COVID-19 is bigger than anything written below. Still, there's substantial activity in crypto that's worth tracking while isolating at home. Stay safe and stay informed.
How The First Blockchain Protocol M&A Went Horribly Wrong
Not all acquisitions end well. Last month, this proved especially true for the Tron team when they tried to buy Steemit. We expect more M&A attempts in the future, so this timeline of events is worth diving into to better understand why traditional M&A dynamics won't work for blockchain networks.
Timeline of events
In mid-February Tron founder Justin Sun decided to (rogue?) buy Steemit, a company that owns a major Steem portal, without any public notification or community discussion. Despite initial reports portraying the Tron/Steem M&A as a success story, here are the ways it was botched:
To begin, the existing, and relatively small, community of Steemers were not alerted to the sudden move and prepared for the worst. As Steemit owned a large number of Steem coins - with the understanding that these coins wouldn't be used to influence the network validator election - the community moved to enforce this "promise" as a protocol rule.
In response, Sun arranged with a number of exchanges to use the tokens in the exchange wallet to vote-in his own validators to control the network. The move led to uproar from folks both inside and outside of the Steem community. The backlash led exchanges to reverse their actions, including a public apology from Binance CEO, CZ.
About a week ago, the Steem community ultimately decided to hard-fork Steem into a new blockchain Hive, leaving Sun and Steemit behind. The fork garnered support from Ethereum's Vitalik Buterin as well as Binance and Huobi, the exchanges that initially supported Sun's failed takeover of Steem.
The Steem drama and resulting fork are part of the same lesson we keep re-learning in this nascent sector: community is everything.
To begin, the notion of M&A with blockchain protocols and platforms is nonsensical. The entire point of public blockchains is there is a lack of a central point of control. If a blockchain project is successful, there should be nothing that is acquirable.
If we analogize this M&A to an attempted takeover of an opensource project we can begin to more clearly assess what went wrong. The customs around taking over an opensource project are almost as old as opensource itself.
It is frowned upon to take over a project by simply speaking to a small number of contributors, a company's board members, or investors and getting their support. Even if the aforementioned stakeholders concede, as in Steemit's case, without garnering support from the community at large it is relatively easy for the community to exit and fork away.
Moats are very weak. There are no patents or proprietary tech that will force customers to use your product. In opensource the only asset is your reputation among the community.
We could have seen a different result if Sun had publicly set expectations to work with the community for a better outcome. In this fractured space - with a graveyard full of hundreds and thousands of barely-used blockchains - it's not difficult to garner consensus among communities to merge and consolidate into bigger communities. However, it requires active and honest efforts to reach net better outcomes which some actors in the space don't seem willing to exert.
⚡️ Bitcoin Blockchain Visualizations
Though there are many websites that display Bitcoin block information, Wiz's newly launched mempool.space offers top-tier visualizations of how the Bitcoin blockchain and mempool work. You can watch, in real-time, how the upcoming block should be filled with unconfirmed transactions from the mempool and track how much in fees could be earned in the next block.
⚡️ Venezuela's Blackout Reveals How Bitcoin Is Used In Latin America
New analysis by Matt Ahlborg dives into a massive blackout that occurred in Venezuela a year ago and reveals interesting facts about Bitcoin usage in the entirety of Latin America. According to data from LocalBitcoins, which has the largest Bitcoin trading volume on the continent, the effects of the blackout on Bitcoin activity spanned beyond Venezuela and affected neighboring countries. The spillover effects reveal how Bitcoin is primarily used as vehicle currency across the continent.
🔹 Aztec ZK-ZK Rollup
The Aztec protocol team is now ambitiously trying to add privacy to Ethereum transactions while simultaneously reducing the associated costs of implementing privacy. This new direction requires two layers of ZK proof, dubbed ZK-Squared Rollup. The bottom ZK layer adds privacy, and the top layer succinctly aggregates multiple private transactions together in a Rollup to reduce the transaction costs. Aztec's announcement gives a great breakdown of the technical difficulties that had to be overcome.
🔹 MakerDAO: Was It Decentralized Or Will it Be In the Future?
The MakerDAO ecosystem has been action-packed the past few weeks. It all started with ETH's sudden price crash on Black Thursday allowing a Keeper to obtain $8.5M worth of ETH for $0. This led to the eventual accumulation of protocol debt, triggering a cascade of events including the quick addition of USDC as a collateral type, March 17, and the first FLOP auction to sell MKR tokens, i.e., inflate the supply, to cover the protocol debt, March 19.
The major takeaway from these events is that it required significant coordination from the Maker Foundation which ended with the Maker Foundation facilitating all the winning bids in the FLOP auction. This cascade of events raised doubts about the decentralization of the MKR protocol.
The MF decided to respond to these concerns by completing the last step of a process, thereby removing its control on the Maker smart contracts, and handing this authority to the governance contract. Though this is a good step towards better decentralization, it's not clear it will reduce the influence the MF has on the ecosystem.
🔹 UMA's Design For Oracle-less Collateralized Positions
The UMA protocol team recognizes that oracles are major chokepoints in DeFi, so they've stepped in to offer a potential solution. The solution dubbed "Priceless Synthetic Tokens" aims to delay the use of oracles as a last resort.
For example, let's consider an ETH-collateralized Vault to create DAI. Instead of having a single ETH-DAI oracle that determines if the Vault is under-collateralized, the new design allows anyone to liquidate the Vault at any time if they subjectively see that the position doesn't have enough collateral. After liquidation, anyone can dispute the action if they disagree, i.e. take the liquidator to court. In this court, an oracle needs to be used to settle the disagreement and determine whether the liquidation was rightfully executed.
Liquidation process in UMA's Priceless Synthetic Token (from cited article)
NextDNS Experimental Support For Handshake Domains
Handshake, which recently launched on Mainnet, aims to decentralize one of the core pillars of Internet infrastructure that we know today: top-level domain (TLD) naming services, e.g., .com, .net, .io, etc.
Handshake currently offers several new TLDs such as .satoshi and .guy. However, there's a catch: websites built on these domains cannot be natively accessed with regular browsers that use traditional DNS resolvers. For these new TLDs to actually become useful, they need to be supported by mainstream DNS companies.
Recently, NextDNS, a new company offering specialized DNS services, decided to explore the new world of extended TLDs by adding experimental support for Handshake. Though this is just a baby step, it is a baby step in the right direction.
Zap Leads by Example During the Crisis
To conclude this week's newsletter on a positive note, Zap founder Jack Mallers is supporting Zap team members during this recession by adding an additional $500 to payroll in order to help keep them and their loved ones safe and healthy.
Though it may not be possible for every business to follow this model, it is a great example of proactively building an environment of trust at a startup.
Disclosure: Volt Capital and/or its partners may have exposure to some of the cryptocurrencies mentioned in this newsletter.