“[Block]chain of Events” — January Edition

A Thematic Review of the Past Month in Crypto by Arca Research

Information is everywhere and accessible to almost everyone with an internet connection. This period of easy information access only started in the last two decades, which makes it all the more interesting that crypto and blockchain have begun to develop. Society has moved from paper records and closed door meetings to Google search and online forums, granting access to the masses on virtually anything. The abundance of information has resulted in a greater demand for transparency. This month we look at transparency and how this theme is not just applicable to the actual features of blockchain technology, but the leaders and communities behind it.

Transparency is King

Transparency has long been a hallmark of blockchain technology. The idea that transactions should be published publicly to prevent fraud and double-spend is revolutionary and has attracted bright minds to work in the crypto space. Further driving the open nature of the community is that projects are all built on open-source software. This means that all the development work and code for a project is publicly accessible and anyone can contribute to its development. Highly supportive and engaged communities have subsequently emerged and are further incentivized by the ability to purchase tokens from the project or receive them by participating in the network. However, with an open and collaborative community environment, and publicly announced on-chain activity, participants in the ecosystem have started to expect this same level of transparency from organizations that run these systems.

Varying levels of transparency exist with some companies burying their progress within Github and others providing hourly updates on Twitter. Below we look at four projects that during the month of January outperformed or underperformed the broader market* based on their level of transparency.

*Bitcoin is used as a the “broader market” benchmark in our calculations.

Winners

Ethereum (ETH)

Ethereum is one of the earliest, large-scale, community-built blockchain projects and as such is often criticized for its slow pace of development. One thing Ethereum cannot be faulted for is their recent communication and honesty as they faced complications and setbacks.

During the end of last year, the Ethereum community was abuzz with the unveiling of Ethereum 2.0, the Ethereum Foundation’s roadmap to ultimately scale the network over the next two years. The first part of this upgrade, called Constantinople, was to be implemented during a hard fork on January 16. The upgrade had technically already been delayed once

(it was originally planned for last November) and the community was eagerly holding their breath to see if the upgrade would be pulled off. For several weeks, the impending hard fork was discussed on every medium imaginable: Twitter, Medium, large crypto outlets and more. Almost everyone in crypto was confident that the update would be pulled off with little to no hiccups.

Then came the wrench: on the morning of January 15, a little-known security firm, Chainanalysis, published a report that exposed a reentrancy vulnerability in the Constantinople code. This security vulnerability could only be exposed in specific instances and most smart contracts would not be susceptible to the reentrancy attacks.

The market reacted immediately to the news, dropping ETH by 6%. Within a few hours however, the Ethereum development team had announced on Twitter and their blog that they had decided to delay the upgrade until the security flaw could be patched. What was impressive about the response was the Ethereum Core Developers’ openness and speed with which they addressed the issue and came to a consensus on next steps. Despite the instant price drop, the market rewarded the transparency, and the price of ETH rallied back to end the week largely unchanged. It’s only during crises and high stress situations like these that projects and teams are tested.

Tron (TRX)

Tron has been plagued with its fair share of negative PR, but the project can’t be faulted for not delivering on its promises. Unlike many other projects, Tron has actually under-promised and over-delivered. The project’s initial white paper, published in mid-2017 for their ICO, forecasted a mainnet launch by early 2019. Tron’s development team beat these dates, launching its mainnet on May 31st, 2018.

In similar fashion, Tron spent the month of January delivering on deadlines for software updates, dapp platforms and announcing the tokenization of the BitTorrent platform. While many criticize Tron’s CEO and Founder, Justin Sun, for his marketing tactics and his frequent Twitter updates, the project can’t be faulted for a lack of communication and transparency with their community. The price of TRX mirrored the positive community sentiment, outperforming the broader market, and ending the month of January up 37%.

Losers

Stellar (XLM)

As the old adage goes, no news is good news. In our information age, this couldn’t be further from the truth. When I worked with a venture portfolio of early stage startups and I didn’t receive an update from the founders for three or more months, I would assume they were in trouble. The same holds true in crypto as an early stage asset class: no news is bad news.

The Stellar Foundation has proved this by not delivering any kind of material update for the last three months, massively driving down the price of Lumens (XLM). As other tokens, like Bitcoin, recovered 6% from the November and December market lows (11/15–12/14/18), Stellar has continued to sell off and is down over 15% since mid December.

These foundations are not companies and are not beholden to token holders to provide updates or boost confidence, but the market has spoken about how they feel in regards to the lack of transparency from the foundation. It’s not like Stellar has nothing to update the community about either. Specifically, the foundation has not yet provided material updates regarding the launch of their Lightning network, Starlight or the Blockchain.com XLM airdrop, both of which happened in late 2018. Although community updates have been provided via their blog and mailing lists, these updates did not touch or identify real progress on these high profile initiatives. Without tangible updates from the foundation, the community can only assume the worst: the lightning network has seen very little usage and only a small percentage of the airdrop was claimed, translating to low adoption of the Stellar network and Lumens.

Ethereum Classic (ETC)

How do teams respond in times of crises? Some come together, propose a solution, implement that solution, and communicate their actions to the public in a timely manner. Others scramble. As we saw with Ethereum’s handling of the security flaw in Constantinople, there’s a right way to handle crises that have significant impacts across the network. Ethereum Classic on the other hand, illustrates how things can go awry.

On January 5, Coinbase detected a “deep chain reorganization” prompting them to stop transactions with the Ethereum Classic blockchain. As rumors circulated that ETC was potentially suffering from a 51 percent attack, the Ethereum Classic developers tweeted out a statement that they did not believe an attack was ongoing or that there were issues.

Source: Link

Hours later their account warned major exchanges to increase confirmation times in order to catch any doublespend activity, yet made no admission of an attack. Over the next two days it came to light through a report from security firm SlowMist and an official blog post from Coinbase, that a 51 percent attack had occurred. By the time Ethereum Classic began to acknowledge the attack, $1.1m in funds had already been stolen. Finally, on January 9, a post-mortem was published following a community ETC meeting.

While the 51 percent attack on ETC was very different from ETH’s last minute suspension of its hard fork, the two events bring to light the importance of speed and communication in reacting to crises. While ETC was slow to respond and act, ETH was faster on the trigger, acting out of an “abundance of caution”. ETC’s messaging was mixed and ambiguous, while ETH’s was clear and direct. ETC’s price for the remainder of January has mirrored the market’s sentiment on its handling of the attack. After staying apace with the overall market’s recovery from mid December last year, ETC price has steadily declined 21% in value since the attack came to light.

Closing Thoughts

Leaders in the crypto space (and any business for that matter) have to understand that they are responsible and have an obligation to their community. Communities are the powerhouse of these tokens whether we like it or not. Transparency is a theme not just present in crypto, but across most of the business sector, as a new generation of consumers with greater access to information has come into purchasing power. Transparency has become of the utmost importance not just because information should be accessible but because it promotes fairness. In an ecosystem whose ethos is decentralization, redistribution of power and wealth, this fairness is the key to success.

— The Arca Research Team

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Medium Katie Talati & Hassan Bassiri
Twitter at @KatieTalati @HassanBassiri @Arca

Disclaimer:

As of the date of this commentary, Arca Digital Assets Fund holds positions in ETH. All data shown is from CoinMarketCap.

This commentary is provided as general information only and is in no way intended as investment advice, investment research, a research report or a recommendation. Any decision to invest or take any other action with respect to the securities discussed in this commentary may involve risks not discussed herein and such decisions should not be based solely on the information contained in this document.

Statements in this communication may include forward-looking information and/or may be based on various assumptions. The forward-looking statements and other views or opinions expressed herein are made as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated and there is no guarantee that any particular outcome will come to pass. The statements made herein are subject to change at any time. Arca Funds disclaims any obligation to update or revise any statements or views expressed herein.

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