On The Brink with Castle Island - Castle Island Ventures Weekly News Roundup 9/20/2019 (EP.01)

Episode Date: September 20, 2019

Matt and Nic from Castle Island Ventures review the top stories of the week in the cryptoasset industry. This week's topics include:  - Steve Nerayoff - ICOBox - VanEck/SolidX ETF Filing - Square - Wells Fargo  - Monero ASICS (Chart)    

Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars, and all of a sudden, people start to worry. So out of this worry, we have something called the Bitcoin. Bitcoin.

Hello and welcome to the On the Brink podcast. I'm Matt Walsh. And I'm Nick Carter. And so today is the first installment of our weekly roundup series. And so this is just a glimpse into a day in the life of the Castle Island office, basically. We're going to spend some time running through what happened this week and pontificate and bloviate. And giving you the hot takes that normally just confined to these office walls. I guess the first hot take for me is, so we're taping this on a Friday morning in Boston. It's pretty early. I flew in from New York this morning. And last night I got myself stuck in a conversation accidentally with someone from Iota. So that was a tough, that was a really tough way to start the day.

I'm shocked that Iota actually still exists. I'm shocked too. That's, you know, roll your own hash function. Apparently you can still be around. So our first news item is this scandalous set of allegations about Stephen Narayov coming from the Eastern District of New York's Attorney's Office. Yeah, so this one is a little bit thorny. So let's just give a quick rundown of the facts here. So Narayov, he's a self-proclaimed Ethereum co-founder. So he's part of that founding group for Ethereum. Well, claims to be, but that seems to be a very tenuous claim. Seems to be a bit of a controversial claim and just Google it yourself.

There's some Reddit threads out there. But in any event, he was early to Ethereum. He was an advisor on a bunch of different ICOs. That much is clear from his LinkedIn profile. He's been an advisor to 20 or so, including overstocks, T0, Banker, LISC, Aon, Casper Labs, StormX. And basically what this is is there's a summary from the U.S. Attorney's Office of the Eastern District of New York that is, it's a breathtaking summary of what's going on here. I'd recommend everyone read it. But it basically says that he had this agreement with this Seattle-based ICO.

As far as I can tell, it looks like it's Storm X, called for Narayov to receive 22.5% of total ICO proceeds. and then 22.5% of the new tokens that were issued. So, I mean, maybe just pause there. Like, that in and of itself is just bananas to me. That's a comically large number for a, I guess he was an advisor to the ICO. I guess. So that end of itself is absurd.

And I think that's maybe the main benefit of some of these lawsuits that will come out is the internal machinations behind these ICOs will be brought to light. whereas the founders originally had a very strong incentive to keep them quiet. Totally, totally. So, you know, it goes on to say that he received these payouts, but then went to the founder and shook her down for additional payouts, as did his business associate, this guy, Michael Haleady, who, you know, people in Massachusetts might actually recognize this guy.

He went to jail for stealing money from Catholic. So, like, you can't make this stuff up. Really sympathetic character. I mean, so more to come maybe on this. Who knows? But I guess the story here is just there's probably more of this to come. Yeah. And yesterday was kind of a big day for criminal and regulatory actions in crypto.

We had the SEC charge ICO box, which was essentially a firm that underwrote ICOs, advise them, incubated them, and help launch their offerings. I had never even heard of this. Had you heard of ICO bucks? Vaguely, yeah. They were among the most prolific of the ICO kind of advisory, ICO investment bank firms, which are now all essentially defunct. But I think they make very juicy targets for the SEC because of the sheer volume.

and the fact that these firms were what really facilitated this kind of really marginal, you know, capital raising activity. Yeah, it's crazy. So apparently these guys had raised $14.5 million and facilitated another $650 million worth of ICOs. So pretty breathtaking levels there. But again, we'll see more of these. It's somewhat surprising that the SEC has not been more active on some of the. these. Yeah, I would be shocked if there are any U.S.-based ICO kind of advisory firms that are left untouched by the SEC in the next couple of years. Yeah, makes sense. So we had some other

news this week. So CBOE BZX exchange withdrew the VNX Solid X Bitcoin ETF proposal this week, and that was ahead of the October 18th SEC deadline for a response. So what do you make of that? Is that as significant as some of the folks on Twitter have been saying? I mean, my read on this without any insider knowledge is that it's better to withdraw on your own as opposed to getting denied. And so my guess is that they had some dialogue with the SEC. It was not going to be approved, and so they withdrew it.

SEC is still reviewing BitWise. proposal as well as Wilshire Phoenix. And so, you know, maybe we'll do an episode on the status of the ETF. And we actually have an interview with Hunter Horsley coming at some point in the next couple weeks from Bitwise, but definitely some infrastructure concerns that the SEC has around qualified custody and market manipulation of the spot markets. A lot of that's getting addressed, but maybe we take this as a sign that the SEC didn't feel that the VENAC proposal was ready to be approved. The noises that we're getting from Clayton

to seem to be pretty negative on market structure in particular. Yeah, I mean, negative, but also, I think, you know, positive in the sense that his comments on CNBC last week at least addressed that there had been a lot of developments on the custody front that were positive. And so we do have these New York qualified custodians

in market. We have a couple in South Dakota. So I think there's a lot that's being addressed there. You'd also have regulated spot market venues like Eris X that are starting, albeit they don't have significant volume on them yet. But, you know, we're making progress. So the other news this week is the Blackstone CEO, Steve Schwartzman, came out and was pretty negative on Bitcoin. No big surprise there.

But what he said was, quote, I don't have much interest because it's, hard for me to understand. I was raised in a world where someone needs to control currencies. There's a reason to want to control currencies, which is why governments do it, end quote. Yeah, so he's short Bitcoin upside, but I guess it's hard to be too snarky here. This is a, I mean, I guess the big takeaway is that most people do operate under these mental models that just don't allow for censorship-resistant, non-sovereign money to even exist. I mean, And it's kind of hard to even imagine that these things are possible, you know, without really understanding them. And the interesting thing here is that that statement really perfectly captures what Bitcoiners dislike about sovereign currencies, which is the monetary discretion, as I call it, you know, the fact that central banks can so idiosyncratically control the supply and the album flow of sovereign currency.

that's what makes it attractive to people like Steve Schwartzman. Yeah, that's right. I mean, one other thing that I was thinking when I was reading this initially was it's really, it's bullish to me that so many smart people just aren't there yet in terms of understanding Bitcoin. I've really not met many people that spend a lot of time trying to understand Bitcoin and its implications in figuring out how it works and then come to the conclusion that it's it's worthless or that there's nothing to be excited about.

Yeah, we had a high-profile conversion this week. Well-known trader Jared Dillian, who writes a very popular newsletter, declared on Twitter today that he had completely done a 180, and he was now in favor of Bitcoin from being a skeptic before. And so what was that? He just spent the time to understand it a little bit more. That's what it took, yeah. And also the nature of Bitcoin changed.

In 2017, it was couched in these scams and all this nonsense. And now I think it's matured a little bit, so that helps. I would throw it out there to the listeners. And are there people that were missing that have really spent a lot of time truly understanding this stuff and are still that still don't think that there's merit there? I mean, I'm having a hard time thinking of any. Well, I suppose if you thought there was some algorithm for managing supply, which was better than the, asymptotic money supply targeting Bitcoin has. Maybe if you thought Libra, for instance, could devise an algorithm,

which targeted certain macroeconomic factors. That might be the bear case. Maybe. But I think it's very clear now that non-sovereign currency is here to stay. It's hard to deny. I think that genie's out of the bottle. So moving on, some other exciting news this week from Square. I mean, you want to talk about a company that absolutely gets it and that is executing at a great pace here.

Square continues to be impressive. So this week, there's a couple things. So they announced three additional new hires in Square Crypto as part of their open source program, which we can talk a little bit more about. And then they also announced at the Baltic Honey Badger Conference in Riga that they're making a $100,000 grant to BTC Pay Foundation. That's the group that supports BTC Pay Server. So I think there's a lot to unpack. We should spend some time talking about this.

But I guess first, what is BTC Pay Server? So BTC Pay Server is an open source suite, which allows businesses to accept Bitcoin in a kind of a nice interface, in a kind of merchant style. Although it's often compared to BitPay, and in fact it's Genesis relates to this infamous tweet by Nicola D'Aure, talking about how BitPay had broken his trust

and he was going to make them obsolete, which is one of the greatest tweets of all time. Yeah, that was just, we should unpack that a little bit. So this was around 2x, right? I believe so is relating to their support of 2X. So BitPay was saying that they would be moving off of Bitcoin or something like that. The symmetry here is really nice because BitPay was trying to change the Bitcoin Protocol to suit their business objectives because they preferred to have lower fees. And so they were trying to increase the block size.

And so BitPay was born out of this conflict. Obviously, Bitcoin did not double the block size. Well, not through that mechanism at least. And not in response of political pressure. And so then BDC pay server is born out of this. And then a couple years down the road, they get a grant from Square, which the Square is the arch type of, kind of Bitcoin humility because they're not trying to change the Bitcoin protocol to suit

their Bitcoin objectives. So there's this amazing historical symmetry to this. Yeah. And let's talk about that a little bit more. So they have they have a team of people they announced this a couple of weeks ago that are just working on open source projects in this space. So they're not building necessarily products and services for Square for a profit motive. They're just working on. Similar to like the Linux Foundation in the sense that there would be sponsorships for certain developers that for-profit companies would be undertaking. And the interesting thing is that from what we can tell from outside, the developers haven't necessarily been tasked to work on any specific facet of the protocol.

It's more like these extremely smart people are being given subsidies to work on Bitcoin as they see fit. So there is clearly, as far as we can tell, no political intent to introduce favorable PRs to Square. Yeah, Square is really ahead of the curve here in terms of the sponsorship of the open source devs. Fidelity has also been active in this space. They sponsor through MIT, through supporting the digital currency initiative. There's some open source developers working there. It's something I wish we saw more of. Well, I would say Squares is probably the fourth big organization to host a lot of developers,

aside from the DCI chain code and Blockstream, of course. So it is notable that these elite developers are finding homes at a whole host of organizations and are empowered to work on Bitcoin without much in the way of guidance. And I think the patronage model is probably the best one, as opposed to siphoning off 20% of the protocol rewards, which leads lots of arguments and messiness. Moving on here, so maybe contrasting an innovative company versus a company that is doing innovation theater, as we like to call it. So not innovating, but window dressing. So a long time, you know, readers of our newsletter will know that we have this ongoing segment where we basically just get a chuckle out of these corporate R&D labs that will put out press releases, basically saying that they're doing blockchain stuff. All of the time it is private blockchain or quote-unquote DLT, distributed ledger technology.

They're typically a way to get a press release out so that these institutions can go to their customers and their employees and say that they're working. on innovative new technologies, but really they're either not going anywhere or they're proposing new intermediaries in saying that they're disintermediating some other intermediaries. So the latest entrant to this graveyard of corporate press releases is Wells Fargo. For those of you who you probably know Wells Fargo from, you know, most notably being known as the company that has amassed $17.2 billion in total fines since the year 2000, breathtaking. good job. So they've partnered with R3, another just innovation theater outfit, to build a dollar stable coin that will run on quote their proprietary DLT platform. So just a lot of words there.

Can you imagine if the Bitcoin white paper started with Bitcoin is a proprietary DLT platform? Just, you know, I don't think we have much more to add here other than, you know, sounds an awful lot like the 2015 NASDAQ press release on putting private equity on a blockchain, sounds a lot like the 2015 Bank of New York Mellon coin, sounds an awful lot like Citigoin, basically a long list of just corporate innovation theater, which I guess is still going on. And there is also an interesting report that came out this week from Michelle Rocks and the team at Cambridge on actually benchmarking enterprise blockchains. And the report very charitably notes that much of the time these enterprises aren't really interested in the technology itself, but more the PR benefits and the use of blockchain as a catalyst.

So Michelle calls this the blockchain meme. And there are some rather charitable interpretations on there. So you could use the promise of a DLT platform to try and. build a shared consortium with some other firms. Or, you know, as we see more frequently, you know, product managers or mental management will use the blockchain buzzword as a way to get senior executives excited about re-architecting their backend or investing in their database infrastructure. Yeah, that's exactly it.

So, I mean, at the end of the day, this is a standards issue and it's an organizing issue between parties that do not really have incentives to organize themselves. So think about settlement of securities in the United States. It took almost 10 years to move from T plus three settlement to T plus two, but it wasn't really a technology problem as much as it was getting everyone on the same page with this migration. And so some of these private blockchain ideas are actually good ideas. Number one, they don't need a blockchain.

I mean, there's nothing about these things that, involve a bearer instrument that untrusted parties are engaging with. I mean, I don't know why you need a blockchain for these things. You do potentially need some of these products and services to exist, but you could do them without a blockchain. It's just a matter of getting people aligned on a common standard, a common way of conducting some of these back office operations. So, you know, not to say that they shouldn't happen,

but, you know, let's do this through like the DTCC. in a centralized way or something. Like, let's not waste the press release. And if you look at the enterprise blockchain benchmarking study, they actually have some data in here and they find amazingly that 77% of these so-called enterprise blockchains are simply blockchain memes, and only 3% of them represent live multi-party consensus systems, which aren't wholly centralized. So it's kind of damning, but interesting to see empirical data on this as well. Yeah, so I'm sure we'll have more press releases in the weeks to come on other nonsense,

but that was Wells Fargo. I want to move on to something that we called out in our chart of the week in our newsletter. So we're going to try to run through this in audio format. I think we should be able to describe what we're talking about here, but I want to talk about Monero and detecting the presence of A6 on these networks. So maybe, as Matt says, maybe audio format isn't the best for charts. We'll include a link to the chart and the show notes. So definitely have that open.

And so what we have here is a chart showing the Minero difficulty over time, as well as the distribution of the non-space. And so for those of you unfamiliar, the nonce is the random string of numbers that the miners, they search this space. to find a number which when combined with block data, block data yields a block that satisfies the criterion for inclusion. And so miners should be searching the space randomly, you know, just incrementing through the non-space.

And for the most part, they do. But when you visually depicted on a scatter plot, as you can see here, when you see irregularities, that can denote ASICs that are active in the network, in the network because for whatever reason, A6 don't always necessarily search the entire non-space. They search a subset. And so when A-6 are present, this becomes evident in the scatter plot as thick bands where only a subset of the non-space is being incremented through. And we like this chart because it is an example of chain archaeology where you can see

that some certain political and historical developments that have occurred on a blockchain, you know, written literally in the ledger data. So you can see two times where the non-space went from a random noise pattern to a very definite banded pattern. And that also coincided with the hash rate increasing really rapidly. And both times, Manero actually forked the hash function. So they changed it to attempt to get rid of the A6. And it looks like it worked, because after each fork, the difficulty dropped, precipitously both times. So what this shows you is the tug of war between entities that are making ASICs and between the network's leadership, which is altering the hash function in an effort to fight that.

It's a really fascinating chart. And so is ASIC resistance futile on these networks once they figure out how to build one? Is it worth continuing to fork every six months? How do you think about that? Well, it's certainly you get into this arms race situation where you have to keep forking and there's obviously risks involved in a fork each time. And I think the real problem I would diagnose here is making the hash function part of the set of things that can be contested or argued about. Because changing the hash function privileges a certain class of entities that might be prepared for the change, whether it's people with they say. or people with the GPs, you have to make a political decision to privilege one of those groups.

And so since the stakes are very high, the economic returns are potentially very significant, their incentive is now to lobby the core developers for a change that's favorable to them. And that's why, for instance, in Ethereum, this Prague-Pow debate is so contentious because you've really serious vested interests on both sides of the debate. Actually, let's just define Prague-Pau, and can you run through what that is and what the argument going on right now? So same debate in Ethereum. Progbao is an alternative proof-of-work hash function, which is meant to be more amenable towards GPUs because we've seen that there are these F-hash ASICs that have been created on Ethereum. And initially, Ethereum was when it was founded, the objective was to be ASIC-resistant with the idea that GPUs are more distributive than ASICs.

and now that this alternative hash function has been created for Ethereum, there's a really huge debate over whether they should just bite the bullet and keep the ASICs and gradually constrict the number of entities that are actually mining or whether they should open it up and make it fairer for easier for GPUs to be active on the network. So it's the same exact debate happening there. This analysis really also brings to light some of the opportunities for developers to potentially have outsized monetary gain by knowing some of these things or collaborating with some of these ASIC developers. Absolutely. And Angela Walsh is a good line about this.

She says that developers invoke the veil of decentralization to claim that nobody's in charge when clearly there are economic interests that really. really matter and there are people in charge that could potentially reward themselves by making a political decision one way or the other. And yet they invoke this decentralization buzzword to obscure the fact that there really is a set of people in charge. And ultimately, the takeaway from this for me is that being able to argue over things like the hash function really reduces the social scalability of the project, as Nick Zabo says. You know, social scalability comes from making certain parameters inarguable. So like the supply cap in Bitcoin, that is something that cannot really be contested,

and hence is just acknowledged to be a basic fact of the protocol. And really, you know, so is Shaw 256, I would say at this point. There have been some proposals to change it, but if it were altered, it would massively privilege whoever had made an ASIC for the next hash function. So it really probably shouldn't be changed. And Bitcoin bit this bullet, and they have ASICs now, and that's fine. That's probably not going to change. But if you make it open for debate, the debates themselves can kind of corrupt the developers

or make them, at the very least, make these economically vested interests. try and bribe the developers, you know, or lobby them really hard. So even the fact that this debate exists, I think reduces the social scalability of some of these networks. That's a great point. So that was it. A little bit light on the deals this week. We'll also be running through any startup fundings typically in this forum, but it was a little bit light this week. So we'll be back next week. We'll be speaking with you early in the week, an interview and then later in the week with another episode of the news roundup. So thanks for listening to the On the Brink podcast and we'll see you next week.