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Token Daily Capital Newsletter #9


TWEET OF THE DAY


"New (and first!) blog post on a topic I am starting to do work in - lattices. Lattice cryptography is really interesting! This post is a tiny introduction to several hard problems in lattice crypto. I'll publish a part 2 on lattice-based key exchanges soon." 

Chelsea, one of the best cryptographers in the game. 


 
  

IN BITCOIN
 

⚡️ Verdict is in... 

And BitMEX has been effectively sanctioned by ASA (UK's advertising authority) for using a logarithmic scale to chart Bitcoin's price in their ad below.





      


IN ETHEREUM

🔹 DeFi Lego (rDAI)

Ryan Sean Adams has recently coined the term money lego to refer to different DeFi innovations. The newest DeFi lego piece is called rDAI. rDAI builds upon Compound protocol's cDAI, which allows users to earn interest by lending their DAI. rDAI allows this interest to go to a different address than the one lending the DAI. Possible use cases include charity or, as we've seen most recently on Rinkeby testnet, donations for dapp development. 
 
      

IN ALTCOINS
 

💸 Developer-less Blockchains 

Litecoin's under fire for having minimal development activity and Charlie Lee confirms that all development is actually done by Bitcoin developers and then just copied/merged upstream by one lead developer to Litecoin Github.

While we appreciate Charlie's honesty, we're confused as to why a developer-less project still has a market cap of more than $5B.  



💸 SEC Clamps Down on Another ICO

The SEC continues to crack down on allegedly fraudulent ICOs. This time, it's an emergency lawsuit against Reginald Middleton, the founder of the cryptocurrency Veritaseum. The court has issued a temporary restraining order against the company preventing any expenditures until a court hearing. The cryptocurrency VERI took a 60% plunge in response to the news and is currently at ~ 99% loss compared to its ATH of February 2018. 

 

      

READ OF THE DAY


📚 Too Clever By Half

A thought-provoking piece on how financial innovations start and how aggressively pushing them forward usually leads to their failure. The article touches on Bitcoin and the challenges it would face in this context. A timely piece (though published over a year ago) in light of recent economic tension.

 
      
PARTNERSHIPS
 

DeFi Summit London (September 10-11)

We are happy to announce our partnership with DeFi Summit London. It will be a 2-day event focused on 'decentralized finance' (DeFi) and related topics such as financial inclusion and the history of open finance.

The event will run 5 tracks in parallel throughout the day. There are 350 spots available to attend and every attendee will be handpicked in order to maximize high-quality multidisciplinary interactions. Expect a mix of academics, crypto entrepreneurs, regulators, institutional service providers, financiers, fintech workers, and economists. Apply today for your ticket https://defisumm.it.

 
      

THOUGHT OF THE DAY
 

Lightning Network, Bitcoin Peg Zones, and  Consumer Payments
Why Bitcoin Peg Zones May be a Better Scalability Solution Than Lightning


Off-Chain Scaling is a Must

Bitcoin block space is scarce and expensive, when someone sends a simple transaction, the 200-bytes transaction will occupy that space in the Bitcoin blockchain forever. The more valuable a bitcoin is, the more expensive this block space is. Low-value transactions will be ultimately priced out because of the fees needed to pay for that space. Even with on-chain scalability solutions that allow batching of transaction or signature aggregation, e.g., Schnorr signatures, the block space will still be expensive for low and medium value transactions. 

Building on this understanding, Bitcoin developers have recognized the need for off-chain scaling solutions, where BTC transactions happen but do not occupy space in the blockchain. Alternative off-chain solutions differ in security, usability, convenience, self-sovereignty and the additional features that can be implemented. For example, custodial wallets to pool capital, side-chains, Bitcoin peg-zones and Lightning Network are all solutions that optimize for different goals. 


Why Bitcoin Peg Zones Can be a Better Option Than LN for Payments

Though LN is arguably the most popular Bitcoin off-chain scalability solution, it isn't the only one. It may not even be the best one in all use cases. When the priority is high-security, off-chain transactions then LN is the way to go. LN security is derived from Bitcoin's blockchain security, making it the most secure and self-sovereign off-chain solution.

However, it is less convenient to use LN. When a user opens a LN channel, they need to maintain enough balance on both sides of this channel to be able to actively send and receive payments. In addition, BTC on LN is still a bearer asset. It is not possible to implement features such as chargebacks or fraud protection with bearer assets.

 

While such features can look contradicting to Bitcoin ethos that encourages self-control of one’s funds, these features are highly appreciated in consumer payments networks. Consumers appreciate the assurances of fraud-protection and the ability to dispute transactions if they didn’t receive the expected products and services. To onboard this sector of consumers to Bitcoin, side chains or generally speaking "Bitcoin peg zones" can be an off-chain solution to offer such services. 

A Bitcoin peg zone is another separate chain or side chain with a token that is pegged to Bitcoin. In that sense, Binance Chain is a bitcoin peg zone with the BTC-b pegged token. Similarly, Blockstream’s Liquid is Bitcoin peg zone with L-BTC as the pegged token. 

In this paradigm, peg zones will be similar to today’s banks - within each zone, BTC transactions can be cheap or free with added features, and Bitcoin on-chain transactions will act as the settlement layer between these banks. In contrast to what we have today, no one would be forced to use a bank or be denied access to the financial system if they are not using these peg-zones/banks. The overall system will be permissionless and decentralized. Peg zones will merely offer extra services and convenience for customers looking for these services. 

For example, a peg zone can only offer faster finality or confidential transactions similar to Blockstream’s liquid, or even completely private transactions similar to Zcash, without the scalability or performance drawbacks thereof. Another can offer fraud protection by allowing the peg-zone validators to freeze accounts if it is proven that the associated account has committed fraud. A third can offer charge-back guarantees if customers are asking for it. 

 


 
Are We Replicating The Current Malfunctioning System on Bitcoin?

One of the key concepts of Bitcoin is to encourage self-sovereignty. Bitcoin users have full control of their money by controlling their private keys. However, this benefit comes with the responsibility of properly maintaining and securing such private keys. Not all consumers are ready to immediately take such responsibility. For many, if the probability that they lose their keys via self-custody is higher than the probability that their service provider will go rogue and seize their assets, then the choice is obvious.

For a long time, consumers have benefited from the additional services and convenience of the current traditional system. It is unrealistic to expect most to ditch these features and immediately learn the new Bitcoin financial system. Peg zones with different features and capabilities could be a gradual introduction to the Bitcoin financial paradigm. Consumers might start by a more centralized peg-zone that offers services similar to the traditional system and gradually move to more decentralized and sovereignty-preserving peg zones.  

Another benefit is that current banks and financial service providers may see it as an opportunity to start offering their services in the Bitcoin ecosystem. Eventually, these organizations would be absorbed into the new paradigm and adopt the more decentralized ethos as their customers start learning the benefits of the more-decentralized financial system. 

 
 
      

Disclosure: Token Daily Capital and/or its partners may have exposure to some of the cryptocurrencies mentioned in this newsletter.

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