Medium Around The Block: #4
Medium is one of the richest sources of information in the crypto + blockchain ecosystem. In fact, it is far better than any single professional publication. However, it is very difficult to surface signal amongst all the noise. We share a list of the most interesting pieces we’ve discovered on Medium from the past week — or from the archives. To receive more of The Block’s analysis, insight, original content and curation, visit us at The Block!
Ann Miura-Ko of Floodgate kicks us off this week by sharing the thesis behind the firm’s largest crypto investment to date, Starkware. She points out that while blockchain’s publicly distributed ledger reinvents trust, there are limitations today: “In the process of democratizing trust through blockchain, two critical problems have emerged: privacy and scalability.” Ann describes the Starkware team, among the early academics who pioneered SNARKS, a type of zero-knowledge proof which produces proof that a complex computational process was done correctly. Ann then walks through a powerful visual example to illustrate how zero-knowledge proofs work. Ann concludes with the following takeaway…
As we near the ten-year mark of bitcoin’s launch, the potential for blockchain and the core concepts it supports has momentum, especially with talented developers that I haven’t seen in some time. Many of these applications would benefit from a fully public blockchain but require privacy at the transaction level and greater scalability whether they are in finance, healthcare or other applications.
Earlier this summer, KJ Erickson penned a gem around network effects — describing how tokenization can herald the end of extraction. First, she summarizes the value extraction that historically has occurred due to network effects…
Unfortunately, network effects are so powerful that they drive network owners towards natural monopolies. In other words, as the network grows, both the value of participating and the cost of switching are sufficiently high that the entire group of potential participants consolidates around a single network.
The downsides start to occur when these powerful network effects are owned by centralized private companies. As network effects push industries towards monopoly, the owner of the network has the ability to assert what MIT Cryptoeconomics Lab economist Cathy Barrera called “Market Power.”
Network effects give private companies market power. Market power gives private companies pricing power. Pricing power allows companies to extract more in rents from their users than is economically optimal — leading to the classic deadweight loss scenarios we all remember from Econ 101.
There are massive upsides to properly designed tokenized networks:
When designed properly, decentralized, open source, tokenized cryptoasset networks solve the problem of incentive alignment between network creators and network participants. When the software is public, and the organizing body is a nonprofit rather than a for-profit, the Extraction Imperative is eliminated — because there are literally no longer shareholders with a claim on cash flows. The value is held in the network itself, represented by token ownership. Everyone who participates in the activity of the network, using and accruing tokens in the process, is effectively a network “owner.” Because there is no division between owners and participants, there is no point at which their incentives diverge.
KJ concludes by highlighting the concept of a “double network effect”, eg “if the first network effect is the impact of new participants on the utility of the network in terms of whatever it’s supposed to provide, the second or ‘double’ network effect is the ability to deploy tokens to incentivize users to build the network faster.” Due to these effects, “tokenization not only keeps incentives aligned, but actually adds a new layer of economic incentive to network growth.”
Amidst much recent talk that #HODLers of cryptocurrencies are “free-loaders”, Dan Held makes the case that they are actually “the revolutionaries.” Bitcoin #HODLers help ensure that bitcoin is “sound money”. Dan takes us through a brief history of Bitoin, highlighting the essential role holders play in developing a feedback loop that “increases value, which increases demand, hash rate, and network security.” These holders also lower volatility in the long run, making Bitcoin more attractive to new entrants. In closing…
By owning Bitcoin, you become the central bank, the backbone of the financial system. Hodling isn’t about finding another buyer at a higher price someday in the future, if hyperbitcoinization occurs you’ll never have to sell.
…
Bitcoin promises an alternative for citizens across the world to keep their savings in a form of money that can neither be confiscated nor diluted. If Bitcoin grows much larger, it may force governments to become a voluntary organization. Through hodling we may finally be free.
Jonathan Cheesman takes a look at staking models, the cost of holding cryptocurrencies and expected returns. The key quote:
As an investor, a difficulty I see with crypto is that free-riders are not supposed to strip value from the economy. That’s the “democratization of finance” part: you aren’t just rewarded for providing capital, you need to contribute. That said, so far, crypto networks have been bootstrapped by rewarding early adopters.
The yields in crypto can be very attractive but you have to be aware of the cost of passive hodling and optimize a portfolio of digital assets for total return.
Qiao Wang and Dan McArdle begin their piece by stating: “One way of thinking about cryptoasset valuation says that only assets that can become a store of value (SoV) are deserving of high network value.” They then explore first-order properties that a cryptoasset must satisfy in order to hold value:
- Immunity to theft
- Credibly low inflation
- Low cost of conversion
They unpack each of these properties further into their component parts and dive very deep into “low cost of conversion.” They close with the following thought:
In short, valuing an early-stage cryptoassets boils down to the question of how likely it will acquire and maintain the first, second, and higher-order properties of SoV described in this post. By way of example, BTC is arguably the best at immunity to theft and credibly low inflation, but will it achieve more utility than say, ETH?
The age old question: “does this project need a blockchain?” has been answered “YES” incorrectly far too many times. This has cost corporations significant time and capital that could have otherwise been usefully allocated. With marketing organizations like IBM and the big consulting firms pushing their clients toward “blockchain solutions”, Mohammed ElSeidy provides a great framework on whether a blockchain is needed for a given problem — and what type should be implemented.
The claim that cryptocurrency mining is a huge waste of energy has been gaining steam over the past few years — with the chatter rising to a crescendo this summer with claims that up to 1% of the world’s energy usage is being put to cryptocurrency mining. In response, LaurentMT highlights a few critical problems with the energy calculations and their focus on per transaction efficiency before defining the utility of Bitcoin’s Proof of Work algorithm: “The main utility of Bitcoin’s PoW is to secure an economic history.” Laurent walks through a mathematical model to show that Bitcoin’s PoW is becoming more efficient at securing the protocol’s economic history.
In this first part, we have discussed why the average cost per transaction isn’t an adequate metrics for measuring the efficiency of Bitcoin’s PoW and why this efficiency should be defined in terms of the security of an economic history.
Based on this observation and two important properties of Bitcoin’s PoW (its global and cumulative effects) we’ve formalized the utility of PoW with a very simple mathematical formula defining the total number of bitcoin.days secured by the system.
At last, we have derived two metrics which both suggest that contrary to a widespread opinion, Bitcoin’s PoW is actually becoming more and more efficient.
The entire history of Bitcoin Cash, the largest fork of Bitcoin to date, has been filled with drama and in-fighting. Kay Kurokawa takes a look at the ideology behind Bitcoin Cash and the upcoming drama. He asserts that ideology justifying the existence of Bitcoin Cash makes it unstable: “It’s easy to see that this ideology, that a hard forked minority chain can be a legitimate successor to the original chain, is completely unstable.” This will present greatest risk when state level adversaries attack Bitcoin Cash. In Kurokawa’s words:
A cryptocurrency project will not be able to easily switch to a policy of having no hardforks when the adversaries become suddenly engaged. For a project like Bitcoin Cash, which have already hard forked twice within a year to solve its problems, the users have been conditioned to believe that hardforks are safe. Thus when a malicious state sponsored hard fork comes along, they will be sitting ducks.Bitcoin users, who have been conditioned to believe that all hardforks are unsafe, will be immune when such an attack comes.
A Stable and sustainable ideology must be the foundation of all cryptocurrencies. No amount of cryptography, consensus protocol development, and technical optimizations will help a cryptocurrency with an unstable and bankrupt ideology.
KJ Erickson makes her 2nd appearance in this week’s summary with a summary of 8 “decentralization” risk factors that could impact the current Big Tech companies’ businesses. The chart below summarizes the risk factors as well as their likely impact on each giant. The results are not what one might expect!

This terrific cryptocurrency investment overview by Alex Krüger dropped nearly a year ago. It’s fun to look back and see how a great trader was thinking at the time — and how things have played out subsequently.
The Notation Capital team writes about “Mining 2.0.” It is their belief that “as blockchains evolve into the era of Mining 2.0, it will become increasingly important for investors, builders and other stakeholders to actually participate in these new networks.” This represents an exciting trend toward the merging of investment and building in the blockchain and cryptocurrency ecosystem.
The Block’s Steven Zheng, Head of Research, explored the security token market in our weekly series on crypto & blockchain sectors. Security tokens exist in a very large market space: “Security tokens aim to tokenize the ownership of all assets, whether they are public & private equities, real estate, or precious metals. For context, the global commercial real estate market alone is worth ~$4T.”
Steven explores points of entry, how security tokens solve existing problems and the barriers to entry into the market. It is very early — with the potential impact high but uncertain: “These tokens can quite literally change how the current financial system operates, or they could as just as easily be another footnote in the new edition of a business textbook.”
Thank you for reading what we’re reading this week. Have a fantastic Labor Day! Until next weekend, Happy #HODLing and see you at The Block!
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