5 things I learned in crypto this week: 26 November - 2 December 2018

December is now upon us and there are already some early signs of festive cheer in the crypto markets, albeit on very shaky foundations. This week’s theme is the thoroughly un-festive matter of governance (wait, come back! It’s way more interesting than it sounds). Before diving in to this weighty topic I’ll take this opportunity to plug an event I have coming up in a little over a week. Any Londoners interested in crypto chat please do come along (surely it won’t be competing with your work’s Christmas Party on a Monday night?): https://www.eventbrite.com/e/cindicator-uncertainty-2019-london-tickets-52903663281

Right, now down to business. Here’s what I learned this week…

1. Central planning as overfitting

This week, Ethereum co-founder Vitalik Buterin was awarded an honorary doctorate in Economics from the University of Basel in recognition of his “outstanding achievements in fields of cryptocurrencies, smart contracts, and the design of institutions.” It seems fitting, therefore, that our first article is a piece co-authored by Vitalik and political economist Glen Weyl on the topic of governance. In this article they explore the concept of ‘simplicity’ in social systems and why having ‘fewer knobs’ to turn in order to govern a system minimises the need for intervention (which tends to benefit those with the privilege of turning those knobs). It’s an interesting read, though don’t feel bad if it takes a couple of goes before the points become clear – I may still need to have a third or fourth read before it properly makes sense. In relation to this, it’s also worth being familiar with Nick Szabo’s concept of the ‘argument surface’ and how the more areas where humans can argue over governance, the less scalable the system becomes.

Link: https://radicalxchange.org/blog/posts/2018-11-26-4m9b8b/

2. Meet your new boss…

We’ve touched on the notion of Decentralised Autonomous Organisations (DAOs) a couple of times in this blog and the concept continues to fascinate me. What if all top-down functions of the modern enterprise, such as admin, planning, accounting, HR, etc., could all be hard-coded and developed into a self-executing management framework? Of course, it’s not as simple as firing the Board and installing a network of computers as its replacement. Yet, in a world of bloated bureaucracies, the concept of moving from ‘top-down’ governance to a permissionless, ‘bottom-up’ mode of organisation has a lot of appeal. Aragon, a blockchain startup founded in 2016, is developing a governance protocol that addresses this specific idea. The project’s latest blog explores the concept of human coordination, looking at the evolution of the corporation, the inexorable problems inherent is such systems, and how new structures might offer more transparent governance. The starting point for the piece is that the corporation of today is no longer fit for purpose. In their words: ‘The management paradigm of the last century - centered on control and efficiency - no longer suffices in a world where adaptability and creativity drive business success’. The blog seeks to show how a DAO-based approach can lay the rules-based framework for different actors to contribute their resources and share risks, unfettered by geographical boundaries. More accurately, ‘Smart contracts running on a public blockchain make DAOs possible in the same way double-entry accounting unlocked joint-stock corporations. By building on top of consensus forming technologies - blockchains -, participants can agree on the state of the organization in the form of assets, liabilities and more’. The blog then (perhaps unsurprisingly) goes on to talk about Aragon’s value prop, though it’s still worth reading until the end.

[Note: I’m not overly familiar with Aragon, nor do I hold any of their tokens, so I can’t vouch for whether this particular project holds the key to the future of governance, but I’ll certainly be watching this space.]

Link: http://blog.aragon.one/the-future-of-organizations/

3. Price doesn’t follow hashrate, hashrate follows price

The nature of proof-of-work systems can be confusing for those (like myself) who haven’t had first-hand exposure to the economics of mining. I watched a CNBC discussion earlier this week (I won’t bother linking it) on the fears that Bitcoin will enter a ‘death spiral’ as the cost of production (i.e. mining) is now greater than the market value. The anchor drew parallels with the oil market, where in such circumstances producers would cease production immediately. In Bitcoin, the relationship between mining cost and operations is slightly more nuanced, and this Coinshares post does a good job of explaining it. The piece outlines the fact that miners tend to operate with a mixture of capital expenditure (capex) and operating costs (opex), which correlates with ROI. A miner, when calculating ROI, needs to think not only of the costs of electricity required to mine new blocks, but also about the flow of cash required to pay for the cost of their equipment (which would normally have been paid up front). In a bear market, a miner may choose to continue mining even if the market price of bitcoin is below the cost of production as the flow is serving to pay their equipment costs (i.e. they’ve become cash-flow negative). If the rewards of mining are negative in relation to both capex and opex costs, then they’ll likely cease production. The article notes that hashrate has fallen from a peak of 55 exahashes per second (EH/s) down to 44, suggesting that miners are feeling the pinch in current market conditions. The article also discusses the relationship between price and hashrate, noting ‘Mining cost will always tend towards the price of bitcoin minus a narrow competitive margin. However, these dynamics are not instant, and there is an asymmetrical delay in the trailing effects.’ So, what happens from here? Well, if the price of bitcoin increases, then increased hashrate will follow, if the price remains at or below the current range then the difficulty adjustment will take effect to bring the cost of production down. In either case, no cause to panic.

Link: https://medium.com/coinshares/an-honest-explanation-of-price-hashrate-bitcoin-mining-network-dynamics-f820d6218bdf

4. Is there such a thing as a fair ICO market?

It’s quite easy, while we’re still dealing with the hangover from last year’s mania, to outright dismiss the value of ICOs as a fundraising mechanism. Indeed, there are a number of obvious flaws in giving millions of dollars to a rookie team on the basis of a well-written whitepaper. The ICO model did however start from a good place – allowing ambitious entrepreneurs to gain the funding they need to bring an idea to life, while simultaneously giving a set of potential early adopters a ‘stake’ (careful not to confuse that word with equity rights) in the project from the beginning. Chris Dixon of a16z recently hypothecated whether if early twitter users were given tokens to help reward their participation and bring new users on to the platform it would have helped to grow faster and more resilient network effects. There’s something ingenious in that idea, and that’s why I’m reluctant to throw the baby out with the bathwater when it comes to ICOs. In the Medium post I’m linking below, the author explores how the model of P3D (Proof of Weak Hands 3D; which was for all intents and purposes a clever Ponzi scheme) could lend a useful perspective for creating a fair ICO market. He outlines the concept of a ‘refund line’, whereby participants stand to get their ETH investment back by means of staking. The purpose is (1) it reduces the heavy selling pressure on ETH as the funding is staked (and therefore not market-dumped), (2) the founders will receive their funding over time based on delivering value rather than in a lump sum, and (3) the participants have protection reclaim their ETH if the project reneges on its promises or tries to exit scam. It’s not a comprehensive model, but a very good thought starter.

Link: https://blog.goodaudience.com/a-proposal-for-a-fair-ico-model-using-p3d-fcc968b6615b

5. “The only way to kill a parasite is to stop feeding it. That’s why decentralisation matters”

I’m possibly saving the best for last here. Andreas really is the hero we don’t deserve, and in this video he goes full Bill Hicks in his diatribe against the ‘parasitic kleptocracy’ of central banking. I can only recommend you watch the whole thing for a passionate defence of why we need peer-to-peer money.

Link: