The Breakdown - Productizing bitcoin maximalism and the emergent of "digital assets not blockchain"

Episode Date: December 17, 2019

More crypto businesses are transitioning to or choosing to focus exclusively on bitcoin only from the beginning, in some ways representing a productization of bitcoin maximalism. In China, however, the government is cracking down fiercly on resurgent crypto businesses that have taking President Xi’s positive comments about blockchain as an excuse to operate more openly. Interestingly, the attitude of many US financial firms seems to be shifting from a version of “blockchain not crypto” to “digital assets not blockchain” as they begin to adapt to demand from customers. 

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It is December 17th, Tuesday, and we're continuing our exploration of narratives that defined 2019, but framed in the context of news that closes out the year. So today we're going to be talking about Bitcoin only. and Ethereum's opportunity cost of change. And then we're going to be looking at a little bit of a battle between blockchain, not crypto on the one hand, versus digital assets, not blockchain on the other. Okay, so let's dive into Bitcoin only and Ethereum's opportunity cost for change.

Ethereum recently went through its Istanbul hard fork. It wasn't a contentious fork. It was a technical update in a lot of ways. For the Ethereum community, it was just sort of business as usual, although there were some disruptions, right? Aragon, the Dow software, had a bunch of smart contracts that were temporarily broken and so on and so forth, but more or less it went off without a hitch, at least according to that community. However, there were a number of folks who were watching from the outside to think about or see

what this idea of hard forks, whether contentious or not, meant in terms of the implications for Ethereum. So Sushu, the CEO of Three Arrow's Capital, said, so a lot of exchanges of OTC brokers are halting deposits and withdrawals of ETH and ERC 20 during a certain window for the upcoming hard fork. This was on December 4th, he said this. They warned fun sent during the window may be lost. How does this tie in with Ethereum as a global settlement layer? By the way, I'm not footing Ethereum here, just saying this is objectively super annoying slash dangerous for users to have to think about and likely a deterrent for its use as a global settlement layer. It's like rebuting a computer while other people are logged into important implications.

A lot of folks dived in and there was a productive conversation. But then today, you have a thread from Udi Werthheimer saying, one, you've heard that Ethereum went through a disruptive hard fork just over a week ago. This was a painful process that left broken contracts and nodes in its wake. The next hard fork, it's in two weeks. Why? Because otherwise the Ethereum blockchain would slow to a crawl. Thread. He goes on to talk about this feature called Ice Age, which is designed to make blocks slower over time, to pressure the ecosystem into agreeing to hard forks. At least that's how he described it. And so again, a lot of contention back and forth. The point of both of these things is obviously these aren't folks who are deep in the Ethereum community. The

Ethereum community has responses to these criteria. So they're not presented as their word is law or anything like that, but more to reflect a narrative, I guess, around what the challenge of Ethereum's approach to non-contentious forks is in the context of the ecosystem of actors who aren't invested deeply in the Ethereum community. And I thought they were worth putting out in the context of a bit of news from the UK. So the UK's oldest, this crypto exchange, which is called CoinFloor, has planned now to delist Ethereum and focus solely on Bitcoin. It's also going to be delisting Bitcoin Cash. And the reason is effectively a worry about the upcoming launch of Ethereum 2.0, right? So this is according to the CoinDest article.

The plan comes ahead of the launch of Ethereum 2.0 tentatively planned for early 2020, which will begin the process of shifting the network away from the energy-consuming proof of work and says this mechanism to prove of stake. CoinFloor's decision suggests that nurturing a team with the specific expertise to follow the technical trials and tribulations of coins like Ethereum may be too expensive for smaller crypto players, particularly if this constitutes only a small part of their trading volume. From the point at which it starts next year, Ethereum's platform upgrade could take years to complete, said the CEO of Coinflore. The complexity of the operation, quote, means for a period of time, there could be two versions

of Ethereum running. This is a small exchange, right? And this is obviously the critique of those in the Ethereum community and why they say it shouldn't be such big news. But CoinFloor has a 24-hour volume between Bitcoin and the British pound of just 450,000. Even Coinbase Pro, which isn't based in the UK, has a volume three times that every day of Bitcoin to the British pound. So a very small exchange, but I think actually that's the point here is that a small exchange is effectively saying that the introduction of Ethereum 2.0 and the technical challenge of having these two chains running simultaneously makes it undesirable for them. And so the interesting question is, are we seeing the opportunity cost of the technical approach of a chain like Ethereum that pushes people off of the

margins. The answer to that question may be yes and it still may be worth it, right? This is not about saying that they're taking the wrong approach necessarily, but it is interesting to note the point at which those sort of technical needs impact the way that other people engage with the chain. Now, of course, there is another kind of thread to this that happens simultaneously. Obviously, I think CoinFloor here is making a decision based on their business, what they see as their most important business, and that's specific to them. However, there's a larger conversation happening as well, and I think something that's the outcome of the narrative from basically the rest of 2019, which is an emergence of more Bitcoin-only businesses. And this is not necessarily just about a

critique of Ethereum so much as a return to or an introduction of the idea that Bitcoin is going to be big enough on its own to support lots and lots of interesting dynamic, meaningfully sized companies. And that is something that during the ICO explosion and even kind of into 2018 wasn't necessarily the way that we people were thinking, right? Venture capitalists and financiers don't necessarily know how to wrap their head around Bitcoin and the Bitcoin ecosystem because it doesn't have an owner, it doesn't play by a traditional set of rules. It doesn't have a traditional infrastructure or a traditional legal structure that, you you can buy into in the same way. It requires a different approach. And so now we're finally seeing

a year and a half after the ICO boom ended, after a year in which Bitcoin is really the performant asset among crypto assets, more or less, of people really focusing on building Bitcoin-only businesses. So a great example of this that has been bouncing around recently is River Financial, which recently changed its name from Alto Financial. The founder of River Financial did a thread recently about this topic particularly. So he says, we often get asked if we will support cryptocurrencies other than Bitcoin at River.com. As we explain in our knowledge-based article here, we will not. At river.com, we are not building a crypto company. We are building a financial institution around the hypothesis that Bitcoin is going to continue to grow in its role as a globally recognized

currency and store of value. Bitcoin is as much a monetary revolution as it is a technical one. The technology can be duplicated, but the network affects brand and ethos can't. If we supported other cryptocurrencies, we would be compromising our ability to bring our clients the best of Bitcoin. We cannot support dozens of assets and also build features unique to the protocol level specifics of each. By offering many questionable assets for trading, companies like Coinbase have effectively become casinos. I don't blame them. Casinos are a great business. Just ask Sheldon Anderson. But a casino is not going to push our monetary and financial systems forward. Bitcoin companies like Square, Cash App, Lightning, Casa Hotal, and many others are

truly building the future. We are very excited to start working alongside them. I think there's a few really interesting points on this front. Effectively, you can see from that commentary, there's two things going into Rivers decision. One is clearly a philosophical disposition towards Bitcoin, towards what Bitcoin means, a belief that Bitcoin is going to reshape the financial system of the future and wanting to build infrastructure for that new financial system, rather than hedging your bets on a lot of different types of crypto assets. So I think that's the philosophical side. The practical side is that these teams have limited resources. And by focusing only on a single asset, in this case, Bitcoin, it allows them to make different decisions about what they

build, right? So a couple days later, you saw a tweet from Andrew Bentley that says, recently signed up for River Financial, the first Bitcoin exchange to support lightning withdrawals and deposits, super clean UX, and the team is committed 100% to Bitcoin, excited to see what they do next. So there, we're seeing the benefits in two ways. One, there's a brand benefit, you know, being shouted out for this commitment to Bitcoin, but two, also being able to make design decisions and product decisions that are specific and focus. Meltem de Mirrors said something similar. She said, setting up my River financial account, excited to see a Bitcoin-only retail brokerage firm. Excited to see how, quote,

Bitcoin-only firms like Casa Hodel River and give Bitcoin and others, focus on building a great user experience. So again, Meltem is reinforcing this idea that the constraint and the singular focus on Bitcoin allows a different level of product focus on the user experience of it. Steve Lee at Moneyball on Twitter, a lot of folks know works at Square Crypto now, makes a different point. One thing I've observed, he says on Twitter, from Bitcoin Optech is how diluted the efforts by most crypto companies are due to supporting dozens or hundreds of tokens. Rivers focus on Bitcoin will put it in a position of strength. So again, it's this idea that there are significant actual real costs in terms of both financial costs and also tradeoffs and time costs to focusing on multiple

assets. So this is new and this is interesting because in some ways this is the culmination and manifestation of a narrative that has characterized 2019, which is the emergence of this Bitcoin-only idea. Embodied in Twitter, obviously, in the context of maximalism, I'm much more interested in the product version of Bitcoin maximalism in some ways than I am in even just the intellectual version that shows up on Twitter as useful or as fascinating as it can be. What we're seeing now is the productization of Bitcoin maximalism. And I think that whether you're a maximalist yourself or not, the outcome of having such a focus on that one domain, that one area, is going to be valuable for a lot of these products. So that'll be really interesting to see. And with that idea of Bitcoin

only and the manifestation of a narrative of Bitcoin only, I want to get into actually the opposite narrative for our second topic, which is, well, the opposite. So in the response, in the wake of Libra, China has obviously been really doubling and tripling down on blockchain. And there are a lot of folks, Dovi Wan, for example, who's an investor at primitive ventures, who think that that focus on blockchain is basically creating, in some ways, a technical infrastructure, but in more ways a narrative infrastructure for a forthcoming digital yuan, right? By China embracing the idea of blockchain and saying that it is going to be the blockchain leader in the world, it creates context for them to be, you know, the first major world power to create a

a central bank digital currency, which is obviously on their agenda, right? They're very clear and very public about that. So as this has been happening in the wake of comments from President Xi about blockchain, obviously, although, you know, he was focused on the blockchain side of the equation, there's still been much more engagement around crypto companies, right, around crypto exchanges, around these things that have theoretically been banned or at least in a gray legal area for a couple years now, a lot of that activity popped back up. People basically testing the system to see what this new disposition was about. Well, it's very clear if it wasn't before that this is about blockchain and not crypto. This is the narrative. This is the blockchain

not crypto country. So another piece from CoinDesk from yesterday evening, Chinese city warns investors crypto isn't blockchain. Waihe, a port city in Shangdong province of eastern China, has a stern warning for investors. Make sure you are really investing in blockchain innovation and not cryptocurrency masquerading as blockchain. The authority said in a statement, as the country is promoting blockchain technologies, people start to hype virtual currencies again, and some of the related illegal opportunities or operations have come back to life. One, you're seeing a increase in the crackdown on crypto activities that are done kind of in the guise of this blockchain that is being embraced, right? So this is an example of one provincial

authority making that distinction very clear. We also saw another bit of news today. Blockchain startup Confluxed gets Shanghai government funding for Research Institute. Effectively, Shanghai government officials have agreed to help a blockchain startup open a research institute and incubation center. They're spending millions of dollars on it. This is a prominent firm. It's Beijing based. It's got Sequoia, China, and Huobi among its investors. It raised $35 million during a private token sale in December of 2018.

It sounds like, in a lot of ways, all about a tool of control. By the government being involved in funding this, they're really making clear that they are focused. on blockchain technology, not crypto, and they have direct access to the actual spaces where they're being created. The point of all of this, rounding it all up, is that the narrative for China is blockchain, not crypto, and the government is willing to spend money in both enforcement, but also in investing in being close to where blockchain is happening in order to keep it that way. Meanwhile, in the U.S. and in Europe, the institutional world is shifting a little bit.

We had a narrative for a long time that was, if not totally like China, kind of similar in the sense that it was about blockchain, not Bitcoin. This was a mantra in 2015, 2016, as corporations started to hear about this. They were interested in this underlying technology. Could enterprise blockchain technology be cost-saving or increased transparency? or make supply chains work better. Those experiments haven't ended. There are still folks who are working on things.

There are still big companies that have big enterprise blockchain divisions. However, you're seeing a shift, I believe, in the financial institution side. If you take, for example, a state street. So the bank is shifting its focus. It had previously had something like 100 blockchain development jobs that it recently cut. However, they are now teaming up with the WinkleVi, the Gemini Exchange, for a digital asset trial. So this trial is going to track a reporting process for Bitcoin and Ether that are held for a user in Gemini's custody service. And the idea is that this is from Tyler Winklevoss.

He says, traditional investors will more seamlessly be able to allocate capital in their portfolio to digital assets through trusted and regulated financial institutions, helping us build a bread or bridge to the future of money. This is now a quote from Ralph Achkar, the managing director of digital product development and innovation at State Street. There is a small but growing to ban for our clients for solutions of this type and many technical operational regulatory and legal considerations to be addressed. That's why we have opted for an open model and started a pilot with the Gemini as an established regulated player in the digital asset space. Earlier this month, State Street did a survey and basically found out that 38% of their clients are planning on putting more money into digital assets in 2020. So in a lot of ways, this is them catching up and making sure that they are understanding where the demand among their clients is. And that demand, again, is not for enterprise blockchain solutions, it's for digital assets specifically. And for Bitcoin, most of all.

And I don't think this is surprising. I think that if you look at where the evangelism has been happening in the wake of the ICO boom, it's people who are going into these big financial institutions and saying that Bitcoin is a player on the world stage. it is a hard-to-kill digital gold type of asset that continues to get more and more people involved. That's what the evangelism has been from an institutional level. People haven't been going and selling ICOs or tokens, or again, enterprise blockchain to these big financial institutions at least. And of course, we're seeing those financial institutions that have embraced these programs

expanding, right? So just this morning, Pomp tweeted out, breaking. Fidelity has just announced they are launching their cryptocurrency business in Europe. This is a global game. Even the Wall Street players realize that. This is from the financial news. Fidelity Digital Assets, the cryptocurrency arm of Fidelity Investments. It's offered custody and trading tools to financial institutions in the U.S. since 2018. Fidelity's UK entity, incorporated on December 16th,

will give the fund manager a platform from which to sell digital asset services to European businesses, including hedge funds and family offices. All of this is to say that we have now a bunch of different narratives that are all kind of jostling. On the one hand, you have, going back to what we saw, this Bitcoin-only companies actually finally kind of manifesting the Bitcoin maximalism that we've seen, turning it into real products and product decisions. That's one. You have the continued presence and in some cases or in some context resurgence of the blockchain not crypto narrative. Obviously, this is China planting its flag in this narrative very, very strongly. And then finally, you have a kind of countervailing point where even some of those

institutions who perhaps fell into that blockchain, not Bitcoin, or blockchain, not crypto camp, are starting to maybe be the digital assets, not blockchain camp. They don't need 100-member developer teams to build enterprise blockchain solutions, but they are looking into how they handle digital assets, you know, perhaps Bitcoin now, focus on liquidity, but perhaps also tokenized securities later on, on a broader level. They're figuring out what it looks like for them as the leaders in custody and all of these sort of parts of the financial markets now, they're figuring out how they're going to adapt to the continued presence of digital assets, starting with Bitcoin and then moving into other things.

So really interesting stuff. Obviously, there's a ton going on here. I think that we're not going to see the end of these narratives competing. One of the things that I find interesting to think about is whether China's strict insistence on blockchain, not crypto, will actually make kind of the same. self-styled opponents of China, or even those who just look warily over to see what's happening in China, ask why they're so afraid of crypto and what that might means, and does that mean crypto is more interesting? Maybe that's optimistic. Maybe people are just going to want to,

or governments are just going to want to control things in the same way that China does, and that's one area that they have in common. It will be fascinating to watch. As I continue to say, I believe that 2020 is poised for a year of huge battles around digital currency and the future of digital currency and who gets to play. I'll keep my eyes out for that. And for now, thanks for listening and I will be back to chat tomorrow. Cheers, guys.