// EDITOR’S COMMENTS
Paul Krugman, (recipient of the Nobel Memorial Prize in Economic Sciences for his work on international trade theory), published a rather damning article on the future of blockchain in The New York Times this week. Two major flaws he posits, are 1) high transactions costs and 2) ‘absence of tethering’.
Point one is true - in part. For version 0.0 blockchains designed 10 years ago. Yes, bitcoin mining is energy-intensive. Yes, this and other flaws make transaction costs high. But as Paul should know - through the homework he hopefully did before publicly condemning blockchain - proof-of-work mining is not the only consensus mechanism out there. Far from it. The more distributed ledgers develop (with blockchain being just one of the set of DLTs), the more sophisticated consensus mechanisms we see. Transaction costs and other scaling issues will be eliminated in DLTs within years - see Radix that already runs Visa volumes at negligible cost. Point one doesn’t stand.
And talking of costs, what about the transaction costs that banks currently charge? What about cross-border transaction costs? Mr Krugman glosses over these.
The second argument he makes is that blockchain is not tethered to anything. Where do Bitcoin and Ethereum tokens derive their value from? Krugman’s argument that “fiat currencies have underlying value because men with guns [governments] say they do. Cryptocurrencies, by contrast, have no backstop, no tether to reality. Their value depends entirely on self-fulfilling expectations — which means that total collapse is a real possibility”.
It’s nonsense to start with: no two cryptocurrencies are the same. And we have thousands. Most aren’t even currencies. They’re commodities, derivatives, assets… even liabilities. Each of their values need to be independently assessed.
Talk of valuation and Apple’s $1 trillion mark reminds me of a little thought-experiment I suggested this week:
Traditional shares in companies like Amazon derive their value and demand from the widely-believed notion that these shares will pay a dividend at some point in the future. Now imagine if a flaw was discovered in the Amazon design that meant no dividends could be paid - ever. After all, it hasn’t yet! What would happen to the share price? Would it continue to increase? What would Amazon be valued at? Surely you’ve become a charity, and you’re now… worthless? I jest - but it’s a serious question and relates to the (most) cryptocurrencies without dividends. What are these instruments worth?
“By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.”, Paul Krugman, 1998.
// MUST READS
- If we are going to attack Krugman’s argument, you may as well hear the other side of the story.
- An interesting look at Resistant protocols: How decentralization evolves published by Medium.
// DISASTER OF THE WEEK
“A massive wrong-way bet on Bitcoin left an unidentified futures trader unable to cover losses, burning counterparties and threatening to dent confidence in one of the world’s largest cryptocurrency venues.”
- Google is making a push into Blockchain, according to Kavita Gupta, Managing Partner of ConsenSys.
- Barclays and Citigroup are about to complete a test led by IBM of how blockchain technology can transform their operations divisions.
- Coinbase partners up with a London-based startup WeGift to give users the option to convert virtual currency into gift cards from more than 120 retailers.
- Blockchain could transform the art world.
- GE backs blockchain cyber security start-up.
// ROAD TO REGULATION
- It is interesting to see how the moves to introduce regulation will end up as there is a view among crypto investors to let things be. This issue with this being, as told by Obi Nwosu, Coinfloor’s chief executive, to the FT, that without moves to stamp out crypto manipulation, “...it will end up like a ’tragedy of the commons’ scenario…damaging the market and potentially destroying it”. Although, see Mike Maples’s piece about how “Crypto-powered governance markets will solve the tragedy of the commons and drive future abundance”.
- Pump and dump schemes coordinated on telegram by crypto investors are starting to really catch the attention of regulators on both sides of the Atlantic: the Financial Stability Board, the group of policymakers and regulators that makes recommendations to the G20, said some crypto data on prices, trading volumes and volatility was unreliable due to manipulation and the US Department of Justice and the Commodity Futures Trading Commission has previously announced a criminal investigation into possible cryptocurrency manipulation, and requested trading data from some large exchanges.
- Hester Peirce, the Securities and Exchange Commissioner, in an exclusive interview with CNBC, explained why she was in favor of a Bitcoin ETF and why the SEC turned down Winklevoss' brothers' application for the second time.
- Coinbase appears to want to make sure that its voice is certainly not left unheard when it comes to the formation and shaping of any regulation as evidenced by its filing to form a political action committee. According to the Center for Responsive Politics, a financial transparency group which tracks money in politics, PACs are formed primarily to raise funds on behalf of candidates in the U.S. running for public office, usually representing specific business or ideological interests.
- Hedera Hashgraph has successfully completed a $100 million raise, reportedly valuing the project at a $6 billion valuation on total supply pre-launch. The project plans to use the raised funds to finish developing and then launch the network. The project plans to raise an additional $20 million through a public sale open to only accredited investors.
- Handshake a project headed by Joseph Poon, the creator of bitcoin’s lightning network has raised $10.2 million to replace the digital entities that today authenticate web payments. The project is backed by a number of prominent funds including A16z Crypto, Founders Fund, Polychain Capital and Draper Associates. The project plans to distribute 85% of it’s tokens valued at $115 million to open source developers on Github, the P2P Foundation and Freenode.
International Blockchain Congress - Hyderabad, India - 3-4 August, 2018
Dubai International Blockchain Summit - Dubai, UAE - 9 August, 2018
Regulation and Compliance in Blockchain Investing - New York, USA - 7 August, 2018
M2Banking and Fintech Latam 2018 - San Francisco, USA - 7-9 August, 2018