51% Rule & Code Is Law

Mike Orcutt of  MIT’s Technology Review put out a piece on Feb 19 that caught our attention.  In it the author discusses a few of the fundamental challenges with crypto.  We briefly comment on his 51% Rule & Code Is Law sections, and how he ndau Collective thinks about these issues and why we have made certain decisions when designing and building ndau to be a digital long-term store of value.


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Issue: To date many crypto projects have used a Proof-of-Work consensus.  PoW is inherently vulnerable to 51% attacks and extremely wasteful of resources.  A 51% attack means an entity or group of coordinated actors can gather the needed processing power to take over 51% of nodes of the blockchain and “fork” the blockchain.  They are effectively taking over the blockchain.  This does not have to be permanent control of 51% to make permanent change.  Actors can “rent” the processing power to control a blockchain for long enough to do serious damage to the project.

As for monetary policy, PoW creates economic incentives that do not benefit all holders of an asset.  No matter the current market supply equilibrium (price is rising or falling) miners will continue to add supply to the market so long as the market value of the asset is greater than the marginal cost to create one more unit of the asset.  We see this with Bitcoin.  As the price of Bitcoin fell from $19,500 down to $3,100 (meaning there was more supply than the market demanded), miners continued to add Bitcoin to the ecosystem as is was in their interest, even if not in the interest of all Bitcoin holders.

ndau Response- Proof of Stake

ndau uses Proof-of-Stake instead, which uses a small fraction of the energy and resources and is where the newer more sophisticated crypto projects are going.  On a proof-of-stake blockchain, every validator submits blocks and the likelihood that their block is chosen is simply the % of network weight (total amount of tokens being staked) that they contribute. So the resource required to secure the blockchain is actually the native token for that blockchain. To acquire the native token, you have to purchase it.  Acquiring 51% of a major project’s staked tokens is a significantly harder feat than controlling computation power for a short period  of time.


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Issue: Many early crypto projects obey the dogma, “the code is the law”, and so if you have a bug in your code or a smart contract, and it does the wrong thing, you’re out of luck.  There are many smart people working on crypto projects.  And most all of them have good intentions.  But the idea that a small group of people can conceive of every possibility relevant to a blockchain that may or may not happen in the future seems far-fetched to us.  Human nature is not thus.  If humans always made rational decisions based on available information, few trading markets would exist as everyone would place similar value on objects and assets.

ndau Response – Built for Humans

We think that dogma is the wrong way to go.  Whether the code has a bug so value gets locked up forever unintentionally, or a hacker does an exploit to steal it, that’s not the way human beings want their monetary system to operate.  ndau’s position is there is no avoiding the human factors of disputes, ethics, expectations, and to take these factors on instead.  As Lawrence Lundy of Outlier Ventures writes, “Different decisions and classes of decisions will need different levels of decentralisation and appropriate mechanisms for conflict resolution to balance efficiency versus diversity.”

This is why ndau has explicit digital governance with the ability to ultimately fix anything that should go wrong – it’s all about resilience and having many layers to ensure the right thing happens if something goes wrong at a layer above.


ndau is the world’s first buoyant digital asset.  Designed and optimized to be a digital long-term store of value.

JPM Coin – Not a Cryptocurrency But Great Press

JP Morgan announced their JPM Coin earlier this week and like any press release using the words “JP Morgan” and “Cryptocurrency”, it got a heck of a lot of play in the media.  But what JP Morgan has created is not a cryptocurrency.  They created a distributed ledger platform for intra-institutional settlement processes; They created an internal blockchain to track payments between their customers.

The company knows their JPM Coin is not a cryptocurrency; their FAQ’s layout many of  the differences.  It does not pass some simple tests for a cryptocurrency: it is not publicly available, it is not permissionless, there are no nodes outside JP Morgan’s control.  A true cryptocurrency is open to all and is permissionless.

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I have read a few well-written articles that are pointing out the problems this JPM Coin is potentially creating for the cryptocurrency community, and how this is just a press release capitalizing on some buzzwords to help JP Morgan’s public profile, I prefer to think of this as another step towards mass adoption of cryptocurrencies.

For those who do not follow the cryptocurrency industry, the fact that they see the words “JP Morgan” and “Cryptocurrency” together in a headline or on CNBC or in an article is removing another psychological barrier to accepting that cryptocurrencies are the future of financial services.  However those of us involved in changing the way humans interact with “money” still need to be wary that the closed-environment, permissioned DLT solutions that many global financial institutions will implement in coming years do not absorb the term “cryptocurrencies” for themselves.


Many Crypto Funds Got This One Wrong

Sina Nader of CryptoLux Capital, and Daniel Cawrey of Pactum Capital have an interesting post in Coindesk today (link below).  It is not about a trade gone wrong, a fat-finger order, or poor market timing.  It’s about the distinction between a Hedge Fund and a Venture Capital Fund and how they are designed to target very different types of investments.  Many asset managers got this, their earliest decision at their fund, wrong.  It seems that in the rush to launch in 2017 or 2018, many asset managers created Hedge Funds (and their associated liquidity and fee structures) when they should have created Venture Funds.  It reminds me of a saying from my days on an FX trading desk…”Don’t let a trade turn into an investment”.

Essentially, there is a difference between a short-term, liquid market which is what Hedge Funds are designed to trade, and a long-term illiquid market (VC’s world).   Interestingly the use of blockchain technology to create security tokens is going to merge the two separate types of investors such that what had traditionally been the domain of VC firms (long-term, illiquid investments) will become more liquid by tokenizing the fund.  The VC funds will be creating the supply of liquid tokens that the hedge funds will start trading.  Maybe the creators of the many crypto hedge funds just need to wait it out a bit longer until there are more native digital assets to trade.

Most Crypto Hedge Funds Aren’t Really Hedge Funds

What Happened to “Decentralized”, Bitcoin?

One of my favorite readings each week comes from diar.co.  Not sure about their readership levels, but the content is superb.  The brought to light a concern I have had with Bitcoin for a while; mining of Bitcoin is reliant on hardware which makes it a industry model similar to any industry in which scale is the primary factor in success.  Think US railroads in the 1800’s, automobiles from 1920 – 2010, steel manufacturing, etc.  I have been lightly aware of the growing influence of just a few mining firms, but the article below shows the levels of consolidation happening in the Bitcoin Mining industry.  It would not be a far fetched thought to believe the lowest cost producers have been working to drop the price of Bitcoin to being marginally incentivizing to those miners in an effort to force out smaller players and further consolidate power.  I suspect that Satoshi’s original concept did not end up with a oligopoly running the Bitcoin network, bet we are heading there.  Bitcoin is a great invention of peer-to-peer, near frictionless transactions between unknown third parties, but the world needs better.  

Bitmain Consolidates Hashing Power Over Mining Pools

Last week, mining pools operated by Bitmain, a Chinese company that controls majority of ASIC miner production, controlled a combined hashrate of more than 42%. Of the two pools run by the outfit, BTC.com mined more than 26% while Antpool mined approximately 16% of Bitcoin blocks in the last week. Bitmain also operates ConnectBTC, its third mining pool, but it only mined less than 0.2%.


It’s worth noting that Bitmain led the Series A funding round in ViaBTC, which operates the fifth largest pool with approximately 9% of the hashrate. ViaBTC asserts that the company is 100% independent and that Bitmain is only the lead investor.

Bitmain’s Bitcoin mining pools centralization is now a mere 8% to the critical level of 50%, which is a serious concern because it potentially threatens Bitcoin’s immutability. It could give one entity a certain degree of control over the whole network such as blocking or reversing transactions. Bitmain doesn’t disclose what percentage of hashrate out of its pools it physically operates but it controls the block templates for the entire pool nonetheless. If Bitmain attempted to misuse its hashrate, it can be expected that the individual miners in these pools would quickly switch to different pools. But then again, it is not exactly clear what is the actual percentage of hashrate that users in these pools control.

In 2014, GHASH.io, a now defunct mining pool, briefly exceeded the 50% threshold but voluntarily decreased its hashrate to under 40% and promised that it will not exceed 40% in the future. Antpool, on the other hand, just announced that it will temporarily eliminate fees from 4% to 0%, which would spurn on further adoption.


Matt Corallo, Bitcoin Core developer, is working to develop an alternative to the currently most used mining protocol Stratum, which would allow individual miners to use their own block templates instead of having to use the block templates chosen by the pool. His mining protocol dubbed BetterHash would help decentralize Bitcoin mining.

As Diar noted in June, the daily estimated profits from Bitcoin mining have decreased by more than 80% in 2018 (Diar, 4 June). According to Bernstein Research, Bitmain controls 70-80% of the Bitcoin mining hardware market, which only furthers the centralization problem. Bitmain has a very significant hardware cost advantage compared to all the other pools as well as priority access to the newest hardware. If Bitcoin mining profitability continues to decrease, it can open the doors for small miners to switch to more profitable coins, which would effectively lead to an increase in Bitmain’s pools hashrates.

Steve Leahy, Managing Director, ntrd

Crypto Exchanges – Losing Their (Not Your) Identity?

Much is discussed about Digital Identification, and the need to protect one’s Digital ID.  Crypto Exchanges use Digital ID security measures as marketing tools versus their competition.  But maybe they should be worried about losing their own identities.

I have stated a few times that the industry of crypto exchanges is following a similar trajectory to the FX brokerage industry of the last 15 years; its just happening at crypto-speed.  And once again, it’s like I am seeing a remake of a movie to which I saw the original. 

This time the specific nuance is that of front-end aggregation platforms.  There are a growing number of firms that are making front-end trading platforms (UnionExchange, MasterDax, Terminal.Global, etc) that can hook into all of your exchange accounts (Binance, Kraken, Bitfinex, etc) and then show you aggregated liquidity, propose real-time arbitrage opportunities, or expose different volume depths.  The exchange operators so far seem not to care because as they see it, they are still holding and monetizing client assets and getting the trading volume.  They do not care if it is going through an intermediary platform.  At the end of the day it is the trader paying the extra fees to the intermediaries.  But the exchanges do not see the insidious long-term plan of these aggregation platforms.

The dominant platform in the retail FX/CFD world is the MT4 platform from a Cypriot company named, MetaQuotes.  The MT4 platform rose to dominance once it was offered by a few of the largest global brokerage firms starting in 2007.  The MT4 platform is just now giving way to the MT5 platform, but it is widely accepted in the industry MT4/MT5 sees 85% of retail order flow for FX/CFD’s.  Similar to the current situation for exchange operators, MetaQuotes did not initially see the problem of third party application front end providers on the MT4 platform.  Starting in the late 2000’s a number of application providers to the FX industry recognized MetaQuotes’ MT4 dominance and decided to integrate their front end platforms into the MT4 Manager platform (think “matching engine” in exchange terminology).  For a while, all was well.  These third-party applications were bringing in new traders to the FX world and volumes were improving so MetaQuotes did not mind.  But when a few of the third-party applications decided to create their own back-end platform and replace the MT4 platform completely, MetaQuotes realized they had allowed these aggregation-platform intermediaries to gain a stronghold over the traders.  

Retail traders do not know, understand or care about what happens on the back end.  They did not even understand the terminology of the back end of a trading platform; Matching engine? Latency? API? A-Book?  B-Book?  Retail traders want a simple interface with their trading platform, and once they learn how to use one interface they do not want to change.  This was the lesson learned from the large brokers’ failed attempts to transfer their MT4-born clients to proprietary platforms.  Retail traders just knew the front end they liked and were used to.  When the aggregation-platform intermediaries decided to build/buy their own matching engines, Metaquotes lost the order flow. 

To their credit MetaQuotes acted decisively when they realized their vulnerability.  They terminated agreements with certain third-party providers and even sued one or two in court with a lot of publicity.  In the end, MetaQuotes shut down all their front-end “partners” so that traders once again would only see and use the MT4 front end platform which has allowed MetaQuotes’ dominance to continue to this day. 

I expect the large crypto exchange operators will soon see the same thing happening to them.  At first they will not mind these aggregation platforms as some of the downstream providers’ features will add volume to the exchanges.  But as soon as one of these aggregators decides to become an exchange unto themselves and cuts the existing exchanges out of the value chain, these giants will wake up and act to take back their traders.

Steve Leahy, Managing Director, ntrd

Thoughts on Stablecoin and Hayek Comparison

In reference to: 

Hayek and Stablecoins By Qiao Wang: (https://medium.com/@QwQiao/hayek-and-stablecoins-3c7f3291d728)

 If you’ve ever taken an Economics class, you’ve likely heard of Nobel Prize winning economist, F.A. Hayek. In his book published in 1976, Denationalization of Money -The Argument Refined, Hayek imagines a world in which currency is not subject to the whims of government, but to that of the competitive market. To clearly explain this scenario, the economist created his own privatized currency to solve for monopolization of money by governments. In theory, the pressures of a competitive market would promote the creation of a currency with better stability and solvency than a government currency could provide.

Qiao Wang’s article shows there are clear connections between cryptocurrency and Hayek’s “Ducat” currency, particularly in reference to Stablecoins. Both Stablecoins and the “Ducat” present similar approaches to solving for stability, mainly by employing creation/redemption mechanisms via smart contracts to control for the respective currency’s deviation from its intended price. However, stability mechanisms don’t necessarily provide solvency.

 If F.A. Hayek were alive today, he’d likely be intrigued with the focus of stability within cryptocurrency. Yet, Hayek’s “Ducat” had one main constraint: at any moment, “Ducat” holders would be permitted to exchange their coins for fiat at a determined fixed rate. To comply with this condition, well developed, smart monetary policy must be implemented to amass the capital necessary in the case of a wide-spread run on the currency. As it’s impossible to ensure the success of any currency, why invest if there’s no guarantee you’ll have constant access to value-storing fiat currency?

 Observing the notable Stablecoins currently on the market, none have completely solved for the issue of maintaining the unrestricted ability to exchange their cryptocurrency, at a fixed rate, for fiat. Many claim their currency is a reliable, long-term store of value, but more often than not, this is only partially true.

 In my opinion, there are a few reasons why many of these “Stablecoins” are susceptible to failure:

1) Stablecoins that peg their currencies to fiat currencies are invariably subject to inflation, and consequently, subject to volatility.

2) Stablecoins that depend on collateral-backed currencies (cryptocurrencies pegged to other cryptocurrencies) are subject to the volatility of that crypto-asset, which is also likely to be pegged to a fiat currency.

3) Stablecoins that mitigate currency devaluation via the issuance of value-storing entities to remove coins from the exchange, such as bonds or shares, rely on the reckless assumption that the currency will regain value. In the case that the coin is unable to recover, participants are left with unredeemable bonds and loss of capital.

4) Even if bond-utilizing coins regain value, there is no explicit pay out date for bond redemption, leaving bond holders unsure of when they’ll be refunded.

 Thus, an ideal cryptocurrency would possess long-term store of value capability without pegging to a fiat currency. Fortunately, the creation of a coin which satisfies those conditions does not appear too far off.

Steve Leahy, Managing Director, ntrd 

What The Circle/Poloniex Deal Signals to Me

This morning Circle Internet Financial (“Circle”) purchased Poloniex, a Singapore-registered, Boston-based crypto exchange that is popular with traders who trade the most liquid digital assets (BTC, ETH, LTC, etc.), and trade “alt-coins”.  Alt-coins tend to be thinly traded, ICO-launched tokens that have caught the attention of regulators around the globe.  Many alt-coins are would be considered “securities” by regulators once the regulators get around to investigating them.  And generally, securities need to trade on regulated exchanges. 

So, the heat was on Poloniex.  They were justifiably concerned that the SEC in the US would come knocking and shut them down for operating a securities exchange without being regulated as such.  That would be the end of their cash cow, cause a massive settlement to the SEC, and potentially ban the ownership and senior staff from ever working in the regulated financial services industry in the US forever.  

Circle is a Goldman Sachs-backed payments platform that has not had a lot of positive press lately.  They raised a lot of venture capital in their early years, but have seemingly been left behind by PayPal, Venmo, and others in the online payments industry.  I had not seen anything about Circle in the blockchain space, nor in the digital asset space in the press.  The announcement today, and some details that have been leaked, confirm our thoughts of what is next for the digital asset exchange industry:

  1. The next round of growth for these exchanges will be based on improving customer experience.  The massive growth of the existing exchanges was driven by a burning need for retail investors to get in on the Bitcoin craze.  The exchange companies were led by a technology-first mindset of the founders (which makes sense), but the customer experience was terrible.  Account opening processes were a mess, KYC processing took weeks, withdrawal and deposit processes failed, and customer support for these new-to-Bitcoin clients was non-existent.  Circle has specifically stated in their press release they will focus on scaling the business and the customer experience as their priorities for Poloniex.  This is the first move towards the digital asset exchange industry being taken over by the marketers.  We will see experienced financial services operators around the globe come into the space and greatly improve the client experience.  We will see more pull-driven marketing from these operators as the demand for new accounts has slowed with Bitcoin of its December highs.
  2. The big financial services names know they need a piece of digital asset service providers.  They cannot yet take direct steps themselves due to regulators and public sentiment, but Goldman’s implicit backing of this deal is very telling.
  3. Playing nice with the regulators.  Some leaked documents (that we believe to be correct if not authentic) show that Circle has spoken to the SEC in the US and plans to operate Poloniex as an “Alternative Trading System” (“ATS) in the United States under the supervision of the SEC.  ATS exchanges have historically been used for trading of low liquidity assets such as stakes in hedge funds, PE ventures, etc.  Though the digital asset exchange world is still a bit like the Wild West, we know the end result because we saw it with the retail FX & CFD industry since 2006 or so; the regulators will eventually get control and the winners in this game will recognize that early and work with the regulators.  Circle’s move with Poloniex means they are in early with the SEC and will be a significant competitor to Coinbase here in the US and across the globe.

Steve Leahy, Managing Director, ntrd