide-how-to-stake-on-eth2-with-lighthouse

Why Emerging Economies need to invest in, legalize and regulate Blockchain and Major Cryptocurrencies?

Brics flag image

In this article I shall focus about the BRICS nations as they are the largest emerging economic bloc.

There have been talks of banning, opening up and re-banning the crypto-sector in India. Similarly there have been ambiguous laws about cryptocurrencies in china – which for the most part controls the entire mining network of Bitcoin, and possibly many other networks with the largest mining companies and hardware producers, exchanges operating from China or by Chinese nationals. In fact the largest crypto-exchanges both by daily trade volume and by market capitalization are operated by Chinese nationals (or former Chinese nationals). Some of the largest cryptocurrencies are operated by Chinese nationals as well. Another case is that of Russia, that has invested a lot of time in legalizing and to some extent regulating cryptocurrencies. Similarly Brazil hosts some of the most innovative blockchain experiments including legalizing land records on blockchains. With all such innovations happening,

Why should BRICS economies care about this technology?

  • Firstly, Cryptocurrencies are slowly becoming an alternative financial asset, similar to gold, diamonds, platinum – only that its properties make it more difficult to detect, control and ban. Even if countries were to legally void out cryptocurrencies, the ease of owning these assets for any individual or citizen would make it difficult to detect or control. In India during the 1980’s and 1990’s the government had imposed tremendous amount of taxes on importing gold, which led to an increase in gold prices, while giving birth to a whole range of gold-ornament firms – some behemoths worth more than several billion dollars just because they were able to “bring in” or “arbitrage” gold prices from international markets. Such legal requirements often – at the cost of preventing – normal retail customers from acquiring an asset will create an elite set of individuals who will possibly monopolize this market. Banning any economic asset for ever – has never been a possibility historically….
  • Secondly, stifling innovation in sectors that are heavily corruption ridden or asymmetric information driven, with virtually no legal oversight creates a bane to society. For example, the real estate sector and property registration issues in the emerging economies have long been an eyesore to the efficient functioning of markets due to heavy policy dependence. Decentralizing and plugging in blockchains has demonstrated significant efficiency into this sector.
  • Thirdly, being home to the largest technically capable information technology specialists in the form of programmers, designers and creators of software, these economies can rapidly scale to true products as has been demonstrated by many large exchanges and DeFI innovations that are shaping today’s world. If governments were to ban this technology or its associated crypto-currencies, they would be denying this huge population of technology professionals a true first chance at the leap. For long, hugely regulated telephone networks, service delivery systems such as utility had bought India and Brazil to a bottleneck. By the time liberalization happened – overnight after realizing the benefits of these technologies, it led to rampant “renting” by few vested parties denying ordinary citizens of the true right to access.
  • Fourthly, proper regulation and appropriate enforcement of financial instruments in this sector will lead to a huge tax collection for the government. An outright ban would leave huge amounts of money on the table. Not only that, properly regulating exchanges and using intelligent platforms such as chainanalytics and other financial tracking systems, money flows can easily be tracked back to owners much more easily than physical assets that are often hidden behind layers of owners. Thus proper financial regulation will bring in the necessary control and enhance government tax collections.

Insights from Ethereum Analytics

What is truly amazing about Ethereum Analytics on ethinfo.com is that it provides data backed evidence of all aspects of the blockchain ecosystem. As we’re ending 2019 – here are some insights:

  1. The network transaction fees has remained mostly constant for all of 2019 except for occasional spikes indicating that there is no surge in the number of transactions happening on the network.
Network fees

2. The total ethereum network utilization chart shows that the ether network utilization has been between 80 and 100 for almost all of this year, with some instances where the network utilization has been upto 98%.

The above image shows how much of the ethereum network is spread around the world. What is interesting to note is that despite the severe ban on “Cryptocurrencies” and other allied technologies in mainland china, there seems to be more than 1073 ethereum nodes active at this point. However, it is likely that these nodes are being run out of Hong Kong’s datacenters and not on mainland china. Similarly, India has about 160 ethereum nodes active at this point – despite the legal ambiguity.

The above graph shows that the overall network difficulty as measured in TeraHashes has continuously increased over the past year.

In conclusion – we have a network that supports cryptocurrencies that is sufficiently decentralized and is bursting at its seams in terms of network throughput with the utilization of about 90% with near-constant/predictable transaction fees. If this network moves toward Proof of Stake and some of the changes such as sharding were to play out on schedule, we will see a significant number of apps being deployed on the global platform.

Earning interest while you HODL

currency and coin image

Cryptocurrencies and primarily Ethereum backed ones create new modes of earning interest. What was once an ICO backed increased adoption of cryptocurrencies – after being hyper-regulated, and banned by countries, has now transformed into an economy of regulated less riskier Decentralized Finance.

The premise for earning interest in cryptocurrency markets is simple, and below I list a few means to do so* . As a disclaimer, users who choose one of these means do so at their own risk.

  • Crypto-Exchanges and Margin Trading
    • Writing a crypto-exchange allowing traders to trade coins in exchange of small commissions per trade. There are more than 100+ decentralized exchanges which use smart contracts to swap one cryptocurrency to another. This approach needs deep expertise in a variety of areas including cybersecurity. The list of known ones is here (State of Decentralized Exchanges)
    • Margin Trading – On exchanges such as Poloneix.com users can lend their HODL-coins to others who trade on their behalf.
  • DeFI interest earning applications
    • With applications such as compound.finance, nexo.io, celsius.network and a host of others, users can invest their HODL -coins and earn interest off those coins based on rates determined by the network. These applications provide extremely high liquidity and enable users to withdraw the very same day.
  • Staking networks
    • Cryptocurrencies such as Tezos enable users to delegate their Tezos to bakers, who pay them interests. In fact, staked.us provides support to stake more than 10 different cryptocurrencies.
  • Collateralized Debt Bonds using Maker Platform
    • The Maker Network and crypto-platform enable users to set collaterals in their own bonds such that their existing crypto-currencies (e.g., ethereum, augur, etc) can be baked from the maker platform. The smart contract which locks the users’ cryptocurrency then issues a stablecoin known as DAI based on the existing governance rates of exchange. This DAI can either be invested in other DeFI platforms or can be locked into a savings platform through a Dai Savings Rate contract thus enabling them to earn interest on existing Dai holdings.

0X and the mission to enable “almost” free value flows

0X Token Symbol

The 0X token and protocol is one of the several generalized decentralized token exchange enablers. Their mission has been to decentralize the exchange of value.

While this mission per-se is genuinely a hard problem, whenever exchange of value happens – many intermediaries extract “fees”. Consider a simple case where you go to a store and buy a $5 item. Often there are several costs associated with the good’s sale, which we don’t pay attention to. For example, the state taxes, the value taxes, the surplus earned by the seller and many others. Often – despite the buyer willing to pay for the good immediately, the good itself is not available for sale. These challenges though multi-fold increase the difficulty in trade for the seller and for the buyer too….

Very often however, certain types of financial products are not even made possible by financial restrictions and often by meagre lack of imagination in the financial industry. For example, if one wanted to sell a portion of his mortgage to a lender who offers a lower rate than the current mortgage rate, that is difficult, since there are transfer fees in between. The transfer fees are significantly high that it discourages such transfers…. All of this though 99% of the regular checking accounts and savings accounts give their billions of holders less than 2% interest rates in the US, and in some cases like in Japan a negative interest rate. This 2% in absolute terms, if inflation adjusted would also be negative.

Similarly, if one were to create a peice of art or an e-book and sell it, the intermediary seller recieves a huge commission for the same. Often if the intermediary is a platform, the platform shares a meagre amount to the end seller. With smart contracts and tokenization of assets through smart contracts, it is possible to convert any asset (physical or virtual or even nonphysical) to tokens. Later those tokens can be put out on sale on a marketplace where takers (i.e., buyers) can buy it. Buying again can be apportioned using traditional bidding or at a fixed price. Similarly, apportioning of value based assets, token based assets, etc… all can facilitate the same.

0X (ZeroX) is a platform and a protocol that provides APIs, programming toolkits and interfaces that are user friendly. It is a layer atop Ethereum’s complex Solidity based interface, that allows users to create decentralized exchanges for “custom” tokens. The decentralized exchanges can then be used to trade “standard” established tokens such as bitcoin, ethereum, etc.. in exchange for “custom” tokens created by the user.

In fact within a few minutes one can create a simple web based interface ( with a Javsascript frontend) to create a simple token exchange for a “custom” token to be exchanged with any “standard” token, which underlying it can embody any complex smart contract. Such flexibility in creating newer types of financial assets and allowing a meaningful trade which is instantaneous, at almost no transaction cost – that too decentralized without a large intermediary firm controlling all transfers, and monitoring it, etc.. gives rise to several possibilities….

A future post will walk through the decentralization process using 0X.

DeFi- Decentralized Finance through Smart contracts & Stablecoins

DeFi Text with cryptocurrency image

It is well known that stable coins and stable coin issuance has given rise to accelerated adoption of cryptocurrencies and blockchain finance overall. Nevertheless, the reason for this adoption increase is in the ability to transport cryptocurrencies i.e., stable coins across exchanges, accounts, boundaries and even physically store it on a ledger or software such as exodus.

Decentralized finance using smart contracts and stable coins has seen profitable innovation in financial management, some of which are incomprehensible with traditional forms of money or other assets. For example, an exchange/defi institution situated in the USA can attract capital in USDC and then can lend it out to banks/financial institutions/retailers in other geographies for a higher rate of interest. In the process, they can then return a part of the profits to their end customers. The crux of the rule is that while retailers cannot lend internationally, institutions can.

Smart contract applications such as compound.finance which operate on the Ethereum network using ERC220 standards, attract investments in stable-coins such as DAI, USDC as stable coins and BTC, ETH, BAT, 0X, WBTC as cryptocurrencies. They create a lending contract between borrower and lender and facilitate paying back the borrowed amount in cryptocurrencies.

There are also a host of exchanges, wallets and applications like Celsius, nexo.io, Coinbase and Blockfi which provide interests ranging from 7% to 1.25% on your stablecoin holdings. The nexo.io also insure your stablecoin holdings using a federal program like the FDIC assuring customers of the safety of one’s holdings…

You might actually be better off just converting your fiat holdings to cryptocurrencies and earning interest off the holdings. This way it is a win-win situation for you. We are still scratching the surface of decentralized finance and as time goes by newer and newer innovations in this space will make finance accessible, decentralized and viable to both lenders and borrowers.