What is money? What is moneyness? (to borrow a term from options terminology) of a cryptocurrency. If Proof-of-stake is indeed an improvement on Proof-of-work, how will that affect money supply and velocity of cryptocurrencies? Both POW and POS currently reward validators using inflation and transaction fees. At scale, are transaction fees something that participants will pay up? These and a few other fascinating topics are discussed in this interesting Epicenter blog by Kyle Samani and Tushar Jain. Well worth a listen if this sort of thing piques your curiosity.
In other news, a major bank finally came out and listed cryptocurrencies as a major threat. Good Morning, BoFA. Great job on reaching that coffee machine, you know what to do now!
Also, Circle, a payments startup backed by Goldman Sachs, acquired Poloniex, one of the crypto-to-crypto exchange majors.
If we reconstitute the five stages of the Crypto hype cycle vis-a-vis Wall Street response to it (denial, anger, bargaining, sadness, acceptance), it seems like we are well into the bargaining phase of things now.
In what seems like eons ago, but actually in the early part of this decade, when bitcoin was in its formative years, the pioneering proponents of the currency believed that bitcoin would become the trust layer of the internet – one single protocol that would serve as a base layer on top of which multiple decentralized applications could be built. However, in 2018, into the tenth year of its existence, Bitcoin is still some ways off from its stated goal of being the universal protocol for the decentralized world; the most compelling use case is its application as Gold 2.0 (which is a multi-trillion dollar opportunity in itself). However, this has affected its velocity, and HODLers, for instance, benefit disproportionately even as transaction costs increase for people who actually want to use bitcoin as a medium of exchange. Add to this the massive energy consumption that PoW entails, the current issues with scalability and the contentious, attritional nature of the broader discourse in the community. While layered solutions such as Lightning Network and Rootstock could broaden the use cases for Bitcoin, the growing urgency for decentralization and the pace of innovation by rival protocols are going to make the gap insurmountable for bitcoin to catch up. The proliferation of protocol ICOs will eventually lead to a multi-blockchain world, with a few core multi-trillion market cap protocols (Bitcoin + Ethereum + a few more), and multiple, smaller, independent protocols with niche use cases. Much like the current tech world, where there are the Valley titans, and the fairly long tailing off after the FAANG giants. Each of these protocols will be good at doing one thing and one thing alone. There is unlikely to be a protocol that can do everything. For instance, Bitcoin could become the most secure trust layer; One or two of Filecoin, Storj and Sia could become the leaders in Storage protocols; ditto with Ethereum and NEO for programmable smart contracts. The ability to seamlessly interact with each other is imperative for blockchains to reach mainstream adoption.
Currently, most of the infrastructure for transferring value between blockchains is centralized, time-consuming and expensive. For example, you cannot exchange your BTC for ZEC without routing the transaction through a centralized entity (Bittrex, Kraken, Shapeshift, etc). Interoperability blockchains with standardized mechanisms for inter-blockchain interactions will become a vital piece of the decentralized ecosystem as blockchains mature and as there emerges an increasing need to communicate with each other. In the inter-operability space, Polkadot and Cosmos are among the notable ones. Based on Polkadot’s timeline, we are roughly 18 months away from the first iteration of interoperability protocols, which gives ample time for incumbent protocols to work on integrating with the upcoming interoperability blockchains.
We believe interoperability will be a key theme for discerning cryptocurrency investors looking to play in truly disruptive protocols. Some other names that we are watching include Cosmos, ICON, Aion and Wanchain.
Cryptocurrency of the Week
Polkadot is a protocol that allows independent blockchains to exchange information. Polkadot is an inter-chain blockchain protocol which unlike internet messaging protocols (eg:-TCP/IP) also enforces the order and the validity of the messages between the chains. This interoperability also allows the additional benefit of scalability by creating a general environment for multiple state machines.
Polkadot allows new designs of blockchains to communicate and pool their security while still allowing them to have entirely arbitrary state-transition functions. This opens the door to a network of blockchains, where private and consortium chains can be firewalled from open and public chains like Ethereum without losing the ability to communicate with them on their own terms.￼￼
• Polkadot is designed to enable applications and smart contracts on one blockchain to seamlessly transact with data and assets on other chains.
• Polkadot gives the ability to run several parachains, each processing multiple transactions in parallel, which allows networks to obtain infinite scalability.
• With Polkadot, security is pooled within the network, which means that individual chains can leverage collective security without having to start from scratch to gain traction and trust.
• Polkadot is built to connect private consortium chains, public permissionless networks, oracles and future technological developments yet to be created in the Web3 ecosystem. It enables an internet where independent blockchains can exchange information and trust- free transactions via the Polkadot relay chain, with the key tenets of scalability, governance and interoperability.
• Working closely with ZCash, OmiseGo, MELONPORT, SORAMITSU, symbiont, OWNAGE, Gridgularity to develop first few use cases.
• ￼Founder of Polkadot is Gavin Wood, co-founder and main developer of Ethereum. He left Ethereum team to develop Parity, a corporate-facing client and wallet. Notable individuals and companies are following this project on Twitter, including Charlie Lee, Bitshares, Omega One, etc.