Bitcoin ETF & Alternative Energy ETFs, ZCash Incentive Structure, and How To Spot Bad Code in Your Crypto Investments
Here’s a transcript of QuantLayer Crypto Podcast #7.
On this episode, Faizaan and I discuss the recent Bitcoin ETF filing by SolidX and VanEck, how it’s reminiscent of the alternative energy ETF boom of the mid to late 2000s, and also talk about what an actively managed ETF in cypto might look like. We also talk about Zcash’s ($ZEC) incentive structure and founders’ award and developer incentives more broadly. We discuss how crypto teams are leaking secret keys to GitHub, a missing deposit on Golem Network’s ($GNT) main net, and how to investigate bad code for your crypto investments. We also cover some interesting alerts that came through our platform in the last week. Enjoy.
The episode in its entirety can be listened to here:
QuantLayer is a software consultancy based in Brooklyn, New York. All opinions expressed by podcast guests are solely their own opinions and do not reflect the opinions of QuantLayer. The information presented should not be construed as investment advice. Guests may maintain positions and assets mentioned in the podcast.
Vikram: So, it’s been a busy week for us. We’ve been adding a ton of new sources to our platform, which has been great. We’ve added seven new exchange listings for listening to when they add coins and I’ve already seen them generate new alerts so far. So, that’s been great. I think another feature that you worked on was the telegram client site filtering stuff.
Faizaan: Yes. So, in addition to just adding more and more sources, you know, we’ve had some of these sources running for a while, and now we’re working on the second stage; which is decreasing the noise and improving the signal. For these telegram chats, the rooms can get very chatty and it can drown out some of the other useful alerts. So, for now, we just added the ability to toggle the telegram alerts on and off. They’re still going to come in; we’re still going to save them. You can see them anytime, but if you’re not interested in the chats and you’re more interested in our exchange and news and other alerts, you can turn those off. In the coming weeks, we’re going to expand on that by, you know, adding more features to better filter your feed.
Vikram: Yes. I like it a lot because I do like reading through what these admins are saying in the chat rooms, but then it’s nice to be able to just filter them out too so I can just focus on like market specific news, and then I can just quickly filter them back in by just clicking the toggle. It’s really nice.
So, on the market side, as far as market investor news goes, we’ve been seeing some interesting developments come in, particularly on the institutional side. There was a Bitcoin ETF filing in the last couple weeks with the SEC. So, the background, and this is in early June; a company called SolidX — I’m not totally sure what they do. Like, I go to their website and they call themselves an innovative block-chain technology company. I mean, it’s not clear like what that is exactly — is working with VanEck — who of course is a very large New York based money manager — and in the last couple weeks they had an SEC filing for a proposed Bitcoin ETF and an exchange traded fund. This is pretty interesting because people had been trying to do this for a while. We’ll post a link to the filing itself in the show notes, but it’s super interesting. It’s titled ‘Self-Regulatory Organizations; Cboe BZX Exchange; Notice of Filing of Proposed Rule Change to List and Trade shares of SolidX Bitcoin Shares Issued by the VanEck SolidX Bitcoin Trust’.
Faizaan: Can you say that three times fast?
Vikram: I think that’ll be the whole podcast if I do. So, what is this thing? In the filing itself they’re basically describing it as a unit of bitcoin holdings. So, according to the registration statement, this is what they call it. Each share will represent a fractional undivided beneficial interest in the Trusts’ net assets; and those assets are going to, basically, be bitcoin. They’re not looking to invest in any other assets besides bitcoin. It’s always interesting to read these SEC filings, I know it’s tempting to read the news and then come back and maybe look at the filings, but they really have everything you need. So, they have a section in their filing called Investment Objective. This basically explains what the goal of what they’re trying to do is, and I’ll just quote it. ‘The investment objective of the Trust is for the shares to reflect the performance of the price of Bitcoin, less the expenses of the Trust’s operations.’ Then they go on to explain, ‘The Trust intends to achieve this objective by investing substantially all of its assets in bitcoin traded primarily in the over-the-counter or OTC markets, though the Trust may also invest in bitcoin traded on domestic and international bitcoin exchanges, depending on liquidity and otherwise at the Trust’s discretion.’ Okay. So, what they’re trying to do is basically buy, on the behalf of their holders, bitcoin that they acquired through over-the-counter.
Faizaan: Yes. Just so I understand this correctly, if I want to buy into this ETF; basically, a share of this ETF represents a fractional share of bitcoin; and I assume that this Trust has some cost of operating that they’re going to be charging me, so what’s to stop me from buying that fractional share of bitcoin? What’s the advantage here?
Vikram: There is no advantage. As a retail investor, it probably would make more sense to do that; even as an accredited venture if you can easily buy bitcoin, it doesn’t make sense to buy bitcoin through a Trust. I think what it gives an institution is they’re going to handle all the custody stuff, like the ETF, so you don’t have to worry about that. That’s probably the main benefit.
Faizaan: This early on, is it a benefit or a risk that you’re having someone handle the custody of your bitcoin?
Vikram: I mean, it goes against the whole ethos of crypto-currencies and bitcoin itself. You want to be running your own show; you don’t want to give access to someone else. Whoever owns the private keys, that person is the one who actually owns the asset.
Faizaan: Just my gut reaction is, I can see the value in this. If it was like a bucket of like 10 different currencies, nine to one obviously managed 10 wallets and you have to keep up with all of them. You know, there’s a lot of administrative overhead; but if it’s just Bitcoin, this seems less of a compelling product, but that’s just my gut reaction.
Vikram: I think that’s my reaction as well. It’s also geared towards just [Inaudible] [08:12] accredited investors, and we’ll talk about that in a little bit. So, if institutions are having trouble in the custody side, this probably helps them out a bit; at least get exposure to the space that they otherwise can’t get exposure to. Another cool thing about the filing is, it has a little section on bitcoin; its history; and very broadly how the bitcoin network works. The section isn’t bad, it serves as a good intro or a good review of the bitcoin network to anyone that’s interested. Another interesting thing about the filing is that they named specific industries that are useful, block-chain focused applications. So, they call, ‘asset title transfer, secure time stamping, counterfeit and fraud detection systems, secure document and contract signing, and distributed cloud storage and identity management’. And I think those are all pretty reasonable. I mean, we talked about these on our last podcast, right?
Faizaan: Yes.
Vikram: Now, there is a really cool section here too, where they’re talking about the OTC market itself and how it works. This is a really interesting space. Over-the-counter is what you think it is. It’s just a market that isn’t through an electronic exchange. It’s kind of like person to person. So, being in the 21st century you expect trades to be really easy automated online, happening through online exchanges, and all that; but there’s a lot of trading that still happens off of exchanges. Just think about real estate deals or other large deals. So, a $100 million piece of property won’t trade on an exchange or a $50 million development deal downtown. These are not deals that you do online or probably want to do online. There are all kinds of necessary formalities involved and what-not. Because of this, the OTC market is still opaque to us. If you’re not heavily involved in the local real estate market, you’re not going to know exactly what’s going on or what kind of deals are happening; that sort of thing.
Faizaan: Right.
Vikram: So, this is, kind of, like an institutional version of local bitcoins. That’s kind of like what the OTC market is. So, they have a little description of OTC market. It’s kind of funny. I’m just going to read it. ‘The OTC market has no formal structure and no open-outcry meeting place. Parties engaging in OTC transactions will agree upon a price — often via phone or email — and one of the two parties would then initiate the transaction. For example, a seller of bitcoin could initiate the transaction by sending the bitcoin to the buyer’s bitcoin address. The buyer would then wire U.S. dollars to the seller’s bank account.’ That’s about as informal as it gets. Right?
Faizaan: Right. They’re not meeting under a tree somewhere.
Vikram: Right. This part was really interesting too: ‘U.S. dollar OTC bitcoin trading volume globally represents on average approximately 50% of the trading volume of bitcoin traded globally in U.S. dollars’. So, you know, half goes through exchanges and half goes through this OTC market. Any kind of insight into these markets is always really interesting.
Faizaan: Yes. I remember actually, when we were in New York around consensus, we had talked to some people that had been going to some of the events where they were talking about some very large OTC deals happening from a lot of these family accounts.
Vikram: Right. Then they have a little comment about how they’ll only participate in U.S. dollar denominated exchanges. So, that limits to them to exchanges like Bitstamp, GDAX, Gemini, Fitbit, bitFlyer, and [Inaudible] [11:29].
Okay. The other interesting thing about this piece, they have a section titled; this was just brought to mind what we were talking about earlier with respect to custody and why as an institution you might care about this ETF; Bitcoin Security and Storage for the Trust, and here they go through how they intend to store the Bitcoin they own on behalf of their clients and I’m just, for whatever reason, picturing all these people in suits carrying around air-gapped computers, but this is what their description is like, ‘The trust will secure Bitcoin using multi-signature ‘cold storage wallets’, an industry best practice. A cold storage wallet is created and stored on a computer with no access to a network i.e., an ‘air-gapped’ computer with no ability to access the Internet. Such a computer is isolated from any network, including local or Internet connections. A multi-signature address is an address associated with more than one private key. For example, ‘2 of the 3’ addresses requires two signatures (out of the three) from two separate private keys (out of the three) to move Bitcoin from a sender address to a receiver address’ and also that the movement of Bitcoin will require physical access to the air-gapped computers and use of multiple authorized signatures, and they have this little bit about how they have a backup and disaster recovery process and the trust will maintain its cold storage wallet backups in different places throughout the US. So what are your initial thoughts about that?
Faizaan: So, that, I think, is very compelling because as you mentioned before if custody is a barrier to institutional money coming in, just solving this problem does have a lot of value because this is something where, you know, even if you have $50 or $100,000,000 you want to put in, you don’t want to invest in managing all of this yourself because it’s a pretty involved process to have multiple physical locations and the whole thing. So, I definitely see the value to this.
Vikram: Yes. It’ll be interesting to see how this progresses down the line with respect to multi-sig. If there are solid multi-sig solutions for custody, it’ll kind of make what these guys are doing a little bit moot, unless they have something else that they’re offering.
Faizaan: Yes. My other thought is, if these are all relatively large transaction sizes, just the nature of this lends itself to people just holding for a long time. So, what do you think a lot more money coming into Bitcoin and not being actively traded does to the market?
Vikram: It’s a good question. I’m not totally sure. There are some stats around how people who have held Bitcoin for a very long time don’t care as much about the price volatility. Like, if you bought a thing in for a couple of dollars and the thing is trading at $6,000, if it’s at $10,000 or $20,000 your overall return doesn’t affect you as much versus, say, you bought at $15,000 and now it’s trading at $6,000. Every couple thousand affects you pretty dramatically. So, I think it’ll kind of depend on what happens to the price longer term. There’s also the ability; the harder it is to get out of an asset, the lower likelihood of you getting out of it will be. So, one reason that it’s hard to do a real estate deal, for example, is there’s a lot of steps involved in that deal. If real estate was suddenly tokenized or something like that; if it was very easy to buy real estate and sell it, that potentially might change. So, if all your Bitcoin is secured through these guys; through multi-sig and cold storage and all that; it’s likely that you might just hold onto it longer. So, I don’t know. That’s just my guess.
They have a little bit about insurance that I thought was really interesting. So, they will have some kind of insurance that will cover — this is what they quote — ‘the loss of Bitcoin by, among other things, theft, destruction, Bitcoin in transit, computer fraud and other loss of private keys that are necessary to access the Bitcoin held by the Trust’.
Faizaan: This is actually interesting because this is something I was going to mention later, but one of the alerts that came through earlier this week on our platform was related to, you know, insurance and reinsurance companies have become much more wary of actually ensuring exchanges in Bitcoin because of just the amount of hacks that have been happening. Just as an aside, I know, I think, in South Korea only four of the exchanges are insured.
Vikram: Oh, wow. The interesting thing about insurance is, I wonder, if the Bitcoin itself is insured or just what the dollar value on some particular date like, every day your dollar value gets insured. I just wonder how that works.
So, there’s a handful of things if I were investing in this fund, I’d probably want to know. One of the things is, you know, how do fund managers handle bad actors in the OTC market. Say, you want to trade 20 million worth of Bitcoin, how do you trust what the other side is going to do? I know there’s OTC market middlemen and so maybe that’s what is involved in that, but it’s just something that I’d probably want to know. And to go back to a couple of questions you had earlier, you know, I’m less interested in a price tracking ETF fund and I’m more interested in participating in the network directly. So, the kind of funds that are probably interested in this or just funds that want exposure, like legal exposure; and they don’t care how they get it; they just want to make sure it’s legal and that whatever they invest in, they’re not going to lose apart from any return that’s lost. Like, they’re not going to actually lose their physical Bitcoin. So, there are a couple past examples that come to mind with respect to this. Back in the mid-2000s; until a couple of years before, right around the credit crunch and then a couple of years after; there were these massive solar subsidies, countries like Germany and Spain would have, and these were very, very bullish and positive for solar panel manufacturers. So, companies like First Solar in the US, Trina Solar, Yingli; these are all Chinese solar manufacturers; they all flew on these subsidies. There’s also a broad public positive sentiment around alternative energy so investors during this time period just wanted access to alternative energy, and they could just buy up a bunch of these stocks or they could buy up a basket of these stocks. So, there ended up being a ton of these little ETFs, like German wind manufacturer ETF or the American solar panel manufacturer ETF; things like that, so they could get some country exposure and some sector exposure as well. So, there’s definitely a benefit to these baskets and ETFs from the perspective, like forget about custody and all that, but if you just wanted alternative energy exposure and you’re not actively involved in the space, you don’t really have the time to go out and do research so you can know everything about Trina versus First Solar or First Solar versus Yingli or even know how solar is going to do compared to wind. Right? Like you just don’t have time to do all that.
You also don’t have time to look at company specifics, like you can’t figure out if First Solar’s delivery schedule is hitting production or behind, what German subsidies going down in the following year are going to mean for them, and things like that. So, you just know you want solar exposure and you just want it now. The easiest thing to do is just buy one of these solar or alternative energy ETFs. The downside of this is just some math. I mean if you have a basket of 10 stocks and the top performer is up 80% and the rest are flatter down, you’re now underperformed compared to just holding that top performer. So, the investors that are going to make the most in this kind of sector are the ones that are probably the most active and right; like you got to be active and right, you can’t be active and wrong. So, I remember during this period the guys that did really well were these private equity firms who would buy up land or pay farmers to lease their land and just fill it up with solar panels and then participate in a local electricity grid. This happened in Germany, Arizona, a whole bunch of places. They made phenomenal returns; while the subsidies were in place, they made phenomenal returns; and then they also flipped the real estate later on as well. So, that’s what being an active investor is; when you take a very concentrated position in something that you really believe in and you end up being right.
In crypto, I think, the version of that will be you’re heavily participating in the network that you’re interested in, that you own a piece of. So, I’m not making any kind of moral judgment or anything in terms of how people are going to invest, but there’s just a difference between being active and passive.
So, my primary issue with an ETF like this is, you don’t get any benefit from any ancillary returns that participating in the Bitcoin network might give you. It looks like an ETF, it just marks to Bitcoin’s price and then you pay management fees on top of it. So, the only groups that really benefit from this, like we talked about, were the ones where the custody issue is solved, but there’s probably something that’s going to happen as far as 2nd Layer goes. As a 2nd Layer participant, you can receive a benefit from, you know, helping route payments on the Lightning Network, you could be reinvesting Bitcoin earnings into cloud mining power, you could borrow on your Bitcoin and reinvest into mining power. Like, there’s all kinds of stuff; extra stuff; you could be doing that also helps the network, which eventually helps the price too.
So, that’s probably my primary issue with this kind of ETF. Yes, it helps solve custody stuff, but then you lock up all these Bitcoin that could have been used for something else. The other major issue too is that this is for accredited investors only, so it doesn’t help retail investors and; it probably, I don’t know, I guess you could argue that it shouldn’t; like if you don’t want to buy a whole bunch of Bitcoin or anything; you’re not in the market for millions of Bitcoin, you’re just buying a little bit; then just go buy it and then store it on your own. They’re not paying you any fees or anything like that. So, I guess it could be argued both ways, but it is still a problem that all these ETFs and other kinds of funds are only for accredited investors because a lot of other people could benefit from it as well.
And so, this filing; while it’s interesting, there’s also a little comment section where the public can just comment directly on the filings, so you can actually read through all these comments; and we’ll link to the show notes all these comments; but some are pretty funny. I’ll read one of them, that was a comment on yesterday, by Kyle McDougall, and this person’s saying, ‘Remove the accredited investors restriction. Wealth is not a measure of intelligence and non-accredited investors, believe it or not, actually have brains too. Please open up this ETF to all investors. Then approve it’. And then aside, ‘Also, too many exchanges are getting hacked. We need different investment instruments that enable more secure environments, with custodial services and cold storage’.
It’s just interesting to see how people react to this because they have a point. It’s not like credit investors isn’t the only ones who can, who can invest. I think the idea behind accredited investors is so that average retail investors don’t lose their life savings. So, presumably, you know, a millionaire is rich so if they lose $20,000, $30,000, $100,000 or whatever it’s not going to kill them, but to a retail investor it could.
Then we have another person saying; Jason Demek; ‘The technological advancement and economic growth of the United States depends on your support and governance to propel us into the future. A Bitcoin ETF would provide a stable framework for diversifying portfolios and investments.’ and then they quote Abraham Lincoln, ‘The best way to predict the future is to create it’. I don’t know.
A lot of these comments are kind of funny and there’s a bunch of these ‘when moon, when lambo’ type of comments. We’ve talked about these moon boys from before. Someone is saying, someone from Anonymous, ‘Please, we really need Bitcoin ETFs. The tech behind Bitcoin is innovative’. That’s it. That’s the whole comment. There are very angry posts in there as well. Read this one. ‘Stop messing around and just have a respected company like Coinbase. Approve or reject this. You guys have terrible judgment…’ So, a lot of angry commenters out here.
Faizaan: Yes, well there’s more than one thing wrong with that comment.
Vikram: So, a more interesting basket we alluded to before would be one that helps investors participate in the Bitcoin network and I think there will be funds like this; it is just going to take a little time. I think bitwise is tracking. I don’t know if it’s top 10, top 15 or top 25, but they’re doing something like that and they’ve also talked about, later on, being a more active participant in a crypto networks. So, it was pretty interesting reading through this ETF filing.
Some more institutional side news; so, Coinbase announced that they added another 10 customers to their custody service. This is an article from the Fort Wayne Business Weekly. So, the company aims to have 100 large institutional customers by the end of the year with as much as 5 billion in assets under management, Sam McIngvale, who’s leading the effort for San Francisco-based Coinbase, said in a phone interview. Coinbase said it already stores more than $20 billion in crypto assets for clients such as retail investors. So, all this stuff makes sense. You know, we want institutional investors, we want to help them with custody, and I imagine having more options out there like Coinbase’s custody solution like that ETF will help them get more involved. But again, like personally I think a lot of this stuff kind of goes against the fundamental ethos of crypto about being your own bank and owning your own keys and so forth. But, you know, I guess we have to give these things time. So, as these networks get stronger and people want to participate, if participating in the Bitcoin network ends up becoming profitable; meaning you can hold your Bitcoin and profit off of it; I imagine that there will be solutions that help with that as well.
There is another really interesting piece of market related news this past week as well and I think it touches a very sensitive topic around incentives for developers, in particular open source developers. So, Zcash is one of these privacy coins was started by Zooko Wilcox in 2016. You know, there’s been quotes calling it the ‘https’ where Bitcoin is ‘http’. I don’t know how valid that analogy is, but I think there’s some kind of privacy point that people are trying to get across.
So, there’s been a bunch of discussion around it and the founder’s reward recently. As part of Zcash incentive structure, a large part of the block reward, around 20%, goes to a founder’s fund, and there’s a little stop in a couple of years; this came out in 2016, I think for the first four years they’re going to have this founder’s reward going on. So, when that first came out, there was a lot of criticism around that. People were upset by it and thought it was a too big of a tax on miners because with Bitcoin, you don’t have any kind of tax like that.
So, this ended up causing a fork; the Zclassic fork by Rhett Creighton. He wrote a long blog post about why we have to get rid of the founder’s reward. And then, there’s also general skepticism around the Zcash project because of that reward people; calling the devs greedy and what-not. So, this goal came up again in the last month or so because there was a Zcash conference; Zcon; where Zooko revealed he’s making something of the order of $300,000 per month from the founder’s reward. So, that is a lot. I think it’s caused the people to ask the same questions people asking before.
There was a very public approach to this on the Zcash forum itself; and the Zcash forum is pretty nice. They have a forum, Z.cash, and you can just go to that and you can see what people are talking about, what’s important. It’s kind of like the Bitcoin mailing list, except I think a lot more non-technical people participate in this as well. So, Eric Meltzer, who is a partner in blockchain; his twitter name is ‘wheatpond’, posted in the forum something titled ‘proposal to create a Zcash Ecosystem Fund directly funded by the Founder’s Reward’ and I highly recommend, we’ll link to this to the show notes, people read this because it’s super interesting.
This was his proposal, ‘At Zcon0 I proposed to modify the founder’s reward to create a new stream of funding for an investment fund that would provide support for people building cool things for Zcash users. Here’s the formal proposal, which is very short and simple, and an FAQ, which is a bit longer. This should not be treated as final document’ so forth and so on. So, this is what is proposed. ‘I proposed to distribute 1% of the founder’s reward to a Zcash Ecosystem Fund tasked with investing in commercial projects that are complimentary to Zcash but which aren’t suitable for foundation grants.’ So, Zcash also — this is me again — has a separate foundation that is supposed to help promote a lot of Zcash-oriented projects. And this is him, Eric, again, ‘I further proposed that the 1% is taken from the founder’s portion (not the company or the foundation’s portion) so as to not affect the ongoing operations of either entity.’
So, this is me again. He is suggesting that there should be community agreement that the founder’s reward is too high, and that there should be some kind of redistribution to help Zcash adoption or he calls these ‘cool projects’; as he puts it. So, the devs were not happy. It was very understandable. You know when people are working on these systems they have a monetary policy in place; they rely on it for their day to day income. So, for many of the devs, this is their sole source of income. In traditional open-source world, maybe you have a day job and then on evenings you care enough about an open-source project that you participate in it. But here this is what people are doing for a living.
So, one of the devs, Ariel Gabizon, this is what he said in the forum, ‘The founders’ shares are theirs, like your salary and savings are yours. It is fine to suggest to someone that you should spend your money this way, you should donate to that cause, et cetera. It’s not fine to pose as a question to the community, what should we do with this person’s money? That question implies it’s the community’s decision and doesn’t require the person’s consent’. Another dev closed the thread and then it got reopened again and then it got even more interesting. So, Eric Meltzer’s business partner at INBlockchain is Xiaolai Lee; who was an early investor in Zcash and recipient of the founder’s reward and it had already been paid out to him but not to others. So, I think that there is some worry there about being a conflict of interest for Eric Meltzer.
So, Matthew Green, he’s a cryptographer at Johns Hopkins; he’s on the team there at Zcash, posts a very reasonable response that I’ll read here. ‘However, and let me be clear that I’m not holding this out as a criticism of Eric so much as an explanation for the surprise and unhappiness on the part of various founder’s reward recipients, I hope this flow of events helps to explain why the recent ZEF proposal has been so shocking’. So, what he says is that back in January 2018, there was a proposal to create a voluntary ZEF; Zcash Ecosystem Fund, I guess. People responded enthusiastically and then there was radio silence; so, is this happening, is this not happening. And then more recently the proposal was to involuntarily take a fraction of the founder’s reward away to fund the ecosystem fund. And then Matthew Green guesses, ‘My guess is that Eric’s new proposal may have been formulated to help deal with tax issues’, which is interesting. I guess originally it was thought to be voluntary, which seems a lot more reasonable, and now it’s more along the lines of we should adjust monetary policy to transfer the assets of these other people and the founder’s fund towards this ecosystem fund.
So, Arjun Balaji wrote a great piece on Zcash and incentives more broadly, and we’ll put that link in the show notes as well, but much of his argument is this; this is me summarizing what he’s saying; in order to build a network that is going to compete with Bitcoin, we’ll need talented individuals to build it and then decentralize it.
Another important part of the argument is that there are a lot of concerns around privacy coins. We’ve talked about this on a few podcasts now. These are coins that are going to be constantly attacked. There needs to be care taken early on, in terms of how these systems are architected and structured, and there needs to be incentives in place for people early on to be active participants in the life cycle of a coin. So, what are your initial takes on this Faizaan?
Faizaan: So, I personally don’t have any issue with a reasonable founder reward because the way I see it, like, you know, there’s — what? hundreds — so many different cryptocurrencies that are all competing for mine share, market share, what have you; and if a currency becomes successful, you want to keep on the team members that have made that successful and by, you know, voting or making it a non-economically attractive option for them, you’re just chopping it off at the knees. And the reality is if a currency goes on to become so successful that the founders are making tons of money, there’s a good chance that the miner and everyone else that was involved early on did pretty well along the way.
So, I don’t really have an issue with the founder’s reward as long as it’s reasonable and I do think that voting on what to do with shares that have already been assigned to someone else seems a little unfair, you know, after the fact that you invested in the community or that specific coin under one set of rules and you can’t sort of just take people’s money away because they’re making too much.
Vikram: Right. Yes. In particular, this kind of coin too; what I mentioned earlier before was — I’m not saying Bitcoin is simple at all — but if you want to to build a privacy coin, it seems like there’s a lot of other things you need to consider as well in addition to the things that you are considering for Bitcoin. And so, Zcash is heavily influenced by the academic work in cryptography. So, Zooko Wilcox is a cryptographer, the founder and major contributor, Matthew Green, is an academic at Johns Hopkins, their entire team. If you go to their team page Zcash/team, it has a large collection of these experienced scientists, and the argument here is that all these people should be involved early on in the architecture and development. You have these aspects like conception, architecture, development, and then you have within privacy how you deal with all these attacks. These are complex systems and need people with experience in their development and it’s not like there was a bad incentive structure in place, you at least have this four-year structure in place where people are going to be incentivized to keep working on it. And if the system is in a good place, four years from now or a couple of years from now, they’ll probably continue to work on it because they want to make sure that their holdings hold value and go up in value.
So, it wasn’t like they pre-mined, you know; people hate pre-mines. Pre-mines are when crypto teams can mine a significant amount of crypto before publicly releasing their crypto. So, you know, you develop a crypto, you mine 50% of it, and then you go publicly onto Bitcoin talk or wherever saying, ‘Oh, we have this new crypto’, and you do that, like, in 2017 where there’s a massive bull run. People have made more money than Zooko has, on Zcash on completely fraudulent coins. So, I have no issue with him being incentivized the way he is.
Faizaan: Yes. I mean, frankly, if let’s say there is no privacy coins that exist and two launch at the same time, and one of them has no economic reward or incentives for the founding team other than just some intrinsic motivation to make the coin succeed and the other one has a clear economic incentive for them; even if in theory there’s a higher tax for me as a miner or a participant, I’m much more likely to invest money in the latter because, I mean, one of the underlying pieces of a lot of crypto currencies is that the economic incentives are what promote good behavior. And that’s true for miners and I think it’s probably true for devs as well.
One thing that I wanted to talk about was, you know, last podcast I mentioned I had bought a ledger to store mine sets on and I just got an email; Ledger has launched their new app Ledger Live, and it’s pretty notable if you have a ledger because what I was having to do right now is when I hook it up I use a Google chrome app to download the different wallets and then each of those wallets has a different application. With the new Ledger Live you can actually have just the one app for all of your different wallets, and when your ledger is disconnected you can still see what the value of your balances are; which is pretty nice. So, you know, your ledger doesn’t have to be connected for you to have some information on what’s going on and you can just operate everything from one app, and it is a multi-platform so it’ll work on, you know, whatever sort of device you have. So, I think that’s a nice little step in the UX for hardware wallets.
Vikram: Yes, that definitely is because I know, like if you just hold a few different coins, it’s a huge pain to use. Like, you need to use your ethereum app to look at that stuff, you need your Bitcoin app, D-cred, or whatever it is. So, how do you see a new user reacting to this versus like that old UX, I guess?
Faizaan: It’s just a little bit smoother, you know. An analogy for me would be; I don’t know if you remember back when you had multiple google accounts, but there wasn’t like multiple sign-on, so you’d have to sign into one and then sign out to check your other email account and sign out of that one to check your third one. Whereas, now you can sort of just have them all and toggle between them, and it’s a little thing but it makes a huge difference in how easily you can have multiple accounts.
Vikram: Yes.
Faizaan: So, I would argue that making it that much easier on the margin makes it more likely that people will diversify their crypto currencies because I think UX does drive that sort of behavior.
Vikram: Yes, because you reduce the whole friction around holding other assets. Like, if you only want to use ledger and you’re only going to buy things that ledger supports so you don’t have to leave them on exchanges or have your own wallets on your machine, then yes; as long as it’s easy to use and the UX is nice; why not?
Faizaan: Exactly.
Vikram: Yes. We’ve had a bunch of cool, good alerts come in as well in the last week. I think, like one theme is, as usual I guess, around hacking and what kind of security measures team should take better note of. So, we saw a couple of alerts of just teams pushing up credentials, right?
Faizaan: Yes. So, what’s interesting is; you know, we added search to our platform so now we can search by symbol and also by content; I was just trying, you know, keywords that I thought might surface something very interesting like ‘arrest’ or ‘release’ or ‘credential’ and what we’re finding is; you know, in these GitHub commits that we crawl; people are pushing up credentials, and that’s super dangerous because; you know, assuming that these teams are funding some of these services out of whatever foundation money or for that given coin; it would not be that difficult for a malicious actor to get a hold of these credentials and burn through quite a lot of their resources. And it’s potentially also just a security issue.
Vikram: Yes. One of the teams is a very large crypto team and, it’s a $300-ish million market cap, had a very public launch recently, and they just pushed up their AWS creds, and even if they’re not right, even if they’re not ‘super important’, they can still get used. Right?
Faizaan: Right. Like, yes, in theory maybe they did a really good job with setting roles and limiting what that key can do, but, in general, I would suspect that most of the time when a key is pushed up, the Venn diagram of people that manage their security policies and scoping resources to keys and the ones that push them up; there’s not much intersection. So, whenever I see a key up, I’m much more likely to believe that it’s a lot closer to having admin-level permissions than something very well crafted.
Vikram: So, you don’t think it’s super clever, like a honeypot, to catch malicious actors or something?
Faizaan: I don’t know what you’re catching, but it’s not really a honeypot. It’s just you putting honey out there and then your honey is not [Inaudible] [41:16 to 41:19]. The second phase of that is not accomplished and you don’t really catch anything.
Vikram: That is very fair. Another interesting thing that came across the whole GitHub set of alerts was that GNT (Golem Network); they’re a distributed — we talked about on the last podcast — computation platform; I think, they’re trying to focus first on graphics rendering; pushed up a comment; title handle ‘missing GNT deposit on nain net’. The reason we opened up, you know, was that it sounded a little concerning, like why is there a missing deposit on their main net, and they have a bit of code that is a temporary try catch block; that basically means that they’re going to try something until the deposit is deployed, that the actual feature is deployed, on the main net; and then they have a little comment in there, says they’re going to remove it after that. I don’t know. What do you think when you see code like this?
Faizaan: My view is; I would say it’s a warning, not an error. So, there’s a good chance that something bad is happening, but not a certainty. Usually when I see something like that, then, you know, it’s time to investigate a little bit. In the case of one of the credentials that I found this morning, I figured out what the credential was for and then went to the documentation for that service and I saw that it could be an admin key; in which case it is very dangerous; or it could be a read-only scoped key; in which case you can’t do too much harm other than maybe bill that user’s account a little bit for usage. In terms of functionality, I think, it’s a great place to then follow up for more context. Like, I’m not a dev on the Golem team, so just by glancing at the code it’s hard to know exactly what the implications are, but it’s definitely a point of investigation. So, if I were, you know, invested in Golem then that would be something that I’d want to follow up with someone on their team on potentially that, you know, what’s this?
Vikram: Yes. I mean the name of the file that the commit is in is ‘Ethereum Incomes’ Keeper.py’ — it’s a python file — so it seems important, but; like I said, we don’t know exactly the context; it’s just, you see it and it’s like, ‘wait, what?’
Faizaan: Yes. To me, I don’t know if this is a good analogy, if you were investing in a public trade company that maybe had done nothing wrong but still suddenly had a class action lawsuit filed against them, it’s a point of concern that you want to keep your eye on or do some follow-up on, probably.
Vikram: Of course. Like, you would want to know if it got gets resolved, right?
Faizaan: Right. So, it could be nothing, but it’s definitely a cause for concern. And most of the ones that I’ve seen come through, that’s been the case; I follow up and it’s nothing critical, like that they’re going to definitely get hacked. I think another thing that we would like to do going forward is it would be good to see how often, you know, a given team is doing a lot of these patches or temporary fixes; because we see a lot of that coming through, like, ‘Oh, we just found this, let’s put this little hack in’, and then you’ll see we reverted this hack and did this other hack instead because the previous hack actually had a different problem. And when those patterns start forming, that’s also another cause for alarm. Right now, finding those is a little more time intensive, but that is something that I think would be great to automate as well. It’s just getting a better idea of is it a one-off or is there a pattern of bad work?
Vikram: Right. Right.
Faizaan: Yeah. A few other things that I’ve found; so, there was the credentials — this wasn’t very recent, but over the last couple of months, apparently there was an assassination plot against John McAfee, and another guy that I think was involved in something called eBitcoin and had some connection to Mt. Gox — I think he has been arrested in Greece.
Vikram: Oh, boy.
Faizaan: It’s Andrew, I don’t know if his first name is Andrew, but Vinnik is his last name (v-i-n-n-i-k). So, it’s interesting to see. I know we had talked about this before; with the amount of fraud and the amount of money in play, it’s a matter of time before something really bad happens to someone in this space. And so, it was just interesting to see that; you know, it was two assassination plots in the news over the last couple of months.
Vikram: Yes, we’ll see. It could get worse with the whole prediction; like Augur just launched its prediction market. We’ll talk about that one a little more on a future podcast, but this is a very interesting space with respect to that.
Faizaan: Yes. And there are two other alerts that came through that I want to talk about. I always like finding stuff in telegram because I feel like we’ve done a good job when we surface something out of a chat because it’s a lot harder to get to that then just, you know, something that’s on medium that might have made its way onto CoinDesk or something.
So, VeChain had their wallet release early and the admins were basically telling everyone ‘don’t use this till the release date’ in the channel. So, I thought that was a bit of information.
Vikram: Yeah.
Faizaan: And then bittrex got hacked and it was a social engineering hack; a user, that had two-factor enabled, had funds taken because someone basically held up a picture of a passport to their support team and was able to convince them that they were that person. As much as the ideal of crypto is to have everything based on mathematical proof, because what you’re dealing with is intermediary, all of these attack factors are still totally open.
Vikram: Yes. Going back to that VeChain telegram chat alert; I just read through it; they’re saying ‘Please read we’re aware the wallet has been released before the scheduled date’, like wouldn’t you think that they could work hand-in-hand with the dev team to make sure that didn’t happen or something like that?
Faizaan: So, this goes back to what I said before; this is a warning and requires more follow-up. What is going on that stuff happens that they don’t have control over with their releases, and then some other team is like telling people ‘this got out, don’t use it’. That, to me is again, is a red flag that, maybe it’s something benign, but definitely requires follow-up if this is something [Inaudible] [47:58].
Vikram: And definitely don’t use that wallet.
Faizaan: Until its past July 9th. Its past july 9th so, now you’re good. Don’t worry about anything. So, this was an article that came through; less of just an actionable alert, but just more something that I found interesting. So, a Carroll School of Management student basically did a study and found that less than half of ICOs survive four months after a sale. Now, broadly speaking, I’m not surprised that a lot of ICOs turned out to be flops; because, you know, there was a lot of white papers with nothing to back them up.
Vikram: Yes.
Faizaan: But it’s interesting to see that it’s actually not playing out and they’re starting to die off. So, we’ll see what that does for the ICO market; now that we’re going to have a lot of gray stones.
Vikram: Yes. I’m reading through that alert. He’s saying, ‘The report covers almost 2,400 ICOs completed before May and examines over a thousand twitter accounts. Researchers gathered data for over 4,000 ICOs, which raised $12 billion in January’. I mean, these are all crazy numbers.
Faizaan: Yes. An interesting line there is ‘Study concludes that the sustainability of an ICO depends on whether the company behind it is able to list its coin on a crypto exchange.
Vikram: Oh, wow. That’s interesting.
Faizaan: Yes. So, that’s interesting. Another thing that I’ve seen; you know, there’s a couple of ICOs that we followed, where we saw that it was a lot of talk and no action and they’ve been floating; basically, just every now and then they list on a new exchange, and they’re not doing anything useful. Basically, they are nowhere near what they said they would do, but just constantly getting listed in other exchange keeps enough buzz that they don’t die. So, it’s an interesting game that some of these companies are playing that aren’t dead but aren’t doing anything useful. It’d be interesting to see the statistic of how many ICOs survived and actually provide a valuable service, I guess, or anything close to what they said they would.
Vikram: It’s weird to be considered dead after raising millions of dollars; because if that’s the case, then it’s literally just a cash grab. If someone raises what doesn’t seem like a lot, but which is actually a pretty big chunk of money; like say you’re a coin and you raise $2 million, you’re not like Uber who’s doing another few hundred-million-dollar round, but you’re like a three-person team, you just raised 2 million.
Faizaan: That would be like raising — what — a small series with nothing, with just a white paper. Its 2 million; it’s still crazy.
And then another one; again, not necessarily market moving, but just an interesting bit of information that came through. So, there’s this company called the Hedger Tech, and basically, they insure the price of your coin. So, you exchange your crypto currency into their hedger coin and you can basically exchange the hedger coin back; let’s say you had BTC, you exchange it to hedger coin and the price of BTC declines, you can exchange your hedger coin back to BTC at the price that you had exchanged it out originally.
So, it’s essentially a way for you to just fix the price of your Bitcoin, provided that Hedger Tech sticks around. There’s a big risk there. What are your thoughts on that?
Vikram: So, I think all the insurance type of stuff is going to be heavily predicated on lawyers getting involved. I think it’s a very difficult thing to do with just code. So, I think I’d like to see; say, you wanted to use one of these insurance platforms — insurance is as conservative as it gets, like insurance companies have been around forever and then they have very conservative people that run them; I think I would want to see a firm like that be around for a while or be run by people who have been in insurance for a very long time.
Faizaan: Or they have some reinsurance with someone legitimate.
Vikram: Exactly.
Faizaan: Like if Hedger Tech had their hedge coins or hedger coins or whatever insured by Berkshire Hathaway, maybe there’s some amount of trust there.
Vikram: Right. We will see how it turns out and how these systems work, but I imagine that there will be need to be some gray beards involved for it to work really well.
Faizaan: Yeah. I was just fascinated by this because after all the volatility we’ve seen in the last year, who decides that their business is going to be that I will guarantee the price of your bitcoin. It’s just a very bold sort of thing to do, irrespective of whether it’s a good idea or not.
Vikram: It kind of coincides with the concept around stable coin?
Faizaan: Right.
Vikram: We’ll talk about those on a future podcast. There’s a handful of guests that I want to talk to specifically about it, but this idea that you can have a coin that tracks some other asset; like the US dollar, like CPI, et cetera; and it’s not volatile, and I think it’s a pretty risky way to go. I’ve seen charts like this for a very long time; where you have a chart of something that’s up into the right with no volatility and then one day something happens and it just gets destroyed. The perfect example of that is Bernie Madoff’s fund. He just made up numbers. He had the fund for 20 years, or whatever, going up or doing well every year and never having anything major happen to the downside. Whenever you see a chart like that, it should give you pause. Stable coins, to me, are an example of something where there’s a massive amount of unknown future risk; if something’s stable for a really long time, it could just stop being stable for some reason. If you have a stable coin track to the US dollar, then it’s contingent on what the dollar does. Dollar, yes, might stay stable for a while but doesn’t mean it will continue to be stable. So, I don’t know. Stable coins, to me, and insurance; things like that, like trying to insure against volatility; always seemed pretty hard.
Show Notes:
Topics
- What they’ve added to QuantLayer’s platform
- Seven new exchanges for listening when they add and remove trading pairs
- Telegram client side filtering
- Bitcoin ETF filing with the SEC
- What a SEC filing is all about
- Investment objective
- The section on Bitcoin: It’s history and how Bitcoin network works
- Specific industries that are useful in blockchain-focused applications
- OTC market in Bitcoin
- The section titled “Bitcoin Security and Storage for the Trust”
- The insurance they have on their Bitcoin
- Less interested in price tracking ETF funds and more interested in participating directly in the network
- Primary and other major issues with an ETF
- Coinbase announced they added 10 customers to their custody service
- Zcash and the founders reward
- What Eric Meltzer posted on the Zcash forum
- Arjun Balaji wrote a great piece on Zcash and incentives and the current debate
- Good incentives systems and bad incentives systems
- Ledger Live launch
- Reviewed some alerts that came in and talked about them
- $GNT (golem network)
- $REP AWS creds
- Less than half of ICOs survive 4 months
- Bancor hack
- Crypto price insurance
- Bittrex hack, even with 2FA enabled
- VeChain wallet released early
- Chinese hackers infect 1M computers to mine bitcoin, arrested
- Assassination plots on Vinnik & McAfee
- Algolia credentials
Links
- SEC Filing: https://www.sec.gov/rules/sro/cboebzx/2018/34-83520.pdf
- List to all the comments: https://www.sec.gov/comments/sr-cboebzx-2018-040/cboebzx2018040.htm
- Comment on accredited vs retail: https://www.sec.gov/comments/sr-cboebzx-2018-040/cboebzx2018040-167365.htm
- Someone commenting on Abraham Lincoln: https://www.sec.gov/comments/sr-cboebzx-2018-040/cboebzx2018040-167356.htm
- Someone who wants an SEC bailout of retail investors: https://www.sec.gov/comments/sr-cboebzx-2018-040/cboebzx2018040-4016099-167307.htm
- Someone on crypto being the future and bad grammar: https://www.sec.gov/comments/sr-cboebzx-2018-040/cboebzx2018040-4016099-167307.htm
- Bunch of these feel like “when moon, when lambo” type of comments:
- https://www.sec.gov/comments/sr-cboebzx-2018-040/cboebzx2018040-167176.htm
- https://www.sec.gov/comments/sr-cboebzx-2018-040/cboebzx2018040-167233.htm
- Angry post: https://www.sec.gov/comments/sr-cboebzx-2018-040/cboebzx2018040-3958028-167098.htm
- Think Bitwise: https://www.bitwiseinvestments.com/
- Coinbase Custody: http://www.fwbusiness.com/news/banking/article_993bc257-0bad-5d64-a5ca-8649c111a18d.html
- ZClassic by Rhett Creighton: https://twitter.com/HeyRhett
- ZCash Forum: https://forum.z.cash/
- Eric Meltzer: https://twitter.com/wheatpond
- Proposal to create a Zcash Ecosystem Fund directly funded by the Founder’s Reward: https://forum.z.cash/t/proposal-to-create-a-zcash-ecosystem-fund-directly-funded-by-the-founders-reward/30111
- Arjun Balaji: https://twitter.com/arjunblj
- Zcash and the Founder Incentive Trilemma: https://medium.com/@arjunblj/zcash-the-founder-incentive-trilemma-fe7689fc8293
- Matthew Green: https://twitter.com/matthew_d_green
- Zcash Team: https://z.cash/team.html
Hey everyone, this is Vikram again. Thanks for listening to us. If you’re
an exchange, a trader or working on a crypto project get in touch with us.
You can reach us on twitter at https://twitter.com/quantlayer or email us
at podcast@quantlayer.com.
