The below is a candid reflection on a very niche and subtle topic that has been brewing in my mind during my time in DevRel with Stacks, a Bitcoin L2. This is also a collection of scattered thoughts that I've tweeted out before in the past year that I want to finally consolidate into a proper post.

Tooling isn’t neutral — it shapes how developers think, and what ecosystems become.

Maybe it’s just me. But spinning up a Hardhat project, writing Solidity, and connecting an EVM wallet to build on a Bitcoin L2 feels… off.

Technically, it works. Pragmatically, it lowers the barrier. EVM tooling is powerful, battle-tested, and familiar to thousands of developers. I get the appeal.

But culturally? Philosophically? From a developer-experience lens?

It feels uncanny.

Building on a Bitcoin L2 should still feel like Bitcoin. Even if execution happens elsewhere, the semantics, direct or indirect, should preserve elements of Bitcoin. Tooling isn’t just a convenience layer. It shapes mental models. It influences design decisions. It subtly dictates what gets built and who builds it.

When a Bitcoin L2 inherits the EVM toolchain wholesale, something subtle shifts. Are we optimizing for Bitcoin-native builders or for Ethereum-native ones? And no offense to Bitcoin L2s embracing EVM tooling. There are strong arguments for it. Faster adoption. Lower switching costs. More liquidity of talent.

But here’s the 🌶 take: Keep EVM tooling in EVM land.

Bitcoin settlement and unilateral BTC movement are non-negotiable requirements. I'm all for that. But identity in the developer experience matters too. Thinking out loud a bit more on this, if we blindly continue inheriting EVM dev tooling to enable our end goal, are we quietly optimizing for Ethereum-native devs over our fellow Bitcoiners? Are we slowly removing the distinction between what Bitcoin feels like vs what Ethereum feels like? Or maybe maintaining a distinct identity of what it means to build on Bitcoin vs to build on Ethereum is not important?

Maybe I’m over-indexing on a nuanced detail. Maybe this is minuscule in the grand scheme. But this “minuscule” thing keeps coming up in real conversations with builders. And I’ve come to believe that not being EVM-compatible L2 isn’t something to apologize for.

That’s why I’ve always admired what Stacks did early on. Instead of defaulting to EVM compatibility, they invested in their own full-stack of devtooling primitives. Their tooling makes you feel the Bitcoin connection. The L1 chain isn’t entirely abstracted away, elements of it are present in the L2 development experience.

Take Stacks' Clarity smart contract language, for example. It’s different. Intentionally so. But that difference gave many developers their first real positive impression of what building on a Bitcoin L2 could mean.

For those that think the devtooling feels don't matter is like saying certain elements of the Bitcoin and Ethereum culture are NOT actually distinct. I think they are, with the devex and devtooling playing a huge role in that.

Ballet had two main offices: one based in Shanghai and the other based in Las Vegas. I was based in the Shanghai office, which was where most of the personnel of the company were located. I was fortunate enough to be there during the 2021 bull run where Ballet was able to raise a substantial Series A investment round, with the majority of the time from then on surviving through the depths of the bear market and multiple unfortunate personnel layoffs.

I was given a management title within our marketing department mainly responsible for our digital marketing ventures and forging strategic ecosystem partnerships. This covered a myriad of hats: marketing strategy, technical content creation, content management, digital ad spend, influencer marketing, community development, business development, livestream/podcasting, product marketing, sales, and even some web development and recruiting. It’s safe to say I was a ninja there.

With all that being said, I want to share some of the takeaways from working at Ballet, specifically in the context of what it’s like working for a crypto wallet startup. Some of the good and some of the bad, but nothing derogatory. Mostly insightful feedback.

Just as a tangent, even though I did technically work for a tech startup in Shanghai, the whole 996 work culture luckily wasn’t practiced at Ballet. But it was still a tech startup in the crypto industry (with an emphasis on both). Taking calls at midnight with partners based in the western hemisphere wasn’t considered out of the norm. And in general, If you’ve ever worked in a tech startup in China, then you’d be well familiar with the operating speed of such a working culture. Things and people move so fast here in China compared to other countries. There is a certain breakneck speed that you pick up here.

As a wallet, no strings attached. One of the best things about working for a crypto wallet project is that you can be completely unbiased in your web3 beliefs. You’re not pigeonholed into supporting a particular blockchain or NFT project or some overpromising DeFi platform, but rather you’re privileged to be crypto-agnostic.

Wallets are literally the first point of contact for new users coming into the space. To put it more directly, you NEED a crypto wallet if you want to do anything in crypto. This made my job so much easier and prudent. And most importantly, it was understandable what we did. Have you ever had conversations with a BD working for an abstract token project? Doesn’t matter if you’re a beginner or proclaimed expert in the space, confusion and skepticism are the usual vibes you pick up when listening to their elevator pitches.

There might be some limitations on the type of crypto wallet you’re working for, ie. working for ColdCard might not be the most ideal place to learn about web3 wallets, unless your deadset on being a bitcoin maxi.  And Ballet, for example, didn’t support certain chains such as Solana or Cardano, but ultimately we were able to work with at least 80% of all crypto projects. Most projects were EVM-based anyways which was no issue for Ballet support. Wallets also had the luxury of being unbiased in the tech they integrated in-app. Depending on your user base and their market demands, integrating the likes of ENS, Unstoppable Domains, MoonPay, WalletConnect and etc. were endless. But there needed to be a limitation of the amount of swiss army knife features you shipped out. Not all were heavily in demand and not all were assumed to NOT sacrifice the security of your codebase. Some wallets, such as Trust Wallet, seemed to support everything and anything under the sun.

I’d honestly recommend anyone interested in a career in this industry to work for a crypto wallet. You’ll learn so much about private key tech, which is essential for understanding how crypto ultimately works. It’s tech that will NEVER fade away.

Security is as relative as the knowledge of one’s own achievable security. Picture this: if you’re new to the space and need a wallet, here are some options to get you setup:

• Get yourself a Ballet wallet that comes ready to use out of the box with the key entropy components and public address preconfigured for a no-hassle setup. Just make sure you don’t drop and lose it anywhere and that you keep it in a secure place because its keys can easily be exposed to the naked eye.

• Download the Metamask browser extension that allows you to generate your own private key with its own pre-configured TRNG but pray you don’t click on any phishing links when using the same browser. Or pray that your computer isn’t already infected with phishing malware.

• Purchase a Ledger hardware wallet that prompts you to write down and properly store 24 written words on paper. And then jump through the fancy electronic hoops of software installation and passcode memorization all while being forced to update your software and firmware on a weekly basis.

• Wipe clean an old laptop and have it fully air gapped for you to set up Bitcoin Core’s wallet. Do the same thing with a laptop connected to the internet so you can run it as an operating node and broadcast your transactions that you’ll have to sign on the offline laptop. And then set up a proper protocol when transfering your unsigned/signed transactions to and from each laptop. Oh and are you using PSBTs?

• Flip a coin 256 times with heads being marked as 1 and tails as 0. Convert these binary digits to base-10 decimal notation where you’ll then convert it to 24 mnemonic words that you’ll then need to use with an HMAC to derive master public and private keys that will then generate parent and child keys. How deep do you want your key derivation to go? Just hope that the open-source tools you find have been sufficiently battle-tested.

  Do you see where I am getting at?
  
  Every relative level of wallet creation expertise has its own challenges that can’t be avoided. Introducing a layer of abstraction for improved UX also introduces another layer of blind trust you’re giving up, while obviating certain mundane practices.
  
  Every wallet claims to have the best security but the reality is that for the most part, they aren’t wrong (assuming randomness of its key entropy is on par). A hardware wallet boasting a CC EAL 6+ isn’t going to deter users from using a device with a CC EAL 5+.  Experiencing wallet hiccups usually fall to the fault of oneself or due to the environment users place their wallet in that gets them into trouble. You can’t break the encryption of Metamask’s browser extension security but you can inadvertently click on a wrong link and find your wallet drained instantly.
  
  By now for most crypto natives, it’s well acknowledged that a mobile or desktop wallet is more prone to phishing attempts than an offline hardware wallet. But you need to understand what’s suitable for a complete newbie. Pushing an artisanal, privacy focused wallet onto a newbie that’s just trying to purchase $100 of bitcoin isn’t ideal, nor practical. It’s the same way how driving stick is merely becoming obsolete.

Insurance salesmen without the shirt and tie. Humorously, there were many moments during my time at Ballet where I felt akin to an insurance salesman. It wasn’t glamorous but it was well understood. Ballet was dead focused on cold storage products where at times we would sing the same tune of “protecting your legacy” in our marketing battle chants. “Not your keys, not your keys” was another repetitious line. But in an industry where web3 security is top of mind, it’s a practice that everyone NEEDED but neither WANTED. In reality, most crypto users felt perfectly fine having their assets on a centralized exchange with the well documented knowledge of what could happen (and will happen eventually) to centralized exchanges. They go belly up on an annual basis.

What we sold wasn’t necessarily on the minds of many crypto users nor was it considered “sexy” enough in web3, but it was essential. Letting your crypto sit on something that has a history of hiccups is a game of hot potato. You never know you’ll need cold storage until you need it.

At the end of the day, we’re provisioning a method for holding your private keys with a companion app that allows you to manage your digital assets. That’s it. There’s nothing gimmicky about that. It’s simple vanilla insurance against the idiocy of centralized entities. This made it very comfortable as we’re not judged as we would be judged if we were a DeFi project or some other gambling-like platform pushing out promised astronomical yields of some sort. Wallets were straightforward to understand and everyone needed it. Did it shine with all the other bells & whistles in the space? No, but it was honest. Honest, yet bland, like a shirt & tie getup.

The uphill battle of crypto marketing. The one facet that everyone seems to have an opinion on is marketing. From external advisors to internal employees, everyone is a self-proclaimed expert in marketing. The reality is that everyone’s opinion on what should work in marketing is akin to everyone’s opinion on politics. Some strategies will and will not work. Solid execution and persistence is a challenge in an industry that changes by the minute. It's also astronomically hard to do it all while running a tight ship in the marketing department at Ballet. At its peak we had only about 5 people within marketing. What people don’t also realize is that marketing covers so many different disciplines that it requires more than just 5 people.

Marketing is hard. Marketing in crypto is tenfold that. Execution of a solid marketing plan is half the battle with the resulting ROI being a tossup.

Moreover, a large portion of crypto marketing is reliant on digital marketing advertisement. But you’re bound at times by the unfriendly crypto policies of many traditional ad platforms which forces you to rely on the word of 3rd party agencies that don’t necessarily deliver. Not only are there scams in web3, but there are scams in web3 marketing. We get inundated on a daily basis with messages from external web3 marketing agencies promising to double or triple our social media exposure. In reality, these services are just deploying bots masked as social media engagement boosters. By now, everyone can see right through any attempts of fluffing up your follower count.

We once worked with an external marketing agency that provided content creation and marketing strategy services. The result was mediocre content that an intern could’ve put together for a fraction of the exuberant cost they charged us. Most of the time it was us putting in most of the work anyways. Marketing strategy and content creation needs to be in-house. Whether it be writing technical blogs or creating product photos, there’s no better people that understand what to slap together than the people working behind the said product. But creating powerful content necessitates the need for a versatile graphic designer alongside your social media guru. You can’t have one or the other. Graphic designers know how to use the tools, but they don’t understand crypto enough to make impactful contextual content. And vice versa with the social media guru, they understand crypto and all the jargon that come along with it, but don’t have the expert skills in using the proper tools to create vivid, aesthetic content. Boasting such a duo in a team is as difficult as having a trustless and user-friendly wallet. But striking a balance is more practical. I was fortunate to have in-house designers that worked side by side with me. Being able to bounce and sharpen ideas in the office is invaluable.

Ultimately our bread and butter was showing out at conferences, which we made sure we were noticed. Most of the time we’d have a popping booth that would attract hordes of folks. If you were attending these conferences, you wouldn’t miss us. We had an offline physical product that needed to be shown physically offline in person to people. There’s only so much you can do with it online.

The topic of crypto marketing could be dedicated to its own blog touching other topics such as influencer management, partnerships, and etc. The scope of marketing covers a wide breadth and depth with no silver bullet. Being able to try and test a slew of creative ideas was like the art of memeology, you never know which one will hit virality despite your content.

Embrace the haters. What people needed to understand is that at its core, Ballet is fundamentally the same as any crypto wallet: provisioning a secure private key storage method. But its ideological & product design approach is vastly different from other crypto wallets. The open-source wallet standards of BIP38 and BIP39 are incorrectly compared and contrasted by everyone. So making a comparison between Ballet and Metamask or Ballet and Ledger is ultimately futile. Critics would naively fall into this misjudgment in comparison without actually digging deeper on the why we use BIP38 in our 2FKG manufacturing process. This ignorance leads to twitter trolls and haters proclaiming Ballet being insecure or worse, a scam, despite being 5 years into the game with zero incidents of product mishaps or loss of user funds.

How do you throw shade at a product you’ve never used nor understood?

These days they mainly attempt to purport the inferiority of Ballet to some other irrelevant factor that wouldn’t hold up in an argument. A product’s functional utility is not tied to what your myopic perception is for the team or certain individual.

If you were good enough, being able to force your haters into 2nd questioning their own knowledge of wallet security was the ultimate win for shutting them up. But it takes practice to get to that level, therefore embrace the haters.

Nobody is consistent with their crypto values & beliefs. “I don’t trust this wallet, but check out this pump & dump token”. Oh you got to love the hypocrisy in crypto…

Unintelligently throwing shade on Ballet’s security while trying to shill some $DUMP token exemplifies the endless amounts of incomprehensible riff raff that goes on in this space.

Are we a web3 or an e-commerce company? Ballet had the dual role of going to market as a web3 company and at the same time, properly handling e-commerce operations. This was way under appreciated. Many crypto teams had the luxury of operating fully decentralized because all they do is software or provide some digital services. But Ballet ran the whole stack of departments in order to fulfill international shipments while juggling jurisdictions in multiple countries and holding regulatory FinCen licenses in the US. On top of that, manage a rigorous and error-free opsec protocol for the manufacturing of our wallets.

So next time if you ever hear people saying Ballet isn’t web3-ish enough, tell them we were juggling two acts at once. A feat 95% of all crypto projects don’t need to deal with.

“Sell me this pen”. Ballet was notorious for its aggressive sales approach, mainly due to the traditional business-like mindset of our commander in chief. We were the first and last on the conference floor. We swarmed passer-byers like old school stock brokers on the trading floors. We strived for sky-high sales KPIs at conferences that forced one to constantly be on one's toes. Some would consider it ruthless. And at the time it’s not hard to think this is too much of a stretch for a mere crypto wallet team. But reflecting back it’s a learning experience that you don’t realize you need until you become your own entrepreneur. Pull down all the marketing glitter and what you still need is the basic fundamental skill of being able to sell face-to-face.

I’ve seen a multitude of people come from big corporate into crypto only to find out that they have to face the daunting reality of being able to cold sell the well abstract merits of decentralization. A large facet of a crypto career is being present at conferences or at local offline meetups. If you can’t put up the conviction of the product/service your project is selling, then you’re not ready for crypto yet. First focus on the why of your product/service, and then most importantly, focus on the why of bitcoin. More often than not, when you’re chatting with family/friends, the conversation always goes full circle to the original intent of what bitcoin is for. Being able to articulate bitcoin to a newbie should be a prerequisite. I’ve seen a handful of crypto folks struggle with just that alone.

Beware of the private key extremists. There are those in the space that will live and die by only a particular method in private key generation and storage. Being able to roll your own entropy and generate your public addresses in an air-gapped fashion with open-source tools is the only way to achieve supreme security, isn’t it? Isn’t that what being a true believer in this space should adhere to? The reality is that such an artisanal (and arcane) method is only attainable by the 0.1% of all crypto users.

In the eyes of these private key extremists, anything else is considered inferior and should be banned in practice. Designing a solution that makes it easy for people to self-custody while sacrificing control over the private key generation is a HUGE SIN! There was absolutely zero compromising with these folks that only imposed their self-righteousness of private key security. Just think about where the industry would be in if everyone had this mindset. There would be absolutely zero innovation. Instead of “onboarding the next billion” we’d be hashtagging “onboarding the next hundred”.

We don’t need to raise and butcher our own cows just for a luscious piece of ribeye anymore.

At the end of the day, we’re sitting on layers of abstraction that have obfuscated the need to hand calculate your RIPEMD160 public key hash from an uncompressed public key pair (If you don’t understand what this means then give yourself a tap on your back for being one of the 99.9% that appreciates innovation and improved UX).

Don’t get me wrong, I still personally geek out to performing raw wallet functions through the command line, but I also do recognize the business need in creating those metaphorical “Easy” buttons. Any wallet that proclaims to be a pure open-source, altruistic, privacy focused tool is a public good and cannot have a sustainable business model.

Ledger is an absolute juggernaut. I’ll admit it’s really hard to compete against Ledger. Despite their hiccups and flaws, they still dominate the hardware wallet space by miles. And it clearly shows in almost every business aspect of theirs. They’re everywhere, literally. They’re on the necks of celebrities. They’re in stylized kiosks at Best Buys. They’re the actual cold storage wallet used by most institutional custodians. They’re in the sponsorship shoutouts of your favorite crypto podcast. Their social media game is on par with the likes of Nike or Apple. Did I mention they’re everywhere?

It’s become ubiquitous for one to recommend a Ledger. Even the most publicized diehard bitcoiners are pushing Ledger sponsorships. Ledger goes against what most private key extremists would deem viable but even they would be content with a Ledger. You cannot overstate the first mover advantage and marketing prowess Ledger has accumulated in their moat. Even Trezor, which has a better track record of PR, is pitted against Ledger sometimes.

So from the eyes of a wallet competitor, Ledger is both hated and loved. Most wallet teams, including Ballet, would fall victim to eyeing what tricks Ledger has up its sleeves. It was common practice to mimic the ways they rolled out communications, marketing announcements, sales promotions, and etc. And at the same time, ungratefully bash them any chance we had.

Ledger is the Apple of hardware wallets. And in this era, they’re almost impossible to beat. Just to put this into a better context, crypto influencers don’t need to be asked by Ledger to create a Ledger review video. They just do it.

Take care of your loyalists. In an industry where new trends and tech seem to pop up on a daily basis, properly treating your existing community base can’t be stressed enough. Ballet has a strong following of loyalists. A diehard group of loyalists that valued cold storage self-custody in the same way with their right to bear arms. To them, self-custody meant freedom and it was a virtue we leveraged. The high switching costs prevalent in the wallet business was a double edge sword: easy to keep your users but hard to attain new ones. Moving one’s core digital assets from one wallet to another is rarely a monthly task. How often does one switch banks? Rewarding current users and seeking complete beginners were paramount to growing the community. With the latter heavily benefiting from direct educational endeavors that Ballet organized.

Lastly, the biggest general takeaway I learned is that most crypto users don’t care about HOW their wallet is secure. A wallet’s absolute raw security is antithetical to its popularity. Users adopt the wallet they use either because it was suggested online by some blog or influencer OR they were given their first crypto via that wallet. I could probably run a poll and ask crypto users why they use their current wallet. The least chosen answer would probably be “because I researched the open-source codebase of the wallet”.

Word of mouth and successful marketing are keys to a wallet’s popularity. Providing security and excellent UI/UX are basic fundamentals. Winning over key influencers is core and the biggest hurdle for any wallet team. And it takes a lot more than hefty sponsorship money to attain this.

To paraphrase all the available content online, Account Abstraction is a next-gen standardized smart contract wallet that is slated to provide more bells & whistles with less onboarding friction for users.

What does that mean and how is this different from our current “regular” crypto wallets?

The wallet’s logic and security is essentially a smart contract. And with smart contracts comes the availability of your slew of advanced functionality such as multi-signers, time-locks, spend limits, whitelisting, on-chain recoverability, and etc.

Account Abstraction was born from the finalization of ERC-4337. It’s essentially a backwards-compatible (no network hard fork needed) set of protocols & services that allow for this concept of an easier, yet Swiss army knife like, wallet that the industry needs for the next onboarding of 1 billion users.

So I did my research and am still a bit stumped. It also doesn’t help that many talks on Account Abstraction (AA) are just merely talks without contextual demonstrations.

There’s still a lot of misconceptions about Account Abstraction. Here’s a few that need to be rethought in the way it's communicated by the community.

Single point of failure doesn’t go away

Alot of the AA explainer/blogs I've come across, the majority of them seem to implicate the rhetoric of AA wallets replacing EOAs. EOAs are skeptically notorious for being complicated because you need to deal with those precarious BIP39 seed words. AA implies that it’ll be “seedless”.

But from my understanding, you still need an EOA behind an AA. Regardless if it's with an actual hardware wallet (which is an EOA), or if it's with your email/pw combo (which can be argued as also being a single point of failure).

So when I see overreaching tweets pushing for AA replacing EOA, it's actually coming off as nonsensical. Because at the end of the day, there will ALWAYS be an EOA or some form of single point of failure behind an AA. Meaning that the issue with protecting/remembering your “private key” will persist. There’s no going around that.

Vanilla payment transactions with EOAs are still cheaper

Can someone tell me why does it cost about 0.005 ETH (as of time of writing) just to send 0.01 ETH via my new fancy AA smart wallet? I thought the whole point of a smart contract wallet is to save fees. I get that network fees are a bit high right now but it costs less to use an EOA wallet to send ETH rather than this fancy new gadget right now.

Hold that thought.

Batching transactions in tandem with pre-paid gas fees can incrementally reduce gas fees per tx in a linear fashion. So it's like, if you spend more (have more on-chain activity), the more you'll benefit from AA wallets. But if you don't garner enough web3 activity/needs, then AA is not really worth it. So is AA’s intended target market a power user or a beginner? I’ve spoken to a few web3 power users and many still haven’t even tried smart wallets yet.

EOAs are still going to be needed

I've also been seeing dApps that are implementing smart wallets/AA in their dApp client. So if I am prompted to create a smart wallet in their dApp, is that smart wallet ONLY applicable/usable to that dApp? Perhaps so…

But what about interoperability? Oh, so then I need to export the key of that siloed smart wallet into a normal EOA wallet? This already seems more complicated than just starting with an EOA.

Gasless fees are a myth and still a question of reality

During my course of AA research, it's been noted many times that during the initial setup of an AA wallet, the UX will be made easier because there will be these paymasters that can help with paying network fees.

False.

During my initial setup of an Ambire smart wallet, I had to take care of my own fees, which was quite hefty.

So here’s the thing. Experiencing gasless transactions is up to the discretion of the provider of your AA wallet. How long could a provider sustain this model? How long could a token project sustain free airdrops all day long? Hmmm…..

Reverting back to web2 login flows & security

There’s an obvious tradeoff between convenience and security. All wallet teams & developers know this. AA smart wallets give us the optionality of 1-click logins via current flows: Login with Google, Facebook, Apple, etc…

Are we inadvertently becoming too reliant on web2 security models by pushing the convenience factor too high? Will the next onboarded users into web3 even know what a private/public key pair is? Is abstracting away arguably fundamental knowledge of wallets removing the intangible self-custody magic we all adhere to with the proverbial “Not Your Keys, Not Your Crypto”?

The continuous and unstoppable improvement on crypto wallet tech is a double-edged sword. But some incidents continue to baffle me: recently a friend of mine who’s been working in this industry for quite a few years didn’t even know what a UTXO is.

Having spent some time tooling with ThirdWeb’s open-source SDKs on AA & embedded wallets, there’s no doubt the onboarding experience is seamless. But at what cost? Each variation of AA & embedded wallets seems to implement some type of ‘2 of 3’ party recoverability setup from the sharding of the actual private key. This means parts of your private key are held by different 3rd parties. I know I previously gave verbal support to Ledger’s Recover service, and I continue to condone it, but it just accentuates the unfortunate trajectory we are heading towards: losing the raw artisanal nature of true self-custody. I believe it's only a matter of time we start seeing complications arise with AA smart wallets.

But that 1-click login flow for a beginner truly can give them a faster crypto onboard. I’ll admit that.

The project is named happyhourDAO. It’s sole cringey purpose is to bring a Drink-To-Earn tokenomic model to web3 via its own ERC20 token, $HOUR.

What the hell does this even mean? Let’s break it down…

It’s essentially a rewards system, built on web3 rails, that F&B merchants can leverage to engage with their patrons and build more exposure from a hopeful network effect.

And how can this be accomplished you say?

Now get this (and try not to fall off your chair): Patrons can “clock in” at a certain F&B merchant and earn $HOUR by the amount of time they spend there.

Oh, it gets better!

Degens can now use those $HOUR tokens for in-house utility/benefits at those spots. Think free/discounted drinks or VIP access to special events.

OR…

They can burn $HOUR tokens to get $DRNK, which is the official governance token of the DAO, enabling people to partake in a grassroots fund investing in selective F&B spots.

Get it? Burn $HOUR to get $DRNK.

Ok enough of the bullsh*t. So how did it start and where is it at now?

Motivation

60% - The desire to build a dApp.

30% - The peculiar attempt at extending my colleagues’ tradition of engaging in local happy hours after work.

10% - The sad realization of the pandemic ripping up the F&B industry and forcing many of my favorite bars/restaurants to shutter their doors.

Process

So when designing the overall structure and network for this, I simply thought to myself, what do other web3 projects have that I’ll need to include. So there I went…

A sexy looking whitepaper, done.

A simple, yet flexible logo, done.

Solidity smart contract deployed on Ethereum mainnet, done.

Open-sourced codebase on Github, done.

Full stack dApp with a very web3-ish front end client, done.

Registered domain name of happyhourdao.xyz, done.

Twitter account shitposting on how the F&B industry needs to be tokenized, done.

A blog to record down all the big brain thoughts, done.

A couple of upgrades to demonstrate active dev team, done.

A failed attempt at listing $HOUR on Uniswap, regrettably done.

Launch

And so as I deploy the smart contracts and set everything else up, I thought to myself…what else does a web3 project need?

A banger IRL party!

So I was shamelessly able to persuade a local tea fusion bar, Teapsy, in “joining” the happyhourDAO network. Yes, they’ve become an active PDE (Participating Drinking Establishment) on the network.

Swag? Got ‘em.

People? Forced a couple of close web3 buddies to show up.

Proof of utility? Bought some Ballet custom crypto cards and used them as voucher passes for a BOGO deal during the event.

Real working use case of the happyhourDAO? Check!

Takeaways

I then got tired…

Not because of spending my own funds and time on everything, but realizing that building a community base is 100x harder than building the open-source codebase of your project. I cannot stress this anymore. We all sometimes get wrapped up in the cutting edge tech that's getting shipped out on the daily, but beneath all this still lies the basic fundamental skill of being able to “sell me this pen”. More credit needs to go to a team’s Business Developer or Community Manager. They’re the ones out in the trenches communicating, educating, and persuading people on the WHYs & HOWs. A lot of people would place the value of devs over the BDs, but I've been hit with a newfound appreciation for those having to shake hands and dox themselves everyday.

And I do want to let this whole exercise of putting together the happyhourDAO be a testament to the openness and democracy of web3. This might even sound cliche but all the tools that you need to build a web3 project are truly waiting at your fingertips. The plethora of open-source dev tools are incredible. Ethers.js, WAGMI.sh, Infura, Truffle, WalletConnect, Remix, and etc…

In closing, the idea and proposal of happyhourDAO, in my opinion and from others, is still a unique proposition in formulating a social web3 community around. I don’t plan on taking this to the next level as it is still merely a side project exercise for whimsical laughs, but I do think it’s got some legs to it. And let’s give some credit here, it’s not just a whitepaper and a twitter account, but an actual working application that anyone can use right now. If you’re an F&B merchant looking for ways to get involved with web3, the floor’s all yours!

Lastly, besides all the bells & whistles put together, it sure has been a great way to get people together in creating happy hours.

“They’ve deceived us.”

“They can no longer be reliable for my crypto.”

“They only care about making money.”

“They will no longer be my main wallet.”

“They’re done.”

If it wasn’t for years of crypto bros solely suggesting a Ledger wallet to newcomers do you think we’d be in this situation? A Ledger wallet surely does have its obvious merits but understanding the context of this controversy isn’t as important as understanding your own knowledge of crypto wallets. As someone who’s in the crypto wallet business, fighting off the constant comparison of “this” versus the industry leader Ledger is a never ending battle of frustration knowing that the opposer’s knowledge is as fragile as the hardware itself.

“It’s safe & complete self-custody!” they’d vigorously defend as they doxx themselves on Twitter with their ENS (sitting adjacent to their NFT pfp) flashing on every tweet of them partying at the monthly crypto conference.

The Recover service news flash by Ledger was more of an intriguing one rather than an alarming one for me. As long as you continuously rely on the software to create your keys after a naive tap of a simple “Create Wallet” button, this is far from a feeling of betrayal. In fact, it’s an industry first: Backup recovery services for retail users.

Rather than spouting out “Ledger” on every instance, take the time to discover the other wallets in the ecosystem. You’d be surprised to find a healthy breadth and depth of wallets out there all with an ample amount of adequate UI/UX you can rely on. As quoted in a previous blog I wrote, “So why shun other wallet tech when in fact deepening the gamut obviates the reliance on just a few. Hardcore privacy folks tend to disparage anything less than abc, but doing so inadvertently centralizes the wallet market.”

Every cycle will mint a new generation of users that don’t share the same principles as the one before it. The Class of 2021 will have no idea what it was like using an exchange without KYC. The Class of 2017 will have no idea what it’s like storing a wallet.dat file. And so on and so forth. 

This PR debacle brought forth by Ledger should actually be taken as a blessing. Informing the ignorant uninformed in this manner makes everyone more knowledgeable. Oh, you thought your Ledger was unfettered from any spectrum of trust?

I, for one, would not use the Ledger Recover service. I’ve always gravitated towards a more artisanal approach to private key/wallet security but it’s not to say I appreciate the optionality for it. As goes the optionality to purchase Ledger’s vanity chain…

Take the time to understand deeper on what Ledger is attempting to accomplish here ladies and gentlemen. It’s all a harbinger of what’s to come. They’re looking at the NEXT billion, along with a lot of other wallet teams that are coming out with similar flavors: account abstraction, MPC, social recovery, etc. Sure one could say more education is needed for proper “DIY” self-custody but it would be insulting to say that  Ledger hasn’t been focused on that front either. They’re probably the biggest proponent of self-custody in terms of educational content created and media spend. Ledger realizes that not everyone is going to need to know jiu-jitsu or proper self-defense techniques in panic situations, but rather outsourcing that could give those with other priorities a peace of mind.

This question is better tackled by looking at the theoretical possible number of wallets that have been used. According to Glassnode’s Total Addresses metric, which is “The total number of unique addresses that ever appeared in a transaction of the native coin in the network”, current data shows there being a bit over a billion unique total addresses in the Bitcoin network. On the Ethereum side, and despite Ethereum’s blazing popularity it gets in the media, only a relative mere 176 million unique total addresses have been seen on the network. 

Let’s have some fun with these numbers…

So how many unique wallets could there have been in the market right now?

Adding up the two totals gives us a possible 1.276 billion unique total addresses in the crypto market, which for now, let’s assume this number can reflect the total number of bitcoin/crypto wallets (wallets) in the market. This is of course incorporating a lot of assumptions such as:

• One address per wallet (a wallet can actually have multiple addresses).

• The same Ethereum addresses are also used for all other EVM networks (to prevent double counting).

• Looking only at the bitcoin and ethereum network as they comprise the majority of crypto activity anyways.

From a wallet team perspective, how much opportunity is there?

If we try to financially quantify market sizing, we could potentially take the per unit cost of let’s say a Ledger Nano X (approximately $150 / unit) and multiply it by the total unique address stemming from above. That would come out to a staggering $191,400 mil. Do bear in mind that this is only a fraction of the total global population, which as of today stands at around 8 billion people. For those familiar with market sizing formulas such as TAM (Total Addressable Market), this would come out to a staggering $1.2 trillion ( [$191,400 mil x 8 bil] / 1.276 bil ). A farfetched and highly optimistic number for sure. A better exercise is to take another common market sizing formula, Serviceable Addressable Market (SAM), and get a more realistic number. But this is an exercise for another time, rather the point I am trying to make is that not one single or oligopoly of wallet makers can tackle this market all by themselves (there is still more room for wallet competitors!). 

And what about crypto value per wallet?

Another interesting take is to calculate the average value per wallet whether it be for Bitcoin or Ethereum. Doing this would simply have each network’s total market cap divided by their unique total addresses which comes out to $468 and $1,206 per wallet address for Bitcoin and Ethereum, respectively. Quite eye-popping considering that Ethereum has only 20% of the number of unique addresses compared to Bitcoin but has an average value to wallet address that comes out to more than double. What can be reasonably inferred from this is that Ethereum is still quite an exclusive circle for the few despite the tenfold amount of media coverage it gets over Bitcoin. Does this mean that if a newbie comes into Ethereum they’ll have a higher chance of holding more value than in Bitcoin? No.

To keep this short and sweet, here are some takeaways from this simple exercise:

• Large untapped market share is an enabler of further growth & diversity in the wallet market.

• Ethereum wallets’ lopsided average value per wallet address is reflective of its exclusivity versus Bitcoin’s altruistic community.

• If we included the market cap values of all EVM networks and continued to assume all UTA on the Ethereum network are the same addresses used for those different EVMs, an average value per wallet address for all EVM networks would be possibly 5x higher.

As mentioned before in previous blogs, your wallet diversification is more important than your crypto asset diversification.

Introduction

The premise of a wallet has significantly changed over the past decade since the first generated genesis block on bitcoin. Even the word itself has evolved from being addressed as a “bitcoin wallet” to a more umbrella understanding of a “crypto wallet” or just “wallet” itself.

As a tangent, a more accurate term for a wallet, as penned by Andreas Antonopolous, should be “keychain” instead. In the sense that your misinterpreted “wallet” essentially is only a private key, or a set of private keys. Everything else that you own is on the ledger.

Where once wallets were just siloed in holding ownership of a set of private and public keys (public address base58 formats weren’t even introduced during the first year of bitcoin), wallets now have spawned a litany of functionality such as the ability to buy crypto, swap tokens, hold NFTs, interact with DeFi dApps for staking, and much more.

Obviously wallets on exchanges have all these functionalities provided as well but for the purpose of this piece, we won’t categorize wallets on exchanges as true wallets. And in fact, they really aren’t. But for those who still hold a majority of assets on exchanges, it well reflects the type of crypto user you are amongst a widening spectrum of users. This can be mapped out to get a gauge and ultimately form a benchmark on what wallet is most appropriate to a certain type of user.

The entirety of this piece will attempt to outline some broad methodologies to use in forming certain benchmarks of crypto wallets and its targeted users by certain characteristics. This is by no means exhaustive or exclusive, but rather a working exercise on examining certain unrealized characteristics to one of the more altruistic and overlooked, but important areas of the bitcoin/crypto space. There are tons of mathematical models that attempt to formulate tokenomics of different networks and measure network activity, but there aren’t any models to form some type of benchmark in the crypto wallet segment.

Perhaps this could be a starting point.

Categorizing crypto users by wallet usage behavior

Let’s look at one extreme end of a proposed wallet usage spectrum. We’ll coin this the “Highly Private” wallet users. They tend to treat their wallet usage in a very anonymous manner. Their tendencies include:

• Doesn’t reuse addresses

• Limits on-chain transactions via layer 2 solutions

• Uses mixing services to obfuscate deterministic trails

• Prefers to leave private keys offline on cold storage solutions

If it doesn’t come obvious enough, the above behaviors tend to be from bitcoiners as they have always upheld the ethos of privacy and anonymity more so than any other decentralized networks. These are the more liberatarian users who could be considered “in it for the tech” and side closely with the cypherpunk movements.

Let’s move to the opposite end of the wallet usage spectrum and we’ll coin this end “Highly Open” wallet users. They tend to treat their wallets as their VIP ticket to the luxe event. Their tendencies include:

• Freely gives out address for potential airdrops and NFT mint events

• Hands over wallet history to potential employers as a way to gauge trading performance

• Publicizes blockchain domain names, such as ENS, over social media channels

• Feels comfortable with leaving private keys online on hot wallets or centralized exchanges

• Signs transactions and proofs needed for token or NFT-gated Discord communities

This spectrum tends to categorize DeFi users and NFT flippers as these sectors demand constant engagement. These sectors are also highly classified as the more money driven arena where clout and “degen scores” tend to win favorably within a community. These are the more greed-driven users who could be considered “in it for the lambos” and have a constant tendency to ask “wen moon?”. News of online hacks and phishing attacks on centralized third parties do not really faze them.

With the characteristics described above, we can map out a simple wallet usage spectrum based on a user’s diversification in types of wallets. With the far most left side indicating Highly Private users and the far most right side indicating Highly Open users. A color scheme of blue and red representing cold and hot, respectively, for visualization purposes. More explanation on the W(e) number values is in the later part of this piece.

If there’s ever any indicator of the type of crypto user one could possibly be, it starts by examining their own emphasis on what a wallet should encapsulate for them. And the growing divide between both spectrums has greatly diverged over the years, further pitting both sides farther away and away from agreement. The low/high time preference on both sides is a measure of transfer speed pertaining to transactions.

In once was a common understanding of the umbrella term “crypto” has now been shunned away by bitcoiners to the point where “crypto” and “bitcoin” are two entirely separate industries. Bitcoiners don’t even acknowledge the hot buzzwords such as Web3 or blockchain. Bitcoin-only wallets are the preferred choice rather than the general crypto wallet, which supports multi-currencies.

A wallet, the infrastructure for any crypto user and the fundamental user foundation, has certain categories that can more accurately describe the user rather than categorizing from the top down. Trying to ascertain the behavior of a user based on network usage, activity usage, or transaction usage can actually skew or rather miss certain traits that may seem like outliers.

Wallets, which are one of the least sexiest parts of the whole industry, are one of the most, if not the most, important part of the whole industry. User activity, network effects, DAO communities, and etc. are all concentric around the wallet.

The 3-axis categorization (Pillars) of a crypto wallet

All wallets can essentially be subjectively measured in terms of various characteristics and categories. For exercise sake, we’ll attempt to group a select choice of wallets based on certain characteristics and group them accordingly. We can start with the most obvious characteristic of security. Again, this will be a very subjective exercise and not meant to come up with accurate degrees of certainty, but more of a baseline in terms of wallet categorical quadrants we can think of. As Andreas Antonopolous once said:

“different groups of people will have different risk models with different tolerance for technical complexity. If what you’re trying to do with security is more technically complex than your level of skill, you introduce a very serious risk that you lose your crypto. There is no gold standard of security that applies for everyone.”

The three characteristics (3 pillars of a crypto wallet) we will use to build our categorical model are listed below:

1. Security. Although there is no gold standard of security, we can use the characteristics as “hot” and “cold” as a bifurcated starting point. Then you could also use any instances of historical hacks or code bugs as a next set of reference for measurement.

2. Agility. This refers to the speed of being able to use the wallet. Speed in terms of set-up, creating and completing transaction process, and simplicity in accessibility. Wallets have their own friction and pain points during the process of a simple transaction. The more friction there is, i.e. plug in, offline tx signing, etc., the slower the overall experience for the user, plus a potential higher susceptibility in making mistakes.

3. Complexity. This could more or less be similar to Agility but there are nuances. A wallet may seem complex at face value for a novice, which would entail speed and agility to decrease. But for a more sophisticated user, that same wallet may not seem complex at all but would still have a low ranking when it comes to agility.

Security has been chosen to be placed on the y-axis, Agility being placed on the x-axis, and Complexity being placed on the z-axis. A fourth axis of functionality could be possible but for simplicity’s sake, it’s easier to visualize a 3-axis chart rather than a convoluted matrix chart. Perhaps a more advanced categorization model can be made for a later piece. For now, we are assuming wallet usage measurement in terms of HODL’ing and sending/receiving basic vanilla transactions. But feel free to make suggestions on how to incorporate a 4th axis of functionality into the framework.

The wallet brands chosen below are completely arbitrary in some instances, but for the most part each representing a certain category to some extent. Categorical fit and placement was also subjective but could be quantified as you will see later in the next section.

As you can see, the z-axis of complexity and x-axis of agility can more or less be linear in relation. Which makes sense: a wallet setup that is more complex should, on average, be less agile for the average user. So in a sense if we want to ignore the z-axis of complexity and replace it with functionality, we could, but this could be for a later analysis piece. Or just use the x-axis and y-axis only for simplicity. Again, this could be considered for a follow up piece.

Quantifying a wallet’s elasticity from the eyes of its user

Ultimately, a wallet can also just be simply measured using the x-axis of agility and the y-axis of security in a ratio as below. A ratio of above 1 would imply a wallet that has relatively high agility, whereas a wallet with a ratio below 1 would imply a wallet that has relatively high security and relatively low agility.

In the image in the first section, we were introduced to a W(e) value, which stands for a proposed quantitative value of a wallet’s elasticity degree. For this case, let the term “elasticity” refer to the wallet’s overall flexibility or tensility to one’s usage. An overarching statement but think of it as the wallet’s ability to respond in an efficient manner. A wallet’s multifunctional speed often sacrifices its raw private key security, and vice versa. We can attempt to quantitatively measure this in a simple 1:1 ratio.

1. The measurement of the x-axis, which corresponds to agility, would be either a subjective or objective measurement. Subjective in the sense where an average crypto user rates the time it would take to activate the device and complete a transaction initiation from a scale of 1 to 10. An Objective measurement could also be conducted through the actual timing of an average crypto user activating a particular crypto wallet and then completing a transaction initiation. The time measurements could be conducted with at least a dozen of crypto wallets with a sample size of “average” crypto users of 500 or so. A normal distribution with the standard deviation to be used in calibrating a score on a scale of 1 to 10.

2. The measurement of the y-axis variable, which corresponds to security, would be mainly a subjective measurement based on a ranking scale derived from a multitude of sample sizes. These sample sizes could be categorized in clusters of security experts, expert crypto users, and average crypto users.

Price elasticity, which is a common metric in economics, measures the degree of change in quantity demanded per degree of change in price. Wallet elasticity, in this sense, would measure the degree of change in agility based on the degree of change in actual raw security of the private key. A W(e) value of over 1 would indicate the wallet’s elasticity is highly agile and less than 1 indicating the wallet’s elasticity is highly secure.

The degree of wallet flexibility would be theoretically capped between the bounds of 0 and 10. With 0 indicating a user that is Highly Private with a cold wallet extreme wallet diversification and with 10 indicating a user that is Highly Open with a hot wallet extreme wallet diversification. These values can essentially be plotted along on the wallet diversification spectrum from above.

Conclusion

As wallets continue to evolve, quantitative measures can also evolve to better position wallets in areas of different needs for different users. By better understanding certain user needs and demands, a wallet can pivot along the spectrum of different characteristics to improve on. Agility, Security, Complexity, and Functionality are all strong foundational characteristics wallets need to be mindful of. A fifth axis can also be incorporated representing the characteristic of durability, or longevity. Wallets essentially are the bridge between the digital and the physical. And as this digital trend continues to uproot our lives, “there is no greater calling than safeguarding the lanes of two-way travel between the physical and digital world”. There will always be a physical initial touch and process when interacting with our digital assets.

Having certain quantitative measures as standard benchmarks when comparing across the market of crypto wallets, new and existing users can have a higher maturity when conducting their own due diligence on which wallet best suits their needs. Although there are already a few standout market leaders in the wallet space, both tails of the distribution hosts a hoard of solid emerging new wallet options that are slowly aiming to fulfill needs that haven’t been covered. This progression will also eventually give us a better picture of a more efficient equilibrium between agility and security that we can use as a gauge of our crypto activity.

Written by Ape #1397

Originally written here on 1/20/2022.

The iconic 1968 movie, Planet of the Apes, is a movie that not only runs deep in cinema success but also a story that can still reverberate a premonition to modern day society. In a classic final scene of the movie, the main characters of the human-played Taylor and the ape-played Dr. Zaius exchange dialogue which turns out to be a warning to man’s prerogative:

“Taylor: A planet where apes evolved from men? There’s got to be an answer.

Dr. Zaius: Don’t look for it, Taylor. You may not like what you find.”

-’Planet Of The Apes’.

The movie eventually morphed into a sci-fi media franchise spawning multiple sequels and remakes. Despite its cultural impact and talking points it receives on certain issues such as race, politics, and animal rights, it’s ultimate message still rings true as we see this digitization trend unraveling before our eyes as real-life global social upheaval continues to disappoint us.

As bizarre as this article title may sound to some unfamiliar with the Web3 scene unfolding before us, PAUSE, give me a minute to explain. And for those familiar with the second usage of “ape” but unfamiliar with the first usage of “ape”, PAUSE. I will also elaborate on my seemingly newfound unprecedented way of investing.

(Warning: There will be many ape references as you may have guessed)

There comes a time and place for new revolutions to “cross the chasm” as they say. Bitcoin did it when Laszlo purchased two pies of Papa Johns. Caesar did it when he forcefully confronted Rocket and claimed position as alpha chimp in the movie Rise of the Planet of the Apes. And now Stacks is doing it with a wild collection of pixelated apes on bitcoin.

Pixelated apes?!

Let’s pivot for a minute.

Deep, deep down inside each of us, is in fact the curious beastly nature of, as referenced above, an ape. Being an evolution of what we see as present day apes, it’s sometimes hard to fathom that they are our early ancestors. In fact, we ARE technically apes, under the hominid family of apes. Without even needing to venture out into the jungle, you’ll see glimpses of what we perceive as “ape activity” every autumn weekend in the designated man cave of certain households protruding a concoction of pant-hootin’ and hollerin’. It’s until we witness those moments when we do realize how eerily closely related we are to the hairy version of apes.

From our casual definition of apes, what are they? They are highly intelligent human-like tailless primates that come in all shapes, sizes, and colors. But the commonality between all of them is their god-like strength.

We’ve all seen videos of apes in packs either at zoos or in the movies. Doesn’t matter if you get one, two, or a group of apes aggravated, there is no escaping the painful, sometimes cruel, physical life-ending punishment unraveling before your eyes. Apes have profound physical strength. When they’re together, that strength is seemingly multiplied. Or as Cesar has once said, “Apes, together, strong”.

But that same communal strength can also be used for good.

So where are we going with this ape conversation?

Well, if you haven’t noticed, but the past year the NFT scene has been blowing up with people changing their social media profile pictures to images of apes. For reasons some may find just as odd as the odd behavior of a furry orange orangutan.

But the ape melee theme in the NFT space is wildly popular for several reasons. Firstly, being is our long innate fascination with using these creatures in our pop culture. Secondly, is the unexplainable swarms of money being thrown into these projects one can only describe as “ape follow ape” behavior. And thirdly, is the emblematic peculiar timeframe we are in with this burgeoning industry. As early apes are early representations of human lifeform, the early glimpses of the capabilities we’ve seen with NFTs are still surely in its infant beginning stages. Or as the proverbial phrase that every crypto native boldly spouts: “We’re still so early”.

For anyone new to the space, including OGs or maxis, the Megapont NFT scene is the best way to get started. The Megapont Ape Club is a collection of pixelated apes that have “evolved at an accelerated rate due to a genetic mutation and as such are considered the kingmakers” within the fictional universe of Megapont. It’s thriving, organic community gives it a fun taste to the NFT scene all while having a familiar relation to something we all respect: Bitcoin. As the community puts it, these apes are not just “on Bitcoin”, but rather they are anchored by “…the most secure, most durable, and most decentralized blockchain that has the most users, most capital, and biggest brand in crypto”.

Sure they’re modeled after apes with a touch of pixelated swagger, but these Megapont Apes are getting another evolutionary calling through a soon-to-be forming of a DAO, a common native currency of $MEGA, an Atomic Banana Bridge allowing the apes to travel interstellar amongst blockchain networks, and much more. As Stacks has unleashed bitcoin’s expressive smart contract potential, Megapont has unleashed the rallying potential of what a real ape NFT community should encapsulate.

“All of human history has led to this moment. The irony is we created you. And nature has been punishing us ever since. This is our last stand. And if we lose… it will be a Planet of Apes.”

- The Colonel.

So in a metaphorical sense, are we reverting back to our beastly ancestors in the way we want to approach the spawning crypto scene? Are we mirroring ourselves as “apes” in an industry that is still so early and still so hard to tell on what may come of it? Or are these ape NFTs a harbinger and medium for us to morph our physical beings onto a native digital asset, allowing us to ape-ly explore and experiment with a digital metaverse we are still trying to understand?

To come full circle and touch back on the opening of this piece, the exploding crypto industry is just a reflection of what we are trying to avoid: a trepidation of the pitfalls of greedy government ruled money and full authoritarian control over humans amongst nation states. Perhaps these ape NFTs, and the rest of the crypto sphere, is a way of avoiding a potential downfall from what we see all wrong with societal, political, and economic structures of human civilization.

As the decentralized crypto space has given rise to the third characteristic of Web3: Ownership, metaphorically we can give rise to our own freedom as a digital native on the internet without being controlled by a centralized server. In once what Web2 entities thought control over internet natives was inevitable, cryptography and decentralized networks have now made them realize those same internet natives are not as inferior as before.

The original Planet of the Apes reflected the counterculture of the 1960s. Let the Megapont Ape NFTs reflect the counterculture of the 2020s. Ape NFTs come off as bizarre and esoteric to conservatives (nocoiners), but let it be a beacon of change we possibly need.

![(Let’s avoid a progression of the above.)

](https://images.mirror-media.xyz/publication-images/G_GX_HpwzzPDDxU7N5uOm.png?height=280&width=650)

“Dr. Zira: Taylor! Don’t treat him that way!

Taylor: Why not?

Dr. Zira: It’s humiliating!

Taylor: The way you humiliated me? All of you? You led me around on a leash!

Cornelius: That was different. We thought you were inferior.

Taylor: Now you know better.”

- ‘Planet Of The Apes’.

In crypto parlance, “ape-ing in” refers to the happy-go-lucky, shoot-to-the-moon hopes that crypto investors place on their blind gambling-like investments. But trust me, as like a normal risk averse investor would, proper “crypto due diligence” was conducted. There are no clout-chasing VCs or fake online influencers shamelessly shilling this project. It’s purely organic. And as a bitcoiner, doing cool organic things on bitcoin is emblematic of the network.

But there is more to it than just pixelated artistic forms of wild apes. It’s an open and welcoming community within the Stacks ecosystem. It’s a signal that NFTs and all the other expressive smart contract applications we see on other Layer 1’s, can also be implemented within the Bitcoin ecosystem. For the ill informed, bitcoin may just seem like a static single functional application, but the reality is that layers can be stacked on top of the base chain in unleashing all the fantasies and realities we want to see in the decentralized web.

As early as we still are for bitcoin and the crypto space, we’re all still exploring its potentials by tinkering with every possible innovation. In its sense, we are all apes. Primitive in technology, ape-ly curious in application, and pixelated as to the unclear but colorful future we are headed to.

Apes, together, on bitcoin.

Sources

https://www.hiro.so/blog/nft-curious-bet-on-bitcoin-nfts-to-secure-your-digital-legacy

https://lwlies.com/articles/planet-of-the-apes-lessons-in-the-apocalypse/

https://lwlies.com/articles/planet-apes-of-the-apes-1960s-counterculture/

https://www.megapont.com/

Originally written on 10/27/2021 here.

Your propensity to self-custody your own private keys and hoard loads of hardware wallets might be an obsession, but that’s ok, because we know you wouldn’t want it any other way.

But think about it.

Your unconscious overprotective nature you place on your private keys, spoiling it with different hardware outerwear, and showing it off on social media is akin to an intimate relationship. You really do care about how it looks, its utility value, and its future potential value it can bring. It’s 2021 and if that’s modern era’s way of defining what makes a relationship a relationship, then so be it.

You see, there really is something immensely intimate about holding your own private keys. You start looking at those 256 bits of 1’s and 0’s as the same X’s and O’s you wrote to your middle school crush. By the time you get to experience the rush of inserting your own private keys into a ScriptSig generation, spilling out the locked UTXOs……game over….you’re hooked.

By the time you get to experience the rush of inserting your own private keys into a ScriptSig generation, spilling out the locked UTXOs……game over….you’re hooked.

The notion of holding something so near and dear to your heart is a reason why it’s private. A set of binary digits so powerful yet so obscure and intangible has the power to metaphorically be inserted into the heart of the Bitcoin network so that one’s precious UTXOs can therefore be unlocked and released. Although a cheeky analogy, it’s having what it takes to open one’s heart in reciprocating back to you, then in a way that precipitates to those around you in an unstoppable raging force.

But…

Like with any relationship, there are caveats…

By giving someone else the opportunity to hold your private keys, you give up that direct relationship and instead invite a third party, a mistress so to speak, in the form of a nefarious crypto exchange. It’s haphazard. That mistress has the chance to sour your relationship with Bitcoin in the form of a hack or stolen funds, thereby losing your hopes in what Bitcoin can really provide.

You see, you’re actually in a love triangle, rather than a 1 to 1 relationship. For some, that might be their thing. But to others, you lose the chance to see that original pure relationship grow into something more. You don’t control your fate with Bitcoin anymore. The mistress does. And the mistress always only cares about itself.

It’s only until you personally take your private keys to sign a transaction is when you will instantly feel that palpable out-of-body connection that is only meant to be between you and the network. With no one else in between.

Holding your private keys is akin to holding a part of the network. A network you can be assured that your UTXOs will be forever secured as long as YOU hold your private keys.

Take back control of your private keys if you don’t already.

Original publication (6/25/21): https://bitcoinmagazine.com/culture/which-side-of-the-moon

It’s Aug. 1, 2028, and we’ve made it to the moon.

The far side.

But it’s cold. It’s dark. Spotted barren craters and valleys are ashed with the flakes of Benjamin Franklins used as fire-starter. Synthetically created cyber hornets, known as Lampyridae, whiz through the thin atmosphere providing much of the necessary light — besides the flickering of relic-like S9s that are still humming away.

The oracles of Plan B have precisely fixed our revolutionary digital gold at $1,000,000 per piece as all of earth has degenerated into lawless warzones. The calamity of the sudden price surge of bitcoin back in 2021 saw all of civilization vehemently FOMO into bitcoin, causing all other asset classes to drop to zero. The total cataclysm sparked World War III, now colloquially known as “The Dump,” the result of mass-scale annihilation of central banks and the ensuing anarchy as even the poor beggar on the street fought for the last available UTXOs.

There are no states, national governments, intergovernmental organizations, regulatory institutions or sovereign borders. The world is akin to a lawless state but with virtual communities as laboratories for conducting failed experiments in the construction of new tokenomic governance structures.

To the naked eye surveying, there is only one such seemingly structured society.

Those who speak ill of the Bitcoin network, or The Network, are immediately deemed as being against The Network, which carries punishment ranging from confinement in a concentration camp to death by ASIC-generated heat exhaustion. The few who do get to live are forced through the treacherous concentration camp known as The Nakamoto Institution, where first-years are forced to recite The White Paper backwards while stacking the newest generation Whatsminer M5000S+++.

War between Bitcoiners and a small but loyal group of die-hard Ethereans, led by a grizzly-faced cyborg villain named Colonel Sassano, continue to play out during the times Jupiters passing gives ample enough lighting for battle. But revealing one’s true network loyalty in a world where Bitcoiners are the dominant species is synonymous with suicide as Bitcoiners roam the spotted desolate terrain with heavy fists.

Mining farms have been warped into gritty, cybernetic, neon-tinged town centers of communities that were naturally built around them for lighting and heating purposes. The largest of all town centers, a megalopolis, is led and ruled by F2Pool, as national identities are no longer bound to one’s birth country or ethnicity, but rather by “Proof of Pool”. Those who are born in the dystopic megalopolis of F2Pool enjoy the generous economic and social benefits that stem from its large hash rate. Those that are born into smaller mining pools are known as the Unfortunates, though they’re still better off than Altcoiners, who can only dream of settling down in the larger pools. Not surprisingly, a majority of the town centers are Chinese-owned due in large part to the now exposed underlying secret of the original Chang’e 4 mission.

NASA’s Ranger 4 has been rewired as a Blockstream satellite that also tracks all physical locations of moon dwellers under the directive of the Saylor Surveillance Society.

Bitcoin nodes are now biogenetically emblazoned on our cyber-enhanced bodies as a requirement at birth, with our bech32 public addresses permanently displayed in a ghoulish neon-green font across the forearm. Despite being visually aesthetic, those emblazoned neon digits lighting up beneath the forearm skin are more of a burden than blessing, as it is tied to all Blockstream satellites that roam the skies. And in this era, reusable addresses are a thing of the past.

There is one group that strives to bring down the authoritarian nature and toxicity of the current status quo, and that group is named the Antonopoulons. Rebellious but mercenary in nature, these rebels stay true to the ethos of Bitcoin’s leaderlessness. This group’s membership consists of a myriad of Satoshi rogues such as Wuille, Dash Jr., Poon, Gavin, Laszlo, Karpelès and a dozen others consisting of a veritable who’s who of the underrepresented and forgotten.

Satoshi is their guidance, concatenated with their legacy addresses. CPUs are their mantra, with an intent of bringing down the oligopoly in mining pools that have run rampant. For now, merciless struggle for power rages on, with all manner of hashrate warfare splaying out, and with ordinary HODLers the collateral damage.

What would things look like if they had been done differently?

It’s May 22, 2028, and we’ve made it to the moon.

The near side.

The Earth shines its earthshine bliss toward moon-goers as they make the three hour Tesla-engineered interplanetary-vortex-shuttle ride, dubbed Lunar Saylor, to the moon and back. The moon has become a gentrified hotspot.

The near side of the moon is now an autonomous nation state with zero travel restrictions to and from earth. All you need is enough bitcoin to pay for the above mentioned Lunar Saylor.

After COVID-19 ravaged the world and central banks ran out of ink for their printing press, a global consortium, now known as the Nakamoto Woods Conference, was held to announce a new global monetary system, rectifying the need to have CBDCs, with bitcoin the global reserve currency.

Governments all accept bitcoin for tax payments and intentional inflation by any sovereign nation’s central bank is deemed a crime punishable by “rug pull” under the bylaws of the United Nodes.

Bio-implanted Bitcoin nodes have become a new trend amongst diehards whilst every mobile phone comes manufactured with a lightning node.

Arthur and Nouriel can be seen poolside on Sunday afternoons in Pyongyang. Elon and Keiser have become unthinkable best buds who spend Friday nights at Club Flo-Nucke. And Schiff and the Winklevoss brothers post their dubs on SatoshiBook daily.

Is it worth mentioning Craig S. Wright’s fourth bitcoin hard fork?

The blissful atmosphere on the near side of the moon is mirroring the halcyon days when the world economy was running on the second most sound monetary asset, gold. Gone are the days of fast and easy money that rewired our brains into high time preference, Miley Cyrus-like twerking beings. Crime and poverty rates have all plummeted as society has focused on long term engagements with zero-to-one inventions back on the rise.

These virtual communities on the moon have undermined questions of legal jurisdiction and taxation for which the geographic boundaries of nation-states are obsolete.

The age of the Bitcoin Network has arrived with our physical, breathing flesh being the only limitation toward attaining the absolute Cypherpunk’s Manifesto.

Made popular by the book, “Outliers: The Story of Success,” the mainstream principle states that, in order to become an expert in any field, you need 10,000 hours of devotional practice in that field.

With every hour being worth every effort and not wasted.

Those 10,000 expended hours are pivotal for one to become an expert in whatever they are striving for, making those 10,000 hours quintessential to the recipe for success.

Of course, 10,000 hours can be denominated in many ways. Those 10,000 hours could be broken down to mean 417 days’ worth of hours, or three hours a day for 3,333 days, which is slightly over nine years. In 2010, 33.333 hours translates to 2,000 minutes, or the time it would take to mine 200 consecutive blocks on the Bitcoin network producing 10,000 bitcoins from block rewards.

The number 10,000 has become the universal bellwether for how we measure the amount needed of X to achieve Y. The significance of 10,000 is apparent and, while those 10,000 bitcoins used to purchase pizza may, at first glance, just seem arbitrary; it was those 10,000 bitcoins that became an allegory for its own aspirations, an argument for innovation, change and a new frontier in monetary financial decentralization. It was those 10,000 bitcoins that pushed forward a monumental moment for bitcoin, marking the first real-life use case for the nascent digital currency.

You see, there’s more to that legendary union between the world’s first cryptocurrency and everyone’s favorite food. There’s more to it than just Laszlo Hanyecz innocently using bitcoin to purchase those two large Papa John’s pizzas. There’s more to it than just Laszlo marking the first real-life bitcoin transaction. There’s more to it than just people using the “pizza infinitely cut” analogy to defend bitcoin’s supply cap.

Pizza was the perfect choice to spend those bitcoins.

It’s the flattened, leavened, wheat base of a pizza that is emblematic of bitcoin’s flattened hierarchy system.

It’s the wood-fired baking process that hardens the outer crust rim, aptly synonymous with the cryptographic burning of energy to fortify a block in the hash-based, proof-of-work process.

It’s the endless variation of sauces and toppings on top of a pizza that can be characterized as the endless layers that the Bitcoin ecosystem is rapidly building on top of the Bitcoin base network. From the tomato sauce to the mozzarella cheese and endless toppings like anchovies, mushrooms, onions, olives, pepperoni; the corollary would be Lightning, Liquid, OmniBolt, WBTC, Umbrel, Sphinx, so on and so forth.

A small pizza is called a pizzetta. A person who makes pizza is known as a pizzaiolo. A small bitcoin, or the smallest bitcoin denomination, is called a satoshi. A person who “makes” bitcoins is known as a miner.

A pizzaiolo readies the pizza dough to be truthfully kneaded leaving it undisturbed and allowed time to proof. But the proof here is not in the pudding, nor the sauce, but rather in the cryptographic hashing in Bitcoin’s proof of work, the honest kneading of a block that transpires the one and only truth.

What started among the Ancient Greeks, and then made popular in Naples, Italy, is now a popular meal option worldwide, unbiased to race, religion, ethnicity and gender.

The word “pizza” in the Lombardic word context is “bizzo” or “pizzo” meaning “mouthful,” related to the English words “bit” and “bite”.1 Bitcoin’s “bit” and “byte” is the quintessential, underlying raw information needed to transfer value from a set of 256 bits to another set of 256 bits, or 32 bytes.

In 2021, 10,000 bitcoins would have needed to be generated from 1,600 consecutive blocks, in 16,000 minutes, costing millions of dollars in resources, energy, labor, research and don’t forget the delicate precise manufacturing of ASIC chips — a culmination of more than 10,000 hours of mastery.

Each hour garners work. Each bitcoin garners much more than the proof of work.

It has been 11 years since that day when those 10,000 bitcoins — worth about $41 at the time — were used to buy pizza; but during those 11 years, Bitcoin has survived four bull/bear markets, three halvings, multiple hard forks, and constant maligned attacks by ignorant critics whose only job is to sensationalize the uninformed.

Those 10,000 hours is in no way equivalent to 10,000 bitcoins. The endless effort expended in those tireless 10,000 hours does epitomize the effort behind 10,000 bitcoins; a process that shall not be naively viewed in vain.

Bitcoin is now the most popular native digital asset and is also unbiased to jurisdiction, political faction, economic status, age and so on.

Pizza is made for the masses. Bitcoin is made for all economic classes.

It’s the melting and browning of the savory cheese that holds the whole pizza together in an asynchronous way, where each strand of cheese represents a node in the network, holding and relaying to every other strand the necessary bond of validation and truth.

Sure, Laszlo could’ve chosen to order a sandwich, McDonald’s, or even Halal food, but the mere coincidence that pizza was chosen can exemplify the accidental fate and similarities between the two. And regardless, ordering another food option wouldn’t have rolled off the tongue as nicely as…

Happy Bitcoin Pizza Day.

PART 1: THE REDUNDANT REMINDER OF NODE REDUNDANCY

“It won’t succeed unless the user experience is simply better than trusted third parties, but we need to start the education process with the very basic fundamental: trusting a third-party with full access to your Bitcoin is just replacing one centralized banking system with another.” — Eric Martindale

For those in the crypto space and are relatively versed in bitcoin language, we’ve all heard the proverbial, “Run your own node” preached throughout bitcoin literature many times. It’s synonymous with “not your keys, not your crypto” or “hodl”.

Regardless if they are adhered to by the crypto community, they hold their own merit and ways of conjuring up regret at the worst moments. Human nature tends to make the same mistakes again; Mt.Gox, QuadrigaCX, OKEx, etc.

Why do we continue to keep falling into the same mistakes time after time?

Because of ease. It’s very easy to open an account with a centralized exchange and keep your bitcoins on their platform. It’s extremely also easy to buy high and sell low when the concomitant FUD infiltrates our decisions.

One area of the bitcoin ecosystem that really hasn’t captured enough retail attention, let alone usage amongst users, is running your own bitcoin node. It’s one of the few areas of bitcoin that has not been “institutionalized” or “monetized”. For good reason though as it’s not supposed to generate monetary incentives, rather it consumes costs that are somewhat linear to blocks mined. It was designed to be grown in a grassroots manner rather than the other financially motivated areas; mining, trading, and custody.

When one runs his/her own node, they don’t have to rely on a third party to broadcast, propagate, validate, and confirm their transactions. They are completely self-sovereign in this manner.

Therefore, to take the earlier mentioned “not your keys, not your crypto”, the same idiom can be applied as, “not your node, not your validation”.

As the crypto community embraces the seemingly near start of the third bitcoin bull run, the inevitable next generation of bitcoin believers will venture down the rabbit hole. This will undoubtedly put more demand, and possibly strain, on third party services that are already in place ranging from wallet providers, exchanges, and even on the mining network. Subsequently this will also naturally demand an increase in the amount of nodes running. But by whom?

“Members of the bitcoin community seem to be losing interest in hosting full nodes. And it’s something to pay attention to, because over time it might mean that the major companies in the industry may have to pick up the slack.” — Daniel Cawrey

The bitcoin community can be divisive at times between the amount of redundancy of having a certain amount of nodes in the network. Does it help the network or does it help the individual?

It’s isomorphic.

But the key word here is redundancy, as in the same ecosystemic redundancy witnessed in nature. Parrotfish are a type of species that feed on the small algae of bio rich corals under sea. This act alone is essential for the survival of corals to flourish on a seabed full of rivals. In a scenario when the parrotfish species die out, a collection of other similar functioning species, such as the surgeon fish and rabbitfish are there to pick up the void. This redundancy in terms of our natural ecosystem provides a gradation of resilience to the system as a unit.

Another example that supports this redundancy in biodiversity is seed dispersion, done by a range of different sized species, which is pervasive in any forest throughout the planet. If one subset of species goes extinct, another subset can fill that void without any downtime. But there is a more precarious caveat in which the extinction of the larger species in size have been researched to inhibit a larger disturbance to the local ecosystem versus its similar functioning small species.

“…larger species in size have been researched to inhibit a larger disturbance…”

In short, redundancy manifests the proverbial “don’t put all your eggs in one basket”. And its this redundancy, which can also be conflated with diversity and/or resiliency (we’ll use these terms interchangeably in this piece to make a general point), is essential to the systems of nature, society, machines, governments, and etc. When the first string quarterback goes down with an ACL tear, the second string man comes up and might even perform better. When a subset of bitcoin nodes suffers some internet outage, the rest of the nodes can easily pick up the slack of validating transactions. It’s a form of risk insurance on network threats. It’s fault tolerant. And this gets cheaper as more and more smaller individuals run nodes rather than placing them in the hands of bigger players prone to centralized attacks.

The sentiment has been preached throughout the corners of the crypto world and it is crystal clear: Everyone should run their own node. But it will take some more education, easy to use tools, and god forbid another type of accidental chain fork to wake the masses. By providing users an all-in-one node setup (more at the end), the ease and importance of running a node will be galvanized.

The ubiquity of nodes is not yet present. But the rush of a seemingly hazardous government interest can be the cataclysm the network needs to even further push out the network beyond their physical reach. This could also be characterized as that diversity, or network resiliency, mentioned earlier. On that note, attempts at placing nodes in space is still a work in progress (although Blockstream’s satellites can be considered “close enough” at the moment).

We’ve always been functioned to strive for maximum efficiencies, but the value of redundancy and diversity is higher albeit sacrificing costs.

“The resource requirements of a full node are moving beyond the capabilities of casual users. This isn’t inherently a problem — after all most people don’t grow their own food, tailor their own clothes, or keep blacksmith tools handy in to forge their own horseshoes either.” — Justus Ranvier

To circle back to the beginning, ease has subsequently led to reliance. Reliance can be misconstrued as laziness or even lack of knowledge. These characteristics are prime meat for entities in taking care of things for you, in more ways than one. But running nodes is one area of the Bitcoin ecosystem we DON’T want institutions to start pouring in. Hypothetically, if that ever happens, then THEY dictate your transaction validations. And in the context of ecosystemic redundancy, Marten Scheffer of Wageningen University states, “While redundancy may be the rule in smaller creatures, the functional uniqueness of larger ones could imply that they are often the Achilles heel for ecological functioning”.

PART 2: WHAT IS THE NODE ECOSYSTEM LIKE NOW?

Currently and historically, capturing an accurate number of bitcoin full nodes up and running has been a less than perfect science. According to bitnodes.io, which is a community developed platform still in beta, there are close to 11,000 nodes running a full node client. This number is what they deem as “reachable” or as others would more accurately say, “listening nodes”. Other sources, including Luke Dashjr, state the number of nodes is much larger in the area between 50k and 100k, maybe more, which includes private nodes.

In the chart seen on coin.dance, the number of nodes more than doubled after the 2017 bull run from around 5,000 to a current reading of over 10,000. Although there is no perfect linear relationship between the amount of transactions and number of nodes, the trend is clear.

Running a full node can be complex and daunting for users. And unlike miners, node operators don’t receive transaction fees or rewards. There are some costs attached to running a node, although its miniscule, which include having extra disk space and internet bandwidth. Like mentioned just before, miniscule, but could increase as the bitcoin transaction history increases.

Besides going the direct raw route and downloading the Bitcoin Core software with some complexity and limited features, there have been a host of providers out there providing Bitcoin full node products that not only allow you to sync the whole transaction history of blocks, but their software stack provides a plethora of features such as multisig, Tor, user friendly UI, Lightning Network Full Node, the necessary hardware, and more. The most notable providers are Casa Node, Nodl One, Lux Node, BitBoxBase, myNode, Umbrel, and even including the HTC Exodus 1 mobile solution.

These different providers are the redundancy we need that also can exhibit small beneficial nuances related to diversity in form, speed, and resilience to disturbances in the network.

SOURCES

1. https://www.sciencedaily.com/releases/2015/10/151008142620.htm

2. https://www.nature.com/articles/s41559-018-0519-1

3. https://www.coindesk.com/bitcoin-nodes-need

4. http://luke.dashjr.org/programs/bitcoin/files/charts/security.html

5. https://www.coindesk.com/bitcoin-node-count-falls-to-3-year-low-despite-price-surge

INTRODUCTION

The one underlying theme that we have seen in the myriad valuation attempts of cryptocurrencies is the all too common, proverbial “we are still too early”. Valuations, which is referring to the exercise of running financial models in excel based on numerous factors that are subject to other subjective exercises of 拍脑袋 (a Chinese way of saying pulling numbers out of your ass), are always early considering the fact that we are running models out to 10 years later in some cases. Early in the sense of “when mass adoption?” and/or early in the sense of lack of adequate historical data. The latter is definitely a concomitant of the former but there is a reason why modeling crypto valuations is important in which I’ll get to in a second.

The second crypto bull run was the solidifying of the word “blockchain” in mainstream media and also the large attraction of traditional finance people into the world of crypto. And what they brought with them was the frameworks (outdated some could say) and theoretical thinking behind how to value these novel digital assets that are borne out of the internet. At the time, these digital assets were more or less penny stocks (some could argue that they still are) but they were enough to capture the attention of some that wanted to justify their prices.

In this piece, I would like to highlight some notable crypto valuation frameworks that caught the crux of attention during the second bull run in crypto and then hopefully seek out what frameworks are being used to this day to deduce a valuation of a cryptocurrency.

Before we dive in, I want to first acknowledge what we already know, which is that, any valuation model isn’t run for the sole purpose of predicting accurate prices. Equity research reports done by numerous young witted minds have gotten bad rap for just blowing hot air. The same may more or less could be said of crypto valuations but to side step and point back to my question posed in the title of this article, I’d say it is neither an exercise for shilling nor futility, but rather an exercise to work out the kinks and incentives of crypto token models in bolstering adoption. Interestingly enough, I’m sure Satoshi never ran a valuation model for bitcoin, but working out an economic model as perfectly crafted as that of Bitcoin is an effort worth trying.

Also, keep in mind that it’s easy to conflate crypto valuation frameworks and tokenomic frameworks (and there’s a ton of these out there as well), but this piece will focus more on the former. And let’s not misconstrue these valuation frameworks for being price targets, one could say these are isomorphic, but there are nuances to its intentions.

Chris Burniske’s INET Model and Update

By far the first attempt at a full fledged valuation framework to gain traction has to be Chris Burniske’s (Partner at Placeholder) INET Model published back in 2017. Although the article itself has amassed close to 17,000 claps on the original article’s Medium post, a few iterations have been made to the original framework which more or less still leave the framework open ended; considering the arduous task of properly adapting to what we envision digital assets to be.

Published over 3 years ago, the model is still considered one of the more clear cut ways to view a crypto asset’s yearly utility value and its present value based on those future expected utility values that are derived from the crypto asset’s market penetration of an existing market. Very similar to a typical cash flow model, but with nuances that includes fitting an S-curve growth or “Take Over Time” to account for initial mainstream adoption, using the equation of exchange in place of revenues/profits, and a float value after Bonders and Hodlers.

Even though there have been many attempts before at valuing bitcoin and all its intricacies, Burniske’s INET model has been, hands down, the general valuation gateway to crypto assets and without a doubt, a lure for others to stab at the model’s overlooked faults. His follow up to this piece, which was published in 2019, attempted to bifurcate what we think of cryptoassets to be: either in the buckets of being Capital Assets, Consumable/Transformable Assets, or Store of Value Assets.

Despite Burniske’s framework being such an immediate hit, many drilled down into his unintentional mistake of keeping velocity, in the equation of exchange, linear or correlated 1:1 with growth.

Alex Evans’ Velocity Approach

The next iteration, which is more of an adaptation to Burniske’s framework is coincidentally, Alex Evans, who joined the reigns at Placeholder with Burniske back in 2018. A UVA econ grad who felt first hand the vehement effects of weak economies in Greece during the recession, Alex proposes that velocity should always be dynamically changing and should “model endogenous velocity as time-varying and distinct from the money supply term”. The issues with velocity has been an ongoing debate with many attempted velocity thesis being published with the overall consensus being: high velocity bad, low velocity good, with the conclusion consisting of non-tested proposals on how to lower velocity.

Evans tries to dissect the individual factors affecting velocity by leveraging the use of Baumol-Tobin’s “cash inventories” approach, which essentially dictates consumer behavior with how much cash they are willing to hold on hand. Or specifically the tradeoffs “between the liquidity provided by holding money (the ability to carry out transactions) and the interest forgone by holding one’s assets in the form of non-interest bearing money.”

By taking the derivative of the total cost function and obtaining the cost-minimizing value of N, which corresponds to the # of transfers each year taken by a user to purchase a token, then taking this cost-minimizing N function back into the average money balance (Y/2N) to obtain the average token holding, or money demanded.

“We can thus say that VOLT ‘money demanded’ is equal to the cost-minimizing VOLT balance that users hold each year, which is a function of the GDP that the VOLT economy facilitates, the expected rate of return on the store-of-value asset, and the cost per transaction.”

If you’re confused, don’t worry. You’re not the only one.

Wang Chun Wei and Bonnie Yiu’s Equilibrium Valuation

The next valuation framework I would like to highlight is a bit more simplistic in the sense that it uses something that we’ve all been taught in our economics 101 course: supply and demand curve equilibrium. This piece, published in 2018 by Wang Chun Wei and Bonnie Yiu of Consulere, is a very underrated framework. In essence, they introduce market clearing conditions by setting both a supply and demand curve equal in terms of the price of a transaction in the native tokens.

When the two equations above are set equal to each other you can then solve for the equilibrium price (# of tokens required for a service) and the quantity (units of service demanded).

As with the case of many crypto valuation frameworks, this model also utilizes the Quantity Theory of Money, or Equation of Exchange, in solving for the optimal token value. Taking P(token)* and Q* from above and substituting them into the MV=PQ equation, you can then solve for X, which is the notation for the exchange rate for tokens to 1 USD, or token value. This could get a bit convoluted to some but more crypto valuation frameworks tend to be. And may I add that this model also is victim to the velocity issue as both writers note “Increasing token velocity reduces token value.” In some regards, “this thesis is directionally correct, but hard to operationalize”, as Alex Evans puts it.

On the Velocity Issue

By now you can see an underlying theme of the above valuation frameworks in which they all center on the velocity issue. The core issue that was proposed eloquently by Kyle Samani, Managing Partner at Multicoin Capital, is simply that tokens that experience high velocity, while being linear with transaction volume, will induce zero network value per the equation below:

Average Network Value = Total Transaction Volume / Velocity

But as Alex Evans and a handful of others have thrown rebuttals, velocity should not be assumed linear but rather dynamically dependent on other factors. The velocity issue could really be laid out in its own separate report so I’m going to avoid diving further, but will leave it on this quote shared to us at PANews by Kyle Samani who still firmly stands by his thesis:

“I think that among most sophisticated entrepreneurs and investors, it is now widely accepted that the velocity problem is real, even if we don’t have strong evidence in the market that medium-of-exchange tokens (which are the kind that are subject to the velocity problem) cannot sustain value (for example, XRP is still #4 on CoinMarketCap).” — Kyle Samani, Managing Partner at Multicoin Capital

TokenInsight’s exchange token valuations

TokenInsight has been one of the few teams actually implementing a valuation framework to deduce a target price for a token. Considering exchanges are one of the few businesses in the industry making money, their respective native tokens have been prime examples of utilizing a Discounted Cash Flow methodology (specifically the H-Model) considering that they more or less align with how a security token would behave. And it’s utterly crucial that exchanges have been reporting their financials similar to how a public company would.

Taken from their recent August 2020: Exchange Token Valuation Report, TokenInsight could probably take the gold standard of creating a crypto “Fitch ratings” style of valuation. With a hybrid approach of combining a DCF value along with using a comparables valuations, TokenInsight has given it a more holistic approach, not to mention their qualitative factors for leveraging a grade based rating.

There are other examples of exchange token valuation frameworks such as the one by Decentral Park Capital, in which they emphasize these tokens by their Price to Assets ratio.

Overview of Token Valuations

The list below is a good snapshot of the more notable pieces of valuing cryptocurrencies. It’s not a complete exhaustive and exclusive list by any means, but a great starting point for anyone who dares to build upon these frameworks for cryptocurrencies.

Conclusion

As most of the above aforementioned crypto valuation frameworks were published around 2017, there really hasn’t been any new groundbreaking frameworks put forth since. But there are a handful of funds that occasionally do put out their own valuation piece, albeit with muted fanfare.

Have the swarm of changes we’ve seen in blockchain, DeFi, the rotation of market leaders, etc. have inadvertently positioned these frameworks obsolete? Are we still trying to find the right rational frameworks to value irrational markets? Regardless of whether these exercises are formulating an accurate crypto valuation, the value of consistently molding and tinkering the way we approach it is something we shouldn’t debase.

As stated in the beginning, these exercises have been a way in rethinking token models and accentuating faults that may have not been noticed. This can lead us to better questions such as, is it the token’s velocity or the protocol’s staking incentives that we should dissect further? How should we divvy up capital allocation in a fair manner? Or does it stem from the way tokens are originally minted and burned? Or instead of burning tokens should protocols “buy-back and make” as proposed by Placeholder?

“There is no one size fits all model for crypto valuations, and valuations are complicated, especially in the crypto market. As we are still in the early stage in this fast-moving crypto financial market, I think we need to attract significant more inflow of a diverse range of institutional money such hedge funds, banks, asset managers, mutual funds, etc. to drive the crypto market, in general, to be even more efficient.” — Johnson Xu, Director of Research at Huobi DeFi Labs and Former Head of Research at TokenInsight, told PANews.

For the newcomers that carry a finance background, stabbing at these through the lens of a CFA curriculum is a natural inclination. But to the event we want to venture down this road of price prediction based on fundamental drivers, the below points will eventually need to show fruition before we end up swerving into futility:

-More reporting and transparency around token projects

-More historical data (this one is obvious)

-More competitors to the existing market leaders

-Better data usage of layer 2 applications

-More HODLers of other cryptocurrencies

-Better tokenomics

Although the above suggestions may or may not be in conflict with the original ethos of crypto, mass adoption is going to need more structure and frameworks rather than going at it in a haphazard manner.

Thanks to Kyle Samani, Managing Partner at Multicoin Capital and Johnson Xu, Director of Research at Huobi DeFi Labs for their insights on this subject matter.

Sources

https://image.tokeninsight.com/levelPdf/TI-Exchange_Token_Valuation-2020.08.pdf

https://medium.com/blockchannel/on-value-velocity-and-monetary-theory-a-new-approach-to-cryptoasset-valuations-32c9b22e3b6f

https://www.coindesk.com/blockchain-token-velocity-problem

https://s3.eu-west-2.amazonaws.com/john-pfeffer/An+Investor%27s+Take+on+Cryptoassets+v6.pdf

https://medium.com/@wintonARK/how-to-value-a-crypto-asset-a-model-e0548e9b6e4e

https://vitalik.ca/general/2017/10/17/moe.html

https://hackernoon.com/an-equilibrium-crypto-token-valuation-model-cd9281fe77db

https://medium.com/@sall/valuing-cryptoassets-from-the-ground-up-441ad5a9ff03

In a recent letter disseminated a few days ago, the OCC has announced fresh guidance on stablecoins. From here on out, the OCC will now allow US Banks to provide banking services to stablecoin issuers. As if they weren’t already but more on that later. The letter, which was drafted by Jonathan V. Gould, Senior Deputy Comptroller and Chief Counsel, lays out the interpretation of how national banks and Federal Savings Associations (FSAs) should position themselves. Below are the main points from the 6-pager letter which can also be accessed here.

o Stablecoin issuers may desire to place assets in a reserve account with a national bank to provide assurance that the issuer has sufficient assets backing the stablecoin in situations where there is a hosted wallet*

o The bank or FSA verifies at least daily that reserve account balances are always equal to or greater than the number of the issuer’s outstanding stablecoins

o Banks must conduct their own internal due diligence and comply with applicable federal securities laws and other regulations such as the Bank Secrecy Act, AML, and section 326 of the USA Patriot Act

*A hosted wallet is an account-based software program for storing cryptographic keys controlled by an identifiable third party. These parties receive, store, and transmit cryptocurrency transactions on behalf of their accountholders; the accountholder generally does not have access to the cryptographic keys themselves. In contrast, an unhosted or personal wallet is one where an individual owner of a cryptocurrency maintains control of the cryptographic keys for accessing the underlying cryptocurrency.

In essence what this interpretation is stating is that stablecoins issuers must be clean and have enough in actual dollar reserves backing up each dollar stablecoin. Something that has been questioned before in many instances but the times have changed and many stablecoin issuers have also leveled up their internal reporting and transparency standards. Below is a snapshot of some of the top US Dollar backed stablecoins along with their corresponding circulation supply.

By in no means do I want to make a political stand or opine on a subjective bias that may be construed critical, but it is important to look at this topic from different vantage points. There are two ways to look at this interpretative letter which I will list below then go more into detail about them:

The first point is that for face value, it’s great for awareness, regulatory friendliness, and the whole narrative of crypto mass adoption. Any more elaboration on this would just be redundant.

On the second point, one could also say it’s a political and economics ploy to grab hold of whatever they have of US Dollar hegemony. At the end of the day, it’s all about control and power. The click bait headline “fall of the US dollar hegemony” has been sweeping the financial media (including crypto media) rounds over the past few months in reflex response to the trillions of dollars printed. For those who have positioned the stance that USDT or any of these stablecoins is the ultimate contender to the US Dollar are a bit faulty in their arguments and can be construed as a misleading thesis. These points have been taken into consideration but if anything, stablecoins are probably complementing the US dollar.

How exactly is the USDT bringing down the dominance of the US dollar when it’s backed by those same US dollars? Most top stablecoins are US dollar backed stablecoins, with their US dollar reserves parked in US financial institutions. Don’t forget, it’s called USDT, it’s called USDC, it’s called BUSD, etc. For Pete’s sake the names itself are promoting the US dollar rather than the other way around. As shown in the graphic above, regardless of the fact that now the SEC is playing buddies with stablecoin issuers is trivial, most of the stablecoin issuers have already parked their US dollars in multiple US banks. In line with the point made above, it’s a way for US financial watchdogs to have more control of the payments system.

What’s interesting is the timely nature of this release by the OCC. Why now are they giving US banks the liberty in servicing stablecoin providers? Have they succumbed to the whole crypto narrative of “when adoption”? Was it the workings of Brian Brooks, Coinbase’s former Chief Legal Officer, now currently acting comptroller of the OCC?

To avoid insinuating any maligned opinions, he actually has been a breath of fresh air to the antiquated financial system. Just recently before this, Brian has been a huge proponent of restricting the way the OCC gives out banking charter licenses. Specifically, he has pushed for these licenses to be given out to non-depository financial institutions, meaning that tech payment companies such as Paypal could hold a national banking charter. And actually the first banking license of this nature was granted to a fintech called Varo Money. Then in August, Brian was a crucial part of the announcement by the OCC to allow US banks to hold and custody crypto assets. But for what reason on could ask? Control? Like with anything, there are two sides to every coin.

“If you went back 10 years, the OCC regulated about 100 percent of payments,” he said. “And then because of a bunch of technology innovations, some of that work that used to be done in banks started leaking outside the system…I can supervise the payments activities of JPMorgan, but I can’t supervise the payments activity of Square,” he added. “That seems really weird to me.”

Would the same proponents, adopters, and users of stablecoins side with the statement made above? Or is the inevitability of regulation in this industry already here? On June 16 of this year, it was confirmed by Centre (one of the 3 in the USDC consortium) that an Ethereum address holding 100,000 USDC stablecoins has been blacklisted in response to a request from law enforcement. It wouldn’t be surprising if we see a resurgence in interest in privacy coins such as Monero or Dash despite their delisting exodus over the past year.

To pivot back to the topic of US dollar hegemony, stablecoins probably aren’t anytime soon going to be the tipping point of pulling down US dollar dominance. Make no mistake, PANews is not trying to play sides here with which currency will become the de facto currency of the world, but it is very hard to put up that argument when the billions of dollars in volume of stablecoin transactions are only a fraction of the trillions of US dollars that are circulated everyday. Without getting too in depth with economic theory, there are other macroeconomic and political levers that are non-crypto related that have the real force in deciding this thesis.

“Uncertainty is the driving factor behind recent fluctuations in Gold prices and U.S. Dollar valuations, but forgone domestic consumption, savings, resulting in a net external investment position would be a better indicator of long-term currency valuations than current economic assumptions. Regardless of the dollar’s current value, the U.S. would only lose its reserve status by allowing its institutions to impose stringent restrictions on international dollar denominated securities market” — Rogan Quinn

Better yet, stablecoins issued by private entities aren’t a threat to US dollar hegemony, but more so controlled central bank digital currencies are.

The past year in DeFi has carved out some obvious DeFi market leadership, but has it formed oligopolies in the space?

In simple terms, the HHI is calculated by taking the total sum of the squares of each firm’s market share, and then multiplying it by 10,000. Depending on the value of the product from this equation, it will either fall in one of the value ranges depicted on the chart on the right hand side.

After the first unprecedented DeFi wave we’ve seen this past summer, there are definitely a few that sit at the top of the DeFi Pulse rankings that clearly stick out to us due to their development team, esteem, popularity, and token popularity. The likes of Uniswap, Compound, Curve, Yearn and Maker are clearly the cream of the crop in DeFi. But despite their rankings and current advantages, SushiSwap has shown that liquidity and other factors aren’t necessarily a formidable MOAT. Things move fast in DeFi and surely can the current DeFi leaders.

Another way to look at the current DeFi landscape’s competitiveness is to take a reading of the Herfindahl-Hirschman Index (HHI) which is a traditionally popular indicator of an industry’s competitive concentration. It’s also used by some governments when reviewing if a possible merger or acquisition would in turn violate any competition laws or antitrust of a particular industry.

From using the current rankings list on DeFiPulse, we took the first 20 DeFi protocols out of the 42 to calculate the HHI. The reason for this is that all of the values after the 20th ranking are too miniscule to make a difference. The following table shows the results.

Based on the results, the current DeFi market’s HHI value comes out to 1,040 which indicates a low concentrated and highly competitive industry. Which is good in general as it exhibits no monopoly or oligopoly currently. For perspective, in the US, the manufacturing, utilities, and finance industries all exhibit high concentration of competition with HHI values over 6,000 according to a study by The Hamilton Project.

Although this formula does have some limitations in interpretations due to its simplicity it’s a great way to get a general overview of the market. Other indicators could also be used to measure market share such as market cap of the corresponding token, # of transactions, and even # of unique addresses. But regardless, in this instance, we can expect a rotation of leadership in the DeFi Pulse rankings.

Originally written on September 8, 2020 for PANONY/PANews: https://www.panewslab.com/en/articledetails/N1477767.html

For those who have seen the blockbuster Wall Street movie, The Big Short, a film depicting certain actors who’ve bet against the housing market of 2008, there is a particular scene that can resonate well with what we are encountering with transaction fees on Ethereum. When two young garage-managed fund managers, Charlie and Jamie, try to apply for the chances of trading high volume CDS (Credit Default Swaps) with JP Morgan, they immediately get stopped short by the JPM banker who tells them, in a slight douchiness manner, they are about $1.47 billion below the minimum requirements of an ISDA Master Agreement (International Swaps and Derivatives Association), a license allowing large whales to conduct trades on the OTC Derivatives markets. Curling into a fetal position immediately after, Charlie then rhetorically questions in an obvious realization of predetermined rejection, “Who the fuck schedules a meeting at 4:50p in the afternoon!” (alluding to how meetings scheduled this late are just meant to be time burners).

A $50 gas fee on Ethereum for a single transaction is by no means on the same level of the $1.5 billion ISDA minimum requirement, but the poignant humbling feeling when one gets reality checked by this barrier is all too real. The innocuous comparison is worlds apart of course but a conspicuous realization to whether or not DeFi is becoming the avenue for have’s and have not’s.

“in the last three months, we’ve gone from an environment where DeFi was expensive to use and a little bit slow, to now, for a lot of people it’s prohibitively expensive.” — Kain Warwick, founder and chief executive of Synthetix (SNX)

This past year, mean transaction gas fees have started out at around 10 gwei to a reading of 480 gwei on September 2nd, to a now “mild” 82 gwei for a standard transaction as of the time of this writing (September 7th). Having to pay more in gas fees than the value of the transaction itself was ubiquitous amongst Ethereum users, pricing out the small players while allowing the deep pockets to eat all the crops that they’ve farmed. It simply didn’t make sense for a retail user to pay $50 to execute a $5 transaction. And what does this imply? A majority of the folks in the crypto-verse sitting on the sidelines while whale farmers brag about their crops.

Unequivocally, high gas fees have become the crypto version of ISDA minimum requirements, albeit without a shirt and tie. To farm on the hot trending yield farming platforms, you need to have at least a couple grand (possibly a lot more) to see some marginal benefits. To trade CDS and other complex derivatives with a willing counterparty in the traditional markets, you need to have the big boy pants on to attain the ISDA holy grail.

As the movie, The Big Short, describes it, an ISDA confers “a hunting license” that lets investors sit at the “big boy table and make high-level trades not available to stupid amateurs”. Flattering isn’t it? The origins of the ISDA Master Agreement dates back to 1985 in a way to create a standardized way of trading large sums in the foreign exchange and interest rate swap markets. These markets churn out trillions of dollars in daily trades making it one of the largest derivates markets. Usually only banks, corporations, and whale investors are able to flaunt their ISDA Master Agreements like a special backstage pass to a sold-out concert. On the surface, ISDA Master Agreement is there to make transaction closeout and netting easier amongst different jurisdictions. That’s on the face value. In reality it’s become more of an exclusive ticket to the most luxurious casino with individuals, rather than corporations, also being holders of an ISDA.

“Trying to be a high stakes trader without an ISDA is like trying to win the Indy 500 riding a llama.”

Although in the movie, the JPM banker states their minimum being $1.5 billion in assets, this requirement is not at all sent in stone with the ISDA as other banks have their own minimum such as Citigroup’s $25 million. Although that $1.5 billion is probably exaggerated for the sake of the movie, it accentuates the uneven playing field that exists.

Hedge fund managers, former investment bankers, and heavy weight managing directors have become in some instances recipients of a personal ISDA Master Agreement allowing them to personally be a counterparty in certain billion dollar OTC trades. In unique situations, even individuals that work for one of the big banks can carry their own ISDA Master Agreement trading with their employer, which is a major violation of any conflicts of interest that exist.

“It’s only the very upper echelons of the finance world that get this royal treatment,” said Tze Tung Chong, a former derivatives executive at firms, including Citadel LLC, who now invests in the contracts for his clients at London investment firm Mons Capital Ltd. “You must be very wealthy; you must be financially sophisticated. But perhaps most important of all, you need to know the right people in the banks.”

I think by now you get the analogy.

But there are other ways retail investors can get their hands on derivate products if they incline to do so based on their risk tolerance. It was only until the past 2 decades that retail investors had the wherewithal in dapping into these financial instruments thanks to online brokerages coming online and more educational materials available. But that’s not to say minimum requirements are non-existent. Some of the more established online brokerages require minimum deposits of as much as $5,000 to $10,000. FINRA, which is the self-regulatory agency that writes and enforces the rules governing registered brokers and broker-dealer firms in the US, characterizes the term “pattern day trader” as any margin customer that maintains a minimum equity of $25,000 on any day that the customer day trades. If the account falls below the $25,000 requirement, the pattern day trader will not be permitted to day trade until the account is restored to the $25,000 minimum equity level.

On the flipside, one could also state these minimums are there for the protection of retail investors. Making them steer clear of high-risk gambling strategies wrapped as “sophisticated financial instruments”. True. There is reasoning there. Then again, investing in $YAMS and $SUSHI really isn’t something we want to encourage crypto newbies to try nor is it a great example of what this technology is predicated on. But there’s more to Ethereum than penny stocks wrapped as food meme’d tokens. There are new aspiring Solidity developers in the space that want to poke at the tech stack. There are new projects building on Ethereum for legitimate real-world use cases that actually have some non-monetary benefits. There are builders that want to use a legitimate decentralized blockchain for building a legitimate product. Not proceeding with deploying a decentralized project on the Ethereum mainnet due to its cost would just go against the main purpose of why Ethereum was built. Moreover, it could also be a pivotal point in Ethereum’s adoption with other smart contract protocols that boast lower fees taking the baton.

That described scene, directed so flawlessly, itself does a fine job of encapsulating the douchey arrogance associated with big bankers and the all too common retail investors that get left behind. And as coincidental as it may seem, the banker dishing out the rejection is portrayed as a JP Morgan employee. JPM Morgan is the main player behind ConsenSys (the Ethereum venture studio) and JPM’s own enterprise blockchain platform, Quorum.

Food for thought.

There was once a time when it was relatively easy to and cheap to mine bitcoin for the average person. Now you need at least a couple of million and a leg to see any economies of scale transpire. Using Ethereum is still for the most part, inexpensive, if you were to put it nicely. But if what we saw this summer was omen to what we can see in the next few years, with even many experts saying Ethereum 2.0 is not the answer to high gas fees, expect the “ISDA” level on Ethereum to shun down more aspiring users like Charlie and Jamie.

Sources

1. https://www.investopedia.com/terms/i/isda-master-agreement.asp

2. https://www.bloomberg.com/news/features/2018-05-03/inside-the-world-s-most-elite-and-secret-traders-club

3. https://www.investmentweek.co.uk/investment-week/feature/1377727/widening-retail-investment-arena-derivatives

4. https://www.finra.org/investors/learn-to-invest/advanced-investing/day-trading-margin-requirements-know-rules

5. https://www.fool.com/knowledge-center/how-much-money-is-needed-to-start-trading-futures.aspx

By now for most following the recent apace movements of the DeFi sector within the blockchain industry, the amount of bitcoin value utilized within these DeFi applications, via their respective layer 1 protocols, has skyrocketed well past our expectations. Ethereum, which has been designated as the default protocol for DeFi, has seen the bulk of this trend propagated onto its ecosystem. At the time of this writing, there is over 38,000 BTC being used on Ethereum, which now represents 1% of the total ETH marketcap. Of course, this amount of BTC is only a measly 0.181% of the total amount of bitcoins available, but if we see the recent trend persist going forward, it’ll be interesting to see the effects this could have on the Bitcoin network itself.

And Ethereum isn’t the only layer 1 protocol that is allowing for these innovative bitcoin-backed tokens…

The most popular option for these bitcoin-backed tokens has been WBTC (Wrapped Bitcoin), which was developed and launched by BitGo in early 2019. To give you a sense of the rapid popularity of these tokens, mostly due to the DeFi frenzy, there were only 3,911 WBTC on June 1 compared to a current amount, as of this writing, of over 26,000 WBTC. That equates to a 570% increase in a span of 2 months.

There are now a concoction of different bitcoin-backed tokens sprucing up onto the other formidable layer 1 protocols as well. For example, the smart contract protocol, Tezos, has announced their own native bitcoin-backed token, tzBTC, which is currently under development and testing. Polkadot, with the engineering support of Interlay, also announced their development and testing plans for PolkaBTC. Below is a timeline encapsulating all the bitcoin-backed tokens that are either launched or recently announced on the major layer 1 protocols with Ethereum carrying the bulk of it.

In retrospective, the advent of these bitcoin-backed tokens is just genius. It allows bitcoin maximalists to use the application ecosystem of other layer 1 protocols, albeit being able to HODL their bitcoins. A WIN-WIN you could say. The way how most of the bitcoin-backed tokens work is simple. Holders of bitcoin just simply deposit their BTC in another controlled wallet address while simultaneously the token standard on whatever protocol mints a 1 for 1 bitcoin backed token. There are different nuances to this process but for the most part, they all essentially encapsulate the swapping of your bitcoins for a bitcoin-backed token that is compatible with the layer 1 protocol standard.

Let’s take the recently announced PolkaBTC by Polkadot and Interlay for example. A user transfers BTC to a vault of their choosing which then sends locked DOT collateral to an Interlay BTC Parachain. That will then send the user PolkaBTC. The redeem BTC process is just a mirror reflection.

In a way, bitcoin-backed tokens represent an accelerated way of interoperability between blockchains. It’s a streamline way of opening up the gateway for more use cases between protocols rather than being stuck in a silo effect. And with bitcoin being perhaps the most popular crypto, this reinforces its use cases outside of just holding bitcoin. In fact, Ethereum projects including WBTC and imBTC hold 70% more bitcoins than Lightning or Liquid. Lightning and Liquid also strive to galvanize the leading cryptocurrency’s utility, similar to the goals of tokenized bitcoin projects. But these protocols have a niche focus of improving the speed and privacy of small and large off-chain bitcoin transactions.

But as innocent as this new use case has been for the blockchain and crypto community, there are implications to this that inadvertently could be divisive rather than innocuous. And it is never too early to postulate on what that might be. Below are some points that are worth to think about.

· Bitcoin being emblematic of real estate. People just wanting to hold bitcoin and use it on DeFi — I think one could state that the belief in Bitcoin is still prevalent as the asset of choice to have. As the mantra has been pervasively propagated to just HODL, as have our bitcoin holders have done. Just HODL. Because although Ethereum has been getting more of the attention in the past year due, bitcoin is still king in crypto. It’s been the first and most battle tested blockchain project to date. And don’t forget, it’s been the reason why all of us are here reading this today. Without Bitcoin, there will probably be either no blockchain industry or maybe even some other superior form of it might have spurred up. But who knows? It is worth nothing that our propensity of wanting to hold bitcoin and be used in other forms can be synonymously compared with real estate. We all want to own real estate in its essential nature of providing us a shelter but it’s also leveraged as an investment vehicle by taking out home equity loans (allowing us to be equipped with short term liquidity), investment real estate (renting it out to the market), house flipping, or even in niche cases where owning a home in a certain district will grant your children to attend a prestigious grade school. Owning a home satisfies our most basic of Maslow’s hierarchy of needs, but what we do with that home allows us to realize our self-fulfillment needs.

Owning bitcoin also satisfies our most basic of needs (security and safety of our wealth), but being able to cross chain the asset onto other smart contract protocols for our yield farming orgasm satisfies our psychological and self-fulfillment needs. This all may be a bit exaggerated for the time being but the similarities are evident. As ubiquitous as real estate is, bitcoin can have the same roadmap.

· Ethereum expeditiously needing rollups. Let’s say in an extreme case where a significant amount of bitcoin gets “wrapped” and used on the Ethereum blockchain. This could accelerate Ethereum’s development of Ethereum 2.0, which as of this writing still has not been released yet. But from many Ethereum developers and Vitalik himself have pointed out, such increased on-chain activity could spur a need for the rollups scaling techniques to be used more pervasively. Currently there have been two types of rollup techniques proposed: zk-Rollups and Optimistic Rollups, with the former being the more preferred. Although this could be argued but zk-Rollups have been proven to be faster and cheaper than Optimistic Rollups and Plasma. On a public chain, a maximum of 15 TPS can be done. But according to Vitalik, added that with rollups, and Ethereum 1.0 as the data layer, the TPS will be reaching 2,000–3,000.

· Out with the old and in with the new. Eventually some of these users might just want to give up BTC and use ETH. Maybe a gradual realization to the increased utility of Ethereum might persuade some wrapped bitcoin users to just give up their BTC for ETH out of simplicity. They are already spending most of the time and usage on the Ethereum network anyways. This is a more of a far-fetched scenario. Persuading one that bitcoin is no longer the “it” crypto will take decades, probably centuries.

· Some of these bridges or centralized wrapped tokens becoming security threats. As useful and innovative one may think this is, there are security concerns to this. For example, Wrapped Bitcoin is realistically just holding the locked bitcoins of users in a centralized third-party custodian. So as secure and trustless bitcoin may be when you hold your own keys, the step of giving your bitcoins to a custodian for WBTC represents an unconscious centralized security threat while you farm those yams on Ethereum. The renBTC design uses smart contracts to lock Bitcoin, as opposed to trusted third-parties used by WBTC. In an actual case of these bitcoin-backed token models going awry, the folks at Thesis, which is the team behind tBTC had to stop their platform from taking in deposits after only a month from its launch date due to a bug in their code. Community contributors started noticing issues when tBTC’s Solidity code wasn’t able to differentiate between P2SH and P2PKH bitcoin addresses.

· Arbitrage trading between different bitcoin-backed tokens or even between Bitcoin itself. One could even envisage a scenario where new financial arbitrage occurs between bitcoin backed tokens and bitcoin itself leading to Bitcoin community members pitted against each other for extra margin. This could lead to a creation of more complex financial derivatives or trading pairs such as BTC/WBTC, BTC/renBTC, BTC/tzBTC, BTC/PolkaBTC, etc. As of this writing, EBTC (EOS BTC) is trading at $13,075 compared to bitcoin’s current price of $11,907. But this would not be something new as BTC arbitraging between different exchanges already exists.

· A substantial decrease in Bitcoin’s on-chain activity. What if activity dies down on the Bitcoin network, forcing bitcoin miners to take matters into their own hands? Banning transfers to those bitcoin addressees from those bitcoin-backed token projects? If a large significant amount of all bitcoins just eventually freeze for the sake of being wrapped up in other blockchain networks, what happens to the on-chain activity of Bitcoin? Decreased on-chain activity could to a decreased amount of tx fees to miners. It would be close to nothing to have a transaction validated on the Bitcoin network eventually. Dormant bitcoins isn’t something new as the network has seen this become more prevalent. Earlier this year, a report by Digital Asset Data shows that more than 10 million BTC have not moved for a whole year which represents about 60% of all bitcoins. This also could lead to the conversation of are on-chain tx a determinant of price or is price a determinant of on-chain transaction. Fellow Messari community analyst George Adams puts it best stating:

“I believe there’s reflexivity between the two (positive feedback loop). For example- in Bitcoin, more on-chain volume = more demand for BTC, which increases price. And then a higher BTC price means more interest from people, which means more on-chain volume. So I think they feed each other…. although I don’t have confidence in a first mover”

This question of who the first mover is as difficult as answering the age-old question of if the chicken or the egg came first. But based on what we know about finance and fundamental investing, the FUNDAMENTALS should be a driver of price (theoretically). Where in the case of Bitcoin, on-chain transactions should be the driver to its price. Many general crypto valuation frameworks would give a rebuttal on this stating that velocity is not necessarily always a driver of network value. But as all of them do agree on is that there are remedies to prevent a token suffering from the token velocity issue, and in bitcoin’s case, it’s the store of value factor. So then if take this thinking, then a decrease in on-chain tx should be a determinant of price and have a substantial impact on transaction fees paid to miners. So as a result, this could lead to the controversial hypothetical death spiral theory. For now, it’s statistically shown that on-chain tx has a significant correlation to that of the transaction fees collected by miners. And as we progress to the year of 2140, transaction fees will be the sole source of income for miners.

But let’s back this thinking up a bit. The relationship between on-chain tx and price, regardless if it is liner or non-linear, shouldn’t be too much taken for face value. As the real determinant should be positioned as, if bitcoin price markets are rational vs irrational, or another way of putting it: efficient vs inefficient.

This is all digressing a bit put I think you can see the implications of the initial innocuous effect of reducing on-chain transaction that could lead to a scenario where sustained low on-chain transaction start to effect network security.

CONCLUSION

The whole notion of being able to use your bitcoins on other blockchain protocols is unanimously supported. We are not trying to give warnings but rather highlight some of the caveats that could emerge down the line. A significant reduction in Bitcoin’s on-chain network activity could straddle the line between network security and usage. Perhaps prompting miners to proactively pull out or take a more drastic approach. But we also see this trend giving way to concomitants of how we use bitcoin. As pointed out earlier, we already see a trend in the amount of bitcoins traded on exchanges slowly pull out in this chart below.

Better yet this could be the point of when we crossover the chasm towards mass adoption. The numbers speak for itself as the TVL in DeFi smart contracts on Ethereum has just whiffed past the $6 billion mark as of the time of this writing. And bitcoin-backed tokens is one of the reasons for that.

SOURCES

• https://news.bitcoin.com/close-to-11-million-btc-havent-moved-in-over-a-year/

• https://www.coindesk.com/polkadot-is-latest-blockchain-to-explore-redeemable-bitcoin-tokens

• https://www.coindesk.com/ethereum-has-become-bitcoins-top-off-chain-destination

• https://btconethereum.com/

• 
  

• https://medium.com/interlay/bitcoin-on-polkadot-proof-of-concept-for-trustless-bridge-shipped-6fb8e549bef0

• https://medium.com/@Bitpie/bitpie-launches-the-swap-gateways-for-stable-coins-ebtc-eeth-and-eusd-2bd7dfced8fe

• https://explorer.binance.org/asset/BTCB-1DE

• Justin Sun’s Twitter

Introduction

Let’s not confuse Handshake with A handshake, which seems to be the antiquated physical way of politely grabbing another person’s hands in a firm-like grip, through quick up and down motions to signal a greeting or an agreement. In some instances, that handshake might be awkwardly prolongated, evoking images of Trump’s notorious handshakes which are well documented on many social media platforms. In the case of an SSL/TSL handshake, such an elongated exchange might prompt a failed connection leading to a 404. Or if a corrupted certificate is exchanged due to a Man-in-the-middle (MITM) attack, a host of other headaches would come along leading to a different view on what a handshake actually traditionally exchanges besides the supposedly innocuous agreement of acknowledgment (or in worst cases, COVID!!!).

In comes Handshake

For a project that has basically been “quiet” compared to other blockchain protocols working in a anonymous-like fashion, the Handshake protocol has crept up in an apace way the past month by seeing its mining hash rate 16x from around 25TH/S to now over 400TH/S. Falling in line with theoretical PoW mining economics, the price of HNS followed suit in the opposite direction starting from around $0.11 on June 7th hitting an ATL around $0.075 on June 28th, now recovering towards $0.0911.

It’s quite clear now how COVID has vehemently altered our lives in many aspects that has caused us to flip the script on a lot of things we’ve never questioned before. Without needing to get into too much detail of what we have experienced over the past 7 months, but the word dystopian could be understandably emblematic of what we have seen play out. The draconian social distancing and stay at home measures have basically placed us to be on the internet more so than we were before. This has inadvertently called for the need of more security and sovereignty in our internet lives as we have seen good actors try to spread important information fall into the hands of government censorship or bad actors trying to take advantage of our naïve internet time.

It was understood from the beginning of how the developers behind the Handshake protocol was going to join the blockchain movement in a concerted effort from the start. Ultimately with the goal of democratizing the way domain names are bought and sold, giving a new standardization around the Root Name Server, which is currently controlled by ICANN. Last year ICANN was egregiously caught attempting to sell the .Org top level domain (TLD) to a private equity firm for a whopping amount of money. A bit more on this later but this spun the question of how more centralized the internet has really become?

The digital TLS handshake

For a brief primer of what the Handshake team is trying to do, it’s best to quickly have an understanding of where the name comes from. No it does not come from our normal polite way of greeting people in person as introduced earlier, which we all now are staring to yearn more of, but rather the digital “handshake” our internet browsers make with backend servers to deliver you your daily “needed” non-essential social media content. It is basically a way for our computers to verify that the internet website we are about to connect to is secure and safe through a cryptographic process that takes milliseconds. Uday Hiwarale does a terrific job of breaking down common standard SSL/TLS handshakes in this article if you want to understand deeper.

But for a brief illustration, it basically looks like a couple of back and forth request and receive messages from the client to the server illustrated in the below graphic as a waterfall like process.

The crux is when a client sends a request to the server, the server sends back a certificate, issued by a centralized trustworthy Certificate Authority (CA) and the public key to the client. This way the client can “trust” that the website is who they are supposed to be and then attaches a ‘pre-master secret’ back to the server encrypted with the public key given. But like with any centralized entity, attacks on these CAs have happened. What’s more alarming is how one CA provider actually has over a 50% market share of all CAs. And who’s to say that these centralized attacks can’t happen again?

For such an arcane territory of the internet, the Handshake protocol tries to alleviate this through their decentralized PoW blockchain network, allowing users to create and purchase their own top level domains with their private keys, such as .com, .net, .org, etc. via a Vickery Auction style. This is essentially trying to “eliminate” the needs for ICANN and CAs that are all too prone to centralized attacks and greedy egos that place money on top of security at times. To most people, these two acronyms, let alone this topic, is of an esoteric subject that really doesn’t affect them in their daily lives. But what we have seen with the advent of Bitcoin being spawned up at coincidentally, or purposely, during the same time of the last financial crisis, the same can be said with Handshake and recent events such as below:

1. In 2011, a Dutch certificate authority, known as DigiNotor, was quickly declared bankrupt after a security breach in their systems was found causing them to issue fraudulent certificates which then resulted in major web browsers to blacklist all DigiNotar certificates at the time.

2. In the same year, another certificate authority known as Comodo issued fraudulent certifications to users for many highly visited sites leading users to believe they were accessing these sites securely when in fact a MITM attack could’ve occurred.

3. And last but not least, the irony in ICANN being exposed for attempting to sell the rights of the more popular TLD, .Org, to a shady private equity firm set up by the former executive of ICANN. What’s more interesting about this news, which led to actual protests outside of ICANN’s offices, was the fact that this alleged sale was about to take place after the price cap of .Org domains was taken off earlier.

How the Handshake has been shakin’ up to be

It’s hard to say whether this project will take off since it merely was launched earlier this year with the help of Tieshun Roquerre and the team at Namebase attracting a more retail focused crowd by making it exponentially easier for a novice to purchase their own TLD and make tweeks to your DNS settings to access their Handshake domain names. And as true to the tune of decentralized and cypherpunk anonymity, the Handshake protocol has “no team” or “There is no official Handshake Foundation or entity.” Ultimately staying true to the ethos of blockchain in the same manner Bitcoin came about.

When analyzing on-chain data, it’s clear that the network is growing in strides based on the total HNS locked in current bids. Through the Handshake block explorer HNScan, by taking the amount of HNS burned and subtracting it from the total HNS locked, the correct amount of HNS locked in bids stands at roughly over $13 million. For comparison’s sake, the Ethereum Naming System (ENS), which only allows users to purchase a domain with the .eth suffix, has supposedly had over 170k ETH spent on ENS during its over 3 year existence. But the biggest nuance between Handshake and ENS (or even Namecoin) is that Handshake allows for the purchase of TLDs.

Daily bids seem to be quite erratic with daily bids ranging from over 10,000 one day to just a measly few hundred on other days. But overall the months from April until now have shown more growth than the months before indicating increased community engagement.

The HNS mining pool, 6Block, have been quite instrumental in the recent run up of the hashrate with their Mars H1 coming onto the market last month. One of 6Block’s team members informed me that “The recent HNS hashrate growth is partly beacuse of the Mars H1 miner shipment, but in the meanwhile, there’re also some other ASIC miners emerging in the market, which is also contributing to the network”. And what’s more surprising is that nobody is talking about this. But as recent word on the street of new HNS mining chips being created through Global Foundries and TSMC are starting to unfold, look for the hashrate to naturally rise up even further. Which is ultimately good for the network in attracting new miners to flow in to support this, one of the more truer, dissident blockchain tech protocols. But if HNS price keeps dropping, mining profitability would also just tank as it already has in the past week from around $12.35/day to a current reading of around -$3/day.

Conclusion

To step back for a quick second, it’s not that we should paint ICANN or CAs as total nefarious actors in the same way many Bitcoin maximalists are towards the central banks. I guess we could applaud their response to the cornovirus pandemic by allowing registrants to delay their domain name renewals. But was it pretty damn shady how the whole .Org fiasco unfolded behind our backs? Yes. How did they think they would be able to slide this past a community of hardcore developers whom, as stated sternly by Boyma Fahnbulleh, HATES CAs and entities like ICANN? Who knows. Has ICANN yet to formally explain the actions of what has happened? No. But as Vint Cerf has candidly explained in a more neutral manner, ICANN is operating at a more complex time than ever before supporting the current team in place while others in the community find it hard to see signs of it improving.

“Developers HATE CAs “ — Boyma Fahnbulleh

Or maybe the community should focus on other aspects such as getting DNSSEC as a standard? The goal of Handshake is not too ultimately takedown ICANN but rather let them do their thing while Handshake does their own thing. The top established TLDs are already reserved from bidding on in the Namebase exchange leaving us with more creative TLDs we could all individually decide to own.

See below for a current snapshot of what’s trending in top listed TLDs to bid on (excluding some outliers):

With HNS still near all time lows facing the ever common question of “when moon”?, or at least back over its ATH of $0.40 back on March 6th, it’s better to realize the functionality that it is meant to solve as we precariously all become ingrained to the internet, especially more so than before. This is only year one of the Handshake protocol. And a matter of fact, this isn’t the first attempt at restructing CAs and root servers, IBM has put its own literature on managing certificates on their IBM blockchain platform. There are numerous PhD style research thesis proposing using smart contracts and a blockchain in securing TLS connections such as the ETDA and the CertChain. But as we see this network’s usage become more pervasive due to current global-social economics exacerbating our reliance on a trust-less root level of TLDs, the irony of the Handshake protocol beginning during a period when handshakes became taboo will be another win for the Web 3.0 movement.

Sources

https://w3techs.com/technologies/overview/ssl_certificate https://learn.namebase.io/about-handshake/about-handshake https://shakescan.com/ https://cacm.acm.org/magazines/2018/12/232883-self-authenticating-identifiers/fulltext https://hackernoon.com/the-certificate-authority-vs-the-handshake-33ccf214d8a2 https://hnscan.com/

Overview

Today marks the 10 year anniversary of the now legendary Bitcoin transaction of two Papa John’s pizzas, equivocally known as Bitcoin Pizza Day. As it happened, computer programmer, Laszlo Hanyecz, offered to pay 10,000 BTC for someone to order him pizza on the day of May 22, 2010. Now at current prices, 10,000 BTC is an ungodly amount compared to what it was trading at 10 years ago. Laszlo has now transpired to be a household name in the bitcoin circle. As Bitcoin’s price increases each and every year, so does the magnitude of what that day means to all the crypto fanatics with many envisaging the opportunity cost of the fortuitous exchange.

Even after appearing on numerous interview media rounds, Laszlo still doesn’t regret one bite of that pizza.

“I honestly thought it would be really cool to say I just traded this open source internet money for a real world good, and I thought what better thing than food. Food is a basic necessity and every geek understands pizza.”

As we fast forward 10 years later in seeing this arcane Bitcoin thing unfold into this burgeoning industry spanning myriad facets of our society, and for those that are currently celebrating by eating an all time favorite but basic of foods, pizza, it’s righteously fitting to look over the basics of Bitcoin’s bedrock: our private and public keys. It’s very easy to disregard what started it all, but from time to time it’s not a bad idea to circle back on the fundamentals of Bitcoin. The Bitcoin White Paper is even listed as a must read article in Messari’s Crypto Thesis 2020 with Selkis even galvanizing us to “show some respect, dammit!”.

This will be a brief overview of how private and public keys are derived from elliptic curve mathematics via python code (no bitcoin python libraries used). Do not worry so much if it seems confusing but rather appreciate the beauty of such an under looked aspect of what makes Bitcoin secure.

The Private Key

The most secure way to derive a private key is to literally use a coin, pencil, and paper. Flip the coin 256 times and jot down the 1’s and 0’s into your binary version of your private key. Or an easier and more time efficient way is to also randomly hit 1’s and 0’s on your keyboard 256 times and that is what I literally did:

1100100010101011101001001010100101110010101101011110101010101010010111110010101001000101010010100100101001111001001001010101001010010100100101010010010011101001001010101001000101111100100100101000100101001011110010010010100100101011101010010010010101100101

Converting this to hex:

c8aba4a972b5eaaa5f2a454a4a792552949524e92a917c92894bc9292ba92565

The Public Key

There are 6 required parameters for any elliptic curve cryptography:

P = the prime

a & b = defines the curve (Bitcoin’s secp256k1 y² = x³ + ax + b)

G = the generator point consisting of the x and y coordinates

N = # of maximum points in the field

All of these given parameters are laid out according to the SEC (Standards for Efficient Cryptography) 2: Recommended Elliptic Curve Domain Parameters.

The modinv function above is the modular inverse arithmetic that is called in the below functions of ECAdd and ECDouble. Basically what it is doing is finding the GCD of two numbers based on the extended Euclidean Algorithm. An algorithm that can be done by hand but when dealing with ginormous numbers, code works a lot faster. And this is considered elliptic curve “division” which is not the same as normal division.

The function ECAdd is taking two points, running a line through them and finding where the line intersects at the third point. This third point is then reflected across the x-axis.

The function ECDouble is similar to ECAdd but instead of starting off with two points in different locations on the curve, it is using two points as a tangent point to find the third point.

The ECMultiply function then takes your private key and turns it back into the binary format to figure out how many times it will perform the ECAdd or ECDouble function based on the 1’s and 0’s by running it through a for loop.

This will lead to generating your public key denoted as a point (x,y) on the curve:

Public Key (uncompressed):

(62950960606369206314310757513095267674632419773761932256833693017846519787332, 46500497617408234120355289693009396999691980610118378141739579271952336683813)

To make it easier to read, we could compress it:

038b2cfb26ba6f65353a8fa2f3d2c42ff7235c2a993ce094c3c619a0de9d356f44

The Public Address

The next steps will convert the compressed public key into the Bitcoin public address that we are all accustomed to seeing which should usually start with a prefix of 1. This process takes it through the Base58Check encoding (basically more shuffling and scrambling of the numbers).

Starting with the compressed public key we had earlier, ‘def hash160(hex_str)’ will run this through the SHA256 and RIPEMD160 hashing algos with the bitcoin version prefix added to the front.

This new concatenation will then be SHA256’ed twice. The first 4 bytes of this new string will then be added to the end of string we had before we SHA256’ed it.

key_hash = 64ef4b753d48468da072fef03c1ea43b019cd9e0

checksum = a7b05f0f9fafc2b31b27e46289cbeb6a9dad4165f5615f1355776603f4ab65d0

key_hash + checksum = 0064ef4b753d48468da072fef03c1ea43b019cd9e0 a7b05f0f

After base58 encoding it, you can then spit out your 34 character, base58checksum public address:

1AChEg7Jc5UEgwYdM1Gy72tyMn8awmnvna

Conclusion

And there you have it. The relatively simplified way of explaining the process in generating your private key, public key, then your public address. And thanks to these hashing algorithms, there is no way to reverse these steps in reproducing your private key if one had the public key on hand.

Resources:

1. Mastering Bitcoin: Unlocking Digital Cryptocurrencies 1st Edition 2014, by Andreas M. Antonopoulos

2. Bitcoin 101 — Elliptic Curve Cryptography — Part 4 — Generating the Public Key (in Python) by James DeAngelo

Prelude

As Neo, along with a host of other smart contract platforms, gears up for the upgrade of their mainnet, specifically Neo 3.0, it’s astonishing to see how far this project has gone and with a deep understatement, needs to further go in order to realize its goals it was set out for in its original whitepaper under the moniker, Antshares. Being situated in Shanghai specifically, although their core developer team and global team are scattered throughout the world, Neo is one of the top blockchain projects based in the Orient of the Pearl having already a reputable name and ecosystem that has boasts their native token, NEO, number 22 on CMC’s ranking list by market cap and have forced its name into the themed “smart contract wars”, which is heavily dominated by Ehereum’s prowess. As steep the mountain may seem, Neo probably will never be able to catch up with Ethereum’s market share of dApps and that would be fine. Neo has other intentions for its blockchain that it could leverage that would still sustain its momentum going into Neo 3.0.

Introduction

I will try to give a quick intro of the project for those who are not familiar with some more of BSJ’s own analysis on this project at the end. The meat of this article will be in the middle consisting of all the high flying calculations and preposterous assumptions we used to formulate a projected token valuation. I stress preposterous because do take this with a grain of salt as we collectively continue to progress crypto token valuation methodologies forward.

To keep it short, Neo, formerly known as Antshares, is a non-profit blockchain protocol designed to be the basis for the smart contract infrastructure in leveraging its vision of becoming the platform for the “smart economy”. The Neo protocol’s key feature is being able to solidify that bond through a regulatory friendly digital identify apparatus. The same manner how our information is already digitized and stored through many different central entities, the Neo protocol will do the same in a decentralized, trustless, and interoperable fashion capable of seamless usage through the myriad of blockchain protocols.

Neo founders, Da Hongfei and Erik Zhang, have propelled Neo in reaching its 3 year anniversary of its mainnet launch and have been the catalyst for other side projects such as Ontology, OnChain, Chromoway, Oasis Labs, and others. A unique selling feature of the Neo protocol is its self developed consensus mechanism, Delegated Byzantine Fault Tolerant system (dBFT), which is an adaptation to the Practical Byzantine Fault Tolerant system. Although most, if not all, consensus mechanism do possess its shortcomings, Neo’s dBFT has been criticized for being too centralized but have been praised for being able to resist blockchain forks through one block finality, which therefore can increase TPS on a much higher scale being suitable for enterprise usage.

Although there are a lot of use cases for smart contract protocols, there are 3 in particular that I think Neo will most likely, not dominate, but have a higher chance of exploiting and gaining market share from others. This leads us into performing a Sum-of-the-parts (SOTP) valuation, or break-up analysis, a method of valuation of a multi-divisional conglomerate in a hypothetical scenario of determining what divisions would be worth if the conglomerate is broken up and spun off.

And it is in these three that I will use as a basis for the valuation:

1. NeoFS: Decentralized cloud storage

2. NeoID: Decentralized Identification system

3. DeFi: Decentralized Finance

These three market segments will be first valued individually based on what the Neo protocol can achieve. These three separate values will then be summed on a subjectively chosen weighted average. I will be using concepts and methodologies proposed from others in a hybrid-like way with the intent of using many assumptions. Also, take note that I initially value each segment based on the Neo blockchain’s GAS token, as this is used as the work token versus the NEO token acting more so of a governance token. More will be explained later for this intuition. As you read through this, feel free to critique and correct any misguided train of thoughts I may have slipped into.

Let’s start!

GAS Token Valuation

NeoFS (first year GAS value: $0.00312)

Out of all the emerging trends in blockchain for 2020, let’s not bypass the advent of decentralized cloud storage protocols, which are geared up for challenging their centralized counterparts in Amazon Drive, Dropbox, Google Cloud Storage, etc. Neo has been on this project for two years already with a prepped launch coinciding with their Neo 3.0 upgrade. Considering the lengthy developmental time, the model is simple: users pay in GAS tokens for cloud storage services on the NeoFS platform. It’s as simple as that. We all can relate to a decentralized cloud storage platform because we use some form of it in a centralized manner whether it be through your USB stick or through your Google Drive.

As with any token valuation, a TAM is needed to gauge the total potential market. A market report done by Cisco, which was also used for BSJ’s Siacoin valuation, was once again used to start as a basis in the NeoFS valuation to visualize the market potential for total annual cloud traffic.

Using the global projection as a starting point, the remaining years were subjectively set to increase by a compounding rate of 5% instead of the projected 27% in the report just to dampen the puffery, so to say. Neo’s potential market capture was then flatlined at 10% rather than growing this rate out on an S-curve trajectory.

As mentioned before, since the tokenomics of NeoFS is the less vague of the three because of its ONE specific function, whereas NeoID and DeFi would take on more generalized usage for valuation purposes, the dynamics and velocity of GAS would take on a more pivotal role. GAS is going to be the main focus of all the segment valuations in this report. It is the work token needed to create smart contracts and pay for services. And as we can see in this previewed model, GAS changing hands is going to at least render a velocity of 4 per user based on the graphic below.

Different factors of NeoFS would also naturally alter the velocity of GAS. Therefore as a way to make use of existing methodologies in the crypto valuation space, Alex Evan’s VOLT velocity model was used to “operationalize” velocity. This velocity model was not used in the other two segments because, well, DeFi and NeoID are too much of a generalized purpose. Evan’s model fits more with a tokenomy with a single good/service, single asset economy.

Now I won’t be explaining or breaking down his formula for the sake of time, but basically it demonstrates that an endogenous velocity of a token is more realistic than a fixed straight line velocity with TAM (GDP) and price having a perfect 1.0 Pearson correlation coefficient. Friction (an understatement) and imbalanced demand between different assets are more realistic in the blockchain space which is the premise of showing that velocity should be variable and not linear by making a user’s average token holdings a derivative of the total cost function (the implicit and explicit costs of holding GAS).

As Alex eloquently states:

“We can thus say that VOLT (GAS) ‘money demanded’ is equal to the cost-minimizing VOLT (GAS) balance that users hold each year, which is a function of the GDP (Y) that the VOLT economy facilitates, the expected rate of return (R) on the store-of-value asset, and the cost [C] per transaction.”

Through a brief discussion with Fabian Wahle, co-founder of NSPCC and one of the original initiators of NeoFS, storage costs per year per terabyte of data would cost between $1 and $2 (Similar to Sia). After plugging and chugging and through my own arbitrage method of choosing the assumptions for the other factors, the ending utility value per GAS comes out to less than 1 cents and continues to decrease year by year which is logical as the # of GAS tokens continues to be minted and velocity increasing as transaction costs were purposely formulated to decrease.

Subsequently, the average GAS balance held and GAS velocity will also increase as the platform gains more adoption.

Instead of a linear fixed 1.0 correlation coefficient, the GDP and Utility Value per GAS comes out to -0.98 coefficient, understandably as we have explained the gradual lowered transaction costs as GDP and adoption increases. The Year of 2021 forms this sharp inflection point due to the lowered annual growth rate implemented on the annual TAM. A 5% annual growth rate compared to a 20%+ growth rate (in the first 2 years) is the more conservative approach we felt more comfortable with.

NeoFS could definitely go toe to toe with this year’s Filecoin mainnet launch, Storj’s testnet completion, and the host of other decentralized cloud platforms that predicate cost efficiency secured storage solution in contrast with Amazon’s $23/month/TB. If what community members are saying about NeoFS being used in tandem with Microsoft’s Azure, it’ll be interesting to see how enterprises accept this segment as being the gateway to further blockchain adoption.

NeoID (first year GAS value: $180)

Over the course of the past two years, a consortium has formed with the sole initiative of provisioning a seamless, secure, and readily available global ID system thanks to the blockchain movement. A system where everyone can have a legalized ID where governments nor black hat hackers can remove this God given privilege of being identified fair and square. This begs the question of why do we need it? Well I’ll spit out three company names and you’ll soon realize the direction I’m headed towards: Target. Equifax. And Ashley Madison. The former two companies are probably more recognizable for their data breaches than the later, but couldn’t resist the temptation of adding it in.

Personal ID theft has been snowballing our news feeds and worries for the past decade thanks to the everything being done online phenomenon. On the extreme: According to a 2016 Cybersecurity Market Report, cybercrime damages will cost the global economy a total of $6 trillion by 2021. On the less extreme and the more frequently experienced:

Although one could also argue that having multiple accounts and password is a more secure way of getting all your accounts tapped into. But I’ll leave that to the cybersecurity experts.

NeoID isn’t proclaiming to solve all these problems and end the dark web of hackers, it is proposing a way to give a global identity in a secured fashion amongst multinational and geographic countries. NeoID is being designed with the eventual compatibility with existing centralized ID solutions, such as identity standards such as W3C’s decentralized identifiers (DID) or certificates following the X.509 specification. But if we were to quantify this and add a value to this network of having your personal ID tied to a blockchain, we could stem a value based on, let’s say, costs saved from ID thefts.

Peter Lin, former NEO developer, put it in a clear and concise framework for the need of an ID network reliant on three models:

The Trust Model

The Game Model

The Privacy Model

The Privacy Model perhaps has the most important weight in such a framework, demonstrating the usage of ZK Proofs and the reliance on at most three parties.

…which could also be mathematically quantified through each parties’ payoff matrix:

But a more easier representation of how having your personal ID secured on a blockchain and trusted amongst the issuer and verifier is through the simple diagram below:

In a term coined by Tron Black, “KYC transitivity” could be accomplished through this simple three party model on the logical basis of one way trust. Think transitive relationships in mathematics.

So to turn back and understand how we can value this network based on GAS, we can start with the TAM being total costs associated with some form of ID theft. According to a report done by Javelin Strategy & Research, the mean fraud amount per victim in 2015 was about $1,038. Victim’s out-of-pocket costs are even less at around $48 thanks to fraud protection services. So using this $48 cost per person multiplied by the number of people in the world, which is about 7.8 billion, we can derive a TAM in the first year of our model being $374,400,000,000 in total costs of ID theft in some form. With an arbitrage number of 5% being NeoID’s market capture slated to increase 7% per year, a TAM decline rate of 10% per year, and a velocity of 2 based on the above three party trust model, utility value per GAS based on the MV=PQ model comes out to $180 in the first year with the annual decrease down to about $15/GAS if this was modeled out to more than 18 years.

The intuition behind the decreasing utility value is simple, the more adoption of a blockchain based ID system, hypothetically the total costs of ID theft, hacks, and the likes should decrease.

DeFi on Neo’s protocol (first year GAS value: $1.46)

Valuing Neo’s protocol based on its projected use case for DeFi applications is the more obvious one and perhaps going to be the largest segment used on Neo. Although Ethereum is DeFi King still and probably will be unless Serenity doesn’t come upon us in the next five years. The bright spot about Neo that makes it more attractive is the developer friendly tools it possesses such as C#, Java, Python, C++, HTML, Javascript, TeX, Typescript, and recently allowing Microsoft’s .NET programming language as a result of their NGD Seattle team. But with Ethereum’s eWASM, Ethereum probably has the better chance of sustaining their market share.

Although DeFi can constitute many markets such as derivatives, lending, synthetics, and so on, the TAM in valuing NEO’s market share in the DeFi space was pegged from a total potential TVL locked in Ethereum contracts based on a total derivatives market value of $500 trillion that the DeFi space can potentially harness from the traditional space. Assuming that Ethereum constituted a 70% market share, the Total DeFi Market Value for the whole of crypto was then derived which allowed us to plug in our assumption of NEO’s 5% DeFi market share to end up at an estimated $76 million in TVL in NEO smart contracts for DeFi applications. Again, by using the equation of exchange and ignoring velocity (because DeFi would encapsulate myriads of financial dApps with different tokenomics) for now, market share per GAS comes to about $1.46 in the first year and close to $100 in the year of 2037 by keeping the assumptions the same throughout.

Although probably a slower than expected growth, the burgeoning protocols of smart contracts will be an inevitable competitive field that would most likely, based on what we see unfolding, keep NEO’s market share of around 5% in DeFi, at a conservative approach.

NEO Token Valuation

Sum-of-the-Parts (SOTP) Valuation

So just to recap, we have broken down the Neo ecosystem into 3 segments that are their highest potential in seeing real use case adoption. The next step, as obvious as it sounds, is to take the weighted average of the three GAS valuations. To go along with the theme of educated arbitrarily chosen assumptions, we envision the three segments to have a weighting scheme something like this for NEO:

The total weighted average would sum to a total value per GAS of around $36.8 in our starting year, which is a reasonable number considering that GAS hit an ATH of around $80 during the crypto craze near the end of 2017. So although prices aren’t near that level, we don’t forsee GAS being able to hit that level for the time being either, at least not in the short term.

The most challenging part of this valuation assignment is formulating a value for the NEO token based on the GAS token. Although we have yet to see a robust valuation framework for a two-token blockchain economy, there are a few angles that we could put forth in an attempt to capture that relationship:

1. Mirroring the relationship between NEO and GAS in the same manner as Preferred and Common Stocks issued by the same firm.

To summarize the relationship between NEO and GAS:

· NEO is used to manage the NEO network through the voting mechanism mentioned in their dBFT system. It is the governance token allowing users to vote and receive dividends.

· GAS is used to fuel and facilitate the protocol. With GAS, users and developers are able to operate and store smart contracts. It is the work token allowing services and functions to happen on the protocol.

· Preferred and Common stocks are similar in that they both receive a dividend and have a fluctuating market price. The main differences are that although preferreds have no shareholder voting rights, they do come before Common stockholders in the event of liquidation (to divvy off tangent for a second, does that even matter for too big to fail?). So in a way Common stocks are reflective in the same way as NEO tokens, but Preferreds fail to mimic the role of a GAS token.

2. Mirroring the relationship between NEO and GAS in the same manner as Bonds and Common Stocks issued by the same firm.

· This relationship would probably be a better fit in characterizing NEO and GAS. Bond holders, or bonds in general, can be viewed as the “work” shares of a firm. Bonds in its nature are used by a firm to raise debt to either fund working capital or long term capex. This is in line with what the GAS tokens are mandated for: to pay for functioning services on the NEO blockchain. Common Stocks and NEO tokens are basically mirrors of each other for reasons stated above. So we went with this relationship in deriving a value for NEO. But with a twist. You see, there have been numerous empirical studies demonstrating the relationship between bonds and common stock issued by the same firm. A lot of them conclude to these underlying findings stated by Simon H. Kwan in a paper titled “Firm-Specific Information and the Correlation between Individual Stocks and Bonds.”:

Ø Research finds that individual stock and bond prices tend to move in the same direction.

Ø Past individual stock prices are found to have forecasting power for current individual bond prices, indicating that stocks lead bonds in reflecting firm-specific information.

The latter is what we are going twist around and have GAS acting as the lead in reflecting firm-specific information, therefore having the forecasting power for individual NEO tokens. The underlying is straightforward, GAS is the work token mostly closely related to the activities to the NEO protocol. A function then needed to be formulated to capture this relationship:

Raising the end of the function to the power of 2 was used to amplify the effects of changes in NEO due to irrational and exuberant investor behavior. This gives us a GAS-NEO token price relationship that looks like this over our time range with a Pearson correlation coefficient around 0.91:

As you can see that movements in NEO tokens are exaggerated by movements in GAS tokens. Applying a conglomerate discount would not be applicable because decentralized blockchain protocols don’t encounter the same centralized management friction as a publicly traded conglomerates would. Or at least, we believe this to be.

Conclusion

The non-profit Neo blockchain protocol is a smart contract infrastructure designed and envisioned to be the platform for the “smart economy”. From raising a successful ICO, to forming relations with government entities through their partner chains, to being a top 20 cryptocurrency by market cap, etc., the journey hasn’t always been “Speedbump Fault Tolerant”, so to speak, for the dBFT project, but their global reach and trailblazing approach has been recognized.

Da Hongfei and Erik Zhang have been continuing to spearhead Neo into areas that would see increased usage such as stablecoins and non-custodial exchanges. Despite the criticism Neo gets for being too centralized, they’ve harnessed the current structure to streamline development and avoid community polarization seen in other projects.

Although the current price projections in this exercise is merely a way to utilize existing and emerging valuation methods, it has been an honest way to breakdown the Neo ecosystem from multiple vantage points and sectors. Allowing us to look deeper into the facets of a smart economy that is quickly being called in at faster rate than expected.

Investing in cryptocurrencies, Initial Coin Offerings (“ICOs”), Initial Exchange Offerings (“IEOs”), and/or Security Token Offering (“STOs”) are highly risky and speculative, and this article is not a recommendation by BlockStreetJournal to invest in these investments. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions.

Sources

https://docs.neo.org/docs/en-us/basic/whitepaper.html https://fs.neo.org/gas https://macabacus.com/valuation/sotp https://coinrivet.com/gas-cryptocurrency-neo-blockchain/