As the 2018 bears continue to roam, cryptocurrency markets are maturing. From the mindless speculation of the ICO bubble, interest and investment has consolidated around Bitcoin as the most fundamentally sound coin. The next run up will reflect this maturation, with new investment likely to accrue to Bitcoin and a small number of altcoins with established fundamentals.
Sophisticated investors entering the space will have higher standards of fundamental analysis than retail investors. Below we outline the key attributes that distinguish legitimate coin projects from empty projects or outright scams.
Three tiers of blockchain developers
The first and most important characteristic of any coin is the quality of blockchain developer. Without a high quality developer team, the other necessary features of a quality blockchain project will be absent. However, not all software developers were created equal. For the purposes of analysis, we arbitrarily divide blockchain developers into three broad categories:
The lowest quality blockchain developer has coding skills limited to forking existing open-source projects and launching ICO tokens on the Ethereum ERC20 smart contract. Both of these actions are overwhelming driven by the goal of self-enrichment. These ‘shitcoins’ are typically created, marketed and dumped on ill-informed retail investors. Bottom tier developers are often marketed as ‘blockchain engineers’ on slick looking marketing pages, despite having no real blockchain coding ability. They are the most numerous, and often anonymous to prevent them being chased by angry scammed investors.
The second tier developers are competent blockchain developers providing small scale or part-time code to established coin projects. These developers understand complexities of blockchain, and are able to code non-core consensus functions such as wallet apps. They are typically application developers.
These devs play a vital supporting role in blockchain development by bringing into reality the concepts and ideas of upper tier developers, working within existing coin development frameworks.
The uppermost tier of blockchain developers are able to turn incredibly complex and diverse concepts of monetary economics and game theory into code. They are responsible for maintaining the essential components of a coin such as the consensus mechanism, coin supply, block size and block propagation dynamics. These are the protocol developers.
Emperor Nakamoto and the Upper tier devs
At the apex of the pyramid is Satoshi Nakamoto, the pseudonymous now-Bitcoin creator. He is followed closely by others in the early anarcho-capitalist/cypherpunk scene who were working on decentralized trustless electronic money since the 1980s. There is likely to be less than 50 individuals on the planet who are true ‘Upper tier’ blockchain developers. There are several reasons for this:
Domains of Knowledge. Blockchain coding demands an incredibly high level understanding of a diverse range of fields including computer science, game theory, monetary economics, applied cryptography, distributed systems engineering and open-source development. The level of proficiency required to develop a coin from the ground-up takes decades of learning and experience in all of these fields. Imagining these fields of knowledge as overlapping Venn diagrams, the number of people who have proficiency in all necessary fields for high level blockchain coding is vanishingly small.
Ideological allegiance. The original blockchain developers were or still are Bitcoin developers who believe strongly in individual monetary sovereignty. These include people like Adam Back, who worked on the Bitcoin precursor Hashcash, Nick Szabo, Gregory Maxwell, Luke Dash Jnr and Peter Wuille (Sipa). They are ideologically driven to build a trustless payment system and improve the lives of people living under financial oppression. To them, financial rewards are a subordinate goal. This contrasts strongly with the money-grabbing aims of lower tier developers who hop from project to project as software mercenaries.
Decentralized vision. Not all top tier developers are Bitcoin developers. Some are pursuing a different vision of a decentralized blockchain future based on Bitcoin’s proof of concept. They were driven by similar lofty ideals — Ethereum founder Vitalik Buterin (decentralized world computer), Litecoin founder Charlie Lee and Monero figurehead Riccardo Spagni (privacy coin) all fall into this category.
The dearth of quality blockchain developers implies some important corollaries —
- The number of projects with highly competent, top tier developers is orders of magnitude smaller than the total number of coins in existence, or listed on CoinMarketCap or exchanges like Binance.
- Developer talent, not money, is the bottleneck for the further progress of any coin.
- Projects that do not create fundamental value through a visionary goal (sound money, trustless privacy coin, decentralized internet) are unlikely to accrue the best developers, and over time unlikely to accrue the most investment.
Characteristics of solid coins
By extension of its competent developer team, any truly legitimate project will demonstrate these other key features:
Active GitHub code repository. Any coin in long term development will have an established record of code contributions, evidence of active participation by its open source contributors. Projects lacking Github repositories are either completely hollow or maintaining proprietary code.
Own blockchain. With a vibrant developer base and active Github, a project is not established unless it has its own blockchain. Unless a coin has its own blockchain, then it is simply leveraging and depending on the developers and code of another project. All ERC20 tokens rely on the codebase of Ethereum and therefore are vulnerable to the whims of the Ethereum developers and the scaling limitations of that chain.
Active community participation.Without users, a project is just empty lines of code and the coins are worthless. Use is a fundamental necessity of any legitimate, value-creating coin. A strong community is a predictor of a vibrant developer base, which encourages stronger coin development and forms a positive feedback loop.
Bitcoin remains the overwhelming leader in all these categories as it sustains the largest and most vibrant user and developer community. The altcoin projects that possess these markers of fundamental quality are the front runners competing with Bitcoin.
Skycoin’s Synth, an Upper tier developer
The coin project lead by one truly brilliant ‘upper tier’ developer has escaped the attention of mainstream crypto market. Synth is the pseudonymous lead developer of Skycoin, and an early participant in the cypherpunk scene.
Synth was involved in Bitcoin since the first public release, fixing bugs in the earliest versions of the Bitcoin software through the IRC chat rooms. He was working on Bitcoin before it compiled on the Linux operating system and when the open-source code was hosted on Sourceforge, a precursor to GitHub. From this early vantage point, he was involved in hedge fund and traditional finance auditing of the Bitcoin source code for its suitability as a mainstream financial asset. Synths knowledge of Bitcoin is incredible broad, and this is quickly apparent to any listening to his interviews. He conceptualizes the necessary factors for cryptocurrency adoption as a pyramid with 3 levels:
- Foundation —the quality of the base level code upon which all the user facing functions like wallet apps are built. Without a solid foundation, the coin is unable to sustain proper development. Coins that lack their own blockchain are shitcoins ipse facto.
- Middle — accessibility of the coin to users and developers. The ease or difficulty at which people interact with and use the coin. Without intuitive, easy-to-use wallet apps and other UX features, a coin will never be adopted at scale.
- Capstone — applications that drive market demand for a coin. Mainstream use of cryptocurrencies cannot occur until specific blockchain-based applications exist that exist entirely within a crypto coin ecosystem.
Like a number of early Bitcoin developers, Synth saw the inherent limitations that Bitcoin faced in delivering a trustless payment system to mass adoption:
Foundation — Proof-of-Work. Synth sees inherent limitations in PoW. Synth points out that hash power is overwhelmingly controlled by Chinese ASIC manufacturer Bitmain, who have a monopoly of Bitcoin mining hardware and mining pools. This is an obvious threat to Bitcoin’s claim of being truly censorship resistant, as Bitcoin’s security relies on decentralization of hashing power (‘1 CPU, 1 vote — Bitcoin whitepaper). This problem has been repeatedly identified and discussed by many Bitcoin core devs including Luke Dash Jnr, Cobra and Matt Corallo, the latter of which is currently working on mining decentralization efforts.
Synth also talks of PoW as a significant flaw in the game theory of Bitcoin. The profit motives of miners has lead them to profiteer on transaction fees at the expense of users. Miners have historically injected fake transactions into blocks with scarce transaction room, inflating fees for all users on the network.
Synth believes that there is no need to combine the functions of block minting, coin creation and block consensus into one algorithm that also serves to secure the chain, and these can be separated in order to bring the cost of consensus down while maintaining the security of the chain.
Middle level — Bitcoin’s usability. Synth believes that inherent friction in using Bitcoin will be self-limiting to its worldwide use a means of payment. This is related to its lack of usability and high transaction fees (driven by competition for scarce block space). That’s fine if Bitcoin is aiming to replace the base layer of international money (i.e. central banking) rather than mass consumer payment platforms like PayPal or VISA, but 10 minute blocktimes and unpredictable fee markets are not conducive to mass market use of Bitcoin as a payment network.
Synth believes that cryptocurrency can eventually replace these legacy institutions as a trustless means of every day payment. However, for coin to reach 1 million, 10 million or 1 billion users will have applications that are demanded by the non-technical user, and necessitate use of that coin.
Applications — Close/open loop economy. Synth sees the effort to create a functional closed loop economy as one of the key challenges for any crypto project and necessary for mainstream adoption. By this, he refers to an economy in which essential goods and services are paid for in that currency. Newly mined Bitcoins are frequently sold as soon as they are mined, so inflow of new fiat investment is constantly required to maintain the same price/Bitcoin. Without incentives to hold a coin beyond the store-of-value thesis, Bitcoin is vulnerable to wild price swings vs fiat currencies as speculators and momentum traders exacerbate price movements. This is the distinction between market demand (demand for consuming or holding a good) and monetary demand (demand for a good as a medium of exchange or store of value), as explained by Saifedean Ammous in his recent book, the Bitcoin Standard (p19).
Whether or not these problems are insurmountable with regard to Bitcoin’s most attractive use as a hard money remain to be seen. However, they were justification enough to re-design the fundamentals of Bitcoin in an attempt to address these problems.
Skycoin — the complete reactionary coin
Synth claims the Skycoin project has existed for the past 6 years, and has been in stealth mode until the last 18 months. During this time, the Skycoin team continually rewrote the codebase in response to trial and error, real-world observation of Bitcoin and Ethereum. Skycoin is Synth’s attempt at bringing crypto to the mainstream:
Foundation — A new consensus algorithm. At the foundation of Skycoin is a novel consensus algorithm based on Web of Trust dynamics, in which network block consensus is achieved through verification by ‘trusted’ nodes. This sounds paradoxical in a trustless cryptocurrency, however it is apparently the most robust approach to Sybil attacks in this context. Pierre Rochard of the Nakamoto Institute and the Noded Podcast describes the use of Web of Trust in Bitcoin governance when deciding on changes to the Bitcoin protocol (see Stephan Livera Podcast 11 ~37:00). After 4 years of academic research, Synth and the Skycoin devs have developed a practical implementation of Web-of-trust to block consensus that replaces Proof-of-Work hashing and its attendant drawbacks. If successfully implemented, this will drastically reduce the cost of consensus and will obsolete Proof-of-Work as the most prevalent cryptocurrency consensus algorithm.
Useability — blockchain hardware. Synth sees blockchain hardware as essential to bridging the conceptual gap from computer code to meatspace. Skycoin are building out specially designed blockchain-hardware using open source Orange or Raspberry Pi boards which they call Skyminers. Skyminers are computers with multiple parallel CPU boards that form the physical infrastructure of the ecosystem, acting as a personal cloud computers. Each node will be able to serve as a block consensus node for Skycoin Core (or Bitcoin), forward encrypted internet packets on the Skywire internet application or rent out network-attached storage. Skycoin are also building motorized WiFi antennas which will build out the MESH network and allow people to start selling bandwidth to each other, denominated in Skycoin.
Seamless UX Mobile, desktop, hardware and web wallets that are intuitive and easy to use. A new programming language called CX, which is based on Golang that reduces the on boarding resistance for lowest-tier software developers to start coding blockchain applications. According to official news, the team has written a CX coding manual for distribution to college students in China, which will allow rapid onboarding of new blockchain application developers into the Skycoin ecosystem.
Applications —Skywire decentralized internet. The flagship application is Skywire, a decentralized networking protocol and MESH network modeled on the cjDNS encrypted peer-to-peer internet project and the Hyperboria implementation. Instead of performing Proof-of Work hashing to mine coins, Skywire nodes forward encrypted packets on this network, and are paid in coins proportional to the bandwidth they contribute. Synth sees Skywire as a new alternative the fragmentation of the internet across the world, in which users would naturally buy and use Skycoin in a closed loop economy to purchase their internet connection. This conforms to Austrian economist Carl Menger’s theory of the sale-ability of money, as Skycoin will become demanded for its use on the Skywire network and within the Skycoin economy. This in turn incentivizes users to buy and hold Skycoin, reducing its velocity and increasing scarcity and eventually its price (for more detailed explanation on Skywire payments, see articles on Coin hours, the parallel Skycoin token).
The scope of the Skycoin project is enormous and deliberately so. Synth acknowledges most new technology implementations will fail and that the truly mainstream use cases for blockchain are yet to be identified. By acting as a decentralized consortium of projects, Skycoin increases the probability that it taps an endogenous demand that drives mainstream adoption of Skycoin.
Skycoin is being built out by a highly-engaged, decentralized developer base including Upper tier blockchain developers. It has established, active Github repositories, an advanced and fully-working blockchain and highly usable wallet applications. Importantly, it has a dedicated community who are building the hardware for a new internet with Skin-in-the-Game.
It is clear that the market has not yet priced these fundamentals, and projects with comparatively little fundamental value are currently priced well above their true price. Coins that emerge from this bear market in ascendancy will be those with a solid core of experienced developers working on their own blockchain. The on-ramps for institutional investment in the cryptocurrency markets are being built daily. Once in place, these sophisticated investors with strict investment criteria will allocate small proportions of their portfolios to a select few coins. Skycoin appears to be among the frontrunners of projects to which value will accrue.
r/skycoin: Skycoin Official Reddit Community - Cryptocurrency 3.0 - Building the new Internet, a better blockchain, and…
Disclosure/disclaimer — We consulted the Skycoin team in the writing of this article. It is not intended as investment advice. The details and features discussed are correct at the time of publication. Investing in the crypto space involves significant risk. Always do your own research.